TAX 111

Lecture Notes by: PLJBC

LIFEBLOOD DOCTRINE
Taxes are essential to the continued subsistence of
Taxation gives inherent power to the State to
the government.
enforce a proportional contribution from its subjects
for public purposes.
Taxes are the lifeblood of the government, for
Taxation is a legislative process of levying taxes by without taxes, the government would be paralyzed
the legislature of the State to enforce proportional for lack of motive to operate and serve the people.
contributions from its subjects for public purposes.
Implication of the lifeblood doctrine in taxation:
1) Tax is imposed even in the absence of a
Taxation is a mode of government cost
Constitutional grant.
distribution by which the State allocates its costs or
2) Claims for tax exemption are construed against
burden to its subjects who benefit from spending.
taxpayers.
3) The government reserves the right to choose the
What does the government provide?
objects of taxation.
✓ Defense
4) The courts are not allowed to interfere with the
✓ Public order and safety
collection of taxes.
✓ Health
✓ Education 5) In income taxation:
✓ Social protection a. Income received in advance is taxable upon
receipt.
b. Deduction for capital expenditures and
Hence, without the government, the people will not
prepayments is not allowed as it effectively
relish the benefits of a civilized and orderly society.
defers the collection of income tax.
c. A lower amount of deduction is preferred
However, the government cannot exist without a
when a claimable expense is subject to limit.
system of funding. (Theory of Taxation)
d. A higher tax base is preferred when the tax
object has multiple tax bases.
BASIS OF TAXATION
The mutuality support between the people and the
INHERENT POWERS OF THE STATE
government.
* The government sustains itself by the power of
Public services taxation, secures itself and the well-being of its
people by police power, and secures its own
Government People properties to carry out its public services by the
power of eminent domain.
Taxes
(1) Taxation power – the power of the State to
enforce proportional contribution from its
Thus, taxpayers CANNOT avoid payment of taxes
subjects to sustain itself.
under the defense of the absence of benefit
(2) Police power – the general power of the State to
received.
enact laws to protect the well-being of the
people.
Also, the direct receipt or act of availing of
government services is NOT A PRECONDITION to (3) Eminent domain – the power of the State to take
taxation. private property for public use after paying just
compensation.
THEORIES OF COST ALLOCATION EMINENT
TAXATION POLICE POWER
1) Benefit received theory – the more benefit one DOMAIN
Government and
Exercising Authority Government Government
receives from the government, the more taxes To protect the
private utilities
For the support of
he should pay Purpose
the government
general welfare of
the people
For public use

Community or Community or
Owner of the
Persons affected class of class of
2) Ability to pay theory – taxpayers should be individuals individuals
property
Unlimited (Tax is Limited No amount is
required to contribute based on their relative Amount of based on (Imposition is imposed (the
imposition government limited to cover government pays
capacity to sacrifice needs) cost of regulation) just compensation)
Importance Most important Most superior Important
Inferior to the Superior to the Superior to the
Relationship with the “Non-impairment “Non-impairment “Non-impairment
*Regardless of the benefit they receive from the Constitution Clause” of the Clause” of the Clause” of the
Constitution * Constitution Constitution
government, those who have more should be taxed Constitutional
Public interest
Public purpose
Limitation and inherent and just
more and those who have less shall contribute less. limitations
and due process
compensation

