FUNDAMENTAL PRINCIPLES OF

TAXATION
08.13.2019
Taxation (defined)
- the process or means by which the
sovereign (independent sate), through its law
making body (the legislature), imposes burdens
upon subjects and objects within its jurisdiction
for the purpose of raising revenues to carry out
the legitimate objects of government.
Question:
This is an inherent limitation on the power of
taxation.
A. Rule on uniformity and equity in taxation.
B. Due process of law and equal protection of
the laws.
C. Non-impairment of the jurisdiction of the
Supreme Court in tax cases.
D. Tax must be for the public purpose.
The process or means by which the sovereign,
through its law-making body raises income to
defray the expenses of the government.
A. Toll C. Taxation
B. License fee D. Assessment
Taxes (defined)
- the enforced proportional contributions
or charges from persons and property levied by
the law-making body of the state by virtue of its
sovereignty for the support of the government
and all public needs.
Question:
The power to demand proportionate
contributions from persons and property to
defray the expenses of the government.
A. Power of taxation
B. Power of imminent domain
C. Police power
D. Power of recall
Enforced proportional contributions from
persons and property levied by the state by
virtue of its sovereignty for the support of the
government and for all public needs.
A. Toll C. Taxes
B. License fee D. Assessment
The three (3) inherent Powers of the
State:
1. Police Power – the power of the state for
promoting public welfare by restraining and
regulating the use of liberty and property. - it
may be exercise only by the government. -the
property taken in the exercise of this power is
destroyed because it is noxious or intended for a
noxious purpose.
2. Power of Taxation – the power by which the
State raises revenue to defray the necessary
expenses of the government.
3. Power of Eminent Domain – the power of the
State to acquire private property for public
purpose upon payment of just compensation.
Similarities among three (3) Inherent
powers of the State:
1. They are inherent in the state.
2. They exist independently of the constitution
although the conditions for their exercise may
be prescribed by the constitution.
3. Ways by which the State Interfere with private
rights and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation
received, directly or indirectly, by the persons
affected.
Distinctions among the three (3)
inherent powers
Purposes of Taxation
1. Primary: Revenue or fiscal Purpose
-to provide funds or property with which to promote
the general welfare and the protections of its citizens and
to enable it to finance its multifarious activities.
2. Secondary: Regulatory Purpose (or
Sumptuary/Compensatory) -
taxation is often employed as a devise for regulation or
control ( implementation of State’s police power) by
means of which certain effects or conditions envisioned
by the government may be achieved such as:
a. Promotion of general welfare
b. Reduction of Social Inequality
c. Economic Growth
THEORY and BASIS OF TAXATION
1. Theory (Authority): LIFEBLOOD THEORY or
NECESSITY THEORY
-the power of taxation proceeds upon the
theory that the existence of government is a
necessity (“Necessity theory”)
-the power of taxation is essential because
the government can neither exist nor endure
without taxation. “Taxes are the lifeblood of the
government and their prompt and certain
availability is an imperious need” (Lifeblood
Doctrine).
 THEORY and BASIS OF TAXATION
2. BASIS of Taxation: BENEFITS RECEIVED or
RECIPROCITY THEORY
- 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 the government. The citizens, on the
other hand, pay the taxes in order that they may be
secured in the enjoyment of the benefits of
organized society. (Doctrine of Symbiotic
Relationship)
 MANIFESTATION OF THE LIFEBLOOD
THEORY:
a) Rule of “No Estoppel against the government”
-means in the performance of its government
al functions;
* the state cannot be estopped by the neglect of its
agents/officers.
* Erroneous application and enforcement of law by
public officers do not block the subsequent correct
application of statutes.
 MANIFESTATION OF THE LIFEBLOOD
THEORY:
b) Collection of taxes cannot be enjoined
(stopped) by injunction
-no court, except the Court of Tax Appeals
(through administrative remedies when collection
could jeopardize the interest of the government or
taxpayer) shall have the authority to grant an
injunction to restrain the collection of any national
internal revenue tax, fee or charge imposed by the
tax code.
- this prohibition shall apply to all collection
activities
 MANIFESTATION OF THE LIFEBLOOD
THEORY:
c. Taxes could not be the subject of compensation
or set-off.
-since claim for taxes is not a debt or contract.
-it is compulsory rather than a matter of
bargain.
-if taxes can be the subject of compensation
or set-off, it can easily give rise to confusion and
abuse, depriving the government of authority over
the manner by which taxpayers can credit and
offset their tax liabilities.
 MANIFESTATION OF THE LIFEBLOOD
THEORY:
d. Right to select objects (subjects) of taxation
