INCOME TAXATION- Chapter 1
contributions upon its citizens even without specific
Inherent Powers- naturally exist as essential force in
order that a government can command, maintain
peace and order, and survive, irrespective of any
Constitutional provision
3 Inherent Powers of Sovereign State
1. Police Power- power to protect citizens and
provide safety and welfare of society
- Restricted by the “due process clause”
Examples:
 Preservation of natural resources
 Segregation of lepers from the public
 Imprisonment of convicted criminals
 Regulation of various professions
2. Eminent Power- power to take private
property for public use
The Constitution limits the exercise of the power by
providing that property may not be taken without
just compensation.
Just Compensation- means paying the owner the full
monetary equivalent of the property taken for public
use
3. Taxation Power- power to enforce
contributions to support the government, and
other inherent powers of the State
Taxation is also defined as:
 Power- refers to the inherent power of a
state, co-extensive with sovereignty to
demand contributions for public purposes to
support the government
 Process- passes a legislative undertaking
through the enactment of tax laws by the
Congress which will be implemented by the
Executive Branch of the government
 Means- a way of collecting and apportioning
the cost of government among those who are
privileged to enjoy its benefits
Nature of Taxation Power
1. Inherent power of sovereignty
Taxation is as old as government itself. Its existence
commences concurrently with the four elements of a
state—people, territory, sovereignty, and
government.
The government having sovereignty can enforce
provision in the Constitution authorizing it.
Only national government exercises the inherent
power of taxation of the state. Local government
units do not possess the inherent power.
2. Essentially a legislative function
The powers to enact laws and ordinances, and to
impose and collect taxes are given the Congress.
The power to make tax laws cannot be exercised by
the executive or judicial branch of the government.
Whenever the delegation of legislative power is the
issue, it is important to know the distinction between
tax delegation and tax administration. This is so
because if what is delegated is tax legislation, the
delegation is invalid, but if what is involved is only
tax administration, the non-delegability rule is not
violated.
3. For public purposes
The Supreme Court also held that the legislature has
no power to appropriate public revenues for
anything but for public purpose—general welfare of
the nation.
No individual or private person shall primarily be
enriched or benefited by the public funds.
4. Territorial in operation
The power to tax can only be exercised within the
territorial jurisdiction of a taxing authority, except
when there exists a “privity of relationship”
between the taxing State and the object of tax based
on the tax principle of reciprocal duties.
Where privity of relationship exists, the state can still
exercise its taxing powers over its citizen outside its
territory. It is because the fundamental basis of the
right to tax is the capacity of the government to
provide benefits and protection to the object of the
tax.
Taxation is bound to observe International Comity.
As a matter of international courtesy, property of on
foreign state may not be taxed by another because of
the principle of sovereign equality among states
under international law.
5. Tax exemption of the government
Exemption from taxation- a grant of tax immunity
to a particular class of persons or corporations
The State’s immunity from taxation is inherent in its
power to impose tax.
Tax exemption applies only to government entities
through which the government immediately and
directly exercises its governmental functions like
the Armed Forces of the Philippines.
6. The strongest among the inherent powers
Taxation power is the strongest of all inherent
powers of the government because, without money,
the government can neither survive nor dispense any
of its other powers and functions effectively.
7. Subject to Constitutional and inherent
limitations
Taxation, Eminent Domain, and Police Powers are all
legislative in nature and character.
Importance of Taxation
 Taxation power exists inseparably with the
State.
 It is very important for the continuous
existence of a nation.
 It is the primary source of government
revenue that is used to effectively and
permanently perform government functions.
 It is exercised to raise revenue to serve the
people for whose benefit taxes are collected.
 Without taxation, the other inherent powers
would be paralyzed.
Basis of Taxation
1. Based on the Principle of Necessity
The government has a right to compel all its citizens,
residents, and property within its territory to
contribute money.
It is the “lifeblood” or the “bread and butter” of the
government and every citizen must pay his taxes.
2. Based on Reciprocal Duties
Under the “benefits-received principle”, the
government collect taxes from the subjects of
taxation in order that it may be able to perform its
functions and provide services to them.
The symbiotic relationship and partnership
between the taxing authority and the subject of
taxation is enough to justify the imposition of tax
power.
Purposes of Taxation
1. Revenue Purpose
The primary purpose of taxation is to raise
revenue by collecting funds or property for the
support of the government in promoting the general
welfare and protecting its inhabitants.
The fiscal policy of the government is based on the
rule that receipts or revenue should be equal to
annual government expenditures.
2. Regulatory Purpose
Regulatory, also known as Sumptuary, is a secondary
objective of imposing tax. This objective is
accomplished to regulate inflation, achieve economic
and social stability, and serve as key instrument for
social control.
Tax may also be used as a tool and weapon in
international relations.
It is an instrument to encourage foreign trade by
providing tax incentives or protect local industries
against foreign competition by imposing additional
taxes on imported goods.