Aspects of the Ability to Pay Theory
a. Gross concept (Vertical Equity) – the extent of
one’s ability to pay is directly proportional to the
level of his tax base.
b. Net concept (Horizontal Equity) – requires
consideration of the particular circumstance of
the taxpayer. (less expenses, more tax)
* The non-impairment clause is a provision in the Philippine Constitution that protects private
agreements from State interference (a) It is contained in section 10, Article III of the constitution
(b) The clause prohibits the State from impairing the obligation of contracts (c) To fall within the
prohibition of non-impairment clause, the impairment of the contract must be substantial and
only affects the rights of the parties with reference to each other and not with respect to non-
parties (d) The clause also protects the liberty of abode and the right to travel
Similarities of the three powers
1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes
with private rights and properties.
5. They are all exercisable by the government even
without a Constitutional grant. However, the
Constitution may impose conditions or limits for
their exercise.
6. They all presuppose an equivalent form of
compensation received by the persons affected
by the exercise of the power.
7. The exercise of these powers by the local
government units may be limited by the national
legislature.
SCOPE OF THE TAXATION POWER
The scope of taxation is widely regarded as
comprehensive, plenary, unlimited, and
supreme.
* However, it is not absolutely unlimited because
taxation has its own inherent limitations and
limitations imposed by the Constitution.
A. Inherent limitations
(1) Territoriality of taxation
(2) International comity
(3) Public purpose
(4) Exemption of the government
(5) Non-delegation of the taxing power
B. Constitutional limitations
(1) Due process of law
(2) Equal protection of the law
(3) Uniformity rule in taxation
(4) Progressive system of taxation
(5) Non-imprisonment for non-payment of debt or
poll tax
(6) Non-impairment of obligation and contract
(7) Free worship rule
(8) Exemption of religious or charitable entities,
non-profit cemeteries, churches, and mosques
from property taxes
(9) Non-appropriation of public funds or property for
the benefit of any church, sect, or system of
religion
(10)Exemption from taxes of the revenues and
assets of non-profit, non-stock, and educational
institutions
(11)Concurrent of a majority of all members of
Congress for the passage of a law granting tax
exemption
(12)Non-diversification of tax collections
(13)Non-delegation of the power of taxation
(14)Non-impairment of the jurisdiction of the
Supreme Court to review tax cases
(15)The requirement that appropriations, revenue, or
tariff bills shall originate exclusively in the House
of Representatives
(16)The delegation of taxing power to local
government units
INHERENT LIMITATIONS OF TAXATION
Territoriality of taxation
The government can only demand tax obligations
upon its subjects or residents within its territorial
jurisdiction.
“Enroachment of foreign sovereignty” – intrusion on
one’s territory
Two-fold obligations of taxpayers:
(1) Filling of returns and payments of taxes
(2) Withholding of taxes on expenses and its
remittance to the government
XPN TO THE TERRITORIALITY PRINCIPLE
(1) In income taxation, resident citizens and
domestic corporations are taxable on income
derived both within and outside the Philippines.
(2) In transfer taxation, residents or citizens such
as resident citizens, non-resident citizens, and
resident aliens are taxable on transfer of
properties located within or outside the
Philippines.
International comity
No country is powerful than the other. It is by this
principle that each country observes international
comity or mutual courtesy or reciprocity between
them.
Wherein:
(1) Governments do not tax the income and
properties of other governments
(2) Governments give primacy to their treaty
obligations over their own domestic tax laws
TAX EXEMPTED:
• Embassies or consular offices of foreign
governments
• Internal organizations and their non-Filipino staff
• Foreign government and foreign government-
owned and controlled corporations
Public purpose
The tax is intended for the common good. Taxation
must be exercised absolutely for public purposes.
Exemption of the government
Under the National Internal Revenue Code,
government properties and income from essential
public functions are not subject to taxation.
However, the income of the government from its
properties and activities conducted for profit,
including income from GOCC (government-owned
and controlled corporations is subject to tax.
Non-delegation of taxing power
The legislative taxing power is vested exclusively in
Congress and is non-delegable.
The power or lawmaking, including taxation, is
delegated by the people to the legislature.
What has been delegated cannot be further
delegated.
XPN TO THE RULE OF NON-DELEGATION
(1) Under the Constitution, local government
units are allowed to exercise the power to
tax to enable them to exercise their fiscal
autonomy.
(2) Under the Tariff and Custos Code, the
President is empowered to fix the amount of
tariffs to be flexible to trade conditions.
(3) Other cases that require expedient and
effective administration and implementation
of assessment and collection of taxes.
CONSTITUTIONAL LIMITATIONS OF TAXATION
Observance of due process of law
No one should be deprived of his life, liberty, or
property without the due process of law
Tax laws should neither be harsh nor oppressive.
Aspects of Due Process
(1) Substantive due process
Tax must only be collected under the authority of
a valid law and only by the taxing power having
jurisdiction.
An assessment without a legal basis violates the
requirement of due process.
(2) Procedural due process
The government shall observe the taxpayer’s
right to notice and hearing.
The law-established procedures must be
adhered to in making assessments and in
enforcing collections.
*Assessments shall be made within 3 years from the due date
of filing of return or from the date of actual filing, whichever is
later.
*Collection shall be made within five years from the date of
assessment.
Equal protection of the law
Taxpayers should be treated equally both in terms of
rights conferred and obligations imposed.
*This rule applies where taxpayers are under the same
circumstances and conditions .
Uniformity rule in taxation
Taxpayers under dissimilar circumstances should
not be taxed the same.
Taxpayers should be classified according to their
commonality attributes, and the tax classification
shall be based on substantial distinction. Hence,
taxpayers falling under the same class are taxed the
same.
“Uniformity is relative equality:
Progressive system of taxation
Tax rates increase as the tax base increases. (this
is consistent with the taxpayer’s ability to pay)
“Taxing the rich more than the poor”
Non-imprisonment for non-payment of debt or
poll tax
No one shall be imprisoned because of his poverty
or mere inability to pay debt.
However, this only applies when the debt is acquired
by the debtor in good faith.
Is non-payment of tax equivalent to non-payment of
debt?
Tax arises from law, while debt arises from private
contracts.
The Constitutional guarantee on non-imprisonment
for non-payment of debt does not extend to non-
payment of tax, except for poll tax.
Poll, personal, community or residency tax
Two components:
a. Basic community tax
b. Additional community tax
*The Constitutional guarantee applies only to basic
community tax. Non-payment of the additional
community tax is an act of tax evasion.
Non-impairment of obligation and contract
Tax exemptions granted under contracts should be
honored and should not be cancelled by a unilateral
government action.
Free worship rule
The Philippine government adopts free exercise of
religion and does not subject its exercise to taxation.
Properties and revenues of religious institutions
such as tithes or offerings are not subject to tax.
However, it does not extend to income generated
from properties or activities of religious institutions
that are proprietary or commercial in nature.
Exemption of religious or charitable entities or
educational, non-profit cemeteries, churches,
and mosques from property taxes
This Constitutional exemption from property tax
applies for properties actually, directly, and
exclusively used for charitable, religious, and
educational purposes.
DOCTRINE OF USE – only properties actually
devoted to religious, charitable, or educational
activities are exempted from real property tax.
DOCTRINE OF OWNERSHIP – properties of
religious, charitable, or educational entities whether
or not used in their primary operations are exempt
from real property tax.
Non-appropriation of public funds or property
for the benefit of any church, sect, or system of
religion
*Separation of religion and the State – to support
freedom of religion, the government should not favor
any particular system of religion by appropriating
public funds or property in support thereof.
However, compensation to priests, imams, or
religious minister working with the military, penal
institutions, orphanages, or leprosarium is not
considered religious appropriation.
Exemption from taxes of the revenues and
assets of non-profit, non-stock educational
institutions
*The Constitution recognizes the necessity of
education in state building
However, this exemption only applies to revenues
and assets that are actually, directly, and
exclusively devoted for educational purposes.
Hence, the National Internal Revenue Code also
exempts government educational institutions form Congress is composed of two bodies:
income tax and subjects private educational (1) The House of Representatives of two bodies
institutions to a minimal income tax. (2) The Senate

