GENERAL PRINCIPLES OF TAXATION

I. THREE INHERENT POWERS OF THE STATE:

1. Power to Tax
2. Police Power
3. Power of Eminent Domain

Distinctions Among the Three Inherent Powers

Taxation Police Power Eminent Domain
Purpose To raise revenue for To promote the To facilitate the State’s
the expenses of the general welfare need of the property for
State. thru regulations. public use.
Amount of No limit Limited to the cost No exaction but private
Exaction of regulation, property is taken for public
issuances of the use.
license, and/or
surveillance.
Benefits Received No special or direct No direct benefit is A direct benefit results in
benefit is received by received by an the form of just
an individual individual. A compensation to the
taxpayer. The public healthy economic property owner.
receives the general standard of society
benefit of protection is attained.
of person, property
and the promotion of
the general welfare.
As to relationship Subject to Relatively free Superior to and may
to Constitutiton Constitutional and from Constitutional override Constitutional
Inherent Limitations Limitations impairment provision
because welfare of the Stat
Inferior to nom- Superior to non- is superior to any private
impairment clause impairment clause contract.
Transfer of Taxes paid become No transfer, but Transfer is effected in
Property Rights part of public funds. restraint in the favor of the State
exercise of
property rights
Scope All persons, property, All persons, Only upon specific
rights, and privileges. property, rights, property.
privileges, and
liberties.
Authority which Exercised by the Exercised by the May be exercised by
exercises the government or its government or its public service corporations
power political subdivisions. political or private entities
subdivisions. operating public utilities if
granted by law.

II. WHAT IS TAXATION?

It is the inherent power by which the sovereign through its law - making body raises
revenue to defray the necessary expenses of government.

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 III.NATURE / CHARACTERISTICS OF TAXATION POWER
The power to tax is an attribute of sovereignty that is exercised by the government for the
betterment of the people within its jurisdiction whose interest should be served. enhanced and
protected.
1. Inherent power of sovereignty;
2. Essentially a legislative function;
3. For public purposes;
4. Territorial in operation;
5. Tax exemption of government,
6. The strongest among the inherent powers of the government; and
7. Subject to Constitutional and inherent limitations.

IV. WHAT ARE THE DIFFERENT PURPOSES AND OBJECTIVES OF TAXATION?

A. Raise Revenue - basically, the purpose of taxation is to provide funds or property with
which the State promotes the general welfare and protection of its citizens.
B. Non - Revenue
a. Promotion of general welfare
b. Regulation
c. Reduction of social inequality
d. Encourage economic growth
e. Protectionism
V. WHAT ARE THE THEORIES AND BASES OF TAXATION?
a. Lifeblood Theory (Importance of taxation).
b. Benefits Protection Theory (Basis of taxation).
VI. STAGES OR COVERAGE OF TAXATION
Taxation covers three (3) separate areas or aspects of government activity, namely:
1. Levying or imposition of the tax. This involves the passage of tax laws which is
generally a legislative act. In the Philippines, the taxing power is exercised by Congress.
2. Assessment. The process of determining the correct amount of tax due.
3. Collection and Payment. The act of compliance with the tax law by the taxpayer.
Item No. 2 and 3 are executive or administrative in nature, Done by the Bureau of
Internal Revenue(“BIR”)
VII. BASIC PRINCIPLES OF A SOUND TAX SYSTEM
a. Fiscal Adequacy - which means that the sources of revenue should be sufficient to meet
the demands of public expenditures;
b. Equality or Theoretical Justice which means that the tax imposed should be proportionate
to the taxpayer's ability to pay; and
c. Administrative Feasibility which means that the tax laws should be capable of
convenient, just, and effective administration
VIII. Questions?
A. May the court interfere with tax legislation?
B. Power to Tax is the power to destroy
C. Power to tax is not the power to destroy while the Supreme Court sits

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IX. WHAT IS TAX?
Enforced proportional contributions from the persons and property levied by the law -
making body of the State by virtue of its sovereignty in support of government and for public
needs.

