Chapter 1 - Taxation in General

Chapter 1: Taxation in General
TAX 1
CHAPTER 1: TAXATION IN GENERAL
TAXES: 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.
TO TAX: to impose a financial charge or other levy upon a tax payer by a state or the functional equivalent
of a state.
Amount of tax collected by the taxing authority from the public is always greater than the amount to be
expended for public purpose.
COMPLIANCE COST: resulting difference; which includes labor cost and other expenses incurred in
complying with tax laws and rules.
HYPOTHECATION: levy of a tax for a specified end (e.g. imposing a tax on vehicles to be used on road
construction rehabilitation and maintenance)
TAXATION DEFINED
Governments perspective
Power by which the sovereign,
through its law-making body,
raises revenue to defray the
necessary
expenses
of
the
government.
A way of apportioning the costs
of government among those who
in some measure are privileged
to enjoy its benefits and must
bear its burdens.
Taxpayers perspective
Compulsory transfer of money (or
goods) from private individuals,
institutions or groups to the
government. It may be levied
upon wealth or income, or in the
form of a surcharge on prices.
Economists perspective
Non-penal,
yet
compulsory
transfer of resources from the
private to the public sector levied
on a basis of predetermined
criteria and without reference to
specific benefit received.
Destructive
power
which
interferes with the personal and
property rights of the people and
takes from them a portion of their
property for the support of the
government.
Some Taxation related terms

Tax base
Assessment or determination of tax liability is
based or the wealth within a jurisdiction that is
liable to taxation.
Tax rate
Describes burden ration, usually expressed as a
percentage, at which a person, property, privileges
or occupation is taxed.
Ex. Taxable income is the tax base for income tax

and assessed value is the tax base for property
taxes.
Important distinction when considering tax rates is

to distinguish between marginal rate and effective
average rate.
Marginal tax rate
Average rate
Percent levied on each Rate a taxpayer would
additional
peso
of be taxed at, if taxing
taxable income.
was done at a constant
rate,
instead
of
Marginal tax rate rises progressively.
as income increases.
Impact of tax
Person from whom government collects money in
first instance. Refers to liability for the tax.
Incidence of tax
Person who finally bears the burden of a tax.
1 | P a g e ( Ya b u t , D i a m i t a s , a n d D e s t a j o )

Ex. Amount of sales tax paid may be shifted or passed on by the seller to the buyer. What is transferred is
not the liability for the tax, but the tax burden. A seller who is directly and legally liable for payment of an
indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the
burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not
directly and legally liable for the payment, ultimately bears the burden of the tax.
Tax base erosion

When traditional taxable components of the tax
based are no longer representative of the economy
at large, this results to demographic changes,
relative changes in production, stagnation or
inflationary effects.
Tax pyramiding
When sales taxes are applied to both inputs and
outputs, thus shifting the tax burden to the ultimate
consumer. In this situation, some or all stages of
production are taxed, with the accumulation borne
by the consumer at the point of sale.
May also result from use of aggressive tax

strategies by taxpayers (eg. Less than appropriate
income is shown and more than deduction is
claimed).
Ex. When a product is taxed at the pre-retail stage

and thus, tax is imposed on successive pairs of
buyers and sellers rather than only at the final sale
of the product to the ultimate consumer.
Violates the uniformity and neutrality principles of
taxation.
Neutral tax
Tax that does not cause individuals or firms to shift
their economic choices, such as to choose among
different goods, inputs, locations etc.
Tax structure that does not change the incentives in
the market.
Ex. Poll tax (e.g. Community Tax Certificate).
Statutory taxpayer
Person on whom the tax is
imposed by law and who paid the
same even if he shifts the burden
to another.
Revenue Neutral
Taxing procedure that allows the government to still
receive the same amount of money despite
changes in tax laws. Government may lower taxes
for one group and raise for another. This allows
revenue to remain unchanged.
Extraterritorial taxation
Tax
is
imposed
property/subject
outside
State.
on
the
Tax exporting
Shifting of a tax burden to nonresidents of a given jurisdiction.
Exporting
can
be
achieved
indirectly by taxing imports or
through
intergovernmental
transfer mechanisms.
RELEVANT THEORIES/BASES OF TAXATION (NL-BS-NS)

1. Necessity theory and lifeblood doctrine: the existence of the government is a necessity.
It has the right to compel all citizens and property within its limits to pay taxes. Taxes
constitute the lifeblood of the nation and are greatly needed to support the
government and its widely expanding services to the people.
a. Should be collected without unnecessary hindrance.
b. Claims for refund or tax credit should be exercised within the time fixed by law because the
functions of an administrative body enforced to collect taxes should not be unduly delayed
or hampered by incidental matters.

