TAXATION – power by which the sovereign through its law-making

body raises revenue to defray the necessary expenses of

government from among those who in some measure are
privileged to enjoy its benefits and must bear its burdens.

Two Fold Nature of the Power of Taxation

1. It is an inherent attribute of sovereignty

2. It is legislative in character

PURPOSES AND OBJECTIVES OF TAXATION

1. Revenue – basically, the purpose of taxation is to provide

funds or property with which the State promotes the
general welfare and protection of its citizens
2. Non-Revenue (Key: PR2EP)
a. Promotion of general welfare
b. Regulation
c. Reduction of social inequality
d. Encourage economic growth
e. Protectionism
THEORIES AND BASES OF TAXATION

1. Lifeblood Theory

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 running of the
government.

2. Necessity Theory

The power to tax is an attribute of sovereignty

emanating from necessity. It is a necessary burden to
preserve the State's sovereignty and a means to give the

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 citizenry an army to resist an aggression, a navy to defend
its shores from invasion, a corps of civil servants to serve,
public improvements designed 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.

3. Benefits-Protection / Reciprocity Theory

Taxation is described as a symbiotic relationship

whereby in exchange of the benefits and protection that
the citizens get from the Government, taxes are paid.

Note: While taxes are intended for general benefits, special

benefits to taxpayers are not required. The Government renders no
special or commensurate benefit to any particular person or
property.

GRANT OF TAX EXEMPTIONS

The inherent power of the state to impose taxes naturally

carries with it the power to grant tax exemptions. The power to
exempt from taxation, as well as the power to tax, is an essential
attribute of sovereignty, and may be exercised in the constitution,
or in a statute, unless the Constitution expressly or by implication
prohibits action by the legislature on the subject.

Exemptions from taxation may be created directly by the

Constitution, e.g., Art. VI, Sec. 28(3) of the Constitution granting tax
exemptions to properties actually, directly and exclusively used for
religious, charitable and educational purposes, or by an act of the
legislature, subject to the limitations as the constitution may place,
expressly or by implication, upon the power of the legislature.

LEGAL BASIS OF THE GRANT OF EXEMPTIONS

Art. VI, Section 28(4) of the Constitution provides that:

No law granting any tax exemption shall be passed without the

concurrence of a.majority of all the members of Congress.
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 Note that in granting tax exemptions, an absolute majority
vote of the Members of Congress is required, while in cases of
withdrawal of such tax exemption, a relative majority vote is
sufficient.

Tax amnesties, tax condonations, and tax refunds are in the

nature of tax exemptions. Such being the case, a law granting tax
amnesties, tax condonations, and tax refunds requires the vote of
an absolute majority of the Members of Congress.

GENERAL RULE: NO EXEMPTION

A constitutional grant of exemption may be self-executing

or may require an act of Congress for its operation. Where a
constitutional provision granting tax exemption is self-executing,
the legislature can neither add nor detract from it; it may,
however, prescribe a procedure to determine whether a claimant
is entitled to the constitutional exemption.

The intent to grant tax exemption must be clear, otherwise

the rule of construction applies that exemption from taxation are
to be strictly construed against exemption and in favor of the right
to tax.

STATUTORY EXEMPTIONS, WHEN VALID

Where the Constitution confers upon the legislature

authority to grant exemptions within certain limits, statutes granting
such exemptions shall be VALID if they do not exceed the
constitutional limits, and VOID if they do.

THE RULE ON CONSTRUCTION OF EXEMPTIONS

The intention of the legislature to grant tax exemptions

must be expressed in clear and unmistakable terms, it can never
be implied from language that will admit of any other reasonable
construction. Exemptions are never presumed; the burden is upon

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the claimant to establish his right to exemption beyond reasonable
doubt.

