Taxation

Principles of Taxation
The Inherent Powers of the State
1.Power to tax
2.Police Power
3.Eminent Domain
Power to Tax

• The act of levying of imposing a tax.

• Process or means by which the law-making body raises income to
defray the necessary expenses of the government.
• Power to impose burdens on subjects and objects (person,
property, privilege) within its jurisdiction.
• 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.
Power to Tax
• Subject to inherent and constitutional limitations, the power of
taxation is regarded as supreme, plenary, unlimited and
comprehensive.

Scope of the Power of Taxation

Comprehensive – power to tax includes the power to destroy
Unlimited – unlimited but with inherent and constitutional limitation
Plenary - complete
Supreme - whatever subject may be selected to pay the tax
Police power

• Ability to create laws to regulate actions in society

• Power of the state to enact laws to promote public health, public
moral, public safety and general welfare of the people.

The police power of the state may be exercised through taxation

because taxes may be imposed for the promotion of the welfare
of the public.
Eminent domain

• Power of the state to take private property for public use upon
paying the owner just compensation to be ascertained according
to law.
They exist independent of the constitution being
fundamental power of the state, except:
a. Power of taxation
b. Police power
c. Power of eminent domain
d. Power of recall
True or False:

The constitution is the source of the State’s

taxing power

FALSE
Power to tax is one of the inherent powers of the State.
They exist independent of the constitution
The power to demand proportionate
contribution from persons and property to
defray the necessary expenses of the
government
a. Power of taxation
b. Police power
c. Power of eminent domain
d. Power of recall
The power to regulate liberty and property to
promote general welfare

a. Power of taxation
b. Police power
c. Power of eminent domain
d. Power of recall
The power to acquire private property upon
payment of just compensation for public
purpose

a. Power of taxation
b. Police power
c. Power of eminent domain
d. Power of recall
Similarities Among the Three Inherent Powers
1) They are inherent in the state.
2) They exist independently of the constitution although the
conditions for their exercise may be prescribed by the
constitution.
3) Ways by which the state interfere with private rights and
properties
4) Legislative in nature and character
5) Presuppose an equivalent compensation received, directly, or
indirectly, by the persons affected.
Distinctions Among the Three Inherent Powers
• A) PURPOSE

Taxation To raise revenue for the expense of the State

Police Power To promote the general welfare thru
regulations
Eminent Domain To facilitate the State’s need of property for
public use
Distinctions Among the Three Inherent Powers
• B) AMOUNT OF EXACTION

Taxation No limit
Police Power Limited to the cost of regulation, issuance of
license, and/or surveillance.
Eminent Domain No exaction but private property is taken for
public use
 Distinctions Among the Three Inherent Powers
• C) BENEFITS RECEIVED

Taxation No special or direct benefit is received by an

individual taxpayer. The public received the
general benefit of protection of person, property
and the promotion of general welfare
Police Power No direct benefit received by an individual. A
healthy economic standard of society is
attained.
Eminent Domain A direct benefit results in the form of just
compensation to the property owner.
 Distinctions Among the Three Inherent Powers
• D) NON-IMPAIRMENT OF CONTRACTS

Taxation Obligations in contracts may not be impaired by

the state where tax exemptions are bilaterally
agreed upon by the state and the taxpayer.
Police Power Obligations in contracts may be impaired by the
government.
Eminent Domain Obligations in contracts may be impaired by the
government.
 Distinctions Among the Three Inherent Powers
• E) PERSONS AFFECTED

Taxation All persons, property, rights and privileges.

Police Power All persons, property, rights, privileges, and
liberties.
Eminent Domain Only upon specific property.
 Distinctions Among the Three Inherent Powers
• F) SCOPE

Taxation Plenary, unlimited, comprehensive, supreme

Police Power Broader in application. General power to make
and implement law.
Eminent Domain Power to take private property for public use
 Distinctions Among the Three Inherent Powers
• G) AUTHORITY

Taxation Exercised by the government or its political

subdivisions
Police Power Exercised by the government or its political
subdivisions
Eminent Domain May be exercised by public service
corporations or private entities operating
public utilities if granted by law.
The strongest of all inherent powers of the
government is:

a. Power of taxation
b. Police power
c. Power of eminent domain
d. Power of recall
 Which of the following statements is not
correct?
a. Taxes maybe imposed to raise revenue or to provide
disincentives to certain activities within the state
b. The state can have power of taxation even if the
Constitution does not expressly give it the power to tax.
c. In the exercise of the power of taxation, the State can
tax anything at any time.
d. The power of taxation in the Philippine constitution are
grants of power and limitations on taxing powers
 Which of the inherent powers maybe
exercised even by public utility companies?
a. Taxation
b. Police Power
c. Eminent Domain
d. A and C
Taxation Defined
Taxation is the process or means by which the sovereign,
through its law-making body, imposes burdens upon
subjects and objects within its jurisdiction for the purpose
of raising revenues to carry out the legitimate objects of the
government.