c. Fraudulent means employed to evade payment of taxes should be stopped at the earliest
stage.
d. Neglect or omission of government officials entrusted with the collection of taxes should not
be allowed to bring harm in the same manner as private persons may be made to suffer
individually on account of his own negligence.
PRESUMPTION: Private persons take good care of their personal affairs.
EXCEPTION: government officials with respect to matters of public concern; exception to the
principle of estoppel.
e. Primary purpose for legislature in adopting measures is to generate funds for the State to
finance the needs of citizenry and to advance common weal.
f. Granting exemptions are construed as strictissimi juris1 against the taxpayer and liberally in
favor of taxing authority.
GR: Taxation
EXCEPTION: exemption from tax
EXCEPTION TO EXCEPTION: if grantee is a political subdivision or instrumentality, rigid rule of
construction does not apply because practical effect of exemption is to reduce the amount of
money that has to be handled by the government in the course of its operation.
2. Benefits-protection theory/theory of reciprocity/symbiotic relationshipcitizen pays
from his property the portion demanded in order that he may be secured in the
enjoyment of the benefits of organized society. A person cannot object to or resist the
payment of taxes solely because no personal benefit to him can be pointed out arising
from the tax.
Despite natural reluctance to surrender part of ones income to taxing authorities, every person who is
able must contribute his share in the burden of running the government. Government is expected to
respond in the form of tangible and intangible benefits.
BPI-FSB vs. CA
HELD: If State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it
apply the same standard against itself in refunding excess payments. When it is undisputed that a
taxpayer is entitled to a refund, the State should not invoke technicalities to keep money not belonging to
it. No one, not even the State, should enrich oneself at the expense of another.
It is a requirement that it be exercised in accordance of the prescribed procedure. If not, the taxpayer has
a right to complain.
3. Taxation as government violation of the non-aggression principle and the social
contract theory.
Government violation of non-aggression principletaxation wrongfully presumes that government has a
higher claim on property than the owner. Taxation is theft and tax resistance is therefore legitimate.
Social contract theoryin an organized society, members agree to define and limit the rights and duties
of each. Principal attribute of sovereignty is the exercise of taxing power which derives its source from the
existence of the state whose social contract with its citizens obliges it to promote public interest and
common good.
Purposes and effect of taxation(Six [6] Rs)
1. Raise revenues.
1 The most strict right or law.


2.
3.
4.
5.
6.
Regulatory purpose.
Redistribution of wealth/reduction of social inequality.
Repricing.
Resuscitate economy.
Representation.
RAISE REVENUESPrimary purpose is REVENUE: to generate funds or property for the State to finance the
needs of the citizens and to advance the common weal.
Taxation is no longer a measure merely to raise revenue; taxes may be levied with a regulatory purpose
as an exercise of police power of the State.
REGULATORY PURPOSE police power may sometimes use the taxing power as an implement for the
attainment of a legitimate police objective.
Powell vs. Pennsylvania
HELD: If massage parlors are found to be mere fronts for prostitution, they may be subjected to such
onerous taxes as to practically force them to stop operating.
PAL vs. Edu
HELD: Law requiring owners of vehicles to pay for their registration is to raise funds for construction and
maintenance of highways. Fees may be regarded as taxes even though they also sere as an instrument of
regulation. If the purpose is revenue, or if revenue is one of the real and substantial purposes, exaction is
called a TAX.
SUMPTUARY PURPOSE OF TAXATION: non-revenue or regulatory purpose of taxation.
REDISTRIBUTION OF WEALTH/REDUCITON OF SOCIAL INEQUALITYthere is an effort to apportion the costs
of government among the people which in a way thwarts the undue concentration of wealth in the hands
of a few individuals.
PROGESSIVITY: those who are able to pay more should shoulder the bigger portion of tax burden.
Taxation is now being used as an implement for exercise of the power of eminent domain.
Full reimbursement (peso for peso basis) is not necessary when the State uses taxation as an implement
of eminent domain.
Ex. Tax deduction does not offer full reimbursement of the senior citizen discount because it only shaves
money off the taxable income resulting to a partial recovery unlike a tax credit which reduces the tax to
be paid by the amount of discount. As such, it does not meet the definition of just compensation.
However, amendment to the law granting senior citizen discount providing for tax deduction instead
credit is not unconstitutional since the State can impose upon private establishments the burden of partly
subsidizing a government program.
REPRICING taxes may be levied to address externalities.
EXTERNALITIES: cost or benefit that is not transmitted through prices and is incurred by a party who was
not involved as either a buyer or seller of the goods or services causing the cost or benefit.
External cost
Negative externality/cost of an externality
External benefit
Positive/benefit of an externality
Ex: Imposition of Pigovian Tax

PIGOVIAN TAX: tax levied on a market activity to correct the market outcome, if there are negative
externalities associated with market activity.
If there are negative externalities, social cost is not covered by the private cost of the activity which may
lead to over-consumption of the product. To correct this, Pigouvian tax may be imposed (effective means
to reduce incidence of bad behavior is to tax it).

