Definition of Taxation:

- 71 Am Jur 2nd 342

- A tax is a compulsory financial charge or some other type of levy imposed upon a
taxpayer by a governmental organization in order to fund government spending
and various public expenditures.

Nature of Internal Revenue Laws:

- Hilado v. CIR
- Hilado claiming 12k+ deductible from his taxes based on Circular V-123 (March 1952)
bec of losses from WW2. Sec of Finance issued new circular saying that losses from
WW2 only deductible in the year of actual loss and disallowed deduction.
- “Internal revenue laws are not political in nature and as such were continued in force
during the period of enemy occupation and in effect were actually enforced by the
occupation government. As a matter of fact, income tax returns were filed during that
period and income tax payment were effected and considered valid and legal.”
- “The Secretary of Finance acted without valid authority in revoking it and approving in
lieu thereof General Circular No. V-139.” - Power to rule on validity of laws vested in the
courts. SOF only vested w power to revoke and repeal orders of his/her predecessor in
office.
- General Circular No. V-123, having been, issued on a wrong construction of the law,
cannot give rise to a vested right that can be invoked by a taxpayer. The reason, is
obvious: a vested right cannot spring from a wrong interpretation.

Scope of Taxation:
- §28, Art. VI, 1987 Constitution
- SECTION 28. (1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
- (2) The Congress may, by law, authorize 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.
- (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.
- (4) No law granting any tax exemption shall be passed without the concurrence
of a majority of all the Members of the Congress.
- 71 Am Jur 2nd 394 – 395
- 71 Am Jur 2nd 397-398
- Chamber of Real Estate and Builders’ Association (CREBA) v. Romulo, Amatong and
Parayno, G.R. No. 160756, March 9, 2010 (http://lawyerly.ph/juris/view/cd241?
user=geGdHMy9XNlVCNWNnNzB3OFlYSlloRkYrUGZNNGJrWjlreWRVbjIvVXRpdz0=)
- Petitioner is an association of real estate developers and builders in the
Philippines.
- Petitioner assails the validity of the imposition of minimum corporate income tax
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets.
- Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is
implemented by RR 9-98. Petitioner argues that the MCIT violates the due
process clause because it levies income tax even if there is no realized gain.
- Petitioner contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary assets
and capital assets and second, respondent Secretary of Finance has no authority
to collect CWT, much less, to base the CWT on the gross selling price or fair
market value of the real properties classified as ordinary assets.
- Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the
government collects income tax even when the net income has not yet been
determined.
- The MCIT on domestic corporations is a new concept introduced by RA 8424 to
the Philippine taxation system. It was devised as a relatively simple and effective
revenue-raising instrument compared to the normal income tax which is more
difficult to control and enforce. It is a means to ensure that everyone will make
some minimum contribution to the support of the public sector.
- Domestic corporations owe their corporate existence and their privilege to do
business to the government. They also benefit from the efforts of the government
to improve the financial market and to ensure a favorable business climate. It is
therefore fair for the government to require them to make a reasonable
contribution to the public expenses.
- With the corrective nature of the MCIT, the following safeguards were
incorporated into the law:
- First, recognizing the birth pangs of businesses and the reality of the need to
recoup initial major capital expenditures, the imposition of the MCIT commences
only on the fourth taxable year immediately following the year in which the
corporation commenced its operations.[25] This grace period allows a new
business to stabilize first and make its ventures viable before it is subjected to
the MCIT.[26]
- Second, the law allows the carrying forward of any excess of the MCIT paid over
the normal income tax which shall be credited against the normal income tax for
the three immediately succeeding years.[27]
- Third, since certain businesses may be incurring genuine repeated losses, the
law authorizes the Secretary of Finance to suspend the imposition of MCIT if a
corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.
- Taxes are the lifeblood of the government. Taxation is an inherent attribute of
sovereignty.[34] It is a power that is purely legislative.[35] Essentially, this means
 that in the legislature primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.
- As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against its
abuse is to be found only in the responsibility of the legislature (which imposes
the tax) to its constituency who are to pay it.
- SC will not strike down a revenue measure as unconstitutional (for being violative
of the due process clause) on the mere allegation of arbitrariness by the
taxpayer.[41] There must be a factual foundation to such an unconstitutional
taint.
- Income means all the wealth which flows into the taxpayer other than a mere
return on capital. Capital is a fund or property existing at one distinct point in time
while income denotes a flow of wealth during a definite period of time.[45]
Income is gain derived and severed from capital.[46] For income to be taxable,
the following requisites must exist:
- (1) there must be gain;
- (2) the gain must be realized or received and
- (3) the gain must not be excluded by law or treaty from taxation.[47]
- Certainly, an income tax is arbitrary and confiscatory if it taxes capital because
capital is not income. In other words, it is income, not capital, which is subject to
income tax. However, the MCIT is not a tax on capital.
- The MCIT is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of goods[48]
and other direct expenses from gross sales. Clearly, the capital is not being
taxed.
- Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of
the normal net income tax, and only if the normal income tax is suspiciously low.
- Absent any other valid objection, the assignment of gross income, instead of net
income, as the tax base of the MCIT, taken with the reduction of the tax rate from
32% to 2%, is not constitutionally objectionable.
- petitioner failed to support, by any factual or legal basis, its allegation that the
MCIT is arbitrary and confiscatory.