-the power to tax is essentially legislative
in nature. Hence, the right to select the
objects/subjects of taxation rests with the
Congress. It includes the determination of:
1. The subject or object to be taxed.
2. The purpose of the tax as long as it is a public
purpose.
 MANIFESTATION OF THE LIFEBLOOD
THEORY:
3. The amount or rate of the tax.
4. Kind of tax
5. Apportionment of the tax.
6. Situs of taxation
7. The manner, means and agencies of collection
of the tax.
 MANIFESTATION OF THE LIFEBLOOD
THEORY:
e. A valid tax may result in the destruction of
the taxpayer’s property
-the power to tax includes the “power to
destroy”, where the tax is a valid tax.
 NEXT MEETING:
Scope of the Power of Taxation (p-10)
Essential Elements of a Tax
Aspects of Taxation
Nature/Characteristics of the State’s Power to
Tax
Classification of taxes
Elements of Sound tax System
Limitations on the State’s Power to Tax.
 Short Quiz
1. Taxation as distinguished from police power
and power of eminent domain.
A. Property is taken to promote the general
welfare.
B. Maybe exercised only by the government.
C. Operates upon the whole citizenry.
D. There is generally no limit as to the
amount that may be imposed.
2.The following are constitutional limitations, except
A. No imprisonment for non-payment of poll tax.
B. Non-impairment of the obligation of contracts.
C. Rule of uniformity and equity in taxation.
D. Exemption from income tax of charitable institutions,
cemeteries, churches, personage or convents
appurtenant thereto, as well as all lands, buildings and
improvements actually, directly and exclusively used for
religious, charitable and educational purposes.
3. Which of the following statements is correct?
A. The President is authorized to increase or
decrease national internal revenue tax rates.
B. One of the nature of taxation is the reciprocal
duties of protection and support between the state
and subjects thereof.
C. Every sovereign government has the inherent
power to tax.
D. Income tax in an indirect tax.
4. A tax must be imposed for public purpose.
Which of the following is not a public purpose?
A. National defense
B. Public education
C. Improvement of the sugar and coconut
industries.
D. Improvement of a subdivision road.
5. Which is not an essential characteristic of a
tax?
A. It is unlimited as to amount.
B. It is payable in money.
C. It is proportionate in character.
D. It is an enforced contribution.
6. Special assessment is an enforced proportional
contribution from owners of land especially benefited by
public improvement. Which one of the following is not
considered as one of its characteristics?
A. It is levied on land.
B. It is based on the government’s need of money to
support its legitimate objectives.
C. It is not a personal liability of the persons assessed.
D. It is based solely on the benefit derived by the
owners of the land.
7. It is the privilege of not being imposed a
financial obligation to which others are subject.
A. Tax incentive
B. Tax exemption
C. Tax amnesty
D. Tax credit
8. As to scope of the legislative power to tax, which is not
correct?
A. Where there are no constitutional restrictions, and
provided the subjects are within the territorial jurisdiction of
the state, Congress has unlimited discretion as to the persons,
property or occupations to be taxed.
B. In the absence of any constitutional prohibition,
Congress has the right to levy a tax of any amount it sees fit.
C. The discretion of Congress in imposing taxes extends to
the mode, method or kind of tax, unless restricted by the
constitution.
D. The sole arbiter of the purpose or which taxes shall be
levied is Congress, provided the purpose is public and the
courts may not review the levy of the tax to determine
whether or not the purpose is public.
9 . Which of the following is a nature of
taxation?
A. The power is granted by legislative action.
B. It is essentially an administrative function.
C. It is generally payable in money.
D. Without it the state can continue to exist.
10. Which of the following is not a determinant
of the place of taxation?
A. Source of the income
B. Citizenship of the taxpayer
C. Residence of the taxpayer
D. Amount of tax to be imposed
11. Which of the following statements is not correct?
A. An inherent limitation of taxation may be
disregarded by the application of a constitutional
limitation.
B. The property of an educational institution
operated by a religious order is exempt from property
tax, but its income is subject to income tax.
C. The prohibition of delegation by the state of the
power of taxation will still allow the BIR to modify the
rules in time for filing of returns and payment of taxes.
D. The power of taxation is shared by the legislative
and executive departments of the government.
 SCOPE OF THE POWER OF TAXATION
In the case of Sison vs. Ancheta (130 SCRA 654),
the Supreme Court held that the power of taxation is
the most absolute of all powers of the government.
It has the broadest scope of all the powers of the
government because in the absence of limitations, it
is considered as comprehensive, unlimited, plenary
and supreme.