It is the act of levying a tax to apportion the cost of the

government among those who, in some measure, are
privileged to enjoy its benefits and must therefore share its
burdens
Aspects of Taxation
1. Levying of Tax (Legislative Function)
2. Assessment of Tax (Executive Function)
3. Collection of Tax (Executive Function)
Scope of the Taxing Power of the Legislative
The Supreme Court held that the power of taxation is the most absolute of all
powers of the government. It has the broadest scope of all the powers of the
government because in the absence of limitations, it is considered as
comprehensive, unlimited, plenary and supreme. The matters within the
competence of the legislature include the determination of the following:
1. Subject or object (person, property and excise/privileges) to be taxed
2. Purpose of the tax (as long as it is a public purpose)
3. Amount/Rate of Tax
4. Kind of tax
5. Apportionment of the tax
6. Situs of taxation
7. The manner and method of collection
Purposes of Taxation
• PRIMARY PURPOSE/ Revenue or Fiscal Purpose
- To raise revenues/funds to defray the necessary expenses of the government

• SECONDARY PURPOSE
a. Regulatory Purpose
- Taxation is employed as a devise for regulation or control by means of which
certain effects or conditions envisioned by the government may be achieved.

b. Compensatory Purpose
- Reduction of social inequality
- Economic Growth
- Promotion of general welfare
Essential Elements or Characteristics of a Tax
1. Enforced contribution
2. Generally payable in money
3. Proportionate in character or uniform
4. Levied on persons, property, or exercise of a right or privilege
5. It is levied by the law-making body of the state
6. For public purpose
Nature of Taxation
1. Inherent in sovereignty
2. Legislative in character
3. Exemption of government entities, agencies and instrumentalities
4. International comity
5. Limitation on territorial jurisdiction
6. The strongest of all the inherent powers of the state
Which of the following statements is not
correct?
a. Taxes maybe imposed to raise revenue or to
provide disincentives to certain activities within
the state
b. The state can have the power of taxation even if
the constitution does not expressly give it the
power to tax
c. In the exercise of power of taxation, the state
can tax anything at any time.
d. The power of taxation in the Philippine co
The Philippine government may subject the land
where embassies of foreign governments are
located to real properties

a. True
b. False
Theory and Basis of Taxation
1. Necessity Theory
- The power of taxation seats upon the theory that the existence of a
government is a necessity

2. Life-blood Theory
- Taxes are the lifeblood of the government. Without taxes, no government
can function

3. Benefits Protection Theory (Symbiotic Relationship)

- The basis of taxation is the reciprocal duties of “protection and support”
between the state and its inhabitants
- Taxes are what we pay for a civilized or organized society.
Basic Principles of a Sound Tax System
1. Fiscal Adequacy
- Sources of the revenue should be sufficient to meet the demands of
public expenditures

2. Equality or Theoretical Justice

- Tax imposed should be proportionate to the taxpayer’s ability to pay

3. Administrative Feasibility
- Tax laws should be capable of convenient, just and effective
administration.
Limitations on the Taxing Power
A. Inherent Limitations
1. Public Purpose
Proceeds from tax must be used for:
a. Support of the government
b. Some of the recognized objects of government
c. To promote the welfare of the community (not individuals)

2. Situs of taxation or territoriality

- Taxing power of a country is limited to person and property within and
subject to its jurisdiction.
Limitations on the Taxing Power
A. Inherent Limitations
2. Situs of taxation or territoriality
- Taxing power of a country is limited to person and property within and
subject to its jurisdiction.
APPLICATION OF SITUS OF TAXATION
SUBJECT MATTER SITUS
• Persons Residence of the taxpayer
• Real Property Location
• Tangible Personal Property Location
• Intangible Personal Property Domicile of the owner
• Income Residence, citizenship, source of income
• Business Place of business
• Gratuitous Transfer of Property Residence of citizenship of the transferor or
location of property
Limitations on the Taxing Power
A. Inherent Limitations
3. International Comity or Treaty
- A state cannot tax another state based on the principle of sovereign
equality among states.
- (e.g. tax law passed imposing taxes on foreign ambassadors is not a valid
law)