X. ESSENTIAL ELEMENTS OR CHARACTERISTICS OF A TAX

a. Enforced contribution
b. Exacted pursuant to legislative authority
c. For raising revenue for public needs
d. Proportionate in character or uniform
e. Payable in money
f. Imposed within the state's jurisdiction
g. Personal to the taxpayer

XI. WHAT ARE THE CLASSIFICATIONS OF TAXES?

A. As to subject matter:

a. Personal Tax - taxes are of fixed amount upon all persons of a certain class within
the jurisdiction without regard to property, occupation or business in which they
may be engaged e.g., Community Tax Certificate.
b. Property Tax - assessed on property of a certain class e.g., Real Property Tax.
c. Excise Tax - imposed on the exercise of a privilege e.g., Income Tax, Donor's and
Estate Tax.
d. Custom Duties - duties charged upon the commodities on their being imported
into or exported from a country e.g., Tariffs.

B. As to burden:
a. Direct Tax - both the incidence of or liability for the payment of the tax as well as
the impact or burden of the tax falls on the same person e.g., Income Tax.
b. Indirect Tax - the incidence of or liability for the payment of the tax falls on one
person but the burden thereof can be shifted or passed on to another e.g., VAT.

C. As to purpose:
a. General Tax - levied for the general or ordinary purposes of the Government.
b. Special Tax - levied for special purposes.

D. As to measure of application:
a. Specific Tax - imposes a specific sum by the head or number or by some standard
of weight or measurement.
b. Ad Valorem Tax - tax upon the value of the article or thing subject to taxation.

E. As to taxing theory:
a. National Tax - levied by the National Government.
b. Local Tax - levied by the local government.

F. As to rate:
a. Progressive Tax - rate or amount of tax increases as the amount of income or
earning to be taxed increases.
b. Regressive Tax - tax rate decreases as the amount of income to be taxed increases

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 c. Proportionate Tax - based on a fixed proportion of the value of the property
assessed.
XII. WHAT ARE OTHER IMPOSITIONS THAN TAXES?
a. Toll - amount charged for the cost and maintenance of the property used
b. Penalty - punishment for the commission of a crime
c. Compromise Penalty - amount collected in lieu of criminal prosecution in cases of tax
violations
d. Special Assessment - levied only on land based wholly on benefit accruing thereon as
a result of improvements or public works undertaken by government within the
vicinity.
e. License or Fee - regulatory imposition in the exercise of the police power.
f. Margin Fee - exaction designed to stabilize the currency.
g. Debt - a sum of money due upon contract or one which is evidenced by judgment.
h. Subsidy - a legislative grant of money in aid of a private enterprise deemed to
promote the public welfare,
i. Customs duties and fees - duties charged upon commodities on their being
transported into or exported from the country.
j. Revenue a broad term that includes taxes and income from other sources as well.
k. Impost - in its general sense, it signifies any tax, tribute or duty. In its limited sense, it
means a duty on imported goods and merchandise.
l. TITHE- imposes by a church or sect.
m. TRIBUTE- imposes by a monarch.

XIII. Limitations on the Power to Tax

1. Constitutional Limitations.
a. No person shall be deprived of life, liberty, or property without due process of
law, nor shall any person be denied the equal protection of the laws. (Art. III, Sec
1).

b. The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. (Art. VI, Sec. 28 (1)).
Uniformity - persons or properties falling under the same should
be taxed the same kind and rate of tax.

Equality - the same means and methods be applied

impartially to all the members of each class.

Equal Protection of the law - means equality before the law.

However, such equality does not deny to the state the power to recognize
factual differences between individuals and classes. It recognizes that
inherent in the right to legislate is the right to classify, provided that it is a
valid and reasonable classification. If the groupings are characterized by
substantial distinctions that make real differences, one class may be
treated and regulated differently from another. (Tiu v. CA, G.R. No.
127410).

c. No person shall be imprisoned for debt or non-payment of a poll tax. (Art. III,
Sec. 20).

