Part I.

Concept & Characteristics of Taxation

A. Taxation/Tax Defined
Taxation 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, therefore, must beat its burdens (De Leon, citing 71 Am
Jur. 2d. 342)

B. Purpose of Taxation
1. Primary Purpose:

(1) Revenue Generation (jurisprudence) but may also be exercised for (2) Social and (3)
Economic (non-revenue) objectives (De Leon for #s 2 & 3)

2. Incidental Purpose: Implement of Police Power

(NPC v. Cabanatuan)

Taxes are the lifeblood of the government, for without taxes, the government can neither exist
nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source
from the very existence of the state whose social contract with its citizens obliges it to promote
public interest and common good. The theory behind the exercise of the power to tax
emanates from necessity; without taxes, government cannot fulfill its mandate of promoting
the general welfare and well-being of the people.

(Progressive Dev’t v. QC)

The term "tax" frequently applies to all kinds of exactions of monies which become public
funds. It is often loosely used to include levies for revenue as well as levies for regulatory
purposes such that license fees are frequently called taxes although license fee is a legal concept
distinguishable from tax: the former is imposed in the exercise of police power primarily for
purposes of regulation, while the latter is imposed under the taxing power primarily for
purposes of raising revenues. Thus, if the generating of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose,
the fact that incidentally revenue is also obtained does not make the imposition a tax.

C. Essential Elements

(Republic v. COCOFED)

Indeed, coconut levy funds partake of the nature of taxes which, in general, are enforced
proportional contributions from persons and properties, exacted by the State by virtue of its
sovereignty for the support of government and for all public needs.

Based on this definition, a tax has three elements, namely:

a) it is an enforced proportional contribution from persons and properties

 b) it is imposed by the State by virtue of its sovereignty; and
c) it is levied for the support of the government.

D. Theory and Rationale

1. (CIR v. CA, Bellosillo J. concurring)

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 law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may be achieved.

xxx xxx xxx

It is said that taxes are what we pay for civilized society. Without taxes, the government would
be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one's hard-earned income to 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.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in

all democratic regimes that it be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right to complain and the
courts will then come to his succor. For all the awesome power of the tax collector, he
may still be stopped in his tracks if the taxpayer can demonstrate . . . that the law has
not been observed.

2. (NPC v. Cabanatuan)

In recent years, the increasing social challenges of the times expanded the scope of state
activity, and taxation has become a tool to realize social justice and the equitable distribution
of wealth, economic progress and the protection of local industries as well as public welfare
and similar objectives. Taxation assumes even greater significance with the ratification of the
1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress;
local legislative bodies are now given direct authority to levy taxes, fees and other charges
pursuant to Article X, Section 5 of the 1987 Constitution, viz:

"Section 5. Each Local Government unit shall have the power to create its own sources of revenue,
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."

This paradigm shift results from the realization that genuine development can be achieved
only by strengthening local autonomy and promoting decentralization of governance. For a
long time, the country's highly centralized government structure has bred a culture of
dependence among local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in matters of local
development on the part of local government leaders." The only way to shatter this culture of
 dependence is to give the LGUs a wider role in the delivery of basic services, and confer them
sufficient powers to generate their own sources for the purpose. To achieve this goal, Section
3 of Article X of the 1987 Constitution mandates Congress to enact a local government code
that will, consistent with the basic policy of local autonomy, set the guidelines and limitations
to this grant of taxing powers, viz:

"Section 3. The Congress shall enact a local government code which shall provide for a more responsive
and accountable local government structure instituted through a system of decentralization with
effective mechanisms of recall, initiative, and referendum, allocate among the different local government
units their powers, responsibilities, and resources, and provide for the qualifications, election,
appointment and removal, term, salaries, powers and functions and duties of local officials, and all
other matters relating to the organization and operation of the local units."

To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote local
autonomy. These include the Barrio Charter of 1959, the Local Autonomy Act of 1959, the
Decentralization Act of 1967 and the Local Government Code of 1983. Despite these
initiatives, however, the shackles of dependence on the national government remained. Local
government units were faced with the same problems that hamper their capabilities to
participate effectively in the national development efforts, among which are: (a) inadequate
tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to
prioritize and approve development projects, (d) heavy dependence on external sources of
income, and (e) limited supervisory control over personnel of national line agencies.

Considered as the most revolutionary piece of legislation on local autonomy, the LGC
effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of
LGUs to include taxes which were prohibited by previous laws such as the imposition
of taxes on forest products, forest concessionaires, mineral products, mining
operations, and the like. The LGC likewise provides enough flexibility to impose tax
rates in accordance with their needs and capabilities. It does not prescribe graduated
fixed rates but merely specifies the minimum and maximum tax rates and leaves the
determination of the actual rates to the respective sanggunian.

E. Benefit Derived
1. (Gomez v. Palomar)

“The petitioner further argues that the tax in question is invalid, first, because it is not levied
for a public purpose as no special benefits accrue to mail users as taxpayers, and second,
because it violates the rule of uniformity in taxation.

