PRINCIPLES OF TAXATION

TAX - An enforced contribution imposed and collected by the government from taxpayers to
cover the costs of government services

CHARACTERISTICS

➢ Imposed by the State which has jurisdiction over the person, property or excises
(activity)
➢ Levied by the Legislature
➢ It is an enforced contribution
➢ Generally payable in money
➢ Proportionate in character – based on the taxpayer’s ability to pay
➢ Levied on persons, property or excises (activity)
➢ Levied for public purpose
➢ Paid at regular periods or intervals
➢ Personal to the taxpayer

3 INHERENT POWERS OF THE STATE

1. Police Power
- The power to protect citizens and provide for safety and welfare of society.
2. Eminent Domain
- The power to take private property (with just compensation) for public use.
3. Taxation
- The power to enforce contributions to support the government, and other
inherent powers of the State.
- The strongest among the inherent powers of the government.

Similarities
a. They are inherent in sovereignty (they can be exercised even without being
expressly granted in the Constitution)
b. They are all necessary attributes of sovereignty because there can be no effective
government without them
c. They are methods whereby the State interferes with the private rights and property
d. Primarily exercised by the legislature
e. They presuppose an equivalent compensation
f. The provisions in the Constitutions are just limitations on the exercise of these powers

Distinctions

TAXATION POLICE POWER EMINENT DOMAIN

Maybe granted to public

As to authority Government only Government only service or public utility
companies

Operates on the
Community or a class Community or a class
particular private
of individuals of individuals
As to persons property of an
Applies to all persons, Applies to all persons,
individual
affected property and excises property and excises
Only particular property
that may be subject that may be subject
is
thereto thereto
comprehended

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 Plenary, Broader in application Merely a power to take
As to scope comprehensive, and General power to make private property for
supreme and implement laws public use

In form of protection
As to benefits Healthy economic Market value of the
and benefits received
standard of society property expropriated
from government

As to amount of Cost of regulation,

Generally, no limit license and other No imposition
imposition
necessary expenses

Superior to and may

Subject to Relatively free from
override Constitutional
As to relationship Constitutional and Constitutional
impairment provision
Inherent Limitations limitations
to Constitution because the welfare of
Inferior to non Superior to non
the State is superior to
impairment clause impairment clause
any private contract

IMPORTANCE OF TAXATION

➢ It is the primary source of government revenue that is used to effectively and

permanently perform government functions.
➢ Without taxation, the other inherent powers (police power and eminent domain powers)
would be paralyzed.
➢ Without revenue, there can be no continuing government.
➢ Without a government, there can be no civilization.

BASIS OF TAXATION

1. Necessity
a. Lifeblood of the Country
● Rule of “No Estoppel against the Government”
- It means that in the performance of its governmental functions,
○ The State cannot be estopped by the neglect of the
agents/officers
○ Erroneous application and enforcement of law by public
officers do not block the subsequent correct applications of
statutes.
● Collection of taxes cannot be enjoined (estopped) by injunction
- Under section 218 of the Tax Code (as amended), no court,
except the Court of Tax Appeals, shall have the authority to
grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge
● Taxes could not be the subject of compensation or set-off
- Taxes cannot be subject to set-off or compensation since claim for
taxes is not a debt or contract.
- No set-off rule means that taxes are not subject to set-off or legal
compensation because the government and the taxpayer are not
mutual creditors and debtors of each other.
● Right to select objects (subjects) of taxation.
- The matters within the competence of the legislature include the
determination of:
1. The subject or object to be taxed
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 2. The purpose of the tax as long as it is a public purpose
3. The amount or rate of the tax
4. Kind of tax
5. Apportionment of the tax
6. Situs of taxation
● A valid tax may result in the destruction of the taxpayer’s property
- The power to tax includes the “power to destroy”
b. “Bread and butter” of the government
2. Reciprocal Duties
- Under the “benefits-received principle”, the government collects taxes from
the subjects of taxation in order that it may be able to perform its functions and
provide services to them.

