Fundamental Principles of Taxation

1. Inherent Power of the State and its Distinction and Similarities

2. Purposes of Taxation
3. Nature and Characteristics of Taxation
4. Definition of Taxes
5. Theory of Taxation
6. Basis of Taxation
7. Scope of the Taxing Power of the Legislature
8. Stages/Aspects of Taxation
9. Principles of Sound Tax System
10.Limitations on the Power of Taxation
11.National Taxes vs. Local Taxes
12.National Internal Revenue Taxes under the administration of the
BIR
13.Double Taxation
14.TAX LAWS (classification of taxes)
15.Tax distinguished from other charges and fees (toll, penalty,
special assessment, license fee, custom duties, debt
16. Subsidy, Revenue, Internal Revenue and Tariff (distinguished)
17. System of Income Taxation
18. Doctrines/Rules in Taxation
1. Equitable Recoupment
2. Set-off Taxes
3. Taxpayer Suit
19. Exemptions from Taxation
20. Escape from Taxation

INHERENT POWERS OF THE STATE

- Inherent power means existing as a natural or basic part of every
sovereign State, without being conferred or granted by the people or
the Constitution.
The 3 Inherent Powers of the State:
1. Police Power - is the capacity of a state to regulate behaviors and
enforce order within its territory. Police power is an inherent
attribute of sovereignty. It can exist even without reservation in the
constitution. It is based on necessity as without it, there can be no
effective government. It is also referred to as the law of
overwhelming necessity.

2. Eminent Domain - is an inherent power of the state that enables it to

forcibly acquire private property, which is intended for public use,
upon the payment of just compensation. It is based on political
necessity; it is inseparable from the state unless it is denied to it by its
fundamental law.

3. Power to Tax - is the inherent power of the sovereign, exercised

through the legislature, to impose burdens upon subjects and objects
within its jurisdiction for the purpose of raising revenues to carry out
the legitimate objects of government. It is the inherent power of the
state to raise revenues to defray the expenses of the government or
for any public purpose. This can be done through the imposition of
burdens on persons, properties, services, rights, occupations or
transactions.

SIMILARITIES OF THE 3 INHERENT POWERS:

1. They are inherent in the State.
2. They exist independently of the constitution although the conditions
for their exercise may be prescribed by the constitution.
3. Ways by which the State interfere with private rights and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received, directly or
indirectly by the persons affected.

PURPOSES OF TAXATION
 1. Primary Purpose – To raise revenues/funds to defray the necessary
expenses of the government (Revenue/Fiscal purpose)

2. Secondary Purpose

a. Regulatory Purpose – Taxation is employed as a devise for

regulation or control (to implement the police power of the State
for the promotion of the general welfare) by means of which
certain effects or conditions envisioned by the government may be
achieved.
b. Compensatory Purposes
1. Reduction of Social Inequality
2. Economic Growth
3. Protect local industries against unfair competition

NATURE and CHARACTERISTICS of TAXATION

1. Inherent power – may be exercised although not expressly granted
by the constitution
2. Essentially a legislative function – only the legislative can impose
taxes.
3. Subject to the inherent and constitutional limitations - not an absolute
power.
4. For public purpose.
5. The strongest of all the inherent powers of the State.
6. Subject to international treaty or comity
7. Generally payable in money
8. Territorial in scope

In the absence of inherent and constitutional limitations, the power to

tax is comprehensive, unlimited, plenary and supreme. It is comprehensive
that in the words of Justice Marshall, that the power to tax include the
power to destroy.
 TAX – is an enforced proportional contribution from persons or
property, levied by the State by virtue of its sovereignty for the support of
the government and for all its public needs.

ESSENTIAL CHARACTERISTICS OF TAX

1. A tax is a forced charge, imposition or contribution
2. It is a pecuniary burden payable in money
3. It is imposed for public purpose
4. It is imposed pursuant a legislative authority
5. It is levied within the territorial and legal jurisdiction of a State
6. It is assessed in accordance with some reasonable rule of
appointment
THEORY OF TAXATION
1. NECESSITY THEORY – the existence of government is a necessity.
The government cannot continue to perform of serving and
protecting its people without means to pay its expenses. For this
reason, the State has the right to compel all citizens and property
within its limit to contribute.

