TAXATION 1

Introductory Concepts and Principles of Taxation

Introduction

Taxation is one of the inherent powers of a state. It is also one of the major subjects of law
in the Philippines wherein every individual is affected by the laws on taxation.

In this module, the focus of discussion are the introductory concepts and principles of
taxation.

Learning Outcomes

At the end of this module, you should be able to:

1. Define taxation
2. Understand the concept and purposes of taxation
3. Determine the nature and characteristics of taxation
4. Distinguish the power of taxation from the other inherent powers of the state
5. Determine the underlying theories and bases of taxation
6. Enumerate the principles of a sound tax system

I. GENERAL PRINCIPLES OF TAXATION

A. Definition, Concept and Purpose of Taxation

TAXATION DEFINED AND ITS CONCEPT

Taxation 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.

As a power, taxation refers to the inherent power of the State (only the government has
the inherent power of taxation, LGUs have no inherent power of taxation because their
power to tax is granted by the Constitution [Sec. 5, Art. 10] and by the statute or law [LGC
of 1991, Book 2]) to demand enforced contributions for public purpose or purposes.

It is also defined as the act of levying a tax, the process or means by which the
sovereign, through its lawmaking body, raises income to defray the necessary expenses of
government. It is a method of apportioning the cost of government among those who, in
some measure, are privileged to enjoy its benefits and must therefore bear its burdens.

Thus, the term “taxation” may be used to refer to either the power to tax or the act or
process by which the power is exercised, or to both.

It is a mode of raising revenue for public purposes.

PURPOSES OF TAXATION

1. The primary purpose of taxation is to raise revenues (Fiscal purpose).

"For the support of government and for all public needs," is according to Judge
Cooley, the purpose of taxes." And so it has been widely believed that the primary
purpose of taxation is to raise funds or property to enable the State to promote the
general welfare and protection of its citizens. (52 Am. Jur. 34)

This was emphasized anew in the renowned case of Hon. Ramon Bagatsing, et
al. v. Hon. Pedro Ramirez, where the tax ordinance enacted by the Municipal Board
of Manila was assailed as not being a "tax ordinance," because the imposition of
 rentals, permit fees, tolls and other fees is not strictly a taxing power but a revenue
raising function. The Supreme Court observed that the pretense bore its own marks
of fallacy. Precisely, the raising of revenues is the principal object of taxation.

2. Secondary or non-revenue purposes (Sumptuary purpose)

But must an imposition, in order to be a tax, be levied solely for the purposes
of revenue? The answer is a resounding NO.

Other than to answer the ever-present need for revenues, taxation also seeks to:
(1) reduce social inequality, (2) encourage the growth of local industries, (3) protect
our local industries against unfair competition, (4) implement the police power of
the state (regulatory purpose).

a) Promotion of general welfare – taxation may be used as an implement of police

power to promote the general welfare of the people.

In the case of Lutz v. Araneta (G.R. No. L-7859, December 22, 1955), the
Supreme Court upheld the validity of the Sugar Adjustment Act, which imposed
a tax on milled sugar since the purpose of the law was to strengthen an industry
that is so undeniably vital to the economy – the sugar industry (Aban, 2001).

b) Regulation of activities/industries – Taxes may also be imposed for a regulatory

purpose as, for instance, in the rehabilitation and stabilization of a threatened
industry which is affected with public interest, like the oil industry (Caltex
Philippines, Inc. v. Commission on Audit, et al., G.R. No. 92585, May 8, 1992).

Taxation also has a regulatory purpose as in the case of taxes levied on excises
or privileges like those imposed on tobacco and alcoholic products, or
amusement places like night clubs, cabarets, cockpits, etc (Aban, 2001).

c) Reduction of social inequality – a progressive system of taxation prevents the

undue concentration of wealth in the hands of few individuals. Progressivity is
based on the principle that those who are able to pay more should shoulder the
bigger portion of the tax burden.

d) Encourage economic growth – the grant of incentives or exemptions encourage

investment thereby stimulating economic activity.

e) Protectionism – Protective tariffs and customs duties are imposed as taxes in

order to protect important sectors of the economy or local industries, as in the case
of foreign importations.

