NOTES ON TAXATION 1 RUSSELL JAY M.

MANGLICMOT | UST CIVIL LAW

General principles
CHAPTER 1: basic concepts

1. DEFINITION OF TAXATION

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 its public needs.

2. ELEMENTS OF TAXES:
 Enforced contributions and obligation created by law.
 Proportional in character
 Levied by the authority of law
 For the support of the government and all its public needs.

Taxation- power by which the sovereign raises revenue to defray the necessary expenses for the government.

2. STATE POLICIES ON TAXATION

Lifeblood Doctrine- provides that the existence of government is a necessity;

 Government cannot continue without means to pay its expenses;
 For these means it has a right to compel its citizens and property within its limits to contribute.

CIR v PINEDA (21 SCRA 105)

 Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.

VERA et. al. v. FERNANDEZ, et. al. (89 SCRA 199)

 Upon taxation depends the Government’s ability to serve the people for whose benefit taxes are collected.

CIR v CTA (234 SCRA 438)

 Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the state effects its
functions for the welfare of its constituents.

COMMISIONER v. ALGUE, INC. (158 SCRA 9)

 Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection
should be made in accordance with as any arbitrariness will negate the very reason for the government itself.

YCMA v. CIR (298 SCRA 83)

 Since taxes are the lifeblood of the nation, a claim of statutory exemption from taxation should be manifest and unmistakable from the
language of the law on which it is based.

PHILIPPINE BANK OF COMMUNCATIONS v. CIR (302 SCRA 250)

 Taxes are the lifeblood of the nation. The primary purpose is to generate funds for the State to finance the needs of the citizenry and to
advance the common wealth.

PHILIPPINE GUARANTY CO., INC. v. CIR (13 SCRA 775)

 The Government is not estopped from collecting taxes by the mistakes or errors of its agents.

3. THEORIES ON TAXATION
a) Necessity theory- taxes are a necessary burden to preserve the State’s sovereignty and a means to give the citizenry facilities and
protection which a government is supposed to provide.
NOTES ON TAXATION 1 RUSSELL JAY M. MANGLICMOT | UST CIVIL LAW

b) Benefits-Protection Theory (Doctrine of Symbiotic Relationship)- State demands and receives taxes on the reciprocal duties of
support and protection. The taxpayer cannot question the validity of the tax law on the ground that payment of such tax will render
him impoverished, or lessen his financial or social standing. , because the obligation to pay taxes is involuntary and compulsory; in
exchange for the protection and benefits one received from the government.

LIABILITIES INVOLVED
Tax creates CIVIL LIABILITY on the part of the delinquent taxpayer although the non-payment thereof created a CRIMINAL LIABILITY which
could be the subject of criminal prosecution under existing laws.

4. NATURE OF TAXING POWER

a) Inherent Attribute of Sovereignty
 Taxes are a necessary burden to preserve the State’s sovereignty and a means to give the citizenry facilities and protection which
a government is supposed to provide.
 Belonging as a matter of right to every independent government, it does not need of constitutional conferment.
 Being an attribute of sovereignty, its relinquishment is never presumed.
 Power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent
attribute of sovereignty, belonging as a matter of right to every independent State or government.
 The State has the righ to compel all citizens and property within its limits to contribute.

b) Legislative in Character
 Taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And
where the people have laid the power, there it must remain and be exercised.
i. Discretion as to purpose for which taxes shall be levied:
 The sole arbiter of the purposes for which taxes shall be levied is the legislature, BUT the courts may review the levy of
the tax to determine whether the purpose is a public one.
LUTZ v ARANETA (98 Phil. 148)
 The legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. The
legislative discretion must be allowed full play, subject only to the test of reasonableness.

ii. Discretion as to subjects of taxation

 Legislature has unlimited scope as to the persons, property, or occupation to be taxed, where there are no constitutional
restrictions, PROVIDED the property is within the territorial jurisdiction of the taxing state.

GOMEZ v. PALOMAR, et. al. (25 SCRA 827)

 The legislature has the inherent power to select the subject of taxation and to grant exemptions.

PUNSALAN v. THE MUNICIPAL BOARD OF MANILA (95 Phil. 46)

 The legislature may, in its discretion, select what occupations shall be taxed, and in the exercised of that discretion it may tax all. Or it
may select for taxation certain classes and leave the others behind.

iii. Discretion as to subjects of taxation

 The legislature has the right to determine the amount or rate of tax, in the absence of constitutional prohibitions. This power has
no limits and may be carried even to the extent of exhaustion and destruction, thus the power to destroy.

iv. Discretion as to the manner, means, and agencies of collection of taxes

 The discretion of the legislature in imposing taxes extends to the mode, method or kind of tax.