a. Comprehensive – as it covers persons,

businesses, activities, professions, rights and
privileges.
 SCOPE OF THE POWER OF TAXATION
b. Unlimited – in the absence of limitations
prescribed by law or the constitution, the power to
tax is unlimited and comprehensive. Its force is so
searching to the extent that the courts scarcely
venture to declare that it is subject to any
restrictions.
c. Plenary – as it is complete; BIR may avail of
certain remedies to ensure collection of taxes.
d. Supreme – in so far as the selection of the
subject of taxation.
ESSENTIAL ELEMENTS OF A TAX
a. It is an enforced contribution. Payment of tax is
not voluntary payment or donation, but an
enforced contribution, exacted pursuant to
legislative authority.
b. It is generally payable in money. It is pecuniary
burden payable in money which must be in legal
tender.
c. It is proportionate in character. Payment of taxes
should be based on the ability to pay theory or
theoretical justice. The use of a graduated tax rates
is in consonance with this rule.
 ESSENTIAL ELEMENTS OF A TAX
d. It is levied on persons, property, or the exercise
of a right or privilege (subjects or objects of
taxation).
e. It is levied by the law-making body of the state.
The power of “imposing” a tax, being purely
legislative function. Congress cannot delegate such
power. This limitation arises from the doctrine of
separation of powers among the three branches of
the government.
f. It is levied for public purpose.
ASPECTS OF TAXATION
Aspects refer to “stages, phases or process”
that are included or embodied in the term
“taxation” such as:
1. Levying or imposition of the tax which is a
legislative act of function.
2. Assessment or determination of the correct
amount of applicable tax.
3. Collection of the tax levied which is essentially
administrative in character. The national agency
charged with the function of collecting internal
revenue taxes is the Bureau of Internal Revenue.
 NATURE/ CHARACTERISTICS OF THE
STATE’S POWER TO TAX
1. It is inherent in sovereignty.
The state of, having sovereignty, can enforce
contribution (tax) even in the absence of a constitutional
provision because the state has the supreme power to
command and enforce obedience to its will from the people
within its jurisdiction.

2. It is legislative in character.
The power to tax (levying or imposition) is peculiarly
and exclusively legislative in nature. It cannot be exercise by
the executive or judicial branches of the government.
 EXCEPTIONS TO NON-DELEGATION RULE:
a. Delegation as provided for in the 1987 Constitution
such as “Delegation to the President” under Section
28 Article VI stating that the Congress may authorize,
by law, 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.
EXCEPTIONS TO NON-DELEGATION RULE:

b. Delegation to local government units as

provided under Section 5, Art X of the
Constitution. The power of local government
units to impose taxes and fees is always subject
to the limitations which Congress may provide,
the former having no inherent power to tax.
EXCEPTIONS TO NON-DELEGATION RULE:
c. Delegation to administrative agencies
Certain aspects of the taxing process that are
not really legislative in nature are vested in
administrative agencies such as:
• Power to value property
• Power to assess and collect taxes
• Power to perform details of computation,
appraisement or adjustment; among others.
 NATURE/ CHARACTERISTICS OF THE STATE’S
POWER TO TAX
3. Exemption of government entities, agencies and
instrumentalities. Immunity is necessary in order that
government functions will not be impeded. Otherwise,
the government will be taxing itself to raise money for
itself. The following rules shall apply in determining
whether or not government entities and agencies are
subject to tax:
a. Agencies performing governmental functions
are tax exempt unless expressly taxed
b. Agencies performing proprietary functions are
subject to tax unless expressly exempted.
NATURE/ CHARACTERISTICS OF THE
STATE’S POWER TO TAX
c. GOCCs performing proprietary functions
are subject to tax, however the following were
granted tax exemptions:
• Government Service Insurance System (GSIS)
• Social Security System (SSS)
• Philippine Health Insurance Corporation (PHIC)
• Philippine Charity Sweepstakes Office (PCSO)
• Local Water Districts (RA 10026)
NATURE/ CHARACTERISTICS OF THE STATE’S
POWER TO TAX
4. International comity (Polite and friendly
agreement[s] among nations)
Under international law, property of a foreign
state may not be taxed by another state due to:
• Sovereign equality of states
• When one state enters the territory of another
state, there is an implied understanding that the
former does not intend to denigrate its dignity by
placing itself under the jurisdiction of the other
state.
• Immunity from suit of a state
NATURE/ CHARACTERISTICS OF THE STATE’S
POWER TO TAX
5. Limitation of territorial jurisdiction
Tax laws cannot operate beyond a state’s
territorial limits. Property outside one’s
jurisdiction does not receive any protection
from the state.

