TAX REVIEWER

PART
ONE______________________________________________
__________

GENERAL PRINCIPLES OF TAXATION

CHAPTER 1.
BASIC CONCEPTS OF TAXATION

I. Concept and Purposes of Taxation

1. What is the meaning of the term "Taxation"?

"Taxation" is the exercise of the State’s inherent power to impose,

through its lawmaking body, a charge or burden upon persons, properties or
property rights, privileges, income and receipts from employment or
business transactions or practice of profession and other taxable activities
within its jurisdiction for the purpose of raising revenue to defray the
legitimate expenses of the government.

II. Nature and Characteristics of

the Power of Taxation

2. Describe the nature and characteristics of the power of taxation.

(1) The power to tax is an essential and inherent attribute of

sovereignty. - The power to tax proceeds upon the theory that the existence
of a government is a necessity and this power is an essential and inherent
attribute of sovereignty belonging as a matter of right to every independent
state or government without being expressly conferred by the people. No
sovereign state can continue to exist without the means to pay its expenses;
and for that reason, it has the right to compel all citizens and properties
within its limits to contribute; hence, the emergence of the power to tax. 1

(2) The power to tax is inherently legislative in character. – Being

inherently legislative in character, the legislature can enact tax laws in order
to raise revenues even without the grant of said power in the Constitution. It

1
CREBA v. Romulo, GR 160756, March 9, 2010 [Per J. Corona, En Banc]
must be noted though that the Constitutional provisions relating to the
power of taxation do not operate as grants of the power of taxation to the
Government, but instead merely constitute as limitations upon a power
which would otherwise be practically without limit. 2

(3) The power to tax is the State’s strongest power; hence it is

sometimes called “the power to destroy.” - As a general rule, the power to
tax as an incident of sovereignty is unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse is to be found only
in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it. So potent indeed is the power that it was once
opined that ”the power to tax involves the power to destroy.” However, it
should be exercised with caution to minimize injury to the proprietary rights
of a taxpayer. Thus, it must be exercised fairly, equally and uniformly, “lest
the tax collectors kill the hen that lays the golden egg.” 3

III. Purposes of Taxation

3. What are the purposes of taxation?

(1) Revenue-raising purpose. - The primary and principal purpose of

taxation is to raise revenue to defray the necessary expenses of the
government. Revenue generation has undoubtedly been a major
consideration in the passage of the Tax Code of 1997.4

(2) Special or regulatory purposes (non-revenue purposes). - Taxation

is also used for special or regulatory purposes, such as regulating a
business. The imposition must bear a reasonable relation to the probable
expenses of regulations, taking into account not only the costs of direct
regulation but also its incidental consequences. If generation of revenue is
the primary purpose and regulation is merely incidental, the imposition is a
tax; but if regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax. It is a well-
established doctrine that the police power may be exercised by the State to
regulate business and incidentally generate revenues. 5

IV. Power of Taxation Distinguished from

Other Inherent Powers of the State

4. Distinguish the power of taxation from the other inherent powers of the
State.

2
Ibid.
3
Roxas v. CTA, GR L-25043, April 26, 1968 [Per J. Bengzon, En Banc], cited in
Tridharma Marketing Corp. v. CTA, G.R. 215950, June 20, 2016 [Per J. Bersamin, First Div.]
4
CIR v. Fortune Tobacco Corp., GR 167274-75, July 21, 2008 [Per J. Tinga, Second
Div.]
5
Cagayan de Oro City v. CEPALCO, GR 224825, Oct. 17, 2018 [Per J. A. Reyes, Jr.,
Second Div.]
 Power of Taxation Police Power Power of Eminent
Domain
This is the inherent This is the inherent power This is the inherent power
power of the of the sovereign state to of the sovereign state to
sovereign state to make, ordain, and appropriate private
levy taxes to be establish wholesome and property for public use
used as a means of reasonable laws, not upon observance of due
raising revenue in repugnant to the process of law and
order to defray the Constitution, to promote payment of just
necessary public health, public compensation. It is
expenses of the morals, public safety and essentially legislative in
government.6 It is the general welfare of the nature, but it may be
the strongest of all people by restraining and validly delegated to
the powers of regulating the use of LGUs.9
government.7 liberty and property.8

