BASIC PRINCIPLES OF TAXATION

1. Inherent powers of the State:

a. Police power – the power of the State to enact laws in relation to persons and property so as to
promote public health, public moral, public safety and general welfare of the people.
b. Power of eminent domain – the power of the State or those to whom the power has been delegated
to take private property for public use upon paying the owner a just compensation to be ascertained
according to law.
c. Power of taxation – the power of the State by which the sovereign raises revenue to defray the
necessary expenses of the government.

2. Similarities among the three inherent powers of the State:

a. They are inherent in the State.
b. They exist independently of the Constitution.
c. They are legislative in nature and character.
d. They constitute the three methods by which the State interferes with private rights and property.
e. Each presupposes an equivalent compensation.

3. Distinction among the three inherent powers of the State:

a. As to benefits received:
1. Police power – no direct and immediate benefit, only such as may arise from the maintenance of
a healthy economic standard of society
2. Power of eminent domain – market value of the property taken from the property owner
3. Taxation – equivalent of tax in the form of protection and benefit

b. As to amount of imposition:
1. Police power – limited to the cost of the license and the necessary expenses of police surveillance
and regulation
2. Power of eminent domain – no imposition, the owner is paid the fair market value of his property
3. Taxation – no limit

c. As to relationship to the non-impairment of obligations clause of the Constitution:

1. Police power – superior to the clause
2. Power of eminent domain – inferior to the clause
3. Taxation – inferior to the clause
 d. As to effect:
1. Police power – no transfer of title, there is restraint on the injurious use of property
2. Power of eminent domain – there is transfer of the right to property, either ownership or a lesser
right
3. Taxation – taxes become part of public funds
e. As to purpose:
1. Police power – promote general welfare
2. Power of eminent domain – public purpose
3. Taxation – support of government
f. As to authority which exercises the power:
1. Police power – government only
2. Power of eminent domain – government, public service companies and public utilities
3. Taxation – government only
g. As to persons affected:
1. Police power – community or class of individuals
2. Power of eminent domain – individual, as owner of a particular property

Taxation – community or class of individuals

1. Taxation defined. Taxation is the act of laying a tax, i.e., the process or means by which the sovereign,
through its lawmaking body, raises revenue to defray the necessary expenses of government.

2. Theory and basis of taxation:

a. The power of taxation proceeds upon the theory that the existence of the government is a
necessity, that it cannot continue without means to pay its expenses and that for this means it has
a right to compel all its citizens and property within its limits to contribute.
b. The basis is the reciprocal duties of protection and support between the State and its inhabitants.
The State collects taxes from the subjects of taxation in order that it may be able to perform the
functions of government. The citizens, on the other hand, pay taxes in order that they may be
secured in the enjoyment of the benefits of organized society (benefits received theory).
3. Lifeblood theory:
a. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious
(expecting obedience) need.
b. Upon taxation depends the government’s ability to serve the people for whose benefit taxes are
collected.
 c. Manifestation of lifeblood theory:
1. Imposition of tax even in the absence of Constitutional grant.
2. Right to select objects of taxation.
3. No injunction to enjoin (or stop) tax collection.
4. Purposes of taxation:
a. The principal (primary) purpose is to raise revenue for governmental needs. This is also called
revenue or fiscal purpose.
b. The secondary purposes of taxation are:
1. Compensatory purposes
a. To reduce excessive inequalities of wealth.
b. To maintain high level of employment.
c. To control inflation.
2. Sumptuary or regulatory purpose
a. To implement the police power of the State to promote the general welfare.
5. Basic principles of a sound tax system (Canons of taxation): FAT
a. Fiscal adequacy – this means that the sources of revenue should be sufficient to meet the demands
of public expenditures.
b. Administrative feasibility – this means that the laws should be capable of convenient, just and
effective administration.
c. Theoretical justice – this means that the tax burden should be proportionate to the taxpayer’s ability
to pay (ability to pay principle).
6. Characteristics or nature of the State’s power to tax:
a. It is inherent in sovereignty, hence, it may be exercised although not expressly granted by the
Constitution.
b. It is legislative in character, hence, only the legislature can impose taxes (high prerogative of
sovereignty).
c. It is subject to constitutional and inherent limitations, hence, it is not an absolute power that can be
exercised by the legislature anyway it pleases.
7. Scope of the power of taxation: CPUS
The power of taxation is comprehensive, plenary, unlimited and supreme. This power is, however,
subject to inherent and constitutional limitations.
8. Matters within the competence of the legislature to determine:
a. The subject matter or object to be taxed.
b. The purpose of the tax so long as it is a public purpose.
c. The amount or rate of the tax.
d. The manner, means and agencies of collection of the tax.
 e. The exemptions from the imposition.
9. Processes included or embodied in the term taxation:
a. Levying or imposition of tax which is a legislative act.
b. Collection of the tax levied which is essentially administrative in character.

