Prelude

to the awesome power of Taxation..

F or eons, our lives have been signi7icantly affected by taxation. More often than not, we tend to
view this as a disruptive system and get ensnared with the idea that it is nothing more than
just a burden.

Taxation- with its long arms- is present in almost all of the activities that we do on a daily basis. We
have been hounded by the government to pay our tax obligations. From the time we 7irst opened our
infant eyes until the time we meet our Maker, taxation is there to hunt us. A learned man even once
said, “Taxation, along with Change, are the constants of the world.”

This awesome power has been perpetually viewed as an avenue of stripping us of our hard-earned
money. Despite the animosity that we catapult towards it, we- as citizens of this country- are still
obligated to contribute to the government through income taxes. To top that up, we also have to deal
with skyrocketing prices of goods due to consumption taxes. Truth be told, no one likes taxation.

However, it is inarguable that most people who put so much ill will on taxation are those who have
very little to no knowledge of this economic process. Without really knowing the true spirit behind
this power, people will still continue to avoid dealing with the obligation of paying taxes.

This is why it is necessary to open everyone’s eyes to the realities of taxation. It is essential that we
understand its purpose and nature in order to grasp the full spectrum of its existence. By educating
ourselves, we will be able to comprehend the importance of embracing taxes as part of our lives and
acknowledging the good intentions that are being enveloped by it.
Despite the years-long 7ight for equality, we were not really born with equal footing – and we will
never be truly equal for there is no such thing as absolute equality. A line in a famous song pretty
much sums up the world’s social state – “Some are rich because of fate and, some are poor with no
food on their plate.”

Not every one of us can go to private universities, avail expensive healthcare bene7its, and fully enjoy
the leisure of life. For some people with limited choices in life, the only hope of survival is an
education in a public school, healthcare in public hospitals, and short walks on public plazas. With
these public services, life is somehow equalized and those who do not have anything can have a
7ighting chance in life.

Now, how do we fund these public services? It is through taxation. The government raises its
revenues to accumulate funds in order to create public schools and universities, to build hospitals
and playgrounds, to reinforce our national defenses, and to improve infrastructure– all of these
through the exercise of the power of taxation. We can say that all of us have contributed to the
crystallization of the reason why the government exists – to serve its people – through our tax
contributions. All of us bene7it from these services – rich and poor alike. In simpler words, our taxes
7inance the common good.

So, the next time you decide to blurt out about the evils of taxation, think of the children who are
struggling to get through life trying to attain an education in a public school; the protection and
convenience that you enjoy because of the maintained peace and order in our society; the public
roads that keep you safe while driving; and the street lamps that make your night-walks more
romantic.

6
The question is not really centered on why we need to pay taxes, but on whether or not we need
public services to be continually provided to us. You may not need it, but certainly, some of our
Filipino brethren do.

“Taxes are the price we pay for civilized society” - Justice Oliver Wendell Holmes

See APPENDIX A: Application of taxation in the current pandemic.

7
Unit 1: General Principles of Philippine Income Taxation

INTRODUCTION UNIT LEARNING OBJECTIVES

__________________________________

This preliminary unit will lay down the foundations By the end of this unit you should be
of the State, its three inherent powers, and its nature. able to:

• apply appropriately the nature,

functions, sources, purposes, scope,
limitations, and salient doctrines of
TIMING the Philippine Income Taxation;
• interpret and construe properly
statutory tax laws applying
This unit is expected to consume nine study hours – prevailing laws, jurisprudence,
six hours for reading and comprehension, and three regulations, and other appropriate
hours for answering the assessments. issuances.

GETTING STARTED!

THE STATE

A state is a community of persons, more or less numerous, permanently

occupying a <ixed territory, and possessed of an independent
government organized for political ends to which the great body of
inhabitants render habitual obedience. (Garner, Introduction to Political
Science)

It can be gleaned from the aforementioned de<inition that a State has four
major elements, to wit, people1; a %ixed territory2 where they reside; a
government3 to govern them; and the sovereignty4 to govern its own
operations free from external control. Under the Declaratory theory of State
recognition, a political body becomes a State when it possesses these four
elements.

Another theory of State recognition only requires a political body to be recognized as a State by
other independent States for the former to be vested with the powers and personalities of a State.
This is referred to as the Constitutive theory. So, if State A is recognized by State B and C as a State
then it is given the personality of a State irrespective of its possession or non-possession of the
elements mentioned above.

1 The inhabitants of the State.

2 The fixed portion of the surface of the earth inhabited by the People of the State.
3 The agency or instrumentality through which the will of the State is formulated, expressed and realized. (Poindexter
v. Greenhow)
4 The supreme and uncontrollable power inherent in a state by which that State is governed.
8
When a sovereign state is given birth to, through either of the two theories, it is automatically vested
with indispensable powers necessary for its survival. These are referred to as the inherent powers
of the State.

