Taxation 1

Part I. General Principles of Taxation

A. Definition, Concept and Purposes of Taxation

Definition and Concept of Taxation

1. It is the act of laying a tax, i.e., the process or means by

which the sovereign, through its law-making body, raises
income to defray the necessary expenses of government. It
is merely a way of apportioning the cost of government
among those who in some measure are privileged to enjoy
its benefits and must, therefore, bear its burdens.

2. As a power, it refers to the inherent power of the State to

demand enforced contributions for public purpose or
purposes.

Purposes of Taxation

1. Revenue-raising purpose; and

2. Non-revenue/special or regulatory purpose.

Revenue Raising Purpose –

The primary purpose of taxation is to provide funds or

property with which to promote the general welfare and
protection of its citizens. Fees may be properly regarded as
taxes even though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or if revenue is,
at least, one of the real and substantial purposes, then the
exaction is properly called a tax.

Non-Revenue/Sumptuary/Special or Regulatory Purpose –

Taxation is often employed as a device for regulation by

means of which certain effects or conditions envisioned by
governments may be achieved. These regulatory purposes
are also known as “sumptuary”.
Thus, taxation can:

(1) Strengthen anemic enterprises or provide incentive to

greater production through grant of tax exemptions or the
creation of conditions conducive to their growth.

(2) Protect local industries against foreign competition by

imposing additional taxes on imported goods, or encourage
foreign trade by providing tax incentives on imported goods.

(3) Be a bargaining tool by setting tariff rates first at a

relatively high level before trade negotiations are entered
into with another country.

(4) Halt inflation in periods of prosperity to curb spending

power; ward off depression in periods of slump to expand
business.

(5) Reduce inequalities in wealth and incomes, as for

instance, the estate, donor's and income taxes, their payers
being the recipients of unearned wealth or mostly in the
higher income brackets.

(6) Be levied to promote science and invention or to finance

educational activities or to improve the efficiency of local
police forces in the maintenance of peace and order
through grant of subsidy.

(7) Taxes may be an implement of the police power to

promote the general welfare.

B. Nature and Characteristics of Taxation

Nature of Taxation

1. It is inherent in sovereignty.
2. It is essentially a legislative function.
3. It is subject to constitutional and inherent limitations.
Taxation is Inherent in Sovereignty –

The power of taxation is an inherent attribute or incident of

sovereignty. It is a power emanating from necessity. It is a
necessary burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist an aggression, a
navy to defend its shores from invasion, a corps of civil
servants to serve, public improvement designed for the
enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a
government is supposed to provide. It is essential to the
existence of every government.

It exists apart from constitutions and without being expressly

conferred by the people. Constitutional provisions relating to
the power of taxation do not operate as grants of the power
to the government. They merely constitute limitations upon a
power which would otherwise be practically without limit.
While the power to tax is not expressly provided for in our
Constitution, its existence is recognized by the provisions
relating to taxation.

Taxation is Essentially a Legislative Function –

The power to tax is peculiarly and exclusively legislative and

cannot be exercised by the executive or judicial branch of
the government. Hence, only Congress, our national
legislative body, can impose taxes. The levy of a tax,
however, may also be made by a local legislative body
subject to such limitations as may be provided by law.

Subject to Constitutional and Inherent Limitations –

These limitations are those provided in the fundamental law

or implied therefrom, while the rest spring from the nature of
the taxing power itself although they may or may not be
provided in the Constitution.
Characteristics of Taxation (also referred to as attributes,
tenets, principles, due process, elements, requisites, or
inherent limitation of taxation):

1. Taxation is for a public purpose.

2. Taxation in inherently legislative.
3. Taxation is territorial.
4. Taxation is subject to international comity.

Levy for Public Purpose –

Under this concept, the impelling reason for the imposition of

the tax must be the welfare of the public, in general. This
follows that the proceeds from such imposition shall inure to
the benefit of the public.

Question: Does a tax law have to have a direct benefit to

the public at large?

Answer: No. In the case of Lutz vs. Araneta (1955), a certain

imposition was successfully passed for the purpose of
upholding the welfare of the sugar industry. It was
questioned on the ground that there is no public purpose
since the sugar industry does not allegedly represent the
public. The issue was resolved in favor of the validity of the
imposition. While sugar industry does not represent the entire
public as the proceeds would not add to the general
budget of the national government, nevertheless, the
industry itself admits of a public nature whose circumstances
and effects directly affect the public. The requirement of
direct purpose does not admit of a direct public benefit from
the imposition.