LIMITATIONS ON POWER OF TAXATION

1. Distinction between inherent and constitutional limitations:
a. Inherent limitations are those which are caused by the very nature of the power itself.
b. Constitutional limitations are those which are expressly found in the Constitution or implied from
its provisions.

2. Inherent limitations:
a. Non-delegation of the power to tax – the power to tax is purely legislative, and it cannot be
delegated by the legislature to the executive or judicial department of the government.
b. Exemption from taxation of government entities – government agencies performing essential
governmental functions are exempt from tax unless expressly taxed, while those performing
proprietary functions are subject to tax unless expressly exempted.
c. Public purpose – this is the purpose affecting the inhabitants of the State as a community and
not merely as individuals.
d. Territorial jurisdiction – the tax laws of a State are enforceable only within its territorial limits.
e. International comity – the property of a foreign State or government may not be taxed by
another.

3. Inherent limitations amplified and illustrated:

a. Non-delegation of the power to tax:
1. The power of taxation being purely legislative, Congress cannot delegate the power to others.
The limitation arises from the doctrine of separation of powers among the three branches of
the government.
2. The following are exceptions to the rules against the delegation of the taxing power:
a. Delegation to the President to fix, within specified limits, tariff rates, import or export
quotas, tonnage and wharfage dues and other duties or imposts.
b. Delegation to local governments the power to create its own sources of revenues and to
levy taxes, subject to such limitations as may be provided by law.
 c. Delegation to administrative agencies certain aspects of the taxing process that are not
legislative, such as:
1. The power to fix value of property for purposes of taxation pursuant to fixed rules.
2. The power to assess and collect taxes.
3. The power to perform any of the innumerable details of computation, appraisement, and
adjustments, and the delegation of such duties.
b. Exemption of government agencies and instrumentalities:
1. Government cannot tax itself.
2. Government agencies operated for profit shall be taxed in the same manner as private business
enterprises.
3. Tax exemption of agencies performing essential governmental function.
c. Public purpose:
1. The best test of rightful taxation is that proceeds of the tax must be used:
a. For the support of the government, or
b. For any of the recognized objects of government, or
c. To promote the welfare of the community.
2. A tax levied for a private (not public) purpose constitutes taking of property without due process
of law as it is beyond the power of the government to impose.
3. Instances of public purpose:
a. Financing of educational activities and programs.
b. Promotion of science.
c. Erection and maintenance of roads, bridges and piers.
d. Aid for victims of a public calamity.
e. Relief for the poor and unemployed and to provide for unemployment benefits.
f. Payment of pensions and bonuses for services rendered by public officers and employees.
g. The construction of experimental stations to seek increases of efficiency in sugar production
and the improvement of living and working conditions in sugar mills or plantation.
d. Territorial jurisdiction:
1. The tax laws (and this is true of all laws) do not operate beyond a country’s territorial limits.
2. Property which is wholly or exclusively within the jurisdiction of another State receives none of
the protection for which a tax is supposed to be compensated.
3. A person may be taxed where there is between him and the taxing State a privity of relationship
justifying the levy.

