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TAXATION

M E M O R YAI D

I. GENERAL PRINCIPLES
TAXATION
Is the inherent power of the state to raise revenues by impositions to defray
government expenses.
As a process, the manner by which the government exercises the power of taxation is
from the act of levy until final collection of the imposition.

TAXES
Are 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 its public
needs.

CHARACTERISTICS OF A TAX: (Code:CPP SP)


1.
2.
3.
4.
5.

An enforced contribution
It is levied on persons and property
It is a personal liability of the taxpayer
It is imposed by the state which has jurisdiction over the person and property, and
It is levied for public purpose.

THEORIES OF TAXATION
1. Lifeblood Theory
Taxes are the lifeblood of the government and their prompt and certain availability is
an imperious need.
This implies that:
1) The BIR is justified in availing of the most expedient remedy in the collection of the
tax (CIR vs. Pineda)
2) The BIR is not bound by the mistakes, errors, or omissions of its agents thus,the
Doctrine of Estoppel does not apply to the collection of taxes. (Rivera vs. Fernandez)
3) No court other than the CTA may enjoin the collection of taxes.
2. Necessity Theory
The existence of the government is a necessity. No government can exist or continue
without means to pay its expenses and to raise those means. It has the right to compel all
persons and property within its limits to contribute.
Although the power to tax is almost unlimited, it must not be exercised in an arbitrary
manner. We may seek redress to courts in case of irregularities.
3. Benefits-Protection Theory
In return for the taxes received, the government only secures to the citizen that
general benefit which results from protection to his person and property and the promotion
of those various schemes which have for their object the welfare of all. This theory spawned
the doctrine of symbiotic relationship.
DOCTRINE OF SYMBIOTIC RELATIONSHIP
Taxes are what we pay for a civilized society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of ones hard-earned income to the taxing authorities,
every person who is able to must contribute his
share in the burden of running the government. The government, for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of the
people and enhance their material and moral values.
NATURE OF THE TAXING POWER
a. Inherent attribute of sovereignty
The power of taxation is an incident of sovereignty as it is inherent in the State, belonging as a
matter of right to every independent government. It does not need of constitutional conferment.
Constitutional provisions do not give rise to the power to tax but merely impose limitations on what
would otherwise be an invincible power.
No attribute of sovereignty is more pervading and at no point does the power of government
affect more constantly and intimately all the relations of life than through the exactions made under it.
[Churchill and Tait vs. Concepcion, 34 Phil. 969]
Being an attribute of sovereignty, its relinquishment is never presumed. [Luzon Stevedoring
Co. vs. CTA, L-30232, July 29, 1988]

Tax is an attribute of sovereignty which emanates from necessity upon which the very
existence of the government is dependent.
b. Legislative in character
"The power to tax is exclusively vested in the legislature and it cannot be delegated as a
whole." In short, only the legislature can impose taxes. This is why a person, activity, or property is
subject to tax because and only because the law says so.
Further, about local government, taxation remains exclusively legislative. Meaning, only the
local legislative body thru an ordinance may impose taxes.
Inherent limitations:
1.
2.
3.
4.
5.

Public Purpose
Inherently Legislative
Territorial
International Comity
Exemption from Taxation of Government Agencies/Instrumentalities

