TAXATION SESSION 1

General Principles in Taxation

Taxation is one of the three inherent powers of the state. Why do we call it inherent power of the
state? When a state is born, born with it is a congenital power. One of which is taxation.
Does B.I.R exercise the power to tax? No. The legislative body is the one who exercises it. A law
must be enacted to exercise the power to tax. The power to tax cannot be exercised without a
law, thus, the Tax Law. The Executive department enforces the law.
The Legislative department has two chambers namely the House of Representatives and the
house of the senate. The one who has the initiative to exercise the tax law is the house of
representative. The originator of the tax law should be coming from the house of representative
but it should be concurred with the house of the senate. Otherwise, there is a violation of the
constitution because appropriation law, revenue laws and tariff laws must originate from the
house of representative.
What is the purpose why Tax law is exercised? To enforce contributions. The reason why tax is
being enforced is that it will serve as the support of the government to serve and protect the
citizens. Taxes are gathered from persons, properties or privileges.
Person (Personal Tax) I.e Community Tax. Tax on the person. Object of the tax is the person.
Property Tax I.e Real property tax. Tax on the property.
Privilege Tax - Estate tax is a tax for the privilege to transfer properties by the decedent to the
heir. Rest of the other taxes are called Privilege Tax. Income tax is a privilege tax. Earning
income in the PH is not a right but a mere privilege. Donation is a privilege tax. It is not a tax on
the donated property, but it is the tax on the privilege to transfer the donated property. VAT is not
a tax on the vatable goods, but it is the tax on the privilege to sell the VATABLE goods.
One of the limitations of taxation is that you can only tax within its territory. If a property is sold or
services are rendered abroad, there is no VAT.
The most important is that taxes are necessary for government expenses. Taxes should be for
public welfare. What does public welfare means? If the appropriation is for public HEALTH,
ORDER, MORALITY, EDUCATION, and the General welfare which is the supreme law. In other
words, everything should for public purpose and we will only appropriate and pay tax for public
purpose.
So, Tax is an inherent power of the state, exercised by the legislative body who enforce
contribution from persons, properties and privileges within its territory for the purpose of
paying the necessary expenses of the government.
The result of taxation is taxes. These are enforced contribution, proportional in character,
levied by the authority of the law for the necessary government expenses.
The basis of Taxation Reason why a state needs the power of taxation?
1. Life Blood Doctrine
2. Necessity Theory
3. Benefit Protection Theory
Life Blood Doctrine
This doctrine states that the government cannot exist or endure without taxes. So the collection of
tax cannot be hindered. Taxes are the life blood of the government.
Necessity Theory
Tax is predicated or based on necessity to preserve sovereignty and to protect the territory.

How do we protect our territory? Through our Armed Forces of the PH (AFP).
Benefit Protection Theory
The state has the power to demand and receive taxes on the reciprocal duties of support and
protection. One of the main reasons why tax is very important is that there is a symbiotic
(interdependent) relationship between the government and the citizen. The government needs
the taxes of the citizen so that it can afford its government expenses. The citizens need the
government to protect them.
CASES
C.I.R vs Pineda
Pineda died and left properties to his eldest son Manuel Pineda. The income tax was not
paid in full. The government, through the C.I. R enforced the tax lien on the
property and
make Manuel pay the full amount of taxes.
Article 774. Succession is a mode of acquisition by virtue of which the property, rights
and obligations to the extent of the value of the inheritance, of a person are transmitted
through his death to another or others either by his will or by operation of law.
Question: Up to what extent can an heir be liable? (a) The full amount of the taxes
assessed? Or (b) only up to the extent of the share that he receives?
Answer: (a) The full amount of the taxes assessed. Manuels contention is invalid
because such law did not come from the Tax Law but from (Civil) Succession Law.
According to the Lifeblood Theory, tax collection must not be hindered. Thus, Manuel
should pay the taxes in full and settle any controversies between the other heirs privately.
Vera vs. Fernandez.
Before Tongoy died, he appointed Vera as his administrator of his estate. In this case,
The government filed a claim for deficiency income tax as other claims. Which is barred
by the rules of court but the claim was however filed within the period of the limitation
prescribed in the NIRC within 2 years.
Question: Can the government claim for taxes filed on time although it is barred by the
rules of court?
Answer: Yes, the government can still claim for taxes under the life blood theory. If there
is a tax collection, it cannot be hindered.
C.I.R vs C.T.A
BIR denied City Trust tax refund application. City Trust filed a petition for review through
CTA. The latter only decided based on the pleadings and evidences presented by City
Trust because the tax refund division of BIR failed to transmit the record to the SolGen.
Since BIR does not have documents, the CTA ordered BIR to grant a refund to the City
Trust.
Question: Is the state estopped by the neglect of its agent?
Answer: No, the government is not estopped. Under the life blood doctrine, collection of
tax cannot be hindered.
CIR va Algue

