General Principles of Taxation

Taxation Defined
● Taxation is the process or means by which the sovereign (independent state), through its law making
body (the legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose
of raising revenues to carry out the legitimate objects of government.
● In simple terms, it is the act of levying a tax to apportion the cost of government among those who, in
some measure, are privileged to enjoy its benefits and must therefore bear its burdens.

The three (3) Inherent Powers of the State

● Police Power. It is the power of the state for promoting public welfare by restraining and regulating the
use of liberty and property.
● Power of Taxation. It is the power by which the State raises revenue to defray the necessary expenses
of the government.
● Power of Eminent Domain. It is the power of the State to acquire private property for public purpose
upon payment of just compensation.

Similarities among the Three (3) Inherent Powers of the State

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

Differences between Power of Taxation, Police Power, and Eminent Domain

Purpose of Taxation
● Primary: Revenue or Fiscal Purpose
 ○ The primary purpose of taxation on the part of the government is to provide funds or property
with which to promote the general welfare and the protection of its citizens and to enable it to
finance its multifarious activities.

● Secondary: Regulatory Purpose (or Sumptuary/Compensatory)

○ While the primary purpose of taxation is to raise revenue for the support of the government,
taxation is often employed as a devise for regulation or control (implementation of State’s
police power) by means of which certain effects or conditions envisioned by the government
may be achieved such as:
■ Promotion of General Welfare
■ Reduction of Social Inequality
■ Economic Growth

Theory and Basis of Taxation

● Theory (Authority): LIFEBLOOD THEORY or NECESSITY THEORY
● Basis of Taxation: BENEFITS RECEIVED or RECIPROCITY THEORY

Manifestation of the Lifeblood Theory

● Rule of “No Estoppel against the Government.”
○ The term estoppel refers to a legal principle that prevents someone from arguing something or
asserting a right that contradicts what they previously said or agreed to by law.
● Collection of taxes cannot be enjoined (stopped) by injunction.
● Taxes could not be the subject of compensation or set-off.
● Right to select objects (subjects) of taxation
● A valid tax may result in the destruction of the taxpayer’s property.

Scope of the Power of Taxation

● Comprehensive: As it covers persons, businesses, activities, professions, rights and privileges.
● Unlimited: In the absence of limitations prescribed by law or the constitution, the power to tax is
unlimited and comprehensive. Its force is so searching to the extent that the courts scarcely venture to
declare that it is subject to any restrictions.
● Plenary: As it is complete; BIR may avail of certain remedies to ensure collection of taxes.
● Supreme: In so far as the selection of the subject of taxation.

Essential Characteristics of Taxes

● Levied by the State which has Jurisdiction over the persons or property.
● Levied and collected for Public Purpose/e.
● Commonly required to be paid at regular periods or Intervals.
● Assessed in accordance with some reasonable rule of Apportionment.
● Levied pursuant to Legislative authority.
● An Enforced contribution.
● Pecuniary burden payable in Money.

Nature or Characteristics of the State’s Power to Tax

● It is inherent in sovereignty.
● It is legislative in character.

Classification of Taxes
● As to scope:
○ National
○ Local
 ● As to subject matter or object:
○ Personal
○ Property
○ Excise

● As to who bears the burden:

○ Direct
○ Indirect

● As to determination of amount:
○ Specific
○ Ad valorem

● As to purpose:
○ Primary, Fiscal, or Revenue imposed solely for the general Purpose
○ Secondary, Regulatory, Special or Sumptuary Purpose

● As to graduation or rate:
○ Proportional
○ Progressive or graduated
○ Regressive

● As to taxing authority:
○ National
○ Local

Elements of Sound Tax System

● Fiscal Adequacy
● Theoretical Justice or Equity
● Administrative Feasibility

Limitations on the State’s Power of Tax

● Inherent Limitations
● Constitutional Limitations

Inherent Limitations
● Situs or territoriality of taxation
● Public purpose
● International comity
● Non-delegability of the taxing power
● Exemption of the Government

Constitutional Limitations
● Provisions indirectly affecting taxation (Art. III, 1987 Constitution)
○ Due process (Sec. 1)
○ Equal protection (Sec. 1)
○ Freedom of the press (Sec. 4)
○ Religious freedom (Sec. 5)
○ Non-impairment of obligations of contracts (Sec. 10)