PURPOSES OF TAXATION

1. REVENUE/FISCAL PURPOSE
- The primary purpose of taxation is to raise revenue by collecting funds or
properties for the support of the government in promoting general welfare.
2. REGULATORY/SUMPTUARY/COMPENSATORY PURPOSE
- Promotion of general welfare
- Reduction of social inequality
- Economic Growth

SCOPE OF TAXATION

1. COMPREHENSIVE - Covers persons, businesses, activities, professions, rights and

privileges
2. UNLIMITED - In the absence of limitations prescribed by law or the Constitution, the
power to tax is unlimited and comprehensive
3. PLENARY - As it is complete; the BIR may avail of certain remedies to ensure collection
of taxes.
4. SUPREME - In so far as the selection of the subject to taxation.

SOURCES OF TAX LAWS

● CONSTITUTION
● STATUTES
● REVENUE REGULATIONS
● BIR ISSUANCES
○ Revenue Memorandum Circulars
○ Revenue Memorandum Orders
○ Revenue Administrative Orders
○ Revenue Delegation of Authorities

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LIMITATIONS TO THE POWER OF TAXATION
1. INHERENT LIMITATIONS (P-I–L-E-T)
a. Taxes may be levied only for public purposes
- No tax law may be enacted for the purpose of raising revenue for
private purposes.
- The purpose should affect the inhabitants of the State or taxing district
as a community and not merely as individuals.

b. Taxation is subject to international comity

- Under international law, property of a foreign State may not be taxed
by another State due to:
➢ Sovereign equality of States
➢ There is an implied understanding that the former does not
intend to denigrate its dignity by placing itself under the
jurisdiction of the other State
➢ Immunity from suit of a State

c. Being inherently legislative, taxation may not be delegated

- The power to tax (levying or imposition) is peculiarly and exclusively
legislative in nature.
- It cannot be exercised by the Executive or Judicial branches of the
government.
- EXCEPTIONS to non-delegation rule:
1. Delegation to the President
- The Congress may authorize by law, 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

2. Delegation to the Local Government Units

NATIONAL LOCAL

Delegated
Authority Inherent (through constitutional
grant)

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 Legislative in nature Legislative in nature
through enactment of through enactment of
Nature
tax laws by the local ordinances by the
Congress local legislative branch
- Question: Since the authority of the LGUs to tax is
merely a delegated power, may the Congress abolish the
power of the LGU to tax?
- Answer: NO. Congress cannot abolish what is expressly
granted by the fundamental law. The only authority
conferred to Congress is to provide the guidelines and
limitations on the local government’s exercise of the
power to tax.

3. Delegation to the Administrative Agencies

- Certain aspects of the taxing process that are NOT really
legislative in nature are vested in administrative
agencies such as:
● Power to value property
● Power to assess and collect taxes
● Power to perform details of computation,
appraisement or adjustment; among others
- Question: The Secretary of Finance, upon
recommendation of the Commissioner of Internal
Revenue, issued a Revenue Regulation using gross
income as tax base for corporations doing business in
the Philippines. Is the Revenue Regulation valid?
- Answer: NO. The regulation establishing gross income
as the tax base is no longer implementation of the law
(administrative function) but actually constitutes
legislation, which is exclusively within the legislative
authority.

d. Government entities are generally tax-exempt

- There is no point the government will be taxing itself to raise money
for itself.
- Governmental Functions = Tax-exempt unless expressly taxed
- Proprietary Function = Taxable unless expressly exempted
- Question: Are Government Owned and Controlled Corporations
(GOCCs) performing proprietary functions subject to tax?
- Answer: YES. Government Owned and Controlled Corporations
(GOCCs) performing proprietary functions are subject to tax except for
the following:

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 ★ Government Service Insurance System (GSIS)
★ Social Security System (SSS)
★ Philippines Health Insurance Corporation (PHIC / PhilHealth)
★ Local Water Districts (RA 10026)
★ Home Development Mutual Fund (HDMF / PAG-IBIG)

e. Tax power is limited to territorial jurisdiction of the State

- Tax laws cannot operate beyond a State’s territorial limits. Property
outside one’s jurisdiction does not receive any protection from the
State.
- Exemption: Resident Citizens.
2. CONSTITUTIONAL LIMITATIONS
a. Due process of law
- Art III, Sec. 1: No person shall be deprived of life liberty or property
without due process of law, not shall any person be denied the equal
protection of laws.
- Procedural due process: requires that taxpayers must be “notified”
of the assessment in writing and must state the fact and the law upon
which it is based.
- Substantive due process: requires that assessments must not be
harsh, oppressive or confiscatory; it must be made under authority of
a valid law; and must be imposed within the territorial jurisdiction of
the State.