Algue is a corporation paid promotional fees and the reason why he paid promotional
fees is that such fees led to the formation of a new corporation called Vegetable Oil Corp
of the PH; and that the latter subsequently purchased the PH sugar estate development
corporation. BIR disallowed the promotional fees to be deemed as expenses.
QUESTION: Is the payment of fees to induce investors and business man to venture in
an experimental enterprise a necessary and reasonable expense?
ANSWER: The Supreme held that the promotional fees are necessary and reasonable
expenses.
The Golden Egg Theory

YMCA vs. CIR

YMCA is a charitable and non-profit institution. They have properties. These properties
were leased to small shop owners, restaurants and canteen operators and collected
parking fees.
Question: Is the rental income of YMCA, which is a non-profit organization, which is
exempted by law to pay tax, subject to tax considering that YMCA is a non-profit
organization?
Answer: Yes, the rental income of YMCA is subject to tax. Even if YMCA is a non-profit
organization, if they entered into a taxable transaction, there must be a collection of tax.
BongBong Case
CA decided that BIR can collect deficiency estate tax to those properties that were left by
the former president. BongBong contended that before BIR can collect, considering that
the properties left have a will, and such will is subject to probate, thus BIR cannot collect
yet.
QUESTION: Is the BIR required to wait for the approval of the probate for it to be able to
collect the deficiency estate tax?
ANSWER: Yes, the BIR can collect the tax even without the courts approval of the
probate on the basis of life blood theory.
Aspects of Taxation
This is the process. (1) Levy, (2) Asses and (3) Collect/Payment. Levy means the making of the
law and is purely legislative. Assessment or Collection is purely administrative (done by executive
department), is the computation.
QUESTION: Does the court have power to inquire what the purpose of the tax is?
ANSWER: The court cannot ask for the purpose of the task. The court has the power to
determine whether the tax law is for public purpose or not. The reason for this is that the power to
tax is purely legislative character.
LOOTS vs Araneta
In this case, a law is enacted to increase existing tax on the manufacture of sugar for the
support of the sugar industry exclusively. LOOTS assailed its constitutionality on the
ground that the tax law is not considered for public purpose.
QUESTION: Are the taxes for the promotion and protection of the sugar industry levied
for the public purpose?