Since taxation is the rule and exemption the exception, the

intention to make an exception ought to be expressed in clear
and unambiguous terms; it cannot be taken to have been
intended when the language of the statute on which it depends is
doubtful or uncertain; and the burden of establishing it is upon him
who claims it. Moreover, if an exemption is found to exist, it must
not be enlarged by the construction, since the reasonable
presumption is that the state has granted in express terms all it
intended to grant at all, and that unless the privilege is limited to
the very terms of the statute, the favor would be extended
beyond dispute in ordinary cases. It applies not only to the power
to grant exemptions, which must be strictly construed, but also to
the exemption's construction as irrevocable, to the period of
duration of the exemption, to the amount of the exemption, to the
scope of the exemption, to charter or contract exemptions as well
as other exemptions, and to a statute exempting property from
retroactive assessments. Since an exemption will never be
presumed, the fact that the charter of a corporation contains no
provision at all for taxation, and that there is no reservation of the
power to alter, amend or repeal the same, does not prevent the
state from afterwards taxing the corporation.

However, there are exceptions to the strict construction

rule, to wit:

1. The rule of strict construction does not apply where the

statute granting the exemption expressly provides for a
liberal interpretation;
2. The rule of strict construction does not apply to special
taxes relating to special cases and affecting only
special classes of persons;

3. While in some cases it is held that the strict construction

rule applies equally well to alleged exemptions of
municipal property, the better rule is that strict
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 construction of exemption statutes applies to
exemptions of property held in private ownership but
not to exemptions of public property. In case of
property owned by the state or the city or other public
corporation, an express exemption should not be
construed with the same degree of strictness that
applies to exemptions contrary to the policy of the
state, since as to such property "exemption is the rule
and taxation the exemption;

4. Exemptions to traditional exemptees, such as those in

favor of religious and charitable institutions;

5. Exemptions in favor of the government, its political

subdivisions or instrumentalities. In Maceda v.
Macaraig, Jr., 197 SCRA 771, the Supreme Court held:
"it is a recognized principle that the rule on strict
interpretation does not apply in the case of exemptions
in favor of a governmental political subdivision or
instrumentality." The basis for applying the rule of strict
construction granting exemptions or deductions, even
more obvious than with reference to the affirmative or
levying provisions of tax statutes, is to minimize
differential treatment and foster impartiality, fairness,
and equality of treatment among taxpayers. The
reason for the rule does not apply in the case of
exemptions running to the benefit of the government
itself or its agencies. In such a case, the practical effect
of an exemption is merely to reduce the amount of
money that has to be handled by government in the
course of its operations;

6. If the taxpayer falls within the purview of exemption by

clear legislative intent.

MEANING OF STRICT CONSTRUCTION RULE

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 When it is said that exemptions must be strictly construed in
favor of the taxing power, this does not mean that if there is a
possibility of a doubt it is to be at once resolved against the
exemption. It simply means that if, after the application of all rules
of interpretation for the purpose of ascertaining the intention of
the legislature, a well-founded doubt exists, then the ambiguity
occurs which may be settled by the rule of strict construction. (2
Cooley, 1415-1418)

Delegation of Power

General Rule:

The power of taxation is peculiarly and exclusively

exercised by the legislature. (See Scope of Legislative Taxing
Power, supra) - refers to tax legislation.

Exceptions to Non-delegability:

1. Flexible Tariff Clause: Authority of the President to fix tariff

rates, import and export quotas, tonnage and wharfage
dues, and other duties or imposts. (Art. VI, Sec.28(2), 1987
Constitution)

2. Power of local government units to levy taxes, fees, and

charges. (Art. X, Sec. 5, 1987 Constitution)

3. Delegation to administrative agencies for implementation

and collection. - merely refers to tax administration or
implementation

PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal Adequacy

Sources of revenues must be adequate to meet

government expenditures (Chavez v. Ongpin, 186 SCRA
331), and other public needs. This is in consonance with the
doctrine that taxes are the lifeblood of the government
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 2. Theoretical Justice

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.
Taxation is said to be equitable when its burden falls
on those better able to pay; taxation is progressive when its
rate goes up depending on the resources of the person
affected.

3. Administrative Feasibility

Tax laws must be capable of effective and efficient

enforcement. They must not obstruct business growth and
economic development.

In Kapatiran Ng Mga Naglilingkod sa Pamahalaan

v. Tan,° the Supreme Court, in upholding the validity of the
VAT law, held that the law "is principally aimed to
rationalize the system of taxes on goods and services;
simplify tax administration, and make the system more
equitable to enable the country to attain economic
recovery.