If there are positive externalities (public benefits from a market activity), those who receive the benefit do
not pay for it and the market may under-supply the product. To correct this, Pigouvian subsidy may be
given.
Illustration:
A tax may be imposed on cigarettesvs. negative externality of second-hand smoke.
Pollution taxfactories emitting smoke.
Taxes may be used to modify consumption or employment by making some classes of transaction
attractive or to protect local industries or consumers.
Ex: Levying of special duties on importation
1. Dumping duty;
2. Countervailing duty;
3. Marking duty; and
4. Discriminatory or retaliatory duty.
RESUSCITATE ECONOMY tax may be imposed as a first aid measure to resuscitate an economy in
distress.
Ex: PD 1956: AD VALOREM TAX on manufactured oils and other fuel oilsfor the purpose of minimizing
frequent price changes by exchange rate adjustments and/or increase in world market prices of crude oil
and imported petroleum products.
Tax exemptions may be granted to entice investments. Reduced tax collection redounds by enticing more
business investments and employment opportunities.
FISCAL POLICY: taxes used to influence macroeconomic performance.
REPRESENTATIONno taxation without representation; no taxes should be imposed on the people but
with their consent, personally or by representatives.
CONSTI: all bills for raising revenue shall originate in House of Representative on theory that they are
more sensitive to local needs and problems.
Characteristics and requisites of taxes
Characteristics
1. An enforced contribution.
2. Exacted pursuant to legislative authority.
3. Contribution being in form of money.
4. Imposed, levied and collected for the purpose of raising revenue.
5. To be used for public or governmental purposes.
6. Levied by authority which has jurisdiction over the person, property, transaction, rights and
privileges.
Requisites (JAPUN)
1. Person or property taxed should be within jurisdiction of taxing authority.
2. Assessment and collection of certain kinds of taxes guarantee against injustice to individuals,
especially by providing notice and opportunity for hearing.
3. For public purpose.
4. Rule of taxation shall be uniform and equitable.
5. Tax must not impinge on the inherent and constitutional limitation on power of taxation.
An enforced contributiondoes not depend on the will or acquiescence of the taxpayer.

Exacted pursuant to legislative authorityGR: power is exercised only by the legislative department
except in case of valid delegations of power or when there is constitutional grant.
Contribution in the form of moneythere is no law prohibiting payment in some other form of property.
However, State could determine in what manner taxes should be discharged.
1. Notes of legal tender do not apply to involuntary contributions exacted by a State buy only to
debts (obligations for payment of money founded on contracts, whether express or implied).
2. Statute requiring payment to be collected in gold and silver coins was sustained on 2 grounds:
a. Right of each state to collect its taxes in such material as it might deem expedient. Mode in
which it should be exercised, were all equally within the discretion of its legislature, except
as restrained by its own constitution; and
b. Legal tender act had no reference to taxes imposed by State authority, but only to debts
arising out of simple contracts or contracts of specialty, which include judgments or
recognizances.
Imposed, levied and collected for purpose of raising revenuetaxes may have regulatory or economic
purpose other than to generate funds.
To be used for public or governmental purposeit cannot be used for private purposes.
Levied by authority which has jurisdiction over the person, property, transaction, rights and privileges
jurisdictional limitation has 2 questions:
1. Is there a sufficient relationship between the State exercising tax power and the object of the
exercise of that power?
2. Is the degree of contact sufficient to justify the states imposition of a particular obligation?
Nature of taxing power

1. It is inherent and legislative.
Inherent
GR: power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse
is to be found only in the responsibility of this
legislature which imposes the tax on the
constituency who are to pay it.
Rule of taxation shall be uniform and equitable and
Congress shall evolve a progressive system of
taxation.
The following are manifestation of this inherent
nature
1. It can be imposed even in the absence of a
constitutional grant
2. Injunction is not generally available to enjoin
collection of taxes
3. Taxes cannot be set-off or compensated
4. It is an unlimited or plenary power
5. It is inherent in the power to tax that State
be free to select the subjects of taxation
Legislative
Legislature lies the discretion to determine the
nature, object, extent, coverage and situs of
taxation. It has the authority to prescribe a certain
tax at a specific rate for a particular public purpose.
Scopes of legislative power:
1. Purposes provided they are lawful and public
2. Person, property, privileges or occupation to
be taxed
3. Amount or rate
4. Kind of tax
5. Apportionment of tax (whether tax shall be
of general application or limited to a
particular locality, partly general and partly
local)
6. Situs
7. Mode or method of collection
Power to tax is primarily vested in Congress;
however it may be exercised by local legislative
bodies pursuant to direct authority conferred by
SEC 5, ART 10 CONSTI.
Taxing power of LGUs is not inherent because they

are not sovereign units. LGU is merely an agency of
the State for carrying out the objects of the
government. Thus, constitutional or legislative
grant is necessary before it can exercise taxing
power.
2.
3.
4.
5.
6.
7.
TAX
FARMING:
principle
of
assigning
the
responsibility for tax revenue collecting to private
citizens or grounds was once used by other
countries.
Power is not granted in the Constitution.