B. Nature and Characteristics of Taxation

TWO-FOLD NATURE OF POWER OF TAXATION

1. The power of taxation is inherent attribute of sovereignty

The power of taxation is an incident of sovereignty as it is inherent in the State,

belonging as a matter of right to every independent government. It does not need of
constitutional conferment. Constitutional provisions do not give rise to the power
to tax but merely impose limitations on what would otherwise be an invincible
power. No attribute of sovereignty is more pervading and at no point does the power
of government affect more constantly and intimately all the relations of life than
through the exactions made under it.

Taxation being an attribute of sovereignty, its relinquishment is never

presumed.
 It is considered inherent in a sovereign State because it is a necessary attribute
of sovereignty. Without this power, no sovereign State can exist nor endure. 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. No
sovereign State can continue to exist without the means to pay its expenses; 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.

2. It is essentially a legislative function

The power to tax is inherent in the State, and the State is free to select the object
of taxation, such power being exclusively vested in the legislature, EXCEPT where
the Constitution provides otherwise. (Art. VI, Sec. 28[2]; Art. X, Sec. 5) This is
based upon 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.”

Scope of legislative power in taxation

1. The determination of:

a. Amount or Rate of tax
b. Subjects of taxation (persons, property, occupation, excises or
privileges to be taxed,
c. provided they are within the taxing jurisdiction)
d. Kind of tax to be collected
e. Method of collection (This is not exclusive to Congress.)
f. Apportionment of the tax (whether the tax shall be of general
application or limited to a particular locality, or partly general and
partly local)
g. Purposes for which taxes shall be levied, provided they are public
purposes
h. Situs of taxation
2. The grant of tax exemptions and condonations
3. The power to specify or provide for administrative as well as judicial
remedies (Philippines Petroleum Corporation v. Municipality of Pililla,
G.R. No. 85318, June 3, 1991).

CHARACTERISTICS OF TAXATION

1. It is for public purpose. Taxes are spent to support government i.e. they are not
supposed to be used for private purpose.
2. It is inherently legislative. The power to tax is vested unto the Congress i.e. the
House of Representatives (from which the tax bill is introduced) and the
Senate. The Congress determines who to tax, what to tax and how the tax shall be
collected. Take note that they are NOT involved in the collection thereof.
3. It is an enforced contribution. Tax is not voluntary, and its imposition is in no way
dependent upon the will or assent of the person being taxed.
4. It is generally payable in money. The government, in the exercise of its civil
remedy in collecting the tax due may, by distraint of personal property or by levy
of real property, take the same to satisfy the tax liability if the taxpayer has no
money
5. It is subject to international comity or treaty.
6. It is territorial.
7. It is not absolute because its exercise is subject to constitutional limitations and
inherent restrictions.
 C. Power of Taxation as distinguished from Police Power and Power of Eminent
Domain

TAXATION POLICE POWER EMINENT DOMAIN

Authority who Government or its political Government or its Government or public service
exercises the subdivision political subdivision companies and public utilities
power
Purpose To raise revenue in support Promotion of general To facilitate the taking of
of the Government. welfare through private property for public
Regulation is merely regulations purpose
incidental.
Persons affected Upon the community or Upon community or On an individual as the owner
class of individuals class of individuals of a particular property
Amount of No ceiling except inherent Limited to the cost of No imposition, the owner is
monetary limitations regulation, issuance paid the fair market value of
imposition of license or his property
surveillance
Benefits received Protection of a secured Maintenance of The person receives the fair
organized society, benefits healthy economic market value of the property
received from government/ standard of society/ taken from him/ Direct benefit
No direct benefit No direct benefit results
Non-impairment Tax laws generally do not Contracts may be Contracts may be impaired
of contracts impair contracts, unless: impaired
government is party to
contract granting
exemption for a
consideration
Test of validity Must not be contrary to Must comply with the Must be for public purpose
inherent and constitutional tests on “lawful and with payment of just
limitations subjects” and “lawful compensation
means”

Similarities between taxation, eminent domain and police power

1. They are inherent powers of the State.
2. All are necessary attributes of the sovereign.
3. They exist independently of the Constitution.
4. They constitute the three methods by which the State interferes with private rights and
property.
5. They presuppose equivalent compensation.
6. The legislature can exercise all three powers.

Q: Can police power and taxation co-exist in one act of the government?