6. Strongest among the inherent powers of the

state (Sison V. Ancheta, 130 SCRA 654).
CLASSIFICATION OF TAXES
1. As to scope

a. National – imposed by the National Government

(e.g. income tax, estate tax, donor’s tax, VAT other
percentage taxes, documentary stamp tax)

b. Local – imposed by local government units such as

municipal corporations (e.g. real estate tax and
professional tax receipts). The local government unit’s
power to tax is based on a constitutional grant that paved
the way for the enactment of the Local Government Code
of the Philippines. Hence, the local government’s power
to tax is not inherent.
 CLASSIFICATION OF TAXES
2. As to subject matter or object:

a. Personal, poll or capitation – tax of a fixed amount

imposed upon individual, 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)

b. 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)
CLASSIFICATION OF TAXES
c. Excise – any tax which does not fail within the
classification of a poll tax or a property tax. This is a
tax on the exercise of certain rights and privileges
(e.g. income tax, estate tax, donor’s tax). Excise tax
may also refer to the tax levied or imposed on sin
products and non-essential goods such as cigars
and liquors (Discussed in volume 2- Transfer and
Business Taxes). Excise taxes of this nature are taxes
applicable to certain specified articles or products
manufactured in the Philippines for domestic sale
or consumption or any other disposition and to
specified things or goods imported into the
Philippines. It may be specific or ad valorem
 CLASSIFICATION OF TAXES
3. As to who bears the burden:
a. Direct – tax which is demanded from the
person who also shoulders the burden of tax or tax
which the taxpayer cannot shift to another. Both
the incidence (liability for the payment of the tax)
as well as the impact or burden of the tax falls on
the same person (e.g. income tax, estate tax,
donor’s tax).
 CLASSIFICATION OF TAXES
b. Indirect – tax which is demanded from one person
in the expectation and intention that he shall
indemnity himself at the expense of another. These
are taxes wherein the incidence of or the liability for
the payment of the tax falls on one person but the
burden thereof can be shifted or passed on to
another person (e.g. VAT, percentage tax, excise tax
on exercisable articles). In the case of Maceda V.
Macaraig (197 SCRA 771), an indirect tax is defined as
one paid by a person who is not directly liable
therefor, and who may therefore shift or pass on the
tax to another person or entity, which ultimately
assumes the tax burden.
CLASSIFICATION OF TAXES
4. As to determination of amount:
a. Specific – tax of fixed amount imposed by
the head or number, or by some standard of
weight or measurement (e.g. excise tax on cigars
and liquors)

b. Ad valorem – tax of fixed proportion of the

value of the property with respect to which the tax
is assessed (e.g. vat, income tax, donor’s tax and
estate tax)
 CLASSIFICATION OF TAXES
5. As to purpose:
a. Primary, Fiscal, or Revenue Purpose – tax
imposed solely for the general purpose of the
government. i.e., to raise revenue for government
purposes (e.g. income tax, donor’s tax and estate tax).

b. Secondary, Regulatory, Special or Sumptuary

Purpose – 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).
CLASSIFICATION OF TAXES
6. As to graduation or rate:
a. Proportional – tax based on a fixed
percentages of amount of the property, receipts,
or other basis to be taxed (e.g. VAT, Table 1-5
above (Ad-valorem tax on distilled spirits)
b. Progressive or graduated – tax rate of
which increases as the tax base or bracket
increases (e.g. income tax on individual taxpayers)
c. Regressive – tax rate of which decreases
as the tax base or bracket increases
 CLASSIFICATION OF TAXES
7. As to taxing authority:

a. National – taxes imposed under the National

Internal Revenue Code (commonly known as the Tax
Code) collected by the national government through
the Bureau of Internal Revenue (BIR) and other
national government agencies. Other national taxes
other than those collected by the BIR as provided for
under special laws include but not limited to:

• Customs duties
• Taxes on narcotic drugs
CLASSIFICATION OF TAXES
• Special education fund taxes
• Energy taxes on aircraft, motorized watercraft,
and electric power consumption
• Sugar adjustment taxes
• Travel tax
• Private motor vehicle tax

b. Local – taxes imposed by local government units

ELEMENTS OF SOUND TAX SYSTEM
a. Fiscal Adequacy
The fundamental purpose of taxation is to
raise the revenue necessary to fund public services.
Consequently, it is necessary that the sources of
revenues must be adequate to meet government
expenditures and sustain the level of public services
demanded by citizens and policymakers.
b. Theoretical Justice or Equity
Taxpayer’s ability to pay must be taken into
consideration. The tax burden should be
proportionate to the taxpayer’s ability to pay.
 ELEMENTS OF SOUND TAX SYSTEM
c. Administrative Feasibility
Tax laws must be capable of effective and efficient
enforcement. A good tax system requires informed
stakeholders who understand how taxes are assessed,
collected and complied with. It should be clear who and what
is being taxed, and how tax burdens affect them. Therefore,
the tax system should be as simple as possible, and should
minimize gratuitous complexity. Complicated tax rules make
the tax system difficult for citizens to understand. Complexity
also makes it harder for governments to monitor and enforce
tax collections, and makes it easier for lawmakers to enact
(and conceal) targeted tax breaks benefitting particular
groups.
 LIMITATIONS ON THE STATE’S POWER
TO TAX
1. Inherent Limitations
These are restrictions arising from the very nature of the
power to tax itself. Inherent limitations are those limitations which
exist despite the absence of an express constitutional provision.
a. Purpose must be public in nature
This one is synonymous to “governmental purpose”. A tax
must always be imposed for a public purpose, otherwise, it will be
declared as invalid. No tax law may be enacted for the purpose of
raising revenue for private purposes. The purpose should affect
the inhabitants of the state or taxing district as a community and
not merely as individuals. It has been said that the best test of
rightful taxation is that the proceeds of the tax must be used:
1. For the support of the government; or
2. For some of the recognized objects or government; or
3. To promote the welfare of the community
 LIMITATIONS ON THE STATE’S POWER
TO TAX
Effect of incidental benefit to private interest
The purposes to be accomplished by taxation need
not be exclusively public. Although private individuals are
directly benefited, the tax would still be valid provided such
benefit is only incidental.