2. LIFEBLOOD DOCTRINE – taxes are the lifeblood of the government

without which it can neither exist nor endure. Hence,
- No estoppel against the Government
- Collection of taxes cannot be enjoined by injunction
- Taxes could not be the subject of compensation or set-off
- A valid tax may result in the destruction of the taxpayer’s
property
- Right to select objects (subject) of taxation

3. BENEFITS-PROTECTION THEORY – the basis of taxation is the

reciprocal duties of protection and support between the State and its
inhabitants. The State collects taxes from the subjects of taxation in
order that it may be able to perform the functions of the government.
The citizens, on the other hand, pay taxes in order that they may
 secured in the enjoyment of the benefits of organized society. This
theory spawned the Doctrine of Symbiotic Relationship which
means, taxes are what we pay for a civilized society.

Distinction among the three inherent powers of the State

Power to Tax Police Power Eminent Domain
Nature Power to enforce Power to make and Power to take private
contributions to implement laws for the property for public use
raise government general welfare with just compensation
funds
Authority Government only Government only May be granted to
public service/utility
companies
Purpose For the support of Promotion of general The taking of private
the government welfare through property for public use
regulation
Persons Community or class Community or a class On an individual as the
Affected of individuals. of individuals. owner of personal
Applies to all Applies to all persons, property.
persons, property property and excise Only particular
and that may be subject property is
thereto comprehended.
Type of Property is Property is noxious or Property is wholesome
Property wholesome and is intended for a noxious and is devoted to public
devoted to public purpose and as such use or purpose
use or purpose taken and destroyed
Effect Contribution No transfer or title. There is a transfer of
becomes part of There may just be a title to property.
public fund restraint on the
injurious use of
property.
Rights Property right Property right and Property right
Affected liberty
Scope Plenary Broader in application. Merely a power to take
comprehensive, General power to private property for
supreme make and implement public use.
law.
Benefits In form of No direct and Market value of
Received protection and immediate benefit but property taken.
benefits received only such as may arise
from government from the maintenance
 of a healthy economic
standard of society.
Amount of No limit Sufficient to cover cost No imposition. The
Imposition of the license and the owner is paid
necessary expenses of equivalent to the fair
police surveillance and value of his property.
regulation

Scope of the Taxing Power of the Legislative

The Supreme Court held that the power of taxation is the most
absolute of all powers of government. It has the broadest scope of all the
powers of the government because in the absence of limitations, it
considered as comprehensive, unlimited, plenary and supreme (130 SCRA
654). The matters within the competence of the legislature include the
determination of the following:
1. The subject or object (person, property, or excises/privileges) to be
taxed. Excises or privileges to be taxed.
2. The purpose of the tax as long as it is a public purpose.
3. The amount or rate of the tax.
4. Kind of tax.
5. Apportionment of the tax (i.e., whether the tax shall be general or
limited to a particular locality or partly general and partly local)
6. Situs of taxation
7. The manner or method of collection.

Stages/Aspects of Taxation
1. Levying or Imposition – This process involves the passage of tax laws
or ordinances through the legislature.

2. Assessment and Collection – This process involves the act of

administration and implementation of tax laws by executive through
its administrative agencies such as the Bureau of Internal Revenue or
Bureau of Customs.
 3. Payment of Tax – This process involves the act of compliance by the
taxpayer in contributing his share to pay the expenses of the
government.

Principle of Sound Tax System

1. Fiscal Adequacy – The sources of government revenue must be
sufficient to meet government expenditures and other public needs.

2. Administrative Feasibility – Tax laws must be capable of convenient,

just and effective administration – free from confusion and
uncertainty.

3. Theoretical Justice – A good tax system must be based on the

taxpayer’s ability to pay. This suggests that taxation must be
progressive conformably with the constitutional mandate that
congress shall evolve a progressive system of taxation.