As a tool to protect trade relation, special duties may
be created to protect new conditions, such as:
 Discriminatory duty- designed to offset any
foreign discrimination against our local
commerce
 Countervailing duty- to offset any foreign
subsidy granted to imported goods to the
prejudice of our local industries
 Marking duty- imposed as additional duty
tax on imported articles and/or containers
with improper classifications
 Dumping duties- additional duty taxes
imposed on imported goods with lower prices
compared to their fair market values to
protect local industries
3. Compensatory Purpose
Taxation is a way of giving back the expected
economic and social benefits due to the inhabitants.
Taxes may be imposed for the equitable
distribution of wealth and income in the society.
In income taxation, higher taxes are collected from
those who earn more.
In estate taxation, estate tax reduces the property
received by the successor through the proportion of
the property collected by the government, which is to
be used for the benefit of the public or to defray the
expenses of the government.
Objects of Taxation
1. Persons
 Natural person- refers to individual
taxpayers
 Juridical person- includes corporations,
partnerships, and any association
2. Properties
 Real properties- immovable properties
such as land and buildings
 Personal properties- movable properties
such as car and other personal belongings
 Tangible properties- that which may be
felt or touched and are necessarily
corporeal, either real or personal
properties
 Intangible properties- “rights” rather than
physical objects such as patents, stocks,
bonds, goodwill, trademarks, franchises,
and copyrights
3. Excise objects
 Transaction- act of conduction
activities related to any business or
profession and it may involve selling,
servicing, leasing, borrowing,
mortgaging, or lending
 Privilege- a benefit derived through
gratuitous transfer by fact of death or
donation
 Right- a power, faculty, or demand
inherent in one person and incidental
to another
 Interest- an advantage accruing from
anything
Scope of Taxation Power
In the absence of limitations provided by the
Constitution, the power to tax is unlimited, complete
(plenary), with wide extent of application
(comprehensive) and with highest degree (supreme).
Taxation reaches every trade or occupation, every
object of industry, and every species of possession.
Limitations to the Power of Taxation
Although taxation power is supreme, its exercise is
not absolute because it is subject to Inherent and
Constitutional Restrictions.
Our Constitution assumes the existence of taxation
and it also provides some provisions to limit the
exercise of tax power. Its main purpose is to protect
the objects of taxation against its abusive
implementation. Therefore, if a tax law violates the
Constitution, such law shall be declared null and void.
Inherent Limitations- natural restrictions to
safeguard and ensure that the power of taxation shall
be exercised by the government only for the
betterment of the people whose interest should be
served, enhanced, and protected
Constitutional Limitations- provisions of the
fundamental law of the land that restrict the
supreme, plenary, unlimited, and comprehensive
power to tax by the State
It must be remembered that a tax law is of no legal
force when it violates the Constitution.
The Constitutional provisions that limit the exercise
of the power to tax are as follows:
1. Due process of law
No personal 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.
2. Equal protection of law
Equal protection of law means that all persons
subject to legislation shall be treated alike under
similar circumstances and conditions both in the
privileged conferred and liabilities imposed.
3. Rule of uniformity and equity in taxation
The rule of taxation shall be uniform and equitable.
Congress shall evolve a progressive system of
taxation.
The progressive system of taxation means that the
tax laws shall give emphasis on the ability-to-pay
principle of taxation.
4. Non-impairment of the contracts
No law impairing the obligation of contracts shall be
passed.

5. President’s Veto Power
Every bill passed by the Congress shall, before it
becomes a law be presented to the President. If he
approves the same, he shall sign it; otherwise, he
shall veto it and return the same with his objections
at large in its journal and proceed to reconsider it.
Item Veto Power- power to veto items in
appropriation bills without affecting any other
provisions of such bills
Pocket Veto Power- the disapproval of a bill by
inaction of the President which results that the bill
shall fail to become law
Under the Constitution, the President does not have
the so-called pocket veto power because his failure to
communicate his veto of any bill presented to him
within 30 days after the date of receipt thereof
automatically causes the bill to become a law.
6. Exemption from property tax
Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques and 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.
If a land owned by religious order is sold, it is subject
to a final tax of 6% based on the selling price or fair
market value whichever is higher.
To be exempted from taxation, the real property must
be exclusively used for religious, educational, and
charitable purposes.
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly and
exclusively for educational purposes shall be
exempted from taxes and duties.
7. Public money not for religious purposes
No public money or property shall ever be
appropriated, applied, paid, or used directly or
indirectly for the use, benefit, or support of any sect,
church, denomination, sectarian, institution, or
system of religion, or for the use, benefit, or support
of any priest, preacher, minster, 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.
The doctrine stated above is to further stress the
principle of the separation of the church and the
State.
8. Congress granting tax exemption
No law granting any tax exemption shall be passed
without the concurrence of a majority of all the
members of the Congress.
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.