Constitutional Limitations:
1. Due Process Clause (Art. III, Sec. 1)
2. Equal Protection Clause (Art. III, Sec. 1)
3. Uniformity (Art. VI, Sec. 28[1])
4. Progressive system of taxation (Art. VI, Sec. 28[1])
5. Non-impairment of contracts (Art. III, Sec. 10)
6. Non-imprisonment for Non-payment of Poll Tax (Art. III, Sec. 20)
7. Appropriation, revenue and tariff bills must originate exclusively in the House of Representatives
(Art. III, Sec. 24)
8. Presidential veto (Art. VI, Sec. 27[2])
9. Presidential power to tax tariff rates (Art. VIII, Sec. 28[2])
10. Freedom of the press (Art. III, Sec. 4)
11. Freedom of religion ((Art. III, Sec. 5)
12. Exemption from property tax of properties of religious, educational, charitable institutions (Art. VI,
Sec.28[3])
13. Tax exemptions granted to non-stock, non-profit educational institutions (Art. XIV, Sec. [4, 5])
14. No public money or property used for a particular sect, priest, religious minister, etc. (Art. VI, Sec.
29[1])
15. Grant of tax exemptions (Art. VI, Sec. 28[4])
16. Grant of power of taxation to local government units (Art. X, Sec. 5)
17. Money collected for a special purpose shall be considered a special fund (Art. VI, 29[3])
18. Exclusive appellate jurisdiction of the SC over judgments of lower courts involving the legality of
taxes, imports, assessments, fees, penalty. (Art. VIII, Sec. 5)
ASPECTS, PROCESS, PHASES OF TAXATION. (Code: LAP Levying, Assessment, Payment)
a. Levying/Imposition of the tax.
This is essentially legislative. It refers to the enactment of tax laws or statutes.
Note: Courts have no power to interfere in the wisdom, objective, motive or expediency in the
passage of a tax law, as this is purely legislative in character. To do so would be tantamount to a
violation of both the letter and spirit of the organic laws by which the Philippine Government was
brought into existence to invade a coordinate and independent department of the Government and to
interfere with the legitimate powers and functions of the Legislature. [Tolentino, et al. vs. Secretary of
Finance, 235 SCRA 630]
b. Assessment and Collection.
This is essentially administrative. It is the act of administration and implementation of tax law
by the executive branch through its administrative agencies. Nonetheless, the delegation must pass
the completeness and sufficient standard test in order to prevent the abuse of its exercise.
c. Payment. This signifies an act of compliance by the taxpayer.
SCOPE OF THE LEGISLATIVE POWER TO TAX [Code: SPASM]
a. Subjects or Objects of Taxation.
Coverage and the kind or nature of the tax.
They may be persons (natural or juridical), property (real or personal); tangible or intangible),
businesses, transactions, rights or privileges.
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it
has been repeatedly held that inequalities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation. [Walter Lutz vs. J. Antonio Araneta, 98 Phil.
148]
b. Public Purpose.
The legislature primarily determines the public purpose of taxation although the courts can
inquire as to whether the purpose is really public or private. However, judicial action is limited to the
determination of the validity of the tax in relation to constitutional precepts or provisions or the
determination in an appropriate case of the application of a tax law.
c. Amount or Tax Rate.
The legislature is free to levy a tax on any amount, provided, it is exercised within the bounds
of constitutional limitations.

Note: Not only is the power to tax unlimited in its reach as to subjects, but in its very nature, it
acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus
becoming in its exercise a power to destroy.
d. Situs of taxation.
Taxation shall only be exercised on persons, properties and excises within the taxing power.
e. Manner, means and agencies of collection of the tax.
Corollary to the sole power to tax is the sole power to prescribe the mode or method by which
the tax shall be collected and to designate the officers through whom its will shall be enforced.
Q. Is the power to tax the power to destroy?
A.IT DEPENDS. The power to tax includes the power to destroy if it is used validly as an implement of
police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical
to the public welfare.
But where the power to tax is used solely for the purpose of raising revenues, the modern view
is that it cannot be allowed to confiscate or destroy.
Note: While taxation is said to be the power to destroy, it is no means unlimited. If so great an
abuse is manifested as to destroy natural and fundamental rights which no free government could
consistently violate, it is the duty of the judiciary to hold such an act unconstitutional. Hence, the
modification: the power to tax is not the power to destroy while the Supreme Court sits.
PRINCIPLES OF A SOUND TAX SYSTEM (Code: FAT)
a. Fiscal Adequacy. The taxes envisioned to be collected must be sufficient for government
expenditures and other public needs.
NOTE: Be careful as sometimes... "an approximate estimate of government expenditures" is
sufficient to satisfy the requirement.
Fiscal adequacy... requires that the sources of revenues must be adequate to meet government
expenditures and their variations" (Chavez v. Ongpin).
b. Administrative Feasibility. The tax law must be capable of convenient, just, effective and efficient
enforcement and administration. Likewise, tax laws should close-up the loopholes for tax evasion and
deter unscrupulous officials from committing fraud.
Equally applies to taxpayers..meaning, they must not have difficulty understanding what the
tax law is all about.
c. Theoretical Justice. The tax law or system must be based on the taxpayers ability to pay.
Rule of taxation must be uniform and equitable. The State must evolve a progressive system of
taxation.
Q. Will a violation of these principles invalidate a tax law?
A.IT DEPENDS. A tax law will retain its validity even if it is not in consonance with the principles of fiscal
adequacy and administrative feasibility because the Constitution does not expressly require so.
HOWEVER, if a tax law runs contrary to the principle of theoretical justice, such violation will render the
law unconstitutional considering that under the Constitution, the rule of taxation should be uniform
and equitable. [Sec. 28(1), Art. VI, 1987 Constitution]
Rule that taxes are personal to the taxpayer.
GEN. RULE: Taxes are personal to the taxpayer. Corporations tax delinquency cannot be enforced on
the stockholder nor transfer taxes on the estate that are assessed on the heirs.
EXCEPTIONS:
1. Stockholders may be held liable for unpaid taxes of a dissolved corporation if corporate assets have
passed into their hands;
2. Heirs may be held liable for the transfer taxes on the estate if the properties of the decedent have
been distributed to them prior to the payment of the required transfer taxes.
TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS AND IMPOSOTIONS
A)
TAXATION
POLICE POWER
Purpose

