Republic of the Philippines

TARLAC STATE UNIVERSITY

College of Arts and Social Sciences
A.Y. 2023 – 2024
Romulo Blvd, San Vicente Tarlac City

TAXATION
LEARNING OBJECTIVES:
1. Analyze the general principles of taxation.
2. Determine the contribution of taxation to the country.
3. Develop critical and analytical skills in differentiating the different purposes of taxation.
4. Appreciate the role of taxation towards our country’s development.

TAXATION

General Principles of Taxation

The power of taxation is normally defined in at least three (3) ways – as a power itself, as a means,
or as a process – as follows:
As a power, it refers to the inherent power of the State to impose proportionate burden from
among the citizenry for the respective share in the cost of running the government and the delivery
of its constitutional mandate to serve and protect.
As a means, it refers to one of the few ways by which the State raises revenue to support its
existence and operations. Other ways to raise revenue could be by foreign financing (e.g. foreign
loans from World Bank, Asian Development Bank, etc.) or by domestic financing (e.g. issuing
bonds and other evidences of indebtedness to the public) and such other means.
As a process, it refers to the method of imposing a tax to raise revenue by the legislative act of
the Congress in passing a law or ordinance. Implementation and enforcement of such laws
belongs to the Executive Department, interpretation is for the Judiciary and compliance rests upon
the taxpayers involved, except upon the hammers of the law against erring taxpayers.
Taxation therefore, is the inherent power of the sovereign, exercised through the legislature, to
impose burdens upon subjects and objects within its jurisdiction for the purpose of raising
revenues to carry out the legitimate objects of government.
It is also defined as the act of levying 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 a method of apportioning the cost of government among those who, in some measure, are
privileged to enjoy its benefits and must therefore bear its burdens.
Taxes
Taxes are the enforced proportional contributions from persons and property levied by the law-
making body of the State by virtue of its sovereignty for the support of the government and all
public needs.
Essential elements of a tax
1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a right or privilege.
5. It is levied by the State which has jurisdiction over the subject or object of taxation.
 6. It is levied by the law-making body of the State.
7. It is levied for public purpose or purposes.

Purposes of taxation
1. Revenue or fiscal: The primary purpose of taxation on the part of the government is to
provide funds or property with which to promote the general welfare and the protection of
its citizens and to enable it to finance its multifarious activities.
2. Non-revenue or regulatory: Taxation may also be employed for purposes of regulation or
control.
a) Imposition of tariffs on imported goods to protect local industries.
b) The adoption of progressively higher tax rates to reduce inequalities in wealth and income.
c) The increase or decrease of taxes to prevent inflation or ward off depression.

Sumptuary purpose of taxation

· More popularly known as the non-revenue or regulatory purpose of taxation. While
the primary purpose of taxation is to raise revenue for the support of the government, taxation is
often employed as a devise for regulation by means of which certain effects or conditions
envisioned by the government may be achieved.
· For example, government may provide tax incentives to protect and promote new
and pioneer industries. The imposition of special duties, like dumping duty, marking duty,
retaliatory duty, and countervailing duty, promote the non-revenue or sumptuary purpose of
taxation.
Theory and basis of taxation
· The power of taxation proceeds upon the theory that the existence of government
is a necessity; that it cannot continue without means to pay its expenses; and that for these
means, it has a right to compel all its citizens and property within its limits to contribute.
· The basis of taxation is found in the reciprocal duties of protection and support
between the State and its inhabitants. In return for his contribution, the taxpayer received benefits
and protection from the government. This is the so-called “benefits received principle.”
Life blood or necessity theory
· The life blood theory constitutes the theory of taxation, which provides that the
existence of government is a necessity; that government cannot continue without means to pay
its expenses; and that for these means it has a right to compel its citizens and property within its
limits to contribute.
Illustrations of lifeblood theory
1. Collection of taxes cannot be enjoined by injunction.
2. Taxes could not be the subject of compensation or set off.
3. A valid tax may result in destruction of the taxpayer’s property.
4. Taxation is an unlimited and plenary power.

