Tax 1: Unit 1.

Chapter I

Chapter I. Introduction to Taxation

I. Inherent Powers of the State - powers that are guaranteed by the mere existence of
the state. These could be exercised even in the absence of a constitutional grant.
(Pepsi-Cola Bottling Co. of the Philippines vs. Municipality of Tanauan, Leyte, G.R. No.
L-31156, February 27, 1976)
1. Police Power- power of the government to regulate property and liberty to promote
and protect public welfare. This power involves the enactment of laws for the general
welfare.
2. Eminent Domain- power of the government to take private property for public welfare.
3. Power of Taxation- power of the government to raise revenue to defray the
necessary expenses of the government.

Inherent Powers of the State Distinguished

Distinction Taxation Police Power Eminent Domain

Purpose Raise revenue for the Destroy property or Take property to

government deprive liberty to promote public
protect public welfare welfare

Benefit General benefits No tangible Just compensation is

from the benefit is given to given to owners of
projects and those persons this property taken
activities of the power is
government exercised

Authority Only the Only the Can be delegated to

government can government can public service
exercise exercise companies or public
utilities

Imposition No limit (based on Limited to cost of No imposition

the gov’t regulation
needs)

Non-impairment Inferior Superior Superior

clause of the
constitution

Sources: Philippine TAX Code; Income Taxation, Banggawan; CPA Reviewer in Taxation, Ampongan;
Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer, The Tax Reviewer 2021e,
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Tax 1: Unit 1. Chapter I

As to importance Inseparable for the Protection,safety and Common necessities

existence of a nation welfare of society of the interest of the
- it supports police community transcend
power and eminent individual rights in
domain property

As to scope Covers all persons, Covers all persons, Covers only a

property and excises property, rights and particular property.
privileges

II. Doctrine of Taxation

1. Lifeblood Theory- taxes are essential and indispensable to the continued subsistence of the
government. Without taxes, the government would be paralyzed for lack of motive power to
activate or operate it.
For this reason:
a. Injunction generally does not lie against the collection of taxes
b. Taxes are generally not subject to set-off or compensation
c. The state is not estopped from collecting taxes by the mistakes or errors of its agents.
d. Tax exemptions are never presumed and are strictly construed against the taxpayer.
e. Taxation is plenary and unlimited in its range.
2. Ability to pay Theory- taxpayer’s should contribute based on their relative capacity to
sacrifice for the support of the government.
3. Benefit Received Theory- all taxpayers are assumed to benefit from the operations of the
government, it might not be directly but it is the government’s means to protect public welfare.
4. Necessity Theory- Government is necessary; however, it cannot continue without the means
of paying for its existence; hence it has the right to compel all its citizens and property within its
power to contribute for the same purpose. Without taxes, the government cannot fulfill its
mandate of promoting general welfare and well-being of the people. (NPC v. City of Cabanatuan
G.R. No. 149110)

Nature or Characteristics of Taxation

1. Legislative in nature- only the legislative department can impose taxes.
2. Inherent in sovereignty
- maybe exercised although not expressly granted by the Constitution.
-The constitution only provides for the limitation of taxation, not grant of powers.
3. Subject to inherent and constitutional limitations- not an absolute power.

III. Scope and Limitations of Taxation

Taxation is (CUPS) Unlimited, Comprehensive, Plenary and Supreme but subject to
limitations.

Sources: Philippine TAX Code; Income Taxation, Banggawan; CPA Reviewer in Taxation, Ampongan;
Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer, The Tax Reviewer 2021e,
Soriano
Tax 1: Unit 1. Chapter I