LIMITATIONS ON THE TAXING POWER

A. Inherent Limitations- inherent limitations proceed from the very
nature of the taxing power itself. The taxing power has very distinct
and positive limitations some of which inhere it its very nature
whether declared or not declared in the written constitution.

1. Public purpose
Proceeds from tax must be used for:
a. Support of the government.
b. Some of the recognized objects of the government.
c. To promote the welfare of the community (not individuals)

2. Situs of taxation or territoriality – the taxing power of a country is

limited to person and property within and subject to its jurisdiction.
 PLACE OF TAXATION
a. The state where the subject to be taxed has s situs may rightfully
levy and collect the tax.
b. The situs is necessarily in the State which has jurisdiction or which
exercises dominion over the subject in question.

FACTORS TO CONSIDER IN DETERMINING SITUS OF TAXATION

a. Subject matter (person, property, or activity)
b. Nature of the tax
c. Citizenship
d. Residence of the taxpayer

APPLICATION OF SITUS OF TAXATION

SUBJECT MATTER SITUS
 Persons Residence of the taxpayer
 Real Property Location
 Tangible Personal Property Location
 Intangible Personal Property Domicile of the owner
 Income Residence, citizenship, source of
income
 Business Place of business
* Gratuitous Transfer of Property Residence or citizenship of the
transferor or location of property

3. International comity or treaty – a State cannot tax another State based

on the principle of Sovereign Equality among States. i. e. tax law
passed imposing taxes on foreign ambassadors is not a valid law.

4. Non-delegability of the Tax power (Enactment of Tax Laws) – Power

of taxation is purely legislative; hence the power cannot be delegated
either to the executive or judicial departments. The limitation arises
from the doctrine of separation of powers among the three branches
of the government.
EXCEPTIONS TO THE RULE AGAINST DELEGATION:
a. Delegation to the President, subject to some limitations and
restrictions, to fix within specified limits, tariff rates and tonnage
or wharfage duties and other duties imposts.
b. Delegation to local governments the power to create its own
sources of revenues and to levy taxes, subject to such limitations as
may be provided by law.
c. Delegation to administrative agencies certain aspects of the taxing
process that are not legislative such as:
 The power to fix value of property for purpose of taxation
pursuant to fixed rules.
 The power to assess and collect taxes.

5. Exemption of the government

a. Agencies performing governmental functions are tax exempt
unless expressly taxed.
b. Agencies performing proprietary functions are subject to tax
unless expressly exempted.
c. GOCC performing proprietary functions are subject to tax,
however the following are granted exemptions:
 Government Service Insurance System (GSIS)
 Social Security System (SSS)
 Philippine Health Insurance Corporation (PHIC)
 Local Water Districts (RA 10026)
 Philippine Charity Sweepstakes Office (PCSO) – already taxable
beginning Jan 1, 2018 under the TRAIN Law

B. Constitutional Limitations on the Taxing Power – the following

provisions may be said to be limitations prescribed in the
Constitution on the taxing power of the government.

1. Observance of due process of law

 2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of poll tax
6. Non-imprisonment of the obligations of contracts
7. Free-worship clause
8. Exemption of charitable institutions, churches, parsonages, or
convents appurtenant thereto, mosque, and non-profit cemeteries,
and all lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or education purposes.
9. Exemption from taxes of the revenues and assets of non-profit,
non-stock educational institutions including grants, endowments,
donations or contributions for educational purposes.
10.Non-appropriation of public funds or property for the benefit of
any church, sect or system of religion, etc.
11.No money shall be paid out of the Treasury except in pursuance of
an appropriation made by law.
12. Concurrence of the majority of ALL MEMBERS OF CONGRESS
for the passage of a law granting tax exemption.
13.Non-diversification of tax collections
14.The President shall have the power to veto any particular item(s)
in an appropriation, revenue or tariff, but the veto shall not affect
the item(s) to which no objection has been made.
15. Non-impairment of the jurisdiction of the Supreme Court to
review tax cases.
16.Appropriations, revenue or tariff bills shall originate exclusively in
the House of Representatives but the Senate may propose or
concur with amendments.
17. Each local government unit shall have a share in the national
taxes.

