07/01/2018

TAXATION LAW I

- Taxation is a mode of raising revenue for public purposes.

- The power to impose taxes is a legislative power; it cannot be imposed by the executive
department nor by the courts.
- Taxation has been defined as the power by which the sovereign raises revenue to defray the
necessary expenses of government.
- Lifeblood Doctrine - Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need.
- Because taxes are the lifeblood of the nation, statutes that allow exemptions are
construed strictly against the grantee and liberally in favor of the government.
- Theories on Taxation:
 Necessity Theory
 It is a necessary burden to preserve the State's sovereignty and a means
to give the citizenry an army to resist aggression, a navy to defend its
shores from invasion, a corps of civil servants to serve, public
improvements for the enjoyment of the citizenry, and those which come
within the State's territory and facilities and protection which a
government is supposed to provide.
 Benefits Protection Theory
 Bases the power of the State to demand and receive taxes on the
reciprocal duties of support and protection. The citizen supports the
State by paying the portion from his property that is demanded in order
that he may, by means thereof, be secured in the enjoyment of the
benefits of an organized society.
 Doctrine of Symbiotic Relationship
 'Taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural reluctance to surrender part of
one's hard-earned income to the taxing authorities, every person who is
able to must contribute his share in the burden of running 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 material and moral values."
- Taxes are personal to the taxpayer.
- Doctrine of Piercing the Corporate Veil - stockholders may be held liable for the unpaid taxes
of a dissolved corporation if it appears that the corporate assets have passed into their hands.
- In taxation, it is one's failure to comply with the civil liability to pay taxes which gives rise to the
criminal liability.
- Nature of the Taxing Power
 Taxation as an Inherent Attribute of Sovereignty
 The power of taxation is an incident of sovereignty as it is inherent in
the State, belonging as a matter of right to every independent
government.
 Taxation as Legislative in Character
 The power to tax is inherent in the State, and the State is free to select
the object of taxation, such power being exclusively vested in the
legislature, EXCEPT where the Constitution provides otherwise.
- The term "levy" or "imposition" refers to the enactment of tax laws or statutes.
- Scope of the Legislative Power to Tax
 The sole arbiter of the purposes for which taxes shall be levied is the
legislature, provided the purposes are public. The courts may review the
levy of the tax to determine whether the purpose is a public one but once that is
 determined, the courts can make no other inquiry as to the purpose of the
tax, as it affects the power to impose it.
 The legislature has unlimited scope as to the persons, property or
occupation to be taxed, where there are no constitutional restrictions, provided
the property is within the territorial jurisdiction of the taxing state.
- The Legislature may, in its discretion, select what occupations shall be taxed, and in the exercise
of that discretion it may tax all. Or it may select for taxation certain classes and leave the others
untaxed.
- The legislature has the right to finally determine the amount or rate of a tax, in the absence of
constitutional prohibitions.
- The discretion of the legislature in imposing taxes extends to the mode, method or kind of tax. As to
the kind of taxes which may be imposed, the legislature has power to levy one or more of the following:
 Property tax,
 excise,
 license or occupation tax,
 a poll or capitation tax,
 franchise tax,
 income tax,
 inheritance tax,
 stock transfer tax, etc.
- "The power to tax involves the power to destroy." This might well be construed to mean that
the power to tax includes the power to regulate even to the extent of prohibition or
destruction,
- "The power to tax is not the power to destroy while the Supreme Court sits."
- The act of assessing and collecting taxes is administrative in character, and therefore can
be delegated.
 First, the tax law must designate which agency will collect the taxes.
 Second, the circulars or regulations issued by the Secretary of Finance or the
Commissioner of the Internal Revenue must be in accordance with the tax
measures imposed by Congress.
- Payment signifies an act of compliance by the tax payer.
- Purposes of Taxation
 The primary purpose of taxation is to raise revenues.
 Secondary or non-revenue purposes
(1) reduce social inequality
 Our present tax system has adopted the progressive
system of taxation, i.e., the tax rate increases as the
tax base increases. This system aims at reducing the
inequality in the distribution of wealth by preventing its
undue concentration in the hands of a few individuals.

(2) encourage the growth of local industries

 The power to tax carries with it the power to grant tax
exemptions. Tax exemptions and tax reliefs serve as
incentives to encourage investment in our local
industry and thereby promote economic growth.

(3) protect our local industries against unfair competition

 The Tariff and Customs Code allows the imposition
of certain taxes (countervailing and dumping duties)
upon imported goods or articles to further protect
our local industry. R.A. 8752 (Anti-Dumping Act)
imposes stricter conditions.

(4) implement the police power of the state (regulatory purpose)

  The power of taxation may be used as an implement of
the police power of the State through the imposition
of taxes with the end in view of regulating a
particular activity.