The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer is constitutionally entitled is
that derived from his enjoyment of the privileges of living in an organized society,
established and safeguarded by the devotion of taxes to public purposes. Any other
view would preclude the levying of taxes except as they are used to compensate for the burden
on those who pay them and would involve the abandonment of the most fundamental
principle of government — that it exists primarily to provide for the common good.

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a
flat rate rather than a graduated tax. A tax need not be measured by the weight of the mail
 or the extent of the service rendered. We have said that considerations of administrative
convenience and cost afford an adequate ground for classification. The same considerations
may induce the legislature to impose a flat tax which in effect is a charge for the transaction,
operating equally on all persons with the class regardless of the amount involved. As Mr.
Justice Holmes said in sustaining the validity of a stamp act which imposed a flat rate of two
cents on every $100 face value of stock transferred:.

"One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The
inequality of the tax, so far as actual values are concerned, is manifest. But, here again equality in
this sense has to yield to practical considerations and usage. There must be a fixed and indisputable
mode of ascertaining a stamp tax. In another sense, moreover, there is equality. When the taxes on
two sales are equal, the same number of shares is sold in each case; that is to say, the same privilege
is used to same extent. Valuation is not the only thing to be considered. As was pointed out by the
court of appeals, the familiar stamp tax of two cents on checks, irrespective of income or earning
capacity, and many others, illustrate the necessity and practice of sometimes substituting count for
weight . . . . "

According to the trial court, the money raised from the sales of the anti-TB stamps is spent
for the benefit of the Philippine Tuberculosis Society, a private organization, without
appropriation by law. But as the Solicitor General points out, the Society is not really the
beneficiary but only the agency through which the State acts in carrying out what is
essentially a public function. The money is treated as special fund and as such need not be
appropriated by law”

F. Basic Principles of a Sound Tax System

1. Fiscal Adequacy – “We agree with the observation of the Office of the Solicitor General
that without Executive Order No. 73, the basis for collection of real property taxes will still
be the 1978 revision of property values. Certainly, to continue collecting real property taxes
based on valuations arrived at several years ago, in disregard of the increases in the value of
real properties that have occurred since then, is not in consonance with a sound tax system.
Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources
of revenues must be adequate to meet government expenditures and their variations.” (Chavez
v. Ongpin)

2. Equality or Theoretical Justice – the tax burden must be distributed in proportion to the
taxpayer’s ability to pay, thus similarly situated tax payers should pay equal taxes, while those
who have none should pay more; it must be both uniform and equitable (de Leon)

3. Administrative Feasibility – Tax laws should be capable of convenient, just and effective
administrative or enforcement at a reasonable cost (De Leon)

G. Aspects of Taxation
1. Levy – imposition of tax via a Legislative Act
2. Collection – collection of the tax essentially administrative in character (i.e. Executive Branch)

H. Classification of Taxes
1. As to Scope
i. National – Tax imposed by the National Government (De Leon)
ii. Municipal or Local – Tax imposed by municipal corporations or local government
units (Id.)
(Ferrer v. Bautista)

Fairly recently, We also stated in Pelizloy Realty Corporation v. Province of Benguet

that: HSAcaE

The rule governing the taxing power of provinces, cities, municipalities and barangays is
summarized in Icard v. City Council of Baguio:

It is settled that a municipal corporation unlike a sovereign state is clothed with no

inherent power of taxation. The charter or statute must plainly show an intent to
confer that power or the municipality, cannot assume it. And the power when granted
is to be construed in strictissimi juris. Any doubt or ambiguity arising out of the term
used in granting that power must be resolved against the municipality. Inferences,
implications, deductions — all these — have no place in the interpretation of the
taxing power of a municipal corporation. [Underscoring supplied]

xxx xxx xxx

Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy taxes,
fees and other charges." Nevertheless, such authority is "subject to such guidelines and
limitations as the Congress may provide."

In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted

Republic Act No. 7160, otherwise known as the Local Government Code of 1991.
Book II of the LGC governs local taxation and fiscal matters.

Indeed, LGUs have no inherent power to tax except to the extent that such power
might be delegated to them either by the basic law or by the statute. "Under the now
prevailing Constitution, where there is neither a grant nor a prohibition by statute, the
tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the
viability and self-sufficiency of local government units by directly granting them
general and broad tax powers. Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional; the constitutional objective obviously is
to ensure that, while the local government units are being strengthened and made
more autonomous, the legislature must still see to it that (a) the taxpayer will not be
over- burdened or saddled with multiple and unreasonable impositions; (b) each local
government unit will have its fair share of available resources; (c) the resources of the
national government will not be unduly disturbed; and (d) local taxation will be fair,
uniform, and just."

