THE INHERENT POWERS OF THE STATE

The Philippines being a sovereign state has its own powers, powers that are not given by the
Constitution and exists since the creation of the state, these powers are known as Inherent
Powers. They are called Inherent Powers because they belong to the very essence of the
government and without them no government can exist.

There are three inherent powers namely, Police Power, Power of Taxation and Power of
Eminent Domain.

Police Power - It is the sovereign power to promote and protect the general welfare. It is the
most pervasive and least limitable of the three powers of the state.
Police power is based upon the concept of necessity of the state and its corresponding right
to protect itself and its people. Police power has been used as justification for numerous and
varied actions by the state. These range from the regulation of dance halls, movie theaters,
gas stations and cockpits. (White Light Corp., vs. City of Manila)

Power of Taxation - It is the inherent power of the state to raise revenues to defray the
necessary expenses of the government or for any other public purpose. This can be done
through the imposition of burdens or imposition on persons, properties, services,
occupations or transactions.

Power of Eminent Domain - It is an inherent power of the state that enables it to forcibly
acquire private property, which is intended for public use, upon the payment of just
compensation.
Just compensation has been defined as the fair and full equivalent of the loss. The true
measure is not the taker's gain but the owner's loss.
The determination of just compensation in expropriation proceedings is essentially a judicial
prerogative. (National Power Corporation v. Spouses Asuque)
This determination of just compensation, which remains to be a judicial function performed
by the court, is usually aided by the appointed commissioners.

SIMILARITIES OF THE THREE POWERS OF THE STATE:

1. They are all inherent in the state and may be exercised by it without the need of an
express constitutional grant.
2. They are not only necessary but also indispensable. The state cannot continue or be
effective unless it is able to exercise them.
3. They are methods by which the state interferes with private rights and properties.
4. They all presupposes an equivalent form of compensation with private rights and
properties interfered with.
5. They are exercised primarily by the national legislature.

LIMITATION OF THE THREE POWERS OF THE STATE:

1. Exercise of these powers are subject at all times to the requirements of the constitution.

DISTINCTION AMONG THE THREE POWERS OF THE STATE:

As to benefits received:

1. Police power - Indirect benefit in the form of maintenance of healthy economic standard of
society.
2. Power of taxation - Indirect benefit in the form of protection and organized society.
3. Power of eminent domain - Direct benefit in the form of just compensation.

As to exercising authority:

1. Police power - Exercised by government and its political subdivisions

2. Power of taxation - Exercised by government and its political subdivisions.
3. Power of eminent domain - Exercised by government and may be exercised by public
utilities, private corporations performing public and/or quasi-public functions.

As to purpose:

1. Police power - To promote and protect the general welfare of the people.
2. Power of taxation - To raise revenue in order to defray the necessary expenses of the
government.
3. Power of eminent domain - For public use.

As to amount imposed:

1. Police power - Limited i.e sufficient as to cover the cost of regulation and necessary
expenses.
2. Power of taxation - Generally no limit as to amount of tax that may be imposed.
3. Power of eminent domain - No amount imposed. The owner of the property will be paid
just compensation.

As to persons affected:

1. Police power - Community or class of individuals.

2. Power of taxation - Community or class of individuals.
3. Power of eminent domain - Operates on the owner of the property.

As to the relationship to the non-impairment of the obligation clause of the Constitution:

1. Police power - Superior to the clause

2. Power of taxation - Inferior to the clause
3. Power of eminent domain - Superior to the clause
Illustrative example:

MRZRM Hotel Corporation is the registered owner of a hotel located in Brgy. Uno, Ternate,
Cavite. DPWH seeks to expropriate the property in accordance with its plans to create
connecting roads for both Ternate and Batangas.
MRZRM Hotel Corporation contends that DPWH is not authorized to do that since it will
impair the existing obligation of MRZRM Hotel Corporation to provide leasehold rights to its
lessees.
Is MRZRM Hotel Corporation correct in its contention?

No, The state recognizes the inherent power of government entities to condemn properties
for public purpose. Since the power of eminent domain is superior to the non impairment
clause, MRZRM Hotel Corporation is not justified in its claim because in the clash of rights, it
is the interest of the common good that prevails.