6. IMPORTANCE OF TAXES
1. Raise revenue
2. Protect locally produced goods against competition from import by imposing higher custom duties.
3. Protect new industries by granting tax exemptions.
4. Regulate property.
5. Distribute equally the wealth of the nation.

7. PURPOSE AND OBJECIVE OF TAXATION

1) Raise Revenues- for the support of government and for all public needs; and to enable the State to promote the welfare and protection
of the citizens.
2) Regulatory measure- taxation may be used as an implement of police power through the imposition of taxes with the end in view of
regulating a particular activity.
NOTES ON TAXATION 1 RUSSELL JAY M. MANGLICMOT | UST CIVIL LAW

3) Promotion of general welfare- race horses are devoted to gambling, if legalized, their owners derive fat income and the public hardly
any profit from horse racing, and this business demands relatively heavy police supervision (Supreme Court in explaining taxing of
boarding stables of race horses in MRHTA v. De La Fuente)
4) Reduction of social inequality- by means of tax credit, or the amount of money that taxpayers can subtract from taxes owed to their
government.
5) Encourage economic growth- Tax exemptions and tax reliefs serve as incentives to encourage investment in our local industry and
thereby promote economic growth.
6) Protectionism- economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import
quotas, and a variety of other government regulations.

8. EXTENT OF TAXING POWER (CUPS)

1) Comprehensive- covers all persons, businesses, activities, professions, rights, and privileges.
2) Unlimited- tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed.
3) Plenary- the BIR may avail of certain remedies to ensure the collection of taxes.
4) Supreme- insofar as the selection of the subject matter of the taxation.

9. PRINCIPLES OF A SOUND TAX SYSTEM

1) Fiscal adequacy- revenues must be adequate to meet government expenditures
2) Theoretical justice- taxes must be reasonable, just, fair, and conscionable. It is equitable when its burden falls on those better able to
pay; and it is progressive when its rate goes up depending on the resources of the person affected.
3) Administrative feasibility- each tax should be clear and plain to the taxpayers, capable of enforcement by an adequate staff,
convenient, and not duly burdensome upon or discouraging to business activity.

10. TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS OF THE STATE

A. Police power
TAXATION POLICE POWER
Purpose Raising revenues Promote public welfare

Amount of exaction No limits Limited to the cost of regulation, issuance of the

licensed, or surveillance.

Benefits received by the taxpayer No benefit except protection of his person No benefit, except a healthy economic standard of
and property and welfare of all society is maintained.

Superiority of contracts Recognizes obligations imposed by Contract limitation does not apply
contracts

Transfer of property rights Taxes paid form part of public funds Merely restraints the exercise of property rights.

B. Taxation and eminent domain

Taxation Eminent domain
Purpose Raise revenue Taking of property for public use

Compensation Accrue to the general benefit of the Just compensation is given the owner of the
state expropriated property

Persons affected All persons Only particular property is comprehended

C. Taxation and Special Assessment

a) a special assessment can be levied only on land;
NOTES ON TAXATION 1 RUSSELL JAY M. MANGLICMOT | UST CIVIL LAW

b) a special assessment cannot, as a rule, be made a personal liability of the persons assessed;
c) a special assessment is based wholly on benefits;
and
d) a special assessment is exceptional both as to time and locality.

The imposition of a charge on all property, real and personal, in a prescribed area, is a tax, not an assessment, although the purpose is
to make a local improvement on a street or highway. A charge imposed only on property owners benefited is a special assessment rather
than a tax.

D. Tax and License

a) A Tax is levied in the exercise of the taxing power; License fees emanate from the police power of the state;
b) The purpose of the tax is to generate revenues; License fees are imposed for regulatory
purposes.
c) The amount of the exaction or charge if it is to be a license fee must only be of sufficient
amount to include expenses of issuing a license; cost of necessary inspection or police surveillance.
d) The imposition is a tax, if its primary purpose is to generate revenue, and regulation is merely incidental; but if regulation is the primary
purpose, the fact that incidental revenue is also obtained does not make the imposition a tax.
e) The State's police power, particularly its regulatory dimension is invoked. Such can be deduced from Section 34 which enumerates the
purposes for which the Universal Charge is imposed and which can be amply discerned as regulatory in character. From the said purposes, it
can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power.