It is not a contract between the State and its citizens.
It is not political in nature.
Taxes are personal.
It is unlimited in range.
It is imprescriptible.
Power is not granted in the Constitutionit merely constitutes limitations upon a power which would be
impractical without it
SEC 28(3), ART 6 CONSTI. Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, nonprofit cemeteries and all lands, buildings and improvements, actually, directly and
exclusively used for religion, charitable or educational purposes shall be exempt from taxation.
It is not a contract between the State and its citizensit operates in invitum, which means that it is in no
way depend on the will or contractual assent, expressed or implied, of the person taxed.
Taxes are obligations arising from law and not from contracts because of lack of consent or choice.
It is not political in nature
Co Kim Chan vs. Valdes Tan Keh
HELD: Internal revenue laws were continued in force during the period of enemy occupation and in effect
were enforced by the occupation government. As a matter of fact, income tax returns were filed during
that period and income tax payment were effected and considered valid and legal. Such tax laws are
deemed to be the laws of occupied territory and not of the occupying enemy.
Tax are personalliability cannot be shifted. Rights are transmissible but obligations are not.
Thus, heirs cannot be held liable beyond what they inherited for delinquent taxes of a decedent.
Corporations tax delinquency cannot be enforced against its stockholders or related entities. A
corporation is vested by law with a separate and distinct personality. However, stockholders may be held
liable for the unpaid taxes of a dissolved corporation if it appears that corporate assets have been passed
into their hands. Same is true if stockholders have unpaid subscriptions pursuant of the trust fund
doctrine.
In case of indirect taxes, shifting of the burden to tax from the seller to the buyer is not incompatible with
the principle that taxes are personal liabilities. When seller passes on the tax to his buyer, he is only
shifting the tax burden, but not the liability, to the buyer as part of the cost of the goods sold or services
rendered.
It is unlimited in rangeit is not subject to any restrictions except in the discretion of the authority which
exercises it. Security against its abuse is to be founded only in the responsibility of the legislature which
imposes the tax on the constituency who pay it.
McCulloch vs. Maryland
HELD: Power to tax involves the power to destroy.
Panhandle vs. Mississippi
HELD: Debunked the ruling in McCullock vs. Maryland where it is held that "power to tax is not the power
to destroy while this court sits. The power to tax may include the power to destroy if it is used as an
implement of the police power in discouraging and in effect ultimately prohibiting certain things or

enterprises inimical to public welfare. But where the power to tax is used solely for the purpose of raising
revenues, modern view is that it cannot be allowed to confiscate or destroy.
It is imprescriptiblewithout exception, taxes being the lifeblood of the government. However, statutes
may provide for prescriptive periods for the collection of particular kinds of taxes when government has
not by express statutory provision, provided a limitation upon its right to assess unpaid taxes, such right
is imprescriptible.
HELD: The government is not bound by any statute of limitations, unless Congress has clearly manifested
its intention that it should be so bound.
Aspects of taxation
1. Aspects (LAP)
a. Levy2
b. Assessment and Collection3
c. Payment and/or exercise of remedies4
2. Grant of exemption is an exercise of power of taxationpower to tax includes power to
exempt
Sound Tax System (ECCEPSD)
1. Canons of taxation.
a. Equity.
b. Certainty.
c. Convenience.
d. Economy.
e. Productivity.
f. Elasticity.
g. Simplicity.
h. Diversity.
Equityevery person should pay to the government depending upon his ability to pay.
Certaintymust not be arbitrary; taxpayer should know in advance how much tax he has to pay, at what
time and in what form.
Conveniencemode and timing must be convenient to tax payers.
2 Determination of persons, property or exercises to be taxed, amount to be raised, rate to be imposed and the
manner of implementation; this is exercised by the Legislature.
3 Manner of enforcing the obligation of taxes already levied upon the taxpayer; act of administration and
implementation by Executive Department.
4 Compliance and/or resistance by the taxpayer; through Executive or Legislature (through suffrage or
initiative/referendum) and ultimately through Judiciary.

Economycost of tax collection should be lower than amount of tax collected.
Productivitytax when levied should produce sufficient revenue to the government.
Elasticitytax system should be fairly elastic so that if at any time the government is in need of more
funds, it should increase its financial resources without incurring any additional cost of collection.
Simplicitytax system should be fairly simple, plain, and intelligible to the taxpayer.
Diversitysystem should include a large number of taxes which are economical; government should
collect revenue by levying direct and indirect taxes.
2. Basic
a.
b.
c.
principles of Sound Tax System(FAT).