THE INHERENT POWERS OF A STATE

The police power, along with the taxing power and eminent domain, is inborn in the very fact of
statehood and sovereignty. These are fundamental attributes of a government that has enabled it to
perform the most vital functions of governance. (Philippine Association of Service Exporters, Inc. v.
Drilon)

POLICE POWER

This is the power of the State to enact legislation that may interfere with
personal liberty or property in order to promote general welfare. (Cruz v.
Pandacan Hiker’s Club)

This power has been referred to as the most demanding, least limitable, and
most pervasive among the inherent powers of the State (Smith, Bell and Co. v.
Natividad). And such is justi<ied under latin maxim salus populi est
suprema lex (the welfare of the people is the supreme law). By reason of
this, such power is not capable of exact de<inition but has been, purposely,
veiled in general terms to underscore its all-comprehensive embrace. Its
scope, ever-expanding to meet the exigencies of the times, even to anticipate
the future where it could be done, provides enough room for an ef<icient and
<lexible response to conditions and circumstances thus assuring the greatest
bene<its.

However, no matter how pervasive this power may be, it still has its limitations found under the
1987 Philippine Constitution, speci<ically under the Bill of Rights. This power oftentimes collides with
the “due process clause.”

Examples of a valid exercise of the Police power of the State:

1. Regulation of the operation of hotels or motels to minimize certain practices hurtful to public
morals, e.g., prostitution, adultery, fornication. (Ermita-Malate Hotel and Motel Operators
Association, Inc. v. The Honorable City Mayor of Manila)
2. Suspending the deployment of female Filipino domestic and household workers abroad to
protect them from maltreatment.

Examples of an invalid exercise of the Police power of the State:

1. The mayor, deporting women of “ill-repute” to another part of the country to exterminate
vice. (Villavicencio v. Lukban)
2. A Brgy. Chairman destroying a basketball ring by cutting it up with a hacksaw due to the
basketball court affecting the peace and order of the barangay where it is located.

9
 You must bear in mind that for an act to be a valid exercise of police power, it is not enough
that the act is done with a lawful purpose, i.e., a valid governmental interest that is for the
general welfare, it must be coupled with a lawful procedure that is reasonably related to the valid
governmental purpose and is neither arbitrary nor oppressive upon individuals.

POWER OF EMINENT DOMAIN

The power of eminent domain is the inherent power of a
state to take, or sanction the taking of, private property a
public use without the owner’s consent, conditioned upon
payment of just compensation.

It is a coercive measure on the part of the State whereby

private interests are impaired for the general welfare.
(Republic v. Jose Gamir-Consuelo Diaz Heirs Association, Inc.)

The proceeding initiated for the exercise of the power

of eminent domain is referred to as expropriation.

Stages in an expropriation proceeding:

1.Determination of the propriety of taking.

The very foundation of the right of eminent domain is a
genuine necessity and that necessity must be of public
character. The ascertainment of necessity must precede or
accompany, and not follow, the taking. (Morrison v.
Indianapolis)

Taking, as the term is commonly understood, imports a physical dispossession of the owner, as when
is ousted from his land or relieved of his watch or his car and is thus deprived of all bene<icial use
and enjoyment of his property. In law, however, the term has a broader connotation. Taking may
include trespass without actual eviction of the owner, material impairment of the value of the
property or prevention of the ordinary uses for which the property was intended.

2. Determination of just compensation.

Just compensation is the full and fair equivalent of the property taken from the owner by the
expropriator. The measure is not the taker’s gain but the owner’s loss.

Where the entire property is not expropriated, there should be added to the basic value of the
owner’s consequential damages after deducting therefrom the consequential bene<its arising from
the expropriation.

10
Furthermore, it does not only refer to the payment of the correct amount but also to the payment
within a reasonable time from the taking because without prompt payment, the compensation
cannot be considered just.

In sum, just compensation in the context of expropriation proceedings pertains to the timely
or prompt payment of an adequate value suf%icient to recoup the loss suffered by the
property owner.

The power is partly founded on the Stewardship Doctrine which provides that private property
is supposed to be held by the individual only as a trustee for the people in general, who are
its real owners.

POWER OF TAXATION

The power of the taxation is the power by which the sovereign raises
revenue to defray the expenses of the government.

It is described as an inherent power of the sovereign albeit

destructive which interferes with the personal and property rights of
the people and takes from them a portion of their property for the
support of the government. (Paseo Realty & Development Corporation
v. CA)

This concept will be further discussed in the subsequent units.

SIMILARITIES AMONG THE INHERENT POWERS OF THE STATE

1. All the powers presuppose an equivalent compensation;

2. The powers interfere with the private rights of individuals;
3. The powers are, generally, exercise by the legislature;
4. There is no need for an express Constitutional grant for the exercise of the powers.

It is a well-established doctrine that the taxing power may be used as an implement of police power
(Gerochi v. Department of Energy). It has also been held that the power of eminent domain may be
used as an instrument of Police Power.

11
NOTABLE DISTINCTIONS OF TAXATION, POLICE POWER, AND EMINENT DOMAIN

PARTICULARS POLICE POWER EMINENT DOMAIN TAXATION

SCOPE Broadest, regulates Limited to the taking of Plenary, comprehensive,

both liberty and property rights for and supreme, but is limited
property. public use. only to property rights.

AUTHORITY Legislative Legislative, public Legislative

service or utility
companies

COMPENSATION An abstract feeling Just compensation. A protected and an

that one has organized society.
contributed to the
general welfare.

Relationship to the Superior Superior Inferior

“non-impairment
clause.”