The principle requires that each tax should be clear

and plain to the taxpayers, capable of enforcement by an
adequate and well-trained staff of public officials,
convenient as to time and manner of payment, and not
duly burdensome upon or discouraging to business activity.

Will a violation of these principles invalidate a tax law?

IT DEPENDS. A tax law will retain its validity even if it is not in

consonance with the principles of fiscal adequacy and
administrative feasibility because the Constitution does not
expressly require so. These principles are only designed to make
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our tax system sound. However, if a tax law runs contrary to the
principle of theoretical justice, such violation will render the law
unconstitutional considering that under the Constitution, the rule of
taxation should be uniform and equitable.

Tax and License

a. A Tax is levied in the exercise of the taxing power; License

fees emanate from the police power of the state;
b. The purpose of the tax is to generate revenues; License
fees are imposed for regulatory purposes.
c. The amount of the exaction or charge if it is to be a license
fee must only be of sufficient amount to include expenses
of issuing a license; cost of necessary inspection or police
surveillance.
d. The imposition is a tax, if its primary purpose is to generate
revenue, and regulation is merely incidental; but if
regulation is the primary purpose, the fact that incidental
revenue is also obtained does not make the imposition a
tax.
e. In Gerochi v. Department of Energy [527 SCRA 696, 715-
717], the Supreme Court held that in exacting the Universal
Charge through Section 34 of the Electric Power Industry
Reform Act of 2001 (EPIRA), the State's police power,
particularly its regulatory dimension is invoked. Such can be
deduced from Section 34 which enumerates the purposes
for which the Universal Charge is imposed and which can
be amply discerned as regulatory in character. From the
said purposes, it can be gleaned that the assailed Universal
Charge is not a tax, but an exaction in the exercise of the
State's police power.

Tax and Toll

Toll is a demand of proprietorship, an amount charged for

the cost and maintenance of the property used; Tax is a demand
of sovereignty for the purpose of raising public revenues.

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 DAVAO GULF LUMBER CORP. v. CIR

293 SCRA 77

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 a tax must be clearly stated in the language of
the law; it cannot be merely implied therefrom.

Taxpayer's Suit Vs. Citizen's Suit

In a taxpayer's suit, one is allowed to sue where there is an

assertion that public funds are illegally disbursed or deflected to
an illegal purpose, or that there is a wastage of public funds
through the enforcement of an invalid or unconstitutional law.

On the other hand, in a citizen's suit, the person

complaining must allege that he has been or is about to be
denied some right or privilege to which he is lawfully entitled or
that he is about to be subjected to some burdens or penalties by
reason of the statute or act complaint of.

In case of doubt, tax laws must be construed strictly

against the State and liberally in favor of the taxpayer because
taxes, as burdens which must be endured by the taxpayer, should
not be presumed to go beyond what the law expressly and clearly
declares.

Why are tax exemptions strictly construed against the taxpayer

and liberally in favor of the State?

Taxes are necessary for the continued existence of the

State.

Strict interpretation of tax exemption laws. Taxes are what civilized

people pay for civilized society. They are the lifeblood of the
nation. Thus, statutes granting tax exemptions are construed
stricissimi juris against the taxpayer and liberally in favor of the
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taxing authority. A claim of tax exemption must be clearly shown
and based on language in law too plain to be mistaken.
Otherwise stated, taxation is the rule, exemption is the exception.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R.
No. 166408, October 6, 2008 citing Mactan Cebu International
Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996,
261 SCRA 667, 680) The burden of proof rests upon the party
claiming the exemption to prove that it is in fact covered by the
exemption so claimed.

Rationale for strict interpretation of tax exemption laws. The

basis for the rule on strict construction to statutory provisions
granting tax exemptions or deductions is to minimize differential
treatment and foster impartiality, fairness and equality of
treatment among taxpayers. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008)He
who claims an exemption from his share of common burden must
justify his claim that the legislature intended to exempt him by
unmistakable terms. For exemptions from taxation are not favored
in law, nor are they presumed. They must be expressed in the
clearest and most unambiguous language and not left to mere
implications. It has been held that “exemptions are never
presumed the burden is on the claimant to establish clearly his
right to exemption and cannot be made out of inference or
implications but must be laid beyond reasonable doubt. In other
words, since taxation is the rule and exemption the exception, the
intention to make an exemption ought to be expressed in clear
and unambiguous terms.

