TAXATION

GENERAL PRINCIPLES

Inherent Powers of The State

1. Police Power- The power to protect citizens and provide for safety welfare of society.
2. Eminent Domain Power- The power to take private property (with just compensation) for public use.
3. Taxation Power- The power to enforce contributions to support the government, and other inherent powers of
the state.

TAXATION POLICE POWER EMINENT DOMAIN

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

Taxation, Definition
 It is an inherent power by which the sovereign:
 through its law-making body
 raises income to defray the necessary expenses of government
 by apportioning the cost among those who, in some measure are privileged to enjoy its benefits and, therefore,
must bear its burdens.

Simply stated, the power of taxation is the power to impose burdens on subject and objects within its jurisdiction.

Theories of Taxation

1. Lifeblood theory (Importance of taxation)

- The phrase expresses the underlying basis of taxation which is governmental necessity, for indeed,
without taxation, a government can neither exist nor endure.

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 2. Necessity theory (Theory of taxation)
- Taxation is a principal attribute of sovereignty. The exercise of the 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 the public good.

3. Benefits-protection theory (Doctrine of Symbiotic Relationship or Basis of Taxation)

- It involves the power of the State to demand and receive taxes based on the reciprocal duties of
support and protection between the State and its citizen.
- Every person who is able 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.

Nature of Taxation Power

1. Inherent Power of sovereignty
-Taxation is as old as the government itself, its existence commences concurrently with the four elements
of a state- people, territory, sovereignty and government.
2. Essentially a legislative function
-The law making body of the government and its political subdivisions exercise the power of taxation. In a
strict sense, the power to make tax laws cannot be delegated to other branches of the government.
3. For public purpose
-The power of taxation flows forth from the legitimate objective of supporting the services of the
government.
4. Territorial in operation
-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.
5. Tax exemption of government
-The State cannot tax itself. Tax exemptions applies only to government entities that exercises
governmental functions.
6. The strongest among the inherent powers of the government
-Without money, the government can neither survive nor dispense any of its other powers and functions
effectively
7. Subject to Constitutional and Inherent Limitation.
-Although taxation power is supreme, its exercise is not absolute because it is subject to Inherent and
Constitutional Limitations.

Inherent Limitations (PENTI)

1. Taxes may be levied only for public purpose
 It is for the welfare of the nation and/or for greater portion of the population;
 It affects the area as a community rather than as individuals;
 is designed to support the services of the government for some of its recognized objects

2. Non-delegability of taxation because of being legislative in nature.

 Exceptions to non-delegation:
a. To local governments in respect of matters of local concern to be exercised by the local
legislative bodies thereof.
b. When allowed by the Constitution.
c. When the delegation relates merely to administrative implementation

3. Tax power is limited to territorial jurisdiction of the State (Situs of Taxation)

 It is the place or authority that has the right to impose and collect taxes.

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  The taxing power of a country is limited to persons and property within and subject to its jurisdiction.
 Reasons:
i. Taxation is an act of sovereignty which could only be exercised within a country’s territorial
limits.
ii. This is based on the theory that taxes are paid for the protection and services provided by
the taxing authority which could not be provided outside the territorial boundaries of the
taxing State.
 Exceptions
i. Where tax laws operate outside territorial jurisdiction – i.e. Taxation of resident citizens on
their incomes derived abroad.
ii. Where tax laws do not operate within the territorial jurisdiction of the State.
iii. When exempted by treaty obligations; or
iv. When exempted by international comity.

4. Taxation is subject to international comity

 It refers to the respect accorded by nations to each other because they are sovereign equals. Thus,
the property or income of a foreign state may not be the subject of taxation by another state.

5. Government entities are generally tax exempt.

 This is premised on the concept that with respect to the government, exemption is the rule and
taxation is the exception in order to reduce administrative costs.
 If the taxing authority is the National Government, it is exempt from tax. Otherwise, we would be
“taking money from one pocket and putting it in another.
 GOCCS performing proprietary functions are taxable.

