October 2023
GENERAL PRINCIPLES OF TAXATION
Atty. C. Llamado
Taxation Defined
The exercise of the sovereign power to raise revenues for the expenses of the government.
Stages or Coverage of Taxation
Taxation covers three (3) separate areas or aspects of government activity, namely:
1. Levying or imposition of the tax. This involves the passage of tax laws which is generally
a legislative act. In the Philippines, the taxing power is exercised by Congress.
2. Assessment. The process of determining the correct amount of tax due.
3. Collection and payment – the act of compliance with the tax law by the taxpayer.
Executive or administrative in nature. Done by the Bureau of Internal Revenue (“BIR”)
3 Inherent Powers of a State:
1) Power to Tax
2) Police Power
3) Power of Eminent Domain
The Power to Tax
Subject to inherent and constitutional limitations, the power of taxation is regarded as supreme,
plenary, unlimited, and comprehensive.1 As long as the legislature, in imposing a tax, does
not violate applicable constitutional limitations or restrictions, the courts have no concern with
the wisdom or policy of the exaction, the political or other collateral motives behind it, the
amount to be raised, or the persons, property, or other privileges to be taxed.2
Police Power
Police power is the inherent power of a sovereign state to legislate for the protection of the
health, general welfare, safety, and morals of the public. It involves the power to regulate both
liberty and property for the promotion of the public good.
Note: The police power of the State may be exercised through taxation because taxes may be
levied for the promotion of the welfare of the public.3
1
To say that “the power to tax is the power to destroy” is to describe not the purpose for which the taxing
power may be used but the degree of vigor with which the taxing power may be employed in order to
raise revenue (1 Cooley 179-181).
2
51 Am. Jur. 77-78.
Lutz v. Araneta, 98 PHIL. 148.
3
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Power of Eminent Domain
The power of eminent domain is the inherent power of a sovereign state to take private
property for a public purpose. The Constitution limits the exercise of this power by providing
that: “Private property shall not be taken for public use without just compensation.”4
Distinctions Among the Three Inherent Powers
A) Purpose:
Taxation
Police Power
Eminent Domain
To raise revenues for the expenses of the State.
To promote the general welfare thru regulations.
To facilitate the State’s need of property for public use.
B) Amount of Exaction
Taxation
Police Power
Eminent Domain
No limit.
Limited to the cost of regulation, issuance of the license, and/or
surveillance.
No exaction but private property is taken for public use.
C) Benefits Received
Taxation
Police Power
Eminent Domain
No special or direct benefit is received by an
individual taxpayer. The public receives the general
benefit of protection of person, property and the
promotion of the general welfare.
No direct benefit is received by an individual. A
healthy economic standard of society is attained.
A direct benefit results in the form of just
compensation to the property owner.
D) Non-Impairment of Contracts
Taxation
Police Power
Eminent Domain
Obligations in contracts may not be impaired by the state
where tax exemptions are bilaterally agreed upon by the state
and the taxpayer. Tax exemptions bilaterally agreed upon
between the government and the taxpayer cannot be
withdrawn.
Obligations in contracts may be impaired by the government.
Obligations in contracts may be impaired by the government.
E) Transfer of Property Rights
Taxation
Police Power
Eminent Domain
4
Taxes paid become part of public funds.
No transfer, but only restraint in the exercise of property rights.
Transfer is effected in favour of the State.
Art. III, Sec. 9, 1987 Philippine Constitution.
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F) Scope
Taxation
Police Power
Eminent Domain
All persons, property, rights, and privileges.
All persons, property, rights, privileges, and liberties
Only upon specific property.
G) Authority which exercises the power
Taxation
Police Power
Eminent Domain
Exercised by the government or its political subdivisions
Exercised by the government or its political subdivisions
May be exercised by public service corporations or private
entities operating public utilities if granted by law
Limitations on the Power to Tax
(1) Constitutional limitations.
(a) No person shall be deprived of life, liberty, or property without due process of law, nor
shall any person be denied the equal protection of the laws.5
(b) The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.6
Uniformity – persons or properties falling under the same class should be taxed the
same kind and rate of tax.
Equality –
the same means and methods be applied impartially to all the members of
each class
Equal protection of the law – means equality before the law. However, such equality
does not deny to the state the power to recognize factual
differences between individuals and classes.