Territorial Jurisdiction –

This relates to the area of jurisdiction and responsibility of a

particular estate. Independent states’ power of taxation is
generally confined only within its jurisdiction to give due
respect and as courtesy to other states. A state, as a rule,
can only impose and implement tax laws and rules within its
jurisdiction in accordance with its wishes. Outside its
jurisdiction, it is without power to do so. However, it can
impose a tax on citizens or entities of other states doing a
trade or business or deriving income within the jurisdiction of
its state.

Subject to International Comity –

This refers to the friendly interaction and participation of the

state with different states. This adheres to some amount of
submission and compliance of certain international rules and
covenants for mutual benefits and enjoyment of the states
and its inhabitants. Bilateral agreements, conventions and
international treaties fall under this category.

International law is distinct from international comity. The

latter comprises of legally non-binding practices adopted by
states for reasons of courtesy.

C. Power of Taxation as distinguished from Police Power and

Power of Eminent Domain

1. As to Concept of Power

a. Taxation: It is the power to enforce contribution to raise

government funds.
b. Police Power: It is the power to make and implement laws
for the general welfare.
c. Eminent Domain: It is the power to take private property
for public use with just compensation.

2. As to Authority Which Exercises the Power

a. Taxation: It is exercised only by the government or its

political subdivisions.
b. Police Power: It is exercised only by the government or its
political subdivisions.
c. Eminent Domain: May be granted to public service or
public utility companies.
3. As to Purpose of Power

a. Taxation: The property (generally in the form of money) is

taken for the support of the government.
b. Police Power: The use of the property regulated, or the
property is taken or destroyed to promote the general
welfare; thus, it is not compensable.
c. Eminent Domain: The private property is taken for public
use or benefit; thus, it must be compensated.

4. As to Person Affected

a. Taxation: It operates upon a community or a class of

entities or individuals.
b. Police Power: It operates upon a community or a class of
entities or individuals.
c. Eminent Domain: It operates on a entity or an individual as
the owner of particular private property.

5. As to Effect of the Exercise of Power

a. Taxation: The money contributed in the concept of taxes

becomes part of the public funds.
b. Police Power: There is no transfer of title or right over a
property; at most there is restraint on the injurious use of
property.
c. Eminent Domain: There is a transfer of the right to property
whether it be of ownership or a lesser right (e.g. possession).

6. As to Benefits Received

a. Taxation: It is assumed that the person affected received

the equivalent of the tax in the form of protection and
benefits he receives from the gov’t.
b. Police Power: The person affected receives no direct
benefit but only such as may arise from the maintenance of
a healthy economic standard of society.
c. Eminent Domain: The person affected receives the market
value of the property expropriated or taken from him.

7. As to the Amount of Imposition

a. Taxation: There is generally no limit on the amount of tax

that may be imposed.
b. Police Power: The amount imposed should not be more
than sufficient to cover the cost of the license and the
necessary expenses of the regulation as nearly as may be
estimated.
c. Eminent Domain: There is no amount imposed but the
owner is paid the market value of the property taken.

8. As to Importance of Power

a. Taxation: It is inseparable to the existence of a nation – it

supports police power and eminent domain.
b. Police Power: It is for the protection, safety and welfare of
society.
c. Eminent Domain: Common necessities and interest of the
community transcend individual rights in property.

9. As to Power’s Relationship to the Constitution

a. Taxation: It is subject to certain constitutional and inherent

limitations, including the prohibition against the impairment
of the obligation of contracts.
b. Police Power: It is relatively free from constitutional
limitations and is superior to the impairment provisions as the
welfare of the State is superior to any private contract.
c. Eminent Domain: Like the power of taxation, it is also
inferior to the impairment of the obligation of contracts so
that the government cannot expropriate property which
under a contract it had previously bound itself to purchase
from the other contracting party.

10. As to Limitation of the Power

a. Taxation: Its constraints are its Constitutional and inherent

limitations.

b. Police Power: It is limited to the demand for public interest

and due process.
c. Eminent Domain: It is bound by public purpose and just
compensation.

D. Theory and Basis of Taxation

1. Lifeblood Theory
2. Necessity Theory
3. Benefits-Protection Theory (Symbiotic Relationship)
4. Jurisdiction over Subject and Objects

Lifeblood Theory –

Taxes are the lifeblood of the government and their prompt

and certain availability is an imperious need. Taxes are the
lifeblood of the government and so should be collected
without unnecessary hindrance. It is said that taxes are what
we pay for civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate
and operate it

Instances when the lifeblood theory is applied –

(1) The prohibition against set-off of taxes;
(2) The prohibition against the issuance of an injunction to
restrain the collection of taxes;
(3) Presumption of correctness of assessments

Necessity Theory –

The power of taxation proceeds upon theory that the

existence of government is a necessity; that is cannot
continue without means to pay its expenses; and that for
those means it has the right to compel all citizens and
property within its limits to contribute.