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Benefit-received principle
· 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. Also called “symbiotic relation”
between the State and its citizens.
· In return for his contribution, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his property. One is compensation or
consideration for the other; protection for support and support for protection.
· However, it does not mean that only those who are able to and do pay taxes can
enjoy the privileges and protection given to a citizen by the government.
Nature or characteristics of the State’s power to tax
1. It is inherent in sovereignty; hence, it may be exercised although it is not expressly
granted by the Constitution.
2. It is legislative in character; hence, only the legislature can impose taxes (although
the power may be delegated).
3. It is subject to Constitutional and inherent limitations; hence, it is not an absolute
power that can be exercised by the legislature anyway it pleases.

Power to tax v. Police power v. Power of eminent domain

TAXATION POLICE POWER EMINENT DOMAIN

Power of the State to

Power of the State to
enact such laws in
take private property for
Power of the State to relation to persons and
public use upon paying
demand enforced property as may
DEFINITION to the owner a just
contributions for public promote public health,
compensation to be
purposes safety, morals, and the
ascertained according
general welfare of the
to law
public

May be granted to
Authority
Only the government or Only the government or public service
Exercising
its political subdivisions its political subdivisions companies of public
the Power
utilities

Enforced contribution is Use of property is

demanded for the regulated for the Property is taken for
PURPOSE
support of the purpose of promoting public use
government the general welfare

Operates upon a Operates upon a Operates on an

Persons
community or class of community or class of individual as the owner
Affected
individuals individuals (usually) of a particular property

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 Money contributed in No transfer of title, at Transfer of the right to
the concept of taxes most, there is restraint property whether it be
EFFECT
becomes part of public on injurious use of the ownership or a lesser
funds property right

Assumed that the Person affected

individual receives the receives no direct and
Person affected
equivalent of the tax in immediate benefit but
BENEFITS receives the market
the form of protection, only such as may arise
RECEIVED value of the property
and benefits received from the maintenance
taken from him
from the government as of a healthy economic
such standard of society

Amount imposed
should not be more
No amount imposed but
Generally no limit on than that sufficient to
AMOUNT OF rather the owner is paid
the amount of tax that cover the cost of the
IMPOSITION the market value of the
may be imposed license and the
property taken
necessary expenses of
regulation

Relatively free from Subject to certain

Relationship Subject to certain Constitutional Constitutional
to the Constitutional limitations and is limitations (e.g. inferior
Constitution limitations superior to the to impairment of
impairment provisions contracts clause)

Tax differentiated from other terms

Tariff / Duties
· The term tariff and custom duties are used interchangeably in the Tariff and
Customs Code or PD No. 1464.
· Customs duties, or simply duties, are taxes imposed on goods exported from or
imported into a country. Custom duties are really taxes but the latter term is broader in scope.
· On the other hand, tariff may be used in one of three senses:
1. A book of rates drawn usually in alphabetical order containing the names of several
kinds of merchandise with the corresponding duties to be paid for the same; or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation or exportation of goods.

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License or regulatory fee v. tax
1. License fee is legal compensation or reward of an officer for specific services while a
tax is an enforced contribution from persons or property by the law-making body by
virtue of its sovereignty and for the support of the government and all public needs.
2. License fee is imposed for regulation, while tax is levied for revenue.
3. License fee involves the exercise of police power, tax of the taxing power.
4. Amount of license fee should be limited to the necessary expenses of inspection and
regulation, while there is generally no limit on the amount of the tax to be imposed.
5. License fee is imposed only on the right to exercise a privilege, while tax is imposed
also on persons and property.
6. Failure to pay a license fee makes the act or business illegal, while failure to pay a tax
does not necessarily make the act or business illegal.

Regulatory tax
· Examples: motor vehicle registration fee, sugar levy, coconut levy, regulation of
non-useful occupations

Special assessment v. tax

1. A special assessment is an enforced proportional contribution from owners of lands
specially or peculiarly benefited by public improvements.
2. A special assessment is levied only on land.
3. A special assessment is not a personal liability of the person assessed; it is limited to
the land.
4. A special assessment is based wholly on benefits, not necessity.
5. A special assessment is exceptional both as to time and place; a tax has general
application.

Some rules:
· An exemption from taxation does not include exemption from a special assessment.
· The power to tax carries with it the power to levy a special assessment.

