General Principles of Taxation

Q: What are taxes?

Taxes are enforced proportional and pecuniary contributions from persons and property
levied by the law-making body of the State by the virtue of its sovereignty for the support of the
government and for the public needs.

• Nature of the Power of Taxation

1. Inherent in sovereignty
o An attribute of sovereignty.
o A necessary burden to preserve the State's sovereignty
o 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.
2. Essentially a legislative function
o Power to tax is peculiarly and exclusively legislative
o Cannot be exercised by the executive or judicial branch of the government.
o Hence, only Congress can impose taxes.
o The LEVY of a tax, may also be made by a local legislative body subject to such limitations
as may be provided by law.
3. Subject to constitutional and inherent limitations
o 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.

>Scope of Taxation<
Supreme, unlimited and comprehensive BUT subject to constitutional and inherent restrictions.

- Purpose of Taxation
Primary purpose:
•To raise revenues for the support of the government
• In relation to lifeblood doctrine
Secondary purposes:
1. Regulation
Tio v. Regulatory Board - tax was imposed primarily to answer the need to regulate the video
industry due in part to rampant film piracy, violation of IP rights and proliferation of porn.
Taxation could be a tool to implement the State's police power.
→ A tax does not cease to be valid merely because it regulates, discourages or even definitely
deters the activities taxed.
→ As long as a tax is for a public purpose, its validity is not affected by collateral purposes or
motives of the legislature in imposing the levy, or by the fact that it has a regulatory effect.
2. General welfare
→ Lutz v Araneta - tax was levied with a regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar industry.
> The protection of a large industry constituting one of the great sources of the state's wealth
and therefore directly or indirectly affecting the welfare of so great portion of the population of
the State is affected to such an extent by public interests as to be within the police power of the
sovereign.
3.Reduction of social inequality
4.Protectionism
→ Special duties under the Tariff and Customs Code and RA 8800 or the Safeguard Measures
Act

• Theory and Basis of Taxation

1. Lifeblood theory
o Without revenue raised from taxation, the government will not survive, resulting in
detriment to society.
Without taxes, the government would be paralyzed for lack of motive power to activate
and operate it.
o Taxes are the lifeblood of the government and their prompt and certain availability is an
imperious need.
2. Necessity Theory
• The power of taxation proceeds upon the theory that the existence of government is a
necessity; that it cannot continue without the 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.
3. Benefits-Protection Theory
o Also called, Symbiotic Relationship theory, it means reciprocal duties of protection and
support between the State and its inhabitants.
o Inhabitants pay taxes and in return, receive benefits and protection from the State.

> Jurisdiction over Subject and Object

The person or property taxes must be within the competent authority s taxing jurisdiction:
→ Situs, source or territoriality (location of economic activity, location of property, source of
income)
→ Citizenship
→Residence

>Theoretical Justice
→ Principles mandate that taxes must be just, reasonable and fair.
→ Tax burden should be in proportion to the taxpayer's ability to pay.
Violation of this principle will result in unconstitutionality of the tax imposition.
Under the Constitution, taxes shall be uniform and equitable.

> Principles of Sound Taxation

1. Fiscal Adequacy
→ Source of revenue should be sufficient to meet the demands of public expenditure.
→ Even if the tax law fails to observe this principle, in that the tax proceeds are insufficient to
meet spending, the tax law is still valid.
2. Administrative Feasibility
→ The tax law must be capable of effective or efficient enforcement.
→ Tax laws should close loopholes for tax evasion and deter corruption of tax officials.
→ No law requiring compliance with this principle.

> Power of Taxation Compared with Other State Powers

1. As to purpose:
Taxation: To support the government

Eminent domain: For public use

Police power: To promote general welfare, public health, public morals, and public safety

2. As to compensation:
Taxation: Protection and benefits received from government

Eminent domain: Just compensation

Police power: Maintenance of public order

3. As to persons affected:
Taxation: Operates upon a community or class of individuals

Eminent domain: Operates on individual property owners

Police power: Operates upon a community or a class of individuals

4. As to authority which exercises power:

Taxation: Exercised only by the government or its political subdivisions

Eminent domain: May be exercised by public service corporations or public utilities if granted
by law

Police power: Exercised only by the government or its political subdivisions

5. As to amount of imposition:
Taxation: Generally no limit to the amount that may be imposed

Eminent domain: No imposition; rather it is the property owner who will be paid just
compensation

Police power: Limited to the cost of regulation

 > Doctrines in Taxation
1. Prospectivity of tax laws

General rule: Tax laws are prospective in operation.

Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the
legislative intent.

Exception to the exception: A tax law should not be given retroactive application when it would
be so harsh and oppressive for in such case, the constitutional limitation of due process would
be violated.

2. Non-retroactivity of rulings

General rule: Any revocation, modification or reversal of rules and regulations promulgated in
accordance with Sections 244 and 245 of the Tax Code and rulings or circulars promulgated by
the CIR that are prejudicial to the taxpayer shall not be given retroactive effect.
Exceptions:
o Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the BIR;
o Where the facts subsequently gathered by the BIR are materially different from the
facts on which the ruling is based; or
o Where the taxpayer acted in bad faith

3. Imprescriptibility

→ Unless otherwise provided by the tax law itself, taxes are imprescriptible.
→ The law on prescription, being a remedial measure, should be liberally construed, and
exceptions to the law on prescription should be strictly construed.

> Construction of Tax Statutes

1. Tax Laws
→ It must be strictly construed against the government.
→ In every case of doubt, tax statutes are construed most strongly against the governm and in
favor of the citizen because burdens are not to be imposed, nor presume to be imposed,
beyond what the statutes expressly and clearly import.

Exceptions:
o Where the language of the statute is plain and there is no doubt as to the legislative
intent. In such case, the words are to be given their ordinary meaning.
o Where the taxpayer claims exemption from the tax
2. Tax Exemptions
o It must be strictly construed against the taxpayer. Exemptions are not favored and are
construed strictissimi juris against the taxpayer.
 He who claims an exemption must be able to justify his claim or right thereto by a grant
expressed in terms too plain to be mistaken and too categorical to be misinterpreted.
o Tax exemptions must be shown to exist clearly and categorically, and supported by clear
legal provisions.
o Deduction, exclusions, condonations and claims for refund are akin to exemptions,
hence, these are strictly construed against the taxpayer as well.
o When the law itself provides for a liberal construction
o In case of exemptions granted to religious, charitable and educational institutions, or to
the government, its agencies, or to public property - because these are generally
exempt from taxation

The rule on strict construction cannot be applied with respect to the interpretation of laws
granting exemptions to NPC. The rule on strict interpretation does not apply in the case of
exemptions granted to political subdivisions or to instrumentalities of the government.

Construction of Tax Statutes

→ Implementing Rules and Regulations (IRRs)
o The Secretary of Finance has authority, in conjunction with the CIR, to promulgate rules
and regulations. Such rules and regulations, as well as administrative opinions and
rulings, ordinarily should deserve weight and respect by the courts.
o However, IRRs, rulings and other issuances must not override, but must remain
consistent with, the law they seek to apply and implement. They are intended to carry
out, neither to supplant nor to modify, the law.
o The CIR has the sole authority to issue rulings but he also has the power to delegate said
authority to his subordinates. He cannot, however, delegate to any of his subordinate
officials the power to issue rulings of first impression (i.e., question involved is new and
important) or to reverse, revoke or modify and existing rule of the BIR (Sec. 7[B], NIRC)
o An interpretative rule is designed to provide guidelines to the law, which the
administrative agency is in charge of enforcing. An administrative rule should be
published if it substantially adds to or increases the burden of those governed.
When an administrative rule is merely interpretative in nature, its applicability needs
nothing further than its bare issuance for it gives no real consequence more than what
the law itself has already prescribed.
o On the other hand, when the administrative rule goes beyond merely providing for the
means that can facilitate or render least cumbersome the implementation of the law
but substantially adds to or increases the burden of those governed, it behooves the
agency to accord at least to those directly affected a chance to be heard, and thereafter
to be duly informed, before that new issuance is given the force and effect of law.
• Inherent Limitations of Taxation
1. Public purpose
→ Legislature is without the power to appropriate revenues for anything but for public
purposes. Public money can only be spent for a public purpose.
→ The public purpose of a tax may legally exist even if the motive which impelled the
legislature to impose the tax was to favor one industry over another. (Tio v. Videogram [1987])

2. Inherently legislative
General rule: The power to tax is non-delegable!

Exceptions:
1. Delegation to the President
→ Congress may authorize, by law, the President to fix, within specified limits and subject to
such limitations and restrictions as Congress may provide:
o Tariff rates
o Import and export quotas
o Tonnage and wharfage dues
o Other duties and imposts within the development program of the government

→ Flexible Tariff Clause: In the interest of national economy, general welfare and/or national
security, the President upon the recommendation of the NEDA is empowered:

• To increase, reduce or remove existing protective rates of import duty, provided that the
increase should not be higher than 100% ad valorem.
•To establish import quota on all imports of any commodity.
•To impose additional duty on all imports not exceeding 10% ad valorem.