Concurrence of a majority of all members of
Congress for the passage of a law granting tax
exemption
As a safety net, the Constitution requires the vote of
the majority of all the member of Congress in the
grant of tax exemption.
Approval of grant exemption – requires absolute
majority not just a relative majority or quorum
majority
Withdrawal of tax exemption – only requires relative
majority
Non-diversification of tax collections
Tax collections should be used only for public
purposes. It should never be diversified nor used for
private purposes.
Non-delegation of the power of taxation
Taxation power is part of lawmaking vested
exclusively in Congress.
*Certain aspects of the taxing process that are non-legislative in
character are delegated.
*Tax bills must originate from the House of
Representatives.
*Each may have their own versions of a proposed
law which is approved by both bodies.
Matters of legislative discretion in the exercise of
taxation
1. Determining the object of taxation
2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which
must be for public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the
national and local government
6. Situs of taxation
7. Method of collection
B. Assessment and collection
➢ Tax law is implemented by the administrative
branch of the government.
➢ Implementation involves the assessment of
the tax liabilities of taxpayer and collection.
➢ Incidence of taxation or the administrative
act of taxation

Department of Finance and the Bureau of Internal SITUS OF TAXATION

Revenue issues revenue regulations, ruling, orders, The place of taxation.
or circulars to interpret and clarify the application of It is the tax jurisdiction that has the power to levy
the law. taxes upon the tax object.
*They are not allowed to introduce new legislations within their
quasi-legislative authority.
Examples of Situs Rules:
Non-impairment of the jurisdiction of the (1) Business tax situs
Supreme Court to review tax cases Businesses are subject to tax in the place where
All causes involving taxes can be raised to and be the business is conducted.
finally decided by the Supreme Court of the
Philippines, notwithstanding the existence of the (2) Income tax situs on services
Court of Appeals. Service fees are subject to tax where they are
rendered.
Appropriations, revenue, or tariff bills shall
originate exclusively in the House of (3) Income tax situs on sale of goods
Representatives, but the Senate may propose or The gain on sale is subject to tax in the place of
concur with amendments sale.
The origination of a bill by Congress does not
necessarily mean that the House bill must become (4) Property tax situs
the final law. Properties are taxable in their location.

