CHAPTER 2 (Part 1)

GENERAL PRINCIPLES AND

CONCEPTS OF TAXATION

Ninia C. Pauig-Lumauan, MBA, CPA

2nd Semester SY 2021-2022
Lyceum of Aparri

Income Taxation
 INHERENT POWERS OF THE STATE

• Inherent Powers are indispensable

powers necessary for the survival of the
state.
• They naturally exist as essential force in
order that a government can command,
maintain peace and order and survive,
irrespective of any Constitutional
provision.

INCOME TAXATION
 INHERENT POWERS OF THE STATE

INHERENT POWERS OF SOVEREIGN STATE

POLICE POWER TAXATION POWER

EMINENT
The power to enforce
DOMAIN POWER contributions to
The power to
protect citizens and The power to take support the
provide for safety private property (with government and other
and welfare of just compensation) for inherent powers of the
society. public use. state.

INCOME TAXATION
 NATURE OF POLICE POWER
• Police Power refers to the inherent power of
the sovereign state to legislate for the
protection of health, welfare and morals of the
community.
• It is exercised usually to guard against
excesses or abuses of individual liberty.
• This power is restricted by the “due process
clause” of the Constitution which provides that
no person may be deprived of “life, liberty, or
property without due process of law.”
INCOME TAXATION
 NATURE OF POLICE POWER

• 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.
• Examples of police power are
preservation of natural resources,
segregation of lepers from the public,
imprisonment of convicted criminals and
regulation of various professions.
INCOME TAXATION
 TAXATION DISTINGUISHED FROM POLICE POWER

• Taxation is for purposes of raising revenues,

while police power is for the purposes of
regulation. (A collection of license fee for a
permit to drive in a public road is an exercise
of police power.) In taxation, there is no limit
on the mount of the tax that maybe
imposed, while in police power, the license
fee must be as a general rule, just enough to
carry out regulation.
INCOME TAXATION
 NATURE OF EMINENT DOMAIN
• Eminent Domain refers to the power of
the sovereign state to take private
property for public purposes.
• It is founded upon the idea that the
common necessities and interests of the
community transcend individual rights in
property.
• Consequently, the State may expropriate
private property when it is necessary in
the interest of national welfare.
INCOME TAXATION
 NATURE OF EMINENT DOMAIN

• Since eminent domain is inherent in

sovereignty, pertinent provisions in the
Constitution are not grants of the power,
but rather limitations upon its exercise.
The Constitution limits the exercise of the
power by providing that property may not
be taken without just compensation.
• “Just compensation” means paying the
owner the full monetary equivalent of the
property taken for public use.
INCOME TAXATION
TAXATION DISTINGUISHED FROM EMINENT
DOMAIN
• Taxation reaches all the persons,
properties, etc., covered by the tax, while
eminent domain reaches only a particular
owner of property. (When the government
takes the land of a citizen and paying him a
fair price for it because the government will
construct a road through it, that is the
exercise of the power of domain.)

INCOME TAXATION
 TAXATION DISTINGUISHED FROM EMINENT
DOMAIN
• There is payment of money by a taxpayer in
taxation, while there is taking of property by
the government in eminent domain. In
taxation, the taxpayer is presumed to
receive a benefit from the government,
while in eminent domain, the property
owner visibly receives a benefit by way of
just compensation (theoretically, a fair price
for the property).
INCOME TAXATION
 NATURE OF TAXATION POWER
• The power to tax is an attribute of
sovereignty that is exercised by the
government for the betterment of the
people within its jurisdiction whose interest
should be served, enhanced and protected.
• The nature of tax power includes the
following:
1. Inherent power of sovereignty;
2. Essentially a legislative function;
INCOME TAXATION
 NATURE OF TAXATION POWER

• The nature of tax power includes the

following:
3. For public purposes;
4. Territorial in operation;
5. Tax exemption of government;
6. The strongest among the inherent
powers of the government;
7. Subject to Constitutional and inherent
limitations;
INCOME TAXATION
 INHERENT POWER OF SOVEREIGNTY

• Taxation is as old as government itself.

Its existence commences concurrently
with the four elements of a state –
people, territory, sovereignty and
government.
• From the moment a state is born, it
automatically possesses the power to
collect taxes from its inhabitants.

INCOME TAXATION
 INHERENT POWER OF SOVEREIGNTY
• The government having sovereignty can
enforce contributions upon its citizens
even without specific provision in the
Constitution authorizing it. It is so
because the State has the supreme
power to command and enforce
obedience to its will from the people
within its jurisdiction.