TAXATION

Taxation power exists inseparably with the State. It is essential for the existence of the government
(Luzon Stevedoring Co. CA). Without taxation, the other inherent powers would be paralyzed.

The police power may be the least limitable, most demanding, and most pervasive among the
inherent powers of the State, but taxation has been held to be the strongest of the three.

IMPORTANT DOCTRINES IN TAXATION

LIFEBLOOD DOCTRINE
Taxes are the lifeblood of the government; without taxes the government
will be paralyzed for the lack of motive power to activate and operate it.
(Commissioner of Internal Revenue v. Algue, Inc.)

Taxation is the “lifeblood” or the “bread and butter” of the

government and every citizen must pay his taxes.
(Commissioner of Internal Revenue v. Pineda)

BENEFITS-RECEIVED/ BENEFITS-PROTECTION/ SYMBIOTIC RELATIONS

DOCTRINE
It is said that taxes are what we pay for a civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one’s hard earned income to the taxing authorities, every person
12
who is able to pay taxes 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 bene<its
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.

NECESSITY THEORY
The power to tax emanates from necessity; without taxes, government cannot ful<ill its mandate of
promoting the general welfare and well-being of the people. That the enforcement of tax laws and
collection of taxes are of paramount importance for the sustenance of government has been
repeatedly observed. (Republic v. Caguioa)

SILENT PARTNER DOCTRINE

The right of a government to tax income emanates from its partnership in the production of income,
by providing the protection, resources, incentive, and proper climate for such production.
(Commissioner of Internal Revenue v. V.E. Lednicky)

OBJECTIVES OF TAXATION

Fiscal purposes
The primary purpose of taxation is to raise revenues to defray government expenses and enable the
government to function.

Regulatory purposes
Taxation may also be used for regulatory purposes as an implement of police power. It may be
employed to protect domestic products from foreign domination or to discourage the importation of
articles which are considered inimical to the public interest by increasing the amount of taxes and
duties imposed on such articles.

Taxation, if so desired, may be used to force entities or even entire industries to substantially reduce
their operations. At times, the burden of taxation is so heavy that it is impractical to continue
operating, forcing entities to totally shut down their operations. So potent indeed is the power that it
was once opined that “the power to tax involves the power to destroy.” (Philippine Health Care
Providers, Inc. v. Commissioner on Internal Revenue) This is referred to as the “Marshall Dictum.”

However, an opposing dictum referred to as the “Holmes Dictum” provides that the power to tax is
not the power to destroy while the Supreme Court sits.

To reconcile the seemingly colliding doctrines: No matter how comprehensive, unlimited,

plenary, and supreme the power of taxation may be, to the extent that the exercise of which
may even amount to the destruction of its subjects, it is not absolute. It may not be exercised in an
oppressive, capricious, whimsical, and arbitrary manner as to deny its subjects the due process of law.
The Supreme Court, as the guardian of the Constitution, is always there to strike down all government
acts violative of the guaranteed constitutional rights.

13
LIMITATIONS ON THE POWER OF TAXATION

INHERENT LIMITATIONS

These limitations are part and parcel of the very nature of the power of taxation.
1. Taxes may be levied only for public purposes;
2. Being inherently legislative, taxation power may not be delegated (Non-delegation of
taxation);
3. Taxation power is limited to the territorial jurisdiction of the taxing authority (Situs of
taxation);
4. Taxation is subject to international comity;
5. The government is, generally, exempted from taxation.

PUBLIC PURPOSE

The legislature has no power to appropriate public revenues for anything but public purpose-
general welfare of the nation.

The term “public purpose” has been expanded even to those activities which only provide indirect
bene<it to the general public and vests the direct bene<it in the form of protection and stabilization
to a particular industry only, such as the sugar industry.

The protection of a large industry constituting one of the great sources of the state’s wealth and
therefore directly or indirectly affecting the welfare of so great a portion of the population of the

14
State is affected to such an extent by public interests as to be within the police power of the
sovereign. (Lutz v. Araneta)

NON-DELEGATION OF TAXATION

The power to tax is inherent in the State, such power being inherently legislative, based on the
principle that taxes are a grant of the people who are taxed, and the grant must be made by the
immediate representatives of the people; and where the people have laid the power, there it must
remain and be exercised.

This only means that it is the law-making body of the Government - the Congress, that exercises the
power of taxation. They have the power to enact tax laws, to de<ine the subjects to be taxed, and
even grant tax immunities, among others.

Exceptions to the non-delegation of the Legislative power to tax:

1. Delegation to the President to <ix, within speci<ied limits and subject to such limitations and
restrictions as the Congress 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. (Section 28, Article VI, 1987 Constitution)
2. Delegation to administrative bodies, such as the Bureau of Internal Revenue and the Bureau
of Customs, for the purpose of enforcement and implementation of the enacted tax laws.
3. Delegation to each local government unit to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. (Section 5, Article X, 1987
Constitution)

SITUS OF TAXATION

As a rule, the power to tax can only be exercised within the territorial boundaries of the taxing
authority. The factors that may be considered in the determination of the situs of taxation are
nationality, residency, and source.

INTERNATIONAL COMITY

This refers to the courteous recognition, friendly agreement, interaction and respect accorded by
one nation to the laws and institutions of another.