Legislative Prerogative
It is in the Congress which has the power to
determine whether the purpose is public or private. A
question on the validity of such tax measure may be raised
before the courts on the ground that it is not for public
purpose. However, once it is settled that it is for a public
purpose, it can no longer be a subject of inquiry.
LIMITATIONS ON THE STATE’S POWER
TO TAX
b. Prohibition against delegation of the taxing
power
What cannot be delegated is the legislative
“enactment/ imposition/ levying” of tax
measure. However, as regards to administrative
implementation of a tax law (i.e., assessment,
collection, valuation of property for tax
purposes), that can be delegated.
c. Territorial limitation (Refer to page /slide 43)
LIMITATIONS ON THE STATE’S POWER
TO TAX
2. Constitutional Limitations
a) Due process of law
There must be a valid law and the
measure should not be unconscionable and
unjust as to amount to confiscation of property.
Tax statute must not be arbitrary as to find no
support in the Constitution. The power to tax
should not be harsh, oppressive, or confiscatory.
This limitation is also known as the right to
notice and hearing.
LIMITATIONS ON THE STATE’S POWER
TO TAX
b. Equal protection of laws
All persons subject to legislation shall
be treated alike under similar circumstances and
conditions both in the privileges conferred and
liabilities imposed.

c. Rule of uniformity and equity in taxation

“The rule of taxation shall be uniform
and equitable.” It does not, however, require
LIMITATIONS ON THE STATE’S POWER
TO TAX
Absolute identity or equality under all
circumstances, but subject to reasonable
classification.

For classification to be valid, the ff. must concur:

• It must be based on substantial distinction
• It must apply both to present and future
conditions
 LIMITATIONS ON THE STATE’S POWER
TO TAX
• It must be germane to the purposes of the law
• It must apply equally to all members of the same
class

A progressive system of taxation means that tax laws

shall place emphasis on direct taxes rather than on
indirect taxes, with ability to pay as the principal
criterion.

Regressive tax rates refer to tax rates which decreases

as the tax base or bracket increases.
LIMITATIONS ON THE STATE’S POWER
TO TAX
d) Prohibition against imprisonment for
non-payment of “poll tax”
No person shall be imprisoned for
debt or non-payment of poll tax. (applicable
only to which is punishable by a surcharge)