4. Sites or situs of taxation:

a. Meaning of situs of taxation – situs of taxation literally means place of taxation.
 b. Basic rule on situs – situs is the State which has jurisdiction or which exercises dominion over
the subject in question.
c. Situs of taxation:
Subject Situs
Poll tax on persons Residence of the person
Real property tax State where the property is located,
whether the owner is resident or not
Tax on tangible personal State where it is physically located,
properties although the owner resides in another
jurisdiction
Tax on intangible personal Domicile of the owner
property
Income tax State where the taxpayer is a citizen or
resident or the place where the income is
derived.
Business, occupation and Place where the business is done, or the
transaction tax occupation is engaged in, or the
transaction took place.
Gratuitous transfer of property State where the transferor is/was a
citizen or resident, or where the property
is located.
d. Multiplicity of situs – income or intangible personal properties may be subject to taxation in
several taxing jurisdiction.
e. Remedies against multiplicity of situs:
1. Provision of exemptions.
2. Allowance of deduction or tax credit for foreign taxes.
3. Treaties with other States.
4.
e. International comity:
1. International comity means courteous and friendly agreement and interaction between nations.
2. International comity is based on any of the following grounds:
a. Sovereign equality among States under international law by virtue of which one State cannot
exercise its sovereign power over another.
b. The usage among States when one enters the territory of another, there is an implied
understanding that the former does not intend to degrade its dignity by placing itself under
jurisdiction of the latter.
 c. The rule of international law that a foreign government may not be sued without its consent
so that it is useless to assess tax since anyway it cannot be collected.
3. Our Constitution has adopted the generally accepted principle of international law as part of the
law of our country.

