GENERAL PRINCIPLES OF TAXATION

INHERENT POWERS OF THE STATE

1. Power to Tax: the act of levying a tax.
2. Police Power: power of the state of promoting public welfare by restraining and regulating the use of liberty and property.
It may be exercised only by the government. Its intended for noxious purpose.
3. Eminent Domain: the power to take private property for public purpose upon payment of just compensation.

TAXATION is the inherent power by which the sovereign (independent state), through its law-making body, raises revenue to defray
the necessary expenses of the government. (Republic Act No. 8424, “The Tax Reform Act of 1997”)

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 share its burdens.

INHERENT TO THE STATE: It is inherent in character because its exercise is guaranteed by mere existence of the state. It can be
exercised even in the absence of a constitutional grant.

SCOPE OF LEGISLATIVE POWER TO TAX

1. The determination of purposes for which taxes shall be levied provided it is for the benefit of the public.
2. The determination of subjects of taxation such as the person, property or occupation within its jurisdiction.
3. The determination as to the amount or rate of tax unless constitutionally prohibited.
4. The determination as to the kind of tax to be collected (i.e. property tax, income tax, inheritance tax, etc.).
5. The determination of agencies to collect the taxes.
6. The power to specify or provide for administrative and judicial remedies.
7. The power to grant tax exemptions and condonations.

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; unqualified; absolute. Under the Tax Code, the BIR may avail of certain remedies to ensure
collection of taxes.
4. Supreme – insofar as the selection of the subject of taxation is concerned.

STAGES/ASPECTS OF TAXATION
1. Levying – a legislative function which involves the passage of tax laws or ordinances through legislature.
2. Assessment and Collection – an executive function which involves the act of administration and implementation of tax laws
through its administrative agencies (i.e., BIR and BOC).
3. Payment of Tax – involves the act of compliance by the taxpayers.

PRINCIPLES OF A SOUND TAX SYSTEM (FAT)

1. Fiscal Adequacy – revenue raised must be sufficient to meet government/public expenditures and other public needs.

2. Administrative Feasibility – tax laws must be clear and concise; capable of effective and efficient enforcement; convenient
as to time and manner of payment, must not obstruct business growth and economic development.

The VAT law cannot be considered as violative of the Administrative Feasibility principle because it is principally aimed to
rationalize the system on taxes of goods and services. Thus, simplifying tax administration and making the system more
equitable to enable the country to attain economic recovery.

3. Theoretical Justice – must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory).

Art. VI, Sec. 28(1) of the 1987 Constitution mandates that the rule on taxation must be uniform and equitable and that the
State evolve a progressive system of taxation.

NOTE: Non-observance of Fiscal Adequacy and Administrative Feasibility will render the tax measure unsound but not
unconstitutional. However, non-observance of the Principle of Theoretical Justice is invalid because the Constitution itself requires
that taxation must be equitable.

IMPRESCRIPTIBILITY OF TAXES: Taxes are generally imprescriptible, except when the law provides otherwise, e.g. the statute of
limitations provided under the Tax Code.
THEORY AND BASIS
1. Life Blood Theory – Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.

Manifestation:
 No estoppel against the government
 Collection of taxes cannot be stopped by injunction
 Taxes could not be the subject of compensation or set-off
 A valid tax may result in the destruction of the taxpayer’s property
 Right to select objects (subjects) of taxation

2. Necessity Theory – government is necessary; however, it cannot continue without the means of paying for its existence;
hence, it has the right to compel all citizens and property within its power to contribute for the same purpose.

The power to tax is an attribute of sovereignty. It is a power 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 improvement 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.

3. Symbiotic Relationship 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 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.

PURPOSE OF TAXATION
1. Primary – to raise revenues; to support the existence of the State and enable the state to promote the general welfare.
2. Secondary – non-revenue or sumptuary
a. Promotion of general welfare – taxation may be used to implement police power (e.g., grant of VAT exemption and
Discounts to Senior Citizens);
b. Regulation - where taxes are levied on excises or privileges for purposes of rehabilitation and stabilization of threatened
industry which is affected by public interest or to discourage consumption of harmful products (e.g., excise taxes on
cigarettes and alcohol);
c. Reduction of Social Inequity – This is made possible through the progressive system of taxation where the objective is to
prevent the undue concentration of wealth in the hands of few individuals. Progressivity is keystoned on the principle that
those who are able to pay should shoulder the bigger portion of the tax burden. (e.g., Income tax)
d. Encouragement of economic growth – tax incentives and reliefs may be granted to encourage investment (i.e., Income Tax
Holiday, 5% preferential Gross Income Tax for PEZA registered entities);
e. Protectionism – for the protection of local industries, in case of foreign importations, protective tariffs and customs duties
and fees (e.g., Special Duties imposed by the Bureau of Customs).

BASIS OF TAXATION
The government provides benefits to the people in the form of public services and the people provide the funds that finance the
government.

“Receipt of benefits is conclusively presumed.”

Every citizen directly/indirectly benefits from the public services rendered by the government:
 Daily free usage of public infrastructures
 Access to public health and education
 Protection and security

THEORIES OF COST ALLOCATION

1. Benefit Received Theory – presupposes that the more benefit one receives, the more taxes he should pay.
2. Ability to Pay Theory – presupposes that taxation should also consider the taxpayer’s ability to pay. They should be
required to pay based on their relative capacity to sacrifice for the support of the government.
Aspects of ATP Theory
a. Vertical Equity (Gross Concept) – proportionate to level of Tax Base
b. Horizontal Equity (Net Concept) – requires consideration (i.e., expenses)