TAXATION | BSLM 2B | FIRST SEMESTER

Elements of the State

1. Territory
2. People
3. Government
4. Sovereignty
● internal
> internal sovereignty refers to the power that a government has within its
own territory and the ability to exercise control over its citizens.
● external
> external sovereignty is the control of a region by a state against other
countries.

Inherent Power of the State

1. Police Power
● Power of the State to enact such laws in relation to persons and property as
may promote public health, safety, morals, and the general welfare of the
public.
2. Eminent Domain
● Power of the State to take private property for public use upon paying to the
owner a just compensation to be ascertained according to law.
3. Taxation
● Power of the State to demand enforced contributions for public purposes.

TAXATION
● is the power by which the sovereign through its law making body raises revenue to
defray the expenses of the government.

TAXES
● are proportional monetary contributions levied by the State against persons or
properties to defray the expenses of the government.

TWO FOLD NATURE OF TAXATION

1. It is inherent attribute of the sovereignty

2. It is legislative in nature

EXTENT OF TAXING POWER

1. Comprehensive
● It is comprehensive because it covers all persons, activities, businesses,
professions, rights , and privileges.
 2. Unlimited
● It is unlimited because the only limitation is the responsibility of the
legislature which imposes tax to the constituents who pay it.

3. Plenary
● It is plenary because it is not incomplete. The government may avail of valid
remedies to make sure that tax is collected.

4. Supreme
● It is supreme because whatever subject may be selected to pay the tax.

SCOPE OF LEGISLATIVE NATURE OF TAX

1. Amount or rate of tax
2. Kind of tax
3. Appointment of tax
4. Method of payment
5. Purposes of levy

CHARACTERISTICS OF TAX
1. Forced charge
2. Pecuniary burden payable in money
3. Levied by the legislature
4. Assessed by some reasonable rule of apportionment
5. Imposed by the state within its jurisdiction
6. Levied for public purpose

REQUISITES OF A VALID TAX LAW

1. Should be for a public purpose
2. Uniform
3. Within the jurisdiction of the taxing authority
4. In compliance with the due process of law
5. Within the inherent and constitutional limitations on the power of taxation

THEORY AND BASIS OF TAXATION

1. Lifeblood Theory
● In Commissioner of Internal Revenue v. Algue, Inc., this Court held:
"Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance."
● They are what we pay for a civilized society. Without taxes, the
government would be paralyzed for lack of motive power to activate
and operate it. 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.
● The lifeblood doctrine emphasizes that taxation is indispensable to the
existence of government such that the government needs the
contribution of its citizens in order to function and operate. Every
 nation's lifeblood is taxation; without it, the government cannot
function. As citizens, we contribute to these efforts' success by paying
income taxes, which allows the government to work on new social
schemes and programs.

2. Necessity Theory
● The exercise of the power to tax emanates from necessity, because
without taxes, government cannot fulfill its mandate of promoting the.
general welfare and well being of the people. (CIR v. Bank of
Philippine Islads, G.R.)
● It is a necessary burden to preserve the State’s sovereignty and a
means to give the citizenry an army to resist an aggression

3. Benefits-Protection/Reciprocity Theory
● This principle serves as the basis of taxation and is founded on the
reciprocal duties of protection and support between the State and its
inhabitants. Also called “symbiotic relation” between the State and its
citizens.
● In return for his contribution, the taxpayer receives the general
advantages and protection which the government affords the taxpayer
and his property. One is compensation or consideration for the other;
protection for support and support for protection.
● However, it does not mean that only those who are able to and do pay
taxes can enjoy the privileges and protection given to a citizen by the
government.
● In fact, from the contribution received, the government renders no
special or commensurate benefit to any particular property or person.
The only benefit to which the taxpayer is entitled is that derived from
the enjoyment of the privileges of living in an organized society
established and safeguarded by the devotion of taxes to public
purpose. The government promises nothing to the person taxed
beyond what may be anticipated from an administration of the laws
for the general good. [Lorenzo v. Posadas]

POWER TO TAX; POWER TO DESTROY

● Marshall Dictum
> POWER TO TAX INCLUDES THE POWER TO DESTROY. It refers to the
unlimitedness and the degree or vigor with which the taxing power may be employed
to raise revenue.

● Holmes Dictum
> POWER TO TAX IS NOT A POWER TO DESTROY WHILE THE
SUPREME COURT SITS. The power to tax has inherent and constitutional limits.
 Power to tax involves the power to destroy
so it must be exercised with caution.