Subject to the provisions of the LGC and consistent with the basic policy of local
autonomy, every LGU is now empowered and authorized to create its own sources
of revenue and to levy taxes, fees, and charges which shall accrue exclusively to the
local government unit as well as to apply its resources and assets for productive,
developmental, or welfare purposes, in the exercise or furtherance of their
governmental or proprietary powers and functions. The relevant provisions of the
LGC which establish the parameters of the taxing power of the LGUs are as follows:
 SECTION 130. Fundamental Principles. — The following fundamental principles
shall govern the exercise of the taxing and other revenue-raising powers of local
government units:

(a) Taxation shall be uniform in each local government unit; (b) Taxes, fees, charges
and other impositions shall:

(1) be equitable and based as far as practicable on the taxpayer's ability to pay;

(2) be levied and collected only for public purposes;

(3) not be unjust, excessive, oppressive, or confiscatory;

(4) not be contrary to law, public policy, national economic policy, or in restraint of
trade;

(c) The collection of local taxes, fees, charges and other impositions shall in no case
be let to any private person;

(d) The revenue collected pursuant to the provisions of this Code shall inure solely to
the benefit of, and be subject to the disposition by, the local government unit levying
the tax, fee, charge or other imposition unless otherwise specifically provided herein;
and,

(e) Each local government unit shall, as far as practicable, evolve a progressive system
of taxation.

SECTION 151. Scope of Taxing Powers. — Except as otherwise provided in this

Code, the city, may levy the taxes, fees, and charges which the province or
municipality may impose: Provided, however, That the taxes, fees and charges levied
and collected by highly urbanized and independent component cities shall accrue to
them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for
the province or municipality by not more than 􏰁fty percent (50%) except the rates of
professional and amusement taxes.

SECTION 186. Power to Levy Other Taxes, Fees or Charges. — Local government
units may exercise the power to levy taxes, fees or charges on any base or subject not
otherwise specifically enumerated herein or taxed under the provisions of the
National Internal Revenue Code, as amended, or other applicable laws: Provided,
That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory
or contrary to declared national policy: Provided, further, That the ordinance levying
such taxes, fees or charges shall not be enacted without any prior public hearing
conducted for the purpose.

2. As to its Purpose
i. General, Fiscal or Revenue – Tax imposed for the general purposes of government,
i.e. to raise revenue for governmental needs (De Leon)
 ii. Special or Regulatory – Tax imposed for a special purpose i.e. to achieve some social
or economic ends irrespective of whether revenue is actually raised or not.

1987 Constitution, Article VI, Section 29 (3) — 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.

3. As to Who Bears the Economic Burden of Taxation; Direct and Indirect

i. Direct – Tax which is demanded or exacted from the very person who also shoulders
the burden of the tax; or tax for which the taxpayer is directly or primarily liable or
which he cannot shift to another (De Leon)

ii. Indirect – Tax which is demanded from, or are paid by, one person in the expectation
and the intention that he shall indemnify himself at the expense of another by passing
on the burden to the latter, falling finally upon the ultimate purchaser or consumer,
or tax imposed upon goods before they reach the consumer who ultimately pays for
it not as tax but as part of the purchase price of goods sold or services rendered. Thus
the person who absorbs or bears the burden of the tax is other than the one on whom
it is imposed and required by law to pay the tax. Practically all business taxes are
indirect. (De Leon)

(Republic v. Meralco)

“The ERB correctly ruled that income tax should not be included in the computation
of operating expenses of a public utility. Income tax paid by a public utility is
inconsistent with the nature of operating expenses. In general, operating expenses are
those which are reasonably incurred in connection with business operations to yield
revenue or income. They are items of expenses which contribute or are attributable
to the production of income or revenue. As correctly put by the ERB, operating
expenses ‘should be a requisite of or necessary in the operation of a utility, recurring,
and that it redounds to the service or benefit of customers.’

Income tax, it should be stressed, is imposed on an individual or entity as a

form of excise tax or a tax on the privilege of earning income. In exchange for
the protection extended by the State to the taxpayer, the government collects taxes as
a source of revenue to finance its activities. Clearly, by its nature, income tax payments
of a public utility are not expenses which contribute to or are incurred in connection
with the production of profit of a public utility. Income tax should be borne by the
taxpayer alone as they are payments made in exchange for benefits received by the
taxpayer from the State. No benefit is derived by the customers of a public utility for
the taxes paid by such entity and no direct contribution is made by the payment of
income tax to the operation of a public utility for purposes of generating revenue or
profit. Accordingly, the burden of paying income tax should be Meralco's alone
and should not be shifted to the consumers by including the same in the
computation of its operating expenses.”

(PAL v. CIR)

“Under Section 129 of the National Internal Revenue Code (NIRC), as amended,
excise taxes are imposed on two (2) kinds of goods, namely: (a) goods manufactured
 or produced in the Philippines for domestic sales or consumption or for any other
disposition; and (b) things imported.

With respect to the first kind of goods, Section 130 of the NIRC states that, unless
otherwise specifically allowed, the taxpayer obligated to file the return and pay the
excise taxes due thereon is the manufacturer/producer.

On the other hand, with respect to the second kind of goods, Section 131 of the
NIRC states that the taxpayer obligated to file the return and pay the excise taxes due
thereon is the owner or importer, unless the imported articles are exempt from excise
taxes and the person found to be in possession of the same is other than those legally
entitled to such tax exemption.

While the NIRC mandates the foregoing persons to pay the applicable excise taxes
directly to the government, they may, however, shift the economic burden of such
payments to someone else — usually the purchaser of the goods — since excise taxes
are considered as a kind of indirect tax.