9. Supreme court’s final judgment in all tax
cases
The Supreme Court shall have the power to review,
revise, reverse, modify or affirm on appeal or
certiorari, as the laws 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.
The Power of Judicial Review in taxation is limited
only to the interpretation and application of tax laws.
10. No imprisonment for non-payment of poll tax
No person shall be imprisoned for debt or non-
payment of a poll tax.
Poll tax- a tax imposed on a person as a resident
within a territory of the taxing authority without
regard to his property, business or occupation
11. Taxes as general funds of the government
All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid
out fir 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.
Stages, Aspects, or Processes of Taxation
1. Levy
Levy or imposition of taxes involves the passage of
tax laws or ordinances through the legislature.
The tax laws to be passed shall determine the nature 3. Administrative Feasibility
of taxes (kind), those to be taxed (subjects- person,
Tax laws must be convenient, just, uniform, and
property or rights), the purpose of tax (objective),
effective in their administration—free from
how much is to be collected (the rate and the base of
confusion and uncertainty.
tax), and how taxes are to be implemented (the
manner of imposing and collecting tax). The principles of fiscal adequacy and theoretical
justice represent the nature of the government’s tax
It also involves grating of tax exemptions, tax
policy and the administrative feasibility represents
amnesties, and tax remedies.
tax administration.
2. Assessment
Imprescriptibility of taxes- taxes in general are not
It involves the act of administration and concelable
implementation of the tax laws by the executive
Double taxation- act of sovereign by taxing twice by
through its administrative agencies such as the BIR
the same purpose in the same year upon the same
or Bureau of Customs.
property.
Taxes are self-assessing. It means that the taxpayer
Indirect duplicate taxation- is a double taxation in a
can compute his taxes by himself.
broad sense. It extends to all cases in which there is a
Assessment- appraisal and valuation of the subject burden of two or more pecuniary impositions.
of taxation
Direct duplicate taxation- double taxation in its
3. Tax Payment/Collection strict sense. It is prohibited because it comprises
imposition of the same tax on the same property.
Payment of tax- process involving the act of
compliance by the taxpayer in contributing his share - it violates the constitutional provision of uniformity.
to defray the expenses of the government
The first two stages of taxation (levy and assessment)
No double taxation:
are referred to as the impact of taxation, and the
third phase is referred to as the incidence of * by taxing corporate income and stockholders'
taxation. dividend from the same corporation.
Principles of a Sound Tax System * a tax imposed by the state and the local government
upon the same corporation.
1. Fiscal Adequacy
* real estate tax and income tax collected on the same
It states that the sources of revenue of the
real estate property.
government should be sufficient to meet the demand
of public expenditures regardless of business * tax are imposed on the taxpayer's final product and
condition. the storage of raw materials used in the production.
Surplus in budget- revenue is greater than Escape from taxation
government expenses
-tax evader breaks the law, tax avoider sidesteps it.
Budget deficit- government expenses are more than
government revenue Forms of escape from taxation

Balanced budget- achieved when revenue equals the 1. Tax evasion (unlawful means)
expenditures 2. Tax aviodance (lawful means)
2. Equality or Theoretical Justice Forms of tax avoidance
This principle states that the tax burden must be A. Tax option
proportionate to the taxpayer’s ability to pay.
B. Shifting
It is based on the philosophy that “he who received
more should give more”. C. Capitation
D. Transformation Set-off taxes - this doctrine states that taxes are not
subject to set off or legal compensation.
E. Exemption
Taxpayer suit- affected through court proceedings
F. Tax amnesty
could only be allowed if act involved a direct and
G. Tax condonation illegal disbursement.
Power to destroy- is based on the Narshall Dectum

Tax evasion - taxpayer uses illegal or unlawful

means to defeat, evade or lessen the payment of tax.
Tax avoidance - also called as tax minimization. It is
reducing or totally escaping from payment of taxes
through legally permissible means.
Tax option- taxpayer may choose to pay lower tax
rate in some transactions as permitted in tax laws.
Shifting- basically, the transfer of tax to another.
Forms of tax shifting :
1. Forward shifting- burden of tax is transferred from
the manufacturer then to the distributer and finally
to the customer.
2. Backward shifting - burden of tax is transferred
from the ultimate consumer through factors of
distribution to the factors of production.
3. Onward shifting - burden of tax is shifted two or
more times.
Capitalization- refers to thr reduction in price of
taxed object equal to the capitalized value.
Transformation - the producer absorbs the payment
of tax to reduce prices and to maintain market share.
Exemption from taxation classifications :
1. Expressed exemption - statutory laws in nature
provided by constitution.
2. Implied exemption - either intentional or
accidental. Tax is imposed on certain class of persons,
etc.
3. Contractual exemption- lawfully entered ny the
government.
Tax amnesty- when yhe state grants general pardon
or intentionally overlocked its authority to impose
penalties.
Tax condonation- state refrains from exactong,
influcting or enforcing something.