Fiscal adequacy.
Administrative feasibility.
Theoretical justice.
Fiscal adequacysources of revenues must be adequate to meet government expenditures and their
variations; violation of this principle will make the law unsound but still valid and not unconstitutional.
Administrative feasibility--- taxes should be capable of being effectively enforced; tax policy that costs
government and taxpayers more to collect that taxes generated is inherently flawed. Violation of this
principle will make the law unsound but still valid and not unconstitutional.
Theoretical justicetaxed must be based on the taxpayers ability to pay and proportional to the relative
value of the property; it must be uniform and equitable and that State must evolve a progressive system
of taxation. It is progressive when its rate goes up depending on the resources of peron affected. Violation
of this principle will make the law unsound, invalid and unconstitutional.
Taxes are not subject to compensationTaxes cannot be offset from government obligations
or liabilities due to the taxpayer
1. Taxes cannot be subject of compensation because government and taxpayer are not mutual
creditors and debtors of each other. A claim for taxes is not a debt, demand, contract or judgment
that is allowed to be set-off.
2. Tax and debt
Tax
Debt
Due to government in its sovereign capacity
Due to the government in its corporate capacity
Imposts levied by the Government for its support or
some special purpose, which the government has
recognized.
Sum of money due upon contract, express or

implied or one which is evidenced by judgment
However, tax in a broad sense may be a debt, so that interest on estate and inheritance may be deducted
as interest on indebtedness:
a. Tax and debt
Tax
Debt
Does not proceed from contract
Generally the result of the contract
Obligations created by law and governed by special Obligation created by a contract
laws and falsification and non-payment of such
taxes impose criminal liabilities
May not be off-set
Can only be imposed by public authority
May be off-set
May arise out of acts of private individuals
Cannot be assigned
Generally payable in money
Do not draw interest unless delinquent
Can be assigned
May be paid in money, property or service
Draw interest if stipulated or there is default

b. Rule on non-imprisonment for non-payment of debts is not applicable. Except for
community taxes/poll taxes (cedula), fraudulent non-payment of other taxes (like real
estate) would be subject to imprisonment. Falsification of community tax is subject to
criminal liability.
c. There can be no off-setting; collection of tax cannot avail the results of a lawsuit against the
government.
d. Compensation had been the practice in the past can set no valid precedent. Such practice
has no legal basis.
EXCEPTION: Domingo vs. Garlitos
HELD: SC allowed legal compensation of tax and debt when the claim of the estate against the
Government has been recognized and amount has already been appropriate for the purpose of a
corresponding law. Both the claim of the Government for inheritance taxes and the claim of the
intestate for services rendered have already become overdue and demandable as well as fully
liquidated. Compensation takes place by operation of law and both debts are extinguished to the
concurrent amount, this:
ART 1200. When all requisites mentioned in ART 1279 5 are present, compensation takes effect by
operation of law and extinguished both debts to the concurrent amount, even though the creditors
and debtors are not aware of the compensation.
Compensation may be applied if these circumstances are present:
1. Both the claim of the Government for inheritance tax and claim for estate for services rendered
have already become due, demandable and fully liquidated.
2. An amount for the claim of the estate had already been appropriated by the Government by virtue
of law.
CIR vs. Esso Standard
HELD: On the ground of solution indebiti6, SC allowed compensation. Obligation to return money
mistakenly paid arises from the moment that payment is made, and not from the time the payee
admits the obligation to reimburse. Since the money belonging to ESSO was already in the hands of
the government, although the latter ha no right whatever to the amount and indeed was bound to
return it, it was neither legally nor logically possible for ESSO to be considered a debtor of the
Government; and whatever other obligation ESSO might subsequently incur in favor of the
Government should have to be reduced in that sum, in respect of which no interest could be charged.
Republic vs. Ericta and Sampaguita Pictures
HELD: SC upheld the dismissal of complaint to pay the amount for alleged unpaid taxes and counter
claim representing the face value of negotiable certificates of indebtedness.
5
2.
3.
4.
5.
ART 1279. In order that compensation may be proper, it is necessary:That each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other;
That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
That the two debts be due;
That they be liquidated and demandable;
That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
6 Payment to one of what is not due to him.

10 | P a g e ( Y a b u t , D i a m i t a s , a n d D e s t a j o )

DOCTRINE OF EQUITABLE RECOUPMENT: grants a right to a creditor to recover debt; debt
diminishes to the extent s/he holds the debtors property in violation of the debtors legal
rights. It is the legal principle that a creditor loses right to recover a debt if the creditor
illegally possess some of the debtors property. ( Doctrine does not apply in the Philippines.)
Applied in taxation
1. It allows a taxpayer to set off previously overpaid taxes due, even though the taxpayer is timebared from claiming refund on previous taxes. It applies only if the Statute of Limitation has
created an inequitable result. It is a defensive remedy against mitigation of damages.
2. It is applicable in cases to a taxpayer who erroneously paid a tax and is later properly assessed a
tax arising from the same taxable event. It allows the taxpayer to offset the tax properly assessed
by the tax erroneously paid, even if the Statute of Limitations would otherwise prevent the
taxpayer from recovering the earlier overpayment through a claim for refund.
3. It can occur only when the untimely refund claim to be set off against the timely assessment
occurs within the same transaction or tax year. Doctrine can only be used as a defense to an
assessment made during the same transaction or tax period.
Classification of taxes
1. Subject matter
Personal, capitation or
poll
Taxes of a fixed amount
upon all persons or upon
all persons of a certain
class, resident within a
specified
territory,
without regard to their
property or occupations
in which they may be
engaged.
Taxes of a specified
amount
upon
each
person performing a
certain act or engaging
in a certain business or
profession is not poll
tax.
Property
Taxes assessed on all property or on all property
of a certain class located within a certain
territory on a specified date in proportion to its
value, or in accordance with some other
reasonable
method
of
apportionment.
Obligation to pay is absolute and involuntary.
It is measured by amount of property owned by
the taxpayer on a given day, and not on the
total amount owned by him during the way.
It is assessed at stated period determined in
advance, collected at appointed times, enforced
by sale of property and by imprisonment of
person assessed.
It is a tax in rem and judgments in proceedings
is one in rem.
Excise
or
privilege
Charge
imposed upon
performance
of
an
act,
enjoyment of
a privilege or
engaging
in
an occupation.
Customs
duties
Charged
upon
commodities
being
imported or
exported.
However,
these do not
pertain
to
performance
of an activity,
at least not to
extent
of
equating
excise
with
business.taxes
.
2. Purpose
General, fiscal or revenue
Designed to raise revenue for the general or
ordinary purposes.
Special or regulatory
Achieve social or economic goals irrespective of
whether revenue is actually raised or not.
Special tax is imposed for special public purpose.
Money raised shall be spent only for such purpose
and if such purpose has been fulfilled, remaining