The power to tax, an inherent prerogative, has to be availed

of to assure the performance of vital state functions. It is the
source of the bulk of public funds. The obligation to pay
taxes rests upon the necessity of money for the support of
the state. For this reason, no one is allowed to object to or
resist the payment of taxes solely because no personal
benefit to him can be pointed out.

Benefits-Protection Theory (Symbiotic Relationship) –

This principle serves as the basis of taxation and is founded

on the reciprocal duties of protection and support between
the State and its inhabitants.

Despite the natural reluctance to surrender part of one's

hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of 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 moral and material values. This symbiotic relationship is
the rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those in
the seat of power.

Jurisdiction over Subject and Objects (Territorial) –

The limited powers of sovereignty are confined to the

subjects and objects within the respective spheres of
governmental control. Thus, while the State can tax all
persons subject to its jurisdiction for all their property left by
them within its jurisdiction, yet its taxing power necessarily
stops at the state boundary lines. The State’s power of
taxation is limited within its territorial jurisdiction. It cannot
reach over into another jurisdiction to seize upon person or
property for purposes of taxation.

E. Principles of Sound Tax System/ Canons of Taxation

3 Principles –
1. Fiscal Adequacy
2. Administrative Feasibility
3. Theoretical Justice
Fiscal adequacy

The sources of tax revenue should coincide with, and

approximate the needs of, government expenditures. The
revenue should be elastic or capable of expanding or
contracting annually in response to variations in public
expenditures.

Administrative Feasibility

Tax laws should be capable of convenient, just and effective

administration. Each tax should be capable of uniform
enforcement by government officials, convenient as to the
time, place, and manner of payment, and not unduly
burdensome upon, or discouraging to business activity.

Theoretical Justice or Equality

The tax burden should be in proportion to the taxpayer’s

ability to pay. This is the so-called ability to pay principle.
Taxation should be uniform as well as equitable.

Case: Congress passed a tax law which to the mind a Atty.

Rivera is contrary to the principles of a sound tax system.
Atty. Rivera went to the Supreme Court to question the
legality of the tax law.

Question: May a tax law be rendered null and void if it was

passed in violation of the principles of a sound tax system?

Answer: No. The non-observance of the principles of a sound

tax system will not necessarily render the tax imposed invalid
except to the extent that those tax laws or regulations are in
violation of specific constitutional limitations like due process,
equal protection, non-impairment of obligations and
contracts, freedom of religion, non-payment of poll tax, etc.
F. Scope and Limitations of Taxation

Scope of Legislature’s Taxing Power –

The taxing power of the legislature extends to the following:
a. the nature or kind of tax to be collected;
b. the object or purpose for which the tax shall be levied;
c. the extent or amount or rate of tax to be collected;
d. the coverage or the persons, property, or occupation to
be taxed;
e. the apportionment of the tax whether it is general or
limited to a particular locality or partly general or partly
local);
f. the method of collection; and
g. the situs or place of taxation.

Limitations to the Power of Taxation

1. Inherent Limitations (Characteristics of Taxation)
2. Constitutional Limitations

Inherent Limitations –
a. Taxation is for Public Purpose
b. Taxation is Inherently Legislative
c. Taxation is Territorial
d. Taxation is subject to International Comity
e. Exemption of Government Entities, Agencies, and
Instrumentalities from Taxation

a. Taxation is for Public Purpose (the power of the legislature

to appropriate public funds is correlative to its power to tax
and as such the power of taxation may only be exercised for
public purpose; the revenues collected from taxation should
be devoted to a public purpose)

b. Taxation is Inherently Legislative

General Rule: The power tax is inherently and purely

legislative in character and may not be delegated.
Exceptions:

(1) Delegation to the Local Governments – by express

provision of the Constitution, the LGUs are now given direct
authority to levy taxes, fees, and other charges pursuant to
Section 5, Article X. The power to tax are no longer
exclusively vested to Congress.