NATIONAL TAXES VS LOCAL TAXES

NATIONAL LOCAL
 AUTHORITY Inherent Power Delegated Power
  NATURE Legislative in nature through Legislative in nature
enactment of tax laws by the through enactment of local
Congress and the Senate ordinances by the local
legislative branch
 PROCESS 1. Levying =Congress 1. Levying =Legislative
2. Assessment/Collection branch of the LGU
= BIR & BOC 2. Assessment/Collection
= Treasurer

National Internal Revenue Taxes under the administration of the BIR:

a. Income Tax
b. Estate and donor’s tax
c. Value-added tax
d. Other percentage taxes
e. Excise taxes
f. Documentary stamp taxes

Double Taxation
Kinds of Double Taxation:
a. Direct Duplicate Taxation, this is objectionable and prohibited
because it violates the constitutional provision on uniformity and
equality. It means:
- Taxing twice
- By the same taxing authority
- Within the same jurisdiction or taxing period
- Same kind or character of tax

b. Indirect Duplication Taxation, is not legally objectionable. It

extends to all cases in which there is a burden of two or more
pecuniary imposition but imposed by different taxing authorities.
 Sources of Tax Laws

a. Constitution
b. Tax Treaties and Conventions with Foreign Countries
c. The “Tax Code” (RA No. 8424 – National Internal Revenue
Code, as amended; i.e. RA 10963-TRAIN Law), Tariff and
Customs Code, and portion of the Local Government Code
d. Statutes and laws like RA 1125 (an Act Creating the Court of
Tax Appeals), RA 7716 (E-VAT Law)
e. Presidential Decrees
f. Executive Orders
g. Court Decisions
h. Revenue regulations promulgated by the Department of
Finance
i. Administrative issuances of the BIR like Revenue
Memorandum Circulars, and those of the Bureau of
Customs like Customs Memorandum Orders
j. BIR Rulings
k. Local Tax Ordinances

Tax Laws
Nature of Internal Revenue Laws – Tax laws are civil and not penal in
nature, although there are penalties provided for their violation. The
purpose of tax laws in imposing penalties for delinquencies is to compel
timely payment of taxes or to punish evasion or neglect of duty in respect
thereof.

CONSTRUCTION OR INTERPRETATION OF TAX LAWS IN CASE OF

DOUBT OR AMBIGUITY
a. Tax statutes are construed strictly against the government and
liberally in favor of the taxpayer. Taxes, being burdens, are not to
 be presumed beyond what the statute expressly and clearly
declares.

b. Provisions granting tax exemptions are construed strictly against

the taxpayers claiming tax exemption and liberally in favor of the
government.

APPLICATION OF TAX LAWS

Tax laws are prospective in operation because the nature and amount of
the tax could not be foreseen and understood by the taxpayer at the time
and transactions which the law seeks to tax was completed.

EXCEPTION:
While it is not favored, a statute may nevertheless operate retroactively
provided it is expressly declared or is clearly the legislative intent. But a
tax law should not be given retroactive application when it would harsh
and oppressive.

CLASSIFICATION OF TAXES
a. According to Subject Matter:
 Personal, Poll or Capital Tax – tax of a fix amount imposed upon
individual, whether citizens or not, residing within a specified
territory without regard to their property or the occupation in
which he may be engaged (e.g. basic community tax)
 Property Tax – tax imposed on property, whether real or
personal, in proportion either to its value, or in accordance with
some other reasonable method of apportionment (e.g. real estate
tax)
 Excise Tax – any tax which does not fall within the classification
of a poll tax or a property tax. This is a tax on the exercise of
 certain rights and privileges (e.g. income tax, estate tax, donor’s
tax, VAT)

b. According to Who Bears the Burden:

 Direct Tax (e.g. income tax, estate tax, donor’s tax)

- Imposed on the person obliged to pay the same and this burden
cannot be shifted or passed on to another.
- A tax in which the taxpayer who pays the tax is directly liable
therefor, that is, the burden of paying the tax is directly on the
person paying the tax.
- Demanded from the very person who, as intended, should pay the
tax which he cannot shift to another.