INCOME TAXATION
 INHERENT POWER OF SOVEREIGNTY
• Any provision in the Constitution
regarding taxation does not create rights
for the sovereignty to have the power to
tax but it merely constitutes limitations
upon the supremacy of tax power.
• Only the national government exercises
the inherent power of taxation of the
state. Local government units do not
possess the inherent power.
INCOME TAXATION
 NATURE OF TAXATION POWER
• In order for the local government units
or political subdivisions to have the
power to tax, there must be:
An expressed constitutional provision
granting them the power to tax;

INCOME TAXATION
 NATURE OF TAXATION POWER

Valid delegation of tax power through

the statute from the national legislature
granting local government units or
political subdivisions to exercise such
power (i.e. Local Government Code of
the Philippines), in the absence of a
Constitutional provision.

INCOME TAXATION
 ESSENTIALLY A LEGISLATIVE FUNCTION
• The law making body of the government
and its political subdivisions exercise the
power of taxation.
• The powers to enact laws and
ordinances, and to impose and collect
taxes are given to Congress.
• Non delegation of Legislative Power to
Tax. In its strict sense, the power to
make tax laws cannot be delegated to
other branches of government.
INCOME TAXATION
 ESSENTIALLY A LEGISLATIVE FUNCTION

• Since peculiarly and exclusive legislative

in nature, the power to make tax laws
cannot be exercised by the executive or
judicial branch of the government.
• Therefore, when the power to tax is
delegated to the local government units
(LGU), only the legislative branch of the
LGU can exercise the power.

INCOME TAXATION
 ESSENTIALLY A LEGISLATIVE FUNCTION

• Also, if delegated to the President, it is

limited to administrative discretion subject
to valid standards.
• Examples of taxation power that cannot be
delegated are the following:
a. Power to select the coverage, object or
property to be taxed;
b. Determining the nature and purposes for
which taxes shall be collected;
INCOME TAXATION
 ESSENTIALLY A LEGISLATIVE FUNCTION

c. Determining the place or situs of tax

imposition;
d. Fixing the amount to be imposed and
tax rates;
e. Granting exemptions or condonations;
f. Setting down the rules of taxation in
general.

INCOME TAXATION
 ESSENTIALLY A LEGISLATIVE FUNCTION

• What may not be delegated is the power

to make tax laws to a non-legislative
body. If the powers delegated are
ministerial and advisory (such as power
to value property, assess and collect
taxes), they shall be allowed since they
are not legislative but only
administrative in nature.

INCOME TAXATION
 ESSENTIALLY A LEGISLATIVE FUNCTION
• Therefore, whenever delegation of
legislative power is the issue, it is
important to know the distinction
between tax delegation and tax
administration. This is so because if what
is delegated is tax delegation, the
delegation is invalid; but if what is
involved is only tax administration, the
non-delegability rule is not violated.
INCOME TAXATION
 FOR PUBLIC PURPOSES
• The power of taxation flows forth from the
legitimate objective of supporting the services
of the government.
• Public taxes are public money, they must be
used to finance recognized public needs. Taxes
are used to finance constructions and
maintenance of roads, health care, education,
security, promotion of science, commerce,
industry and others for the welfare of the
general public.
INCOME TAXATION
 FOR PUBLIC PURPOSES

• The Supreme Court also held that the

legislature has no power to appropriate
public revenues for anything but for public
purpose-general welfare of the nation.
• Thus, in order to consider appropriation of
taxes valid, it must be for the common good
of the people. No individual or private
person shall primarily be enriched or
benefited by the public funds.

INCOME TAXATION
 FOR PUBLIC PURPOSES
• It has been held that tax has been utilized
for public purpose if the welfare of the
nation or the greater portion of its
population has benefited with its use.
TERRITORIAL IN OPERATION
• The taxing authority must observe “tax
situs” because the country’s tax laws are
effective and enforceable only within its
territorial limits.
INCOME TAXATION
 TERRITORIAL IN OPERATION

• As a rule, the power to tax can only be

exercised within the territorial
jurisdiction of a taxing authority, except
when there exists a “privity of
relationship” between the taxing State
and the object of tax based on the tax
principle of reciprocal duties.