RELATIONSHIP BETWEEN POLICE POWER AND POWER OF TAXATION

Marshall Dictum "The power to tax involves the power to destroy; that the power to destroy
may defeat and render useless the power to create"

The power of taxation includes the power to destroy if it is used validly as an implement of
the police power of the state. Therefore, it should be exercised with caution to minimize
injury to the proprietary rights of the taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kills the 'hen that lays the golden egg.' (Roxas v. CTA, 23
SCRA 276)

Illustrative example:

The city of Naic, Cavite recently imposed higher taxes on the operations of nightclubs. The
validity of the imposed tax was questioned by one of the nightclub operators on the ground
that it will put them out of business. Is the tax law valid?

Yes, the power to tax includes the power to destroy. In the case at bar, the taxes was used
as an implement of police power in order to limit prostitution in the area.

Holmes Dictum "The power to tax is not the power to destroy while this court sits"

The power of taxation, although it seems unlimited in scope must adhere to the due process
clause, rules of the Constitution and must not be arbitrarily imposed.
Taxes may be inherently punitive but when the fine lines between damage and destruction is
crossed, the court must step forth and cut the hangmans noose. (Tinga, J.)
Simply put, Marshall Dictum refers to a tax law that is valid while Holmes Dictum refers to an
invalid tax law. For a tax to be considered valid, it must violate none of the constitutional and
inherent limitations.

INTRODUCTION TO TAXATION

Undoubtedly, taxation is one of the killer subjects in the CPA board exam. It does not only
give hardships to students but also to practitioners alike. This is for the reason that although
the law of taxation is brief, its concepts lies in thousands of court decisions and rulings.
Throughout the course of this book, court decisions, BIR rulings and regulations will be
discussed in order for students to appreciate more the subject and realize its relevance in
the real life practice.

WHAT IS THE NATURE OF TAXATION?

It is the inherent power of the state to raise revenues to defray the necessary expenses of
the government or for any other public purpose. This can be done through the imposition of
burdens or imposition on persons, properties, services, occupations or transactions

WHAT ARE THE PURPOSES OF TAXATION?

1. Primary purpose
a. Revenue or Fiscal Purpose - The primary purpose of taxation is to raise
revenue for the support of the government’s fundings, projects etc. For no
government, no matter how mighty it may be, cannot survive without the
support of the people.
2. Secondary purpose(Non-revenue purpose)
b. Regulatory or Sumptuary Purpose - Taxation is no longer a measure merely
to raise revenue to support the existence of government. Taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the police
power of the State. (Caltex v Commissioner , 208 SCRA 755)

WHAT IS THE THEORY/ UNDERLYING DOCTRINE OF TAXATION?

Lifeblood theory - Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance, made in accordance with law. Without taxes, the
government would be paralyzed with lack of power to operate it. (CIR v. Algue 158 SCRA 8,
16-17)

Illustration of Lifeblood Theory:

 1. Collection of taxes cannot be enjoined - A principle deeply embedded in our
jurisprudence is that taxes being the lifeblood of the government should be collected
promptly, without unnecessary hindrance or delay.In line with this principle, the
National Internal Revenue Code of 1997 (NIRC) expressly provides that no court
shall have the authority to grant an injunction to restrain the collection of any national
internal revenue tax, fee or charge imposed by the code.An exception to this rule
obtains only when in the opinion of the Court of Tax Appeals (CTA) the collection
thereof may jeopardize the interest of the government and/or the taxpayer. (Angeles
City v Angeles City Electric Corporation and RTC branch 57, Angeles City)

The situation, however, is different in the case of the collection of local taxes as there
is no express provision in the LGC prohibiting courts from issuing an injunction to
restrain local governments from collecting taxes. (Angeles City v Angeles City
Electric Corporation and RTC branch 57, Angeles City)

2. Taxes are not subject to set-off or compensation-

Under Article 1278, NCC, compensation should take place when two persons in their own
right are 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 under the statutes of set-off, which are
construed uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they do not arise out of the
contract or transaction sued on. ... (80 C.J.S. 73-74. ) .

3. Tax exemptions are strictly construed against the taxpayer and liberally in favor of the
government - The government chiefly relies on taxation to obtain the means to carry on its
operations. Taxes are essential to the existence of the government, hence, the dictum “taxes
are the lifeblood of the government”, in this regard, the right of taxation cannot be easily
surrendered; statutes granting tax exemptions are strictly construed against the taxpayer.
(CIR v Eastern Telecommunications Philippines, Inc, GR 163835)

With regards to tax laws and statutes, it is construed liberally in favor of the taxpayer and
strictly against the government.