4. Constitutional limitations:
a. Due process of law. “No person shall be deprived of life, liberty or property without due process of
law nor shall any person be denied the equal protection of law”.
1. Any deprivation of life, liberty, or property is with due process if it is done:
a. Under the authority of law that is valid or of the Constitution itself; and
b. After compliance with fair and reasonable methods of procedure prescribed by law.
2. Procedural due process in judicial proceedings requires “opportunity to be heard before judgment
is rendered affecting one’s person or property.”
3. Due process in taxation requires:
a. Tax must be for public purpose.
b. Imposed within the territorial jurisdiction.
c. No arbitrariness or oppression in assessment and collection.
4. All persons subject to legislation shall be treated alike under circumstances and conditions both
in the privileges conferred and liabilities imposed.
5. The Constitution does not require things which are different in fact to be treated in law as though
they were the same.
6. Classification is allowed. It is valid when:
a. There is substantial distinction.
b. The classification is germane (relevant) to the issue.
c. The classification applies not only to existing conditions but future conditions as well.
d. The classification is applicable to all members of the same class.
7. There is denial of equal protection in the following cases:
a. Where an ordinance imposes a property tax on motor vehicles using the streets of Manila,
such being payable only by owners of vehicles residing outside Manila who also use the streets
are not made to share the corresponding burden.
b. Where a tax provision is enforced against manufacturers of filled milk only, but not against
persons similarly situated such as manufacturers of condensed skimmed milk.
b. Power of the President to veto any particular item or items in a Revenue or Tariff bill:
1. As a general rule, under the Constitution, the President may not veto a bill in part and approve it
in part. The exception is with respect to revenue or tariff bill.
c. Non-impairment of the obligation of contracts. “No law impairing the obligations of contracts shall
be passed”.
1. The obligation of contract is impaired when its terms or conditions are changed by law or by a
party without the consent of the other, thereby weakening the position of the latter.
d. Non-imprisonment for non-payment of poll tax. “No person shall be imprisoned for debt or non-
payment of poll tax”.
1. The prohibition is against “imprisonment” for “non-payment”. Hence, an imposition of a fine (but
not subsidiary imprisonment), or even imprisonment for any other violation than non-payment
would not be unconstitutional.
2. Only non-payment of poll tax (or community tax) is covered by the limitation. Non-payment of
other (additional) taxes can validly be subjected by law to imprisonment.
e. The Congress may authorize the President to fix tariff rates, import and export quotas, tonnage and
wharfage dues and other duties or imposts.
f. Rule of uniformity and equity in taxation. “The rule of taxation shall be uniform and equitable”.
1. All taxable articles or properties of the same class shall be taxed at the same rate.
2. A tax is considered uniform when it operates with the same force and effect in every place where
the subject may be found.
3. The concept of equity in taxation requires that apportionment of the tax burden be, more or less,
just in the light of the taxpayer’s ability to shoulder the tax burden and, if warranted, on the basis
of the benefits he receives from the government.
4. To ensure and enhance the equity objective, the Constitution enjoins Congress to evolve a
progressive system of taxation.
5. Progressive system of taxation means that tax shall place emphasis on direct rather than indirect
taxation, with ability to pay as the principal criterion. A system that places emphasis on indirect
taxes is said to be a regressive tax system.
6. Equal protection refers more to like treatment of persons in like circumstances, uniformity and
equity refer to the proper relative treatment for tax purposes of persons in unlike circumstances.
7. Double taxation, in its general sense, means taxing a person, property or right twice during the
same taxable period. In its general sense, it does not violate the equal protection and uniformity
clauses of the constitution.
a. Direct double taxation or direct duplicate taxation (which violates the equal protection and
uniformity clauses of the constitution) means:
1. Taxing twice.
 2. By the same taxing authority.
3. Within the same jurisdiction or taxing district.
4. For the same purpose.
5. In the same year (or taxing period)
6. Some of the property in the territory
b. There is no direct double taxation (indirect duplicate taxation) in the following cases:
a. A tax on a mortgage of property when the mortgaged property is also taxed at its full value
as real estate.
b. A tax upon the same property imposed by two differing States.
g. No appropriation for religious purposes. “Exemption of religious, charitable or educational entities,
non-profit cemeteries, and churches from property taxation”.
1. The tax exemption covers property taxes only and not other taxes.
2. Conveyance (transfer) of exempt property would be subject to transfer taxes.
3. The test of the exemption of the property is the use and not ownership.
h. Non-impairment of the jurisdiction of Supreme Court in tax cases.
i. Concurrence by a majority of all members of the Congress for the passage of a law granting tax
exemptions.
1. What is exemption from taxation?
a. Tax holiday
b. Privilege of immunity from a tax burden of which others are subjected to.
c. The power of taxation carries with it the power not to tax or the power to exempt.
d. The general rule, however, is taxation and exemption is the exception.
e. Strictly construed against the taxpayer claiming the exemption and in favor of the State.
f. The exemption must be based on reasonable grounds.
g. It requires a majority vote of congress on tax exemption grant.
h. It is personal and cannot be assigned or transferred by the person to whom it is given without
the consent of the State given in clear and unmistakable terms.
2. Kinds of tax exemption:
a. Express or affirmative – clearly provided for in the constitution, statutes, or tax treaty with
other countries. Examples are:
1. Exemption from real property tax on real properties used for religious and charitable
purposes by religious and charitable institutions per the Constitution.
2. Exemption from income taxation of non-profit organizations and exemption from gift tax
of certain donations per the NIRC.
3. Reciprocity agreements with other nations intended to minimize tax burdens of their
respective subjects.
 4. Grounds for statutory or express exemptions:
a. Contracts - franchise grant with exemption from tax entered into between the State
and the grantee.
b. Public policy - those enjoyed by religious and charitable institutions and non-profit
organizations.
c. Reciprocity.
b. Exemption by omission or implied exemption. Occurs when a tax is imposed on certain class
of taxpayers without mentioning the other class. Those not mentioned are therefore
exemptions by omission, either intentional or accidental.
3. Tax exemption and tax amnesty distinguished:
a. Tax exemption is an immunity from civil liability only. It is immunity or privilege, a freedom
from a charge or burden of which others are subjected to. It is prospective in application.
Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is
a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive
application

TAX AND OTHER CHARGES

1. Tax defined: Tax is an enforced contribution levied by the State by virtue of the sovereignty on persons
and property within its jurisdiction for the support of the government and all public needs.