INCOME TAXATION
 TERRITORIAL IN OPERATION
• This relationship implies contractual support
or duty of care afforded by the Government
to its citizen residing outside the country.
• Where privity of relationship exists, the state
can still exercise its taxing powers over its
citizen outside its territory. It is because the
fundamental basis of the right to tax is the
capacity of the government to provide
benefits and protection to the object of the
tax.
INCOME TAXATION
 TERRITORIAL IN OPERATION
• The State cannot tax property wholly and
exclusively within the jurisdiction of another
state since it does not afford protection on
property beyond its territorial boundaries
for which a tax is supposed to compensate.
• Taxation is bound to observe International
Comity. This is the courteous recognition,
friendly agreement, interaction and respect
accorded by one nation to the laws and
institutions of another.
INCOME TAXATION
 TERRITORIAL IN OPERATION

• As a matter of international courtesy,

property of one foreign state may not be
taxed by another because of the
principle of sovereign equality among
states under the international law.
• Since one State cannot exercise its
sovereign dominion over another, a
nation cannot impose taxes to the
properties of other nations.
INCOME TAXATION
 TERRITORIAL IN OPERATION

• An example of international comity

limitation on the power of taxation is the
tax exemption of properties used by
diplomats or head of states in the
exercise of sovereign powers and
diplomatic functions.

INCOME TAXATION
 TAX EXEMPTION OF THE
GOVERNMENT
• Exemption from taxation is a grant of tax
immunity to a particular class of persons
or corporations. The State’s immunity
from taxation is inherent in its power to
impose tax.
• The state cannot be taxed without its
consent; otherwise, such is derogation of
its sovereignty.
INCOME TAXATION
 TAX EXEMPTION OF THE GOVERNMENT

• Tax exemption applies only to

government entities through which the
government immediately and directly
exercises its governmental functions like
the Armed Forces of the Philippines and
the Philippine National Police.

INCOME TAXATION
 TAX EXEMPTION OF THE GOVERNMENT

• If, however, the government entities are

performing proprietary functions such as
Philippine National Railways and
National Power Corporation, they are
generally subject to tax in the absence of
tax exemption provisions in their
charters or the law creating them.

INCOME TAXATION
TAX EXEMPTION OF THE GOVERNMENT

• Agencies performing governmental

functions are exempt from tax unless
expressly taxed, and those performing
proprietary functions are subject to tax
unless expressly exempted.

INCOME TAXATION
 THE STRONGEST AMONG THE INHERENT
POWERS
• Taxation power is the strongest of all
the inherent powers of the government
because without money, the
government can neither survive nor
dispense any of its other powers and
functions effectively.

INCOME TAXATION
 SIMILARITIES AMONG TAXATION,
EMINENT DOMAIN AND POLICE
POWERS
• The similarities among the three inherent
powers of the State are as follows:
1. They are inherent in sovereignty (they can
be exercised even without being expressly
granted in the Constitution).
2. They are all necessary attributes of
sovereignty because there can be no
effective government without them.
INCOME TAXATION
 SIMILARITIES AMONG TAXATION, EMINENT DOMAIN AND
POLICE POWERS

3. They constitute the three (3) ways by

which the state interferes with private
rights and property.
4. They are all legislative in nature and
character.
5. They presuppose an equivalent
compensation; and
INCOME TAXATION
 SIMILARITIES AMONG TAXATION,
EMINENT DOMAIN AND POLICE
POWERS

6. The provisions in the Constitution are

just limitations on the exercise of
these powers.

INCOME TAXATION
 DISTINCTION OF TAXATION, POLICE
POWER AND EMINENT DOMAIN
TAXATION POLICE POWER EMINENT
DOMAIN
1. As to Power to Power to make Power to take
concept enforce and implement private property
contribution to laws for the for public use
raise general welfare. with just
government compensation.
funds.
2. As to Plenary, Broader in Merely a power
scope comprehensive application. to take private
and supreme. General power to property for
make and public use.
implement laws.

INCOME TAXATION
DISTINCTION OF TAXATION, POLICE
POWER AND EMINENT DOMAIN
TAXATION POLICE POWER EMINENT DOMAIN

3. As to Exercised only Exercised onlyMay be

authority by government by government granted to
or its political or its political
public service
subdivisions. subdivisions. or public
utility
companies.
4. As to Money is taken Property is takes Private
purpose to support the or destroyed to property is
government. promote taken for
general welfare. public use.