amount shall be placed in general funds of the
government to be spent for any general purpose.
3. Who bears the burden
Direct
Imposed and absorbed by same person.
Personal tax
Those
of
a
fixed
amount
upon
all
persons of a certain
class within jurisdiction
of the taxing power
without regard to the
amount
of
their
property.
Direct tax
Both the incidence of
or liability for the
payment of tax as well
as impact or burden of
tax falls on same
person and cannot be
shifted.
Ex. Franchise tax: a
percentage
tax
imposed on franchise
holders is a direct
liability of the franchise
grantee.
Those that are exacted from the very person ho, it

is intended or desired, should pay them; they are
impositions for which a taxpayer is directly liable on
the transaction or business he is engaged in.
Ex. Income taxtaxes an individuals ability to pay
based on his income or net wealth.
Indirect
Tax paid by a person other than one whom it is
imposed.
Taxes wherein liability for payment of tax falls on
one person to another.
Illustration
1. VAT is payable by any person, in the course
of trade and business. It is applied to each
stage of production. Burden of paying the
amount may be shifted on to the buyer,
transferee or lessee of goods, properties or
services.
2. Contractors taxpayable by contractor but
it is the owner of the building that shoulders
the burden.
3. Excise taxliability for payment may fall
from a person other than the one who
actually bears the burden.
Those that are demanded, from or are paid by, one
person in the expectation and intention that he can
shift the burden to someone else.
Ex.
VATsubstantial
expenditures.
portion
of
consumer
4. Rate or graduation
Proportional
Fixed rate regardless of tax base.
Progressive or graduated
Tax rate and tax base are directly
proportional.
Regressive
Tax rate and tax base
inversely proportional.
Implies that tax rate progresses

as affluence (income) increases.
Implies that tax rate regresses as

affluence increases.
are
PROGRESSIVE
TAXES:
tax
imposed whereby the rate or
amount of tax increases.
REGRESSIVE TAXES: tax rate
decreases as the amount of
income increases.
PROPORTIONATE TAXES: based on
a fixed portion of the value of the

subject being taxed.
5. Taxing authority
National
Imposed by Congress
Local/municipal
imposed by local legislative bodies
6. Scope
General
Imposed throughout the state or civil division for
raising revenue for general purposes on the ground
of general public interests.
Specific
Levied for a special purpose for the benefit of a part
of a body politic resting upon the supposition that a
portion of the public is specially benefited in the
increase of the value of property.
7. Basis of amount
Specific
Fixed amount by head or number or by some
standard of weight or measurement.
Specific
Imposes a specific sum
by the head or number
or by some standard of
weight or measurement
and which requires no
assessment beyond a
listing and classification
of the subject to be
taxed.
Excise
Privilege tax laid upon
the manufacture, sale
or
consumption
of
commodities within the
country .
Ad valorem (value)
Fixed proportion of value of property with respect to
which taxes are assessed and require the
intervention of assessors or appraisers to estimate
the value of such property.
8. Others
Consumption
Imposed
on
consumable
commodities and services.
Most are flat rate taxes. Sales,
excise and VAT are different
forms.
Sumptuary
Government
levy
on
goods
considered socially undesirable,
most commonly alcohol and
tobacco.
SALES TAX: indirect consumption

tax applied at the retail level.
These
are
calculated
by
multiplying the retain price of a
good or service by the tax rate.
Other source of revenue/funds and impositions
Flat
Charged no matter how much
value. It does not change.