 Indirect Tax (e.g. VAT and OPT)

- Payment is demanded from a person who is allowed to transfer the

burden of taxation to another.
- A tax paid by a person who is not directly liable therefor, and who
may therefor shift or pass the tax to another person or entity, which
ultimately assumes the tax burden (Maceda v. Macaraig, 197 SCRA
771)
- Is demanded in the first instance form one person with the
expectation that he can shift the burden to someone else, not as a tax
but as part of purchase price.

c. According to Determination of Amount:

- Specific Tax – this is a fixed amount based on volume, weight or

quantity of goods as measured by tools, instruments or standards.
(e.g. excise tax on cigars and liquors)
 - Ad Valorem Tax – this imposition is based on the value of the
property subject to tax. (e.g. VAT, income tax, donor’s tax and estate
tax)

d. According to Purpose:

- Fiscal/General/Revenue Tax – levied without a specific or pre-

determined purpose. (e.g. excise tax on cigars and liquors)
- Regulatory/Special/Sumptuary Tax – those intended to achieve
some social or economic goals. (e.g. tariff and certain duties on imports)

e. According to Jurisdiction/Scope or Authority

- National Tax – imposed by the National Government
- Local Tax – imposed by municipal corporations (e.g. real estate
tax)

f. According to Graduation or Rate

- Proportional/Flat Rate Tax – unitary or single rate. (e.g. VAT, OPT)
- Progressive/Graduated Tax -as the tax base grows the tax rate
increases. (e.g. income tax on individuals, estates, trusts, estate tax
donor’s tax)
- Regressive Tax – the tax rate increases as the tax base decreases.

TAX DISTINGUISHED FROM OTHER CHARGES AND FEES

TAX VS TOLL
TAX TOLL
 It is a demand of sovereignty  It is a demand of proprietorship
 It is one’s support for the  It is a compensation for the use
government of somebody else’s property
 It is imposed only by the  It may be imposed by the
government government or private
individuals
 It is based on government  It is determined by the cost of
 needs property or improvement
thereon

TAX VS PENALTY
TAX
 It is imposed to raise revenue
 It is imposed only by the
government
 It arises from law
 Generally, payable in money
PENALTY
 It is imposed to regulate
conduct through punishment
and suppression of injurious act
 May be imposed by the
government or by private
individuals.
 It may arise from law or
contract
 May be paid in money or in
kind

TAX VS ASSESSMENT
TAX ASSESSMENT
 Levied on business, interests,  Levied on land
transactions, rights, persons,
properties or privileges
 May be made a personal  Cannot be made the personal
liability of the person assessed liability of the person assessed,
because it is the land that
answers for the liability
 Based on necessity with no  Based wholly on benefits
hope of direct or immediate received.
benefit to the taxpayer
 Is of general application  It is exceptional in application
for the recovery of cost and/or
maintenance of improvement

TAX VS LICENSE FEE

TAX LICENSE FEE
  Tax is levied in the exercise of
the taxing power
 The purpose of it is to generate
revenue
 Generally, amount is unlimited
 Imposed on person, property,
rights or transaction
 Non-payment does not make
the business illegal
 License fee emanate from the
police power of the state
 The purpose of its regulatory
 Limited to the necessary
expenses of regulation and
control
 Imposed on the exercise of a
right or privileges
 Non-payment makes the
business illegal

TAX VS CUSTOM DUTIES

TAX CUSTOM DUTIES
 Imposed on person, property,  Imposed on imported or
rights or transaction exported goods
 It comprehends more than the  It is also a tax
term custom duties

TAX VS DEBT
TAX DEBT
 Based on law  Based on contract
 Not assignable  Assignable
 payable in money  payable in kind or in money
 not subject to set-off  Subject to set-off
 Non-payment may result to  No imprisonment (except when
imprisonment debt arises from crime)
 Bears interest only if delinquent  Interest depend upon the
stipulation of the parties

SUBSIDY
  Refers to a pecuniary aid directly granted by the government to an
individual or private commercial enterprise deemed beneficial to the
public.
 NOT A TAX although tax may have to be imposed to pay it.

