CHAPTER 1
A. Concepts, Nature, and Characteristics
Taxation
● Act of laying a tax; the process or
means by which the sovereign,
Meaning of Taxes
through its law-making body, raises
● Are the enforced proportional and
income to defray the necessary
expenses of the government
● A way of apportioning the cost of
government among those who, in
some measure, are privileged to
enjoy its benefits and must bear its
burdens
● Refers to the inherent power of the
state to demand enforced
contribution for public purpose
○ Taxation → can refer to the
power of tax or the process
by which the power is
exercised, or both
Essential Characteristics of Tax
Purpose, Scope, and Rationale
● Provide funds or property with which
to promote the general welfare
and protection of its citizens
○ Taxation may also be exercised to
attain various social and economic
objectives
● In its broadest and most general
sense, taxation includes every
imposition of charge or burden by
the sovereign power upon persons,
property, or property rights, for the
use and support of the government
and to enable it to discharge its
appropriate functions
● <Taxes are what we pay for a
civilized society. Without taxes, the
state would be paralyzed for a lack
of the motive power to activate and
operate it.=
○ Despite the natural
reluctance to surrender part
of one’s hard-earned
income, everyone who can
must contribute their share
○ Governments are expected
to respond in the form of
tangible and intangible
benefits; improve the lives of
the people and enhance
moral and material values
● Dispels the notion that taxation →
arbitrary method of exaction
○ Exaction = excessive or harsh
demand of a reward or fee for an
official service
pecuniary contributions from
persons and property levied by the
law-making body of the state having
jurisdiction over the subject for the
support of the government and all
public needs
● At the heart of it, taxes are there
to promote t h e general welfare
and protection of its citizens, as
well as revenue and non-revenue-
generating purposes
● Note: Taxes should be paid in legal tender
● It is an enforced contribution
○ Not a voluntary payment or
donation; imposition is not
dependent upon the will or
assent, open or implied, of
the person taxed
○ Taxation without
representation (or consent in
some form of those who will
be taxed) is contrary to the
principle of good
government
○ Principle of Representation →
applies to political communities,
not individuals
■ Satisfied by their
adequate
representation in the
legislative which
votes the tax
● It is proportionate in character
○ Ordinarily based on ability to
pay; in practice, some
people pay very high taxes,
or some, none at all
○ Example: Progressive Taxation
● It is generally payable in money
○ Unless qualified by law (e.g.
backpay certificates under Sect
2, RA No. 304),
○ Pecuniary burden → exaction to
be discharged alone in the form of
money
 ● It is levied on persons or property
○ Taxes may also be imposed on
acts, transactions, rights, or
privileges
○ However, it is only a person who
pays the tax
○ Property is resorted to for the
purpose of ascertaining the
amount of tax that must be
paid; enforces payment in
case of default
○ Not all who pay a tax shoulder the
burden of the tax
● It is levied by the state which has
jurisdiction over the person or property
○ Object to be taxed must be
subject to the jurisdiction of the
taxing state
○ Necessary to ensure the tax can
be enforced
○ A state can tax all persons
subject to its jurisdiction for
all their property left by
them within, yet its taxing
power stops at the state
boundary lines
■ Cannot reach over into
another jurisdiction to
seize upon
○ Philippines → territorial principle;
jurisdiction-based
● It is levied by the law-making body of the
state
○ The power to tax is a
legislative power which
under the Constitution, only
the Congress can exercise
through the enactment of tax
statutes
○ Obligation of a tax → statutory
liability
■ Power to tax is no longer
vested exclusively on
Congress
■ Local legislative
bodies are now given
direct authority to
levy taxes, fees, and
other charges
pursuant to the
Constitution subject
to such guidelines
and limitations
● It is levied for public purpose or
purposes
○ Taxation involves, and a tax
constitutes, a charge or
burden imposed to provide
income for public purposes
○ Public purposes includes
support of the government,
administration of law, or
payment of public expenses
○ Revenue derived from taxes
cannot be used for purely
private purposes, or for the
exclusive benefit of private
persons
○ <Public purpose or purposes= is
implied in the levy of tax
● It is required to be paid at regular or
definite period
o They are commonly required to be
paid at regular periods or intervals
every year.
