Under Philippine taxation law, the principle of tax exemption is rooted in the Constitution, statutes, and principles of equity and justice. The general rule is that all persons, property, and privileges are subject to taxation unless exempted by law. Exemptions can be express, where the exemption is specifically stated, or implied, where it can be inferred from the nature of the taxation law or relevant circumstances.

Here is a detailed discussion on the topic:

I. Definition and Nature of Tax Exemption

Tax exemption is a privilege granted by law or the Constitution that releases a taxpayer, in whole or in part, from the obligation to pay taxes. It is a departure from the general rule that taxes are the lifeblood of the government and are essential for its existence and functioning. Consequently, tax exemptions are viewed with strict scrutiny and are generally disfavored unless clearly and unequivocally provided by law.

II. Classification of Tax Exemptions

Express Exemption
Express tax exemptions are those explicitly provided in the law or the Constitution. They are often specifically stated to avoid ambiguity and provide clarity. Examples include:
- Section 28(3), Article VI of the Philippine Constitution, which allows Congress to grant exemptions from property taxes.
- Specific exemptions granted by statutes, such as exemptions granted to educational institutions under the National Internal Revenue Code (NIRC) or exemptions granted to charitable institutions and religious organizations.
- Franchise exemptions or those specified in specific franchises for corporations or entities providing public utilities, such as the exemption given to non-profit educational institutions on income generated from school-related activities.
Implied Exemption
Implied exemptions arise from the construction or interpretation of the law, based on its purpose and the intent of the legislature. While not directly stated, these exemptions may be inferred when:
- Statutory Purpose: It is evident that taxing a certain entity, activity, or property would be inconsistent with the purpose of the statute or with the mandate of public policy.
- Nature of Activity or Entity: Certain activities or entities are impliedly exempt from taxation if they serve a public purpose or government function. For instance, the government itself and its agencies, instrumentalities, and properties used solely for public purposes are impliedly exempt from taxation.
- Historical Context or Precedent: In some cases, the historical context and established precedents in taxation law support an implied exemption, especially when taxing a specific entity or activity would interfere with its essential operations.

III. Principles Governing Tax Exemptions

Strict Interpretation
Tax exemptions are construed strictly against the taxpayer and in favor of the taxing authority. This principle stems from the presumption that all subjects are liable to tax unless explicitly exempted. Any doubt concerning the grant of exemption is resolved against the entity claiming it.
Liberal Interpretation in Favor of Government or Charitable Institutions
The strict interpretation rule has exceptions, particularly for charitable institutions, educational institutions, religious organizations, and government instrumentalities. The reason for this liberal interpretation is that these institutions generally serve a public purpose, and the intent of the legislature is often to support them through tax reliefs.
Non-Transferability of Exemptions
Tax exemptions are generally personal to the entity or individual to whom they are granted and do not extend to successors or assignees unless expressly provided by law. For instance, a tax exemption granted to a non-stock, non-profit educational institution would not transfer to another organization even if it takes over the educational institution’s functions.
Duration and Scope of Exemptions
The duration and scope of tax exemptions are limited to what is explicitly provided in the law. Any expansion beyond the express terms is disallowed, and exemptions do not extend to new or additional taxes not contemplated at the time of the exemption’s grant.
Revocability of Exemptions
Tax exemptions are generally revocable unless the Constitution provides otherwise. Congress has the authority to modify or repeal tax exemptions granted by statute. A classic example is the withdrawal of certain tax exemptions granted under specific economic zones or freeport areas, where Congress passed laws to subject certain formerly exempt transactions to VAT and other taxes.

IV. Common Types of Tax Exemptions in Philippine Law

Exemptions Granted to Government and Government Entities
- The government itself, including its agencies and instrumentalities, is exempt from tax unless a statute provides otherwise.
- Local government units (LGUs) and their instrumentalities may be exempt from national taxes in respect of properties or activities related to public functions.
Constitutionally Granted Exemptions
- Educational institutions and nonprofit, charitable, or religious organizations enjoy tax exemptions on property directly and exclusively used for educational or charitable purposes.
- Exemptions for churches, parsonages, and convents appurtenant to churches, as well as mosques and non-profit cemeteries.
Statutorily Granted Exemptions
- Non-stock, non-profit educational institutions are exempt from income tax on revenue derived from educational operations.
- Charitable institutions, hospitals, and other similar organizations registered under the law are granted tax relief, provided their income or activities directly relate to their functions.
Special Laws and Economic Zones
- Special economic zones, like the Philippine Economic Zone Authority (PEZA), grant exemptions to businesses operating within them, including exemption from national and local taxes. However, the extent of these exemptions is subject to strict legal conditions and is often revised by Congress.
- Exemptions given under various investment incentive laws like the Omnibus Investments Code and the Special Economic Zone Act.

V. Judicial Interpretation of Tax Exemptions

Philippine jurisprudence emphasizes a restrictive approach to interpreting tax exemptions, affirming the need for clear, unequivocal language in granting exemptions. A few landmark cases illustrate this principle:

Commissioner of Internal Revenue v. Court of Appeals and Ateneo de Manila University
This case reinforced that any exemption for income derived from real estate, as long as it is incidental to the educational purpose, remains valid. The Court underscored that exemptions granted to educational institutions are construed liberally but within the bounds of their educational mission.
Lladoc v. Commissioner of Internal Revenue
The Supreme Court upheld that donations to religious institutions are tax-exempt as long as they serve a purpose consistent with the institution’s religious mission, reinforcing that the intent of the donation and its purpose are critical in determining taxability.
Philippine Heart Center v. Local Government of Quezon City
This case clarified the extent of the property tax exemption for properties of charitable institutions, stating that only properties directly and exclusively used for charitable purposes are tax-exempt.

VI. Conclusion

Tax exemptions are crucial components of Philippine tax law, balancing the government’s need for revenue with the support of public welfare initiatives, such as education, religion, and charitable institutions. They are a matter of legislative grace, and without clear, express provisions, entities cannot claim exemption. Judicial precedent mandates a careful, conservative approach to interpreting exemptions, emphasizing that only the legislature has the authority to grant, expand, or revoke them. Thus, entities and individuals claiming tax exemptions must demonstrate compliance with all legal conditions to uphold their exempt status.