Poll tax – a tax of fixed amount imposed on

residents within a specific territory regardless of
citizenship, business or profession.
 LIMITATIONS ON THE STATE’S POWER
TO TAX
e. Prohibition against impairment of obligation of
contracts.
f. Prohibition against infringement of religious
freedom
g. Prohibition against appropriation of proceeds of
taxation for the use, benefit, or support of any
church.
h. Prohibition against appropriation of proceeds of
taxation for the use, benefit, or support of any
church.
LIMITATIONS ON THE STATE’S POWER
TO TAX
h) Prohibition against taxation of religious,
charitable and educational entities (an
exemption from real property tax only-actual
use not to ownership)
i) Prohibition against taxation of non-stock,
non-profit educational institutions (covers
income, property, donor’s tax and customs
duties )
LIMITATIONS ON THE STATE’S POWER
TO TAX
J) OTHERS
1. Grant of tax exemption
2. Veto of appropriation, revenue, tariff
bills by the President
3. delegated authority of president to
impose tariff rates, import and export quotas,
tonnage and wharfage dues as delegated by
Congress through a law.
LIMITATIONS ON THE STATE’S POWER
TO TAX
4. Non-impairment of the Supreme Court (SC)
jurisdiction
5. REVENUE BILLS shall originate exclusively
from the House of Representatives
6. Infringement of press freedom
7. Revocation of tax exemption
“grant of franchise” may be revoked by
another law-as specifically provided in the
constitution that grant of any franchise is always
subject o amendment, alteration or repeal by
Congress when common good so requires
SITUS OF TAXATION (place of
taxation)
FACTORS TO CONSIDER IN DETERMINING THE SITUS
OF TAXATION:
a. Subject matter (person, property or
activity)
b. Nature of the tax
c. Citizenship
d. Residence of the taxpayer
e. Source of income
f. Place of excise, business or occupation
being taxed
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
1. TAX versus TOLL
A Toll is a sum of money for the use of
something, generally applied to the
consideration, which is paid of the use of a road,
bridge or the like of a public nature.
 TOLL
Demand of proprietorship
Paid for the use of another’s
property
Amount is based on cost of
construction or maintenance of
the public improvement used
May be imposed by the
government or private
individuals or entities
TAX
Demand of sovereignty
Paid for the support of
government
Amount is based on the
necessities of the State
My be imposed only by the State
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
2. TAX versus PENALTY
Penalty is a sanction imposed as a
punishment for violation of law or acts deem
injurious. The violation of tax may give right to
imposition of penalty.
PENALTY TAX
Designed to regulate conduct Primarily aimed at rising revenue
May be imposed by the May be imposed only by the
government or private individuals government
or entities
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
3. TAX versus SPECIAL ASSESSMENT
Special assessment is an enforced
proportional contribution from owners of lands for
special benefits resulting from public
improvements. In Republic v. Bacolod, 17SCRA632,
a special assessment is a levy on property which
derives some special benefit from the
improvement. Its purpose is to finance such
improvement, thus accruing only to the owners
thereof who, after all, pay the assessment
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
It is not a tax measure intended to raise
revenues for the government because the proceeds
thereof may be devoted to the specific purpose for
which the assessment was authorized.

Characteristics of Special Assessment:

a. Levied only on land
b. Not a personal liability of the person assessed
c. Based wholly on benefits (not necessary)
d. Exceptional both as to time and place
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
4. TAX versus REVENUE
Revenue refers to all the funds or income
derived by the government, whether from tax or
any other source.

REVENUE TAX
Amount collected Amount imposed
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
5. TAX versus SUBSIDY
Subsidy is a pecuniary aid directly granted
the government to an individual or private
commercial enterprise deemed beneficial to the
public. Subsidy is not a tax although tax may
have to be imposed to pay it.
TAX DISTINGUISED FROM OTHER TERMS
OR IMPOSTS
6. TAX versus PERMIT or LICENSE FEE
Permit or License is a charge imposed under
the police power for purposes of regulation.
 PERMIT OR LICENSE FEE TAX

For regulation For revenue

Exercise of police power Exercise of taxing power
Amount is limited to the Generally no limit
necessary expenses of regulation
Imposed on the right of reward of Imposed also on persons or
an officer for specific services property
Legal compensation or reward of An enforced contribution
an officer for specific services assesses by sovereign authority
to defray public expenses
Failure to pay license fee makes An enforced contribution
the act or business illegal assesses by sovereign authority
to defray public expenses
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
TEST IN DETERMINING IF THE IMPOSITION IS A
TAX ORLICENSE FEE:
* If the purpose is primarily or if revenue
is, at least, one of the real and substantial
purposes, then the exaction is a tax. If the
purpose is regulatory in nature, it is a license.
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
7. TAX versus DEBT
DEBT
Based on contract
May be paid in kind
Assignable/May be the subject of
set-off or compensation
A person cannot be imprisoned for Imprisonment is a sanction for
non-payment of debt (except
when it arises from a crime)
Draw interest when stipulated or
when of prescription default
TAX
Based on law
Generally payable in money
Cannot generally be
assignable/subject of set-off or
compensation
non-payment of tax (except poll
tax)
Does NOT draw interest except
only when delinquent
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
8. TAX versus CUSTOMS DUTIES
Customs duties are taxes imposed on
goods exported from or imported into a country.
 TAX DISTINGUISED FROM OTHER
TERMS OR IMPOSTS
9. TAX versus TARIFF
Tariff may be used in one of three (3) senses:
a. 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; or
b. The duties payable on goods imported or
exported; or
c. The system or principle of imposing duties on the
importation (or exploitation) of goods.
*The term tariff and customs duties are used interchangeably in the
Tariff and Customs Code.
DOUBLE TAXATION
In its strict sense, double taxation referred
to is direct duplicate taxation.
In its broad sense, double taxation is
referred to as indirect double taxation. It
extends to all cases in which there is a burden of
two or more impositions.
Direct double taxation means taxing twice
1. By the same taxing authority, jurisdiction
or taxing district
2. For the same purpose
 3. In the same year or taxing period
4. Same subject or object
5. Same kind/character of the tax