E. Tax and Toll- toll is a demand of proprietorship, and amount charged for the cost and maintenance of the property used; Tax is a demand
of sovereignty for the purpose of raising public revenues.

F. Tax and Penalty- A person is criminally liable in taxation only when he fails to satisfy his civil obligation to pay taxes.

G. Taxes and Debt

(1) are not contracts between the parties, either expressed or implied; but they are the positive acts of the government through its
various agents, binding upon the inhabitants, and to the making and enforcing of which their personal consent individually is not required;
(2) cannot be assigned as debts, or be proved in bankruptcy as such; nor, if uncollected, are the assets which can be seized by
attachment or other judicial processes, and subjected to the payment of municipal indebtedness;
(3) are not the subject of set-off either on behalf of the state or the municipality for which they are imposed, or of the collector, or on
behalf of the person taxed, as against such state, municipality or collector;
(4) do not draw interest, as do sums of money owing upon a contract.

11. ASPECTS OF TAXATION

A. Levy- refers to the enactment of the law by the Congress imposing tax
B. Assessment and collection- the act of administration and implementation of the tax law by the executive department through the
administrative agencies
C. Payment- the act of compliance by the taxpayer including whatever remedies are available to him under the law

CHAPTER 2: Classification of taxes

1. According to subject matter/object

a. Personal, poll or capitation- tax of a fixed amount on individuals residing within a specified territory, without regard to their property,
occupation or business. Ex. Community tax (basic)
b. Property- imposed on property, real or personal, in proportion to its value, or in accordance with some reasonable method or
apportionment. Ex. Real estate Tax
c. Excise- imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation, profession or
business. Ex. Income tax, VAT, Estate Tax, Donor’s Tax

2. According to burden or incidence

a. Direct- the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate tax
b. Indirect – imposed on the taxpayer who shifts the burden of the tax to another, Ex. VAT, customs duties.

3. According to purpose
a. general, fiscal or revenue- imposed for the general purpose of supporting the government. Ex. Income tax, percentage tax
b. special or regulatory- imposed for a special purpose, to achieve some social or economic objective. Ex. Protective tariffs or custom
duties on imported goods intended to protect local industries

4. According to determination of taxes

a. specific- of fixed amount that is imposed by the head or number, or by some standard of the weight and measurement.
b. ad valorem- of fixed proportion in relation with the value of the property in respect to which the tax is assessed.
NOTES ON TAXATION 1 RUSSELL JAY M. MANGLICMOT | UST CIVIL LAW

5. According to scope or authority imposing the tax

a. national- imposed by the national government
b. municipal or local- imposed by the municipal corporations or local governments
6. As to graduation of rates
a. proportional- based on a fixed percentage of the amount of the property, receipts, or on other basis to be taxed.
b. progressive and graduated- the rate of the tax increases as the tax base or bracket increases
c. regressive- the rate of tax decreases as the bases or bracket increases
d. degressive- increase of tax rate is not proportionate to the increase of tax base

7. According to tax base

a.

CHAPTER 3: LIMITATIONS OF TAXATION

I. Inherent limitations
A. Legislative in nature/ non-delegation of power to tax- the power to tax is exclusively vested in the legislative body
XPNs:
a. Art Vi, Sec 28 (2)- The Congress may, by law, authorize the President to impose tariff rates, import and export quotas, etc., subject
to the limitations and guidelines as the congress may impose, consistent with the national development program of the government.
b. Art. X, Sec 5: Each local government unit shall have the power to create its own sources of revenue, fees, charges, subject to such
guidelines and limitations as the Congress may provide consistent with the basic policy of local autonomy. Such taxes, fees, and other charges
shall accrue exclusively to the local government.

B. Extent of judicial review of tax laws- The sole arbiter of the purposes for which taxes shall be levied is the legislature, BUT the courts
may review the levy of the tax to determine whether the purpose is a public one.

2. Territorial- taxing power of a country is limited to person and property within and subject to its jurisdiction.

XPNs: a. where tax laws operate outside territorial jurisdiction, ie, taxation of residents on their incomes derived abroad

b. where the tax laws do not operate within the territorial jurisdiction of the state when exempted by treaty obligations or when exempted
by international comity.

