GENERAL PRINCIPLES OF TAXATION

Taxation Defined
The exercise of the sovereign power to raise revenues for the expenses of the government.

Stages or Coverage of Taxation

Taxation covers three (3) separate areas or aspects of government activity, namely:
1. Levying or imposition of the tax. This involves the passage of tax laws which is generally a legislative act. In the
Philippines, the taxing power is exercised by Congress.
2. Assessment. The process of determining the correct amount of tax due.
3. Collection and payment – the act of compliance with the tax law by the taxpayer.
Executive or administrative in nature. Done by the Bureau of Internal Revenue (“BIR”)

3 Inherent Powers of a State:

1) Power to Tax
2) Police Power
3) Power of Eminent Domain

The Power to Tax

Subject to inherent and constitutional limitations, the power of taxation is regarded as supreme plenary, unlimited,
and comprehensive. As long as the legislature, in imposing ta tax, does not violate applicable constitutional
limitations or restrictions, the courts have no concern with the wisdom or policy of the exaction, the political or other
collateral motives behind it, the amount to be raised, or the persons, property, or other privileges to be taxed (51 Am.
Jur. 77-78).

Police Power
Police power is the inherent power of a sovereign state to legislate for the protection of the health, general welfare,
safety, and morals of the public. It involves the power to regulate both liberty and property for the promotion of the
public good.
The police power of the State may be exercised through taxation because taxes may be levied for the
promotion of the welfare of the public (Lutz v. Araneta,98 PHIL. 148).

Power of Eminent Domain

The power of eminent domain is the inherent power of a sovereign state to take private state to take private property
for a public purpose. The Constitution limits the exercise of this power by providing that: “Private property shall not
be taken for public use without just compensation. “ (Art. III, Sec. 9, 1987 Philippine Constitution)
Distinctions Among the Three Inherent Powers
A) Purpose:
Taxation To raise revenues for the expenses of the State.
Police Power To promote the general welfare thru regulations.
Eminent Domain To facilitate the State’s need of property for public use.

B) Amount of Taxation
Taxation No limit.
Police Power Limited to the cost of regulation, issuance of the license, and/or surveillance.
Eminent Domain No exaction but private property is taken for public use.

C) Benefits Received
Taxation No special or direct benefit is received by an individual taxpayer. The public
receives the general benefit of protection of person, property and the promotion
of the general welfare.
Police Power No direct benefit is received by an individual. A healthy economic standard of
society is attained.
 Eminent Domain A direct benefit results in the form of just compensation to the property owner.

D) Non-Impairment of Contracts
Taxation Obligations of contracts may not be impaired. Tax exemptions bilaterally
agreed upon between the government and the taxpayer cannot be withdrawn.
Police Power Obligations of contracts may be impaired.
Eminent Domain Obligations of contracts may be impaired.

E) Transfer of Property
Taxation Taxes paid become part of public funds.
Police Power No transfer, but only restraint in the exercise of property rights.
Eminent Domain Transfer is effected in favour of the State.

F) Scope
Taxation All persons, property, rights and privileges.
Police Power All persons, property, rights, privileges, and liberties
Eminent Domain Only upon specific property.

G) Authority which exercises the power

Taxation Exercised by the government or its political subdivisions
Police Power Exercised by the government or its political subdivisions
Eminent Domain May be exercised by public service corporations or private entities operating
public utilities if granted by law

Limitations on the Power to Tax

(1) Constitutional limitations.

(a) 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 the laws (Art. III, Sec.1).

(b) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation (Art. VI, Sec. 28 (1)).

Uniformity - persons or properties falling under the same class should be taxed the same kind and
rate of tax.
Equality - the same means and methods be applied impartially to all the members of each class

Equal protection of the law -
means equality before the law. However, such equality does not
deny to the state the power to recognize factual differences
between individuals and classes. It recognizes that inherent in the
right to legislate is the right to classify, provided that it is a valid
and reasonable classification. If the groupings are characterized
by substantial distinctions that make real differences, one class
may be treated and regulated differently from another (Tiu v. CA,
G.R. No. 127410).

