EVASION – a scheme used outside of those lawful means and when availed of, it usually subjects the

taxpayer to further or additional civil or criminal liabilities. (CIR v. The Estate of Benigno P. Toda, ibid)

It is also known as “TAX DODGING.” It is punishable by law.

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is
due; (2) an accompanying state of mind which is described as being “evil,” in “bad faith,” “willful,” or
deliberate and not accidental;” and (3) a course of action or failure of action which is unlawful. (CIR v. The
Estate of Benigno P. Toda, ibid)

Tax fraud is the use of deceit in order to evade taxes.

The willful neglect to file the required tax return or the fraudulent intent to evade taxes, considering that the
same is accompanied by the legal consequences, cannot be presumed. The fraud contemplated by law is
actual and constructive. It must be intentional fraud consisting of deception willfully and deliberately done or
reported to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated by the law. It must amount to intentional
wrongdoing with the sole object of evading the tax. (CIR v. Japan Airlines, Inc., G.R. No. 60714, October 4,
1991)

A substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of

deductions shall constitute prima facie evidence of a false or fraudulent return. Failure to report sales,
receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of
deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for substantial
underdeclaration of sales, receipts or income or for overstatement of deductions. (Sec. 248(B), NIRC)

EXEMPTION – grant of immunity from tax.

I. EXEMPTION FROM TAXATION

Taxation is the rule and exemption is the exception, and therefore, he who 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.”

Exemption from taxation

Taxation is the rule and exemption is the exception. (FELS ENERGY, INC. v. PROVINCE OF BATANGAS, 516
SCRA 186 (2007))

May a tax exemption be revoked?

Yes. Since taxation is the rule and exemption therefrom is the exception, the exemption may be withdrawn at
the pleasure of the taxing authority.

Hence, in MCIAA V. MARCOS [261 SCRA 667], the Supreme Court noted that Section 234 of the the Local
Government Code unequivocally withdrew exemptions from payments of real property taxes granted to
natural or juridical persons, including government-owned and control corporations. Since MCIAA is a GOCC,
it follows that its exemption granted under a charter prior to the LGC has been withdrawn.

In SMART V. CITY OF DAVAO [565 SCRA 237], the Supreme Court noted that the “in lieu of all taxes” clause
in its charter has become functus officio with the abolition of franchise tax on telecommunications companies
in accordance with the VAT law.

II. DOCTRINE OF EQUITABLE RECOUPMENT

This doctrine basically refers to a taxpayer who has a claim for refund against the government, but was not
able to file his written claim for tax refund because the reglementary period within which to file his valid claim
for tax refund has already prescribed. As such, despite the lapse of the period, this doctrine allows that the
tax that should have been refunded be credited instead to his existing or other tax liability. This doctrine of
equitable recoupment is not allowed in this jurisdiction. It is highly disfavored.

III. COMPENSATION AND SET-OFF

 As held in CALTEX VS. COA [208 SCRA 727], taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other. A claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off. (see FRANCIA V. IAC [162 SCRA 753]).

There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay taxes on the ground that the government owes him an amount equal or greater
than the tax being collected (PHILEX MINING V. CIR [294 SCRA 687]).

Taxes cannot be the subject of set-off because they are not in the nature of contracts between parties but
grow out of a duty to, and, are positive acts, of the Government, to the making and enforcing of which, the
personal consent of the taxpayer is not required (REPUBLIC V. MAMBULAO LUMBER [4 SCRA 622])

NOTE: In one case, DOMINGO V. GARLITOS [8 SCRA 443], the Supreme Court allowed the set-off between
taxes and debts. It opined that if the obligation to pay taxes and the taxpayer’s claim against the government are
both overdue, demandable, as well as fully liquidated, compensation takes place by operation of law and both
obligations are extinguished to their concurrent amounts. In the said case, the taxpayer who has been assessed
municipal taxes was allowed to assign in favor of the municipality a final judgment obtained by him against the
said municipality to cover the assessment. Atty. Domondon reconciled the rulings of the Supreme Court in
DOMINGO V. GARLITOS [8 SCRA 443] and FRANCIA V. IAC [162 SCRA 753] by stating that in the former
case, both claims being overdue, demandable, and fully liquidated while in the latter case, the claim against the
government was not overdue and demandable as it was already settled. Atty. Domondon submits that when
confronted with a bar problem, we follow the doctrine laid down in FRANCIA V. IAC [162 SCRA 753] unless the
facts would involve the (1) the application of the principle of solutio indebiti or (2) it involves local government
taxes.

Is the civil concept of solutio indebiti applicable to taxation?

Yes. In the case of FILINVEST DEVELOPMENT CORPORATION VS. CIR [529 SCRA 605], the Court held
that in the field of taxation where the State exacts strict compliance upon its citizens, the State must likewise
deal with taxpayers with fairness and honesty. Hence, under the principle of solutio indebiti, the Government
has to restore to petitioner the sums representing erroneous payments of taxes.

IV. COMPROMISE AND TAX AMNESTY

Compromises are allowed and enforceable when the subject matter thereof is not prohibited from being
compromised and the person entering into it is duly authorized to do so. In fact, under SECTION 204 OF THE
TAX CODE, payment of internal revenue taxes may be compromised on the grounds of (1) doubtful validity
of the assessment or (2) financial incapacity.

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties
on persons otherwise guilty of evasion or violation of a revenue or tax. REPUBLIC V. IAC [196 SCRA 335]