I.

BASIC PRINCIPLES OF TAXATION

A. TAXATION AS AN INHERENT POWER OF THE STATE

Power to tax is inherent in sovereignty

 the moment the State exists, the power to tax automatically exists
 enforceable even without any delegation by the Constitution or legislation from Congress
 LGUs have no inherent power to tax; but expressly granted by the Constitution or
legislation

Lifeblood Theory (CIR v Algue)

 Tax is necessary to meet the expenses of government without which the latter cannot
operate
 Every person must contribute his share in the running of the government

B. PHASES AND SCOPE OF TAXATION

Levy – where Congress enacts a statute to impose taxes

Collection

Subject Matter – refers to persons, things, transaction, privilege, etc.

C. INHERENT LIMITATIONS

1. Taxation should be for public use

a. Public welfare should be the penultimate objective.
b. Taxation may be used to implement the State’s police power.
2. Taxation is inherently legislative.
3. The Government is self-explanatory.
a. LGUs are expressly prohibited from levying tax from the NG
b. Ng may tax GOCCs, agencies and instrumentalities
4. Territoriality
a. Taxing authority cannot impose taxes on subjects beyond its territorial
jurisdiction.
b. It may determine the tax situs.

D. CONSTITUTIONAL LIMITATIONS

Constitution is not the source of the taxing power. It simply defines and delimits the power.

1. Due Process Clause (Section 1, Art. III)

 Enforced contribution from the people cannot be made without a law authorizing the
same

Substantive Due Process

 Requires that the tax statute must be within the constitutional authority of Congress and
that it must be fair, just and reasonable.

Procedural Due Process

  Requires notice and hearing, or at least an opportunity to be heard.

2. Equal Protection Clause (Section 1, Art. III)

 Means that taxpayers of the same footing should be treated alike, both as to privileges
conferred as well as on obligations imposed.

Violations (Villegas v Hsiu Chiong Tsai Poi)

 When classification is made where there should be none
 When no classification is called for

Valid Classification (Pp v Cayat)

 There must be substantial distinctions that make real differences.
 These must be germane and relevant to the purpose of law.
 The distinction must not only be applicable to present but also to future conditions.
 The distinction must apply to persons, things and transactions belonging to the same
class.

3. Freedom of Religion (Section 5, Art. III)

Non Establishment Clause

 Covers the prohibition to establish a national or official religion since in that case, there
will be an appropriation from taxes paid by the people.

Free Exercise Clause

 This is the basis of tax-exemption granted to religious institutions.

4. Non-Impairment of Contracts (Section 10, Art. III)

Applications
 People’s right and freedom to contract
 Sanctity of contracts
 Does not apply to franchises
 Not applicable to police power and eminent domain

5. Non-imprisonment for Non-Payment of Tax (Section 20, Art. III)

Poll tax – tax imposed on persons without any qualification (e.g. CTC); payment is not
mandatory (merely permissive)

E. DOCTRINE OF EQUITABLE RECOUPMENT VS. DOCTRINE OF SET-OFF

Doctrine of Equitable Recoupment

 Refers to a case where the taxpayer has a claim for refund but he was not able to file a
written claim due to the lapse of the prescription period within which to make a refund.
 The taxpayer is allowed to credit such refund to his existing tax liability.
 Allowed only in common law countries, not in the Philippines

Doctrine of Set-off or Compensation

 Applies when the government and taxpayer are mutually debtors and creditors of each
other.
  Also not allowed in the Philippines since taxes are not in the nature of contracts between
parties.
 Taxes grow out of duty to, and are the positive acts of the government to the making and
enforcing of which, the personal consent of the individual taxpayer is not required.
(Republic v. Mabulao)

F. DOUBLE TAXATION

Double Taxation
 The imposition of the same taxing body of two taxes on what is essentially the same
thing
 The imposition of two taxes on the same property during the same period and for the
same taxing purpose
 Allowed in the Philippines because there is no prohibition in the Constitution or any
statute

When not allowed? Elements:

 The taxes are levied by the same taxing authority
 Same subject matter
 Same taxing period
 Same purpose

International Juridical Double Taxation

 The imposition of comparable taxes in 2 or more States on the same taxpayer in respect
of the same subject matter and for identical periods.
 Can be eliminated by 2 contracting States.
 Should be eliminated in order to encourage foreign investors to invest in the Philippines

Most Favored Nation Clause

 Grants the contracting party terms and condition not less favorable than those granted to
the “most favored” among the other contracting parties.
 Intended to establish the principle of equality of international treatment by providing the
citizens of the contracting parties privileges accorded by either party to those of the MFN

Methods to minimize burden

 By granting tax exemptions
 By giving tax credits
 By reducing the rate of tax

G. EXEMPTION FROM REAL ESTATE TAX

Note: The properties must be ACTUALLY, DIRECTLY and EXCLUSIVELY used for religious,
educational and charitable purposes to be exempt from taxation. (Section 28[3], Art. VI).