LESSON 1: INCOME TAXATION (ACCOUNTANCY, LAW STUDENT)

Inherent Powers of the State

1. Police Power
 the power of the state to promote public welfare by restraining and
regulating the use of liberty and property
 most pervasive, least limitable, and most demanding
 This is the power vested in the Legislature by the Constitution to make,
ordain, and establish all manner of wholesome and reasonable laws,
statutes and ordinances, either with penalties or without, not repugnant to
the Constitution, for the good and welfare of the State and its subjects.

Basis:
This power is based on the legal maxim “salus populi est suprema lex” (the voice of the people is
the supreme law). Every citizen of every community, in a civilized society must bear certain
burdens imposed for the good of all.

Note:
No right is absolute in the face of the common good.

Nature:
Police power is an attribute of sovereignty and founded on the obligation of the State to provide
protection for its citizens and the safety and good order of society.

Scope:
Police power is founded on which our social system rests and has for its object the improvement
of social and economic conditions affecting the community. It depends on the security of the
social order, life and health of citizens, comfort and existence in a thickly populated community,
enjoyment of social life, and beneficial use of property.

Requisites:
1. Interest of the public is general, not that of pa particular class
2. means used are reasonably necessary for the purpose, and not unduly oppressive upon
individuals

2. Power of Eminent Domain

 the power of the state to acquire private property for public purpose
 This is the right of the State to acquire private property for public use upon
payment of just compensation and observance of due process.

Basis:
It is based on genuine necessity and that necessity must be of public character. It must be
reasonable and practicable such that it would greatly benefit the public with the least
inconvenience and expense to the condemning party ad property owner consistent with such
benefit.

Requisites:
1. There must be taking of public property
2. It must be for public use
3. There must be just compensation
4. Due process of law must be observed in taking of the of property

3. Power of Taxation
 the power of the state to raise revenue to defray the necessary expenses of
the government.
 An inherent power of the state exercised through legislature, to impose
burdens upon subjects and objects within its jurisdiction, for the purpose
of raising revenues to carry out the legitimate objects of the government.

Nature:
An inherent power of the state exercised through the legislature.

Scope:
To impose burdens upon subjects and objects within its jurisdiction.

Purpose:
For raising revenue to carry out the legitimate objects of the government

Revenue Objective – To build a just and human society and the establishment of a government
under certain ideals and aspirations.

Sumptuary Objective – An implement of the police power of the state for regulatory purposes.
In this case, it is used in furtherance of any government objective either as an incentive or
deterrence. As an implement, the generation of revenue is merely incidental or in furtherance
thereof. (Lutz v. Araneta, 98 Phil 148).

Compensatory Objective – For social justice purposes or other purposes or other legitimate
objectives of the State, with a view to realize social justice, equitable distribution of wealth,
economic progress and other similar objectives (Southern Cross Cement Corp. v. Cement
Manufacturers Assoc. of the Phils, GR 158540)

Similarities:

1. They are inherent powers of the state.

2. They are ways in which the state interferes with private rights and property.
3. They are legislative in nature and character.
 4. Presupposes an equivalent compensation received, directly or indirectly, by the persons
affected.

Inherent defined:
As being inherent, it means that as long as the state exists, this power can never be taken away.

The Power of Taxation

Scope of the Power of Taxation

 Comprehensive - covers persons, businesses, activities, profession, rights and privileges

 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.
 Plenary - it is complete; unqualified; absolute. 
 Supreme - insofar as the selection of the subject of taxation is concerned.

Limitations of the Power of Taxation

Inherent:

 Public purposes
 Exemption of the government
 Non-delegation of the taxing power
 International comity
 Situs or territoriality of taxation

Constitutional:

 Due process of the law

 Uniformity and equity in taxation
 Equal protection of laws
 Non-impairment of contracts
 Non-imprisonment for non-payment of poll tax
 Non-taxation of religious, charitable, and educational entities
 And others

Theories of Taxation

1. Principle of Necessity | Lifeblood or Necessity Theory

2. Doctrine of Symbiotic Relationship | Benefits Received or Reciprocity Theory

3. Equity Theory | Ability to Pay Theory

"It is said that taxes are what we pay for a 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. 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 moral and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary method of exaction
by those in the seat of power."

Definition and Purpose of Taxation

Taxation

 inherent power of the state

 to enforce a proportional contribution
 from its subject
 for public purposes

Characteristics

 inherent power of the State

 essentially a legislative function
 subject to limitations

Purposes of Taxation

1. Revenue purpose
2. Regulatory purpose
3. Compensatory purpose

Stages/Aspects of Taxation

1. Levying or imposition 
 Legislative in nature, lodged to the Congress
 Determination of the following
1. Subjects of taxation
2. Purpose of taxation
3. Amount of tax
4. Situs of taxation
5. Method of tax collection
6. Apportionment of tax
 2. Assessment and Collection
 Administrative in nature, implemented by the DOF, thru the BIR
 Taxes are assessed and collected

Essential Elements of a Valid Tax

1. Enforced contribution
2. Levied for public purpose
3. Proportionate in character
4. Uniform and equitable 
5. Generally payable in money
6. Imposed by the State within its jurisdiction
7. Imposed upon persons, properties, activities, or exercise of a right or privilege
8. Within the inherent and constitutional limitations

Classification of Taxes As to:(examples)

A. Scope
1. National taxes (income tax, value-added tax, percentage tax, estate tax, donor's
tax, documentary stamp tax)
2. Local taxes (real estate tax, professional tax, etc.)
B. Purpose
1. Revenue taxes (income tax, value-added tax, percentage tax, estate tax, donor's
tax, documentary stamp tax)
2. Regulatory taxes (excise taxes)
3. Compensatory taxes
C. Object or subject matter
1. Personal taxes (community tax)
2. Property taxes (real estate tax)
3. Exercise of right or privilege taxes (income tax, donor's tax, estate tax)
D. Graduation or rate
1. Proportional taxes (value-added tax, percentage tax, donor's tax, estate tax, some
capital gains tax)
2. Progressive taxes (income tax on individuals)
3. Regressive (not used in the Philippines)
E. Bears the burden
1. Direct taxes (income tax, donor's tax, estate tax)
2. Indirect taxes (value-added tax, percentage tax)
F. Amount determination
1. Specific taxes (some excise taxes)
2. Ad valorem taxes (income tax, value-added tax, percentage tax, donor's tax, estate
tax)
G. Taxing authority
1. National government taxes (income tax, value-added tax, percentage tax, estate
tax, donor's tax, documentary stamp tax)
2. Local government taxes (real estate tax, professional tax, etc.)