It
recognizes that inherent in the right to legislate is the
right to classify, provided that it is a valid and reasonable
classification. If the groupings are characterized by
substantial distinctions that make real differences, one
class may be treated and regulated differently from
another.7
(c) No person shall be imprisoned for debt or non-payment of a poll tax.8
5
Art. III, Sec. 1.
Art. VI, Sec. 28(1).
7
Tiu v. CA, G.R. No. 127410.
6
8
Art. III, Sec. 20.
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(d) 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.9
Note: The exemption referred to here is exemption from the real property tax which is
a local tax levied by a province or city (not by the National Government).
(e) No law granting any tax exemption shall be passed without the concurrence of a
majority of all the members of Congress.10
(f) No law impairing the obligation of contracts shall be passed.11
i) When the tax exemption is bilaterally agreed upon between the government and
the taxpayer, the exemption cannot be withdrawn without violating the nonimpairment clause.
ii) However, when the tax exemption is unilaterally granted by law, the same may be
withdrawn by virtue of another law without violating the non-impairment clause.
Ex. When the tax exemption is granted under a franchise embodied in a law, the
same may be withdrawn at any time.
(g) No law shall be made respecting an establishment of a religion or prohibiting the free
exercise thereof.12
No public money or property shall be appropriated, applied, paid, or employed, directly
or indirectly for the use, benefit, or support of any sect, 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.13
(h) All appropriation, revenue or tariff bills xxxxxxx shall originate exclusively in the
House of Representatives, but the Senate may propose or concur with amendments.14
(i) 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.15
(j) The Supreme Court shall have the power to review, revise, reverse, modify, or affirm
on appeal or certiorari as the law or the Rules of Court may provide, final judgments
9
Art. VI, Sec. 10. Exempt from real property taxation.
Art. VI, Sec 28(4).
11
Art. III, Sec. 10.
10
12
Art. III, Sec. 5.
Art. VI, Sec. 29 (2).
14
Art. VI, Sec. 24.
15
Art. VI, Sec. 28 (2).
13
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and orders of lower courts in xxxx all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto.16
(k) 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.17
(l) 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.18
(m) All money collected or 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.19
(2) Inherent limitations. These are restrictions arising from the very nature of the power to
tax itself. They are:
(a) The levy must apply within territorial limits for the exercise of effective tax
jurisdiction.
(b) The tax must be for a public purpose.
(c) Exemption from taxation of the government, any political subdivision thereof, or
agencies performing purely governmental functions. Ex. City government of
Makati.
However, when a local government unit (LGU), government agency, or government
owned and controlled corporation engages in activities which are proprietary in
character (i.e. engaging in businesses and activities similar to those performed by other
taxable corporations), such LGU, government agency, or GOCC shall be subject to
both income and business taxes as other private corporations. Exs. Land Bank of the
Philippines; PAGCOR.
EXC: The Government Service Insurance System (GSIS), the Social Security System
(SSS), Home Development Mutual Fund (Pag-Ibig), the Philippine Health
Insurance Corporation (PHIC or Philhealth), and local water districts (LWDs);
are exempt from the income tax imposed under Section 27 of the National
Internal Revenue Code (“NIRC”).
16
Art. VIII, Sec. (5) (2) (b).
17
Real properties of non-stock, non-profit educational institutions are exempt from real property taxes which are
imposed by the local government. Provided such properties are actually, directly, and exclusively used for
educational purposes.
Moreover, income of a non-stock, non-profit educational institution derived from any activity or property shall be
exempt from income taxation as long as such income is used actually, directly, and exclusively for educational
purposes (CIR vs. De La Salle, Inc., Supreme Court G.R. No. 196596, November 2, 2016).
18
Art. VI, Sec. 27 (2).
19
Art. VI, Sec. 29 (3).
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(d) As a general rule, the taxing power of the legislature may not be delegated.
Exceptions to this non-delegability rule are:
i) The authority of the President to fix tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties and imposts (Art. VI, Sec. 28 (2), 1987
Constitution).
ii) 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 (Art. X, Sec. 5, 1987 Constitution). Ex. Real property taxes.
iii) Delegation to administrative agencies for implementation of the tax laws, and
collection of the tax to the BIR.
(e) International comity.