Jurisprudence states that indirect taxes are those which are demanded in the first
instance from one person with the expectation and intention that he can shift
the economic burden to someone else. In this regard, the statutory taxpayer
can transfer to its customers the value of the excise taxes it paid or would be
liable to pay to the government by treating it as part of the cost of the goods
and tacking it on to the selling price. Notably, this shifting process, otherwise
known as "passing on," is largely a contractual affair between the parties. Meaning,
even if the purchaser effectively pays the value of the tax, the manufacturer/producer
(in case of goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition) or the owner or importer (in case of
imported goods) are still regarded as the statutory taxpayers under the law. To this
end, the purchaser does not really pay the tax; rather, he only pays the seller more for
the goods because of the latter's obligation to the government as the statutory
taxpayer.

In this relation, Section 204 (c) of the NIRC states that it is the statutory taxpayer
which has the legal personality to file a claim for refund. Accordingly, in cases
involving excise tax exemptions on petroleum products under Section 135 of the
NIRC, the Court has consistently held that it is the statutory taxpayer who is entitled
to claim a tax refund based thereon and not the party who merely bears its economic
burden.”

4. As to the Subject of Taxation

i. Personal (poll or capitation) – Tax of a fixed amount imposed on persons residing
within a specified territory, whether citizens or not, without regard to their property
or the occupation or business in which they may be engaged. Taxes of a specified
amount imposed upon each person performing a certain act or engaging in certain
business or profession, however, are not poll taxes (citing 71 Am. Jur. 2d 357)

ii. Property – Tax imposed on property, whether real or personal, in proportion either
to its value, or in accordance with some other reasonable methods of apportionment.
The obligation to pay the tax is absolute and unavoidable and is not based upon the
voluntary action of the person assessed (citing 71 Am. Jur. 358)
iii. Excise – Any tax which does not fall within the classification of a poll tax or a
property tax. Thus, it is said that an excise tax is a charge imposed upon the
performance of an act, the enjoyment of a privilege, or the engaging in an occupation
(citing 71 Am. Jur. 360–61), profession or business. The obligation to pay this tax is
based on the voluntary action of the person taxed in performing the act or engaging
in the activity which is subject to the excise. The term is synonymous with privilege
tax. Note however, that excise tax is not to be confused with excise tax imposed on
certain articles manufactured or produced in, or imported into, the Philippines, “for
domestic sale or consumption or for any other disposition

(Iloilo Bottlers Inc. v. City of Iloilo)

“The tax imposed under Ordinance No. 5 is an excise tax. It is a tax on the privilege
of distributing, manufacturing or bottling softdrinks. Being an excise tax, it can be
levied by the taxing authority only when the acts, privileges or businesses are done or
performed within the jurisdiction of said authority. Specifically, the situs of the act of
distributing, bottling or manufacturing softdrinks must be within city limits, before
an entity engaged in any of the activities may be taxed. In the case at bar, sales were
made by Iloilo Bottlers, Inc. in Iloilo City. Thus, We have no option but to declare
the company liable under the tax ordinance.”

Local Government Code of 1991, Republic Act No. 7160, [October 10, 1991]

SECTION 156. Community Tax. — Cities or municipalities may levy a community

tax in accordance with the provisions of this Article.

SECTION 157. Individuals Liable to Community Tax. — Every inhabitant of the

Philippines eighteen (18) years of age or over who has been regularly employed on a
wage or salary basis for at least thirty (30) consecutive working days during any
calendar year, or who is engaged in business or occupation, or who owns real property
with an aggregate assessed value of One thousand pesos (P1,000.00) or more, or who
is required by law to file an income tax return shall pay an annual additional tax of
Five pesos (P5.00) and an annual additional tax of One peso (P1.00) for every One
thousand pesos (P1,000.00) of income regardless of whether from business, exercise
of profession or from property which in no case shall exceed Five thousand pesos
(P5,000.00). cd

In the case of husband and wife, the additional tax herein imposed shall be based
upon the total property owned by them and the total gross receipts or earnings derived
by them.

SECTION 158. Juridical Persons Liable to Community Tax. — Every corporation

no matter how created or organized, whether domestic or resident foreign, engaged
in or doing business in the Philippines shall pay an annual community tax of Five
hundred pesos (P500.00) and an annual additional tax, which, in no case, shall exceed
Ten thousand pesos (P10,000.00) in accordance with the following schedule:

(1) For every Five thousand pesos (P5,000.00) worth of real property
in the Philippines owned by it during the preceding year based on
the valuation used for the payment of real property tax under
 existing laws, found in the assessment rolls of the city or municipality
where the real property is situated — Two pesos (P2.00); and
(2) For every Five thousand pesos (P5,000.00) of gross receipts or
earnings derived by it from its business in the Philippines during the
preceding year — Two pesos (P2.00). aisa dc
The dividends received by a corporation from another corporation however shall,
for the purpose of the additional tax, be considered as part of the gross receipts or
earnings of said corporation

5. As to the Basis of the Tax

i. Specific – Tax of a fixed amount imposed by the head or number, or by some
standard of weight or measurement; it requires no assessment (valuation) other than
a listing or classification of the objects to be taxed (De Leon citing 51 Am. Jur. 53; We
Wa Yu v. City of Lipa [99 Phil. 575, (1956)])

(We Wa Yu v. City of Lipa)