4. A valid tax may result in destruction of taxpayer’s property

5. The power to tax is unlimited and plenary in scope - However, a tax must also adhere to
the limitations inherent to its power and limitations set by the constitution.

WHAT IS THE BASIS/RATIONALE OF TAXATION?

Symbiotic relationship - The basis of taxation is the mutual support provided by the
taxpayers and by the government to each other. Despite the natural reluctance to surrender
part of one’s hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values.(CIR v. Algue 158 SCRA 8,
16-17)

SCOPE OF TAXATION POWER

In the absence of any limitations, the taxation power is regarded as supreme,

comprehensive, unlimited and plenary.

However, that is not always the case, since our tax laws is one that comes with limitations,
both inherent and constitutional.

INHERENT LIMITATIONS

1. Tax must be imposed for public purpose. - If tax is used for private purposes, it does
violate the substantive due process, resulting to a tax law that is invalid. The
imposition of taxes for public purpose is so essential for the nation’s growth that it is
mentioned in the Preamble re: establish a Government that shall embody our ideals
and aspirations, promote the common good.

2. Principle of International comity - In law, comity specifically refers to legal reciprocity,

the principle that one jurisdiction will extend certain courtesies to other nations, or
other jurisdictions within the same nation. The term refers to the idea that courts
should not act in a way that demeans the jurisdiction, laws, or judicial decisions of
another jurisdiction.

3. Power to tax cannot be delegated - The rule is that what has been delegated cannot
be delegated, or as expressed in the Latin maxim: potestas delegate non delegare potest.
This rule is based upon the ethical principle that such delegated power constitutes not only a
right but a duty to be performed by the delegate by the instrumentality of his own judgment
acting immediately upon the matter of legislation and not through the intervening mind of
another.

4. Exemption of Government from taxation- There is no prohibition regarding

Government to tax itself, However, this is not usually done since the benefits does not
outweigh the costs.

The provisions of existing special general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are
imposed upon corporations or associations engaged in similar business, industry, or activity
Previously, PAGCOR was paying a mere 5% franchise tax in lieu of all other taxes including
corporate income tax but with the enactment of RA 9337, it excluded PAGCOR from the list
of GOCCs that are exempted from paying corporate income tax.RMC No. 33-2013 was
made to further clarify that PAGCOR will be subjected to corporate income tax and also with
the 5% franchise tax for its income from both gaming and other related services.

However, in a 2014 decision uplifted by the Supreme Court, PAGCOR would only be made
liable to pay corporate income tax on its income from other related services while it will
continue to pay 5% franchise tax in lieu of all taxes on its income from gaming operations. In
this regard, Supreme Court so ordered to cease and decist the said RMC.

5. Tax laws of the state are enforceable only within its territorial jurisdiction -Territorial
jurisdiction in this context refers to such functions as imposition and collection of taxes,
resolution of tax disputes, and enforcement in case of violation of tax laws.

CONSTITUTIONAL LIMITATIONS OF THE POWER TO TAX

DIRECT CONSTITUTIONAL LIMITATIONS

1 No person shall be imprisoned for non-payment of debt or poll tax (Section 20, Article III of
the Constitution)-
Poll tax is a tax of fixed amount imposed on residents within a specific territory regardless of
citizenship, business or profession. Example is community tax. One of the purposes of its
imposition is to support local government and to raise additional revenue for the local
community.

2 The rule of taxation shall be uniform and equitable-

(Section 28 (1), Article III of the Constitution)- Uniformity in taxation — says Black on
Constitutional Law, page 292 — means that all taxable articles or kinds of property, of the
same class, shall be taxed at the same rate. It does not mean that lands, chattels, securities,
incomes, occupations, franchises, privileges, necessities, and luxuries, shall all be assessed
at the same rate. Different articles may be taxed at different amounts, provided the rate is
uniform on the same class everywhere, with all people, and at all times.

Equity in the rule of taxation is concern whether the tax burden is distributed fairly among the
population.In this regard, two aspects of equity is widely recognized, the horizontal equity
and the vertical equity.

