GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

INHERENT POWERTS OF THE STATE

When a Sovereign State is born, it exits with indispensable powers necessary for its survival.
There powers are called “inherent powers”. They naturally exist as essential force in order that a
government can command, maintain peace and order, and survive, irrespective of any Constitutional
provision.

The three inherent powers of the Sovereign State are summarized as follows:

INHERENT POWERS OF SOVERIEGN STATE

POLICE POWER – the power to protect citizens and provide for safety and welfare of society.

EMINENT DOMAIN POWER – the power to take private property (with just compensation) for public
use.

TAXATION POWER –the power to enforce contributions to support the government, and other inherent
powers of the State.

NATURE OF POLICE POWER

Police power refers to the inherent power of the sovereign state to legislate for the protection
of health, welfare and morals of the community. It is exercised usually to guard against excess or abuses
of individual.

This power is restricted by the “due process clause” of the Constitution which provides that no
person may be deprived of “life, liberty, or property, without due process of law”. (Article III, Section 1,
Philippine Constitution)

The police power of the State may be exercised through taxation because taxes may be levied
for the promotion of the welfare of the public.

Examples of police power are preservation of natural resources, segregation of lepers from the
public, imprisonment of convicted criminals, and regulation of various professions.

NATURE OF EMINENT DOMAIN

Eminent Domain refers to the power of the sovereign state to take private property for public
purpose. It is founded upon the idea that the common necessities and interest of the community
transcend individual rights in property.

Consequently, the State may expropriate private property when it is necessary in the interest of
national welfare. Since eminent domain is inherent in sovereignty, pertinent provisions in the
Constitution are not grants of the power, but rather, limitations upon its exercise. (Article XII, Section 18,
Philippine Constitution)

The Constitution limits the exercise of the power by providing that property may not be taken
without just compensation. (Article III, Section 9, Philippine Constitution)

“Just compensation” means paying the owner the full monetary equivalent of the property
taken for public use.
TAXATION DEFINED

Taxation is defined as:

1. A power by which an Independent State, through its law-making body, raises and accumulates
revenue from its inhabitants to pay the necessary expenses of the government.

As a power, it refers to the inherent power of a state, co-extensive with sovereignty to demand
contributions for public purposes to support the government.

2. A process or act of imposing a charge by governmental authority on property, individuals or

transactions to raise money for public purposes.

As a process, it passes a legislative undertaking through the enactment of tax laws by the
Congress which will be implemented by the Executive Branch of the government through its
Bureau of Internal Revenue (BIR) to raise revenue from the inhabitants in order to pay the
necessary expenses of the government.

3. A means by which the Sovereign State through its law-making body demands for revenue in
order to support its existence and carry out its legitimate objectives.

As a means, it is a way of collecting and apportioning the cost of government among those who
are privileged to enjoy its benefits.

SIMILARITIES AMONG TAXATION, EMINENT DOMAIN AND POLICE POWERS

The similarities among the three inherent powers of the State are as follows:

1. They are inherent in sovereignty (they can be exercised even without being expressly
granted in the Constitution)

2. They are all necessary attributes of sovereignty because there can be no effective
government without them.

3. They constitute the three ways by which the State interferes the private rights and property.

4. They are all legislative in nature and character.

5. They presuppose an equivalent compensation; and

6. The provisions in the Constitutions are just limitations on the exercise of these powers.
 DISTINCTION OF TAXATION, POLICE POWER AND EMINENT DOMAIN

TAXATION POLICE POWERT EMINENT DOMAIN

1. As to CONCEPT Power to enforce Power to make and Power to take private
contribution to raise implement laws for the property for public use
government funds general welfare with just compensation
2. As to SCOPE Plenary, Broader in application Merely a power to take
comprehensive and – General power to private property for
supreme make and implement public use
laws
3. As a Exercised only by Exercised only by May be granted to
AUTHORITY government or its government or its public service or public
political subdivisions political subdivisions utility companies
4. As to PURPOSE Money is taken to Property is taken or Private property is
support the destroyed to promote taken for public use
government general welfare
5. As to The power to make tax Can be expressly Can be expressly
NECESSITY OF laws cannot be delegated to the local delegated to the local
DELEGATION delegated government units by government units by
the law-making body the law-making body
6. As to PERSON Operates on a Operates on a Operates on the
AFFECTED community or a class community or a class particular private
of individual of individual property of an
individual
7. As to BENEFITS Continuous protection Healthy economic Market value of the
and organized society standard of society property expropriated
8. As to AMOUNT Generally no limit Cost of regulation, No imposition
OF license and other
IMPOSITION necessary expenses
9. As to Inseparable for the Protection, safety and Common necessities
IMPORTANCE existence of a nation – welfare of society and interest of the
it supports police community transcend
power and eminent individual rights in
domain property
10. As to Subject to Relatively free from Superior to and may
RELATIONSHIP Constitutional and Constitutional override Constitutional
TO Inherent limitations limitations impairment provision
CONSTITUTIO because the welfare of
N Inferior to non- Superior non- the State is superior to
impairment clause impairment clause any private contract
11. As to Constraints by Limited by the demand Bounded by public
LIMITATIONS Constitutional and for public interest due purpose and just
Inherent limitations process compensation
NATURE OF TAXATION POWER

The power to tax is an attribute to sovereignty that is exercised by the government for the
betterment of the people within its jurisdiction whose interest should be served, enhanced and
protected.

The nature of tax power includes the following:

1. Inherent power of sovereignty;

2. Essentially a legislative function;
3. For public purposes;
4. Territorial in operation;
5. Tax exemption government;
6. The strongest among the inherent powers of the government; and
7. Subject to Constitutional and Inherent limitation.