2. Essential characteristics of tax:

a. It is payable in money.
b. It is commonly required to be paid at regular intervals (but not all taxes).
c. It is levied on persons and property within the jurisdiction of the State.
d. It is an enforced contribution.
e. It is levied pursuant to legislative authority.
f. It is proportionate in character.
g. It is levied and collected for the purpose of raising revenue to be used for public purpose.

3. Classifications of taxes: APROBS

a. As to determination of amount:
1. Specific – tax of fixed amount imposed by the head or number, or by some standard of weight
or measurement. It requires no assessment other than a listing or classification of the subjects
to be taxed (e.g. excise tax on cigar, cigarettes and liquors).
 2. Ad valorem – tax of fixed proportion of the value of the property with respect to which the tax
is assessed. It requires the intervention of assessors or appraisers to estimate the value of
such property before the amount due from each taxpayer can be determined (e.g. VAT, income
tax, donor’s tax and estate tax).

b. As to purpose:
1. General/fiscal/revenue – tax imposed solely for the general purpose of the government, i.e.,
to raise revenue for government expenditures (e.g. income tax, donor’s tax and estate tax).
2. Special/regulatory – tax imposed for a specific purpose, i.e., to achieve some social or economic
ends irrespective of whether revenue is actually raised or not (e.g. tariff and certain duties on
imports).
c. As to rates or graduation:
1. Proportional – tax based on a fixed percentage of amount of the property, receipts, or other
basis to be taxed (e.g. VAT, other percentage taxes).
2. Progressive – tax the rate of which increases as the tax base or bracket increases (e.g. income
tax, estate tax and donor’s tax).
3. Regressive – tax the rate of which decreases as the tax base or bracket increases.

d. As to object or subject matter:

1. Personal/poll/capitation – tax of a fixed amount imposed on individuals, whether citizens or not,
residing within a specified territory without regard to their property or the occupation in which he
may be engaged (e.g. community tax).
2. Property – tax imposed on property, whether real or personal, in proportion either to its value, or
in accordance with some other reasonable method of apportionment (e.g. real estate tax).
3. Excise – any tax which does not fall within the classification of a poll tax or a property tax. This is
a tax on the exercise of certain rights or privileges (e.g. income tax, estate tax, donor’s tax, VAT,
other percentage taxes).
Note: This is different from the excise tax which is a business tax imposed on items such as cigars,
cigarettes, wines, liquors, automobiles, mineral products, etc.
e. As to who bears the burden:
1. Direct – tax which is demanded from the person who also shoulders the burden of the tax or tax
which the taxpayer cannot shift to another (e.g. income tax, estate tax, donor’s tax).
2. Indirect – tax which is demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another or tax which the taxpayer can shift to another.
f. As to scope:
 1. National – imposed by the National Government (e.g. income tax, estate tax, donor’s tax,
valued-added tax, other percentage taxes, documentary stamp tax).
2. Local or Municipal – imposed by municipal corporations (e.g. real estate tax, community tax).

4. Regressive system of taxation:

a. A regressive tax must not be confused with regressive system of taxation. In a society where the
majority of the people have low income, it exists when there are more indirect taxes imposed than
direct taxes.
b. The low-income sector of the population as a whole buys more consumption goods on which indirect
taxes are collected. The burden of indirect taxes rests more on them than on the more affluent
groups.
c. Studies reveal that the progressive elements of the income and other direct taxes have not
sufficiently offset the regressive effects of the indirect taxes as a whole.