Theory and Basis of Taxation
● Existence of government
○ Power of taxation proceeds
upon the theory that the
existence of government is
necessary; cannot continue
without means to pay
○ Gives the right to compel citizens
and property within its limits to
contribute
● Reciprocal duties of state and inhibitors
○ Found in the reciprocal
duties of protection and
support between the state
and its inhabitants
○ Taxpayer → receives
general advantages and
protection which the
government affords the
taxpayer and his property
○ Benefits-received principle
can be in the form of
compensation or
consideration for the other:
protection for support and
support for protection
● Public purpose requirement for lawful
taxation
○ Doesn’t mean that only
those who are able to and do
pay taxes enjoy the
privileges and protection;
both are enjoyed by those
 who do not and cannot pay
taxes
○ Protection in the enjoyment of
rights is a duty owed by the state
to every citizen
○ From the contributions, the
government renders no
special or commensurate
benefit to any particular
property or person
■ Tax is compulsory
and the payer gets
no definite, specify
commodity or service
■ Not imposed on the basis
of a special or peculiar
benefit
○ A person cannot object to or
resist tax payment solely
because there is no personal
benefit arising from the
payment (Lorenzo vs.
Posadas [1937])
● In taxation, what matters is that the tax
imposition is for public purpose
Nature of the Power of Taxation
● It is inherent in sovereignty
○ Inherent in sovereignty as
an incident or attribute
thereof, being essential to
the existence of every
government
○ Exists apart from constitutions
and without being expressly
conferred
■ Constitution
provisions relating to
the power of taxation
do not operate as
grants of the power
to the government
■ Merely constitute
limitations upon a power
which is practically
limitless
■ Its existence is recognized
by the provisions relating
to taxation
● It is legislative in character
○ Exclusively legislative; cannot be
exercised by the executive or
judicial branch
○ Only the Congress, the national
legislative body, can impose taxes
○ Levy of a tax may be made by a
local legislative body subject to
limitations
○ Constitution expressly grants the
power to tax to LGUs
● It is subject to constitutional and
inherent limitations
○ Power of taxation is not absolute;
subject to certain limitations or
restrictions
○ Most limitations are specifically
provided in the Constitution or
implied
■ The rest are inherent and
spring from the nature of
the taxing power itself
○ Individual equities and
inequalities, however, are
not considered in the
exercise of power and the
mere fact that taxation is
unjust or oppressive with
respect to a particular
taxpayer does not render a
tax law invalid
Aspects of Taxation
● The exercise of the power of taxation
involves two aspects, and they are:
○ Taxation → levying or imposition
of the tax which is a legislative act
○ Tax administration →
collection of the tax
levied which is
essentially administrative in
character
● Taxation and tax administration, together,
the two process constitute the taxation
system
Extent of the Legislative Power to Tax
● Being legislative, all incidents are
naturally within the control of the
legislature
● Has the discretion to determine
the manners mentioned, subject to
constitutional and inherent
restrictions
● The subjects or objects to be taxed
○ Refers to the coverage and kind
of nature of the tax
■ Persons, natural or
juridical; property,
real or personal, or
 tangible or
intangible; business,
transactions, rights,
or privileges;
○ A state is free to select the subject
of taxation
○ Inequalities which result
from a singling out of one
particular class for taxation
or exemption infringe no
constitutional limitation, so
long as it is reasonable and
not arbitrary (Luz vs. Araneta
[1968], Sison Jr. vs.
Ancheta, [1984])
● The purpose or object of the tax so long
as it is a public purpose
○ The legislative body can
levy a tax or make an
appropriation provided it is
for public purpose
○ However, the determination on
what is a public purpose is not
conclusive
○ Decision on the question is a
judicial function, not legislative
○ Once it is settled that the
purpose is public, the courts
can make no other inquiry
into the objective of the
legislature in imposing the
tax (Pascual vs. Sec. of
Public Works [1961])
○ Judicial action is limited only to a
review where it involves:
■ Determination of the
validity of the tax in
relation to
constitutional
precepts; tax may be
declared invalid
because it violates
the constitutional
requirement of
uniformity and equity
in taxation
■ Determination in an
appropriate case of
the application of a
tax law; courts may
decide a tax has
been illegally
collected when the
taxpayer is entitled to
exemptions, or his
liability has already
been extinguished
● The amount or rate of the tax
○ Generally, the legislature may levy
a tax of any amount or rate it sees
fit
○ If the taxes are oppressive or
unjust, the only remedy is
ballot box and voting or
election of new
representatives (Cooley,
178-181)
○ <The power to tax involves the
power to destroy.=
■ Describes not the
purposes for which
the taxing power may
be used, but the
extent to which it