→ To enter into executive agreements

→ To ratify treaties which grant tax exemption subject to Senate concurrence

Inherent Limitations of Taxation

2. Delegation to Local Government Units

• Each LGU has the power to create its own revenue and to levy taxes, fees and charges subject
to such guidelines and limitations as the Congress may provide.
• Mactan Cebu International Airport Authority v. Marcos: The power to tax is primarily vested
in Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no
longer by virtue of a valid delegation as before but pursuant to direct authority conferred by
Section 5, Article X of the Constitution.
• Currently, Titles I (Local Taxation) and Title lI (Real Property Tax) of Book II, LGC of 1991
prescribe the "guidelines and limitations" of local taxing power.
3. Delegation to Administrative Agencies

•For the delegation to be valid, the law must be complete in itself and must set forth sufficient
standards.
•Example: Sec. 244 of the NIRC authorizes the Secretary of Finance, upon recommendation of
the Commissioner, shall promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.
•There are certain aspects of the taxing process that are not legislative, and they may therefore
be vested in an administrative body:
o Power to value property for purposes of taxation pursuant to fixed rules
o Power to assess and collect the taxes
o Power to perform any of the innumerable details of computation, appraisement, and
adjustment, and the delegation of such details.
•These are not really exceptions to the rule as no delegation of the strictly legislative power to
tax is involved.

Territorial; Situs of Taxation

→ Situs refers to the place of taxation.

→ The State where the subject to be taxed has a situs may rightfully levy and collect the tax.
Exceptions:
o Where tax laws operate outside the territorial jurisdiction of the taxing state
• taxation of resident citizens on their foreign source income.
o Where tax laws do not operate within the territorial jurisdiction - waiver of taxing
jurisdiction via treaty or international comity.
1.Domiciliary theory - based on residence
2.Nationality theory - based on citizenship
3.Source rules - where the activity that produced the income took place

For real property taxes:

→ Real property - lex rei sitae or where the property is located
→ Personal property - mobilia sequuntur personam or movable follows owner (movables follow
domicile of owner)

3. International comity: The respect accorded by nations to each other because they are
sovereign equals. Thus, the property or income of a foreign state or government may not be
the subject of taxation by another state.
→ When a foreign sovereignenters the territorial jurisdiction of another, there is an implied
understanding that the former does not intend to degrade its dignity by placing itself under the
jurisdiction of the other.
→ In international law, a foreign government may not be sued without its consent. Hence, it is
useless to impose a tax which could not be collected.
 > Inherent Limitations of Taxation
Exemption of government
•The government cannot tax itself.
•Income derived from any public utility or from the exercise of any essential
governmental function accruing to the Government of the Philippines or to any political
subdivision thereof is also exempt.
•The exemption applies only to government entities through which the government
immediately and directly exercises its sovereign powers. For GOCCs performing
proprietaryfunctions, they are generally subject to tax in the absence of tax exemption
provisions in their charters.

> Constitutional Limitations of Taxation

Directly Affecting
1. Prohibition against imprisonment for nonpayment of poll tax (Art. III, Sec. 20)
2. Uniformity and equality of taxation (Art. VI,Sec. 28(1))
3. Grant by Congress of authority to the President to impose tariff rates (Art. VI, Sec.28[2))
4. Prohibition against taxation of religious, charitable entities, and educational entities
(Art.VI, Sec. 28[3])
5. Prohibition against taxation of non-stock, nonprofit educational institutions (Art. XIV,
Sec. 4)
6. Majority vote of Congress for grant of tax exemption (Art. VI, Sec. 28)
7. Prohibition on use of tax levied for special purpose (Art. VI, Sec. 29(3])
8. President's veto power on appropriation, revenue, tariff bills (Art. VI, Sec. 27(2])
9. Non-impairment of jurisdiction of the Supreme Court (Art. VIll, Sec. 2 in rel. to Art.
VIII,Sec. 5(2b])
10. Grant of power to the local government units to create its own sources of revenue (Art.
X, Sec.5)
11. Flexible tariff clause (Art. VI, Sec. 28(2])
12. Exemption from real property taxes (Art. VI,Sec. 28(3])
13. No appropriation or use of public money for religious purposes (Art. VI, Sec. 29(2])
Due Process (Art. Ill, Sec. 1)
Equal Protection (Art. Ill, Sec. 1)
Religious Freedom (Art. Ill, Sec. 5)
Non-impairment of Obligations and Contracts (Art. Ill, Sec. 10)
 Double Taxation
o Taxing the same property twice when it should be taxed but once.
o Taxing the same person twice by the same jurisdiction over the same thing.
o There is no constitutional prohibition against double taxation in the Philippines. It is
something not favored, but not altogether prohibited, provided constitutional mandates
are not violated.