“Under its charter, the City of Lipa is given the power to tax, fix the license fee for,
or regulate the business affecting among others, the storage and sale of oil, gasoline,
petroleum and the like. It does not possess the power to impose a tax. In order that
such power may be exercised, the grant must be clear. It cannot be implied for the
reason that a municipal corporation, unlike a sovereign state, does not possess
inherent power of taxation.

xxx

We are inclined to uphold the latter view for the reason that the tax which they seek
to collect is imposed by "some standard of weight or measurement" and not regardless
of it. Thus, the tax imposed is 1/10 centavo per liter on the sale of gasoline and 1/2
centavo per liter on the sale of alcohol, gas, or petroleum. And it has been held that
"A tax which imposes 'a specific sum by the head or number, or some standard
of weight or measurement, and which requires no assessment beyond a listing
and classification of the objects to be taxed", is a specific tax (61 C. J., 74). It is
the sense that the tax on manufactured oils and other fuels is imposed by the National
Internal Revenue Code (section 142, Commonwealth Act No. 466, as amended by
section 11, Republic Act No. 56). The tax is considered a specific tax if the amount is
imposed per liter of volume capacity." It is therefore plain that the enactment of the
ordinances in question is ultra vires. “

ii. Ad Valorem – Tax of a fixed proportion of the value of the property with respect to
which the tax is assessed; it requires the intervention of assessors or appraisers to
estimate the value of such property before the amount due from each payer can be
determined. The phrase “ad valorem” means literally “according to its value” (Id. citing 71
Am. Jur. 2d 355)
 6. As to the Graduation of the Rate
i. Proportional – Tax based on a fixed percentage of the amount of the property,
receipts or other basis to be taxed. The rate of the tax remains constant for all levels
of the tax base or any given income level. It is also called flat or uniform tax [i.e. Real
Estate, VAT, and other Percentage Taxes] (De Leon)

ii. Progressive or Graduated – Tax the rate of which increases as the tax base or
bracket increases [i.e. Income, Estate, Donor’s Tax] (Id.)

iii. Regressive – Tax the rate of which decreases as the tax base or bracket increases, i.e.
the tax rate and tax base move in opposite direction. We have no regressive taxes (Id.)

I. Tax Distinguished from Other Exaction

1. License Fee; Inspection Fee

(Progressive Dev’t v. QC).

To be considered a license fee, the imposition questioned must relate to an occupation

or activity that so engages the public interest in health, morals, safety and development
as to require regulation for the protection and promotion of such public interest; the
imposition must also bear a reasonable relation to the probable expenses of regulation,
taking into account not only the costs of direct regulation but also its incidental
consequences as well. When an activity, occupation or profession is of such a character that
inspection or supervision by public officials is reasonably necessary for the safeguarding and
furtherance of public health, morals and safety, or the general welfare, the legislature may
provide that such inspection or supervision or other form of regulation shall be carried out at
the expense of the persons engaged in such occupation or performing such activity, and that
no one shall engage in the occupation or carry out the activity until a fee or charge sufficient
to cover the cost of the inspection or supervision has been paid.

In the case at bar, the "Farmers Market & Shopping Center" was built by virtue of Resolution
No. 7350 passed on 30 January 1967 by respondents' local legislative body authorizing
petitioner to establish and operate a market with a permit to sell fresh meat, fish, poultry and
other foodstuffs. The same resolution imposed upon petitioner, as a condition for continuous
operation, the obligation to "abide by and comply with the ordinances, rules and regulations
prescribed for the establishment, operation and maintenance of markets in Quezon City."

The "Farmers' Market and Shopping Center" being a public market in the sense of a
market open to and inviting the patronage of the general public, even though privately
owned, petitioner's operation thereof required a license issued by the respondent City,
the issuance of which, applying the standards set forth above, was done principally in
the exercise of the respondent's police power. The operation of a privately owned market
is, as correctly noted by the Solicitor General, equivalent to or quite the same as the operation
of a government-owned market; both are established for the rendition of service to the general
public, which warrants close supervision and control by the respondent City, for the
protection of the health of the public by insuring, e.g., the maintenance of sanitary and hygienic
conditions in the market, compliance of all food stuffs sold therein with applicable food and
drug and related standards, for the prevention of fraud and imposition upon the buying public,
and so forth.
 i. Cost of Licensing/Inspection

(MERALCO v. El Auditor General)

Taxes or Taxes are, according to all known authorities, "an enforced contribution of money or
other property assessed in accordance with some reasonable rule of apportionment by
authority of a sovereign state, on persons or property within its jurisdiction, for the purpose
of defraying the public expenses "(26 RCL, par. 2, page 13); or "a rate or sum of money
assessed on the person or property of a citizen by government for the use of the nation or
state; burdens or charges imposed by the legislative power upon persons or property to raise
money for public purposes" (61 CJ , 65); and Rights or Fees, are on the other hand, "a
reward or compensation allowed by law to an officer for specific services performed by
him in the discharge of his official duties; a sum certain given for a particular service;
the sum prescribed by law as charge for services rendered by public officers "(25 CJ,
1009). The purpose of taxes or taxes is clearly to raise funds for public purposes or for the
needs of the State; and the concept in which the rights are charged fees, is, as mentioned in
article 40 of Commonwealth Law No. 146, in the "reimbursement of expenses incurred
by the Commission for the supervision and regulation of operations "Public service of
the appellant, concession is made in the legitimate exercise of police power.

