GENERAL PRINCIPLES a tax must be clearly stated in the language of the law
hence cannot be merely implied therefrom.
1. Taxation vs. Taxes
Taxation is a mode of raising revenue for public
purposes. It is the power by which the sovereign
raises revenue to defray the necessary expenses of
government. It is a way of apportioning the cost of
government among those who in some measure are
privileged to enjoy the benefits and must therefore
bear its burdens.
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 for all its public needs.
Taxes are:
a) Enforced contributions
b) Proportional in character, based on one’s
ability to pay
c) Levied by the authority of the law
d) For the support of the government and all its
public needs
THEORIES OF TAXATION:
1. Lifeblood Doctrine
The power of taxation is essential because the
government can neither exist nor endure without
taxation. Taxes are the lifeblood of the government
and their prompt and certain availability is an
imperious need.
The government’s ability to serve and protect the
people depends largely upon taxes. Taxes are what we
pay for a civilized society.
CIR vs. NEXT MOBILE, INC.
Taxes are the nation’s blood through which
government agencies continue to operate and which
the State discharges its functions for the welfare of its
constituents.
CIR vs. NIPPON EXPRESS CORP.
In matters of taxation, the government cannot be
estopped by the mistakes, errors or omissions of its
agents for upon it depends the ability of the
government to serve the people for whose benefit
taxes are collected.
CIR vs. ALGUE, INC.
Taxes are the lifeblood of he government and so
should be collected without necessary 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.
DAVAO GULF LUMBER CORP vs. CIR
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.
Otherwise stated, any exemption from the payment of
PHILIPPINE BANK OF COMMUNICATIONS vs. CIR
Basic is the principle that “taxes are the lifeblood of
the nation.” The primary purpose is to generate funds
for the State to finance the needs of the citizenry and
to advance the common weal.
2. Necessity Theory
CIR vs. BPI
The theory behind the exercise of the power to tax
emanates from necessity, it is that, without taxes,
government cannot fulfill its mandate of promoting
the general welfare and well-being of the people.
3. Benefits-Protection Theory (Doctrine of
Symbiotic Relationship)
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. The obligation
to pay taxes is involuntary and compulsory, in
exchange for the protection and benefits one receives
from the government.
Doctrine of Symbiotic Relationship
CIR vs. ALGUE, INC.
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 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.
4. Jurisdiction over subjects and objects
Taxation is territorial because it is only within the
confines of its territory that the State may give
protection.
5. Willful blindness doctrine
This doctrine provides that one cannot escape tax
liability when it can be shown that there is willful or
deliberate act or omission in the payment of his taxes
due to the government.
NATURE OF THE TAXING POWER
1. Inherent Power
The power of taxation is inherent in the State because
it is a necessary attribute of sovereignty belonging as
a matter of right to every independent government. It
does not need of constitutional conferment.
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Constitutional provisions do not give rise to the power
to tax but merely impose limitations on what would
otherwise be an invincible power.
Without this power, no sovereign State can exist nor
endure. The power to tax proceeds upon the theory
that the existence of a government is a necessity and
this power is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every
independent State or government. No sovereign State
can continue to exist 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, hence the emergence of the power to tax.
2. Legislative Power
The power to tax is inherent in the State and it is free
to select the object of taxation, such power being
exclusively vested in the legislature except where the
Constitution provides otherwise.
This is based upon the principle that “taxes are a grant
of the people who are taxed, and the grant must be
made by the immediate representatives of the people.
And where the people have laid the power, there it
must remain and be exercised.”
CHAMBER OF REAL ESTATE AND BUILDERS’
ASSOCIATION, INC vs. ROMULO
The legislature wields the power to define what tax
shall be imposed, why it should be imposed, how
much tax shall be imposed, against whom or what
shall it be imposed and where it shall be imposed.
Is the power to tax the power to destroy?
MCCULLOCH vs. MARYLAND
The power to tax involves the power to destroy means
that this power also includes the power to regulate
even to the extent of prohibition or destruction since
the inherent power to tax vested in the legislature
includes the power to determine who to tax, what to
tax and how much tax is to be imposed.
Power to tax is plenary over the subjects to which it
extends and is unlimited, hence the Congress may tax
anything. Therefore, it should be exercised with
caution to minimize injury to the propriety rights of a