Such that, laws that add income to the national (5) Personal tax situs
treasury and those that allows spending must Person are taxable in their place of residence.
originate from the House of Representatives.
OTHER FUNDAMENTAL DOCTRINES IN
Each local government unit shall exercise the TAXATION
power to create its own sources of revenue and 1. Marshall Doctrine
shall have a just share in the national taxes “The power to tax involves the power to destroy.”
This is a constitutional recognition of the local
autonomy of local governments and an express Taxation power can be used as an instrument of
delegation of the taxing power. police power.

STAGES OF THE EXERCISE OF TAXATION However, taxation power does not include the power
POWER to destroy if it is used solely to raise revenue.
A. Levy or imposition
➢ involves enactment of a tax law by the Ex. Imposition of excessive tax on cigarettes
Congress and is called “impact of taxation”.
➢ Legislative act in taxation
2. Holme’s Doctrine
“Taxation power is not the power to destroy while the
court sits.”
Taxation may be used to build or encourage
beneficial activities by the grant of tax incentives.
Ex. Creation of Ecozones with tax holidays and
provisions of incentives, such as Omnibus
Investment Code and the Barangay Micro-Business
Enterprise Law.
3. Prospectivity of tax laws
Tax laws are generally prospective in operation.
An “ex post facto law” or a law that retroacts is
prohibited by the Constitution.
Income tax laws may operate retrospectively if so
intended by Congress under justifiable conditions.
Ex. Congress can levy tax on income earned during
periods of foreign occupation even after the war.
4. Non-compensation or set-off
Taxes are not subject to automatic set-off or
compensation.
The taxpayer cannot delay payment of tax to wait for
the resolution of a lawsuit involving his pending claim
against the government.
Tax is not a debt; hence, it is not subject to set-off.
XPN:
a. Where the taxpayer’s claim has already
become due and demandable such as when
the government already recognized the
same and an appropriation for refund was
made
b. Cases of obvious overpayment of taxes
c. Local taxes
5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to
another entity by contract.
6. Imprescriptibility in taxation
*Prescription is the lapsing of a right due to the passage of time.
*Taxes are generally imprescriptible unless the law itself provides for
such prescription. (non-cancellable)
Tax prescribes if not collected within 5 years from
the date of its assessment.
In the absence of an assessment, tax prescribes if
not collected by judicial action within 3 years from
the date the return is required to be filed.
Taxes due from taxpayers who did not file a return
or those who filed fraudulent returns do not
prescribed.
7. Doctrine of estoppel
Any misrepresentation made by one party toward
another who relied therein in good faith will be held
true and binding against that person who made the
misrepresentation.
*The government is not subject to estoppel.
The neglect or omission of government officials
entrusted with the collection of taxes should not be
allowed to bring harm or detriment to the interest of
the people.
Erroneous applications of the law by public officers
do not block the subsequent correct application of
the same.
8. Judicial Non-interference
*Anchored on the Lifeblood Doctrine
Generally, courts are not allowed to issue injunction
against the government’s right to collect tax as this
would unnecessarily defer tax collection.
9. Strict Construction of Tax Laws
“Taxation is the rule, exemption is the exception.”
However, when taxation laws are vague, the
doctrine of strict legal construction is observed.
Vague tax laws – the Constitutional requirement of
due process requires laws to be sufficiently clear and
expressed in their provisions. Hence, a vague tax
law means no tax law.
*construed against the government and in favor of the tax payers
Vague exemption laws – the claim for exemption is
construed strictly against the taxpayer in accordance
with the lifeblood doctrine. Hence, a vague
exemption law means no exemption law.
*construed against the taxpayer and in favor of the government
When an exemption is claimed, it must be shown
indubitably to exist.
A taxpayer claiming a tax exemption must point to a
specific provision of law conferring on the taxpayer,
in clean and plain terms, exemption from a common
burden.
DOUBLE TAXATION
This occurs when the same taxpayer is taxed twice
by the same tax jurisdiction for the same thing.
Elements of double taxation
1. Same object Primary element
2. Same type of tax
3. Same purpose of tax
Secondary elements
4. Same tax jurisdiction
5. Same tax period
Type of Double Taxation
1. Direct double taxation (in strict sense)
It is prohibited because it comprises the imposition
of the same tax on the same property for the same
purpose by the same state during the same taxing
period.
This occurs when all the element of double taxation
exists for both impositions.
2. Indirect double taxation (in broad sense)
It extends to all cases in which there is a burden of
two or more pecuniary impositions.
This occurs when at least one of the secondary
elements of double taxation is not common for both
