E.

Principles of a Sound Tax System

The basic principles of an ideal or a sound tax system are the following:
1. Fiscal adequacy – The source of government revenue must be sufficient to meet
governmental expenditures and other public needs.1 This is essential in order to avoid
budgetary deficits and to minimize foreign and local borrowings. It means also that the
revenues should be elastic or capable of expanding or contracting annually in response to
variations in public expenditures.2
The alternatives are to incur the risk of a series of deficits or surpluses due to
inelastic revenues or to adjust the amount of public expenditures to fit the flow of funds
probably by curtailing certain activities so that the budget may be balanced.2

2. Theoretical justice – a good tax system must be based on the taxpayer’s ability to pay.
The burden should be distributed in the portion and that it should be fair to average
taxpayer and based upon his ability to pay. It is also called as the ability to pay principle
which holds that similarly situated taxpayers should pay equal taxes, while those who
have more should pay more.3
This suggest that, taxations should be uniform as well as equitable. 4 Further, it
must be progressive conformably with the constitutional mandate that Congress shall
evolve a progressive system of taxation.

3. Administrative feasibility – the tax system should be capable of being properly and
efficiently administered by the government and enforced with the least inconvenience to
the taxpayer. It means that the tax must be plain and clear to the tax payer and should be
capable of efficient enforcement by government officials.
Administrative feasibility must be one that is capable of uniform enforcement by
government officials, convenient as to time and manner of payment, and not unduly
burdensome upon, or discouraging to business activity. As stated in the Report of Tax
Commission, No tax however ideally just and fair, is better than its actual operation.
Every tax must be capable of being enforced universally and uniformly under such
standards of administration as the government can command and under such conditions,
political and moral, as exist at the time and place.5
1

1
[ CITATION Cha90 \l 13321 ]
2
The Fundamentals of Taxation (2016 Ed.) Hector S. de Leon and Hector M. de Leon., p. 13.
3
The Fundamentals of Taxation (2016 Ed.) Hector S. de Leon and Hector M. de Leon., p. 14.
4
Section 28(1), Art. VI, 1987 Constitution.
5
Report of Tax Commission of the Philippines, Vol. 1, February 1939, pp. 23-31
 Will a violation of these principles invalidate a tax law?
It depends. The non-observance of these principles, which are merely intended to
make the tax system sound, will not render the tax impositions by the taxing authority
invalid, except to the extent that specific that specific constitutional or statutory
limitations are impaired. Accordingly, an exaction in kind or in services, instead of
money although perhaps violative of administrative feasibility, may not outright be
legally objectionable since no specific constitutional or statutory limitations against it
exist. 2

Relevant cases:
Chaves vs. Ongpin
Chavez, the petitioner, seeks to declare unconstitutional Executive Order 73 of
President Cory Aquino. Chavez, as a taxpayer and an owner of three parcels of land. He
alleges the following: 1. that EO 73 accelerated the application of the general revision of
assessments thereby mandating an excessive increase in real property taxes; 2.that sheer
oppression is the result of increasing real property taxes at a period of time when harsh
economic conditions prevail; and 3. that the increase in the market values of real property
as reflected in the schedule of values was brought about only by inflation and economic
recession.
Chavez argues further that the unreasonable increase in real property taxes
brought about by EO No. 73 amounts to a confiscation of property repugnant to the
constitutional guarantee of due process.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP) joins
Chavez in his petition to declare unconstitutional EO 73, but additionally alleges the
following: that Presidential Decree No. 464 is unconstitutional insofar as it imposes an
additional one percent (1%) tax on all property owners to raise funds for education, as
real property tax is admittedly a local tax for local governments and does not meet the
requirements of due process.
The court ruled that the Executive order is constitutional. The revision of the
assessments in EO 73 does not impose new taxes nor increase taxes but changed the date
of implementation of the increase from January 1988 to January 1, 1987. Thus, the court
agrees with the Office of the Solicitor General that the attack on Executive Order No. 73
has no legal basis as the general revision of assessments is a continuing process mandated
by Section 21 of Presidential Decree No. 464. Further, Court agrees with the observation
of the Office of the Solicitor General that without EO 73, the basis for collection of real
property taxes win still be the 1978 revision of property values. Certainly, to continue
collecting real property taxes based on valuations arrived at several years ago, in
disregard of the increases in the value of real properties that have occurred since then, is
2
Tax Law and Jurisprudence (2014 Ed.) Justice Jose C. Vitug and Justice Ernesto D. Acosta p. 3.
not in consonance with a sound tax system. Fiscal adequacy, which is one of the
characteristics of a sound tax system, requires that sources of revenues must be
adequate to meet government expenditures and their variations.