07/08/2018

TAXATION LAW I

- Extent of the Power of Taxation

 Comprehensive
 It covers persons, businesses, activities, professions, rights and
privileges.
 Congress knows what and who to tax
 Unlimited
 A tax does not cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed. The power to
impose taxes is one so unlimited in force and so searching in extent that
the courts scarcely venture to declare that it is subject to any restrictions
whatever, except such as rest in the discretion of the authority which
exercises it.
 Plenary
 As it is complete. Under the NIRC, the BIR may avail of certain remedies
to ensure the collection of taxes.
 The law passed is considered as complete including the remedies
 Supreme
 Taxation, although referred to as the strongest of all the powers of the
government, cannot be interpreted to mean that it is superior to the other
inherent powers of the government. It is supreme insofar as the
selection of the subject of taxation is concerned.
 The two others powers are useless without the power of taxation
because of the funds.

- Taxation is not absolute.

- Limitations of the Power to Tax:
 Inherent
 Public Purpose
 Taxes are enacted only for a public purpose
 Taxation must be primarily for public purpose
 Non-Delegability
 Inherently legislative in nature
 Vested upon the Congress and cannot be delegated
 The President cannot impose taxes
 The President cannot grant tax amnesty as it partakes
the nature of a tax exemption
 Only the Congress can grant a tax exemption
 Exceptions from delegation of power to tax:
o Power granted under the Constitution
granted to the Local Government Units
to create its own sources of revenues
but subject to standards and limitations
 that the Congress may prescribe. The
Congress cannot prohibit the LGUs as
the grant is conferred by the
Constitution.
o LGUs do not have the inherent power to
tax but delegated directly under the
Constitution.
o Flexible tariff clause – Art. 6, Sec. 28,
Par. 2, 1987 Constitution
 The grant of power to administrative bodies to make
 Exemption of the Government from Taxes
 Generally, the government is exempted from paying
taxes.
 Since the State is a sovereign, it cannot tax itself.
 This applies only when the government performs
governmental functions.
 If the government performs proprietary functions, they
are not exempt from tax.
 International Comity
 Generally accepted principles of international laws as
part of the law of the land

 Territoriality
 Jurisdiction or status of Taxation
 Constitutional
- Double taxation is not prohibited unless
- Due process clause is important in taxation because money is considered as a property
- Equal protection clause
- Art. III, Sec. 20
 No person shall be imprisoned for debt or non-payment of a poll tax.
- Art. VI, Sec. 27 & 28
 Sec. 27 –
(1) Every bill passed by the Congress shall, before it becomes a law, be
presented to the President. If he approves the same he shall sign it;
otherwise, he shall veto it and return the same with his objections to the
House where it originated, which shall enter the objections at large in its
Journal and proceed to reconsider it. If, after such reconsideration, two-thirds
of all the Members of such House shall agree to pass the bill, it shall be sent,
together with the objections, to the other House by which it shall likewise be
reconsidered, and if approved by two-thirds of all the Members of that
House, it shall become a law. In all such cases, the votes of each House
shall be determined by yeas or nays, and the names of the Members voting
for or against shall be entered in its Journal. The President shall
communicate his veto of any bill to the House where it originated within thirty
days after the date of receipt thereof, otherwise, it shall become a law as if
he had signed it.

(2) The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or
items to which he does not object.
  Sec. 28 –
(1) The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
(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.
(3) Charitable institutions, churches and personages 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.
(4) No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.

- Progressive taxation is not prohibited in the Philippines

- Art. XIV
 Section 4.
(1) The State recognizes the complementary roles of public and private
institutions in the educational system and shall exercise reasonable
supervision and regulation of all educational institutions.

(2) Educational institutions, other than those established by religious

groups and mission boards, shall be owned solely by citizens of the
Philippines or corporations or associations at least sixty per centum of
the capital of which is owned by such citizens. The Congress may,
however, require increased Filipino equity participation in all
educational institutions.

The control and administration of educational institutions shall be vested in

citizens of the Philippines.

No educational institution shall be established exclusively for aliens and no

group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this subsection shall not apply to schools
established for foreign diplomatic personnel and their dependents and,
unless otherwise provided by law, for other foreign temporary residents.

(3) All revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the dissolution
or cessation of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned,

may likewise be entitled to such exemptions, subject to the limitations
provided by law, including restrictions on dividends and provisions for
reinvestment.

(4) Subject to conditions prescribed by law, all grants, endowments, donations,

or contributions used actually, directly, and exclusively for educational
 purposes shall be exempt from tax.