● Provisions directly affecting taxation

○ Prohibition against imprisonment for non-payment of poll tax (Art. III, Sec. 20)
 ○ Uniformity and equality of taxation (Art. VI, Sec. 28)
○ Grant by Congress of authority to the President to impose tariff rates (Art. VI , Sec. 28)
○ Prohibition against taxation of religious, charitable entities, and educational entities (Art. VI,
Sec. 28)
○ Prohibition against taxation of non-stock, non-profit educational institutions (Art. IX, Sec. 4)
○ Majority vote of Congress for grant of tax exemption (Art. VI, Sec. 28)
○ Prohibition on use of tax levied for special purpose (Art. VI, Sec. 29)
○ President’s veto power on appropriation, revenue, tariff bills (Art. VI, Sec. 27)
○ Non-impairment of jurisdiction of the Supreme Court (Art. VI, Sec. 30)
○ Grant power to the LGUs to create its own sources of revenue (Art. IX, Sec. 5)
○ Origin of Revenue and Tariff Bills (Art. VI, Sec. 24)
○ No appropriation/use of public money for religious purposes (Art. VI, Sec. 28)

Situs of Taxation
● Commonly known as “place of taxation.” It is the place or authority that has the right to impose and
collect taxes.
● Rule: A State may not tax property lying outside its borders or lay an excise or privilege tax upon the
exercise or enjoyment of a right to privilege derived from the laws of another State and therein
exercised or enjoyed.

Factors that determine Situs

● Subject matter (person, property, or activity)
● Nature of the tax
● Citizenship
● Residence of the taxpayer
● Source of income
● Place of excise, business or occupation being taxed

Means of Avoiding or Minimizing the Burden of Taxation

● 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.

● Transformation – the manufacturer or producer upon whom the tax has been imposed, fearing for the
loss of his market share 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 at a lower cost.

● Evasion - is a scheme where the taxpayer uses illegal or fraudulent means to defeat or lessen payment
of a tax.

● Tax Avoidance - is a scheme where the taxpayer uses legally permissible alternative method of
assessing taxable property or income, in order to avoid or reduce tax liability.

● Amnesty - it is the general 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.

● Capitalization - the reduction in the selling price of income producing property by an amount equal to
the capitalized value of future taxes that may be paid by the purchaser.

● 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.
Kinds of Exemption
● As to basis:
○ Constitutional. Immunities from taxation which originate from the constitution.
○ Statutory. Immunities from taxation which emanates from legislation.

● As to form:
○ Express. Exemptions expressly granted by statute.
○ Implied. When particular persons, property, or rights are deemed exempt as they fall outside
the scope of the taxing provision itself.

● As to extent:
○ Total. Connotes absolute immunity.
○ Partial. One where a collection of a part of the tax is dispensed with.

Principles Governing Tax Exemptions

● Exemptions from taxation are highly disfavored in law.
● He who claims an exemption must be able to justify his claim by the clearest grant of organic or statute
law because tax exemptions are not presumed.
● If ambiguous, there is no tax exemption.
● He who claims exemption should convincingly prove that he is exempted. Therefore, tax exemption
must be strictly construed.
● No law granting any tax exemption shall be passed without the concurrence of majority of all members
of Congress.

Sources of Tax Laws

● Constitution
● National Internal Revenue Code
● Tariff and Customs Code
● Local Government Code (Book II)
● Local tax ordinances/ City or municipal tax codes
● Tax treaties and international agreements - A tax treaty is one of the sources of our law on taxation. The
Philippine Government usually enters into tax treaties in order to avoid or minimize the effects of
double taxation. A treaty has the force and effect of law.
● Special laws
● Decisions of the Supreme Court and the Court of Tax Appeals 9. Revenue rules and regulations and
administrative rulings and opinions

Nature of Internal Revenue Laws

● Internal revenue laws are not political in nature.
● 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 the timely payment of
taxes or to punish evasion or neglect of duty in respect thereof.

Construction of Tax Laws

● Public purpose is always presumed.
● If the law is clear, apply the law in accordance to its plain and simple tenor.
● A statute will not be construed as imposing a tax unless it does so clearly, expressly and
unambiguously.
● In case of doubt, it is construed most strongly against the Government, and liberally in favor of the
taxpayer.
● Provisions of a taxing act are not to be extended by implication.
● Tax laws operate prospectively unless the purpose of the legislature to give retrospective effect is
expressly declared or may be implied from the language used.
● Tax laws are special laws and prevail over a general