INHERENT POWER OF SOVEREIGNTY

Taxation is as old as government itself. Its existence commences concurrently with the four
elements of a state – people, territory, sovereignty and government.

From the moment a state is born, it automatically possesses the power to collect taxes from its
inhabitants.

The government having sovereignty can enforce contributions upon its citizen even without a
specific provision in the Constitution authorizing it. It is so because the State has the supreme power to
command and enforce obedience to its will from the people within its jurisdiction.

Any provision in the Constitution regarding taxation does not create rights for the sovereignty to
have the power to tax but it merely constitutes limitations upon the supremacy of tax power.

Only the national government exercises the inherent power of taxation of the state. Local
government units do not possess the inherent power.

In order for these government units or political subdivisions to have power to tax, there must
be:

 An expressed Constitutional provision granting them the power to tax.

 Valid delegation of tax power through the stature from the national legislature granting local
government units or political subdivisions to exercise such power (i.e., Local Government Code
of the Philippines), in the absence of a Constitutional provision.

ESSENTIALLY A LEGISLATIVE FUNCTION

The law-making body of the government and its political subdivision exercise the power of
taxation. The powers of enact laws and ordinaries, and to impose and collect taxes are given to the
Congress. The scope of legislative taxing power comprises the following:

a. Subjects of taxation (persons, property, rights, transactions, occupation, etc. to be taxed);

b. Amount or rate of the tax (e.g., 5%-32% for individual’s net taxable income, 30% for
corporation’s net taxable income; 12% value-added tax based on sales or gross receipts, etc.)
c. Purpose of tax (public purposes);
d. Apportionment of tax;
e. Situs of taxation; and
f. Method of tax collection.
NON-DELEGATION OF LEGISLATIVE POWER TO TAX. In its strict sense, the power to make tax laws
cannot be delegated to other branches of the government. Since peculiarly and exclusively legislative in
nature, the power to make tax laws cannot be exercised by the executive or judicial branch of the
government.

Therefore, when the power to tax is delegated to the local government units (LGU), only the
legislative branch of the LGU can exercise the power. Also, if delegated to the President, it is limited to
administrative discretion subject to valid standards.

Examples of taxation power that cannot be delegated are the following:

a. Power to select the coverage, object or property to be taxed;

b. Determining the nature and purpose for which taxes shall be collected;
c. Determining the place or situs of tax imposition;
d. Fixing the amount to be imposed and tax rates;
e. Granting tax exemptions or condonations; and
f. Setting down the rules of taxation in general.

What may not be delegated is the power to make tax laws to a non-legislative body. If the
powers delegated are ministerial and advisory (such as power to value property, assess and
collect taxes), they shall be allowed since they are not legislative but only administrative in
nature.
Therefore, whenever the delegation of legislative power is the issue, it is important to
know the distinction between tax delegation and tax administration. This is so because if what is
delegated is tax legislation, the delegation is invalid, but if what is involved is only tax
administration, the non-delegability rule is not violated.

FOR PUBLIC PURPOSES

The power of taxation flows forth from the legitimate objective of supporting the series
of the government.
Publix taxes are public money. They must be used to finance recognized public needs.
Taxes are used to finance constructions and maintenance of roads; health care, education,
security, promotion of science, commerce, industry, and others for the welfare of the general
public.
The Supreme Court also held that the legislature has no power to appropriate public
revenues for anything but for public purpose – general welfare of the nation.

Thus, in order to consider appropriation of taxes valid, it must be for the common good
of the people. No individual or private person shall primarily be enriched or benefited by the public
funds.

It has been held that tax has been utilized for public purpose if the welfare of the nation or the
greater portion of its population has benefited with its use.

TERRITORIAL IN OPERATION

The taxing authority must observe “tax situs” because the country’s tax laws are
effective and enforceable only within its territorial limits.
 As a rule, the power to tax can only be exercised within the territorial jurisdiction of a taxing
authority except when there exists a “privity of relationship” between the taxing State and the object of
tax based on the tax principle of reciprocal duties.

This relationship implies contractual support or duty of care afforded by the Government to its
citizen residing outside the country.

Where privity of relationship exists, the state can still exercise its taxing powers over its citizen
outside its territory. It is because the fundamental basis of the right to tax is the capacity of the
government to provide benefits and protection to the object of the tax.

The State cannot tax property wholly and exclusively within the jurisdiction of another state
since it does not afford protection on property beyond its territorial boundaries for which a tax is
supposed to compensate.

Taxation is bound to observe International Comity. This is 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, property of one foreign state may not be taxed by another
because of the principle of sovereign equality among states under international law.

Since one State cannot exercise its sovereign dominion over another, a nation cannot impose
taxes to the properties of other nations.

As example of international comity limitation on the power of taxation is the tax exemption of
properties used by diplomats or head of states in the exercise of sovereign powers and diplomatic
functions.

TAX EXEMPTION OF THE GOVERNMENT

Exemption from taxation is a grant of tax immunity to a particular class of persons or

corporations. The State’s immunity from taxation is inherent in its power to impose tax.

The state cannot be taxed without its consent; otherwise, such is derogation to its sovereignty.

Tax exemption applies only to government entities through which the government immediately
and directly exercises its governmental functions like Armed Forces of the Philippines (AFP).

If, however, the government entities are performing proprietary functions such as Philippine
National Railway (PNR) and National Power Corporation (NPC) they are generally subject to tax in the
absence of tax exemption provision in their charters or the law creating the.

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