Permissible double taxation

o Warehouse business although carried on in relation to operation of sugar refinery is a
distinct and separate taxable business.
o License tax may be levied upon a business or occupation although the land or property
used in connection therewith is subject to property tax.
o Excise tax on cigarettes is distinct from income tax paid by manufacturer or importer of
cigarettes.
→ Double taxation becomes illegal or invalid when it is double taxation in the obnoxious sense
(direct duplicate taxation).
• Ifit's direct duplicate taxation, it may be invalidated under the due process clause.

→ Requisites for Direct Duplicate Taxation:

o Two taxes are imposed;
o On the same subject matter;
o By the same taxing authority;
o Within the same jurisdiction;
o During the same taxing period; and
o The two taxes are of the same kind and character.

>Means Employed to Avoid and MitigateDouble

>Taxation
Unilateral:
-Tax deduction
-Tax credit

> Exemption
Allowance on the Principle of Reciprocity
Bilateral:
o Tax treaty
o Treaty provisions mitigate, if not entirely avoid, double taxation.
o The purpose of the treaty is to facilitate international trade and investment by lowering
tax barriers.
Exemptions
o Grant of immunity to a particular class of persons from a tax which persons generally
within the same state or taxing district are obliged to pay.
o It is an immunity or privilege; it is freedom from a financial charge or burden to which
others are subjected.
 o Exemption is allowed only if the law clearly provides for it. It is not presumed.
o Not violative of the equal protection clause so long as there is substantial distinction

Rationale:
• To confer a benefit to a particular class which the Legislature feels outweighs the foregone
revenue
Grounds:
May be used on a contract (petroleum service contract under PD 87)
May be based on public policy like:
1. To encourage new industries (MCIT exemption for first 4 years of operation)
2. To foster charitable institutions
May be based on international reciprocity, to lessen the rigors of international or multiple
taxation
> Nature
-it is personal to the guarantee.
-Generally revocable by the government unless the exemption is
founded on a contractual tax exemption.
o Considered a waiver by the government of sovereign rights to collect taxes.
o Not necessarily discriminatory (or class legislation) so long as exemption has reasonable
foundation or rational basis.
> Kinds
1. Express or affirmative
•When certain persons, property or transactions are, by express provision of law, exempted
from certain taxes, in whole or in part.

2. Implied (exemption by omission)

•When a tax is levied on certain classes without mentioning other classes

3.Misnomer because there is no tax exemption by implication.

4.Strict construction of tax imposition in favor of the taxpayer

> Revocation of exemption:

General rule:
•A tax exemption may be revoked by the government anytime.
•Since taxation is the rule and exemption therefrom is the exception, the exemption
may be withdrawn at the pleasure of the taxing authority.
Exception:
•A contractual tax exemption cannot be revoked anytime without impairing the obligation of
contracts.
•The only exception to this is where the exemption was granted to private parties based on
material consideration of a mutual nature, which then becomes contractual and is thus covered
by the nonimpairment clause of the Constitution.
 Compensation and Set-off
General rule: Internal revenue taxes cannot be the subject of set-off or compensation
o This would adversely affect the government revenue system.
o Government and taxpayer are not creditors and debtors of each other.

Exception: If the claims against the government have been recognized and an amount has
already been appropriated for that purpose.

→ Where both claims have already become due and demandable as well as fully liquidated,
compensation takes place by operation of law and both debts are extinguished to the
concurrent amount. (Domingo v. Garlitos, 29 June 1963)
>Doctrine of Equitable Recoupment
o A claim for refund barred by prescription may be allowed to offset unsettled tax
liabilities.
o This doctrine finds no application in this jurisdiction.
>Compromise
o A contract whereby the parties, by making reciprocal concessions avoid litigation or put
an end to one already commenced. (Art. 2028, Civil Code)
o It involves a reduction of the taxpayer's liability.

Generally, compromises are allowed and enforceable when the subject matter thereof is
not prohibited from being compromised and the person entering into it is duly authorized to do
SO.
In the NIRC, the CIR is expressly authorized to enter, under certain conditions, into a
compromise of both the civil and criminal liabilities of the taxpayer.
No provisions exist under the Local Government Code
While the tax liability is not prohibited from being compromised, there is no specific
authority, however, given to any public official to execute the compromise so as to render it
effective.