This principle limits the authority of the government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its property held and activities
undertaken in that capacity. As a rule, the Philippine government cannot tax foreign
ambassadors nor impose real property taxes upon foreign embassies.
(f) Double Taxation. Two types of double taxation are direct double and indirect double
taxation.
Direct double taxation – Where:
(1) the same subject is taxed twice;
(2) by the same taxing authority;
(3) within the same jurisdiction;
(4) during the same taxing period; and
(5) covering the same kind or character of tax (Villanueva v. City of Iloilo, L-26521).
There is no constitutional prohibition against double taxation in the Philippines
(Villanueva v. City of Iloilo, L-26521, December 28, 1968), though it is not favoured.
Indirect double taxation, which lacks one or more of the elements of direct double
taxation, is also permissible.
Basic Principles of a Sound Tax System
1. Fiscal Adequacy – which means that the sources of revenue should be sufficient to meet
the demands of public expenditures;
2. Equality or Theoretical Justice – which means that the tax imposed should be
proportionate to the taxpayer’s ability to pay; and
3. Administrative Feasibility – which means that the tax laws should be capable of
convenient, just, and effective administration
Theory or Basis of Taxation
1) Life-blood Theory.
- Taxes are the lifeblood of the government. Without taxes, no government can
function.
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2) Benefits Protection Theory (Symbiotic Relationship)
- Taxes are what we pay for a civilized or organized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate it
(Commissioner v. Algue, 158 SCRA 9).
Essential Elements or Characteristics of a Tax
1. Enforced contribution
2. Exacted pursuant to legislative authority
3. For raising revenue for public needs
4. Proportionate in character or uniform
5. Payable in money
6. Imposed within the state’s jurisdiction
7. Personal to the taxpayer
Classification of Taxes
a) According to scope or exercising authority
National tax
- Imposed by the National Government
Exs. Income tax, Estate tax, Donor’s tax,
VAT, OPT, Excise Tax, DST
Municipal or local tax
- Imposed by local government units
Exs. Occupation tax, Real property tax (RPT)
b) According to subject matter or object
Personal, capitation, or poll tax
Property tax
Excise tax
Fixed amount imposed upon persons - Imposed on - Imposed upon the performance of an act;
of a certain class without regard to
property
the exercise of a right; or the engaging in
property, trade, business, or
business or profession
occupation
Ex. Community tax
Ex. RPT
Exs. VAT, Donor’s tax, Estate tax, Income tax,
Occupation tax, Excise tax
-
c) According to who bears the burden of the tax
Direct tax
Indirect tax
- The liability for the tax (impact), and the burden - The liability or impact for the tax falls on the
thereof (incidence) fall on the same taxpayer
original taxpayer, but the burden or incidence
thereof is shifted to another.
Ex. Income tax
Ex. VAT, excise tax, custom duties
d) According to purpose
General or Revenue tax
Levied without a specific or pre-determined purpose
Ex. Income tax, VAT, etc.
Special tax
Levied for a special purpose
Ex. Protective tariffs; special
assessments
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e) According to the rate applied
Proportional
Progressive
Regressive
Based on a fixed percentage of the The tax rate increases as the tax The tax rate decreases as the
tax base
base increases
tax base increases
Exs. RPT, VAT, Donor’s tax,
Ex. Income tax on individuals Ex. None
Estate tax.
under the graduated rates
f) According to measurement of the amount due
Specific
Ad Valorem
Measured by number, or based on weight Based on the value of the property and may require the
or physical measurement
intervention of assessors and appraisers
Exs. Excise tax on lubricating oils, waxes, Exs. RPT; excise tax on liquors, cigarettes packed by
petroleum, etc.
machine, and automobiles
Nature or Construction of Tax Laws
1. Tax laws are prospective, generally, but can have retrospective application.
The constitutional prohibition against the passage of laws having retrospective application
(also called ex post facto legislation) is limited to penal or criminal statutes.
Tax laws are not penal in character. Being civil in nature, the constitutional prohibition
against ex post facto legislation does not apply to tax laws.20 They can therefore be given
retrospective application if expressly declared by the tax law.