To levied for the purpose of


raising
revenues

Amount of Exaction

No limits

Benefits

Contracts
Transfer

B)

No special or direct benefit is


received by the taxpayer other
than
that
the
government
secures the general welfare of
the citizens.
Recognized
the
obligations
imposed
by of
Taxes paid form part of the
public funds

TAXATION

To promote public welfare through


regulation
Limited to the cost of regulation,
issuance of the license or
surveillance
No direct benefited, yet a healthy
economic standard of society is
maintained.
Does not apply to police power
Allows merely the restraint on the
exercise of property rights.

EMINENT DOMAIN

Purpose

To raise public fund


General benefit of the citizens

Compensation
Applies to all persons, property
and excises that may be subject
thereto

Persons Affected

C)

Taking of property for public use


Just compensation is given to the
owner
of
the
expropriated
property
Only
particular
property
is
comprehended

TAXATION

Power

Exercise of the taxing power

Purpose

To raise government fund

Amount of Exaction

No limits

Imposition
Scope
Effect of Non-payment

If the primary purpose is to


generate funds and regulation
is merely incidental
Legitimate and illegitimate
business
Does not render business illegal

TAXATION
Not limited to land
As a rule, cannot be made a personal
liability of the persons assessed
Is based wholly on benefits
It is exceptional both as to time and
locality. A
charge imposed only on the property
owners who are benefited is a special
assessment rather than a tax.

LICENSE
Exercise of police power
Imposed for regulatory
purposes
Limited to the cost of regulation,
issuance of the license or
surveillance
EXCEPT: when the fees are
imposed for the purpose of
regulating non-useful business,
occupation,
or
activity,
the
amount may now exceed the cost
of regulation.
If the primary purpose is to
regulate and to generate funds
is merely incidental
Only legitimate business
Renders the business illegal

SPECIAL ASSESSMENT
May be levied only on land
Personal liability
Special purpose
The imposition of a charge on all property in
a
prescribed area is a tax not an assessment
although the purpose is to make a local
improvement on street or highway

TAXATION

TOLL

It is a demand of sovereignty for the


purpose of
raising public revenues.

It is a demand of proprietorship, an amount


charged for the cost and maintenance of the
property used

TAXATION

PENALTY

It is a civil liability. Person is criminally


liable
only when he fails to satisfy his civil
obligation to pay taxes

It is a punishment for the commission of a


crime.

TAX

DEBT
Basis

Law

Contract or jugdment
Effect of Non-payment
Imprisonment (except in case of poll tax)
No imprisonment
Mode of Payment
Generally payable in money
Payable in money, property or services
Assignability
Not assignable

Assignable

Set off
May not be a subject of compensation or
May be a subject of compensation or set-off
set-off
Interest
Does not draw interest unless delinquent
Draws interest if stipulated or delayed
Authority
Imposed by public authority
It is a private transaction

Taxes are not debts because a tax does not depend upon the consent of the taxpayer and there is no
express or implied contract to pay taxes.
Exceptions:
1. Tax collection being enforceable by court action [ Sambrano v. TA, 101 Phil. ]
2. In the application of certain statutes of limitation [ Rep. Far Eastern American, Co., 7 SCRA 399]
3. In the matter of deductible items from gross income [ Commissioner v. Prieto, 109 Phil. 592] ( Vitug
Book)
4. When it is secured by a bond, the tax is considered as a bond.
SET-OFF
General Rule: Taxes cannot be the subject of compensation or set-off.
Reasons:
1. Lifeblood theory
2. Taxes are not contractual obligation but arise out of duty to the government.