(2) Delegation to the President –

(a) delegation of tariff powers to the President under the
flexible tariff clause (Sec. 28(2), Art. VI, 1987 Constitution);
(b) Delegation of emergency powers to the President (Sec.
23(2), Art. VI, 1987 Constitution);
(c) Delegation to the President to enter into executive
agreements and to ratify tax treaties subject to
concurrence of the Senate.

c. Taxation is Territorial (the taxing power may only be

exercised only on persons, property or businesses within the
jurisdiction of the taxing authority)

Exceptions to the Territorial Rule –

(1) where tax laws operate outside territorial jurisdiction, as in
the taxation of resident citizens on their incomes abroad;
(2) Where tax laws do not operate within the territorial
jurisdiction of the state, as when they are exempted by virtue
of treaty obligations or when exempted by international
comity.

d. Taxation is subject to International Comity (comity is

respect accorded by every nation to each other as co-
equals such that the property or income of a foreign state or
government may not be subject to tax by another state)

e. Exemption of Government Entities, Agencies, and

Instrumentalities from Taxation (State: exempt from taxation)

General Rule: The State may not be subject to taxation. By

express provisions of the Local Government Code, LGUs may
not levy taxes, fees or other charges of any kind on the
National Government, its agencies, and instrumentalities.

Exception: The State may tax itself including its political

subdivisions. GOCCs are now subject to tax as their
exemptions from local taxes have been withdrawn under the
Local Government Code.

Note: They are called inherent limitations as they limitations

that exist despite the absence of an express constitutional
provision thereon.

2. Constitutional Limitations
a. Provisions Directly Affecting Taxation
b. Provisions Indirectly Affecting Taxation

Provisions Directly Affecting Taxation

(1) Prohibition against imprisonment for non-payment of poll

tax (Sec. 20, Art. III)

“No person shall be imprisoned for debt or non-payment

of a poll tax.”

(2) Uniformity, equitability and progressive system of taxation

(Sec. 28(1), Art. VI)

“The rule of taxation shall be uniform and equitable. The

Congress shall evolve a progressive system of taxation.”

(3) Grant by Congress of authority to the President to fix tariff

rates, import and export quotas, etc. (Sec. 28(2), Art. VI)

(4) President’s power to impose flexible tariff rates (Sec. 28(2),

Art. VI)

“The Congress may, by law, authorize the President to fix

within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and
 export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national
development program of the Government.”

(5) Prohibition against taxation of religious, charitable entities,

and educational entities (Sec. 28(3) Art. VI)

(6) Exemptions from real property taxes on charitable

institutions, churches, parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements actually, directly, and
exclusively used for religious, charitable, and educational
purposes (Sec. 28(3) Art. VI)

“Charitable institutions, churches and parsonages or

convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt
from taxation.”

(7) Exemption from taxes and duties of all revenues and

assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes
(Sec. 4 (3), Art. XIV)

“All revenues and assets of non-stock, non-profit

educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by
law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions subject to the limitations provided by law
including restrictions on dividends and provisions for
reinvestment.”

(8) Majority vote of all the Members of Congress required for

law granting tax exemption (Sec. 28(4), Art. VI)

“No law granting any tax exemption shall be passed

without the concurrence of a majority of all the
Members of the Congress.”

(9) Treatment of tax levied for special purpose as a special

fund and to be used for such special purpose only (Sec.
29(3), Art. VI)

“All money collected on any tax levied for a special

purpose shall be treated as a special fund and paid out
for such purpose only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the general funds
of the Government.”

(10) President’s veto power on any particular item or items in

an appropriation, revenue, tariff bills (Sec. 27 (2), Art. VI)

“The President shall have the power to veto any

particular item or items in an appropriation, revenue, or
tariff bill, but the veto shall not affect the item or items to
which he does not object.”

(11) Non-impairment of jurisdiction of the Supreme Court

over cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto
(Sec. 5 (2)(b), Art. VIII)

“Sec. 5. The Supreme Court shall have the following

powers:
(1) x xx
(2) Review, revise, reverse, modify, or affirm on appeal or
certiorari, as the law or the Rules of Court may provide,
final judgments and orders of lower courts in:
(a) x xx
(b) All cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation
thereto.”
(12) Grant of power to the local government units to create
its own sources of revenue and to levy taxes subject to
Congressional limitations (Sec. 5, Art. X)

“Each local government unit shall have the power to

create its own sources of revenues and to levy taxes,
fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with
the basic policy of local autonomy. Such taxes, fees,
and charges shall accrue exclusively to the local
governments.”