- Art.
- A property of a person cannot be taxed without due process of law.
- Due process:
 Substantive – the law
 Procedural
 Notice (ex. Assessment in taxation)
 Hearing (ex. Tax payer is given the right to files his protest)
- Principles of a Sound Tax System
 These principles are not considered as limitations
 Non-adherence of these principles does not constitute a violation
1. Fiscal Adequacy
o Sources of revenues must be adequate to meet government
expenditures (Chavez v. Ongpin, 186 SCRA 331), and other
public needs.
o Sufficient, adequate or enough to cover what is needed
(governmental expenses)
o Fiscal policy
2. Theoretical Justice
o A sound tax system must take into consideration the taxpayers'
ability to pay. Our laws mandate that taxes must be reasonable,
just, fair, conscionable. Under Art. VI, Section 28(1) of the
Constitution, the rule of taxation must be uniform and equitable.
The State must evolve a progressive system of taxation.
o Horizontal Equity
 General Rule: Requires that persons, objects or
subjects belonging to the same class or are similarly
situated alike must be treated the same or alike in terms
of benefits, exemptions, etc.
 Exception: Valid classification
 When is there valid classification?
 The equal protection of the laws clause allows
for valid classification. This means:
(1) that the classification should be based on
substantial distinctions which make for real
differences;
(2) that it must be germane to the purpose of
the law;
(3) that it must not be limited to existing
conditions only; and
(4) that it must apply equally to each member of
the class.
 Section 23 states the situs of taxation
o Vertical Equity
 Progressive - higher income, higher tax
 Tax must be based on the capacity to pay
3. Administrative Feasibility
 o Tax laws must be capable of effective and efficient enforcement.
They must not obstruct business growth and economic
development.
o Convenience on the part of the tax payer and of the officers
o Competence on both to comply with the requirements
4. Economic efficiency (not yet observed in the Philippine jurisdiction)
- Art. VI, Sec. 28, par. 8 – Tax system must be uniform and equitable
- TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS AND IMPOSITIONS
 Taxation distinguished from Police Power
 As to Purpose –
 Taxation is levied for the purpose of raising revenues;
Police Power is exercised to promote public welfare
through regulation.
 As to Amount of Exaction –
 The amount gathered in the exercise of Taxation
contemplates of no limits; in Police Power, the exaction
is limited to the cost of regulation, issuance of the
license, or surveillance.
 As to the Benefits Received by the Taxpayer –
 In Taxation, no special or direct benefit is received by
the taxpayer other than the fact that the government
secures to the citizen that general benefit resulting from
the protection of his person and property and the welfare
of all.

Similarly, no direct benefits are received through the

exercise of Police Power, yet a healthy economic
standard society is maintained.

 As to Superiority of Contracts –
 Taxation recognizes the obligations imposed by
contracts. This limitation does not apply to Police Power.
 As to Transfer of Property Rights –
 In Taxation, the taxes paid form part of the public funds,
whereas Police power allows merely the restraint on the
exercise of property rights.
 Taxation distinguished from Eminent Domain
 As to Purpose –
 Taxation is exercised in order to raise public revenue;
Eminent domain or expropriation is the taking of property
for public purpose.
 As to Compensation –
 Payment of taxes accrues to the general benefit of the
citizens of the taxing state; in Eminent Domain, just
compensation is given the owner of the expropriated
property.
 As to Persons Affected –
  Taxation applies to all persons, property and excises
that may be subject thereto; in Eminent Domain, only
particular property is comprehended.
- Double Taxation – when the same taxable item is taxed more than once by either the same or
by different government agencies. It can either be in a “juridical” or an “economic” form.
- In Philippine jurisprudence, double taxation has been described as “direct duplicate taxation.”
- Tax is superior compared to other inherent powers however, with respect to non-impairment
clause, it is inferior.
- Non-impairment clause applies when the government is a party to the contract.
- Government may revoke franchises granted as franchises are generally granted by the Congress.
- Classification of Taxes:
1. Personal, capitation or poll tax
2. Property tax
3. Excise tax
- Constitutional Limitations as to Taxation
 Art. 3, Sec. 1 and Sec. 4, 10
 Art. 6, Sec. 28 par. 3
 *religious organizations are exempted only from real estate tax
 Art. 6, Sec. 27 par. 2
 Art. 6, Sec. 28
 Art. 14, Sec, 4, par. 3
 Sec. 23 NIRC
 Sec. 27 (b) NIRC
 Sec. 30 (h) NIRC
- No condition imposed as to the source of income of the non-stock and non-profit educational
institution
- Tax exemption
- Tax amnesty
- Taxes are generally payable in money for convenience and administrative feasibility
- Direct Taxation – if both burden and incidence stays with the same person
o Burden/Impact
o Incidence
- Indirect Taxation