INCOME TAXATION
DISTINCTION OF TAXATION, POLICE POWER AND EMINENT
DOMAIN
TAXATION POLICE POWER EMINENT DOMAIN

5. As to The power to Can be expressly Can be expressly

necessity of make tax laws delegated to the delegated to the
delegation cannot be local government local
delegated. units by the law government
making body. units by the law
making body.

6. As to Operates on a Operates on a Operates on the

person community or community or a particular
affected a class of class of private property
individuals. individuals. of an individual.

INCOME TAXATION
 DISTINCTION OF TAXATION, POLICE
POWER AND EMINENT DOMAIN
TAXATION POLICE EMINENT
POWER DOMAIN
7. As to Continuous Healthy Market value
benefits protection and economic of the
organized standard of property
society. society. expropriated.
8. As to Generally no Cost of No imposition
amount of limit regulation,
imposition license and
other
necessary
expenses

INCOME TAXATION
 DISTINCTION OF TAXATION, POLICE POWER
AND EMINENT DOMAIN
TAXATION POLICE POWER EMINENT
DOMAIN
9. As to Inseparable for Protection, Common
importance the existence of safety and necessities and
a nation-it welfare of interest of the
supports police society. community
power and transcend
eminent individual
domain. rights in
property.

INCOME TAXATION
 DISTINCTION OF TAXATION, POLICE POWER
AND EMINENT DOMAIN
TAXATION POLICE POWER EMINENT
DOMAIN
10. As to Subject to Relatively free Superior to and
relationship Constitutional from may override
to and inherent Constitutional Constitutional
Constitution limitations. limitations. impairment
provision
Inferior to non- Superior to because the
impairment non- welfare of the
clause. impairment State is
clause. superior to any
private
contract.

INCOME TAXATION
 DISTINCTION OF TAXATION, POLICE POWER
AND EMINENT DOMAIN
TAXATION POLICE POWER EMINENT
DOMAIN
11. As to Constraints by Limited by the Bounded by
limitation Constitutional demand for public purpose
and inherent public interest and just
limitations. and due compensation,
process.

INCOME TAXATION
 IMPORTANCE OF TAXATION

• Taxation power exists inseparably with

the State. It is essential for the existence
of the government.
• Taxation is very important for the
continuous existence of a nation. It is
the primary source of government
revenue that is used to effectively and
permanently perform government
functions.
INCOME TAXATION
 IMPORTANCE OF TAXATION
• Taxation is exercised to raise revenue for
the very existence of the government to
serve the people for whose benefit taxes
are collected. These reasons make the
payment of taxes compulsory.
• Without taxation, the other inherent
powers (police and eminent domain)
would be paralyzed.

INCOME TAXATION
 IMPORTANCE OF TAXATION

• For this reason, even the police power of

the government may be exercised
through taxation power.
• Without revenue, there can be no
continuing government. Without
government, there can be no civilization.

INCOME TAXATION
 BASIS OF TAXATION
• Taxation is basically established based on the
principles of
a. necessity, and
b. reciprocal duties for protection and support
between the State and inhabitants.
• Based on the Principle of Necessity. The
government has a right to compel all its
citizens, residents and property within its
territory to contribute money.
INCOME TAXATION
 BASIS OF TAXATION
• It is because the government cannot exist
without any means to pay its expenses –
a necessary burden to preserve the
State’s sovereignty.
• Taxation is the “lifeblood” or the “bread
and butter” of the government and every
citizen must pay his taxes.
• Taxes, being the lifeblood of the
government, their prompt and certain
availability is of the essence.
INCOME TAXATION
 BASIS OF TAXATION
• Based on Reciprocal Duties. Under the
“benefits-received principle” the government
collects taxes from the subjects of taxation in
order that it may be able to perform its
functions and provide services to them.
• The government’s right to tax income
emanates from its being a silent partner in
the production of income through means of
providing protection, proper business
climate, and peace and order to the
taxpayers in the making of earnings.
INCOME TAXATION
 BASIS OF TAXATION

• The citizen, on the other hand, pays taxes

to support the government in order that
he may continuously be sustained with
security and benefits of an organized
society.
• The symbiotic relationship and
partnership between the taxing authority
and the subject of taxation is enough to
justify the imposition of tax power.
INCOME TAXATION
 BASIS OF TAXATION
• The payment of taxes may therefore
mean helping the government to finance
its legitimate objectives.
• The government revenue is used to serve
the people for whose benefit taxes are
collected. This is an indispensable
partnership between the people and the
government.

INCOME TAXATION