1. License fees: paid for the right granted by some competent authority to do an act which, without
such authority, would be illegal. It implies an imposition on the right to use or dispose of a
property, purpose a business, occupation or calling or exercise a privilege.
a. SEC 147, LGC: municipalities may impose and collect such reasonable fees on business and
occupation, and (except professional tax) on practice of any profession or calling
commensurate with cost of regulation, inspection and licensing before any person may
engage in such business or occupation.
b. Amount of fee is considered in determining whether for revenue or as regulation.
Exemption from tax does not carry exemption from license fee. However, if license fee is
substantially more than cost of regulation, it may be considered as tax and therefore
covered by exemption. Authority to exact fee does not carry power to collect tax.
Tax
License fee
Emerges from power of taxation of State.
Emerges from police power of State.
PURPOSE:
generate
revenue;
incidental. It is not tax even
incidentally generated.
regulation
if revenue
is
is
Amount is not subject to limitations provided not

oppressive.
PURPOSE: regulatory to promote public welfare
Amount limited to regulationcost of p

(issuance of license and regulation) and super
(surveillance).
EXCEPTION:
when
imposed
to
nonoccupations.
Normally paid when business on operation.

Tax cannot be bargained away except for lawful
consideration.
Before commencement of business.

May be bargained away with
consideration.
Non-payment does not make business illegal.

However, it may be ground for criminal
prosecution, distraint and levy of properties.
Non-payment of license fee makes business ill
2. Special assessmentexaction on property levied in accordance with benefits conferred

upon that property.
Taxes
Levied on land, persons, property, income, business
etc.
Personal liability of taxpayer.
Based on necessity and partially on benefits
derived.
Of general application.
Special assessments
Levied on land.
Not and cannot be made a personal liability.
Based solely on benefits derived.
Of special application only as to particular time and
place.
Ordinary tax
Provide the government with revenues needed for
the financing of state affairs.
Special assessment
Finance the improvement of particular properties,
with benefits of the improvement accruing or
inuring to the owners who pay the assessment.
Refusal of citizen to pay may not be sanctioned

because it would government functions.
Refusal to pay may hold sanctions.
3. Finespaid in case of violation of law.
or

4. Penaltypunitive sanction for compelling timely action.
Tax
Enforced proportional contributes from persons and
property.
Penalty
Punishment for violation of law or acts deemed
injurious. Thus, violation of tax may give rise to
imposition of penalty.
Imposed to raise revenue.
Imposed to regulate and rectify a conduct.
Only government may impose.
Government and individuals may impose.
5. Tollpayment or fee exacted by the authorities for some right or privilege (e.g.
passage along a road or over a bridge).
Taxes
Demand of sovereignty for purpose of raising public
revenue.
Toll
Compensation for the use by one of anothers
property.
Amount is determined by State.
Amount based on cost

improvement being used.
Imposed by State.
May be imposed by either government or a private

individual or entity.
of
property
or
of
6. Tariff/customs dutyimpost upon goods transported from one political jurisdiction to

another.
7. Subsidygrant of money in aid of a private enterprise deemed to promote the public
welfare.
8. Compromise penaltyamount imposed in case of a compromise involving violations of
tax laws.
9. Revenuemoney which comes to a person or entity from an source or sources which
includes money which comes to a government from taxes.
Taxation distinguished from police power and eminent domain

1. Distinctions
Taxation
For revenue.
Police power
For promotion of general welfare.
Eminent domain
For public purpose.
Amount has no limit so long as it

is not confiscatory.
Should only cover the cost of

regulation (e.g. issuance of
license or surveillance).
Amount depends on the value of

property needed.
General benefit to all inhabitants

(e.g. protection).
Intangible
altruistic
feeling
of
There is just compensation.

No special or direct benefit is
received by the taxpayer, merely
general benefit of protection
except in special instances.
Contracts may not be impaired
unless the taxpayers gave no
consideration or in case of a
government franchise.
Money is taken.
Interferes only with property

rights although violation of tax
laws may result to imprisonment.
having done something good.

Healthy economic standard
society is attained.
of
Direct benefit results in the form

of just compensation to the
property owner.
Contracts may be impaired.
Contracts may be impaired.
Any property, including money,

which is the source, implements
or proceeds of the danger to
health, safety or morals.
Property other than money and

choses in action.
Regulates
property.
both
liberty
and
Interferes only with property

rights although violation of tax
laws may result to imprisonment.
2. Taxation may be enhanced through the exercise of police power

Illustration. If under police power, local government can classify lands as residential and
commercial, then, since conversion of industrial land is usually assessed on higher assessment
level, tax collections are increased.
3. Taxation may be used as an implement of the police power and eminent domain
Power to destroy may be included if tax is used validly as an implement of police power.
Judicial review
1. Courts cannot review the wisdom of or advisability or expediency of a tax
SC is only allowed to settle actual controversies involving rights which are legally demandable and
enforceable and may not annul an act of the political departments simply because the Court feels
it is unwise or impractical.
2. Requirements of questioning constitutionality
a. There must be actual controversy falling for exercise of judicial review;
b. Question before Court must be ripe for adjudication;
c. Locus standi7of a private citizen questioning the act;
d. Question of constitutionality must be raised at the earlier opportunity; and
e. Issue of constitutionality must be the lis mota of the case.
A private person is allowed to raise constitutional questions only if he can show that he has personally
suffered some actual or threatened injury as a result of the allegedly illegal conduct of the government,
injury is fairly traceable to the challenged action and injury is likely to be redressed by a favorable action.
7 Partys personal and substantial interest in a case such that he has sustained or will sustain direct injury as a result
of the governmental act being challenged; Right of appearance in a court of justice on a given question; in private
suits, standing is governed by real parties in interest (SEC 2, RULE 3);
REAL PARTY: party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails
of the suit.
INTEREST: material interest in an issue affected by the decree.
MERE INTEREST: mere interest in the question involved or mere incidental interest.