2. Levies

Indeed, coconut levy funds partake of the nature of taxes which, in general, are enforced
proportional contributions from persons and properties, exacted by the State by virtue of its
sovereignty for the support of government and for all public needs.

Based on this definition, a tax has three elements, namely: a) it is an enforced proportional
contribution from persons and properties; b) it is imposed by the State by virtue of its
sovereignty; and c) it is levied for the support of the government. The coconut levy funds fall
squarely into these elements for the following reasons:

(a) They were generated by virtue of statutory enactments imposed on the coconut farmers
requiring the payment of prescribed amounts. Thus, P.D. No. 276, which created the Coconut
Consumers Stabilization Fund (CCSF), mandated the following:

“a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its equivalent in other coconut
products, shall be imposed on every first sale, in accordance with the mechanics established under R.A.
6260, effective at the start of business hours on August 10, 1973.

“The proceeds from the levy shall be deposited with the Philippine National Bank or any other
government bank to the account of the Coconut Consumers Stabilization Fund, as a separate trust
fund which shall not form part of the general fund of the government. The coco levies were further
clarified in amendatory laws, specifically P.D. No. 961 and P.D. No. 1468 — in this wise:

“The Authority (Philippine Coconut Authority) is hereby empowered to impose and collect a levy, to
be known as the Coconut Consumers Stabilization Fund Levy, on every one hundred kilos of copra
resecada, or its equivalent in other coconut products delivered to, and/or purchased by, copra exporters,
oil millers, desiccators and other end-users of copra or its equivalent in other coconut products. The
levy shall be paid by such copra exporters, oil millers, desiccators and other end-users of copra or its
equivalent in other coconut products under such rules and regulations as the Authority may prescribe.
Until otherwise prescribed by the Authority, the current levy being collected shall be continued.”
Like other tax measures, they were not voluntary payments or donations by the people. They
were enforced contributions exacted on pain of penal sanctions, as provided under P.D. No.
276:

“3. Any person or firm who violates any provision of this Decree or the rules and regulations
promulgated thereunder, shall, in addition to penalties already prescribed under existing
administrative and special law, pay a fine of not less than P2,500 or more than P10,000, or suffer
cancellation of licenses to operate, or both, at the discretion of the Court.

Such penalties were later amended thus:

“Whenever any person or entity willfully and deliberately violates any of the provisions of this Act,
or any rule or regulation legally promulgated hereunder by the Authority, the person or persons
responsible for such violation shall be punished by a fine of not more than P20,000.00 and by
imprisonment of not more than five years. If the offender be a corporation, partnership or a juridical
person, the penalty shall be imposed on the officer or officers authorizing, permitting or tolerating the
violation. Aliens found guilty of any offenses shall, after having served his sentence, be immediately
deported and, in the case of a naturalized citizen, his certificate of naturalization shall be cancelled.

(b) The coconut levies were imposed pursuant to the laws enacted by the proper legislative
authorities of the State. Indeed, the CCSF was collected under P.D. No. 276, issued by former
President Ferdinand E. Marcos who was then exercising legislative powers.

(c) They were clearly imposed for a public purpose. There is absolutely no question that they
were collected to advance the government’s avowed policy of protecting the coconut industry.
This Court takes judicial notice of the fact that the coconut industry is one of the great
economic pillars of our nation, and coconuts and their by products occupy a leading position
among the country’s export products; that it gives employment to thousands of Filipinos; that
it is a great source of the State’s wealth; and that it is one of the important sources of foreign
exchange needed by our country and, thus, pivotal in the plans of a government committed
to a policy of currency stability.

Taxation is done not merely to raise revenues to support the government, but also to provide
means for the rehabilitation and the stabilization of a threatened industry, which is so affected
with public interest as to be within the police power of the State, as held in Caltex Philippines v.
COA 57 and Osmeña v. Orbos.

Xxx

Equally important as the fact that the coconut levy funds were raised through the taxing and
police powers of the State is respondents’ effective judicial admission that these levies are
government funds. As shown by the attachments to their pleadings, respondents concede that
the Coconut Consumers Stabilization Fund (CCSF) and the Coconut Investment
Development Fund “constitute government funds . . . for the benefit of coconut farmers:

“Collections on both levies constitute government funds. However, unlike other taxes that the
Government levies and collects such as income tax, tariff and customs duties, etc., the collections on
the CCSF and CIDF are, by express provision of the laws imposing them, for a definite purpose,
not just for any governmental purpose. As stated above part of the collections on the CCSF levy
should be spent for the benefit of the coconut farmers. And in respect of the collections on the CIDF
 levy, P.D. 582 mandatorily requires that the same should be spent exclusively for the establishment,
operation and maintenance of a hybrid coconut seed garden and the distribution, for free, to the coconut
farmers of the hybrid coconut seed nuts produced from that seed garden.