b. Equal protection of law

- Art III, Sec. 1: No person shall be deprived of life liberty or property
without due process of law, not shall any person be denied the equal
protection of laws.
- All persons subject to legislation shall be treated alike under similar
circumstances and conditions both in the privileges conferred and
liabilities imposed.

c. Rule of uniformity and equity

- Art. VI, Sec. 28 (1): The rule of taxation shall be uniform and
equitable.
- It requires the uniform application and operation, without
discrimination, of the tax in every place where the subject of the tax is
found. It does not, however, require absolute identity or equality
under all circumstances, but subject to reasonable classification.
- The Congress shall evolve a progressive system of taxation.

OVER BUT NOT OVER RATE

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 - 250,000 0%

250,000 400,000 20% of the excess over 250,000

400,000 800,000 P30,000 + 25% of the excess over 400,000

P130,000 + 30% of the excess over

800,000 2,000,000
800,000

P490,000 + 30% of the excess over

2,000,000 8,000,000
2,000,000

P2,410,000 + 35% of the excess over

8,000,000 -
8,000,000

d. Non-impairment of contracts
- Art. III, Sec. 10: No law impairing the obligation of contracts shall be
passed.
- An example of impairment by law is when a later taxing statute
revokes a tax exemption based on a contract. But this only applies
when the tax exemption has been granted for a valid consideration.

e. Non-imprisonment for non-payment of “poll tax”

- Art. III, Sec. 20. No person shall be imprisoned for debt or non-
payment of a poll tax.
- Poll tax (sedula) is a tax of fixed amount imposed on residents within
a specific territory regardless of citizenship, business or profession.

f. President’s power to veto separate items in revenue or tariff bills

- Art. VI, Sec. 27(2): 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 which he does not object.
○ Pocket Veto = right to reject a particular item/s in a tax bill.
○ Full Veto = right to reject the whole tax bill.

g. Exemption from REAL PROPERTY TAX of religious, charitable or educational

entities, nonprofit cemeteries, churches and convents appurtenant thereto.
- Art. VI, Sec. 28 (3) 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.
- The test of exemption refers to the actual use, not ownership.
- Illustration: Mr. Ramos is the owner of a 5,000 sqm parcel of land
located in Manila City. He leased the property for P50,000 a year to a

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 religious congregation for 15 years. The religious congregation built on
a 1,000 sqm portion a seminary and a chapel that it used in
connection with its religious activities. It constructed a 10-storey
building on the remaining 4,000 sqm, which it rented out to various
commercial establishments, the proceeds of which go to the support of
its various seminaries located throughout the Philippines. These
seminaries are organized as non-profit and non-stock educational
institutions.
- Question 1: Is Mr. Ramos exempt from the payment of real property
tax?
- Answer: Yes, Mr. Ramos is exempt from the payment of real property
taxes on the 1,000 sqm portion of his 5,000 sqm lot, as well as on the
remaining 4,000 sqm.
- Question 2: Is the religious congregation exempt from the payment
of RPT?
- Answer: The religious congregation should pay RPT on the 4,000 sqm
parcel of land and the 10-story building because the basis for taxation
of real property is use and not ownership.
- Question 3: Is the religious congregation exempt from the payment
of income taxes on the rental receipts?
- Answer: The religious congregation is subject to income taxation. The
constitutional tax exemptions refer only to real property that are
actually, directly and exclusively used for religious, charitable or
educational purposes, and that the only constitutionally recognized
exemption from taxation of revenues are those earned by non-profit,
non-stock educational institutions which are actually, directly and
exclusively used for educational purposes.

h. Exemptions of non-stock, non-profit educational institutions

- Art. XIV, Sec 4(3): 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.
- This exemption covers income tax, property tax, donor’s tax, and
customs duties.

i. No public money shall be appropriated for religious purposes

- Art. VI, Sec. 29(2): 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 domination, sectarian
institution or system of religion, or any priest.