Tax exemptions are strictly construed against the

taxpayer. The law must be clear that you are covered in that
exemption. A taxpayer invoking the exemption must show or
prove or has the burden that it will be exempted or that he is
covered by the exemption. Taxation is the rule and exemption is
the exception.

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SOURCES OF TAX LAWS (Key: SPEC2TRA BLT)

1. Statutes
2. Presidential Decrees
3. Executive Orders
4. Constitution
5. Court Decisions
6. Tax Codes
7. Revenue Regulations
8. Administrative Issuances
9. BIR Rulings
10. Local Tax Ordinance
11. Tax Treaties and Conventions

Progressive Tax – rate or amount of tax increases as the amount of

the income

PROGRESSIVE SYSTEM OF TAXATION

This is different from a progressive tax rate. In the case of

progressive or graduated tax rate, this is where the rate increases as
the tax base increases. In the case of income, the more income
you have, the higher will be the tax rate.

Progressive System of Taxation means that the state has more

direct taxes than indirect taxes

Is a tax law adopting a regressive system of taxation valid?

Yes. The Constitution does not really prohibit the imposition

of indirect taxes which, like the VAT, are regressive. The
Constitutional provision means simply that indirect taxes shall be
minimized. The mandate to Congress is not to prescribe, but to
evolve, a progressive tax system. (EVAT En Banc Resolution,
Tolentino, et al vs Secretary of Finance, October 30, 1995)

Double taxation” prohibited in the Philippines? (b) When is double

taxation ‘objectionable’ or ‘obnoxious’, and hence prohibited?

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 A. There is no constitutional prohibition against double
taxation in the Philippines. It is something not favored, but
permissible, provided some other constitutional
requirement is not thereby violated, such as the
requirement that taxes must be uniform. (Villanueva vs. City
of lloilo, G.R. No. L-262521, Dec. 28, 1968.)

B. In order to constitute double taxation in the objectionable

sense, the same property must be taxed twice when it
should be taxed but once; both taxes must be imposed on
the same property or subject-matter, for the same purpose,
by the same State, Government, or taxing authority, within
the same taxing period, and they must be the same kind or
character of tax. (Villanueva vs. City of lloilo, G.R. No. L-
262521, Dec. 28, 1968.)

Moreover, double taxation becomes obnoxious

only where the taxpayer is taxed twice for the benefit of
the same governmental entity or by the same jurisdiction
for the same purpose, but not in a case where one tax is
imposed by the State and the other by the City or
Municipality. (Pepsi-Cola Bottling Co. of the Phil., Inc. vs.
Mun. of Tanauan, Leyte, G.R. No. L-31156, Feb.27, 1976;
Commissioner of Internal Revenue vs. Hawaiian-Philippine
Co., G.R. No. L-16315, Oct. 10, 1967; Punzalan vs. Mun.
Board of Manila, 95 Phil. 46 [1954]).

RULE OF NO ESTOPPEL AGAINST THE GOVERNMENT

General Rule: The Government is not estopped by the mistakes or

errors of its agents; erroneous application and enforcement of law
by public officers do not bar the subsequent correct application of
statutes. (E. Rodriguez, Inc. vs. Collector, L-23041, July 31, 1969)

Exception: In the interest of justice and fair play, as where injustice

will result to the taxpayer. (see CIR vs. CA, GR No. 117982, Feb. 6,
1997; CIR vs. CA, GR No. 107135, Feb. 3, 1999)

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Department of Finance

Under Executive Orders 127, 127-A and 292, the Department of

Finance is responsible for the following:

 Formulation, institutionalization and administration of fiscal

policies in coordination with other concerned subdivisions,
agencies and instrumentalities of the government;

 Generation and management of the financial resources of

government;

 Supervision of the revenue operations of all local

government units;

 Review, approval and management of all public sector

debt, domestic or foreign; and

 Rationalization, privatization and public accountability of

corporations and assets owned, controlled or acquired by
the government.

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