Chief Justice Marshall declared that the power to tax is also called the power to destroy.
Therefore, it should be exercised with caution to minimize injury to the proprietary rights of
the taxpayer. It must be exercised fairly, equally and uniformly, less the tax collector kills the
“hen that lays the golden egg.” And in order to maintain the general public’s trust and
confidence in the government, this power must be used justly and not treacherously. [Chief
Justice Marshall in McCulloch v. Maryland, reiterated in Roxas v. CTA, 23 SCRA 276]

Justice Holmes seemingly contradicted the Marshallian view by declaring in Panhandle

Oil Company v. Mississippi that “the power to tax is not the power to destroy while
this court sits.”

Domondon’s reconciliation of Marshall and Holmes

● The imposition of a valid tax could not be judicially restrained merely because it
would prejudice taxpayer’s property.
● An illegal tax could be judicially declared invalid and should not work to prejudice a
taxpayer’s property.
● Marshall’s view refers to a valid tax while Holmes’ view refers to an invalid tax.

PURPOSES OF TAXATION

1. Revenue or Fiscal
● 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.

2. Non-revenue or Regulatory
1. Taxation may also be employed for purposes of regulation or control.
a. promotion of general welfare
b. regulation
c. reduction of social inequality
d. encourage economic growth
e. protectionism

POWER OF JUDICIAL REVIEW IN TAXATION

● As a long the legislature does not violate constitutional limitations or restrictions, the
judiciary cannot intervene with the power of the legislature.

The Constitution expressly grants the Supreme Court the power of Judicial Review as the
power to declare a treaty, international or executive agreement, law, presidential decree,
proclamation, order, instruction, ordinance or regulation unconstitutional.
BASIC PRINCIPLE OF A SOUND TAX

1. Fiscal adequacy
● It means that the sources of revenue should be sufficient to meet the demands
of public expenditures. [Chavez v. Ongpin, 186 SCRA 331]

2. Administrative feasibility
● It means that tax laws should be capable of convenient, just and effective
administration.

3. Theoretical justice
● It means that the tax burden should be proportionate to the taxpayer’s ability
to pay. This is the so-called “ability to pay principle".

SITUS OF TAXATION
● Situs of taxation literally means place of taxation. The general rule is that the taxing
power cannot go beyond the territorial limits of the taxing authority. Basically, the
state where the subject to be taxed has a situs may rightfully levy and collect the tax.

In the Philippines, there are different factors in determining the situs of taxation: residence;
nationality; citizenship; nature of tax; subject matter; object of tax; and source. Depending
on the law involved, two or three of these factors may apply.

For example, in income tax law, nationality, source and residence are factors. Whether or not
a person is a national of the Philippines and whether or not he is a resident are factors
important as the source of income: whether from within or outside the Philippines.

TAXATION POLICE POWER EMINENT DOMAIN

1. PURPOSE

To raise revenue To promote public purpose To facilitate the State's need

through regulations of property for public use

2. AMOUNT OF EXACTION

No limit Limited to the cost pf No exaction; but private

regulation, issuance of the property is taken by the
license or surveillance State for public use

3. BENEFITS RECEIVED
No special or direct benefit No direct benefit is received; A direct benefit results in
is received by the taxpayer, a healthy economic standard the form of just
merely general benefit of of society is attained compensation to the
protection property owner

4. NON-IMPAIRMENT OF CONTRACTS

Contracts may not be Contracts may be impaired Contracts may be impaired

impaired

5. TRANSFER OF PROPERTY RIGHTS

Taxes paid become part of No transfer but only Transfer is effected in favor
public funds restraint in its exercise of the State

6. SCOPE

All persons, property, and All persons, property, rights, Only upon a particular
excises and privileges property

SYSTEM OF TAXATION

GLOBAL SYSTEM SCHEDULAR SYSTEM

A system employed where the tax system A system employed where the income tax
views indifferently the tax base and treatment varies and is made to depend on
generally treats in common all categories of the kind of category of taxpayer.
taxable income of the individual.

A system which taxes all categories of A system which itemizes the different
income except certain passive incomes and incomes and provides for varied percentages
capital gains. It prescribes a unitary but of taxes to be applied thereof.
progressive but for the taxable aggregate
incomes and flat rates for certain passive
incomes deprived by individuas.