4. Non-delegability of the taxing power

General Rule: Power of taxation is purely legislative, hence power to tax
cannot be delegated to either legislative or executive branch.
Limitations on the Taxing Power
A. Inherent Limitations
4. Non-delegability of the taxing power
General Rule: Power of taxation is purely legislative, hence power to tax
cannot be delegated to either legislative or executive branch.
Exceptions:
a. Delegation to the president
b. Delegation to local governments to create its own sources of revenues
and to levy taxes
c. Delegation to administrative agencies certain aspects of the taxing
process that are not legislative such as:
c.1 power to fix the value of property for purposes of taxation
c.2 power to assess and collect taxes
Limitations on the Taxing Power
A. Inherent Limitations
5. Tax exemptions of the government
General Rule:
• Agencies performing governmental functions are tax-exempt unless expressly taxed
• Agencies performing proprietary functions are subject to tax unless expressly
exempted.
• GOCCs (Government owned and controlled corporations) performing proprietary
functions are subject to tax. However, the following are granted exemptions:
a. GSIS
b. SSS
c. HDMF/ Pag-ibig
d. PHIC
e. Local water districts
Limitations on the Taxing Power
B. Constitutional Limitations
1. Observance of the due process of law
2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme in taxation
5. Non-imprisonment for non-payment of poll tax and debt
6. Non-impairment of the obligations of contracts
7. Free worship clause
8. Exemption of charitable institutions, churches, parsonages,
convents, mosques and non-profit cemeteries and all lands,
buildings and improvements actually, directly and exclusively used
for religious, charitable or educational purposes.
Limitations on the Taxing Power
B. Constitutional Limitations
9. Exemptions from taxes of the revenues and assets of non-profit non-
stock educational institutions including grants, endowments,
donations or contributions for educational purposes.
10. Non-appropriation of public funds or property for the benefit of any
church, sect or system of religion, etc.
11. No money shall be paid out of the Treasury except in pursuance of
an appropriation made by law.
12. Concurrence of a majority of ALL MEMBERS OF THE CONGRESS for
the passage of law granting tax exemption.
13. Non-diversification of tax collections.
Limitations on the Taxing Power
B. Constitutional Limitations
14. The president shall have the power to veto any particular items in
an appropriation, revenue or tariff, but the veto shall not affect the
items to which no objection has been made.
15. Non-impairment of the jurisdiction of the Supreme Court to review
tax cases
16. Appropriations, revenue or tariff bills shall originate exclusively in
the house of representatives but the Senate may propose or concur
with amendments.
17. Each local government unit shall exercise the power to create its
own sources of revenue and shall have a just share in national taxes.
National Taxes vs Local Taxes
National Local
Authority Inherent Power Delegated Power
Legislative in nature Legislative in nature
through enactment of through enactment of
Nature tax laws by the local ordinances by the
Congress and the local legislative branch
Senate
1. Levying = Congress 1. Levying = Legislative
2. Assessment/Collecti branch of the LGU
Process
on = BIR & BOC 2. Assessment/Collecti
on = Treasurer
National Internal Revenue Taxes
under the administration of the BIR
a. Income Tax
b. Estate and Donor’s Tax
c. Value Added Tax
d. Other percentage tax
e. Excise Tax
f. Documentary Stamp Tax
National Internal Revenue Taxes
under the administration of the BIR
a. Income Tax
b. Estate and Donor’s Tax
c. Value Added Tax
d. Other percentage tax
e. Excise Tax
f. Documentary Stamp Tax
DOUBLE TAXATION
permissible permissible permissible
but discouraged
Direct Double Taxation Indirect Double Taxation
Similar? Similar?
Taxing authority
Tax jurisdiction or taxing or ✘
district
Tax object/purpose or ✘
Taxable year or ✘
Kind or character of tax or ✘
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
favoured.
Sources of Tax Laws
Constitution Court decisions
Tax Treaties
Local tax ordinances
Tax Code
Revenue regulations,
Statues and laws revenue memorandum
circulars, revenue
Presidential memorandum orders
Decrees and
Executive Orders