5. Distinction of tax from other charges: PD SALT

a. Penalty vs. tax
PENALTY TAX
Designed to regulate conduct Aimed at raising revenue
Imposed by government or private Imposed by government only
entities

b. Debt vs. tax

DEBT TAX
Based on contract Based on law
Assignable Generally not assignable
May be paid in kind Generally payable in money
May be subject to set-off or Generally not subject to set-off or
compensation compensation
No imprisonment for non-payment Imprisonment for non-payment,
except poll tax
Governed by ordinary prescriptive Governed by special prescriptive
period period
Draws interest when stipulated or when Does not draw interest except
there is default when delinquent
c. Special assessment vs. tax
Special assessment is an enforced proportional contribution from owners of lands for special benefits
resulting from public improvements.
SPECIAL ASSESSMENT
Levied on land only
Not a personal liability of the person assessed
Based wholly on the special benefits to the
property assessed
Exception both as to time and place
TAX
Levied on persons, property or the exercise of
privilege
Personal liability of the person taxed
Based on the necessities of the government
without any special benefit directly accruing to
the taxpayer
Has general application

d. License fee vs. tax

License fee or permit is a charge imposed under the police power of the State for the purpose of
regulations.
LICENSE FEE
Imposed for regulation
Involves an exercise of police power
Amount is limited to the necessary expenses
of regulations
Imposed on the right to exercise a privilege
Legal compensation or reward of an officer for
specific services
Failure to pay makes the act or business illegal
TAX
Imposed for revenue
Involves exercise of taxing power
Amount is generally not limited
Imposed on persons, property and the right to
exercise a privilege
Enforced contribution assessed by sovereign
authority to defray public expenses
Failure to pay does not necessarily make the
business illegal

e. Toll vs. tax

Toll is a sum of money collected for the use of something, generally applied to the consideration
which is paid for the use of road, bridge or the like, of a public nature.
TOLL TAX
Demand of proprietorship Demand of sovereignty
Paid for use of another person’s property Paid for the support of the government
 Amount is based on the cost of construction or Amount is based on the necessities of the
maintenance of the public improvements used State
May be imposed by the government or by Imposed by government only
private entities

6. Other charges/related terms:

a. A subsidy is pecuniary aid directly granted by the government to an individual or private commercial
enterprise deemed beneficial to the public.
b. Revenue refers to all the funds or income derived by the government, whether from tax or any other
sources.
c. Internal revenue refers to taxes imposed by the legislature other than duties on imports and exports.
d. Customs duties (or simply duties) are taxes imposed on goods exported to or imported from a
country. Customs duties are really taxes but the latter is broader.
e. Tariff may be used in one of the following three senses:
1. A book of rates drawn usually in alphabetical order containing the names of several kinds of
merchandise with the corresponding duties to be paid for the same.

2. The duties payable on goods imported or exported.

3. The system or principles of imposing duties on the importation or exportation of goods.
7. National taxes imposed under special laws:
a. Customs duties
b. Sugar adjustment taxes
c. Taxes on narcotic drugs
d. Specific educational fund tax
e. Science fund taxes
f. Energy taxes on aircraft, motorized watercraft and electrical power consumption
g. Travel tax
h. Private motor vehicle tax
8. Sources of tax laws:
a. Constitution
b. Statutes or laws
c. Presidential decrees
d. Revenue regulations
e. Administrative rulings and opinions.
f. Judicial decisions
g. Provincial, city, municipal and barangay ordinances
 h. Treaties and international agreements
9. Basic tax laws of the Philippines:
a. National internal revenue code
b. Tariff and customs code
c. The local tax code
d. The real property tax code
10. Tax avoidance vs. tax evasion
a. Tax avoidance (tax minimization) is the use by the taxpayer of legally permissible methods in order
to reduce tax liability.
b. Tax evasion (tax dodging) is the use by the taxpayer of illegal means to defeat or lessen the payment
of tax.
11. Relationship among impact, shifting and incidence of taxation:
The impact of taxation corresponds to the imposition of the tax, shifting refers to the transfer of the tax
and incidence consists of the payment of the tax.
12. Shifting:
a. Defined. Shifting is the transfer of the burden of a tax by the original payer or the one to whom the
tax was assessed or imposed to another or someone else.
b. Kinds of shifting
1. Forward shifting – this takes place when the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally settles to the ultimate purchaser or
consumer.
2. Backward shifting – this is effected when the burden of the tax is transferred from the customer
or purchaser through the factors of distribution to the factor of production.
3. Onward shifting – this occurs when tax is shifted two or more times either forward or backward.