Horizontal equity is the idea that people having the same amount of income and wealth
should be taxed the same disregarding the non-income factors like religion, ethnicity, race
and gender.
Vertical equity is the idea that those who have more money or earning more money should
be taxed more than those who have less and earn less.

3. The Congress shall evolve a progressive system of taxation (Article VI, Section 28 of the
Constitution) - Taxes is one of the main instrument for the Government to minimize the gap
between the rich and the poor. In this regard, it is of great importance that we must
understand the three systems of taxation.

A. Progressive System- The higher is the one’s ability to shoulder the tax burden, the
higher he should pay. The income tax for individuals is based on this system.
B. Proportional System- This system assesses a flat rate of tax regardless of wealth or
income.One of the merits of this system is it is easier for tax administration to apply.
C. Regressive System- The taxes increases as the tax base decreases. This tax is
identified by consumption taxes.For example if the government is imposing 12% tax
for a certain commodity, those who have lower income would feel the burden more
than those who have higher income, thus being regarded as an anti-poor system.

4. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills shall originate exclusively in the House of Representatives,
but the Senate may propose or concur with amendments (Article VI, Section 24 of the
Constitution)- This limitation finds it wisdom from the very well-founded doctrine, no taxation
without representation. The House of representatives are deemed the ones more closer and
more representative of the people that they are the ones more capable of knowing how
much burden the people are capable of bearing, hence every bill, revenue or tariff bills must
originate from them. However, Consistent with the local autonomy, local governments are
entitled to their own power to impose taxes to create their own sources of revenue.

5. 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 he
does not object (Article VI, Section 27(2) of the Constitution)- This limitation is grounded
upon the principle of Checks and Balances, although the power of taxation is vested
exclusively in the Congress, the President has the power to veto items he does object, the
power of the President serves as a check upon the other.

6.Tax exemption of charitable institutions, churches, parsonages and convents appurtenant

thereto, mosques, and all lands, buildings and improvements of all kinds actually, directly
and exclusively used for religious, charitable or educational purposes (Article VI, Section 28
of the Constitution)- The exemption stated herein is from real property taxes only. ​Moreover,
the exemption in favor of property used exclusively for charitable or educational purposes is 'not
limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p. 1430), but
extends to facilities which are incidental to and reasonably necessary for the accomplishment of
said purposes, such as in the case of hospitals, "a school for training nurses, a nurses' home,
property use to provide housing facilities for interns, resident doctors, superintendents, and other
members of the hospital staff, and recreational facilities for student nurses, interns, and residents'
(84 CJS 6621), such as "Athletic fields" including "a firm used for the inmates of the institution.
(Cooley on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is not the ownership but the use of the property for purposes
mentioned in the Constitution.

7. No tax exemption without the concurrence of majority vote of all members of Congress
(Article VI, Section 28(4) of the Constitution.

8. No use of public money or property for religious purposes except if priest is assigned to
the armed forces, penal institutions, government orphanage or leprosarium.- This is based
on the well-founded principle of Separation of Church and State. It is worthy to remember,
however, that the Constitution prohibits is the giving of aid to the religious institution and not
the mere entering into a transaction or agreement wherein the State could benefit for itself.

9. Money collected on tax levied for a special purpose to be used only for such purpose,
balance if any, to general funds

10. The Supreme Court's power to review judgments or orders of lower courts in all cases
involving the legality of any tax, impose, assessment or toll or the legality of any penalty
imposed in relation to the above

11. Authority of local government units to create their own sources of revenue, to levy taxes,
fees and other charges subject to guidelines and limitations imposed by Congress consistent
with the basic policy of local autonomy;

12. Automatic release of local government's just share in national taxes- Automatic release
of the local government’s share will allow LGU’s to efficiently and effectively serve the
Filipino people. The share stated herein should include the entire national internal revenue
taxes. National internal revenue taxes as enumerated by the NIRC are as follows:

A. Income taxes;
B. Estate and donor’s taxes
C. Value-added tax;
D. other Percentage taxes;
E. Excise taxes;
F. Documentary stamp taxes; and
G.Such other taxes as are hereafter may be imposed and collected by the BIR.