There is indirect double/duplicate taxation

(Broad sense- which is not prohibited by the
constitution) if any of the elements described
above is not present. Unlike the US Constitution,
our Constitution does not expressly prohibit
direct double taxation. However, it is something
not favored. Such taxation should, whenever
possible, be avoided and prevented.
 MEANS OF AVOIDING OR MINIMIZING
THE BURDEN OF TAXATION
1. Shifting
Shifting is the transfer of the burden of a
tax by the original payer or the one on whom
the tax was assessed or imposed to someone
else.
Transferred is not the payment of the tax
but the burden of the tax.
Only indirect taxes may be shifted; direct
taxes cannot be shifted.
Example:
* Manufacturer or producer may shift tax
assessed to wholesaler, who in turn shifts it to the
retailer, who also shifts it to the final purchaser or
consumer.

Taxes that may be shifted:

* VAT; Percentage taxes; excise taxes on
excisable articles
* Ad-valorem taxes that oil companies pay to
BIR upon removal of petroleum products from its
refinery.
2. Transformation
An escape from taxation where the
producer or manufacturer pays the tax and
endeavor to recoup himself by improving his
process of production thereby turning out his
units of products at a lower cost.

3. Evasion
Tax evasion is the use by the taxpayer of
illegal or fraudulent means to defeat or lessen
the payment of a tax.
It is also known as “tax dodging.”
 It connotes fraud through the use of
pretenses or forbidden devices to lessen or defeat
taxes.
Example:
* Deliberate failure to report a taxable income
or property; deliberate reduction

4. Tax Avoidance
Tax avoidance is the exploitation by the
taxpayer of legally permissible alternative tax rates
or methods of assessing taxable property or income
in order to avoid or reduce tax liability. It is politely
called “tax minimization” and is not punishable by
law.
5. Exemption
It is the grant of immunity to particular persons or
corporations or of a particular class from a tax which
persons and corporations generally within the same
state or taxing district are obliged to pay.
It is an immunity or privilege;
It is freedom from a financial charge or burden to
which others are subjected.
Exemption is allowed only if there is a clear
provision therefor.
It is not necessarily discriminatory as long as
there is a reasonable foundation or rational basis.
In the construction of tax statutes, exemptions
are not favored and are construed against the taxpayer.
Grounds for granting tax exemptions
a. May be based on contract. In such a case, the
public which is represented by the government
is supposed to receive a full equivalent
therefore, i.e. charter of a corporation.
b. May be based on some ground of public policy,
i.e., to encourage new industries or to foster
charitable institutions. Here, the government
need not receive any consideration in return for
the tax exemption.
c. May be based on grounds of reciprocity or to
lessen the rigors of international double or
multiple taxation.
Nature of power to grant tax exemption
a. National government – The power to grant tax
exemptions is an attribute of sovereignty for the
power to prescribe who or what persons or
property shall be taxed implies the power to
prescribe who or what persons or property shall
not be taxed. It is inherent in the exercise of the
power to tax that the sovereign state be free to
select the subjects of taxation and to grant
exemptions therefrom.
b. Local governments- Municipal corporations
are clothed with no inherent power to tax or to
grant tax exemptions.
But the moment the power to impose a
particular tax is granted, they also have the
power to grant exemption therefrom unless
forbidden by some provision of the Constitution
or the law.
The legislature may delegate its power to
grant tax exemptions to the same extent that it
may exercise the power to exempt.
KINDS OF EXEMPTION
As to basis:
• Constitutional –immunities from taxation which
originate from the constitution.
• Statutory – immunities from taxation which
emanates from legislation.

As to form:
1. Express- exemptions expressly granted by statute
2. Implied - When particular persons, property or
rights are deemed exempt as they fall outside
the scope of the taxing provision itself.
As to extent:
1. Total – connotes absolute immunity.
2. Partial – one where a collection of a part of the
tax is dispensed with.

PRINCIPLES GOVERNING TAX EXEMPTIONS

Exemptions from taxation are highly
disfavored in law.
He who claims an exemption must be able to
justify his claim by the clearest grant of organic or
statute law because tax exemptions are not
presumed.
 If ambiguous, there is no tax exemption.
He who claims exemption should convincingly
prove that he is exempted.
Therefore, tax exemption must be strictly
construed. No law granting any tax exemption shall
be passed without the concurrence of majority of
all members of Congress.

Amnesty
It is the general or intentional overlooking by
the state of its authority to impose penalties on
persons otherwise guilty of evasion or violation
of a revenue or tax law. It partakes of an absolute
forgiveness or waiver of the Government of its right to
collect. It is a way to give tax evaders, who wish to relent
and are willing to reform a chance to doso.

Amnesty involves immunity from all criminal, civil and

administrative liabilities from non-payment of taxes.