(c) No person shall be imprisoned for debt or non-payment of a poll tax (Art. III, Sec. 20).
(d) Charitable institutions, churches, and parsonages, or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from taxation (Art. VI, Sec. 10)
(e) No law granting any tax exemption shall be passed without the concurrence of a majority of all the
members of Congress (Art. VI, Sec 28 (4)).
 (f) No law impairing the obligation of contracts shall be passed (Art. III, Sec. 10).

i) When the tax exemption is bilaterally agreed upon between the government and the taxpayer,
the exemption cannot be withdrawn without violating the non-impairment clause.

ii) When the tax exemption is unilaterally granted by law, the same may be withdrawn by virtue
of another law without violating the m=non-impairment clause.

Ex. When the tax exemption is granted under a franchise, the same may be withdrawn at
any time.

(g) No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof
(Art. III, Sec. 5).

No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly for
the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of
religion, or of any priest, preacher, minister, or other religious teacher or dignitary as such except when
such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution, or
government orphanage or leprosarium (Art. VI, Sec. 29 (2)).

(h) All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives,
but the Senate may propose or concur with amendments (Art. VI, Sec. 24).
(i) The congress may, by law, authorize the President to fix within specified limits, and subject to such
limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework of the national development program
of the Government (Art. VI, Sec. 28 (2)).
(j) The Supreme Court shall have the power to review, revise, reverse, modify, or affirm on appeal or
certiorari as the law or the Rules of Court may provide, final judgements and orders of lower courts in
xxxx all cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed
in relation thereto (Art. VIII, Sec. (5) (2) (b)).
(k) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties. Xxxxxx
(l) The President shall have the power to veto any particular item or items in an appropriation, revenue, or
tariff bill, but the veto shall not affect the item or items to which he does not object (Art. VI, Sec. 27
(2)).
(m) All money collected or any tax levied for a special purpose shall be treated as a special fund and paid
out for such purpose only. If the purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds of the Government (Art. VI,
Sec. 29 (3)).

(2) Inherent limitations. These are restrictions arising from the very nature of the power to tax itself. They are:
(a) The levy must apply within territorial limits for the exercise of effective tax jurisdiction.
(b) The tax must be for a public purpose.
(c) Exemption from taxation of the government, any political subdivision thereof, or agencies
performing purely governmental functions. Ex. City government of Makati.

However, when a local government unit (LGU), government agency, or government owned and
controlled corporation engages in activities which are proprietary in character (i,e. engaging in
businesses and activities similar to those performed by other taxable corporations), such LGU,
government agency, or GOCC shall be subject to both income and business taxes as other private
corporations. Ex. Land Bank of the Philippines; PAGCOR.
 EXC: The Government Service Insurance System (GSIS), the Social Security System (SSS) , the
Philippine Health Insurance Corporation (PHIC or Philhealth), and local water districts (LWDs); are
exempt from the income tax imposed under Section 27 of the National Internal Revenue Code
(“NIRC”)

(d) As a general rule, the taxing power of the legislature may not be delegated. Exceptions to this non-
delegability rule are:

i) The authority of the President to fix tariff rates, import and export quotas, tonnage and wharfage
dues, and other duties and imposts (Art. VI, Sec. 28 (2), 1987 Constitution).

ii) Each local government unit shall have the power to create its own sources of revenues and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments? (Art. X, Sec. 5,1987 Constitution). Ex Real property taxes.

iii) Delegation to administrative agencies for implementation of the tax laws, and collection of the tax
to the BIR.

(e) International comity.

This principle limits the authority of the government to effectively impose taxes on a sovereign state
and its instrumentalities, as well as on its property held and activities undertaken in that capacity. As a
rule, the Philippine government cannot tax foreign ambassadors nor impose real property taxes upon
foreign embassies.