Constitutional Limitations
1. Due process of law
 The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support
in the Constitution, as where it can be shown to amount to a confiscation of property.
2. Equal protection of law
 No person shall be deprived of life, liberty, or property without due process of law, nor shall any
person be denied the equal protection of the laws.
 It means that all persons subjected to such legislation shall be treated alike, under like circumstances
and conditions, both in the privileges conferred and in theliabilities imposed.
3. Rule of uniformity and equity
 “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system
of taxation.
 Uniformity – It means all taxable articles or kinds of property of the same class shall be taxed at the
same rate. Tax is uniform when it operates with the same force and effect in every place where the
subject is found. Different articles may be taxed at different amounts provided that the rate is
uniform on the same class everywhere, with all people at all times.
 Equality – When the burden of the tax falls equally and impartially upon all the persons and property
subject to it.
 Equity – When its burden falls on those better able to pay.
4. President’s power to veto
 The President may not veto a bill in part and approve it in part.
 The President shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill
but the veto shall not affect the item or items which he does not object.
5. Exemptions from property taxation of religious, charitable or educational entities, nonprofit cemeteries,
churches and convents appurtenant thereto.
 It pertains to exemption from real property taxes only.
6. No public money shall be appropriated for religious purposes.

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  Public money or property cannot be used for a religious purpose; except, if a priest is assigned to the armed
forces, penal institutions, government orphanages or leprosarium.
7. Majority of all the members of the Congress granting tax exemption.
 No law granting tax exemption shall be passed without the concurrence of a majority vote of all
8. Power of the Supreme Court to review the legality of any tax.
 The Supreme Court can review judgments or orders of lower courts in all cases involving:
a. The legality of any tax, impost, assessment, or toll;
b. The legality of any penalty imposed in relation thereto
9. No imprisonment for non-payment of poll tax.
 Poll tax- It is a fixed amount upon all persons, or upon all persons of a certain class, residents within a specified
territory, without regard to their property or occupation. It is a tax imposed on a per head basis. The present poll
tax is the community tax.
 A person may be imprisoned for non-payment of internal revenue taxes, such as income tax as well as other
taxes that are not poll taxes if expressly provided by law.
 A person cannot be sent to prison for failure to pay the community tax.
10. Appropriations, Revenue, and Tariff Bills (ART) shall originate exclusively from the House of Representatives

Doctrines in Taxation
1. Prospectivity of Tax Laws
 Taxes must only be imposed prospectively, except if the law expressly provides for retroactive imposition.
 Retroactive application of revenue laws may be allowed if it will not amount to denial of due process.
 The prohibition against ex post facto laws applies only to criminal matters and not to laws which are civil
in nature. When it comes to civil penalties like fines and forfeiture (except interest), tax laws may be
applied retroactively unless it produces harsh and oppressive consequences which violate the taxpayer’s
constitutional rights regarding equity and due process.

2. Doctrine of Imprescriptibility
 Taxes are imprescriptible as they are the lifeblood of the government. However, tax statutes may provide
for statute of limitations.
 Although the NIRC provides for the limitation in the assessment and collection of taxes imposed, such
prescriptive period will only be applicable to those taxes that were returnable. The prescriptive period
shall start from the time the taxpayer files the tax return and declares his liability

3. Double Taxation
 Otherwise described as “direct duplicate taxation”, the two taxes must be imposed on the same subject
matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same
taxing period; and the taxes must be of the same kind or character.
 Kinds of Double Taxation
i. As to validity
1. Direct Double Taxation (Obnoxious) - Double taxation in the objectionable or prohibited
sense since it violates the equal protection clause of the Constitution.
2. Indirect Double Taxation - Not repugnant to the Constitution.
o This is allowed if the taxes are of different nature or character imposed by
different taxing authorities.
o Generally, it extends to all cases when one or more elements of direct taxation
are not present.
ii. As to scope
1. Domestic Double Taxation - When the taxes are imposed by the local and national
government within the same State.
2. International Double Taxation - occurs when there is an imposition of comparable taxes
in two or more states on the same taxpayer in respect of the same subject matter and
for identical periods.