Toll v. tax
1. Toll is a sum of money for the use of something. It is the consideration which is paid for
the use of a road, bridge, or the like, of a public nature. Taxes, on the other hand, are
enforced proportional contributions from persons and property levied by the State by
virtue of its sovereignty for the support of the government and all public needs.
2. Toll is a demand of proprietorship; tax is a demand of sovereignty.
3. Toll is paid for the use of another’s property; tax is paid for the support of government.

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 4. The amount paid as toll depends upon the cost of construction or maintenance of the
public improvement used; while there is no limit on the amount collected as tax as long
as it is not excessive, unreasonable, or confiscatory.
5. Toll may be imposed by the government or by private individuals or entities; tax may be
imposed only by the government.

Tax v. penalty
1. Penalty is any sanction imposed as a punishment for violation of law or for acts deemed
injurious; taxes are enforced proportional contributions from persons and property
levied by the State by virtue of its sovereignty for the support of the government and all
public needs.
2. Penalty is designed to regulate conduct; taxes are generally intended to generate
revenue.
3. Penalty may be imposed by the government or by private individuals or entities; taxes
only by the government.

Obligation to pay debt v. obligation to pay tax

1. A debt is generally based on contract, express or implied, while a tax is based on laws.
2. A debt is assignable, while a tax cannot generally be assigned.
3. A debt may be paid in kind, while a tax is generally paid in money.
4. A debt may be the subject of set off or compensation, a tax cannot.
5. A person cannot be imprisoned for non-payment of tax, except poll tax.
6. A debt is governed by the ordinary periods of prescription, while a tax is governed by
the special prescriptive periods provided for in the NIRC.
7. A debt draws interest when it is so stipulated or where there is default, while a tax does
not draw interest except only when delinquent.

Survey of Philippine Taxes

A. Internal revenue taxes
1. Income tax
2. Transfer taxes
a. Estate Tax
b. Donor’s Tax
3. Percentage taxes
a. Value Added Tax
b. Other Percentage Taxes
4. Excise taxes
5. Documentary stamp tax
B. Local/Municipal Taxes
C. Tariff and Customs Duties
D. Taxes/Tax incentives under special laws

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Classification of Taxes
As to subject matter or object
1. Personal, poll or capitation tax
a. 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, i.e. community tax.
2. Property tax
b. Tax imposed on property, real or personal, in proportion to its value or in
accordance with some other reasonable method of apportionment.
3. Excise tax
c. A charge imposed upon the performance of an act, the enjoyment of a privilege,
or the engaging in an occupation.
As to purpose
1. General/fiscal/revenue tax
A general/fiscal/revenue tax is that imposed for the purpose of raising public funds for the
service of the government.
2. Special/regulatory tax
A special or regulatory tax is imposed primarily for the regulation of useful or non-useful
occupation or enterprises and secondarily only for the purpose of raising public funds.

As to who bears the burden

1. Direct tax
A direct tax is demanded from the person who also shoulders the burden of the tax. It is a
tax which the taxpayer is directly or primarily liable and which he or she cannot shift to another.
2. Indirect tax
An indirect tax is demanded from a person in the expectation and intention that he or she
shall indemnify himself or herself at the expense of another, falling finally upon the ultimate
purchaser or consumer. A tax which the taxpayer can shift to another.

As to scope of the tax

1. National tax
A national tax is imposed by the national government.
2. Local tax
A local tax is imposed by municipal corporations or local government units (LGUs).

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As to the determination of amount
1. Specific tax
A specific tax is a tax of a fixed amount imposed by the head or number or by some other
standard of weight or measurement. It requires no assessment other than the listing or
classification of the objects to be taxed.
2. Ad valorem tax
An ad valorem tax is a 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 taxpayer can be determined.

As to gradation or rate
1. Proportional tax
Tax based on a fixed percentage of the amount of the property receipts or other basis to
be taxed. Example: real estate tax.
2. Progressive or graduated tax
Tax the rate of which increases as the tax base or bracket increases. Example: income tax.
Digressive tax rate: progressive rate stops at a certain point. Progression halts at a
particular stage.
3. Regressive tax
Tax the rate of which decreases as the tax base or bracket increases. There is no such
tax in the Philippines.