Kapatiran ng mga Naglilingkod sa Pamahalaan vs. Tan

EO 273 was issued by the President of the Philippines which amended the
Revenue Code, adopting the value-added tax (VAT) effective 1 January 1988. Four
petitions assailed the validity of the VAT Law for being beyond the President to enact;
for being oppressive, discriminatory, regressive, and violative of the due process and
equal protection clauses, among others, of the Constitution. The Integrated Customs
Brokers Association particularly contend that it unduly discriminate against customs
brokers (Section 103 [r]) as the amended provision of the Tax Code provides that “service
performed in the exercise of profession or calling (except custom brokers) subject to
occupational tax under the Local Tax Code, and professional services. The case at bar
assails the constitutionality of the EO since the VAT law violative of the administrative
feasibility principle.
The court held that it is not violative. The VAT law is principally aimed to
rationalize the system of taxes on goods and services. Thus, simplifying tax
administration and making the system more equitable to enable the country to
attain economic recovery.

Diaz vs. Secretary of Finance

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief assailing the validity of the impending imposition of value-
added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway
operators. Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of sale of services that are subject to VAT;
that a toll fee is a user’s tax, not a sale of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the nonimpairment clause of
the constitution. The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including tollway operations, except where the law
provides otherwise; that the Court should seek the meaning and intent of the law from the
words used in the statute; and that the imposition of VAT on tollway operations has been
the subject as early as 2003 of several BIR rulings and circulars.
ISSUE: WON Toll fees collected by tollway operators may be subjected to VAT
RULING: YES. The law imposes VAT on all kinds of services rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected
services is not exclusive. By qualifying services with the words all kinds, Congress has
given the term services an all- encompassing meaning. The listing of specific services is
intended to illustrate how pervasive and broad is the VATs reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined as a form of
service rendered for a fee should be deemed included unless some provision of law
especially excludes it.
If the legislative intent was to exempt tollway operations from VAT, as
petitioners so strongly allege, then it would have been well for the law to clearly say so.
Tax exemptions must be justified by clear statutory grant and based on language in the
law too plain to be mistaken. But as the law is written, no such exemption obtains for
tollway operators. The Court is thus duty-bound to simply apply the law as it is found.
Administrative feasibility is one of the canons of a sound tax system. It
simply means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer. Non-
observance of the canon, however, will not render a tax imposition invalid "except to the
extent that specific constitutional or statutory limitations are impaired.” Thus, even if the
imposition of VAT on tollway operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution.

Abakada Guro Partylist vs Ermita

RA 9337, an act amending certain sections of the National Internal Revenue Code
of 1997, is questioned by petitioners for being unconstitutional. Procedural issues raised
by petitioners are the legality of the bicameral proceedings, exclusive origination of
revenue measures and the power of the Senate concomitant thereto. Also, Substantive
issue was raised regarding the undue delegation of legislative power to the President to
increase the rate of value-added tax to 12%.
Petitioners Pimentel et al argue that the 12% increase in the VAT rate imposes an
unfair and additional tax burden on the people. Petitioners also argue that the 12%
increase, dependent on any of the 2 conditions set forth in the contested provisions, is
ambiguous because it does not state if the VAT rate would be returned to the original
10% if the rates are no longer satisfied. They argue that such rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate from year to year.
ISSUE: WON Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107
and 108, respectively, of the NIRC giving the President the stand-by authority to raise the
VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation
of the legislative power to tax.
RULING: NO. The case before the Court is not a delegation of legislative power.
It is simply a delegation of ascertainment of facts upon which enforcement and
administration of the increase rate under the law is contingent. The legislature has made
the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact
or condition. It leaves the entire operation or non-operation of the 12% rate upon factual
matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of
discretion is the fact that the word shall is used in the common proviso.  The use of the
word shall connote a mandatory order.  Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion. No statutory construction or
interpretation is needed. Neither can conditions or limitations be introduced where none
is provided for.
Petitioners also contend that the increase in the VAT rate, which was allegedly an
incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the
previous year, should be based on fiscal adequacy. They obviously overlooked that
increase in VAT collection is not the only condition. There is another condition, i.e., the
national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
That the first condition amounts to an incentive to the President to increase
the VAT collection does not render it unconstitutional so long as there is a public
purpose for which the law was passed, which in this case, is mainly to raise revenue.
In fact, fiscal adequacy dictated the need for a raise in revenue. The principle of
fiscal adequacy as a characteristic of a sound tax system was originally stated by
Adam Smith in his Canons of Taxation (1776), as: IV. Every tax ought to be so
contrived as both to take out and to keep out of the pockets of the people as little as
possible over and above what it brings into the public treasury of the state. It simply
means that sources of revenues must be adequate to meet government expenditures
and their variations.