V. Theories and Bases of Taxation

5. What are the theories and bases of taxation?

(1) Lifeblood-of-the government theory. - Taxes are the lifeblood of

the Government and their prompt and certain availability is an imperious
need, for without taxes, the government can neither exist nor endure,10 and
it would be paralyzed for lack of power to activate and operate it, resulting in
its destruction.11 A principal attribute of sovereignty, the exercise of taxing
power derives its source from the very existence of the State whose social
contract with its citizens obliges it to promote public interest and common
good. Since taxes are the lifeblood of the government that should be
collected without unnecessary hindrance, every precaution must be taken
not to unduly suppress it.12

(2) Necessity theory. –The theory behind the exercise of the power to
tax emanates from necessity for without taxes, the government cannot fulfill
its mandate of promoting the general welfare and well-being of the people.
It is a prerogative essential to the perpetuity of the government. No
sovereign state can continue to exist without the means to pay its expenses;

6
CAPWIRE v. Prov’l. Treasurer of Batangas, GR 180110, May 30, 2016 [Per J.
Peralta, Second Div.]
7
HSBC v. CIR, GR 13188, Nov. 15, 1918 [Per J. Malcolm, En Banc]
8
Gerochi v. Dept. of Energy, G.R. 159769, July 17, 2007 [Per J. Nachura, En Banc]
9
Mun. of Cordova v. Pathfinder Dev’t. Corp. and Topanga Dev’t. Corp. , GR 205544,
June 29, 2016 [Per J. Peralta, Third Div.]
10
Republic v. Caguioa, GR 168584, Oct. 15, 2007 [Per J. Carpio-Morales, En Banc].
11
CIR v. Algue, Inc., G.R. L-28896, Feb. 17, 1988 [Per J. Cruz, First Div.]
12
Pilmico Mauri Foods Corp. v. CIR, G.R. 175651, Sept. 14, 2016 [Per J. Reyes,
Third Div.]
and that for those means, it has the right to compel all citizens and property
within its limits to contribute, hence, the emergence of the power to tax. 13

(3) Benefits-protection theory (Symbiotic relationship theory). - The

basis of taxation is founded in the reciprocal duties of protection and
support between the state and its inhabitants. The state demands and
receives taxes from the subjects of taxation within its jurisdiction that it may
be enabled to carry its mandate into effect and perform the functions of
government; and the citizen pays from his property the portion demanded in
order that he may, by means thereof, be secured in the enjoyment of the
benefits of organized or civilized society. Hence, despite the natural
reluctance to surrender part of one’s hard-earned income to taxing
authorities, every person who is able to pay must contribute his share in the
running of the government. The government for its part is expected to
respond in the form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the
seat of power. 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.14 .
VI. Situs of Taxation

6. What is meant by “Situs of Taxation”?

The term “situs of taxation” simply means “place of taxation” and

that a tax may only be imposed by the State on persons, property, or
business within its jurisdiction in accordance with the principle of
territoriality. Thus, the State has the right to compel only all persons,
properties or objects within the limits of its jurisdiction to contribute taxes.
It only means that a State may lay a personal tax upon persons subject to
the jurisdiction of its sovereignty, a property tax upon properties located
within its territory, and an excise tax upon acts done therein; but, however
broad the power of taxation in its character and searching in its extent, it is
necessarily limited to persons, properties, or business within its jurisdiction,
to subjects within its jurisdiction, or over which it can exercise dominion.
The financial exigencies of the State afford no justification for sustaining a
tax on a transaction beyond the borders of the State. Within the territorial
jurisdiction, the taxing authority may determine the “place of taxation” or
what is known as the “tax situs.” The basic rule is that the State where the
subject to be taxed has a situs may rightfully levy and collect the tax, and
the situs is necessarily in the State which has jurisdiction or which exercises
dominion over the subject in question. This is based on the theory that the
tax laws of a State can have no extraterritorial operation. 15

13
CIR v. Basf + Inks Phils, Inc., G.R. 198677, Nov. 26, 2014 [Per J. Peralta, Third
Div.]
14
CIR v. San Miguel Corp., GR 205045, Jan. 4, 2017 [Per J. Leonen, Second Div.]
 That is the reason why the imposition of a tax upon person or
property or transaction abroad is generally considered a violation of the
Constitutional provision that no person shall be deprived of his property
without due process of law.

7. What is meant by “mobilia sequuntur personam”?

The situs of intangible personal property is the place where the owner
is domiciled and only there because taxation follows the person who shall be
subject to tax. This is in accordance with the principle of mobilia sequuntur
personam. Income from intangible personal property is generally taxable
where the obligation arises. That is why, income of a nonresident foreigner
from shares of stock in a domestic corporation, whether as dividends or as
gains from sale, are taxable in the Philippines. The reason is that said shares
receive the protection and benefit of our tax laws. In the same manner,
interest income from a loan is taxable in the state where the loan obligation
arises.