As a matter of international courtesy, a property of one foreign state may not be taxed by another
because of the principle of sovereign equality among states under international law. This concept
refers to the latin maxim par in parem non habet imperium5.

5 as among equals, there can be no sovereignty

15
NON-TAXABILITY OF THE GOVERNMENT

As a general rule, the government is not to be taxed. A contrary interpretation would result to an
absurd situation where the collecting authority taxes itself - a mere transfer of funds from one
pocket to the other.

However, this concept applies only to those governmental entities through which the State
immediately and directly exercises its governmental functions like the AFP, CHED, and DPWH,
among others.

Those entities which are performing proprietary functions such as the Philippine National Railways,
and the National Power Corporation are generally subject to tax and are outside the ambit of this
rule.

Notwithstanding all the mentioned concepts, there is no prohibition against the Government taxing
itself. Thus, if the State wills it, then it can tax all the government agencies even those which perform
governmental functions.

In other words, agencies performing governmental functions are exempt from tax unless expressly
taxed, and those performing proprietary functions are subject to tax unless expressly exempted.
(National Power Corporation v. RIC)

CONSTITUTIONAL LIMITATIONS

The following limitations in the power of taxation are found and are explicitly provided in the 1987
Philippine Constitution.

It must be emphasized that the power of taxation, as all inherent powers of the State, exists
independently from the Constitution, and the latter is not essential for the exercise of the former.
The Constitutional provisions merely serve as a limitation to the inherent powers, they are not
grants of power.

The 1987 Constitution can be roughly viewed as a document that attempts to strike the balance
between the powers of the government and the liberty of the people. On one hand, it provides for
limitations against the capricious, arbitrary, whimsical, discriminatory, and con<iscatory exercise of
the inherent powers by the government, on the other, it provides the limitations for the exercise of
each constitutional liberty guaranteed to every individual.

It is worth noting that the existence of a right or power does not grant either the
government or an individual an unbridled discretion to exercise it in whatever manner. All
acts must be exercised in good faith in regard to the existing rights of others. Justice Isagani
Cruz once held, that “it is error to suppose that this subject suggests the unjustified ascendency of
authority over liberty as this might result in tyranny or the unwarranted primacy of liberty over authority
as this would result in anarchy. The true role of Constitutional Law is to effect an equilibrium between
authority and liberty so that rights are exercised within the framework of the law and the laws are
enacted with due deference to rights.”

16
The following are the salient limitations to the power of taxation provided by the 1987 Philippine
Constitution:

Due Process and Equal Protection Clause

No person shall be deprived of life, liberty, or property without due process of law, nor shall
any person be denied the equal protection clause. (Section 1, Article III, 1987 Constitution)

Due process
The exercise of the power of taxation must respect the due process clause of the Constitution. It
requires that every tax law must have a valid governmental purpose which will serve the public, and
the enforcement of which be reasonably related to the achievement of such goal and such is neither
oppressive nor con<iscatory.

“Due process” has two aspects.

The <irst is “substantial due process,” which requires the intrinsic validity of a tax law in interfering
with the property rights of each taxpayer. The law must bear a valid governmental objective, i.e., the
interests of the general public as distinguished from those of a particular class. Jurisprudence,
however, expanded the de<inition of public purpose to indirect bene<its to be enjoyed by the general
public, thus, it held in the case of Lutz v. Araneta, that a tax measure is still valid even if it directly
bene<its a particular industry only, in this case the sugar industry, as such industry is one the largest
industries in the Philippines making it one of the sources of the nation’s wealth, and it therefore
affects directly or indirectly a great portion of the populace.

The second facet of the “due process” clause is the “procedural due process” which requires that the
method to be employed in enforcing the law be reasonably related to the achievement of the valid
governmental interest and it must not be arbitrary nor con<iscatory. The philosophical phrase, “the
ends justify the means” is not altogether true in the context of “due process”

The essence of due process is distilled in the immortal cry of Themistocles to Eurybiades: Strike! But
hear me <irst!” Less dramatically, it simply connotes an opportunity to be heard. (Dadubo v. Civil
Service Commission)

Equal protection
This provision requires tax laws to be applied equally among all its subjects.

However, it is well settled that “equality before the law” under the Constitution does not import a
perfect identity of rights among all men and women. It admits of classi<ications.

The Constitution allows clustering of its subjects, and the application of varying rules on each
separate cluster. It only requires the law to be uniformly applied to a valid class and not necessarily
to the entire populace. Thus, speci<ic tax privileges granted to senior citizens cannot be validly
challenged by a 19-year old asking for the same bene<its, as the latter is not yet among the valid
classi<ication where the former belongs.

In sum, equality under the law simply means, “equality among equals.”
17
Uniformity of Taxation
The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive
system of taxation. (Section 28, Article VI, 1987 Constitution)

Uniformity in taxation requires that the same treatment be applied to members of the same class.
Consider the previous example, if a senior citizen is afforded the VAT exemption, and the same
bene<it is withheld from another senior citizen belonging to the same class, then there is a violation
of the uniformity of taxation.

