Nature and Scope of

The Power of Taxation

The power of taxation is comprehensive, plenary, unlimited and supreme. It is

essentially legislative in character and is inherent in the state.

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 Theories of Taxation

1. Lifeblood Theory
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 running of the government.

(CIR v. Algue, Inc.)

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 Theories of Taxation

2. Necessity Theory
The power to tax is an attribute of sovereignty emanating from necessity. It is a
necessary burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public improvements designed 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.

(Phil. Guaranty Co., Inc. v. CIR)

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 Theories of Taxation

3. Benefits-Protection / Reciprocity Theory

Taxation is described as a symbiotic relationship whereby in exchange of the
benefits and protection that the citizens get from the Government, taxes are
paid.
(CIR v. Algue, Inc.)

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 Primary Purpose of Taxation

Generate funds or property with which to promote

the general welfare and afford protection to its
citizens.

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 Secondary or Non-Revenue
Purposes of Taxation
• Reduce excessive inequalities in the distribution of wealth and means by using
the progressive scheme of income taxation and imposing estate taxes to
equalize wealth;
• Protect local industries against foreign competitors by imposing protective
tariff on imported goods;
• Encourage the growth of home industries through the proper use of tax
exemptions and tax incentives;
• Implement the police power of the state in promoting the general welfare;

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 Secondary or Non-Revenue
Purposes of Taxation
• Use as bargaining tool in trade negotiations with other countries;
• Curb spending power and halt inflation by increasing taxes in periods of
prosperity and expand business. It also wardsoff depression by lowering taxes
in periods of slump. • Promote science and invention; and
• Finance activities to improve efficiency of military or local police forces in the
maintenance of peace and order through the grant of subsidies.

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 Other Aspects of Taxation or
Taxation System
• Levying or imposition of the tax – this refers to the process of determining
the persons or property to be taxed; the purpose of the tax as long as it is a
public purpose; the sum/s to be raised; the rate, manner, means and agencies
of tax collection. It is a legislative act with powers vested in Congress.
• Collection of the tax – this refers to the manner of enforcing the tax
obligation on the part of those required to pay the tax. It is essentially
administrative in character with powers vested in the Department of Finance
especially BIR, Bureau of Customs (BOC) and local government units.

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 Essential Characteristic of Tax

• An enforced contribution
• Levied pursuant to legislative authority
• Proportionate in character
• Generally payable in money
• Levied by the state which has jurisdiction over the persons or property

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 Essential Characteristic of Tax

• Levied and collected for public purpose/s

• Commonly required to be paid at regular periods or intervals
• An involuntary contribution and revenue to the government for public
purpose
• Compulsory government exaction or levy on persons, property, income and
business

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 Basic Principles of a
Sound Tax System

• Fiscal Adequacy – sources of revenues should be sufficient to meet

expenditures of government regardless of business conditions.
• Equality or theoretical justice – taxes must be imposed with equity, certainty,
convenience, and consideration of the taxpayer’s ability to pay.

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 Basic Principles of a
Sound Tax System

• Administrative feasibility and compliance – the law must reasonable, just and
effective administration. Moreover, taxpayers should find it easy and
convenient to comply.
• Consistency or compatibility with economic objectives or goals – economic
effects of taxation extend far beyond the matter of incidence, allocation of
resources to the public sector and redistribution of income.

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 Definition of Taxation, Eminent
Domain, and Police Power
• Taxation – the power by which the sovereign raises revenue to defray the
necessary expenses of the government.
• Eminent Domain – the power of the state or those to whom the power has
been delegated to take private property for public use upon payment of just
compensation to be ascertained according to law. It is sometimes called the
power of expropriation.
• Police Power – the power of the state to enact laws, in relation to persons
and property, that may promote public health, morals, safety and the general
welfare and prosperity of its inhabitants.

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 Similarities among Taxation,
Eminent Domain & Police Power

• Rest upon necessity because there can be no effective government without

them.
• Underlie and exist independently under the Constitution although the
conditions for their exercise may be prescribed by the statutes or laws.
• The state lawfully interferes with private rights and property.

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 Similarities among Taxation,
Eminent Domain & Police Power

• Exercise of the powers is given to the executive authorities (national or local)

although legislative in nature and character.
• Presuppose an equivalent compensation received, directly or indirectly, by the
persons affected in the exercise of these governmental powers

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 Similarities among Taxation,
Eminent Domain & Police Power
As To Compensation Or Benefits Received
Taxation It is assumed that the individual receives
the equivalent of the tax in the form of
protection and benefits from the
government.