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 iii. Methods to Ease Double Taxation
1. Tax credit – an amount subtracted from taxpayer’s tax liability in order to arrive at the
net tax due.
2. Tax deduction – an amount subtracted from the gross amount on which a tax is
calculated.
3. Tax exemption – a grant of immunity to particular persons or entities from the
obligation to pay taxes.
4. Imposition of a rate lower than the normal domestic rate

4. Escape from Taxation (SCATE2 )

1. Shifting
- The transfer of the burden of tax by the original payer or the one on whom the tax was
assessed or imposed to another or someone else without violating the law.
- Kinds of Shifting
a. Forward shifting – When the burden of tax is transferred from a factor of production through
the factors of distribution until it finally settles on the ultimate purchaser or consumer.
b. Backward shifting – When the burden is transferred from the consumer through the factors of
distribution to the factors of production.
c. Onward shifting – When the tax is shifted two or more times either forward or backward.
- Kinds of taxes it applies: It applies to indirect taxes since the law allows the burden of the tax to
be transferred. In case of direct tax, the shifting of burden can only be via a contractual provision.

2. Capitalization
- It is the reduction in the price of the taxed object equal to the capitalized value of future taxes which
the purchaser expects to be called upon to pay.

3. Avoidance
- It is the scheme where the taxpayer uses legally permissible alternative method of assessing
taxable property or income, in order to avoid or reduce tax liability.
- Also known as Tax Minimization, tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer in good faith and at arms length.

4.Transformation
- It is the scheme where the manufacturer or producer upon whom the tax has been imposed, fearing
the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup
himself by improving his process of production, thereby turning out his units of products at a lower
cost.

5. Evasion
- It is the scheme where the taxpayer uses illegal or fraudulent means to defeat or lessen payment
of a tax.
- Tax evasion is a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities

6. Exemption
- It is the grant of immunity, express or implied, to particular persons or corporations, from a tax
upon property or an excise tax which persons or corporations generally within the same taxing
districts are obliged to pay.
- Characteristics:
1. Personal in nature and covers only taxes for which the grantee is directly liable.
2. It cannot be transferred or assigned by the person to whom it is given without the consent of
the State.

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 3. Strictly construed against the taxpayer.
4. Exemptions are not presumed. But when public property is involved, exemption is the rule,
and taxation, the exception.

5. Impact of taxation: Otherwise known as the burden of taxation, it is the economic cost of the tax. The impact of
taxation may fall on another person not statutorily liable to pay the tax.

6. Incidence of taxation: The incidence of taxation is upon the person statutorily liable to pay the tax. Where the
burden of the tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an added
cost on the goods purchased, which constitutes a part of the purchase price.

7. Compensation or Set off

 Compensation or set-off take place when two persons, in their own right, are creditors and debtors of each
other
 No set-off is admissible against the demands for taxes levied for general or local governmental purposes.
 Taxes are not in the nature of contracts between the parties but grow out of duty to, and are positive acts of
the government to the making and enforcing of which, the personal consent of the individual taxpayer is not
required.
 Where both of the claims of the government and the taxpayer against each other have already become due,
demandable, and fully liquidated, compensation takes place by operation of law and both obligations are
extinguished to their concurrent amounts.
 In the case of the taxpayer’s claim against the government, the government must have appropriated the
amount thereto

8. Doctrine of Equitable Recoupment

 It is a principle which allows a taxpayer, whose claim for refund has been barred due to prescription, to
recover said tax by setting off the prescribed refund against a tax that may be due and collectible from him.
Under this doctrine, the taxpayer is allowed to credit such refund to his existing tax liability.