3. The government and the taxpayers are not mutually creditors and debtors of each other.
Exception: Where both claims already became overdue and demandable as well as fully liquidated, or
where the government and the taxpayer are in their own right reciprocally debtors and creditors of
each other, compensation takes place by operation of law.
Doctrine of EQUITABLE RECOUPMENT not followed in the Philippines.
Thus, a tax presently being assessed against a taxpayer may not be recouped or set-off
against an overpaid tax the refund of which is already barred by prescription.
REQUISITES OF A VALID TAX (Code: PUJAN)
a. It should be for a public purpose
b. The rule of taxation should be uniform
c. That either the person or property taxed be within the jurisdiction of the taxing authority
d. That the assessment and collection be in consonance with the due process clause.
e. The tax must not infringe on the inherent and constitutional limitations of the power of taxation.
PURPOSES OF TAXATION
a. Primary to raise revenues
b. Secondary/non-revenue purposes (RIPE)
1. To reduce social inequality
2. To implement the police power of the State (regulatory purpose)
3. To protect our local industries against unfair competition
4. To encourage the growth of local industries
EXTENT/SCOPE OF THE TAXING POWER (CUPS)
a. It is comprehensive. It covers persons, businesses, activities, professions, rights and privileges.
b. It is unlimited. The power to impose taxes is one so unlimited in force and so searching in extent
that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such
as rest in the discretion of the authority which exercises it
c. It is plenary as it is complete.
d. It is supreme. Taxation, although referred to as the strongest of all the powers of the government,
cannot be interpreted to mean that it is superior to the other inherent powers of the government, only
that it is supreme insofar as the selection of the subject is concerned
LIMITATIONS ON THE TAXING POWER
A. Inherent limitations of the taxing power
1. Public purpose. Taxation is for public purpose when:
a. the thing to be furthered by the appropriation of public revenue is something which is the
duty of the
government to provide; or
b. When the proceeds of the tax will directly promote the welfare of the community in equal
measure
NOTE: Incidental advantage to the public or to the State, which results from the promotion of private
enterprise or business, does not justify their aid by the use of public money.
Q. Who may determine public purpose?
A. This is a legislative prerogative. The power to determine whether the purpose of taxation is public or
private resides in Congress. However, this will not prevent the court from questioning the propriety of
such a statute on the ground that the law enacted is not for public purpose; but once it is settled that
the law is for a public purpose, the court may no longer inquire into the wisdom, expediency or
necessity of such tax measure. It is the purpose which determines the public character of the tax law,
not the number of persons benefited. As long as the ultimate result favors the welfare of the public in
general, the appropriation of public revenue is deemed done for the public purpose.
Q. When must public purpose exist?
A. "It must exist at the time the tax proceeds are being used or a tax law is being passed for a certain
purpose, whichever comes first. [Pascual vs. Sec. of Public Works]
2. International Comity - principle of sovereign equality among states and of their freedom from suit
without their consent. It limits the authority of the government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its property held, and activities taken in that
capacity.
Thus, if a tax law violates certain international laws, it is not only invalid but it is also
UNCONSTITUTIONAL because the constitution says " the Philippines....adopts the generally accepted
principles of international law as part of the laws of the land..."
3. Non-delegation of taxing power
GEN. RULE: Power of taxation is vested inCongress and may not be delegated.
EXCEPTIONS:
a. Local taxing power granted by the Constitution (Art. X, Sec. 5);
Q Suppose this provision does not exist, may LGU exercise the power of taxation?
A. Yes, under the Doctrine of Implied Necessity the power to create municipal corporations carries with
it by necessary implication, the power to tax.
In case of doubt as to whether the LGU has the power to tax or not, all doubts must be
resolved in favor of the existence of such power.
b. Authority of the President, under the Constitution, to fix tariff rates, import and export
quotas (Art 6, Sec. 28[2])