may be employed to
raise revenues
○ Taxes cannot be held invalid
merely because the power
which is manifested by its
imposition may involve the
power to destroy
○ Constitution → says that the
rule of taxation should be
uniform and equitable
■ Power to destroy →
must be exercised with
caution to minimize injury
■ Must be exercised fairly,
equally and uniformly
● The manner, means, and agencies of
collection of the tax
○ Refers to the administration of the
tax or the implementation of tax
laws
○ Legislature must equally
possess the sole popper to
prescribe the mode or
method of tax collection, and
to designate officers for
enforcement, as well as
remedies which the state or
taxpayer may avail
○ This power or authority does not
involve the following:
■ Choice of the subject to be
taxed
■ The definition of the
 purpose for which the tax
is imposed
■ Determination of the
amount thereof
○ Must observe and comply with
procedural requirements
prescribed
Non-revenue Objectives of Taxation
● Primary purpose of taxation is to raise
revenue for the support of the
government
○ Also used as a devices for
regulation by means of
which certain effects or
conditions envisioned by the
government can be
achieved
● Can strengthen anemic
enterprises or provide incentive to
greater production through grant of
tax exemptions or the creation of
conditions conducive to their
growth
● Import taxes may be increased to
protect local industries against
foreign competition, or decreased
to encourage foreign trade
● Import good taxes may be used as
a bargaining tool by setting tariff
rates first at a high level before
trade negotiations are entered into
● Taxes may be increased in
periods of prosperity to curb
spending power and halt
inflation, or lowered to expand
business and ward off depression
● Levied to reduce inequalities in wealth
and incomes
● Used to promote science and
invention to finance educational
activities, or to improve local police
forces’ efficiency in maintaining
peace and order through subsidy
○ Reference: RA No. 5448, RA No.
5447, RA No. 6141
● Made as an implement of the police power
to promote general welfare
○ Sugar Adjustment Act →
designed to obtain a
readjustment of the benefits
derived by people interested
in the sugar industry;
rehabilitate and stabilize the
industry, being one of the
greatest contributors to the
country’s wealth
● Tax provisions may be enacted so that low
income earners pay little to no income
taxes
○ Exclusions, exemptions,
deductions, and tax credits
● Tax provisions may provide
incentives for certain desirable
activities to encourage investments
in productive assets or facilities that
will lead to increased employment
○ Employment specifically for low
and middle income workers
○ Designed to discourage socially
undesirable practices, i.e. smoking
● As long as a tax is for public
purpose, its validity is not affected
by collateral purposes or motives of
the legislature in imposing the level,
or by the fact it is regulatory, or if it
discourages or deters the activities
taxed
○ Also applies even though the
revenue obtained from the
tax appears very negligible
or the revenue purpose is
only secondary
Basic Principles of a Sound Tax System
● Fiscal adequacy
○ Sources of revenue, as well as
receipts taken as a whole, should
be sufficient to
meet the demands of public
expenditure
○ Revenue should be elastic
or capable of expanding and
contracting annually in
response to variations in
public expenditures
○ Alternative A: Incur the risk of
deficits or surpluses due to
inelastic revenue
○ Alternative B: Adjust the amount
of public expenditure to fit the flow
of funds
■ Properly curtailing
activities so the budget is
balanced
■ Elasticity can be
obtained without
creating any new
 taxes annually, but persons residing with a
merely changing the specified territory;
rates ■ Citizens and non-
● Equality or theoretical justice citizens, without
○ Tax burden should be distributed regard to their
in proportion to the payer’s ability property, occupation,
to pay or business
○ Contribution of each ■ Taxes of a
person towards the specified amount
government expenses imposed upon each
should be so apportioned person performing a
that they would feel neither certain act or
more or less engaging in a certain
inconvenienced business are not poll
● Administrative feasibility taxes
○ Tax laws should be capable ■ Example: Community
of convenient, just, and (residence) tax
effective administration or ○ Property → whether real
enforcement at a reasonable or personal; in proportion
cost either to its value, or in
○ No tax is better than its accordance with a
actual operation; each tax reasonable method of
should be clear and plain, apportionment
capable of uniform ■ Example: Real estate tax
enforcement by government → taxed is based on
officials, convenient as to the market value or price sold,
time, place, and manner of whichever is higher
payment, and not unduly
○ Excise → tax which does
burdensome
not fall within the
● Non-observance of the principles
classification of poll or
will not necessarily render the tax
property tax; a charge
invalid expect to the extent that
imposed upon the
specific limitations are violated
performance of an act, the
Errors on the Part of Tax Officials enjoyment of a privilege, or