Police Power The person affected receives no direct

and immediate benefits but only such as
may arise from the maintenance of
public safety, health and welfare of the
public
Eminent Domain The person affected receives the market
value of the property taken from him

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 Similarities among Taxation,
Eminent Domain & Police Power
As to whom directed
Taxation To the public
Police Power To the public
Eminent Domain To a particular person or property

As to nature of compensation
Taxation Presumes protection or benefits.
Police Power Provides better social & economic
standards.
Eminent Domain Requires payment of just compensation.

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 Similarities among Taxation,
Eminent Domain & Police Power

As to why property is taken

Taxation To support the government
Police Power For public welfare
Eminent Domain For public use

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 Similarities among Taxation,
Eminent Domain & Police Power

As to relation to impairment clause

Taxation Inferior to non-impairment clause of the
constitution
Police Power Superior to non-impairment clause of
the constitution
Eminent Domain Inferior to nonimpairment clause of the
constitution

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 Similarities among Taxation,
Eminent Domain & Police Power

As to purpose
Taxation The property is taken from the taxpayer
to support the government.
Police Power The use of property is regulated for the
purpose of promoting the general
welfare; hence, it is not compensable
Eminent Domain The property is taken for public use;
hence, it must be compensable.

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 Similarities among Taxation,
Eminent Domain & Police Power
As to effect
Taxation The money becomes part of the public
funds.
Police Power There is no transfer of title; at most,
there is restraint in the injurious use of
property.
Eminent Domain There is transfer of the right of
property whether it be of ownership or
a lesser right or possession.

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 Similarities among Taxation,
Eminent Domain & Police Power
As to relationship to the Constitution
Taxation Subject to certain constitutional
limitations including the non-impairment
of the obligations and contracts
Police Power Relatively free from constitutional
limitations and is superior to the
impairment provisions.
Eminent Domain Inferior to the impairment clause. The
government cannot expropriate
property which is previously bound by
contract to purchase from other
contracting party.

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 Similarities among Taxation,
Eminent Domain & Police Power
As to authority which exercises the power
Taxation May be exercised only by the
government or its political
subdivisions
Police Power May be exercised only by the
government or its political
subdivisions
Eminent Domain May be exercised by entity engaged in
public service or public utilities, if the
power is granted by the law.

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 Similarities among Taxation,
Eminent Domain & Police Power
As to amount imposition
Taxation No limit to the amount of tax that
may be imposed.
Police Power Limit to the cost of the license and the
necessary expenses of police
surveillance, inspection, examination, or
regulation.
Eminent Domain Not fixed because the basis of
computing is the property’s fair market
value or finally determined by the court.

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 Classification of Taxes
As to Subject Matter or Object
1. Kinds of Taxes on Persons
• Individual Income Tax – is the tax or imposition on:
o The Gross Compensation Income of a person based on a graduated scale.
Income tax is based on the gross compensation income less premium on
health and/or hospital insurance as the case maybe.

o The net income from the exercise of a profession or other income derived
from business.

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 Classification of Taxes

• Poll or Residence Tax – refers to per capita or poll tax.

• Privilege or Professional Tax – levied in the practice of profession. All

professionals like lawyers, CPAs, doctors are required to pay their
Professional Tax before they can practice.

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 Classification of Taxes
2. Kinds of Taxes on Property
• Transfer Tax – vary depending on the manner in which property may be
transferred. Kinds of Transfer Tax under the NIRC:
o Estate Tax – levied on property transferred by way of succession. It is based
on the gross value of the estate of a deceased person.
o Donor's Tax – refers to the gratuitous transfer of property by one person to
another during the former's lifetime. This is called "donation intervivos" which
means that the terms of the donation will take effect during the lifetime of
the donor.

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 Classification of Taxes
Taxes on Real Property
o Real Property Tax – imposed on a property owner based on the assessed
value of his property. Percentage tax varies depending on the classification of
the property whether classified as commercial or residential. It is also based
on the current fair market value or zonal value of the property, whichever is
higher.

o Capital Gains Tax (CGT) – a property owner who sells, exchanges or

transfers his real property must pay this CGT based on the selling price; fair
market or zonal value, whichever is higher.

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 Classification of Taxes
3. Kinds of Business Taxes:
• Value-Added Tax (VAT) – is a business tax imposed and collected from the
seller in the course of trade or business on every sale of properties (real or
personal), lease of goods or properties (real or personal) or vendors of
services. It is an indirect tax, thus, it can be passed on to the buyer.

• Percentage Tax – is a business tax imposed on persons or entities who sell or

lease goods, properties or services in the course of trade or business with
gross annual sales or receipts that do not exceed P3,000,000 and are not
VAT-registered.

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 Classification of Taxes
• Excise Tax – an internal tax imposed on the manufacture, sale or consumption
of an item within a country, or paid for a license to carry on certain callings or
occupations.