Progressive taxation is built on the principle of the taxpayer’s ability to pay. Taxation is
progressive when its rate goes up depending on the resources of the person affected. This is best
characterized by the graduated tax rates in personal taxation where the rate of tax increases as the
income of the taxpayer likewise increases.

Now, focus on the VAT. It is an antithesis of progressive taxation. By its very nature, it is regressive.
The 12% VAT applies to all of the consuming public regardless of their ability to pay. Why is it
allowed then?

This has been answered in the case of Abakada Guro Partylist v. Honorable Executive Secretary
Ermita, the Court stating in part, “Nevertheless, the Constitution does not really prohibit the
imposition of indirect taxes, like the VAT. What is simply provides is that Congress shall evolve a
progressive system of taxation. Resort in indirect taxes should be minimized entirely because it is
dif<icult, if not impossible, to avoid them by imposing such taxes according to the taxpayer’s ability
to pay.”

The “progressive” provision therefore is not mandatory but is a mere desire of the framers
of the Constitution, which must be followed only for as long as it is possible to do so.

Non-impairment of contracts
No law impairing the obligation of contracts shall be passed. (Section 10, Article III, 1987
Constitution)

This implies that tax laws are inferior and cannot diminish the ef<icacy of existing valid contracts
before the former’s enactment.

Origin of tax laws

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. (Section 24, Article VI, 1987
Constitution)

Tax bills which are generally considered as revenue or tariff bills, must be initiated by the House of
Representatives. It is believed that the House of Representatives is a body which is more
representative of the people.

18
The Senate, however, may, after receiving the bill from the House of Representatives, propose
amendments and even entirely replace it with another bill. This is consistent with the power of the
Senate to propose or concur with amendments to the original bill initiated by the House of
Representatives. (Tolentino v. Secretary of Finance)

Tax Exemptions
No law granting any tax exemption shall be passed without the concurrence of a majority of
all the members of the Congress. (Section 28, Article VI, 1987 Constitution)

It is the entire Congress, composed of both Houses, that must vote for the grant of tax exemption.
Moreover, the vote necessary is that of the majority of ALL its members and not merely of those who
constituted a quorum.

Exemption from property taxes

Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and
non-pro%it cemeteries and all lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes shall be exempted from
taxation. (Section 28, Article VI, 1987 Constitution)

The tax exemption granted by this provision does not relate to all types of taxes, it only relates to
PROPERTY TAXES.

Ownership has nothing to do with the tax exemption, the Constitution merely requires that the
lands, buildings, and improvements are ACTUALLY, DIRECTLY, and EXCLUSIVELY USED for the
aforementioned purposes, regardless of the status of ownership.

Educational institutions
All revenues and assets of non-stock, non-pro%it educational institutions used directly, and
exclusively for educational purposes shall be exempted from taxes and duties. (Section 4,
Article XIV, 1987 Constitution)

This provision is specific to a non-stock, non-profit educational institution. Also, unlike the
previous provision, this relates to both revenues and assets of a non-stock, non-profit
educational institution.

Free exercise of religion

No law shall be made respecting an establishment of religion or prohibiting the free exercise
thereof. The free exercise and enjoyment of religious profession and worship, without
discrimination or preference shall forever be allowed. No religious test shall be required for
the exercise of civil or political rights. (Section 5, Article III, 1987 Constitution)

19
Public money
No public money or property shall ever be appropriated, applied, paid or used directly or
indirectly for the use, bene%it, or support of any sect, church, denomination, sectarian,
institution, or system of religion, or for the use, bene%it or support of any priest, preacher,
minister, 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. (Section 29, Article VI, 1987 Constitution)

Non-imprisonment
No person shall be imprisoned for debt or non-payment of a poll tax. (Section 20, Article III,
1987 Constitution)

This provision relates only to non-payment of BASIC POLL TAX. Non-payment of addition poll tax or
any other type tax may still result to imprisonment.

Guardian of the Constitution

The Supreme Court shall have the power to review, revise, reverse, modify or af%irm on
appeal or certiorari, as the laws or the Rules of Court may provide, %inal judgments and
orders or lower courts in all cases involving the legality of any tax, impost, assessment or toll
or any penalty imposed in relation thereto. (Section 5, Article VIII, 1987 Constitution)

It is the Supreme Court that has the <inal word on the validity of a tax measure. It is to be
emphasized, that it is only a <inal order or resolution from the Court that will put to rest a question
of validity of any tax law.

Tax laws validly enacted by Congress are, despite it being seemingly invalid, presumed to be valid
and enforceable laws without a court order stating otherwise.

STAGES OF TAXATION

Taxation involves three main stages, being:

1. Levy;
2. Assessment; and
3. Tax payment or collection.

LEVY

Levy or imposition of taxes involves the actual passage and enactment of tax laws or ordinances.
This is, strictly speaking, the actual exercise of the power of taxation.

20
The tax laws to be passed shall determine the nature of taxes, those to be taxed, the purpose of the
tax, how much is to be collected, and how taxes are to be implemented. (Petro v. Pililla)

This process also involves the granting of tax exemptions, tax amnesties, and tax remedies that the
government and taxpayers may avail for the proper implementation of a tax measure. (Commissioner
of Internal Revenue v. Botelbo Shipping Corporation)

ASSESSMENT

Assessment involves the act of administration and implementation of the tax laws by the Executive
Department through its administrative agencies such as the BIR and the BOC.