However, tax laws, like other statutes, are to be construed as having only a prospective
operation unless the purpose and intention of the legislature to give retrospective effect is
expressly declared or is necessarily implied from the language used.21
A tax creates a civil obligation or liability on the part of the taxpayer, although the nonpayment thereof creates a criminal liability, which could be the subject of criminal
prosecution under existing laws. In short, in taxation, it is one’s civil liability to pay taxes
that gives rise to criminal liability.22
2. A statute will not be construed as imposing a tax unless it does so clearly, and
unambiguously.
A tax cannot be imposed without clear and express words for that purpose. Accordingly,
the provisions of a taxing act are not to be extended by implication.23
20
21
22
23
Law of Basic Taxation in the Philippines, Benjamin Aban; citing Republic v. Oasan Vda. de Fernandez,
et al., 99 Phil. 934; Ex Parte Garland, 18 Law Ed. 366.
Lorenzo v. Posadas, 64 Phil. 353.
Republic v. Patanao, L-22356, July 21, 1967.
Marinduque Mines Agents v. Municipal Council of Hinabangan, L-18924; Commissioner v. CA, GR
115349, April 18, 1997.
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In case of doubt, statutes imposing a tax are construed most strongly against the
Government, and liberally in favor of the citizen because burdens are not to be imposed
beyond what the statutes expressly can clearly import.24
3. Tax exemptions are to be construed strictly against the taxpayer.
Legal provisions providing for tax exemptions are to be construed strictly against the grant
and liberally in favor of the taxing power.25
Exemption from taxation is construed strictissimi juris, i.e. strictly against exemption.
Hence, exemption must be anchored firmly on an express provision of law. He who claims
exemption must be able to justify his claims by the clearest grant of organic and statute
law.26
4. Revenue laws are not political in nature.
Our internal revenue laws are not political in nature and as such were continued in force
during the period of enemy occupation and in effect were actually enforced by the
occupation government.27
5. Legislative intention must be considered. Tax statutes are to receive a reasonable
construction with a view to carrying out their purpose and intent.28
6. Tax laws are special laws, and prevail over general laws.29
Sources of Tax Laws
1. The 1987 Constitution;
2. Tax statutes such as the National Internal Revenue Code (“NIRC”), the Tariff and Customs
Code, the VAT Law, the Revised Documentary Stamp Tax Law, the Amended Excise Tax
Law, and portions of the Local Government Code;
3. Executive orders on taxation, and local tax ordinances;
4. Tax treaties and conventions with foreign countries;
5. Judicial decisions;
6. Rules and regulations promulgated by the Department of Finance, the Bureau of Internal
Regulations (“BIR”), Bureau of Customs, etc.
7. Administrative interpretations and opinions of tax officials particularly those of the
Commissioner of Internal Revenue.
24
Manila Railroad v. Collector of Customs, GR 10214; CIR v. La Tondeña, Inc. et. al., L-10431.
Phil. Int’l. Fair, Inc. v. Collector, G.R. L-12928 and L-12932, 1962.
26
Collector v. Manila Jockey Club, Inc., 53 O.G. 3762.
27
Emilio Y. Hilado v. Collector, G.R. No. L-9408, October 31, 1956.
28
51 Am. Jur. 361.
29
Republic v. Gancayco, L-18307, June 30, 1964.
25
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Forms of Escape from Taxation
1. Shifting the burden of the tax.
2. Capitalization. By not selling property which has increased in value, the owner avoids
the income tax to be paid on the gain if the same is sold. An increase in the value of an
asset is merely an unrealized increase (gain) in capital.
3. Transformation. The manufacturer or producer upon whom the tax has been imposed,
fearing the loss of his market if he should add the tax to the price, pays the tax. He then
endeavors to recoup the tax paid by making his production more efficient and lowering his
cost of production.
4. Tax exemption. Exemption from taxation is the freedom from the burden of paying tax.
5. Tax avoidance. Tax avoidance occurs when the means used to minimize taxes are legal
and not prohibited by law.