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d. 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 shall be exempt from taxation. (Art. VI, Sec 10)

e. No law granting any tax exemption shall be passed without the concurrence of a
majority of all members of Congress (Art. VI, Sec 28(4)).

f. No law impairing the obligation of contracts shall be passed. (Art III, Sec 10)
a. When the tax exemption is bilaterally agreed upon between the
government and the taxpayer, the exemption cannot be withdrawn
without violating the non-impairment clause.
b. When the tax exemption is unilaterally granted by law, the same may be
withdrawn by virtue of another law without violating the non-
impairment clause.
Ex: When the tax exemption is granted under a franchise, the same
may be withdrawn at any time.

g. No law shall be made representing an establishment of religion or prohibiting the

free exercised thereof (Art. III, Sec. 5)
No public money or property shall be appropriated, applied, paid, or employed,
directly or indirectly for the use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of religion, or of any priest,
preacher, minister, or other religious teacher or dignitary as such except when
such priest, preacher, minister or dignitary is assigned to the armed forces or to
any penal institution, or government orphanage or leprosarium. (Art. VI, Sec.29
(2)).

h. All appropriation, revenue or tariff bills xxxxxx shall originate exclusively in the
House of Representatives, but the Senate may propose or concur with
amendments. (Art. VI, Sec 24).

i. The Congress may, by law, authorize the President to fix within specified limits,
and subject to such limitations and restrictions as it 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 of the Government
(Art. VI, Sec. 28(2)).

j. The Supreme Court shall have the power to review, revise, reverse, modify, or
affirm on appeal or certiorari as the law or the Rules of Court may provide, final
judgments and orders of lower courts in xxx all cases involving the legality of any
tax, impost, assessment, or toll, or any penalty imposed in relation thereto (Art.
VIII, Sec. 5)

k. All revenues and assets of non-stock, non-profit educational institutions used

actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties.

l. The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items
to which does not object (Art. VI, Sec. 27 (2)).

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 m. All money collected or any tax levied for a special purpose shall be treated as a
special fund and paid out such purpose only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government. (Art. VI, Sec. 29 (3)).

2. Inherent Limitations. These are restrictions form the very nature of the power to ax
itself. They are:
a. The levy must apply within territorial limits for the exercise of effective tax
jurisdiction.
b. The tax must be for a public purpose.
c. Exemption from taxation of the government, any political subdivision thereof, or
agencies performing purely governmental functions.

However, when the local government unit (LGU), government agency, or

government owned and controlled corporation engages in activities which are
proprietary in character (i.e., engaging gin business and activities similar to those
performed by other taxable corporations), such LGU, government agency, or GOCC
shall be subject to both income and business taxes as other private corporations. Exs.
LBP; PAGCOR

EXC: The Government Service Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO), and local water districts (LWDs); are exempt from the
income tax imposed under Section 7 of the NIRC.

d. As a general rule, the taxing power of the legislature may not be delegated.
Exceptions to this non - delegability rule are
i) The authority of the President to fix tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties and imposts (Art. VI, Sec. 28 (2), 1987 Constitution).
ii) 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 (Art. X, Sec. 5, 1987
Constitution). Ex. Real property taxes.
iii) Delegation to administrative agencies for implementation of the tax laws, and
collection of the tax to the BIR

e. International comity.
This principle limits the authority of the government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its property held and activities.
undertaken in that capacity. As a rule, the Philippine government cannot tax foreign
ambassadors nor impose real property taxes upon foreign embassies.

f. Double Taxation. Two types of double taxation are direct double and indirect double
taxation.

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 Direct double taxation - Where:
1. the same subject is taxed twice:
2. by the same taxing authority;
3. within the same jurisdiction;
4. during the same taxing period; and
5. covering the same kind or character of tax (Villanueva v. City of Iloilo, L - 26521).
There is no constitutional prohibition against double taxation in the Philippines
(Villanueva v. City of Iloilo, L - 26521, December 28, 1968) , though it is not favored .

Indirect double taxation, which lacks one or more of the elements of direct double
taxation, is also permissible.

XIV. NATURE OR CONSTRUCTION OF TAX LAWS

1. Tax laws are prospective, generally, but can have retrospective application.

Tax laws, like other statutes, are to be construed as having only a prospective
operation unless the purpose and intension of the legislature to give respective effect
is expressly declared or is necessarily implied from the language used (Lorem Posadz
64 PL 353).
Tax laws are not penal in character. Being civil in nature, the constitutional
prohibition against the passage of ex post facto legislation does not apply to tax laws
(Law of Basic Taxation in the Philippines, Benjamin Aban, citing Republic Fida de
Fernandes, et al., 99 Phil. 914, Ex Parte Garland, In Law Ed. 160).
They can therefore be given retrospective application if expressly declared by the tax
law.
A tax creates a civil obligation or liability on the part of the taxpayer, although the
non-payment thereof creates a criminal liability, which could be the subject of
criminal prosecution under existing laws. In short, in taxation, it is one's civil liability
to pay takes that gives rise to criminal liability (Republic v. Patanon, L - 22156, July
21, 1967).