A: YES. Taxation is no longer envisioned as a measure merely to raise revenue to support the
existence of the government. Taxes may be levied with a regulatory purpose to provide a means
for the rehabilitation and stabilization of a threatened industry which is affected with public interest
as to be within the police power of the state (Caltex Philippines, Inc. v. Commission on Audit, 208
SCRA 726). Thus, the power of taxation may be exercised to implement police power (Tiu v.
Videogram Regulatory Board, 151 SCRA 208).

Distinguish taxation power from police power

TAXATION POLICE POWER

Purpose
To raise revenue To promote public purpose through regulations

Amount of Exaction
No limit Limited to the cost of regulation, issuance of the
license or surveillance

Benefits Received
No special or direct benefit is received by the No direct benefit is received; a healthy economic
taxpayer; merely general standard of
benefit of protection society is attained
Non-impairment of Contracts
Contracts may not be impaired Contracts may be impaired

Transfer of Property Rights

Taxes paid become part of public funds No transfer but only restraint in its exercise

Scope
All persons, property and excises All persons, property, rights and privileges

Taxation is distinguishable from police power as to the means employed to implement

these public good goals. Those doctrines that are unique to taxation arose from peculiar
considerations such as those especially punitive effects of taxation, and the belief that taxes are the
lifeblood of the state yet at the same time, it has been recognized that taxation may be made the
implement of the state’s police power (Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005).

D. Theory and Basis of Taxation

The theories underlying the power of taxation are:

1. Lifeblood Theory
2. Necessity Theory
3. Benefits-protection Theory (Doctrine of Symbiotic Relationship)
4. Jurisdiction over subject and objects

TAXATION AND THE LIFEBLOOD DOCTRINE

Taxation has been defined as the power by which the sovereign raises revenue to
defray the necessary expenses of government. It is a way of apportioning the cost of
government among those who in some measures are privileged to enjoy the benefits and
must therefore bear its burdens. (51 Am. Jur. 34)

The power of taxation is essential because the government can neither exist nor
endure without taxation. Taxes are the lifeblood of the government, and their prompt and
certain availability is an imperious need. (Bull v. United States, 295 U.S. 247,15 APTR
1069, 1073) The collection of taxes must be made without hindrance if the state is to
maintain its orderly existence.

Government projects and infrastructures are made possible through the availability
of funds provided through taxation. The government's ability to serve and protect the
people depends largely upon taxes. Taxes are what we pay for a civilized society.

The following rules or principles or legal provisions are based on lifeblood

doctrine:

1. Set-off or compensation is NOT allowed

2. Gov’t is NOT stopped by the mistakes or errors of its agents
3. Courts are NOT allowed to restrain the collection of taxes
4. Summary remedies of distraint and levy
 5. Tax exemptions are strictly construed against the person claiming exemption
6. The commissioner or internal revenue is NOT required by law to decide
disputed assessments

Manifestations of lifeblood theory:

1. Imposition even in the absence of constitutional grant.
2. State’s right to select objects and subjects of taxation.
3. No injunction to enjoin collection of taxes except for a period of 60 days upon
application to the CTA as an incident of its appellate jurisdiction.
4. Taxes could not be the subject of compensation and set-off, subject to certain
exceptions.
5. A valid tax may result in destruction of property.

THEORIES ON TAXATION

Taxation, as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner, is a

power predicated upon necessity (Necessity Theory). The theory behind the exercise of
the power to tax emanates from necessity. Without taxes, the government cannot fulfill its
mandate of promoting the general welfare and wellbeing of the people (Gerochi v. DOE,
527 SCRA 696, 2007). It is a necessary burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public improvements for the enjoyment of the
citizenry, and those which come within the State's territory and facilities and protection
which a government is supposed to provide.

The Benefits-Protection Theory, on the other hand, bases the power of the State to
demand and receive taxes on the reciprocal duties of support and protection. The citizen
supports the State by paying the portion from his property that is demanded in order that
he may, by means thereof, be secured in the enjoyment of the benefits of an organized
society. Thus, the taxpayer cannot question the validity of the tax law on the ground that
payment of such tax will render him impoverished, or lessen his financial or social
standing, because the obligation to pay taxes is involuntary and compulsory, in exchange
for the protection and benefits one receives from the government.

This theory spawned the DOCTRINE OF SYMBIOTIC RELATIONSHIP, a term

culled from the ruling of the Supreme Court in the celebrated case of Commissioner of
Internal Revenue v. Algue, Inc., supra," which stressed that:

“Taxes are what we pay for 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 who is able to must
contribute his share in the burden of running 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 material and moral
values.”

