NADINE GABAO
TAXATION LAW REVIEW
A. CONCEPT AND PURPOSE OF TAXATION
TAXATION
Elements of Taxation
1. Enforced proportional
contribution from persons and
properties;
2. Imposed by the State by virtue
of its sovereignty; and
3. It is levied for the support of
government.
[Republic v. COCOFED, G.R. Nos.
147062-64 (2001)]
Nature
1. Inherent in sovereignty
2. Essentially a legislative function –
It includes the authority to:
a. Determine the nature, purpose,
extent, coverage, apportionment,
situs, and method of collection of
the tax;
b. Grant tax exemptions or
condonations; and
c. Specify or provide for the
administrative as well as judicial
remedies that either
government or the taxpayers may
avail themselves in the proper
implementation of the tax
measure.
3. Subject to constitutional and
inherent limitations
Personal Review Notes
I. GENERAL PRINCIPLES
Definition
 As a revenue raising measure, it is the process or means by which the sovereign, through its law-making body, raises income to defray the necessary
expenses of government.
 As a power, it refers to the inherent power of the state to demand enforced contributions for public.
Purpose
A. Revenue-Raising
The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common welfare.
B. Special or Regulatory
 Promote general welfare of the people as an implement of Police Power. [Southern Cross Cement Corporation v. Cement Manufacturers Association
of the Philippines, et al., G. R. No. 158540 (2005)]
 Strengthen anemic enterprises or provide incentives to greater production through grant of tax exemptions or the creation of conditions conducive
to their growth.
 Protect local industries against foreign competition by imposing additional taxes on imported goods, or encourage foreign trade by providing tax
incentives on imported goods.
 International bargaining tool by setting tariff rates first at a relatively high level before trade negotiations.
 Halt inflation in periods of prosperity to curb spending power; ward off depression in periods of slump to expand business.
 Reduce inequalities in wealth and incomes, progressivity is based on the principle that those who are able to pay more should shoulder the bigger
portion of the tax burden.
 Encourage economic growth through the grant of incentives or exemptions, which encourage investment and thereby stimulate economic activity.
 Promote science and invention [see RA. No. 5448]
 Improve the efficiency of local police forces in the maintenance of peace and order through grant of subsidy [see RA. No. 6141].
Characteristics of Taxing Power Characteristics of Tax
1. It is comprehensive. Covers persons, businesses, 1. Enforced contribution
activities, professions, rights, and privileges. 2. Proportionate in character – Laid by some rule of apportionment which is usually based on ability to
2. It is unlimited. The power to impose taxes is one pay. “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
so unlimited in force and so searching in extent, system of taxation.” [Sec. 28 (1), Art. VI, 1987 Constitution];
the
that the courts scarcely venture to declare that 3. Levied for public purpose. Revenues derived from taxes cannot be used for purely private purposes
it is subject to any restrictions whatever, except or for the exclusive benefit of private persons. [Gaston v. Republic Planters Bank, G.R. No. 77194
such as rest in the discretion of the authority (1988)];
which exercises it. 4. Generally payable in the form of money – Although the law may provide payment in kind (e.g.
3. It is plenary or complete. Under NIRC, the BIR backpay certificates under Sec. 2, R.A. No. 304, as amended);
may avail of certain remedies to ensure the 5. Personal to the taxpayer;
collection of taxes. 6. Levied on persons, property, rights, acts, privileges, or transactions;
4. It is supreme. It is supreme insofar as the 7. Levied by the State which has jurisdiction or control over the subject to be taxed;
8. Levied by the law-making body of the State. The power to tax is a legislative power but is also
selection of the subject of taxation is concerned.
granted to local governments, subject to such guidelines and limitations as law may be provided by
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TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS

(Source: UP BOC)

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(Source: UP BOC)

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B. DISTINGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN

(Credits to the Source)

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Personal Review Notes
C. THEORY AND BASIS OF TAXATION

TAXATION

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. It is
1. Lifeblood Theory said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it [CIR v. Algue, G.R. No. L-28896 (1988); See also CIR v.
Pineda, G.R. No. L-22734 (1967)].

The power to tax is an attribute The obligation to pay taxes rests upon the necessity of money for the
2. Necessity Theory of sovereignty. It is a power support of the state. For this reason, no one is allowed to object to
emanating from necessity. or resist the payment of taxes solely because no personal benefit to
him

It is a necessary burden to preserve the State's sovereignty and a means to

give the citizenry:
 an army to resist an aggression;
 a navy to defend its shores from invasion;
 a corps of civil servants to serve;
 public improvement designed for the enjoyment of the citizenry and those
which come within the State's territory; and
 facilities and protection which a government is supposed to provide.
[Phil. Guaranty v. CIR, G.R. No. L-22074 (1965)]

3. Benefits-Protection This principle serves as the basis of
taxation and is founded on the
Theory reciprocal duties of protection and
(Symbiotic Relationship) support between the State and its
inhabitants.
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. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power. [CIR v. Algue, supra]

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D. JURISDICTION OVER SUBJECT AND OBJECTS

TAX JURISDICTION
OF TAXATION
1. The gov’t cannot tax a particular object of taxation which is
not within its territorial jurisdiction.