(f) Double Taxation. Two types of double taxation are direct double and indirect double taxation.
Direct double taxation – Where:
(1) The same subject is taxed twice;
(2) By the same taxing authority;
(3) Within the same jurisdiction;
(4) During the same taxing period; and
(5) Covering the same kind or character of tax (Villanueva v. City of Iloilo, L-26521).
There is no constitutional prohibition against double taxation in the Philippines (Villanueva v. City
of Iloilo, L-26521, December 28,1968), though it is not favoured.
Indirect double taxation, which lacks one or more of the elements of direct double taxation, is also
permissible.
Basic Principles of a Sound Tax System
1. Fiscal Adequacy – which means that the sources of revenue should be sufficient to meet the demands of public
expenditures;
2. Equality or Theoretical Justice – which means that the tax imposed should be proportionate to the taxpayer’s
ability to pay; and
3. Administrative Feasibility – which means that the tax laws should be capable of convenient, just, and effective
administration
Theory or Basis of Taxation
1) Life-blood Theory.
- Taxes are the lifeblood of the government. Without taxes, no government can function.
2) Benefits Protection Theory (Symbiotic Relationship)
- Taxes are what we pay for a civilized or organized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it (Commissioner v. Algue, 158 SCRA 9).

Essential Elements or Characteristics of a Tax

 1. Enforced contribution
2. Exacted pursuant to legislative authority
3. For raising revenue for public needs
4. Proportionate in character or uniform
5. Payable in money
6. Imposed within the state’s jurisdiction
7. Personal to the taxpayer

Classification of Taxes
a) According to scope or exercising authority
National tax Municipal or local tax
- Imposed by the National Government - Imposed by local government units
Exs. Income tax, Estate tax, Donor’s tax, VAT, OPT, Exs. Occupation tax, Real property tax (RPT)
Excise Tax, DST

b) According to subject matter or object

Personal, capitation, or poll tax Property tax Excise tax
- Fixed amount imposed upon persons of a - Imposed on property - Imposed upon the performance of an act; the
certain class without regard to property, trade, exercise of a right; or the engaging in business or
business, or occupation profession
Ex. Community tax Ex. RPT Exs. VAT, Donor’s tax, Estate tax, Income tax,
Occupation tax, Exercise tax
c) According to who bears the burden of the tax
Direct tax Indirect tax
- The liability for the tax (impact), and the burden thereof - The liability or impact for the tax falls on the original
(incidence) fall on the same taxpayer taxpayer, but the burden or incidence thereof is shifted to
another.
Ex. Income tax Ex. VAT, excise tax, custom duties

d) According to purpose
General or Revenue tax Special tax
Levied without a specific or pre-determined purpose Levied for a special purpose
Ex. Income tax, VAT, etc. Ex. Protective tariffs

e) According to the rate applied

Proportional Progressive Regressive
Based on a fixed percentage of the tax base The tax rate increases as the tax base The tax rate decreases as the tax base
increases increases.
Exs. RPT, VAT, Donor’s tax, Estate tax. Exs. Income tax on individuals under Exs. None
the graduated rates

f) According to measurement of the amount due

Specific Ad Valorem
Measured by number, or based on weight or physical Based on the value of the property and may require the intervention of
measurement assessors and appraisers
Exs. Excise tax on lubricating oils, waxes, petroleum, Exs. RPT; excise tax on liquors, cigarettes packed by ,machine, and
etc. automobiles

Nature or Construction of Tax Laws

1. Tax laws are prospective, generally, but can have retrospective application.
Tax laws, like other statutes, are to be construed as having only a prospective operation unless the purpose and
intention of the legislature to give retrospective effect is expressly declared or is necessarily implied from the
language used (Lorenzo v. posadas, 64 Phil. 353).
 Tax laws are not penal in character. Being civil in nature, the constitutional prohibition against the passage of
ex post facto legislation does not apply to tax laws (Law of basic taxation in the Philippines, Benjamin Aban;
citing Republic v. Oasan Vda. De Fernandez, et al., 99 Phil. 934; Ex Parte Garland, 18 Law Ed.336).