- Sison v. Ancheta, 130 SCRA 654 (citing C.J. John Marshall [McCulloch v. Maryland] and
J. Holmes [Panhandle Oil Co. v. Mississippi])
- The assailed provision further amends Section 21 of the National Internal
Revenue Code of 1977, which provides for rates of tax on citizens or residents
on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes,
and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar
arrangements, (e) dividends and share of individual partner in the net profits of
taxable partnership, (f) adjusted gross income.[2] Petitioner[3] as taxpayer
alleges that by virtue thereof, "he would be unduly discriminated against by the
imposition of higher rates of tax upon his income arising from the exercise of his
 profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers."
- The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of
sovereignty. It is the strongest of all the powers of government."[13] It is, of
course, to be admitted that for all its plenitude, the power to tax is not unconfined.
There are restrictions. The Constitution sets forth such limits. Adversely affecting
as it does property rights, both the due process and equal protection clauses
may properly be invoked, as petitioner does, to invalidate in appropriate cases a
revenue measure.
- 'The power to tax is not the power to destroy while this Court sits.' - Justice
Holmes
- It is undoubted that the due process clause may be invoked where a taxing
statute is so arbitrary that it finds no support in the Constitution. An obvious
example is where it can be shown to amount to the confiscation of property. That
would be a clear abuse of power.
- On equal protection, there is a denial of this constitutional mandate whether the
assailed act is in the exercise of the police power or the power of eminent
domain is to demonstrate "that the governmental act assailed, far from being
inspired by the attainment of the common weal was prompted by the spirit of
hostility, or at the very least, discrimination that finds no support in reason.
- "Equality and uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for purposes of
taxation,
- the petition is without merit, considering the (1) lack of factual foundation to show
the arbitrary character of the assailed provision;[31] (2) the force of controlling
doctrines on due process, equal protection, and uniformity in taxation and (3) the
reasonableness of the distinction between compensation and taxable net income
of professionals and businessmen -- certainly not a suspect classification.

- Sarasola v. Trinidad, 40 Phil. 259, G.R. No. 14595, October 11, 1919

Underlying Theory and Basis:

- 71 Am Jur 2nd 346-347
- CIR v. Algue, Inc. L-28896 Feb 17, 1988

Principles of a Sound Tax System

- Abakada Guro Party List Officers v. Ermita, et. al., G.R. No. 168056, September 1, 2005
- Diaz and Timbol v. Secretary of Finance and the Commissioner of Internal Revenue
[G.R. No. 193007. July 19, 2011.]

Comparison with Police Power and Eminent Domain

- Similarities and distinctions: 71 Am Jur 2nd 395-397
- Gerochi, et al. v. DOE, et al., G.R. No. 159796, July 17, 2007
 - Matalin Coconut Co., Inc. v. Mun. Council of Malabang, 143 SCRA 404
- Lutz v. Araneta, 98 Phil 48 e. NTC v. CA, 311 SCRA 508 (1999)

Stages or Aspects of Taxation