Technically, the word “assessment,” as used in this context refers to the appraisal and valuation of
the subject of taxation. This involves the determination of tax prescription, surcharges, and interests
to arrive at the speci<ic sum of tax charged on a person or property in accordance with a prevailing
tax law.

PAYMENT or COLLECTION

This is the process of actual compliance by the taxpayer to the tax law, it is in this stage that the
taxpayer contributes his share to defray the expenses of the government.

The first two stages are referred to as the impact of taxation, and the third phase is called
the incidence of taxation.

As a rule, the aspects of taxation that may be delegated to the Executive Department are assessment
and collection only since these involve administration of the tax laws.

PRINCIPLES OF A SOUND TAX SYSTEM

The fundamental principles of a sound taxation system based on Adam Smith’s Canons of Taxation
are:
1. Fiscal adequacy;
2. Theoretical justice;
3. Administrative feasibility.

FISCAL ADEQUACY
The principle of <iscal adequacy states that the sources of revenue of the government should be
suf<icient to meet the demand of public expenditures regardless of business condition. The revenue

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of the government should be capable of expanding or contracting annually in response to variations
in public expenditures.

THEORETICAL JUSTICE
This principle provides that the tax burden must be proportionate to the taxpayer’s ability to pay. It
is desirable to follow the philosophy that “he who received more should give more.” This reinforces
the constitutional provision on the evolution of a progressive system of taxation in the Philippines.

ADMINISTRATIVE FEASIBILITY
Administrative feasibility means that the tax system should be capable of being effective
administered and enforced with the least inconvenience to the taxpayer and to the government.
(Diaz v. Secretary of Finance)

Tax laws must be convenient, just, uniform, and effective in their administration - free from
confusion and uncertainty. Their exercise and compliance should be convenient as to its place, time,
and manner, not only to the taxpayers but also to the body enforcing them.

The development of the withholding tax system, quarterly <iling and payment of income taxes, and
the electronic <iling of tax returns, are evolutions applying this principle of administrative feasibility.

MORE RELEVANT DOCTRINES IN TAXATION

Prospective application of tax laws

The effectivity of the tax laws commences only upon its approval, and its scope would only cover
present and future transactions

The retroactive application of tax laws shall not be applied unless there is a clear intent of the
legislature that such law shall also be imposed on past transactions. (Hydro Resources v. CA)

Double taxation

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There is double taxation when a subject is taxed multiple times when it should have been taxed only
once.

There is no Constitutional prohibition against double taxation in the Philippines. (Villanueva

v. Iloilo)

It is only direct double taxation that is disallowed in the Philippines. This kind of double taxation
violates the constitutional provision of uniformity and equal protection, as well as the principle that
tax must not be excessive, unreasonable, and inequitable. Therefore, such taxation should, whenever
and wherever possible, be avoided to prevent injustice or unfairness.

Double taxation is obnoxious when the taxpayer is taxed twice on the same subject matter, for the
same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing
period; and the taxes must be the same kind or character (Nursery Care Corporation v. Treasurer of
Manila). These are the characteristics of the exercise of direct double taxation.

Escape from taxation

The concept of escape from taxation permits the taxpayer to minimize, if not totally escape, the
payment of tax by lawful means.

A tax evader breaks the law, the tax avoider sidesteps it. (Schultz & Harris, American Public Finance)

FORMS OF ESCAPE FROM TAXATION

Tax evasion
The taxpayer uses illegal or unlawful means to defeat, evade, or lessen the payment of tax. It
presupposes malice, fraud, bad faith, or willful intent on the part of the taxpayer to defraud the
State. (Republic v. Gonzales)

Tax avoidance
This is the legal right of the taxpayers to a decreased amount of what otherwise could be his taxes or
altogether avoid them by means which the law permits. (Delphers Traders Corp v. IAC)

Shifting
The transfer of tax burden to another; the imposition of tax is transferred from the statutory
taxpayer to another without violating a law. The Value-added tax is the best example to characterize
this concept where the seller (statutory taxpayer) shifts the burden of paying for the output vat to
the ultimate consumer.

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Capitalization
This refers to the reduction to the price of the taxed object equal to the capitalized value of the
future taxes which the purchaser expects to be called upon to pay.

Transformation

In this case, the producer absorbs the payment of tax to reduce prices and to maintain market share.

Exemption
This is characterized as the state of being immune from the effects of taxation.

Three types of tax exemption:

1. Expressed - where the exemption is explicitly provided by law or the Constitution.

2. Implied - where the exemption is only implied under the doctrine of expressio unions est
exclusio alterius (What the law excludes, it does not include)
3. Contractual - those lawfully entered into by the government in contracts under existing laws.

Tax amnesty
When a State grants general pardon or intentionally overlooks its authority to impose penalties on
persons guilty of tax evasion or violation of tax law. (Republic v. IAC)

Equitable recoupment
A tax claims for refund, which is prevented by prescription may be allowed to be used as payment
for unsettled tax liabilities if both taxes arise from the same transaction in which overpayment is
made and underpayment is due. This principle is, however, not applicable in the Philippines.