Two (2) most common kinds of excise tax

o Specific Tax - based on weight or volume, capacity, or any other physical unit
of measurement of the subject goods.
o Ad Valorem Tax - based on the selling price or on other specified value of
the goods.

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 Classification of Taxes
As to who bears the burden

• Direct – demanded from persons who shoulder the burden of the tax which
the taxpayer is directly liable, for which he cannot shift to another.

• Indirect – demanded from one person in the expectation and intention that
he shall indemnify himself at the expense of another, and the burden of such
tax falling finally upon the ultimate purchaser or consumer.

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 Classification of Taxes
As to determination of amount

• Specific – fixed amount that is imposed based on physical unit of

measurement, as by head or number, weight or length or volume.

• Ad valorem – fixed amount in proportion to the value of property with

respect to which the tax is assessed.

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 Classification of Taxes
As to purpose

• General, fiscal or revenue – imposed for the general purposes of the

government to raise revenues for government needs.

• Special or regulatory – imposed for a special purpose, regardless of whether

revenue is raised or not, and is intended to achieve some social or economic
end.

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 Classification of Taxes
As to scope or authority imposing the tax

• National – imposed by the national government.

• Municipal or local – imposed by municipal or local government.

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 Classification of Taxes
As to graduation or rate
• Proportional – based on a fixed percentage of the amount of property,
receipts, or other basis to be taxed.

• Progressive or graduated – the rate increases as the tax base or bracket

increases.

• Regressive – the rate decreases as the tax base or bracket increases.

• Degressive – the increase in rates is not proportionate to the increase of tax

base.

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 Tax as Distinguished from
Other Terms
1. From license or permit fee

Tax – an enforced contribution assessed by sovereign authority to defray

public expenses; imposed for revenue purposes on persons, property and right
to exercise privilege; involves exercise of taxing power; generally has no
maximum amount imposed; non-payment does not make a business or act illegal.
License – legal compensation or reward of an officer for specific services;
imposed for regulatory purposes; involves exercise of police power; amount is
limited to cost of issuing the license and reasonable police surveillance; imposed
only on right to exercise privilege; non-payment makes the act or business
illegal.

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 Tax as Distinguished from
Other Terms
2. From toll

Tax – a demand of sovereignty imposed exclusively by the state or government;

it is for the support of government; the amount is regulated by the government
to support it.

Toll – a demand of proprietorship; imposed by private persons and also by

government; a compensation for use of another’s property; the amount is
determined by cost of property.

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 Tax as Distinguished from
Other Terms
3. From penalty

Tax – aimed at raising revenue; imposed only by the government.

Penalty – imprisonment or fine to regulate conduct; imposed by the

government and also by private entities.

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 Tax as Distinguished from
Other Terms
4. From special assessment

Tax – levied on persons, property, or exercise of privilege; can be made a

personal liability of the person assessed; based on government’s necessity
without any special benefit accruing to taxpayer; applied in general application;
not exceptional as to time and locality.

Special Assessment – levied only on land; based on special benefits resulting to

property assessed and not on necessity; exceptional both as the time and place
and not applied generally; not a personal liability of person assessed.

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 Tax as Distinguished from
Other Terms
5. From revenue

Tax – refers to the income derived from the regular system of taxation, and as
such, accrues more or less regularly every year.

Revenue – refers to the aggregate of all funds or income derived by the

government from taxes or from whatever sources or whatever means. It is
broader in scope.

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 Tax as Distinguished from
Other Terms
6. From custom duties

Tax – broader than custom duties on tariff because tax refers to an exaction by
the government including tariff and custom duties.

Custom duties – refers to a kind of tax imposed on articles that are traded
internationally, particularly impositions on imported or exported goods.

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 Tax as Distinguished from
Other Terms
7. From debt

Tax – based on law; generally payable in money; cannot be a subject of set-off

or compensation; governed by special prescriptive periods under the NIRC;
imprisonment is sanctioned for the non-payment of tax; cannot generally be
assigned; does not draw interest except when delinquent.

Debt – generally based on expressed or implied contracts; may be paid in kind

and be a subject of set-off or compensation; governed by prescriptive periods
under the Civil Code and other special laws; a person cannot be imprisoned for
non-payment thereof except when it arises from a crime.

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 Tax as Distinguished from
Other Terms

From subsidy

Subsidy – a pecuniary aid granted directly by the government to an individual

or private commercial enterprise deemed beneficial to the public. It is not a tax
although a tax may have to be imposed to pay it.

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 Nature of Internal Revenue Law

Internal revenue laws are not political in nature. They are deemed to be the laws
of the occupied territory and not of the occupying enemy. Taxes are civil and
not penal in nature, although there are penalties provided for their violation.

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 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.

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