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 j. Majority of all the members of the Congress required in granting tax
exemption
- Art. VI, Sec 28(4). No law granting any tax exemption shall be
passed without the concurrence of a majority of all the Members of the
Congress.

k. The Congress may not deprive the Supreme Court of its jurisdiction in all
cases involving the legality of any tax
- Art. VIII, Sec. 5(2): The Supreme Court shall have the power to
review, revise, 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 all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto.

l. Tax collection shall generally be treated as general funds of the government.

- Art. VI, Sec. 29(3): All money collected or any tax levied for special
purposes shall be treated as a special fund and paid out for 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.

m. Revenue or tariff bill must exclusively originate from the lower house.
- Art. VI, Sec. 24: All appropriation, revenue or tariff bills, bills
authorizing the increase of public debts, bills of local application and
private bills, shall originate exclusively in the House of Representative,
but the Senate may propose or concur with amendments.

DISTINGUISHMENT OF TAX

1. TAX VS LICENSE
● Tax = for revenue
● License = for regulation
2. TAX VS TOLL
● Tax = for the support of government
● Toll = for the use of another’s property
3. TAX VS PENALTY
● Tax = enforced contribution
● Penalty = punishment for violation of law
4. TAX VS SPECIAL ASSESSMENT
● Tax = enforced contribution from individuals for public purpose
● Special Assessment = enforced contribution from owners for special
benefits resulting from public improvements.

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 5. TAX VS CUSTOMS DUTIES
● Tax = applies to everything
● Custom Duties = applies to imports and exports
6. TAX VS DEBT
● Tax = does not draw interest
● Debt = draws interest

ASPECTS/STAGES OF TAXATION

1. Levying (Legislative) - imposition of tax

2. Assessment (Executive) - determination of the correct amount of applicable tax
3. Collection (Executive) - administrative in nature; Bureau of Internal Revenue

PRINCIPLES OF A SOUND TAX SYSTEM

1. FISCAL ADEQUACY - Revenue raised must be sufficient to meet

government/public expenditures and other public needs.
2. ADMINISTRATIVE FEASIBILITY - Tax laws must be clear and concise; capable
of effective and efficient enforcement; convenient as to time and manner of
payment, must not obstruct business growth and economic development.
3. THEORETICAL JUSTICE - Must take into consideration the taxpayer’s ability to
pay.

NOTE:
- Non-observance of Fiscal Adequacy and Administrative Feasibility will render
the tax measure unsound but NOT unconstitutional.
- Non-observance of the Principle of Theoretical Justice may render the tax measure
unconstitutional.

OTHER DOCTRINES OF TAXATION

● “The power to tax is the power to destroy” by Justice Marshall
- Taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property
for the support of the government. (McCulloch vs. Maryland, 4 Wheat, 316 4
L ed. 579,607)

● “The power to tax is not the power to destroy as long as this court (Supreme Court)
sits” by Justice Holmes
- Taxpayers may seek redress before the courts in case of illegal imposition of
taxes and irregularities.

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 ● IMPRESCRIPTIBILITY OF TAXES
- Taxes are generally imprescriptible, except when the law provides otherwise,
e.g., the statute of limitation provided under the Tax Code.

DOUBLE TAXATION
- It means taxing the same person for the same tax period and the same activity
twice, the same jurisdiction
- Double taxation in strict sense is when:
1. Both taxes are imposed on the same property or subject matter;
2. For the same purpose
3. Imposed by the same taxing authority
4. Within the same jurisdiction
5. During the same taxing period
6. Covering the same kind or character of tax

- Double taxation in broad sense is when:

○ The opposite of direct double taxation
○ Not legally objectionable
○ The absence of one or more of the foregoing requisites of obnoxious direct tax
makes it indirect

- CONSTITUTIONALITY
➢ Double taxation in its stricter sense is unconstitutional
➢ Double taxation in its broader sense is not necessarily so.

MODES OF ELIMINATING DOUBLE TAXATION

1. TAX DEDUCTION
- An amount subtracted from the gross income to arrive at taxable income
2. TAX CREDIT
- An amount subtracted from an individual’s or entity’s tax liability (tax due) to
arrive at the tax liability still due.
3. TAX TREATIES WITH OTHER STATES
- A tax treaty sets out the respective rights to tax of the state of source (situs)
and the state of residence with regard to certain cases, an exclusive right to
tax is conferred on one of the contracting states; however, for other items of
income or capital, both states are given the right to tax.