They can thereof be given retrospective application if expressly declared by the tax law.

A tax creates a civil obligation or liability on the part of the taxpayer, although the non-payment thereof creates a
criminal liability, which could be the subject of criminal prosecution under existing laws. In short, in taxation, it
is one’s civil liability to pay taxes that gives rise to criminal liability (Republic v. Patanao, L-22356, July 21,
1967).

2. A statute will not be construed as imposing a tax unless it does so clearly, and unambiguously.
A tax cannot be imposed without clear and express words for that purpose. Accordingly, the provisions of a
taxing act are not to be extended by implication (Marinduque Mines Agents v. Municipal Council of
Hinabangan, L-18924; Commissioner v. CA, GR 115349, April 18, 1997).
In case of doubt, statutes imposing a tax are construed most strongly against the Government, and liberally in
favor of the citizen because burdens are not to be imposed beyond what the statutes expressly can clearly import
(Manila Railroad v. Collector of Customs, GR 10214; CIR v. La Todeña, Inc. et. al., L-10431).

3. Tax exemptions are to be construed strictly against the taxpayer.

Legal provisions providing for tax exemptions are to be construed strictly against the grant and liberally in favour
of the taxing power (Phil. Int’l. fair, Inc. v. Collector, G.R. L12928 and L-12932, 1962).

Exemption from the taxation is construed stictissimi juris, i.e. strictly against exemption. Hence, exemption must
be anchored firmly on an express provision of law. He who claims exemption must be able to justify his claims
by the clearest grant of organic and statute law (Collector v. Manila Jockey Club, Inc., 53 O.G. 3762).

4. Revenue laws are not political in nature.

Our internal revenue laws are not political in nature and as such were continued in force during the period of
enemy occupation and in effect were actually enforced by the occupation government (Emilio Y. Hilado v.
Collector, G. R. No. L-9408, October 31, 1956).

5. Legislative intention must be considered. Tax statutes are to receive a reasonable construction with a view to
carrying out their purpose and intent (51 Am. Jur. 361)

6. Tax laws are special laws, and prevail over general laws (see Republic v. Gancayco, L-18307, June 30, 1964).

Sources of Tax Laws

1. The 1987 Constitution;
2. Tax statutes such as the National Internal Revenue Code (“NIRC”), the Tariff and Customs Code, the VAT
Law, the Revised Documentary Stamp Tax Law, the Amended Excise Tax Law, and portions of the Local
Government Code;
3. Executive orders on taxation, and local tax ordinances;
4. Tax treaties and conventions with foreign countries;
5. Judicial decisions;
6. Rules and regulations promulgated by the Department of Finance, the Bureau of Internal Regulations
(“BIR”), Bureau of Customs, etc.
7. Administrative interpretations and opinions of tax officials particularly those of the Commissioner of
Internal Revenue.

Forms of Escape from Taxation

 1. Shifting the burden of the tax.
2. Capitalization. By not selling property which has increased in value, the owner avoids the income tax to be paid
on the gain if the same is sold. An increase in the value of an asset is merely an unrealized increase (gain) in
capital.
3. Transformation. The manufacturer or producer upon whom the tax has been imposed, fearing the loss of his
market if he should add the tax to the price, pays the tax. He then endeavors to recoup the tax paid by making his
production more efficient and lowering his cost of production.
4. Tax exemption. Exemption from taxation is the freedom from the burden of paying tax.
5. Tax avoidance. Tax avoidance occurs when the means used to minimize taxes are legal and not probihited by
law.
6. Tax evasion. Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat
taxes (Yutivo Sons Hardwarev. CTA, L-13203, January 28, 1961, 1 SCRA 160).