c. When delegation relates merely to administrative implementation that may call for some
degree of discretionary powers under a set of sufficient standards expressed by law.
4. Territoriality or situs of taxation persons or property must be within the jurisdiction of the taxing
power.
The territoriality rule does not merely relate to "geographical" location, but to the jural concept
or nexus or bond between the taxing authority and the taxpayers. And this nexus depends on the type
of taxes imposed, the personal circumstances of the taxpayers, and the location of the subject of
taxation.
Rules Observed in Fixing Tax Situs
a. POLL/CAPITATION/COMMUNITY TAX
- are based upon the residence of the taxpayer, regardless of the source of income, or
- location of the property of the taxpayer.
b. PROPERTY TAX
b1. Real Property- is subject to taxation in the state or country where it is located, regardless of
whether the owner is a resident or a non-resident. [First National Bank vs. Marine, 284 U.S. 321. 77
ALR 401]
b2. Personal Property - the situs is wherever it was actually kept or located, held to be the
domicile of its owner following the age-old Doctrine of Mobilia sequuntur personam or movables follow
the person.
MOBILIA SEQUUNTUR PERSONAM
Although a mere fiction of law, without any constitutional foundation, it is nevertheless applied
when convenient, provided it is not inconsistent with express provisions of the law.
Gen. Rule: To acquire a situs in a state other than the domicile of the owner, tangible property must
have a definite location there, accompanied by some degree of permanency; mere temporary or
transient presence in the state is not sufficient.
Except: Actual or business situs [Wells Fargo v. CIR] which has been codified in Section 104, R.A.8424
enumerating certain properties which acquired actual situs in the Philippines, viz:
-franchise exercised in the Philippines;
-shares of stock, obligations, bonds issued by domestic corporations organized and constituted
in accordance with Philippine laws;
-shares, obligation, bonds issued by foreign corporation where 85% of its business is located in
the Philippines. It is subject to donors tax and estate tax;
-shares/right in a partnership business or industry established in the Philippines;
-shares, obligations, bonds, issued by foreign corporations which acquired business situs, when
such have been used in the furtherance of the business of the foreign corporation.
Thus, the RULE: irrespective of the owner, donors tax or estate tax can be imposed upon these
properties. EXCEPT: Where the foreign corporation grants exemption or does not impose taxes on
intangible properties of Filipino citizen.
c. BUSINESS TAX- place of business
d. EXCISE TAX- Where the act is performed or where occupation is pursued
e. SALES TAX- where the sale is consummated
f. INCOME TAX- consider citizenship residence and sources of income (Sec. 42, R.A. 8424)
g. TRANSFER TAX- residence or citizenship of the taxpayer or location of property
h. FRANCHISE TAX- state which granted the franchise
i. VALUE ADDED TAX- Destination Principle is followed
5. Tax-exemption of the Government as a matter of public policy, property of the State or any of its
political subdivisions devoted to government uses and purposes are generally exempt from taxation.
However, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the
government performing functions may be subject to tax. [ MCIAA vs. Marcos, 261 SCRA 667].

Agencies performing
governmental
functions
Tax exempt unless expressly
stated otherwise.

Agencies performing proprietary functions


Subject to tax unless expressly exempted.
Government-owned and controlled
proprietary
functions hence, subject to tax.

corporations

perform

General Rule: Government is taxable


Exception: When there is a law which says that it is exempt from
tax.
From these rules, you now make a distinction:
1) agencies performing governmental function as a rule are tax
exempt
UNLESS expressly subject to tax; and
2) agencies performing proprietary function are subject to tax
UNLESS
expressly exempt. (Posadas vs. Standard Well)
With respect to government properties, NDC vs. Cebu City,
enunciated
these principles:
1. Properties owned by the Republic of the Philippines AND
agencies
without separate and distinct personality are exempt from
taxation. In
other words, those agencies with charter are treated in
accordance
. with the provisions of their respective
chapters for tax purposes.
2.The exemption of their of public properties from taxation does
not extend
to the improvements introduced upon them by the present
occupants at
their expense.

performing governmental functions distinguished from proprietary functions

Agencies