Set-off or compromise
Set-off or compensation refers to the extinguishment of obligation wherein there is simultaneous
balancing or weighting of two obligations of two persons who are mutually creditors and debtors of
each other. (Article 1278, Civil Code of the Philippines)

Generally, taxes are not subject to set-off or compensation because the government and the taxpayer
are not mutual creditor and debtor of each other. (Republic v. Mambulao Lumber Co.)

Debts, on the other hand, are generally subject to set-off. There is however, a material distinction
between a tax and a debt. Debts are due to the Government in its corporate capacity, while taxes are
due to the Government in its sovereign capacity (Philex Mining Corporation v. Commissioner of Internal
Revenue). Moreover, taxes are based on law, while debts are based on contract.

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TAX LAWS

Taxes are forced burdens, charges, exactions, impositions, or contributions assessed in accordance
with some reasonable rule of apportionment, by authority of a sovereign state, upon the person,
property, or rights exercised, within its jurisdiction, to provide public revenues for the support of the
government, the administration of the law, or the payment of public expenses.

Taxes are the result of the exercise of the power of taxation. Taxation is the power; taxes are laws
which resulted from such power. The former is the tree while the latter are its fruits.

Taxes are obligations created by law. Taxes arise from law and could only be imposed by the
government. Taxes may be imposed even without previous agreement between the government and
the taxpayers.

The Philippine Internal Revenue laws are generally civil6 in nature; they are neither political7 nor
penal8 in nature. (Republic v. Oasan Vda. De Fernandez, et al.)

APPLICATION, CONSTRUCTION, and INTERPRETATION of TAX LAWS

Under the doctrine of verba legis, if a tax law is clear, and leaves no room for interpretation, we
should apply it as it is using the plain meaning of the words used in such law.

In case of doubt however, tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority, and he who claims an exemption must be able
to justify his claim by the clearest grant of organic or statute law. Deductions for income taxes
partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed. (Commissioner of Internal Revenue v. General Foods, Inc.)

Moreover, there is also a well-settled rule that tax refunds, or credits, just like exemptions, are
strictly construed against the taxpayer. (Commissioner of Internal Revenue v. San Roque Power
Corporation)

SOURCES OF TAX LAWS

1. 1987 Constitution;
2. Treaties and Conventions;
3. Statutes;
4. Jurisprudence;

6It is that mass of precepts that determine and regulate the relations of assistance, authority, and obedience among
members of the family, and those which exist among members of a society for the protection of private interests.
7 Political Law is that branch of public law which deals with the organization and operations of the governmental
organs of the State and defines the relations of the State with the inhabitants of its territory.
8 Criminal law is that branch or division of law which defines crimes, treats of their nature, and provides for their
punishment.
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 5. Ordinances;
6. Administrative Issuances.

The primary source of tax laws in the Philippines is the National Internal Revenue Code of 1997, as
amended by R.A. 10963 (TRAIN), R.A. 11346, R.A. 11256.

TYPES OF TAXES

Taxes are the fruit of the exercise of the power of taxation. It is our contribution to the government
for it to defray its expenses. It has been said that, “taxes are what we pay for a civilized society.”
(Commissioner of Internal Revenue v. Algue, Inc.) The following are the classi<ications of the varying
taxes that we’ll encounter under the Philippine jurisdiction:

As to purpose:

1. Revenue or Fiscal. These taxes are imposed solely for the purpose of raising revenue for the
government, e.g., income tax, value added tax, and transfer taxes.
2. Regulatory, Special, or Sumptuary. These taxes are imposed for the purpose of achieving some
social or economic goals, e.g., customs duties, protective tariff on imports to control foreign
trade, and some excise taxes.

As to subject matter:

1. Personal, Poll, or Capitation. These taxes are <ixed in amount and imposed on persons residing
within a speci<ied territory regardless of the amount of their property, income, or their status in
life, e.g. community tax.
2. Property. These taxes are imposed on personal or real properties based on its proportionate
value or in accordance with some other reasonable method of apportionment, e.g. real property
taxes.
3. Excise. These taxes are imposed upon the performance of a right or act, the enjoyment of a
privilege or the engagement in an occupation, e.g. professional tax, income tax, estate tax,
donor’s tax, and value-added tax.

As to valuation:

1. Ad valorem. These taxes are <ixed in amounts in proportion to the value of the property with
respect to which the tax is assessed. It may require the intervention of Assessors to estimate the
value of such property before the amount due from each taxpayer can be determined, e.g., real
estate tax, custom duties, and some excise taxes.
2. Speci%ic. These taxes are <ixed amounts imposed and based on some standard of weight or
measurement, head or number, length or volume. It requires independent assessment other
than a listing or classi<ication of the subject to be taxed, e.g., excise taxes on cigars or <ireworks.

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As to who bears the burden

1. Direct. These tax liabilities are personal and non-transferrable. They are demanded from
persons who are bound by law to pay the tax. The liability for the payment of tax as well as the
burden of the tax falls on the same person, e.g., community tax, personal income tax, transfer
taxes, traveler’s tax, corporate income tax.
2. Indirect. These taxes are transferrable. The liability for the payment of tax falls on one person
but the burden thereof can be shifted or passed to another, e.g., value-added tax, customs duties,
amusement taxes.