VII. Principles of a Sound Tax System

8. What are the principles of a sound tax system?

The three basic principles of a sound tax system are as follows:

(1) Fiscal adequacy simply means that the sources of revenue

should be sufficient to meet the demands of public expenditures. Fiscal
adequacy requires that the revenues should be capable of expanding or
contracting annually in response to variations of public expenditures. This is
in consonance with the theory that “taxes are the lifeblood of the
government.” 16

(2) Administrative feasibility simply means that the tax system

should be capable of being efficiently administered by the government and
enforced with the least inconvenience to the taxpayers and to the tax
administrators. Non-observance of the canon, however, will not render a tax
imposition invalid except to the extent that specific constitutional or
statutory limitations are impaired.17

(3) Theoretical justice or equality means that the tax burden should
be proportionate to the taxpayer’s ability to pay. Justice and equality are
abstract terms. But justice means at least that a tax system should appeal
to the average person as fair, and that it should represent public opinion at

15
Mun. of Cainta v. City of Pasig and Uniwide Sales Warehouse, GR Nos. 176703 &
176721, June 28, 2017 [Per J. Martires, Second Div.]
16
Abakada Guro Party List v. Ermita, GR 168056, Sept. 1, 2005 [Per J. Austria-
Martinez, En Banc]
17
Mun. of Cainta v. City of Pasig and Uniwide Sales Warehouse, G.R. Nos. 176703 &
176721, June 28, 2017 [Per J. Martires, Second Div.]
the time as to what is fair. Justice, moreover, always refers primarily to the
tax system as a whole rather than to any particular tax. 18

VIII.Stages or Aspects of Taxation

9. What are the stages or aspects of taxation? Explain each.

There are three (3) stages or aspects of taxation, namely:

(1) Levy or imposition of the taxes.– This refers to the act of the
Legislative Department of the government of enacting tax laws authorizing
the imposition of taxes on persons, rights and privileges, property or
business. Levy is an exercise of the power to tax which is exclusively
legislative in nature and character. 19

(2) Assessment and Collection of taxes.2011 – This refers to the acts

of the Executive Department of the Government thru its Administrative
Agencies in charge of implementing and administering the assessment and
collection of taxes. Assessment refers to the act of a government agency to
determine the correct amount of taxes due to and payable by a taxpayer,
while collection is the actual effort exerted by the government agency to
effect the exaction of what is due from the taxpayer.

(3) Payment of taxes. - This refers to the last stage of taxation

wherein the taxpayer complies with its tax obligations by paying the correct
amount of taxes due from him.

IX. Definition, Elements and Requisites of a Valid Tax

10. What is the meaning of the term “taxes”?

Taxes are the enforced proportional contributions exacted by the

State upon persons and properties pursuant to its sovereignty in order to
support the Government and to defray all the public needs. 20

11. What are the elements of taxes?

Every tax has three elements, namely:

(1) It is an enforced proportional contribution from persons and

properties;

(2) It is imposed by the State by virtue of its sovereignty through the

Legislative Branch of the government; and
18
Diaz v. Secretary of Finance and CIR, G.R. 193007, July 19, 2011 [Per J. Abad, En
Banc]
19
NPC v. Albay, GR 87479, June 4, 1990 [Per J. Sarmiento, En Banc]
20
Mandanas v. Ochoa, GR 199802, April 10, 2019 [Per CJ Bersamin, En Banc]
 (3) It is levied for the support of the Government and to defray all
public needs.21

12. What are the requisites of a valid tax?

The requisites of a valid tax are as follows:

(1) A tax must be levied by the legislative authority in the exercise of

its taxing power through the enactment of tax laws, and by the local
government units through the enactment of tax ordinances, subject to such
guidelines and limitations as the law may provide;

(2) It should comply with the requirements of due process, i.e., the
assessment and collection of taxes must not be arbitrary, in that a taxpayer
should be given proper notice and the opportunity to be heard;

(3) It is an enforced charge or burden imposed to persons,

properties, business and rights within the territorial jurisdiction of a country
in accordance with the principle of territoriality;

(4) Its purpose must be to defray the legitimate expenses of the

government or for a public purpose; 22

(5) It must be uniform and equitable, NOT unjust, excessive,

oppressive, confiscatory or discriminatory;

(6) It must not violate the inherent and Constitutional limitations of

the power of taxation;