Tax Amnesty
o Partakes of an absolute forgiveness or waiver by the Government of its right to collect
what otherwise would be due it
o Like tax exemption, it is never favored nor presumed in law. If granted, the terms of the
amnesty must be construed strictly against the taxpayer and liberally in favor of the
taxing authority.

Tax amnesty vs. Tax exemption

Tax amnesty
o Immunity from all criminal and civil obligations arising from non-payment of taxes.
o It applies to past tax period, hence, of retroactive application.
Tax exemption
•Immunity from all civil liability only.
•It is generally prospective in application.
Escape from Taxation
Shifting
o It refers to the transfer of tax burden from the person directly liable for the tax to
someone else (to a buyer). Shifting is generally not prohibited under the law.
o What is shifted is the tax burden, not the liability for the tax.
o Thus, the person directly liable for the tax remains liable whether or not the tax burden
is shifted.
o Only indirect taxes are shifted.

Impact of Taxation

o The point on which a tax is originally imposed.

o From the government's perspective, the statutory taxpayer (the person directly liable to
pay the tax) is the person who must pay the tax to the government.

Incidence of Taxation
o The point on which the tax burden finally settles.
o It takes place when shifting has been effected from the statutory taxpayer to another.

Tax Avoidance (tax minimization)

o It is permissible.
o Tax avoidance occurs when taxpayers take advantage of legally permissible alternative
tax rates or methods of assessing taxable property or income transactions in order to
avoid or minimize tax liability.
Examples:

Estate planning schemes resorted to by taxpayers in converting their property to shares of

stock in a corporation.

Tax Evasion (tax dodging)

• It is illegal.
•Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of tax. It is a term that connotes fraud through the use of pretenses or forbidden
devises to lessen or defeat taxes.

Elements:
• The end to be achieved: payment of less than that known by the
taxpayer to be legally due or paying no tax when it is shown that tax is due.
•An accompanying state of mind which is described as being evil, in bad faith, willful,
deliberate, and not accidental.
•A course of action or omission that is unlawful.
 ➢ Under-declaration of taxable value
• Mis-declaration of dutiable goods
• Substantial under-declaration of taxable income for consecutive years coupled with
substantial overstatement of deductions

Simulated sales
Keeping of two or more books of accounts
Taxes Tariff
Various kinds of enforced contributions upon persons for the attainment of public
purposes
Imposed on articles which are traded internationally

➢ Tax as Distinguished from Other Forms of Taxation

Taxes vs. Toll

Taxes
• Paid for the support of the government
• Demand of sovereignty
• Generally, no limit on amount as long as it is not excessive, unreasonable or confiscatory
• Imposed only by the government
Toll
o Paid for the use of another's property
o Demand of proprietorship
o Amount paid depends on the cost of construction and/or maintenance of the public
improvement used
o Imposed by the government or by private individuals or entities

Taxes vs. License

Taxes
o Imposed under the taxing power of the state for purposes of revenue
o Forced contributions for the purpose of maintaining government functions
o Generally unlimited as to Amount
License and Regulatory Fees
o Levied under the police power of the state
o Exacted primarily to regulate certain businesses or occupations
o Should not unreasonably exceed the expenses of issuing the license and of supervision
Imposed on persons, property and to exercise a privilege
Failure to pay does not necessarily make the act or business illegal
o Imposed only on the right to exercise a privilege
o Failure to pay makes the act or business illegal
Taxes vs Special Assessment
Taxes
o levied not only on diass
o Imposed regardless of public improvements
o Contribution of a taxpayer for the support of the government
o It has a general application both as to time and place

Special Assessment or Special Levy

o levied onben land
o Imposed because of an increase in value of land benefited by public improvement
o Contribution of a person for the construction of a public improvement
o Exceptional both as to time and locality.

Taxes vs. Debt

Taxes
o Based on laws
o Generally cannot be assigned
o Generally paid in money
o Cannot be a subject of set off or compensation
o Imprisonment is a sanction for nonpayment of tax, except poll tax
Debt
o Generally based on contract, express or implied
o Assignable
o May be paid in kind
o Can be a subject of set off or compensation
o A person cannot be imprisoned for nonpayment of debt (except when it arises from a
crime)
Taxes vs. Penalty
Taxes
o Violation of tax laws may give rise to imposition of penalty
o Generally intended to raise revenue
o May be imposed only by the government
o Cannot be a subject of set off or compensation
Penalty
o Any sanction imposed as a punishment for violation of law or acts deemed injurious
o Designed to regulate conduct
o May be imposed by the government or private individuals or entities