ANSWER: Public Purpose does not mean that if not all is being benefited, it shall not be
deemed for public purpose. Public Purpose does not require that all will be benefited for it
to be for public purpose. As long as it is available to the public, it is deemed for public
purpose.
The SC held that sugar industry is considered for public purpose.
Gomez vs. Palomar.
FACTS: Petitioner Benjamin Gomez mailed a letter at the post office in San Fernando,
Pampanga. It did not bear the special anti-TB stamp required by the RA 1635. It was
returned to the petitioner. Petitioner now assails the constitutionality of the statute
claiming that RA 1635 otherwise known as the Anti-TB Stamp law is violative of the equal
protection clause because it constitutes mail users into a class for the purpose of the tax
while leaving untaxed the rest of the population and that even among postal patrons the
statute discriminatorily grants exemptions. The law in question requires an additional 5
centavo stamp for every mail being posted, and no mail shall be delivered unless bearing
the said stamp.
ISSUE: Is the Anti-TB Stamp Law unconstitutional, for being allegedly violative of the
equal protection clause?
HELD: No. It is settled that the legislature has the inherent power to select the subjects
of taxation and to grant exemptions. This power has aptly been described as "of wide
range and flexibility." Indeed, it is said that in the field of taxation, more than in other
areas, the legislature possesses the greatest freedom in classification. The reason for
this is that traditionally, classification has been a device for fitting tax programs to local
needs and usages in order to achieve an equitable distribution of the tax burden. The
classification of mail users is based on the ability to pay, the enjoyment of a privilege and
on administrative convenience. Tax exemptions have never been thought of as raising
revenues under the equal protection clause.
Punzalan vs City Of Manila
There is tax on occupation in Manila. The Petioner assailed its validity on the grounds of
discrimination and unfair because other cities do not impose additional tax.
Question: Can the court question the purpose of the tax law? Can the court inquire what
are the cities that have power to impose taxes of same nature?
Answer: No because in the given case, the question is upon the enactment of the law
and such question is purely legislative character.
The power to tax is the strongest of all the powers of the Government. However, in Roxas vs CTA, the
power to tax is the power to destroy. Is this conflicting? It is not a power to destroy as long as there is due
process, it cannot be the power to destroy. Golden Egg Theory.
Purposes of Taxation
1. To raise revenue
2. To reduce social inequality, to encourage growth of local industry and to protect the local
industry against unfair competition.
Can we use the power to tax to implement Police Power? Eminent Domain?
Bagatsing v Ramirez
Taxes can be imposed even if it is not for revenue and non-revenue purpose. Example is
a regulatory fee.

CIR vs Central Luzon Drug Corporation

Can the power to tax be implement for non-revenue purposes that is an
implement of eminent domain? Yes.
Extent of Taxation
Taxation is CUPS
1. Comprehensive Because it covers properties, persons, privileges and even
profession.
2. Unlimited Because it is not only for revenue purposes but also non-revenue purposes.
3. Plenary Because it may avail of different revenue.
4. Supreme Because it has the power to select the subject matter of taxation concern
For us to have a sound tax system, we need to have an effective and efficient. Fiscal Adequacy
Fiscal means money and Adequacy means sufficient. The tax collected must be sufficient to
meet the government expenditure.
Administrative Feasibility means management that is feasible. Theoretical Justice means
ability to earn carried the ability to pay the tax.
Chaves vs Ongping
Question: Will the violation of these principles invalidate the tax law?
Answer: Fiscal Adequacy and Administratively Feasibility may be violated but not the Theoretical
Justice.
Art.6 Sec 28 PH constitutions. The rule of taxation shall be uniform and equitable.
Police Power To promote public welfare
Taxation To raise revenue
Eminent Domain To take property for public purpose and to raise revenue.
Special Taxes levy only on land while Taxes levy on all such as the persons and privileges.
License emanates from police power while Taxes emanates from Taxation.
Toll A demand of proprietorship, Taxes a demand of sovereignty.
Penalty is a criminal liability; Tax is a civil liability
When you pay tax that is not a penalty but a civil liability. But if you do not pay tax, that is criminal
liability.
Debt vs Tax
Debt is based on contract while tax is based on law. I.e
The government agreed that if you can render a certain service, the government will pay
you. Despite the agreement, the government failed to pay on time which, as a result the
government is indebted to you. Comes tax payment time, you did not pay the tax thinking
that the government anyway is still indebted to you and thinking that off-setting is allowed.
This is not allowed because off-setting is only allowed if the obligation is based on
contract. But if one is based on contract and the other one is based on law, off-setting is
not allowed. Furthermore, tax collection cannot be hindered under the life blood doctrine.
DOUBLE TAXATION
Is double taxation constitutional? Depending on what kind of double taxation
Double taxation is where taxes are imposed twice. If it is imposed in the same jurisdiction,
authority, purpose, object and year,(JAPOY), it is called DIRECT DOUBLE TAXATION WHICH
IS UNCONSTITUTIONAL. But if one of the foregoing enumerations is not the same, it is allowed.
It is called INDIRECT DOUBLE TAXATION.