(7) Being a burden, it should not be presumed beyond what the

applicable statute expressly and clearly declares: 23

(8) It should be proportionate in character, or laid by some rules of

apportionment which are usually based on the ability to pay:

(9) It is compulsory rather than a matter of bargain: 24

(10) It is generally a pecuniary burden which must be in legal

tender, although the law may provide for payment in kind. 25 BQ2013

X. Tax Distinguished
21
Ibid.
22
Gaston v. Republic Planters Bank, GR L-77194, March 15, 1988 [Per J. Melencio-
Herrera, En Banc]
23
CIR v. Filinvest Devt. Corp., GR 163653, July 19, 2011 [Per J. Perez, En Banc]
24
Philex Mining Corp. v. CIR, GR 125704, Aug. 28, 1998 [Per J. Romero, Third Div.]
25
51 Am. Jur. 38-39
 from Other Forms of Exactions

13. Distinguish tax from other forms of exactions.

Tax may be distinguished from other forms of exactions as follows:

(1) Taxes vis-a-vis Customs Duties

‘Tax’ is broader in terms than ‘Customs Duties’, because tax includes

all kinds of impositions, including customs duties; while the term ‘Customs
Duties’ indicates a particular kind of tax, being commonly applied to levies
made by the government on the importation or exportation of commodities
in or out of the country.

(2) Taxes vis-a-vis Toll Fees

A ‘Tax’ is imposed under the taxing power of the government

principally for the purpose of raising revenues to fund public expenditures,
while ‘Toll Fees’ are collected by private tollway operators as reimbursement
for the costs and expenses incurred in the construction, maintenance and
operation of the tollways, as well as to assure them a reasonable margin of
income. ‘Toll Fees’ are not taxes.26

(3) Taxes vis-a-vis License Fees

The term ‘Taxes’ has been defined by case law as the enforced
proportional contributions from persons and property levied by the state for
the support of government and for all public needs. While, under the Local
Government Code, a ‘License Fee’ is defined as any charge fixed by law or
local ordinance for the regulation or inspection of a business or activity.

From the foregoing jurisprudential and statutory definitions, it can be

gleaned that the purpose of an imposition will determine its nature as either
a tax or a fee. If the purpose is primarily revenue, or if revenue is at least
one of the real and substantial purposes, then the exaction is properly
classified as an exercise of the power to tax. On the other hand, if the
purpose is primarily to regulate, then it is deemed an exercise of police
power in the form of a license fee, even though revenue is incidentally
generated. 

Stated otherwise, if generation of revenue is the primary purpose,

the imposition is a tax but, if regulation is the primary purpose, then the
imposition is properly categorized as a license fee. 27

(4) Tax vis-a-vis Special Assessment

26
Diaz v. Sec. of Finance, GR 193007, July 19, 2011[Per J. Abad, En Banc]
27
Cagayan de Oro City v. CEPALCO, GR 224825, Oct. 17, 2018 [Per J. A. Reyes, Jr.,
Second Div.]
 ‘Tax’ is an enforced contribution from persons, properties, activities,
transactions and income, while ‘Special Assessment’ is an enforced
proportional contribution from owners of lands especially or peculiarly
benefited by public improvements introduced by the local government.

(5) Tax vis-a-vis Debt

‘Taxes’ and ‘Debts’ are of different nature and character. Strictly

speaking, a ‘Tax’ is not a ‘Debt’ in that there can be no set-off between the
taxpayer and the Government. A ‘Tax’ is created by law, while a ‘Debt’
arises from contract, whether express or implied. No person shall be
imprisoned for nonpayment of debt, while imprisonment may be provided
by law for delinquency in the payment of a tax, except for non-payment of a
poll tax. Taxes are due to the Government in its sovereign capacity, while.
debts are due to the Government in its corporate capacity, 28 The statute of
limitation governing the right of recovery of a debt is provided in the Civil
Code, while the right to assess and collect a tax is governed by the NIRC, by
the CMTA, and by the LGC.

XI. Kinds of Taxes

14. What are the kinds of taxes?

(1) As to scope or authority to impose

(a) National taxes - are the taxes being imposed and collected by
the National Government. These are the (i) National internal revenue taxes
under the NIRC, namely, Income tax, Estate Tax, Donor's Tax, VAT, Other
Percentage Taxes, Excise Taxes, Documentary Stamp Taxes and such other
taxes as may be imposed and collected by the BIR under the NIRC; and the
(ii) Customs duties, under the CMTA.29

(b) Local taxes – are the taxes imposed and collected by the Local
Government Units. Examples: Professional Tax, Local Business Taxes, Real
Property Tax, etc.