impositions.
*Nothing in our law expressly prohibits double taxation.
*Direct double taxation is discouraged because it is oppressive
and burdensome to taxpayers; and is believed to counter the
rule of equal protection and uniformity in the Constitution.
How can double taxation be minimized?
a. Provision of tax exemption – only one tax law is
allowed to apply to the tax object while the other tax law
exempts the same tax object
b. Allowing foreign tax credit – both tax laws of the
domestic country and a foreign country tax the tax object,
but the tax payments made in foreign tax law are deductible
against the tax due of the domestic tax law
c. Allowing reciprocal tax treatment – provisions in tax
laws imposing reduced tax rates or even exemption if the
country of the foreign taxpayer also gives the same
treatment to Filipino non-residents therein
d. Entering into treaties or bilateral agreements –
countries may stipulate for a lower tax rates for their
residents if they engage in transactions that are taxable by
both of them
e. Allowing for deductions – such as vanishing
deduction in estate tax
There is no double taxation in the following
cases:
1. By taxing corporate income and stockholder’s
dividends from the same corporation.
2. A tax imposed by the state and the local
government upon the same occupation, calling
or activity.
3. Real estate tax and income tax collected on the
same real estate property leased for earning
purposes.
4. Taxes are imposed on the taxpayer’s final
product and the storage of raw materials used in
the production of the final product.
ESCAPES FROM TAXATION
A. Those that result to loss of government
revenue
1. Tax evasion – also known as “tax dodging”,
refers to any act or trick that tends to illegally
reduce or avoid the payment of tax
Ex. Gross understatement of income, non-declaration of
income, overstatement of expenses or tax credit,
misrepresenting the nature or amount of transaction to take
advantage of lower taxes
2. Tax avoidance – also known as “tax
minimization”, refers to any act or trick that
reduces or totally escapes taxes by legally
permissible means
Ex. Selection and execution of transaction that would
expose taxpayer to lower taxes, maximizing tax options, tax
carry-overs or tax credits, careful tax planning
3. Tax exemption – also known as “tax holiday”,
refers to the immunity, privilege or freedom from
being subject to a tax which others are subject
to. This can only be granted by the Constitution,
law, or contract.
All forms of tax exemptions can be revoked by
the Congress except those granted by the
Constitution and those granted under contracts.
B. Those that do not result to loss of
government revenue
1. Shifting – process of transferring tax burden to
other taxpayers
a. Forward shifting – shifting of tax which
follows the normal flow of distribution. This is
common with essential commodities and
services such as food and fuel.
Ex. From manufacturer to wholesalers, retailers to
consumers
b. Backward shifting – the reverse of forward
shifting. This is common with non-essential
commodities where buyers have
considerable market power and commodities
with numerous substitute products.
Ex. Consumer or purchaser may shift tax imposed on
him to retailer by purchasing only after the price is
reduced, and from the latter to the wholesaler, and
finally to the manufacturer or producer.
c. Onward shifting –Tax is shifted two or more
times either forward or backward.
A transfer from the seller to the purchaser
involves one shift; from the producer to the
wholesaler, then to the retailer, we have two
shifts; and if the tax is transferred again to the
purchaser by the retailer, we have three
shifts in all.
2. Capitalization – pertains to the adjustment of
the value of an asset caused by changes in tax
rates.
Ex. The value of a mining property will correspondingly
decrease when mining output is subjected to higher taxes.
(This is a form of backward shifting of tax)
3. Transformation – pertains to the elimination of
wastes or losses by the taxpayer to form savings
to compensate for the tax imposition or increase
in taxes.
*The producer absorbs the payment of tax to reduce prices
and to maintain market share.
*The producer instead tries to improve his method of
production and the savings he acquires from the reduced
production cost is used to cover the amount of tax.
Tax Amnesty
It is an absolute forgiveness or waiver by the
government on it right to collect and is retrospective
in application.
Erring taxpayers to give them a chance to reform
and enable them to have a fresh start to be part of a
society with a clean slate.
Tax Condonation
It is the forgiveness of the tax obligation of certain
taxpayer under certain justifiable grounds.
“Tax remission”
*Tax exemption, tax refund, tax amnesty, and tax condonation are
construed against the taxpayer and in favor of the government.
TAX AMNESTY VS TAX CONDONATION
Covers both civil and Covers only civil
criminal liabilities liabilities of the taxpayer
Operates Applies prospectively
retrospectively by and the portion already
forgiving past paid by the taxpayer will
not be refunded
Conditional upon the Requires no payment
taxpayer paying the
government a portion
of the tax