REVENUE
 Refers to all the funds or income derived by the government, whether
from tax or any other source.
 Amount collected

INTERNAL REVENUE
INTERNAL REVENUE means taxes imposed by the legislature other
than duties on imports and exports.

TARIFF
May be used in one of the three (3) senses:
1. A book of rates drawn usually in alphabetical order containing the
names of several kinds of merchandise with the corresponding
duties to be paid for the same; or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation (or
exportation) of goods.
* The term tariff and customs duties are used interchangeably in the Tariff
and Custom Code.

SYSTEMS OF “INCOME” TAXATION

 a. Global System – All items of gross income, deductions are
reported in one income tax return and the applicable tax rate is
applied on the tax base.

b. Schedular System – Different types of income are subject to

different sets of graduated or flat income tax rates.

OTHER DOCTRINES/RULES IN TAXATION

Equitable Recoupment – Claim for refund which is prevented by

prescription may be allowed to be used as payment for unsettled tax
liabilities if both taxes from the same transaction in which overpayment is
made and underpayment is due.

Set-off Taxes – taxes are not subject to set-off or legal compensation

because the government and the taxpayer are not mutual creditors and
debtors of each other.

Taxpayer Suit - this provides that a taxpayer suit can only be allowed if the
act involves a direct and illegal disbursement of public funds derived from
taxation.

Exemptions from Taxation

It is a grant of immunity, express or implied, to particular persons, or
corporations generally within the same taxing district, are obliged to pay.

CLASSIFICATION FROM TAXATION

 a. Express or affirmative – these are express provisions in the
Constitution, statutes, treaties, ordinances, franchises or contracts

b. Implied or exemption by omission – this occurs when a tax is levied

on certain classes of persons, properties or transactions without
mentioning other classes. Those not mentioned are deemed
exempted by omission.

INTERPRETATION OF EXEMPTION GRANT

Exemption grants are strictly against the person or entity claiming
exemption. One must justify such claim by clear and positive grant.

ESCAPE FROM TAXATION

1. Evasion or Dodging, the taxpayer uses unlawful means to evade or
lessen the payment of tax.

2. Avoidance, also called tax minimization, it is the reduction or totally

escaping payment of tax through legally permissible means.

3. Shifting, basically, it is the transfer of tax burden to another. The

imposition of tax transferred from the statutory taxpayer to another
without violating the law.

THREE (3) KINDS SHIFTING

a. Forward shifting
b. Backward shifting
c. Onward shifting

4. Capitalization, the seller is willing to lower the price of the

commodity provided the taxes will be shouldered by the buyer.

5. Transformation, the manufacturer absorbs the additional taxes

imposed by the government without passing it to the buyers for fear
 of lost of his/its market. Instead, he/it increases quantity of
production, thereby turning their units of production at a lower cost
resulting to the transformation of the tax into a gain through the
medium of production.

6. Exemption, it is an immunity, privilege or freedom from paying of a

charge or burden to which others are obliged to pay.

Taxpayer’s suit
A case where the act complained of directly involves the illegal
disbursement of public funds derived from taxation. Taxpayers have locus
standi to question the validity of tax measures or illegal expenditures of
public money. In such cases, they are parties in interest who will be
prejudiced or benefited by the avails of the suit. The general rule is that not
only persons individually affected but also taxpayers have sufficient
interest of preventing the illegal expenditures of money raised by taxation.
They may, therefore, question in the proper court the constitutionality of
statutes requiring the expenditure of public funds. But a taxpayer is not
relieved from the obligation of paying a tax because of his belief that it is
being misappropriated by certain officials, for otherwise, collection of taxes
would be hampered and this may result in the paralyzation of important
governmental functions.