Tax Systems
Constitutional mandate
· The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. [Section 28(1), Article VI, Constitution]
Progressive system of taxation v. regressive system of taxation
· A progressive system of taxation means that tax laws shall place emphasis on direct
taxes rather than on indirect taxes, with ability to pay as the principal criterion.
· A regressive system of taxation exists when there are more indirect taxes imposed
than direct taxes.
Three basic principles of a sound tax system
1. Fiscal adequacy
It means that the sources of revenue should be sufficient to meet the demands of public
expenditures. [Chavez v. Ongpin, 186 SCRA 331]
2. Equality or theoretical justice

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It means that the tax burden should be proportionate to the taxpayer’s ability to pay. This is the
so-called “ability to pay principle.”
3. Administrative feasibility
It means that tax laws should be capable of convenient, just and effective administration.
Power to tax is exclusively legislative in nature
· The power to tax is peculiarly and exclusively legislative and cannot be exercised
by the executive or judicial branches of the government. Hence, only Congress can impose taxes.
Matters within the competence of the legislature
1. The subject or object to be taxed.
2. The purpose of the tax so long as it is a public purpose.
3. The amount or rate of the tax.
4. The manner, means, and agencies of collection of the tax.

Inherent Limitations
1. Purpose must be public in nature
2. Prohibition against delegation of the taxing power
3. Exemption of government entities, agencies and instrumentalities
4. International comity
5. Limitation of territorial jurisdiction

Public purpose in taxation

· This is one of the inherent limitations of the power to tax and is synonymous to
“governmental purpose.” A tax must always be imposed for a public purpose, otherwise, it will be
declared as invalid.
· The term “public purpose” has no fixed connotation. The essential point is that the
purpose of the tax affects the inhabitants as a community and not merely as inhabitants.
· It has been said that the best test of rightful taxation is that the proceeds of the tax
must be used:
a) for the support of the government; or
b) some of the recognized objects of government; or
c) to promote the welfare of the community.

Reasons for exempting governmental entities

· Government will be taxing itself to raise money for itself.
· Immunity is necessary in order that governmental functions will not be impeded.
What government entities are exempt from income tax?

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 1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
5. Philippine Amusement and Gaming Corporation (PAGCOR)

Prohibition against appropriation of proceeds of taxation for the use, benefit, or support
of any church
Section 29, Article VI, Constitution
1. No money shall be paid out of the Treasury except in pursuance of an appropriation
made by law.
2. No public money or property shall be appropriated, applied, paid, or employed directly
or indirectly, for the use, benefit, or support of any 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.
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.
Prohibition against taxation of real property actually, directly and exclusively used for
religious, charitable and educational purposes
· 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. [Section 28 (3) , Article VI, Constitution]
· This is an exemption from real property tax only.
· The exemption in favor of property used exclusively for charitable or educational
purposes is not limited to property actually indispensable therefore, but extends to facilities which
are incidental to and reasonably necessary for the accomplishment of said purposes. [Abra
Valley College v. Aquino, 162 SCRA 106]
Prohibition against taxation of the revenues and assets of non-stock, non-profit
educational institutions
· 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. [Section 4, Article XIV, Constitution]
· This exemption from corporate income tax is embodied in Section 30 of the NIRC
which includes a non-stock, non-profit educational institution.

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· Note however the last paragraph of Section 30 which states: “Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their property, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such income, shall be subject to tax
imposed under this Code.”

Taxation of proprietary educational institutions

· 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 investment. [Section 4 (3), Article XIV, Constitution]
· Under Section 27(B) of the NIRC, proprietary educational institutions and hospitals
which are non-profit shall pay a tax of ten percent (10%) on their taxable income except for
passive incomes which are subject to different tax rates.
Situs in Taxation
· Literally, situs of taxation means place of taxation. It is the State or political unit
which has jurisdiction to impose a particular tax.
· The determination of the situs of taxation depends on various factors including the:
1. Nature of the tax;
2. Subject matter thereof (i.e. person, property, act or activity;
3. Possible protection and benefit that may accrue both to the government and the
taxpayer;
4. Residence or citizenship of the taxpayer; and
5. Source of the income.

REFERENCES:
1. BIR.gov.ph TAX REFORM FOR ACCELERATION AND INCLUSION ACT RA 10963
2. De Leon, Hector S and De Leon, Hector M. FUNDAMENTALS OF TAXATION. 2016

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