“On the other hand, the laws which impose special levies on specific industries, for example on the
mining industry, sugar industry, timber industry, etc., do not, by their terms, expressly require that
the collections on those levies be spent exclusively for the benefit of the industry concerned. And if the
enabling law thus so provide, the fact remains that the governmental agency entrusted with the duty
of implementing the purpose for which the levy is imposed is vested with the discretionary power to
determine when and how the collections should be appropriated (Republic v. COCOFED)

i. Special Assessment or Special Levy

SECTION 240. Special Levy by Local Government Units. — A province, city or

municipality may impose a special levy on the lands comprised within its territorial
jurisdiction specially benefited by public works projects or improvements funded by
the local government unit concerned: Provided, however, That the special levy shall not
exceed sixty percent (60%) of the actual cost of such projects and improvements,
including the costs of acquiring land and such other real property in connection
therewith: Provided, further, That the special levy shall not apply to lands exempt from
basic real property tax and the remainder of the land portions of which have been
donated to the local government unit concerned for the construction of such projects
or improvements. (Local Government Code of 1991)

3. Toll Fees
i. Sum of money for the use of something, generally applies to the consideration which
is paid for the use of a road, bridge or the like of a public nature (1 Cooley 77)
ii. De Leon provides differences in page 19 (proprietorship v. sovereignty; use of
another’s property v. support of government; amount dependent on cost of
construction/maintenance v. no limit on taxable amount; toll may be imposed by
private v. tax only imposable by government

SECTION 155. Toll Fees or Charges. — The sanggunian concerned may prescribe the terms
and conditions and fix the rates for the imposition of toll fees or charges for the use of any
public road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and
constructed by the local government unit concerned: Provided, That no such toll fees or charges
shall be collected from officers and enlisted men of the Armed Forces of the Philippines and
members of the Philippine National Police on mission, post office personnel delivering mail,
physically-handicapped, and disabled citizens who are sixty-five (65) years or older. (Local
Government Code of 1991)

4. Penalty
i. Sanction imposed as punishment for violation of law or acts deemed injurious. Thus
the violation of tax laws may give rise to imposition of penalty
(1) Regulation of Conduct v. Revenue Raising
(2) Private Entities may impose v. Only Government

5. Tariff and Customs Dues

i. Tariff – Book of rates drawn usually in alphabetical order with merchandise listed;
duties payable; system or principle of imposing duties on the importation or
exportation of goods
ii. Customs Dues – Taxes imposed on goods exported to or imported into a country
 *Tariff and Cutoms are used interchangeable in the Tariff and Customs Code

6. Subsidies
i. Pecuniary aid directly granted bu the
7. Debt
i. Based on Contract v. Based on Law
ii. Assignable v. Generally not Assignable
iii. May be Paid in Kind v. Paid in Money Only
iv. May be Set – Off v. No Set – Off
v. No imprisonment for Debt v. May be imprisoned for tax evasion
vi. Ordinary Rules on Prescription v. Special Prescriptive Periods
vii. Interest may be by stipulation v. Only When Delinquent

(Republic v. Mambulao Lumber)

And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, cannot be the subject of set-off or compensation.

"A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy
in an action or any indebtedness of the state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on. . . . ." (80 C.J.S. 73-74.)

"The general rule, based on grounds of public policy is well- settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow
out of a duty to, and are the positive acts of the government, to the making and enforcing of which,
the personal consent of individual taxpayers is not required. . . . If the taxpayer can properly refuse
to pay his tax when called upon by the Collector, because he has a claim against the governmental
body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure
must be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide
the result of a lawsuit, and meanwhile the ̃nancial affairs of the government will be thrown into
great confusion." (47 Am. Jur. 766-767.)

Part II. Nature of the Power of Taxation

A. Inherent Power of the State; Essential and Inherent Attribute of Sovereignty

a. Police Power (see p. 26)
b. Eminent Domain (id.)
c. Taxation

Note:
As to Authority – Taxation and Police Power by Government and Political Subdivisions;
Eminent Domain may be granted to Public Service Companies or Public Utilities
As to Purpose – Taxation: money is taken for support of govern
B. Legislative In Nature
a. Cannot be Delegated
b. Exceptions
 i. Local Government

ARTICLE X, Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of decentralization with
effective mechanisms of recall, initiative, and referendum, allocate among the different local government units
their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to the
organization and operation of the local units.

ARTICLE X, Section 5. 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.

ii. President

ARTICLE VI, Section 28(2). 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.

iii. Administrative Agencies

Section 401. Flexible Clause.

