b. Construction and Interpretation of Tax Laws and Tax Exemptions

9. Tax Exemption

a. Nature – Exempt Person vs. Exempt Transaction b. Express or Implied c. Contractual d. Construction of Tax Exemption Laws e. Revocation

a) Tax Laws

General rule: Provisions imposing a tax are construed strictly against the government and liberally in favor of the taxpayer. In case of doubt, tax statutes are construed strictly against the government and liberally in favor of the taxpayer (CIR v. CA, G.R. No. 107135)¹

Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declare.

Tax statutes offering rewards are liberally construed in favor of informers.

Exception: Where the language of the tax statute is plain and there is no doubt as to the legislative intent. In such case, the words employed are to be given their ordinary meaning.

b) Tax Exemptions and Exclusions

General rule: Exemptions are not favored and are construed strictissimi juris against the taxpayer.

An exemption from the common burden cannot be permitted to exist upon vague implication or inference.

Taxation is the rule while exemption is the exception. Therefore, whoever claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to be misinterpreted.”

If not expressly mentioned by law, it must at least be within its purview by clear legislative intent.

Claims for refunds based on a tax exemption or incentive are strictly construed against the claimant. Refunds of taxes erroneously or illegally collected are governed by their applicable statutory requirements and prescription periods.

Exceptions:

• When the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be resolved in favor of exemption.
• When the exemption is in favor of the government itself or its agencies because the general rule is that they are exempt from tax
• When the exemption refers to religious, charitable and educational institutions
• When there is an express mention or when the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction does not apply.

c) Tax Rules and Regulations

The construction placed by the office charged with implementing and enforcing the provisions of the NIRC is entitled to great respect, especially if long-standing, but is not controlling on courts and cannot override the statute.

Taxpayers cannot be deprived of their entitlement to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring the prior application for tax treaty relief. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. The denial of a tax relief based on a tax treaty due to the failure of a taxpayer to comply with a RMO would impair the value of the tax treaty and the State’s duty to comply in good faith with the tax treaty. (Deutsche Bank Ag Manila Branch v. CIR, G.R. No. 188550, 5 May 2014)²

Non-retroactivity of Rulings (Sec. 246³) - Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases:

• Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue;
• Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or
• Where the taxpayer acted in bad faith.

Strict construction so as not to extend the plain terms thereof that might create offenses by mere implication not so intended by the legislative body. (People v. Martin, G.R. No. L-38019, 16 May 1980)⁴

Tax Exemption

The grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected. (Greenfield v. Meer, G.R. No. 156, 27 September 1946)⁵

Nature of Tax Exemption

Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is directly liable. In any case, it cannot be transferred or assigned by the person to whom it is given without the consent of the State.

Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law. (Manila Electric Company v. Vera, G.R. No. L-29987, 22 October 1975)⁶

Exemptions are not presumed, but public property is generally exempt; under Section 234(a) of the Local Government Code, real property owned by the Republic or a political subdivision is taxable when its beneficial use is granted to a taxable person.

General Rule: Exemptions are not presumed.

Exception: Public property is generally exempt, but real property owned by the Republic or a political subdivision loses the exemption under Section 234(a) of the Local Government Code when its beneficial use is granted to a taxable person.

Where two exemption provisions may apply, determine their scope and effect under their respective terms, including any express withdrawal or exclusivity provision.

Kinds of Tax Exemption

• Express (or affirmative) – when certain persons, property or transactions are, by express provision, exempted from all or certain taxes, either entirely or in part.

Examples of Statutory Tax Exemptions:

• Intercorporate dividends by a domestic corporation from another domestic corporation
• Section 800 of the Customs Modernization and Tariff Act (RA 10863)⁷
• Section 234 of the Local Government Code⁸
• Other special laws such as Omnibus Investment Code of 1987⁹ and Philippine Overseas Shipping Act¹⁰
• Implied (or by omission) – when a tax is levied on certain classes of person, properties or transactions without mentioning the other classes. Every tax statute makes exemptions since all those not mentioned are deemed exempted. The omission may either be accidental or intentional.
• Contractual – those lawfully entered into by the government in contracts under existing laws. These exemptions must not be confused with the tax exemptions granted under franchises, which are not contracts within the context of non-impairment clause of the Constitution. (Cagayan Electric Power & Light Co., Inc. v. CIR, G.R. No. L-60126, 25 September 1985)¹¹

The mere undertaking of NPC under the Agreement, that it shall be responsible for the payment of all real estate taxes and assessments, does not justify the exemption of FELS – a private company. The privilege granted to NPC cannot be extended to FELS. (Fels Energy, Inc. v. Province of Batangas and the Office of the Provincial Assessor of Batangas, G.R. No. 168557, 16 February 2007)¹²

Rationale/grounds for exemption

A presumption that the public interest will be subserved by the exemption allowed. Grant of exemption rests upon that such will benefit the body of the people and not upon any idea of lessening the burden of the individual owners of property.

Purpose is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of exemptions.

Created in a treaty on grounds of reciprocity or to lessen the rigors of the international double or multiple taxation.

Equity is not a ground for tax exemption.

Revocation of tax exemption

Tax exemption is generally revocable. The congressional power to grant an exemption necessarily carries with it the consequent power to revoke the same.

In order to be irrevocable, the tax exemption must be founded on a contract or granted by the Constitution.

By way of exception, a contractual tax exemption obtained from the State for a valid and material consideration of a mutual nature cannot be revoked without impairing the obligation of contracts under the Constitution. (Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, 11 September 1996¹³; Manila Electric Company v. Province of Laguna and Benito R. Balazo, G.R. No. 131359, 5 May 1999¹⁴)