6. Capitalization
The reduction in the selling price of income
producing property by an amount equal to the capitalized
value of future taxes that may be paid by the purchaser.
7. Avoidance
Tax avoidance is the tax saving device
within the means sanctioned by law. This
method should be used by the taxpayer in good
faith and at arm’s length.
Tax evasion, on the other hand, is a
scheme used outside of those lawful means
which is not acceptable.

Elements of Tax Evasion

Tax evasion connotes the integration of three
factors:
a) The end to be achieved, i.e., the payment of
less than that known by the taxpayer to be
legally due, or the non-payment of tax when
it is shown that a tax is due;
b) An accompanying state of mind which is
described as being “evil,” in “bad faith,”
“willful,” or “deliberate and not accidental”;
and
c) A course of action or failure of action which is
unlawful.
SOURCES of Tax Laws
1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances/City or municipal tax codes
6. Tax treaties and international agreements
A tax treaty is one of the sources of our
law on taxation. The Philippine Government usually
enters into tax treaties in order to avoid or minimize
the effects of double taxation. A treaty has the force
and effect of law.
8. Special Laws
9. Decisions of the Supreme Court and the Court
of Tax Appeals.
10. Revenue rules and regulations and
administrative rulings and opinions
Effectivity of revenue rules and regulations
Except when the law otherwise
expressly provides, the aforesaid revenue tax
issuances shall not begin to be operative until
after due notice thereof may be fairly assumed.
 Purpose of rules and regulations
a. To properly enforce and execute the laws
b. To clarify and explain the law
c. To carry into effect the law’s general provisions
by providing details of administration and
procedure

Requisites for validity of rules and regulations

a. They must not be contrary to law and
constitution.
b. They must be published in the Official Gazette
or a newspaper of general circulation.
Nature of Internal Revenue Laws
Internal revenue laws are not political in
nature. Tax laws are civil and not penal in
nature, although there are penalties provided
for their violation.
The purpose of tax laws in imposing
penalties for delinquencies is to compel the
timely payment of taxes or to punish evasion or
neglect of duty in respect thereof.
Construction of Tax Laws
* Public purpose is always presumed.
* If the law is clear, apply the law in
accordance to its plain and simple tenor.
* A statute will not be construed as imposing
a tax unless it does so clearly, expressly and
ambiguously.
* In case of doubt, it is construed most
strongly against the Government, and liberally in
favor of the taxpayer.
 * Provisions of a taxing act are not to be
extended by implication.
* Tax laws operate prospectively unless the
purpose of the legislature to give retrospective
effect is expressly declared or may be implied
from the language used.
* Tax laws are special laws and prevail over
a general law.
RULE WHEN THERE IS DOUBT IN
STATUTE OR LAW
No person or property is subject to
taxation unless within the terms or plain import
of a taxing statute.
In every case of doubt, tax statutes are
construed strictly against the government and
liberally in favor of the taxpayer.
PROVISIONS GRANTING TAX
EXEMPTIONS
Such provisions are construed strictly
against the taxpayer claiming tax exemption.
When a tax is unquestionably imposed, a
claim of exemption from tax payments must be
clearly shown and based on language in the law
too plain to be mistaken.
 APPLICATION OF TAX LAWS
General Rule: Tax laws are prospective in operation
because the nature and amount of the tax could not
be foreseen and understood by the taxpayer at the
time the transactions which the law seeks to tax was
completed.
Exception: While it is not favored, a statute may
nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative intent.
But a tax law should not be given retroactive
application when it would be harsh and oppressive
which violate the taxpayer’s constitutional rights
regarding equity and due process.
Taxpayer’s Suit
-it is one brought or filed by a taxpayer
arguing the validity of a tax statute and its
enactment or the constitutionality of its alleged
public purpose.
-it is a case where the act complained of
directly involves the illegal disbursement of
public funds derived from taxation.
-taxpayers have locus standi to question
the validity of tax measures or illegal
expenditures of public money.
 -but the taxpayer is not relieved from the
obligation of paying a tax because of his belief
that it is being misappropriated by certain
officials, for otherwise, collection of taxes would
be hampered and this may result in the
paralyzation of important governmental
functions.
TRUE OR FALSE
1. The three fundamental powers of the state
may be exercise only by the government.
2. Taxation is a process or means by which the
sovereign, through its law making body raises
income to defray the expenses of the
government.
3. Eminent domain may be exercise even by
public service corporations and public
entities.
4. Police power regulates both liberty and
property.
5. Taxes are raised to cover the cost of
governance.
6. Toll is one of the taxes collected by the
government.
7. License fees are imposed in the exercise of
police power.
8. License fee is imposed to raise revenue.
9. Tax is generally unlimited because it is based
on the needs of the State.
10. The amount imposed in the exercise of
police power depends on whether the activity is
useful or not.