a. The President, upon investigation by the Commission and recommendation of the National Economic Council, is
hereby empowered to reduce by not more than fifty per cent or to increase by not more than five times the rates of
import duty expressly fixed by statute (including any necessary change in classification) when in his judgment such
modification in the rates of import duty is necessary in the interest of national economy, general welfare and/or
national defense.
b. Before any recommendation is submitted to the President by the Council pursuant to the provisions of this section,
the Commission shall conduct an investigation in the course of which it shall hold public hearings wherein interested
parties shall be afforded reasonable opportunity to be present, to produce evidence and to be heard. The Commission
may also request the views and recommendations of any government office, agency or instrumentality, and such office,
agency or instrumentality shall cooperate fully with the Commission.
c. The President shall have no authority to transfer articles from the duty-free list to the dutiable list
nor from the dutiable list to the duty-free list of the tariff.
d. The power of the President to increase or decrease rates of import duty within the limits fixed in
subsection "a" shall include the authority to modify the form of duty. In modifying the form of
duty the corresponding ad valorem or specific equivalents of the duty with respect to imports from
the principal concerning foreign country for the most recent representation period shall be used
as basis.
e. The Commissioner of Customs shall regularly furnish to the Commission a copy each of all
customs import entries containing every pertinent information appearing in the collectors'
liquidated duplicates, including the consular invoice and/or the commercial invoice. The
Commission or its duly authorized agents shall have access to and the right to copy all the customs
import entries and other documents appended thereto as finally in the General Auditing Office.
 f. The Commission is authorized to adopt such reasonable procedure, rules and regulations as it may
deem necessary to carry out the provisions of this section.
g. Any order issued by the President pursuant to the provisions of this section shall take effect thirty
days after its issuance
h. The provisions of this section shall not apply to any article the importation of which into the
Philippines is or may be governed by Section 402 of this Code.
i. The authority herein granted to the President shall be exercised only when Congress is not in
session.

Section 402. Promotion of Foreign Trade

a. For the purpose of expanding foreign markets for Philippine products as a means of assisting in the
economic development of the country, in overcoming domestic unemployment, in increasing the
purchasing power of the Philippine peso, and in establishing and maintaining better relationship
between the Philippines and other countries, the President, upon investigation by the Commission and
recommendation of the National Economic Council, is authorized from time to time:

(1) To enter into trade agreements with foreign governments or instrumentalities thereof; and

(2) To modify import duties (including any necessary change in classification) and other import restrictions, as
are required or appropriate to carry out and promote foreign trade with other countries: Provided, however, That
in modifying import duties no increase shall exceed by five times or the decrease be more than fifty per cent of
the rate of duty expressly fixed by this Code.

b. The proclaimed duties and other import restrictions shall apply to articles the growth, produce or
manufacture of all foreign countries, whether imported directly or indirectly: Provided, That the
President may suspend the application of any concession to articles the growth, produce or
manufacture of any country because of its discriminatory treatment of Philippine commerce or because
of other acts (including the operations of international cartels) or policies which in his opinion tend to
defeat the purposes set in this section; and the proclaimed duties and other import restrictions shall be
in force and effect from and after such time as is specified in the proclamation. The President may at
any time terminate any such proclamation in whole or in part.

c. Every trade agreement concluded pursuant to this section shall be subject to termination upon due
notice to the foreign government concerned at the end of not more than five years from the date on
which the agreement comes into force and, if not then terminated, shall be subject to termination
thereafter upon not more than six months' notice.

d. The authority of the President to enter into trade agreements under this section shall terminate on the expiration of five
years from the date of enactment of this Code: Provided, That trade agreements concluded pursuant to the provisions of
this section and subsisting as of the date of the expiration of this authority shall remain in force for the period fixed in
the agreement in and may not be extended but he may be sooner terminated in accordance with the preceding subsection.

e. Nothing in this section shall be construed to give any authority to cancel or reduce in any manner
any of the indebtedness of any foreign country to the Philippines or any claim of the Philippines against
any foreign country.

f. Before any trade agreement is conducted with any foreign government or instrumentality thereof,
reasonable public notice of the intention to negotiate an agreement with such a government or
instrumentality shall be given in order that any interested person may have an opportunity to present
his views to the Commission which shall seek information and advice from the Department of
Agriculture and Natural Resources, the Department of Commerce and Industry, the Central Bank of
the Philippines and from such other sources as it may deem appropriate.

g. (1) The Commission, upon its own motion, or in pursuance of a request of the President or a resolution of either house
of Congress, or upon application of any interested party when in the judgment of the Commission there is good and
sufficient reason therefor, shall conduct an investigation to determine whether any product, as a result of any concession
granted under a trade agreement, is being imported into the Philippines in such increased quantities as to cause or threaten
serious injury to the domestic industry producing like or directly competitive products. The Commission shall render a
report thereof to the President, through the National Economic Council, within three months after the motion, request,
resolution or application was received.

Should the Commission find that the representations made in accordance with the preceding
paragraph are justified, it shall recommend to the President, through the National Economic
Council the withdrawal or modification of the concession, its suspension in whole or in part,
or the establishment of import quota which shall not be less than ten per centum or more than
one hundred per centum of the average annual quantity imported or, in the absence thereof,
the average annual value of such importation, during the three calendar years immediately
preceding the date such quota is fixed, to the extent and for the time necessary to prevent or
remedy such injury.

(2) Upon receipt of the report of the findings and recommendation of the Commission, the
President may prescribe such adjustments in the rates of import duties, or such other
modifications as are recommended by the Commission to be necessary to prevent or remedy
serious injury to the respective domestic industry.

h. Nothing in this section shall be construed to preclude giving effect to any executive agreement or
any future preferential trade agreement with the United States, or to extend to any other country the
preferential treatment accorded by the Philippines to the products of the United States of America.

i. The Commission is authorized to adopt such reasonable procedure, rules and regulations as it may deem necessary to
execute its functions under this section.