28
Air Canada v. CIR, GR 169507, Jan. 11, 2016, [Per J. Leonen, Second Div.]
29
Strictly speaking, customs duties are also taxes because they are exactions
whose proceeds become public funds. According to Garcia v. Executive Secretary, customs
duties is the nomenclature given to taxes imposed on the importation and exportation of
commodities and merchandise to or from a foreign country. Although customs duties have
either or both the generation of revenue and the regulation of economic or social activity as
their moving purposes, it is often difficult to say which of the two is the principal objective in a
particular instance, for, verily, customs duties, much like internal revenue taxes, are rarely
designed to achieve only one policy objective. We further note that Section 102 (oo) of R.A.
10863 (Customs Modernization and Tariff Act) expressly includes all fees and charges
imposed under the Act under the blanket term of taxes.
It is clear from the foregoing clarification that the exclusion of other national taxes
like customs duties from the base for determining the just share of the LGUs contravened the
express constitutional edict in Section 6, Article X of the 1987 Constitution. Mandanas v.
Ochoa, GR 199802, April 10, 2019 [Per C.J. Bersamin, En Banc]
 (2) As to object or subject matter-

(a) Personal, capitation, or poll tax. - Generally, personal, capitation

or poll tax is a tax of a fixed amount imposed upon persons, or upon all the
persons of a certain class, residing within a specified territory, without
regard to their property, occupation or business in which they may be
engaged in.30 Example: The current Community Tax Certificate which
supplanted the Residence Tax Certificate is purely a poll tax.

(b) Property tax. - In general, taxes on property are taxes assessed

on all properties, whether real or personal, or on all property of a certain
class located within a certain territory on a specified date in proportion to its
value, or in accordance with some other reasonable methods of
apportionment, the obligation to pay of which is absolute and unavoidable
and is not based upon any voluntary action of the person assessed.
Example: The real property tax imposed by the LGUs under the authority of
the LGC of 1991, as amended.

(c) Privilege tax. - This is the tax imposed upon performance of an

act, the enjoyment of a privilege, or for engaging in business or exercising a
profession. Example: The annual Professional Tax levied by the province or
city.31

(3) As to burden or incidence.BQ2001, 2006 –

(a) Direct tax – This is a tax wherein both the incidence of or liability
for the payment of the tax, as well as the impact or burden of the tax falls on
the same person. In other words, it is a tax exacted from the very person
who, it is intended or desired, should pay it; an imposition for which a
taxpayer is directly liable on the transaction or business he is engaged in,
hence, cannot be shifted to another. 32 Examples: Income tax, Estate Tax,
Donor’s Tax.

(b) Indirect tax – This is a tax wherein the incidence of or liability for
the payment of the tax falls on one person but the burden or impact thereof
can be shifted or passed on to another. In other words, it is a tax which is
demanded, in the first instance, from one person in the expectation and
intention that he can shift the burden to someone else, not as a tax, but as
part of the cost of the goods or service that the buyer buys, and the burden
finally resting on the ultimate buyer or consumer. 33 Examples: VAT, Other
Percentage Taxes, Excise Tax, Documentary Stamp Tax.

30
Villanueva v. City of Iloilo, GR L-26521, Dec. 28, 1968 [Per J. Castro, En Banc]
31
Sec. 139, in relation to Sec. 151, LGC
32
Silkair (Singapore) Pte., Ltd. v. CIR, GR 184398, Feb. 25, 2010 [Per J. Leonardo-
De Castro, First Div.]
33
PAL v. CIR, GR 198759, July 1, 2013 [Per J. Perlas-Bernabe, Second Div.]
 (4) As to purpose. -

(a) General or fiscal tax - It is a tax which is levied for the general
purpose of supporting the government.

(b) Special, regulatory or sumptuary tax - It is a tax which is levied

for a special purpose to achieve some social or economic objectives. Thus,
a government’s levy on goods considered socially undesirable, such as
alcohol and tobacco, is a sumptuary tax. Another example is Safeguard
Duty, which is a special duty imposed for the purpose of protecting domestic
industries and producers from increased imports which could inflict serious
injury on them.

(5) As to tax rates. -

(a) Progressive or graduated tax rates - The rate of the tax increases
as the base of the tax increases. Example: Income tax rates for individual
taxpayers.

(b) Fixed or proportionate tax rates - The tax is based on a fixed

percentage of the amount of income, sales or receipts derived by the
taxpayer or other basis of the taxes being paid. Examples: VAT , Other
Percentage Taxes.