3. For a specific purpose- tax is considered for public purpose if:

1. it is for the welfare of the nation and/or for greater portion of the population
2. it affects the area as a community rather than as individuals
3. it is designed to support the services of the government for some of its recognized projects

Tests in determining public purpose

a. Duty test – whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a
government to provide
b. Promotion of general welfare test- whether the proceeds of the tax will directly promote the welfare of the community in equal measure.

Principles relative to public purpose:

1. Tax revenue must not be used for purely private purposes or for the exclusive benefit of private persons.
2. Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no constitutional limitation because
the legislature is free to select subjects of taxation.
3. An individual taxpayer need not derive direct benefits from the tax.
4. Public purpose is continually expanding. Areas formerly left to private initiative now lose their boundaries and may be undertaken by the
government if it is to meet the increasing social challenges of the times.
5. The public purpose of tax law must exist at the time of its enactment.

4. Subject to international comity- refers to the respect accorded by nations to each other because they are sovereign equals. Thus, the
property or income of a foreign state may not be the subject of taxation by another state.
 A state must recognize the generally accepted tenets of international law that limit the authority of the government to effectively impose
taxes upon a sovereign State and its instruments.

5. Tax exemptions of government entities- the government is exempt from tax EXCEPT when it chooses to tax itself. Where it is done precisely
to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.

 Government agencies- any of the various units of the Government, including a department, bureau, office, instrumentality, or GOCC, or
a local government or a distinct unit therein.
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 Tax exempted: performing governmental functions

 Subject to tax unless expressly exempted: performing proprietary functions.

 Government instrumentalities- any agency of the government not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through charter.
 Unless otherwise provided, the taxing powers of provinces, cities and municipalities shall not extend to the levy of instrumentalities
of local government units.

II. CONSTITUTIONAL LIMITATIONS

1. Equal protection of the law- accomplished when the burden of the tax falls equally and impartially upon all persons and property subject
to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon others
similarly situated or of like character.

Absolute equality impossible- it is an unattainable goal as long as the man and government is imperfect.
Legal inequality- When taxes become discriminative between individuals of the same class taxes, and selects some for an exceptional
burden.
Universal application- what the clause requires is equality among equals as determined according to classification.
Classification- grouping of persons or things similar to each other in certain particular and different from all others in these same
particulars and different from all others in these same particulars.
Requisites of a valid classification:
1) Must be based on substantial distinction
2) Must apply both to present and future conditions
3) Must be germane to the purpose of the law
4) Must apply equally to all members of the same class.
Case Doctrines:
Benjamin Gomez v. Enrico Palomar (25 SCRA 827): A flat tax which in effect is a charge for a transaction, operating equally among persons
within the class regardless of the amount involved does not infringe the rule of uniformity and equality of taxation.

Eastern Theatrical Co. v. Victor Alfonso (83 Phil. 852): taxing power has the authority to make reasonable and natural classifications for
purposes of taxation.

Manila Race Horse Trainers Assn, Inc. v. De La Fuente (88 Phil. 60): Race horses are devoted to gambling and if legalized, their owners derive
fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision. The
differentiation conforms to the practical dictates of justice and equity and is not discrimination within the meaning of the Constitution.

City of Bagui v. Fortunato de Leon (25 SCRA 938): A tax is considered uniform when it operates with the same force and effect in every place
where the subject may be found. Where the statute or ordinance applies equally to all persons, firms, and corporation placed in similar
situations, there is no infringement of the rule in equality.

Antero Sison v. Ancheta (130 SCRA 654): The state has the inherent power to select the subject of taxation, and inequalities which results
from the singling out of one particular class for taxation or tax exemption infringe no constitutional limitation.

Juan Luna Subdivision, Inc. v. Sarmiento (91 Phil 371): Each set of taxes is a class by itself, and the law would be open to attack as a class
legislation only if all taxpayers belonging to one class were not treated alike.

Association of Custom Brokers, Inc. v. Mun. Board, City of Manila, et al. (93 Phil. 107): Ordinance exacts tax does not distinguish between
a motor vehicle for hire and which is purely for private use, or between a motor vehicle registered in the City of Manila and one registered
in another place. This inequality renders the ordinance in question offensive to the constitution.

Ormoc Sugar Company, Inc. v. The Treasure of Ormoc City, et al. (22 SCRA 603): The ordinance only taxes centrifugal sugar produced and
exported by the Ormoc Sugar Co., Inc. and none other. For the classification to be reasonable, the terms should applicable to future condition
as well.