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FORMS OF ESCAPE FROM TAXATION

1. SHIFTING

- The burden of payment is transferred from the statutory taxpayer to another

without violating the law (e.g., VAT)

2. CAPITALIZATION
- The reduction in the price of the taxed object equal to the capitalized value of
future taxes the purchaser is expected to be called upon to pay

3. TRANSFORMATION

- For manufacturers or producers, upon whom taxes are imposed, fearing the
loss of his market if he should add to the price, pays the tax and endeavors to
recoup himself by improving his process of production, thereby producing his
units at a lower cost.

4. TAX AVOIDANCE

- Exploitation by the taxpayer of legally permissible alternative tax rates or

methods of assessing taxable property or income, in order to avoid or reduce
tax liability. Also known as “tax minimization”

5. TAX EXEMPTION

- Grant of immunity to particular persons or corporations of a peculiar class

from a tax which persons or corporations generally within the same rate or
taxing district are obligated to pay.

6. TAX EVASION

- Use of a taxpayer of illegal or fraudulent means to defeat or lessen the

payment of tax.
- Also known as “tax dodging”
- It presupposes malice, fraud, bad faith, or willful intent on the part of the
taxpayer either to under declare income or over declare deductions to defeat
tax liability.

7. COMPENSATION OR SET-OFF
- As a general rule, taxes cannot be subject of a set-off or compensation
because of the lifeblood doctrine; they are not contractual obligations but
arise out of duty to the government; and the government and the taxpayers
are not mutually debtors and creditors of each other.

8. COMPROMISE AND ABATEMENT

- These powers are powers granted to the Commissioner of Internal Revenue to
reduce tax liabilities and/or penalties.

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 9. TAX AMNESTY
➢ Refers to the articulation of the absolute waiver by a sovereign of its right to
collect taxes and power to impose penalties on persons or entities guilty of
violating a tax law.
➢ Tax amnesty aims to grant a general reprieve to tax evaders who wish to
come clean by giving them an opportunity to straighten out their records.
(Metropolitan Bank and Trust Co. v. Commissioner of Internal Revenue G.R.
No. 178797, 4 August 2009)

TAX AMNESTY TAX EXEMPTION

Amnesty from all criminal and civil obligations

Immunity from civil liability only
from non-payment of taxes

Immunity or privilege granted to qualified

taxpayers from a charge or burden of which
It is a general pardon given to all taxpayers
others are subjected (Florer vs. Sheriden, 137
Ind. 28, 36 NE 365)

Applies prospectively after the grant of the

It applies only to past tax periods.
exemption or from qualification therefrom.

CLASSIFICATION OF TAXES

1. As to purpose
● REVENUE or FISCAL = general purpose of the government
● REGULATORY or SUMPTUARY = specific purpose; for regulation or control
(implementation of Police Power)

2. As to incidence

● DIRECT = demanded from the person who also shoulders the burden of tax;
cannot shift to another (income tax, donor’s tax)
● INDIRECT = demanded from one person in the expectation and intention
that he shall indemnify himself at the expense of another; can shift to another
(VAT, percentage tax)

3. As to amount
● SPECIFIC = fixed amount imposed by head or number, or weight or
measurement (excise tax on cigars and liquors)
● AD VALOREM = fixed proportion of the value of the property with respect to
which the tax is assessed (income tax, estate tax, VAT)

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4. As to rate/progression
● PROGRESSIVE = tax the rate of which increases as the tax base/bracket
increases (income tax)
● REGRESSIVE = tax the rate of which decreases as the tax base or bracket
increases
● PROPORTIONATE = tax based on a fixed percentage of amount of the
property, receipts, or other bases
5. As to authority imposing the tax
● NATIONAL = imposed under Tax Code; collected by the BIR and others
○ Income Tax – Estate Tax – Donor’s Tax – Value-Added Tax – Other
Percentage Tax – Excise Tax – Documentary Stamp Tax
○ Other Taxes as are or hereafter may be imposed and collected by the
BIR
● LOCAL = imposed by the local government units
6. As to subject matter
● PERSON = tax of a fixed amount imposed upon individual (community tax)
● PROPERTY = tax imposed on property (real estate tax)
● OTHERS = tax that does not fall within the classification of a poll/property
tax (income tax/ donor’s tax, estate tax

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