As to the taxing authority:

1. National. These are the taxes imposed and collected by the National Government, e.g., income
tax, value-added tax, percentage taxes, estate tax, donor’s tax, excise tax, customs duties,
documentary stamp tax.
2. Local. These are the taxes imposed and collected by the Local Governments through the
enactment of tax ordinances, e.g., community tax, real property transfer tax, real property tax,
professional tax.

As to rate:

1. Proportional or Flat. The rate of tax is based on a <ixed percentage of the amount of the
property, receipt, or other basis of the subject to be taxed, e.g. real estate tax, value-added tax,
estate tax, donor’s tax.
2. Progressive or Graduated. The rate of tax increases as the tax base or bracket increases, e.g.
personal income taxes.
3. Regressive. The rate of tax decreases as the tax base or bracket increases. Currently there is no
regressive tax in the Philippines.
4. Digressive. A <ixed rate is imposed on a certain amount but diminishes gradually on sums below
it.
5. Mixed. A tax system that uses a combination of different tax rates.

BURDENS OTHER THAN TAXES

Taxes are not the only burdens individuals may face. The following are other charges or fees
separate and distinct from taxes:

1. Penalty. Any sanction imposed, a punishment for violations of law or acts deemed injurious.
This usually arises from law and/or contracts. This differs from tax as it may be imposed by
either a private or a public entity.
2. Debt. An obligation to pay based on a contract. It is usually payable in money or in kind, subject
to legal compensation or assignment. Non-payment of debt will not result to imprisonment, on
the other hand, non-payment of tax may result to it.
3. Toll. Compensation for the use of somebody else’s property determined by the cost of the
improvement. It is a demand of proprietorship for the use of property and may be imposed by a
private or public entity. Meanwhile, taxes are a demand of sovereignty and may be imposed only
by the government.
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4. License Fee. A contribution enforced by the government primarily to restrain and regulate
business or occupation. This is primarily an exercise of police power rather than the power of
taxation.

The payment of a license fee is usually a pre-condition to engage in trade or business and non-
payment of which outlaws a business. The amount imposed is usually limited to the cost of
regulation.

Taxes, on the other hand, is not a pre-condition to engage in trade or business and non-payment of
which does not affect the legality of a business. Moreover, the amount imposed in the exercise of
taxation is usually unlimited.

5. Special assessment. An amount collected by the government for the purpose of reimbursing
itself for certain extended bene<its regarding construction of public works. It is levied only on
land and is not a personal liability of the persons assessed.

UNIT SUMMARY

A sovereign state has three inherent powers used to execute its duties and functions, namely, police
power, power of eminent domain and power of taxation.

The police power, known as the most pervasive of the bunch, is the power of the State to interfere
with the liberty and property of the people for the general welfare. The power of eminent domain,
on the other hand is the power of the State to take private property for public use, this may only be
exercised over the property rights of the people.

The power of taxation, which is the focus of this course, is the power of the State to enforce
contributions from its people to defray governmental expenses. This power is regarded as the most
powerful among the three powers as the exercise of the other two depends on the funding to be
raised from the power of taxation.

These awesome inherent powers are the ways and methods by which the State interferes with the
liberties of the people, and to prevent the abuse in the exercise of these powers, several limitations
were placed in the form of either inherent and constitutional limitations. These limitations strike the
balance between the authority of the State to exercise its powers, on one hand, and the liberty of the
people to be left alone, on the other. The end goal is the effect and equilibrium between authority
and liberty so that rights are exercised within the framework of the law and the laws are enacted
with due deference to rights.

Remember the words of Justice Cruz: “It is error to suppose that this subject suggests the unjusti<ied
ascendency of authority over liberty as this might result in tyranny or the unwarranted primacy of
liberty over authority as this would result in anarchy. The true role of Constitutional Law is to effect
an equilibrium between authority and liberty so that rights are exercised within the framework of
the law and the laws are enacted with due deference to rights.”

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INHERENT LIMITATIONS ON THE POWER OF TAXATION
1 The power of taxation must be exercised for a public purpose.
2 The power of taxation is essentially legislative in nature, and generally, cannot be delegated
to other branches of the Government
3 The power of taxation may be exercised only within the territorial boundaries of the taxing
authority.
4 The power of taxation is subject to the concept of international comity.
5 Generally, the government cannot be taxed.

CONSTITUTIONAL LIMITATIONS ON THE POWER OF TAXATION

1 Due process and equal protection clause.
2 Uniformity, equitability and progressiveness of taxation.
3 Non-impairment clause.
4 Tax laws must originate from the House of Representatives.
5 Tax exemptions may be granted only with the concurrence of a majority of all the members of the
Congress.
6 Lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable,
or educational purposes shall be exempted from property taxes.
7 Revenues and assets of non-stock, non-pro<it educational institutions used actually, directly, and
exclusively used for educational purposes shall be exempted from taxes and duties.
8 Freedom of religion
9 Public money and property shall only be utilized for public purposes.
10 The Supreme Court of the Philippines has the power to review, revise, reverse, modify, or af<irm on
appeal or certiorari <inal judgments and orders of lower courts involving the legality of any tax,
impost, assessment or toll or any penalty in relation thereto.

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