Party must show not only that law or act is invalid butalso that he has imminent danger of sustaining
some direct injury as a result of its enforcement and not merely that he suffers in some indefinite way.
3. Moot and academic case
GR: Courts decline jurisdiction on the ground of mootness
EXCEPTION: Not moot and academic if:
a. There is a grave violation of the Constitution;
b. Exceptional character of the situation and the paramount public interest is involved;
c. When constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar and the public; and
d. Case is capable of repetition yet evading review.
4. Judicial proceedings not required
Collection of taxes levied should be summary and interfered with as little as possible. However,
taxpayers and State are not prohibited from seeking remedies from courts.
5. Quantum of evidence: preponderance of evidence
PREPONDERANCE OF EVIDENCE: weight, credit and value of the aggregate on either side;
testimony adduced by one side is more credible and conclusive than that of the other.
6. No estoppel against the government
Government is not estopped by mistakes or errors of its agents.
Erroneous application of the law by public officers do not bar the subsequent correct application of
statutes. Principle of Estoppel does not apply when State acts to rectify mistakes, errors,
irregularities or illegal acts of its officials and agents. Rule holds true even if rectification
prejudices parties who had meanwhile received benefits. This is particularly true in collection of
legitimate taxes due where collection has to be made whether or not there is error, complicity or
plain neglect on part of collecting agents.
However, this rule may be relaxed in the interest of justice and fair play, as where injustice will
result to the taxpayer.
Taxpayers suit
Citizen and taxpayer suits
Plaintiff in a taxpayers suit
Plaintiff is affected by the expenditure of public
funds.
Plaintiff in citizens suit

He is but the mere instrument of public concern.
Right a citizen and a taxpayer to maintain an action

in courts to restrain the unlawful use of public funds
to his injury cannot be denied
In a matter of mere public right, people are real

parties. It is the right, if not the duty, of every
citizen to interfere and see that public offense be
properly pursued and punished and that public
grievance be remedied
DIRECT INJURY TEST: for a private individual to invoke judicial power in determining the validity of an
executive or legislative action, he must have sustained direct injury and it is not sufficient that he has
general interest common to all members in public.
Brushing aside technicalities
Requirement of locus standi may be waived in the exercise of court discretion, where transcendental
importance prompted the Court to act liberally.
Requirements
1. Cases involve constitutional issues;

2. For taxpayers, there must be a claim of illegal disbursement of public funds or that tax measure is
unconstitutional;
3. For voters, there must be a showing of obvious interest in the validity of election law in question;
4. For concerned citizens, there must be a showing that issues raised are for transcendental
importance which must be settled early; and
5. For legislators, there must be a claim that official action complained of infringes upon their
prerogatives as legislators.
Decision to entertain a taxpayers suit is discretionary upon court.
Questioning the validity and constitutionality of statutes by a taxpayer
GR: Locus standi must be present
EXCEPTION: Misapplication of funds
GR: Not only persons individually affected, taxpayers must have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and they may, therefore, question the constitutionality of
statutes requiring expenditure of public moneys.
To justify the suit, it is necessary that public funds should be involved.
Requisites of taxpayers suit
1. Tax money is being extracted and spent in violation of specific Constitutional protections against
abuses of legislative power;
2. Public money is being deflected to any improper purpose; and
3. Petitioner seeks to restrain respondents from wasting public funds through enforcement of an
invalid or unconstitutional law.
Expenditure of public funds by an officer of the State for the purpose of executing an unconstitutional act
constitutes a misapplication of such funds.
Taxpayer need not be a party to the contract to challenge its validity. As long as taxes are involved,
people have the right to question contracts entered into by the government.
Transcendental importance
Determinants
1. Character of funds or other assets involved in the case;
2. Presence of a clear case of disregard of a constitutional or statutory prohibition by the public
respondent agency or instrumentality of the government; and
3. Lack of any other party with a more direct and specific interest in raising the questions being
raised.
It is not proper to implead the President as respondent
GR: The President, during his actual incumbency, may not be sued in any civil or criminal case.
EXCEPTION: He remains accountable to the people but he may be removed from office only by
impeachment.

Chapter 1 - Taxation in General

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Chapter 1 - Taxation in General

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Chapter 1: Taxation in General

Some Taxation related terms

Ex. Taxable income is the tax base for income tax

Important distinction when considering tax rates is