(13) No appropriation or use of public money for religious

purposes (Sec. 29. Art. VI)

“No public money or property shall be appropriated,

applied, paid, or employed, directly or indirectly, for the
use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of religion,
or of any priest, preacher, minister, or other religious
teacher, or dignitary as such, except when such priest,
preacher, minister, or dignitary is assigned to the armed
forces, or to any penal institution, or government
orphanage or leprosarium.”

(14) All appropriations, revenue or tariff bills shall originate

exclusively from the House of Representatives, but the
Senate may propose or concur with amendments (Sec. 24,
Art. VI)

“All appropriation, revenue or tariff bills, bills authorizing

increase of the public debt, bills of local application,
and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur
with amendments.”
Provisions Indirectly Affecting Taxation

(1) Due process (Sec. 1, Art. III)

(2) Equal protection (Sec. 1. Art. III)

“No person shall be deprived of life, liberty, or property

without due process of law, nor shall any person be
denied the equal protection of the laws.”

(3) Religious freedom (Sec. 5. Art. III)

“No law shall be made respecting an establishment of

religion, or prohibiting the free exercise thereof. The free
exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall
forever be allowed. No religious test shall be required for
the exercise of civil or political rights.”

(4) Non-impairment of obligations of contracts (Sec. 10, Art.

III)

“No law impairing the obligation of contracts shall be

passed.”

G. Situs of Taxation

1. Meaning

The situs of taxation literally means the place of taxation. It is

the place or authority that has the right to impose and
collect taxes.

Basis or Determinants of the Situs of Taxation

1. The symbiotic relationship of the taxing authority and the

taxpayer;
2. The jurisdiction, State or political unit that gives protection
has the right to demand support.

Effect of Multiplicty of Situs of Taxation

Due to the variance in the concept of “domicile” for tax

purposes and considering the multiple relationships that may
arise with respect to intangible property and the use to
which the property may have been devoted, all of which
may receive the protection of the laws of jurisdictions other
than the domicile of the owner, the same income or
intangible property may be subject to taxation in several
taxing jurisdictions.

How Multiplicity of Situs of Taxation is Addressed

The taxing jurisdiction may:

1. provide for exemptions or allowance of deduction or tax
credit for foreign taxes; and/or
2. enter into tax treatise with other jurisdictions/States.

2. Situs of Income Tax

a.From sources within the Philippines: all kinds of taxpayers

are subject to income tax on income derived from sources
within the Philippines;

b.From sources without the Philippines: only resident citizens

and domestic corporations are subject to income tax on
income derived from sources without the Philippines;

c. Income partly within and partly without the Philippines:

taxable income attributable to sources within the Philippines
may be determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance.

3. Situs of Property Taxes

a. Taxes on Real Property: the situs of taxes on real property is

where the property is located (lex situs)
b. Taxes on Personal Property:

(1) If the personal property is tangible: the situs is where the

property is physically located although the owner resides in
another jurisdiction.

(2) If the personal property is intangible:

General rule: the situs is the domicile of the owner

(mobiliasequunturpersonam)

Exceptions:
(a) where the intangible personal property has acquired a
business situs in another jurisdiction;
(b) where the law provides for the situs of the subject of
the tax

4. Situs of Excise Taxes

Excise taxes or privilege taxes are taxes imposed on the

performance of an act, the enjoyment of a right or privilege,
or the engagement in an occupation. Thus, the situs of
excise taxes is where the transaction was performed, or
where the right, privilege, or occupation was exercised as
this is the place which gives protection to the business or
occupation.

Situs of Transfer Tax

a. Estate Tax:

(1) For citizens (resident or non-resident) and resident

aliens, they are taxed wherever their properties and assets
are located;
(2) For non-resident aliens, they are taxed on their
properties located in the Philippines.

b. Donor’s Tax: Same rule applies as that of estate tax

5. Situs of Business Tax

a. Sale of real property: the situs is where the real property is

located

b. Sale of personal property: the situs is where the sale is

perfected and consummated.

c. VAT: the situs is the place where the transaction is made. It

is either the place where the property is sold and consumed
or where the service is to be performed,

H. Stages of Taxation

3 Stages of Taxation –

1. Levy – it is the enactment of a law by Congress imposing a

tax;

2. Assessment and Collection – it is the act of administration

and implementation of the tax law by the executive
department through the administrative agencies;

3. Payment – it is the act of compliance by the taxpayer

including whatever remedies are available to him under the
law;

Note: Refund – technically, it is not a stage of taxation, but a

remedy available to a taxpayer which seeks to return excess
of tax withheld from, collected from, or erroneously paid by
a taxpayer.