2. A statute will not be construed as imposing a tax unless it does so clearly, and
unambiguously.
A tax cannot be imposed without clear and express words for that purpose.
Accordingly, the provisions of a taxing act are not to be extended by implication
(Marinduque Mine Agents Municipal Council of Hinabangan, L - 18924;
Commissioner v. CA. GR 115349, April 18, 1997)

In case of doubt, statutes imposing a tax are construed most strongly against the
Government, and liberally in favor of the citizen because burdens are not to be
imposed beyond what the statutes expressly can clearly import (Manila Ratiroadv.
Collector of Customs, GR 10214: CIR v. La Tondeña, Inc. et al., 1-10431)

3. Tax emptions are to be construed strictly against the taxpayer.

Legal provisions providing for tax exemptions are to be construed strictly against the
grant and liberally in favor of the taxing power (Phil. Int’l. Fair, Inc. v. Collector, G.R.L
12928 and 1-12932, 1962).

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 Exemption from taxation is construed strictissimi juris, i.e., strictly against exemption.
Hence, exemption must be anchored firmly on an express provision of law. He who
claims exemption must be able to justify his claims by the clearest grant of organic and
statute law (Collector v. Manila Jockey Club, Inc., 53 0.G. 3762)
4. Revenue laws are not political in nature.
Our internal revenue laws are not political in nature and as such were continued in force
during the period of enemy occupation and in effect were actually enforced by the
occupation government (Emilio Y. Hilado v Collector, GR No. 9408, October 31, 1956).
5. Legislative intention must be considered. Tax statutes are to receive a reasonable
construction with a view to carrying out their purpose and intent (51 Am. Jur. 361)

6. Tax laws are special laws, and prevail over general laws (see Republic. Gancayco L -
18307, June 30, 1964)

XV. SOURCES OF TAX LAWS

1. The 1987 Constitution

2. Tax statutes such as the National Internal Revenue Code (NIRC), the Tariff and
Customs Code, the VAT Law, the Revised Documentary Stamp Tax Law, the Amended
Excise Tax Law, portions of the Local Government Code, and TRAIN LAW.
3. Executive orders on taxation, and local tax ordinances,
4. Tax treaties and conventions with foreign countries,
5. Judicial Decisions
6. Rules and regulations promulgated by the Department of Finance, the Bureau of Internal
Regulations (BIR " Bureau of Customs, etc.
7. Administrative interpretations and opinions of tax officials particularly those of the
Commissioner of Internal Revenue.

XVI. FORMS OF ESCAPE FROM TAXATION.

a. Shifting the burden of the tax
b. Capitalization.
By not selling property which has increased in value, the owner avoids the income
tax to be paid on the gain if the same is sold. An increase in the value of an asset
is merely an unrealized increase (gain) in capital
c. Transformation
The manufacturer or producer upon whom the tax has been imposed, fearing the
loss of his market if he should add the tax to the price, pays the tax. He then
endeavors to recoup the tax paid by making his production more efficient and
lowering his cost of production

d. Tax exemption.
Exemption from taxation is the freedom from the burden of paying tax.

e. Tax avoidance.

Tax avoidance occurs when the means used to minimize taxes are legal and not
prohibited by law.

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 f. Tax evasion.
Tax evasion connotes fraud through the use of pretenses and forbidden devices to
lessen or defeat taxes (Furivo Sons Hardware CTA, L - 13203, January 28, 1981,
1 SCRA 180)

Sources:
Atty. C. Llamado, CPAR Review Material, May 2018
Jack L.A. De Vera, Quicknotes Taxation, 2016 Edition.
Edwin C. Valencia, Gregorio F. Roxas, Income Taxation, 2016-2017-7th Edition.