9. Compromise
 It is an agreement between two or more persons who, to avoid lawsuit, amicably settle their differences on
such terms and conditions as they may agree on. It implies the mutual agreement by the parties in regard to
the thing or subject matter which is to be compromised.
 It is a contract whereby the parties, by reciprocal concessions avoid litigation or put an end to one already
commenced.
 Compromises are generally allowed and enforceable when the subject matter thereof is not prohibited from
being compromised and the person entering such compromise is duly authorized to do so.

10. Tax Amnesty

 A tax amnesty, being a general pardon or intentional overlooking by the state of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute
forgiveness or waiver by the government of its right to collect what otherwise would be due to it, and in this
sense, prejudicial thereto, particularly to give tax evaders, who wish to relent or are willing to reform a chance
to do so and become a part of the new society with a clean slate.

The Power to Tax as Power to Destroy (Marshall) vs. The power to tax is not a power to destroy while the
Supreme Court sits (Holmes).
 Marshall’s view refers to a valid tax while the Holmes’ view refers to an invalid tax.
 The imposition of a valid tax could not be judicially restrained merely because it would prejudice taxpayer’s
property.
 An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer’s property.

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Characteristics of the power to Tax (CUPS)
1. Comprehensive - It covers persons, businesses, activities, professions, rights and privileges.
2. Unlimited - It is so unlimited in force and searching in extent that courts scarcely venture to declare that it is subject to
any restrictions, except those that such rests in the discretion of the authority which exercises it.
3. Plenary - It is complete. Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes.
4. Supreme - It is supreme insofar as the selection of the subject of taxation is concerned.

Purposes of Taxation
1. Revenue – to raise funds or property to enable the State to promote the general welfare and protection of the people.
2. Non-revenue [PR2EP]
a. Promotion of general welfare – taxation may be used as an implement of police power to promote the general welfare of
the people.
b. Regulation of activities/industries
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 – In case of foreign importations, protective tariffs and customs are imposed to protect local industries.

Basic Principles of Sound Tax System (FAT)

1. Fiscal adequacy
a. Revenue raised must be sufficient to meet government/public expenditures and other public needs.
2. Administrative feasibility
a. Tax laws must be clear and concise.
b. Capable of effective and efficient enforcement.
c. Convenient as to time and manner of payment; must not obstruct business growth and economic development.
3. Theoretical justice
a. Must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory).
b. The rule on taxation must be uniform and equitable and that the State must evolve a progressive system of
taxation.

Stages/ Aspects of Taxation

1. Tax Legislation (Levy or Imposition) – This refers to the enactment of a law by Congress authorizing the imposition of tax.
It further contemplates the determination of the subject of taxation, purpose for which the tax shall be levied, fixing the
rate of taxation and the rules of taxation in general.

2. Tax Administration (Assessment and Collection) – This is the act of administration and implementation of the tax law by
executive through its administrative agencies. The act of assessing and collecting taxes is administrative in character, and
therefore can be delegated.
3. Payment – The act of compliance by the taxpayer, including such options, schemes or remedies as may be legally
available.

Taxes, Definition
These are enforced proportional contributions from persons and properties, levied by the State by virtue of its
sovereignty for the support of the government and for all its public needs.

Characteristics of taxes
1. It is levied by the State which has jurisdiction over the person or property
2. It is levied by the State through its Law-making body
3. It is an Enforced contribution not dependent on the will of the person taxed.

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4. It is generally Payable in money
5. It is Proportionate in character
6. It is levied on Persons and property
7. It is levied for a Public purpose.

Requisites of Valid Tax

1. It should be for a public purpose;
2. It should be uniform;
3. That either the person or property being taxed be within the jurisdiction of the taxing authority; and
4. The tax must not impinge on the inherent and constitutional limitations on the power of taxation.