Inherent Limitations - Those which proceed from the very nature of the taxing power itself.
They are known as elements, tenets, or characteristics of taxation. (PINES)
1. Levied for public purpose - Public purpose should be given a broad interpretation. It does
not only pertain to those purpose which are traditionally viewed as essentially governmental
functions, such as building roads and delivery of basic services, but also includes those
purposes designed to promote social justice. (Planters Products, Inc V. Fertiphil Corp., G.R. No.
166006)
2. Exemption of the government from taxation - The inherent limitation of exemption of
government from tax covers:
a. Government entities
b. Government agencies
c. Government instrumentalities
Reason: Properties of the national government as well as those of the local government units
are not subject to tax, otherwise, it will result in the absurd situation of the government “taking
money from one pocket and putting it in another.”
3. Non-delegation of the legislative power to tax -
The following matters cannot be delegated by Congress:
a. Selection of property or transaction to be taxed;
b. Determination of purposes;
c. Rate of taxation;
d. Rules of taxation
Reason: Delegated power constitutes not only right but also a duty to be performed by
the delegate through the instrumentality of his own judgment and not through the
intervening mind of another.
Exceptions to the non delegability of Taxation: (PAL)
a. Delegation to the President - delegation of
I. Tariff powers by Congress under the flexible tariff clause
II. Emergency Powers
b. Delegation to Administrative agencies - also known as the power of subordinate
legislation, subject to the following tests:
I. Completeness Test
II. Sufficient Standard Test
c. Delegation to Local Government - the Constitution grants each LGU the power to create
its own sources of revenue and levy taxes, fees and charges, which shall accrue
exclusively to the LGU.
4. Territoriality/Situs - It is also known as the place of Taxation. It is the place or authority that
has the right to impose and collect taxes.
General Rule: A state may not tax property lying outside its borders or lay exercise or privilege
tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state
and therein exercised or enjoyed.
Reasons:
a. Taxing power of a country is limited to person and property within and subject to
its jurisdiction
Sources: Philippine TAX Code; Income Taxation, Banggawan; CPA Reviewer in Taxation, Ampongan;
Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer, The Tax Reviewer 2021e,
Soriano
Tax 1: Unit 1. Chapter I

b. Benefits-Protection Theory
5. International Comity - A state must recognize the generally accepted tenets of international
law, some of which are those that limit the authority of the government to effectively impose
taxes on a sovereign state and its instrumentalities.
Reasons:
a. Doctrine of Sovereign Equality - states are juridically equal, enjoy the same rights, and
have equal capacity in their exercise.” (as between equals, there is no sovereign)
b. Doctrine of Sovereign Immunity - A foreign government may not be sued without its
consent. Thus, it would be useless to impose tax which could not be collected.

Constitutional Limitations
1. Due Process of Law
2. Equal Protection of the Laws
3. Non-impairment of obligation of contracts*
4. Non-imprisonment for non-payment of debt and poll tax
5. Rule of Taxation should be uniform and equitable
6. Promotion of Progressive tax system
7. Veto Power of the President
8. Absolute Majority vote of all members of the congress to enact a law granting tax exemption.
9. Exemption from Real Property Tax of religions/ religious organizations.
10. Exemption from taxation of nonprofit non-stock educational institutions.

*The non-impairment clause is contained in Section 10, Article III of the Constitution, which
provides that no law impairing the obligation of contracts shall be passed. The non-impairment
clause is limited in application to laws that derogate from prior acts or contracts by enlarging,
abridging or in any manner changing the intention of the parties. There is impairment if a
subsequent law changes the terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of
the parties. (SC Jurisprudence)

Essential Characteristics of Taxes

1. Enforced contribution
2. Generally payable in money
3. Proportionate in character
4. Levied on persons, property or exercise of right or privilege by the lawmaking body of the
state which has jurisdiction over the object of taxation
5. Levied for public purpose

IV. Stages of Taxation (LAPR)

1. Levying or Imposition (Impact of Taxation) - this process involves the enactment of a tax
law by Congress. It is also referred to as the legislative act in taxation
2. Assessment –The process of determining the correct amount of tax due in accordance with
the prevailing tax laws. Taxes are generally self-assessing.
Sources: Philippine TAX Code; Income Taxation, Banggawan; CPA Reviewer in Taxation, Ampongan;
Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer, The Tax Reviewer 2021e,
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Tax 1: Unit 1. Chapter I

3. Payment (Incidence of Taxation) - The act of compliance by the taxpayer in contributing his
share to defray the expenses of the government.
4. Refund - Recovery of any tax alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or any sum alleged
to have been excessively, or in any manner wrongfully collected.