6. Tax evasion. Tax evasion connotes fraud through the use of pretenses and forbidden
devices to lessen or defeat taxes.30
Tax and Licence Distinguished
Tax
Purpose
Limitations on taxation
Amount
Effect of non-payment
License
To raise revenue
To regulate action, businesses,
industries, professions
Subject to constitutional and inherent Not subject to the limitations on
limitations on the power to tax
taxation
Unlimited
Limited to the cost of regulation
(licensing, inspection, surveillance)
Does not make the business illegal
Makes the business illegal
Tax
Special Assessment
Imposed on all property (real or personal) in a Imposed only on property which benefit from
prescribed area
the improvement
“Special Assessment” Defined
A special assessment is in the nature of a tax upon property levied according to benefits
conferred on the property. The whole theory of a special assessment is based on the doctrine
that the property against which it is levied derives some special benefit from the improvement
xxxxxxx their property being increased in value by the expenditure to an amount at least equal
to the sum they are required to pay.31
30
31
Yutivo Sons Hardware v. CTA, L-13203, January 28, 1961, 1 SCRA 160.
1 Cooley on Taxation, 105.
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Characteristics of Special Assessment
1. A special assessment can be levied only on land;
2. A special assessment cannot (at least in most states) be made a personal liability of the
person assessed;
3. A special assessment is based wholly on benefits; and
4. A special assessment is exceptional both as to time and locality.
Tax and Debt Distinguished
Source of obligations
Obligee
Form of payment
Interest
Assignability
Compensation/Set-off
Incarceration for nonpayment
Tax
Debt
Law
Due to the government in
its sovereign capacity
Money
No interest except in cases
of delinquency
Not assignable
No
Yes, except for nonpayment of poll tax
Contract
Due to obligee under a contract; May be due to
the government in its corporate capacity
Money, property, or services
If stipulated or if the payment is in delay
Generally assignable
Yes
No person can be imprisoned for non-payment
of debts (Constitution).
Tax and Toll Distinguished
Tax
Demand for sovereignty
Imposed by the government
May be based on income or on the value
of the property
Forced contribution
Toll
Demand of ownership or proprietorship
May be imposed by private persons or entities
Largely based on the cost of the property used, or on
the cost of the improvement used
Compensation charged by the owner for the
voluntary use of the property/improvements
Tax Administration
It is a system involving assessment, collection, and enforcement of taxes, including the
execution of judgment in all tax cases decided in favor of the Bureau of Internal Revenue by
the courts.
Powers and Duties of the Bureau of Internal Revenue (“BIR”)
1. The assessment and collection of all national internal revenue taxes, fees, and charges;
2. The enforcement of all forfeitures, penalties, and fines connected therewith;
3. The execution of judgments in all cases decided in its favor by the Court of Tax Appeals,
and the ordinary courts;
4. The giving effect to and the administering of the supervisory and police power conferred
to it by the Tax Code or other laws.
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Powers of the Commissioner of Internal Revenue (“CIR”)32
1. Power to interpret tax laws subject to review by the Secretary of Finance;
2. Power to decide disputed assessments, refunds of internal revenue taxes, fees and other
charges, penalties imposed in relation thereto, other matters arising under the National
Internal Revenue Code (“NIRC”) or other laws or portions thereof administered by the
Bureau of Internal Revenue (“BIR”), subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals (“CTA”);
3. Power to examine any book, paper, record, or other data which may be relevant or material
to a tax inquiry;
4. Power to obtain information from any person other than the person whose internal revenue
tax liability is subject to audit or investigation or from any office or officer of the national
or local governments, government agencies and instrumentalities;
5. Power to summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books
of accounts and other accounting records;
6. Power to take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry;
7. Power to make assessments.
8. Power to prescribe real property values by dividing the country into different zones and
determining the FMV of real properties located in each zone;
9. The Commissioner is authorized to inquire into the bank deposits and other related
information held by financial institutions of:
(a) A decedent to determine his gross estate;
(b) A taxpayer who has filed an application for compromise of his tax liability by
reason of financial incapacity to pay his tax liability; and
(c) A taxpayer who is subject of a request for the supply of tax information from a
foreign tax authority pursuant to an international agreement or treaty.
10. The Commissioner has the authority to accredit and register individuals and general
professional partnerships (GPPs) and their representatives who prepare and file tax returns,
statements, reports and other papers, or who appear before the BIR, for taxpayers.
11. Power to prescribe additional procedural or documentary requirements in connection with
the submission or preparation of financial statements accompanying the tax returns.
32
The BIR shall have a chief to be known as the Commissioner of Internal Revenue (CIR), and four (4) assistant
chiefs to be known as Deputy Commissioners (Sec. 4, NIRC).
12