13. Tax exemption of all revenues and assets of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational purposes-

In order for the non-stock, non-profit educational institutions to enjoy its tax exemption
conferred by the 1987 Constitution, there are two requisites, namely: (a) the school must be
non-stock and non-profit; and (b) the income is actually, directly and exclusively used for
educational purposes. There are no other conditions and limitations.Moreover, BIR in its
ruling no 201-2016 clarified that income derived from operation of cafeterias and bookstores
located within the premises of the institution shall be also exempt from paying income tax so
long as they are owned by the institution and classified as ancillary activities.

14. Tax exemption of all revenues and assets of proprietary or cooperative educational
institutions subject to limitations provided by law including restrictions on dividends and
provisions for reinvestment of profits

15. Tax exemption of grants, endowments, donations or contributions used actually, directly
and exclusively for educational purposes subject to conditions prescribed by law.

PRINCIPLES OF A SOUND TAX SYSTEM

In order for the state to achieve its collection target for the year, it must adhere to the
“principles”, principles that demarcates the line between a successful tax system into an
unsuccessful one. Absence of one principle does not necessarily connote an invalid tax
except to the extent that limitations, both inherent and constitutional are not violated.

A. Fiscal Adequacy- This principle revolves around the theory that the State should not incur
a deficit.The tax system imposed by the legislature must sustain the day to day needs of its
Government and ultimately, the People.

B. Theoretical Justice- This means that the tax burden shall be proportionate to the
taxpayer’s ability to pay, also known as the ability to pay theory.

C. Administrative Feasibility- Complicated tax rules are hard for taxpayer to understand and
to comply. If the state would implement taxes only few can understand, then certainly, it will
fall short of its target revenue collections. In sum, tax law should be capable of just,
convenient and effective administration. Note however, that this does not mean elimination
of the graduated tax rates and imposition of the flat rate tax but rather, an imposition of tax
that has no loopholes, gray areas and will not cause confusion to the People.

STAGES OR PROCESS OF TAXATION

A. Levying of the Tax- This is the stage where the liability is imposed and the persons or
properties charged with the tax are identified.It is the primary duty of the Congress to levy
the tax.

Petro vs. Petilla, 198 SCRA 82- The legislative taxing power includes the authority: 
a. to determine the nature, object, extent, coverage, and situs of the tax 
imposition, b. to grant tax exemptions or condonations, and c. to specify or 
provide for the administrative, as well as judicial remedies that either the 
government or the taxpayers may avail themselves of in the proper 
implementation of the tax measure. 

B. Assessment of the Tax- This is the determination of the amount of the tax to be paid.
C. Collection of the tax- This is essentially an administrative function.

ESSENTIAL CHARACTERISTICS OF TAX

A. It is an enforced contribution
B. It is generally payable in money
C. It is proportionate in character
D. It is levied on persons, property or property rights
E. It is levied by the state which has jurisdiction or control over the subject to be taxed-
F. It is levied for public purpose

DOCTRINES IN TAXATION

Prospectivity of Tax Laws- ​Like other statutes, tax laws operate prospectively, whether they
enact, amend or repeal, unless the purpose of the legislature to give retrospective effect is
expressly declared or may be implied from the language used. Lorenzo vs Posadas (G.R. No.
43082, 18 June 1937, 64 Phil 353)

REGISTRATION OF BUSINESS (SOLE PROPRIETOR/CORPORATIONS)

In order for students to highly appreciate this book, the author intends to deeply go into the
relevance of taxation not only in the viewpoint of the government but also to the viewpoint of the
taxpayers.

Taxes being the primary source of revenue, the Government ensures that all businesses, sole
proprietorships, corporations whether stock or non-stock are registered with the BIR.
BIR FORM 1901- Application form for registration for self-employed, mixed income individuals,
non-resident alien engaged in trade/business, estate, trust.
BIR FORM 1902- Application form for registration for individuals earning purely compensation
income (local and alien employee)
BIR FORM 1903- Application form for registration for corporations, government owned or
controlled corporations, including GAIs, LGUs, cooperatives and associations.

For student’s appreciation of the subject, provided below is the BIF form 1901.

With the introduction of the Republic Act no. 11055 signed into law by the President on
November 2018, and in accordance with the Government’s effort to put up a national ID system,
a PhilSys Number (PSN) was included in the form. With a good universal ID system on hand, it is
believed that delivery of and access to public services would be more efficient. Meanwhile,
opponents of this system sights data privacy and data security to be one of the most paramount
concerns in the implementation of this system.