V. Situs of Taxation -is the place of taxation. It is the tax jurisdiction that has the power to levy
taxes upon the tax object.
1. Business Tax-
a. Sale of real property - place where the property is located
b. Sale of personal property - where the sale took place or conducted.
c. VAT - the place where the transaction was made
2. Income - place where the same is earned, or citizenship or domicile of the owner and source
of the income
3. Gratuitous transfer of properties - depends on the property, citizenship and/or domicile of the
decedent or donor
4. Real property - location of the property.
5. Tangible personal property- where the property is physically located although the owner
resides in another jurisdiction
6. Intangible property- place where the intangible is used or exercised.

VI. Escape from Taxation

1. Shifting – the burden of payment is transferred from the statutory taxpayer to another without
violating the law (e.g., VAT);
2. Capitalization – the reduction in the price of the taxed object equal to the capitalized value of
future taxes the purchaser is expected to be called upon to pay.
3. Transformation - for manufacturers or producers, upon whom taxes are imposed, fearing the
loss of his market if he should add to the price, pays the tax and endeavors to recoup himself by
improving his process of production, thereby producing his units at a lower cost.
4. Tax Avoidance – exploitation by the taxpayer of legally permissible alternative tax rates or
methods of assessing taxable property or income, in order to avoid or reduce tax liability. Also
known as “tax minimization.” (e.g. utilizing all permissible allowable deductions)
5. Tax Exemption – grant of immunity to particular persons or corporations of a particular class
from a tax which persons or corporations generally within the same rate or taxing district are
obliged to pay.

Tax Avoidance Tax Evasion

As to legality Legal and not subject to Illegal and subject to criminal

criminal penalty or civil penalty

As to Manner of Commission Accomplished by legal Accomplished by breaking

Sources: Philippine TAX Code; Income Taxation, Banggawan; CPA Reviewer in Taxation, Ampongan;
Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer, The Tax Reviewer 2021e,
Soriano
Tax 1: Unit 1. Chapter I

procedures or means which the letter of the law

may be contrary to the intent
of the law yet do not violate
the letter of the law

As to Effects Minimization of taxes Almost always results in the

absence of tax payments

Classifications of Tax System

1. Global- generally treats in common all categories of taxable income of
the individual. All types of income are treated as if they are the same.
2. Schedular- system which itemized the different income and provides
from varied percentages of taxes, to be applied thereto.

VII. Other Concepts in Taxation

1. Double Taxation- occurs when the same object is taxed twice by the same tax jurisdiction,
for the same purpose, for the same tax period. It is not unconstitutional but being discouraged.
2. Set-off or compensation-
General Rule: It is not allowed for tax purposes.
Reason: Tax liability is not based on contracts between the taxpayer and the government, but
based on statutory requirements.
Exception: If the obligation to pay taxes and the taxpayer’s claim against the government are
both overdue demandable and fully liquidated, compensation takes place by operation of law
and both obligations are extinguished to their concurrent amount. (CIR v. Toledo Powers Inc.
G.R. No. 183880)
3. Taxpayer’s Suit- a suit that can only be pursued if a direct or illegal disbursement of public
fund from taxation is done.
Requisites of a Taxpayer’s Suit:
a. Public funds derived from taxation are disbursed by a political subdivision or
instrumentality
b. In doing so, a law is violated or some irregularity is committed; and
c. Petitioner is directly Affected by the Alleged act.
4. Equitable Recoupment- this states that a claim 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 doctrine is not applicable in our jurisdiction.
Reason: If allowed, both the collecting agency and the taxpayer might be tempted to
delay and neglect the pursuit of their respective claims within the period prescribed by
law. (CIR v. UST. G.R. No. L-10936)
5. Tax Amnesty- it is a general pardon or the intention overlooking by the State of its authority
to impose penalties on persons otherwise guilty of violation of tax law.

Sources: Philippine TAX Code; Income Taxation, Banggawan; CPA Reviewer in Taxation, Ampongan;
Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer, The Tax Reviewer 2021e,
Soriano