Special benefits to taxpayers are not required. A person cannot object to or resist the
payment of taxes solely because no personal benefit to him can be pointed out arising from
the tax (Lorenzo v. Posadas, 64 Phil. 353). The expenses of government, having for their
object the interest of all, should be borne by everyone, and the more man enjoys the
advantages of society, the more he ought to hold himself honored in contributing to those
expenses (ABAKADA Guro Party List v. Ermita, G.R. No. 168056, September 1, 2005).

Jurisdiction over subjects and objects

It is the country, state or sovereign that gives protection and has the right to demand
payment of taxes with which to finance activities so it could continue to give protection.
 Taxation is territorial because it is only within the confines of its territory that a country,
state or sovereign may give protection.

E. Principles of a Sound Tax System

1. Fiscal adequacy, which means that the sources of revenue should be sufficient to
meet the demands of public expenditures

Sources of revenues must be adequate to meet government expenditures

(Chavez v. Ongpin, 186 SCRA 331), and other public needs. This is in consonance
with the doctrine that taxes are the lifeblood of the government.

2. Administrative feasibility, which means that the tax laws should be capable of
convenient, just, and effective administration.

Tax laws must be capable of effective and efficient enforcement. They must
not obstruct business growth and economic development.

In Kapatiran Ng Mga Naglilingkod sa Pamahalaan v. Tan, the Supreme

Court, in upholding the validity of the VAT law, held that the law "is principally
aimed to rationalize the system of taxes on goods and services; simplify tax
administration, and make the system more equitable to enable the country to attain
economic recovery."

The principle requires that each tax should be clear and plain to the
taxpayers, capable of enforcement by an adequate and well-trained staff of public
officials, convenient as to time and manner of payment, and not duly burdensome
upon or discouraging to business activity. (Report of the Tax Commission of the
Philippines, February 1939, Vol. 1, pp. 23-31)

3. Equality or theoretical justice, which means that the tax burden should be
proportionate to the taxpayer’s ability to pay – ability to pay principle

A sound tax system must take into consideration the taxpayers' ability to
pay. Our laws mandate that taxes must be reasonable, just, fair, conscionable. Under
Art. VI, Section 28(1) of the Constitution, the rule of taxation must be uniform and
equitable. The State must evolve a progressive system of taxation.

Taxation is said to be equitable when its burden falls on those better able to
pay; taxation is progressive when its rate goes up depending on the resources of the
person affected.

A violation of the principle of a sound tax system may or may not invalidate a tax law

A tax law will retain its validity even if it is not in consonance with the principles of fiscal
adequacy and administrative feasibility because the Constitution does not expressly require so.
These principles are only designated to make our tax system sound. However, if a tax law runs
contrary to the principle of theoretical justice, such violation will render the law unconstitutional
considering that under the Constitution, the rule of taxation should be uniform and equitable (J.
Dimaampao, 2015).

Case Studies and Digests

1. Regulatory purpose
Chevron Philippines, Inc. vs. BCDA, et. al., G.R. No. 173863, September 15, 2010.
(https://lawphil.net/judjuris/juri2010/sep2010/gr_173863_2010.html)
2. Characteristics of taxation: Taxation is for public purpose
 Planters Products, Inc. vs. Fertiphil Corporation, G.R. No. 16606, March 14, 2008
(https://lawphil.net/judjuris/juri2008/mar2008/gr_166006_2008.html)
3. Lifeblood Doctrine
Commissioner of Internal Revenue vs. Algue, Inc., et. al., G.R. No. L-28896, February 17,
1988 (https://lawphil.net/judjuris/juri1988/feb1988/gr_l_28896_1988.html)
4. Necessity Theory
The Philippine Guaranty Co., Inc. vs. The CIR, et. al., G.R. No. L-22074, April 30, 1965.
(https://lawphil.net/judjuris/juri1965/apr1965/gr_l-22074_1965.html)
5. Principles of a Sound Tax System: Fiscal Adequacy
Francisco I. Chavez vs. Jaime B. Ongpin, G.R. No. 76778, June 6, 1990
(https://lawphil.net/judjuris/juri1990/jun1990/gr_76778_1990.html)