taxpayer.
ROXAS vs. CA
However, the power to tax includes power to destroy
only if it is used validly as an implement of the police
power of the State in discouraging and in effect,
ultimately prohibiting certain things or enterprises
inimical to the public welfare.
But if it is used solely for the purpose of raising
revenues, it cannot be allowed to confiscate or
destroy.
PURPOSE OF TAXATION:
1. Primary or Raise revenues
The primary purpose of taxation is to raise funds or
property to enable the State to promote the general
welfare and protection of its citizens.
2. Secondary or Non-Revenue Purposes
Other than raising revenues, taxation also seeks to:
a) Reduce social inequality
- Progressive system of taxation aims to
reduce the inequality in the distribution of
wealth by preventing its undue
concentration in the hands of a few
individuals.
CIR vs. CENTRAL LUZON DRUG CORP
The power to tax has indeed become a most effective
tool to realize social justice, public welfare, and the
equitable distribution of wealth.
b) Encourage the growth of local industries
- It is a settled rule that the power to tax
carries with it the power to grant tax
exemptions to encourage investments in
our local industry and promote economic
growth.
c) Protect against unfair competition
d) As an implement of police power
(regulatory measure)
TIO vs. VIDEOGRAM REGULATORY BOARD
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.
May the power of taxation be used as an
implement of the power of eminent domain?
CIR vs. CENTRAL LUZON DRUG CORP
Yes. Tax measures are but “enforced contributions
exacted on pain of penal sanctions” and “clearly
imposed for a public purpose.”
CHARACTERISTICS OF TAXATION:
1. Comprehensive
– covers persons, businesses, activities,
professions, rights and privileges.
2. Unlimited
TIO vs. VRB
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.
3. Plenary
- As it is complete.
4. Supreme
- It is supreme insofar as the selection of
the subject of taxation is concerned.
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 the citizens expropriated
PRINCIPLES OF A SOUND TAX SYSTEM of the state property
PERSONS All persons, Only a
a. Fiscal adequacy AFFECTED property particular
and excises property
Sources of revenue must be adequate to meet that may
government expenditures and other public needs. This subject
is in consonance with the doctrine that taxes are the thereto
lifeblood of the government.
3. From SPECIAL ASSESSMENT
b. Theoretical justice
Tax Special Assessment
A sound tax system must take into consideration the Levied only on land
taxpayer’s ability to pay. Our laws mandate that taxes Personal to the Cannot be made a
must be reasonable, just, fair and conscionable. taxpayer personal liability of the
person assessed
The rule on taxation must be uniform and equitable Based wholly on benefits
and the State must evolve a progressive system of Imposition of a charge Imposition of a charge
taxation. on all property, real only on property of the
and personal, in a owners benefited
c. Administrative feasibility prescribed area
Tax laws must be capable of effective and efficient
4. From LICENSE
enforcement. They must not obstruct business growth
and economic development.
Tax License
Levied in the exercise of Emanates from the
TAXATION DISTINGUISHED FROM OTHER
taxing power police power of the State
INHERENT POWERS AND IMPOSITIONS
Generate revenues Regulatory purposes
1. From POLICE POWER Unlimited Only sufficient or
necessary
Taxation Police Power
PDC vs. Quezon City
PURPOSE Raise revenues Promote public
welfare
The imposition is a tax, if its primary purpose is to
through
generate revenue, and regulation is merely incidental;
regulation
but if regulation is the primary purpose, the fact that
AMOUNT OF No limits Limited to the
incidental revenue is also obtained does not make the
EXACTION cost of
imposition a tax.
regulation,
issuance of
5. From TOLL
license or
surveillance
Tax Toll
BENEFITS TO No special or No direct
Demand of sovereignty A demand of
TAXPAYER direct benefit, benefits
for the purpose of proprietorship, an
only protection
raising public revenues amount charged for the
of his person,
cost and maintenance of
property and
the property used
welfare
SUPERIORITY Recognizes the No application
6. From DEBT
OF obligations
CONTRACTS imposed by
A tax is not a debt for the reason that a tax does not
contracts
depend upon the consent of the taxpayer and there is
TRANSFER OF Form part of Merely the
no express or implied contract to pay taxes.
PROPERTY public funds restraint on the
RIGHTS exercise of
Taxes are not subject of set off:
property rights
GR: As a rule, taxes cannot be subject to
compensation because the government and the
2. From EMINENT DOMAIN
taxpayer are not creditors and debtors of each other.
Taxation Eminent
EXN: The SC allowed the offsetting of taxes only
Domain
because the determination of the taxpayer’s liability is
PURPOSE Raise Taking of intertwined with the resolution of the claim for tax
revenue property for refund of erroneously or illegally collected taxes under
public use Section 229 of the NIRC.
COMPENSATION Accrue to Just
the general compensation FRANCIA vs IAC
benefit of is given to the
owner of the