● Errors do not bind the government or the engaging in an
prejudice its right to collect the tax legally occupation, profession, or
due
business
● Government is never estopped by
■ Obligation to pay is based
the mistakes or errors on the part on voluntary action of the
of its agents or unauthorized or person taxed
illegal acts of public officials ■ Synonymous with privilege
● If through a misapprehension, an tax
officer executed it for a long time, ■ Example: Income tax,
the error may be corrected when value-added tax, estate
the true interpretation is later tax, donor’s tax
ascertained (PLDT vs. CIR [1952]). ● As to who bears the burden
○ Direct → tax demanded or
B. Classifications & Distinctions exacted from the very
Classification of Taxes person who also shoulders
● As to subject matter or object the burden; taxpayer is
○ Personal, poll, or primarily liable and cannot
capitation → tax of a fixed shift to another
amount imposed on ■ Example: Corporate and
 individual income tax,
estate tax, donor’s tax
○ Indirect — tax demanded
from, or are paid by, one
person in the expectation
and intention that he shall
indemnify himself at the
expense of another by
passing the burden to the
latter, falling on the ultimate
purchaser
■ Tax imposed on
goods before
reaching the
consumer who pays
for it as part of the
purchase price of
goods or services
■ What is transferred is not
the seller’s liability but
merely the tax burden
■ Example: Value-added
tax, percentage taxes,
excise taxes, customs
○ Case: Withholding Tax
■ Incidence and burden of
taxation falls on the same
entity
■ Burden of taxation is
not shifted to the
withholding agent
who merely collects
by withholding the
tax due from income
payments to entities
arising from certain
transactions, and
remits the same to
the government
● As to determination of amount
○ Specific → tax of a fixed
amount imposed by the
head or number; requires
no assessment (valuation)
other than a listing or
classification of objects to
be taxed
■ Example: Taxes on
liquors, cigars and
cigarettes, etc.
○ Ad valorem → tax of a
fixed proportion of the value
of the property with respect
to which the tax is
assessed; <by the value of=
or according to value
■ Requires an
assessment to
estimate the value of
such property before
determining the
amount due
■ Example: Real
estate tax, excise
tax on automobiles,
jewelry, customs
duties (except
cinematography)
○ Case: Excise Tax
■ Those imposed
under the NIRC on
certain specified
articles (Chap II-G)
are either special or
ad valorem
■ Cited as a tax code; kind
of property tax applicable
to particular articles
■ Real estate tax →
ad valorem tax but
also a property tax,
although it is not an
excise tax
● As to purpose
○ General, fiscal, or revenue → tax
imposed for general government
purposes
■ Example: Income tax,
VAT, almost all kinds of
taxes
○ Special or regulatory → tax
imposed for special
purposes, such as some
social or economic ends
irrespective of whether the
revenue is raised or not
■ Example: Protective
tariffs or customs
duties on import
goods to enable
locally manufacturing
goods or similar
products to compete
domestically
● As to scope or authority
○ Natural → imposed by the natural
environment
 ■ Example: NIR taxes,
customs duties, or those
imposed by special laws
○ Municipal or local → imposed by
municipal corporations or LGUs
■ Example: Real estate tax,
professional tax
● As to graduation or rate
○ Proportional → based on
a fixed percentage of the
amount of the property,
receipts, or other basis to
be taxed; also known as flat
or uniform tax
■ Remains constant for all
levels of the tax base or
any given income level
■ Example: Real estate tax,
VAT, and percentage tax
○ Progressive → tax rate increases
as the tax base or bracket
increases
○ Regressive → tax rate
decreases as the tax base
or bracket increases; not
applicable in the Philippines
Regressive/Progressive System of Taxation
● Regressive tax is not the same as
regressive system of taxation
○ This system exists when there are
more indirect taxes imposed than
direct taxes
○ Burden of indirect taxes
rests more on the low-
income sectors than the
affluent groups because
they consume more goods
which are taxed indirectly
Tax Distinguished from Others
Tax vs. Toll
● Toll → sum of money for the use
of something; applied to the
consideration which is paid for the
use of a road, bridge, or public
nature
Tax vs. Penalty
● Penalty → sanctions imposed as
punishment for violation of law
or acts deemed injurious;
violations of tax laws may give rise
to imposition of penalty
Tax vs. Special Assessment
● Special assessment → enforced
proportional contribution from
owners of lands especially or
peculiarly benefited by public
improvements
● Levied only on land
● A charge is imposed only on
property owners benefited is a
special assessment rather than a
tax notwithstanding that the statute
calls it a tax
● An exemption from taxation doesn’t
include exemption from special
assessment
○ Power to tax carries the power to
levy a special assessment
Tax vs. License or Permit Fee
● License or permit fee → charge imposed
under the police power for regulation
● License → nature of a special
privilege, of a permission or
authority to do what is within its
terms