2. Tax laws cannot operate beyond a State’s territorial

3. Property outside the State’s jurisdiction does not receive

any protection of the State.

4. If a law is passed by Congress, it must see to it that the object

or subject of taxation is within the territorial jurisdiction of
the taxing authority.

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E. PRINCIPLES OF A SOUND TAX SYSTEM

TAX SYSTEM
OF TAXATION It simply means that sources of revenues must be adequate to meet government expenditures
and their variations. The dire need for revenue cannot be ignored. Our country is in a quagmire
Fiscal Adequacy of financial woe. [Abakada Guro vs. Sec. Ermita, G.R. NO. 168056, Sept. 1, 2005]

 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
Administrative Feasibility
tax imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired." [Diaz and Timbol vs. Sec. of Finance, G.R. No. 193007, July 19, 2011]

Theoretical Justice or Equality

The tax burden should be in
proportion to the taxpayer’s
ability to pay. This is the so-
called ability to pay principle.
Taxation should be uniform as
well as equitable [Section 28(1),
Art. VI, 1987 Constitution] The
State must evolve a progressive
system of taxation.
In Churchill v. Concepcion, the SC explained
that a tax "is uniform when it operates with
the same force and effect in every place
where the subject of it is found."
[British American Tobacco vs. Sec. of Finance,
G.R. No. 163583, April 15, 2009]
Taxation is said to be equitable when its
burden falls on those better able to pay.
[Reyes and Reyes vs. Pedro Almanzor, G.R.
Nos. L-49839-46, April 26, 1991]
Uniformity of taxation, like the kindred concept of
equal protection, merely requires that all subjects or
objects of taxation, similarly situated, are to be treated
alike both in privileges and liabilities (citations omitted).
Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial
and not arbitrary,
(2) the categorization is germane to achieve the
legislative purpose,
(3) the law applies, all things being equal, to both
present and future conditions, and
(4) the classification applies equally well to all those
belonging to the same class.
[British American Tobacco vs. Sec. of Finance, G.R. No.
163583, April 15, 2009]

Taxation is progressive when its rate goes up

depending on the resources of the person
affected.
[Reyes and Reyes vs. Pedro Almanzor, G.R.
Nos. L-49839-46, April 26, 1991]

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F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION

INHERENT LIMITATIONS

 An inherent limitation on the power of taxation is public purpose. Taxes are exacted Public use is no longer confined to the traditional
Public Purpose notion of use by the public but held synonymous
only for a public purpose.
 The reason for this is simple. The power to tax exists for the general welfare; hence, with public interest, public benefit, public welfare,
implicit in its power is the limitation that it should be used only for a public purpose. and public convenience.
[Planters Products, Inc. vs. FERTIPHIL Corp., G.R. No. 166006, March 14, 2008] [Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G.R. No. 159647 (2005)]

Tests in Determining Public Purpose:

a) Duty Test – Whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a government to
provide.
b) Promotion of General Welfare Test – Whether the proceeds of the tax will directly promote the welfare of the community in equal measure.
c) Character of the Direct Object of the Expenditure – It is the essential character of the direct object of the expenditure which must determine its
validity as justifying a tax and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community, and
thus the public welfare, may be ultimately benefited by their promotion.
[Pascual v. Sec. of Public Works, G.R. No. L-10405 (1960)]

The power to tax is exclusively vested in the legislative body and it may not be re-
Inherently Legislative Legislature has the power to determine
delegated. Judge Cooley enunciates the doctrine in the following oft-quoted language:
the:
"One of the settled maxims in constitutional law is that the power conferred upon the
a. Nature (kind),
legislature to make laws cannot be delegated by that department to any other body or
b. Object (purpose),
authority.”
c. Extent (rate),
[People v. Vera, G.R. No. L-45685 (1937)]
d. Coverage (subjects) and
For a valid delegation of power,
e. Situs (place) of taxation.
it is essential
Stated in another way, taxation may exceptionally be delegated, subject to such well-
that the law delegating the
settled limitations as:
power must be
a. The delegation shall not contravene any constitutional provision or the inherent
1) complete in itself, that is, it
limitations of taxation;
must set forth the policy to be The powers which cannot be delegated
b. The delegation is effected either by:
executed by the delegate and, include:
· the Constitution; or
2) it must fix a standard — limits  The determination of the subjects to be taxed;
· by validly enacted legislative measures or statute; and
of which are sufficiently  The purpose of the tax, the amount or rate of
c. The delegated levy power, except when the delegation is by an express provision of the
determinate or determinable the tax;
Constitution itself, should only be in favor of the local legislative body of the local or
— to which the delegate must  The manner, means, and agencies of
municipal government concerned.
conform. collection; and
[VITUG and ACOSTA]
[Osmena v. Orbos, G.R. No.  The prescribing of the necessary rules with
99886 (1993)] respect thereto.