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A claim for taxes is not a debt, demand, contract or
judgment as is allowed to be set-off. The reason is
that taxes are not in the nature of contracts between
the parties which the personal consent of the
individual is not required.
LIMITATIONS ON THE TAXING POWER
1. Inherent Limitations
Examples of which are income tax, estate tax and
donor’s tax.
On the other hand, indirect tax is a tax primarily paid
by persons who can shift the burden upon someone
else.
Examples are VAT, excise tax, other percentage tax
and documentary stamp tax.

a) Public purpose DOUBLE TAXATION

REASON: The power to tax exists for the general
welfare; hence, implicit in its power is the limitation
that it should be used only for a public purpose. It
would be a robbery for the State to tax its citizens and
use the funds for private purpose.
PASCUAL vs. SECRETARY OF PUBLIC WORKS
The rule is that, if the public advantage or benefit is
merely incidental in the promotion of a particular
enterprise, such defect shall render the law invalid. On
the other hand, if what is incidental is the promotion
of a private enterprise, the tax law shall be deemed
for a public purpose.
b) International Comity
The basis for this rule is the mandate of the
Constitution that the State must adopt the generally
accepted principles of international law as part of the
law of the land and adheres to the policy of peace,
equality, justice, freedom, cooperation and amity with
all nations.
c) Territoriality
CIR vs. BANK OF COMMERCE
Double taxation means taxing the same property
twice when it should be taxed only once, that is, taxing
the same person twice by the same taxing authority
in the same jurisdiction for the same thing.
PEPSI-COLA BOTTLING Co. Vs MUNICIPALITY OF
TANAUAN, LEYTE
The SC declared that double taxation, in general, is
not forbidden by our constitution, however, it
becomes obnoxious only when the taxpayer is taxed
twice for the benefit of the same government
authority or jurisdiction for the same purpose.
Kinds of Double Taxation:
a) Direct – constitutes double taxation in the
objectionable or prohibited sense.
b) Indirect – permissible double taxation. This
is allowed if the taxes are of different nature
or character, imposed by different taxing
authorities or vice versa.

Taxing power of the country is limited to person and c) International – it is defined as the imposition
property within and subject to its jurisdiction. of comparable taxes in two or more states on
the same taxpayer in respect of the same
2. Constitutional Limitations subject matter and for identical periods.

a) Due process of law

b) Equal protection of the law TAX EVASION vs. TAX AVOIDANCE
c) Uniformity of Taxation
d) Progressive Taxation Tax evasion is a scheme used outside of the lawful
e) Non-impairment Clause means and when availed of, its subjects the taxpayer
f) Non-imprisonment for non-payment of poll to further or additional civil or criminal liabilities. It
tax refers to the willful attempt to defeat or circumvent
g) Bills to originate from the House of the tax law in order to illegally reduce one’s tax
Representatives liability.
h) Veto power of the President
i) President’s power to tax On the other hand, tax avoidance is a tax saving
j) Freedom of press device within the legal means used by the taxpayer to
k) Freedom of religion reduce taxes. It delves into the act of taking
l) Tax exemption of properties actually, directly advantage of legally available tax-planning
and exclusively used for religious, charitable opportunities in order to minimize one’s tax liability.
and educational purposes
m) Local taxation
n) Special fund

KINDS OF TAXES

Direct vs. Indirect

Direct tax is a tax which the taxpayer is liable on the

transaction or business it engages in.