Tax and Licence Distinguished

Tax License
Purpose To raise revenue To regulate action, businesses,
industries, professions
Limitations on taxation Subject to constitutional and inherent Not subject to the limitations on
limitations on the power to tax taxation
Amount Unlimited Limited to the cost of regulation
(licensing, inspection, surveillance)
Effect of non-payment Does not make the business illegal Makes the business illegal

“Special Assessment” Defined

A special assessment is in the nature of a tax upon property levied according to enefits conferred on the property.
The whole theory of a special assessment is absed on the doctrine that the property against which it is levied
derives some special benefit from the improvement xxxxxxx their property being increased in value by the
expenditure to an amount at least equal to the sum they are required to pay (1 Cooley on Taxation, 105).

Characteristics of Special Assessment

1. A special assessment can be levied only on land;
2. A special assessment cannot ( at least in most states) be made a personal liability of the person assessed;
3. A special assessment is based wholly on benefits; and
4. A special assessment is exceptional both as to time and locality.
Tax Special Assessment
Imposed on all property (real or personal) in a prescribed Imposed only on property which benefit from the
area improvement
Tax and Debt Distinguished
Tax Debt
Source of obligations Law Contract
Obligee Due to the government in Due to obligee under a contract; May be due to the government
its sovereign capacity in its corporate capacity
Form of payment Money Money, property, or services
Interest No interest except in cases If stipulated or if the payment is in delay
of delinquency
Assignability Not assignable Generally assignable
Compensation/Set-off No Yes
Incarceration for non- Yes, except for non- No person can be imprisoned for non-payment of debts
payment payment of poll tax (Constitution).

Tax and Toll Distinguished

Tax Toll
Demand for sovereignty Demand of ownership or proprietorship
Imposed by the Government May be imposed by private persons or entities
May be based on income or on the value of the property Largely based on the cost of the property used, or on the
cost of the improvement used
Forced contribution Compensation charged by the owner for the voluntary use
of the property/improvements

Tax Administration
It is a system involving assessment, collection, and enforcement of taxes, including the execution of judgement
in all tax cases decided in favour of the Bureau of Internal Revenue by the courts.

Powers and Duties of the Bureau of Internal Revenue (“BIR”)

1. The assessment and collection of all national internal revenue taxes, fees, and charges;
2. The enforcement of all forfeitures, penalties, and fines connected therewith;
3. The execution of judgements in all cases decided in its favour by the Court of Tax Appeals, and the ordinary
courts;
4. The giving effect to and the administering of the supervisory and police power conferred to it by the Tax
Code or other laws.
Powers of the Commissioner of Internal Revenue (“CIR”)
1. Power to interpret tax laws subject to review by the Secretary of Finance;
2. Power to decide disputed assessments, refunds of internal revenue taxes, fees and other charges, penalties
imposed in relation thereto, other matters arising under the National Internal Revenue Code (“NIRC”) or
other laws or portions thereof administered by the Bureau of Internal Revenue (“BIR”), subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals (“CTA”);
3. Power to examine any book, paper, record, or other data which may be relevant or material to a tax inquiry;
4. Power to obtain information from any person other than the person whose internal revenue tax liability is
subject to audit or investigation or from any office or officer of the national or local governments,
government agencies and instrumentalities;
5. Power to summon the person liable for tax or required to file a return, or any officer or employee of such
person, or any person having possession, custody, or care of the books of accounts and other accounting
records;
6. Power to take such testimony of the person concerned, under oath, as may be relevant or material to such
inquiry;
7. Power to make assessments.
8. Power to prescribe real property values by dividing the country into different zones and determining the
FMV of real properties located in each zone;
9. The Commissioner is authorized to inquire into the bank deposits and other related information held by
financial institutions of:

1) A decedent to determine his gross estate;

2) A taxpayer who has filed an application for comprise of his tax liability by reason of financial
incapacity to pay his tax liability; and
3) A taxpayer who is subject of a request for the supply of tax information from a foreign tax authority
pursuant to an international agreement or treaty.
10. The Commissioner has the authority to accredit and register individuals and general professional
partnerships (GPP) and their representatives who prepare and file tax returns, statements, reports and other
papers, or who appear before the BIR, for taxpayers.
11. Power to prescribe additional procedural or documentary requirements in connection with the submission or
preparation of financial statements accompanying the tax returns.