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Personal Review Notes

There are certain aspects of the taxing
process that are not legislative and they
may, therefore, be vested in an
administrative body. The powers which
are not legislative include:
1) The power to value property for
purposes of taxation pursuant to fixed
rules;
2) The power to assess and collect the
taxes; and
3) The power to perform any of the
innumerable details of computation,
appraisement, and adjustment, and the
delegation of such details.
The exercise of the above powers is really
not an exception to the rule as no
delegation of the strictly legislative power
to tax is involved.
Exceptions to non-delegability of the power of taxation
a. Delegation to local governments
This exception is in line with the general principle that the power to create municipal corporations for purposes of local self-government carries with
it, by necessary implication, the power to confer the power to tax on such local governments. (1 Cooley 190). This is logical for after all, municipal
corporations are merely instrumentalities of the state for the better administration of the government in respect to matters of local concern. [ Pepsi-
Cola Bottling Co. of the Phil. Inc. v. Mun. of Tanauan, G.R. No. L-31156 (1976)].
Under the new Constitution, however, LGUs are now expressly given the power to create its own sources of revenue and to levy taxes, fees and
charges, subject to such guidelines and limitations as the Congress may provide which must be consistent with the basic policy of local autonomy. [Sec
5, Art. X 1987 Constitution]
b. Delegation to the President
1. Tariff powers by Congress under the Flexible Tariff Clause 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. [Sec. 28(2), Art. VI, 1987 Constitution]
2. Emergency Powers [Sec. 23(2), Art. VI, 1987 Constitution.
3. To enter into Executive agreements; and
4. To ratify treaties which grant tax exemption subject to Senate concurrence.
c. Delegation to administrative agencies
Limited to the administrative implementation that calls for some degree of discretionary powers under sufficient standards expressed by law or
implied from the policy and purposes of the Act.

As a Rule:
Territorial A state may not tax property lying outside its borders or lay an excise or
privilege tax upon the exercise or enjoyment of a right or privilege
derived from the laws of another state and therein exercise and
enjoyed. [51 Am .Jur. 87- 88].
Taxation may be exercised only within the territorial jurisdiction of the
taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the
taxing authority may determine the place of taxation” or “ tax situs".

Reasons:
1) Tax laws do not operate
beyond a country’s
territorial limits.
2) Property which is wholly
and exclusively within the
jurisdiction of another
state receives none of the
protection for which a tax
is supposed to be a
compensation.
Note: Where privity of relationship exists. It does not mean, however, that a
person outside of state is no longer subject to its taxing powers. The There is a territorial system of taxation for
fundamental basis of the right to tax is the capacity of the government to foreign corporations and individuals, as
provide benefits and protection to the object of the tax. A person may be taxed well as non-resident citizens.
where there is between him and the taxing state, a privity of the relationship Only Philippine-sourced income is subject
justifying the levy. Thus, the citizen’s income may be taxed even if he resides to Philippine taxes for non-resident
abroad as the personal (as distinguished from territorial) jurisdiction of his citizens. Corporations incorporated under
government over him remains. In this case, the basis of the power to tax is not Philippine laws and resident citizens are
dependent on the source of the income nor upon the location of the property subject to income tax on their worldwide
nor upon the residence of the taxpayer but upon his relation as a citizen to the income.
state. As such a citizen, he is entitled, wherever he may be, inside or outside [See Section 23 of the NIRC, as amended.]
of his country, to the protection of his government.

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In Hilton vs. Guyot  (supra), the highest court of the United States said that
International Comity comity "is the recognition which one nation allows within its territory to
the legislative, executive, or judicial acts of another nation, having due
regard both to International duty and convenience, and to the rights of its
own citizens or of other persons who are under the protection of its laws. "  which one nation allows within its territory to the acts of foreign
[J. A. SISON vs. the Board of Accountancy and Robert Orr Ferguzon, G.R. No.
L-2529, December 31, 1949]
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Personal Review Notes
International Law is founded largely upon mutuality, reciprocity, and
the principle of comity of nations. Comity, in this connection, is
neither a matter of absolute obligation on the one hand, nor of
mere courtesy and good will on the other; it is the recognition
governments and tribunals, having due regard both to the
international duty and convenience and the rights of its own
citizens or of other persons who are under the protection of its
laws. The fact of reciprocity does not necessarily influence the
application of the doctrine of comity, although it may do so and has
been given consideration in some instances. (30 Am. Jur., 178; Hilton
vs. Guyot, 159 U. S., 113, 40 Law. ed., 95; 16 S. Ct., 139.) [J. A. SISON
vs. the Board of Accountancy and Robert Orr Ferguzon, G.R. No. L-
The comity thus extended to other nations is no impeachment of
sovereignty. It is the voluntary act of the nation by which it is offered,
and is inadmissible when contrary to its policy, or prejudicial to its
interest. But it contributes so largely to promote justice between
individuals, and to produce a friendly intercourse between the
sovereignties to which they belong, that courts, but the comity of the
nation, which is administered and ascertained in the same way, and
guided by the same reasoning, by which all other principles of
municipal law are ascertained and guided. (30 Am. Jur., 178; Hilton vs.
Guyot, 159 U. S., 113, 40 Law. ed., 95; 16 S. Ct., 139.) [Supra]
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Exemption of Government
Entities, Agencies, and
Instrumentalities

CONSTITUTIONAL LIMITATIONS

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