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 INCOME TAXATION
Income – In a broad sense, means all wealth that
flows into the taxpayer other than as a mere return of
capital. It is described as gains and profits including
gains derived from the sale or other disposition of
capital assets.
SOURCES OF INCOME
- Property (capital)
- Labor (service)
- Sale/exchange of capital asset and
activity
COM vs. BOAC
Sources of income is any property, activity or service
that produced the income.
REQUISITES FOR INCOME TO BE TAXABLE
1. There must be gain or profit
2. The gain must be realized or received
- It is considered realized when the earning
process is complete or virtually compete
and an exchange has taken place.
3. The gain must not be excluded by law or
treaty
Doctrine of Constructive Receipt
Income which is credited to the account of and may
set apart for a taxpayer and which may be drawn by
him at any time is subject to tax for the year during
which it was so credited or set apart although not yet
then actually received or reduced to his possession.
This doctrine is designed to prevent the taxpayer
using the cash basis from deferring or postponing the
actual receipt of taxable income.
FILIPINAS SYNTHETIC CORP vs CA
The SC held that it is the right to receive income, and
not the actual receipt, that determines when to include
the amount in gross income.
Examples:
a) Matured interest coupons due and
demandable (convertible into cash)
b) Share in the profits of a partner in a
partnership
c) Interest credited on saving bank deposit
d) Dividends applied to a corporation against the
indebtedness of a stockholder
e) Rental payments refused by the lessor when
the lessee tendered payment and the latter
made a judicial deposit of the rental
f) Amount credited to shareholders of a building
and loan association
GROSS INCOME
Section 32(a) of NIRC
Except when otherwise provided in this Title, gross
income means all income derived from whatever
source, including but not limited to the following:
1) Compensation for services (fees, salaries,
wages, commissions and similar items)
2) Derived from the conduct of trade or business
or the exercise of profession
3) Gains derived from dealings of property
4) Interest
5) Rents
6) Royalties
7) Dividends
8) Annuities
9) Prizes and winnings
10) Pensions
11) Partner’s distributive share from the net
income of GPP
Gross income means total income from all sources
before deductions, exemptions or other tax
reductions.
EXCLUSIONS FROM GROSS INCOME
Reason:
1. The item of receipt does not fall within the
definition of income for income tax purposes
2. A provision of Tax Code or special law
exempts it from income tax
Section 32(b) of NIRC
1) Life insurance – insurance contract is a
contract of indemnity.
REASON: Indemnity rather than as gain or profit.
However, if the designation of beneficiary is
REVOCABLE = taxable under estate tax
If IRREVOCABLE (related) = excluded
IRREVOCABLE (administrator or the estate itself) =
taxable
2) Amount received as return of premium –
return of premium means a repayment of a
part or the whole of the premiums paid.
However, excess of the amounts received over the
aggregate premiums or consideration paid is taxable.
3) Gifts, bequests and devises – not a product
of capital nor industry.
4) Compensation for injuries or sickness – it
is compensatory and not a gain or profit.
EXN: It is taxable if the amount of the damages
recovered represents loss of anticipated profits
because it represents a return of capital or
investment.
5) Income exempt under treaty
6) Retirement benefits, pensions, gratuities, etc.
a) Private Retirement benefits
b) No retirement plan (retirement pay law)
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 c) Separation benefits – for any causes a) Regional or area headquarters of multi-
beyond the control of the employee national corporations
d) SSS, GSIS and other retirement benefits b) Offshore banking units established in the
Philippines
7) Miscellaneous items c) Petroleum service contractors or sub-
contractors
a) Income received by foreign governments
from their investments in the Philippines 8% OPTIONAL TAX RATE
b) Income derived by the Government of the
Philippines or any political subdivision Self-employed individuals and/or professionals whose
from any public utility or from the exercise gross sales or gross receipts and other non-operating
of any essential governmental function. income do not exceed the VAT threshold 3M shall have
c) Prizes and awards under the ff: the option to avail of an 8% tax.
a. Received recognition from
religious, scientific, educational,
artistic, literary or civic
achievement
b. Recipient was selected without
any action on his part to enter
contest
c. Recipient not required to render
substantial future services as a
condition on receiving the award
d) Prizes and awards received in sports
competition to athletes and sanctioned by
their national sports associations. It must
be accredited by the Philippine Olympics
Committee (POC)
e) 13th month pay and other benefits
a. Total exclusion shall not exceed
P90,000
b. If it exceed, only the excess is
taxable
f) GSIS, SSS, Medicare

INDIVIDUAL INCOME TAXATION

Classification of Individual Taxpayers:

1) Resident Citizen (RC) – citizens of the

Philippines who are residing therein.
2) Non-resident Citizen (NRC) – citizens of the
Phils who are physically present abroad for an
uninterrupted period covering an entire
taxable year.
3) Resident Alien (RA) – non-citizens who reside
in the Philippines:
a. Must be a resident not a mere
transient or sojourner (intention to
stay)
b. Floating intention as to the time of
return to his country
c. Extended stay

Maintenance of residence is the test but actual stay is

a basic factor in determining residency. Therefore the
following must be considered:

i. Maintenance of residence in the Philippines

ii. Actual physical residence
iii. Temporary stay is on extended stay
iv. resides more than 1 year

4) Non-resident Alien (NRA) – neither citizen nor

resident of the Philippines
5) Non-resident Alien not engaged in trade or
business (NRA-NETB)

GR: Taxed 25% on gross or entire income

EXN: 15% if:

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