Jose Reyes v. Pedro Almanzor (196 SCRA 322): Taxation is said to be equitable when its burden halls on those better able to pay; taxation is
progressive when its rate goes up depending on the resources of the person affected.

Mayor Antonio J. Villegas v. Hiu Chiong Tsai Pao and Judge Arca (86 SCRA 270): Classification should be based on real and substantial
differences having a reasonable realtion to the subject of legislation.

Misamis Oriental Assn of Coconut Traders, Inc. v. Department of Finance Secretary, et al. (238 SCRA 63): the Constitution does not forbid
the differential treatment of persons so long there is a reasonable basis for classifying them differentially.
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Tolentino, et al. v. Secretary of Finance (235 SCRA 630): A deliberate and calculated device in the guise of a tax to limit the circulation of
information to which the public is entitled in virtue of the Constitution guaranties. The case is a classic illustration of the warning that the
power to tax is the power to destroy.

2. Due Process-
GR: violated where the tax imposed is for a private purpose as distinguished from a public purpose; a tax is imposed on property outside the
State, and arbitrary or oppressive method used in assessing and collecting taxes.
XPN: not violated when applied to a particular taxpayer, although the purpose of the tax will result in injury rather than benefit to such
taxpayer.
 Due process may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown
to amount to a confiscation of a property.
 Does not require property subject to the tax or the amount to be raised should be determined by judicial inquiry, and a notice and
hearing.
 Due process clause will not strike down a revenue measure as unconstitutional on the mere allegation of arbitrariness by the taxpayer.
There must be factual foundation to such unconstitutional taint.
 There must be clear and unequivocal breach of the Constitution and proof of arbitrariness.
 For income to be taxable, following requisites must exist:
1) There must be gain
2) The gain must be realized or received
3) The gain must not be excluded by law or treaty from taxation

Illustrative violations of the due process clause:

1. Tax amounts to confiscation of property
2. The subject of confiscation is outside the jurisdiction of the taxing authority
3. If the law is imposed for the purpose other than a public purpose
4. If the law which is applied retroactively imposes unjust and oppressive taxes
5. Where the law is in violation of inherent limitations.

Case doctrines:
Carlos Superdrug Corp v. DSWD (526 SCRA 130): “In the absence of evidence demonstrating the alleged confiscatory effect of the provision
in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor.”

Jose Reyes v. Pedro Almanzor (196 SCRA 322): The taxing power has the authority to make reasonable and natural classification for purposes
of taxation but the government’s act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no supports
in reason.

CIR v. CTA and Fortune Tobacco Corp (261 ScRA 236): When the administrative rule goes beyond merely providing for the means that
facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it
behooves the chance to be heard, and thereafter to be duly informed, before the new issuance is given force and effect of law.

3. UNIFORMITY OF TAXATION- all taxable articles or kinds of property of the same class shall be taxed at the same rate; it is uniform when
it operates with the same form and effect in every place where the subject of it is found.

Uniformity vs. Equality

Tax Uniformity- requires that all taxable property shall be alike subjected to the tax.
 Violated if particular kinds, species, or items of property are selected to bear the whole burden of the tax, while others, which
should be equally subject to it, are left untaxed.

Tax equality- accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it.

Case Doctrines:

Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas v. Tan (163 SCRA 371): Inequalities which result from the singling out of one
particular class for taxation or exemption infringe no constitutional limitation.

4. PROGRESSIVE TAXATION- when its rate goes up depending on the resources of the person affected

Tax pyramiding- the imposition of a tax on a tax. It typically happens with taxes that are imposed on goods or services, such as a sales tax.
Typically frowned upon by the Supreme Court, the Legislature and tax authorities.

Regressive system of taxation is valid. The mandate of Congress is not prescribe, but to evolve progressive tax system. This is a mere directive
upon Congress, not a justiciable right or a legally enforceable one. We cannot avoid regressive taxes but only minimize them.
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5. NON-IMPAIRMENT CLAUSE- only applies where it claimed that the obligation of a contract is impaired by a law of the state—a statute or
constitutional provision of the State. It does not apply to mere decisions of courts construing a contract.

Is tax exemption revocable? IT DEPENDS.

Revocable- if the grant of an exemption does not constitute a contract, but is merely a spontaneous concession by the legislature with any
service or duty imposed.
Irrevocable- if the tax exemption constitutes a valuable consideration