TAX CUSTOMS DUTY

Coverage
More comprehensive than customs duty Only a kind of tax therefore limited coverage
Object
Persons, property, etc. Goods imported or exported

TAX TOLL
Definition
An enforced proportional contribution from persons and property A consideration paid for the use of a road, bridge or the like, of a
for public purpose/s. public nature.
Basis
Demand of sovereignty Demand of proprietorship
Amount
Generally the amount is unlimited Amount is limited to the cost and maintenance of public
improvement
Purpose
For the support of the government For the use of another’s property
Authority
May be imposed by the State only May be imposed by private individuals or entities

TAX LICENSE FEE

Purpose
Imposed to raise revenue For regulation and control
Basis
Collected under the power of taxation Collected under police power
Amount
Generally, amount is unlimited Limited to the necessary expenses of regulation and control
Subject
Imposed on persons, property, rights or transaction Imposed on the exercise of a right or privilege
Effect of Non-Payment
Non-payment does not make the business illegal Non-payment makes the business illegal
Time of Payment
Normally paid after the start of business Normally paid before the commencement of the business

TAX SPECIAL ASSESSMENT

Nature
An enforced proportional contribution from persons and property An enforced proportional contribution from owners of lands
for public purpose/s. especially those who are peculiarly benefited by public
improvements
Subject
Imposed on persons, property rights or transactions Levied only on land
Person Liable
A personal liability of the taxpayer Not a personal liability of the person assessed
Purpose
For the support of the government Contribution to the cost of public improvement

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Scope
Regular exaction Exceptional as to time and locality

TAX DEBT
Basis
Obligation created by law Obligation based on contract, express or implied
Assignability
Not assignable Assignable
Mode of Payment
Payable in money or in kind Payable in kind or in money
Set-off
Not subject to set-off Subject to set-off
Effect of non-payment
May result to No imprisonment (except when debt arises from crime)
imprisonment
Interest
Bears interest only if delinquent Interest depends upon the written stipulation of the parties
Prescription
Governed by the special prescriptive periods provided for in the Governed by the ordinary periods of prescription
NIRC

TAX PENALTY
Definition
An enforced proportional contribution from persons and property Sanction imposed as a punishment for a violation of the law or acts
for public purpose/s. deemed injurious; violation of tax laws may give rise to imposition
of penalty.
Purpose
To raise revenue To regulate conduct

Classification of Taxes

Property Excise Ad Valorem Direct Indirect Proportional Progressive National

Real Estate Tax o o o o
Income Tax o o o
Estate Tax o o o o
Donor’s Tax o o o o
VAT o o o o
Community Tax o
Percentage Tax o
Amusement Tax o

KIND OF TAX SITUS

Personal or community tax Residence or domicile of the taxpayer
Real Property Tax Location of property
Personal Property Tax -tangible: where it is physically located or permanently kept
-intangible: Sec. 104 of NIRC
Business Tax Place of business
Excise or Privilege Tax Where the act is performed or where occupation is pursued
Sales Tax Where the sale is consummated
Income Tax Consider (1)Citizenship (2)Residence (3)Source of Income
Transfer Tax Residence or citizenship of the taxpayer or location of property
Franchise Tax State which granted the franchise
Corporate Tax Law on incorporation

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Tax Laws
 Set of rules that provide means for the State to raise revenues.
 Not political and penal in nature, rather they are civil in nature although there are penalties provided for their violation.
 Are special laws and prevail over a general law

Sources of Tax Laws

 Republic Acts/ Statutes/ Tax Code
 Presidential Decrees
 Executive Orders
 Court Decisions
 Revenue Regulations

Two Major Classification of Tax Laws

 Tax Imposition – one that provides a burden
 Tax exemption – one that provides immunity

Tax Impositions
 in case of doubt, it is construed strongly against the government, and liberally in favor of the government.

Tax Exemption
 highly disfavored in law and not presumed
 he who claims exemption must be able to justify his claim by the clearest grant of organic or statute law by word too palin to be
mistaken
 must be strictly construed against the taxpayer
 are personal

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