HANDOUT 1: GENERAL PRINCIPLES OF TAXATION
J-Culajara
ATENEO DE ZAMBOANGA UNIVERSITY
School of Management and Accountancy
Accountancy Department
I. GENERAL PRINCIPLES OF TAXATION
Taxation is the power by which the sovereign
raises revenue to defray the expenses of government. It is a
way of apportioning the cost of government among those
who in some measure are privileged to enjoy its benefits and
must bear its burden
Nature and power of taxation
 It is legislative in character.
 It is an attribute of sovereignty.
 It is generally not delegated to executive or judicial
department.
 It is subject to constitutional and inherent
limitation.
As subject to Constitutional and Inherent Limitations –
The power to tax is said to be the strongest of all the powers
of government. It is unlimited, plenary, comprehensive and
supreme, in the absence of Constitutional restrictions, the
principal check on its abuse resting in the responsibility of
members of Congress to their constituents. However, the
power of taxation is subject to constitutional and inherent
limitations.
Aspects of Taxation
 Levy – the enactment of a law of Congress
imposing a tax.
 Assessment – the act of the administration and
implementation of tax law by the executive
department through the administrative agencies.
Integrative Course for Taxation Instructor: K.
 Collection/Payment – the act of compliance by the sovereignty for the support of government and for
taxpayer, including such options, schemes or all public needs.
remedies as may be legally available to him.
Attributes or characteristics of tax
II. THE THEORIES OR UNDERLYING  It is a forced charge, imposition or contribution.
BASES OF TAXATION  It is assessed in accordance with some rule of
apportionment.
A. Lifeblood Theory  It is imposed by the State on persons, property, or
The existence of government is a necessity; it exercises within its jurisdiction.
cannot exist nor endure without the means to pay its
 It is levied by the legislative body of the State.
expenses; and for those means, the government has the
right to compel all its citizens and property within its limits  It is a pecuniary burden payable in money.
to contribute in the form of taxes.  It is levied for a public purpose.
 It is personal to the taxpayer.
B. Benefits-Protection Theory
Taxes are what we pay for civilized society. Purposes and objectives of taxation
Without taxes, the government would be paralyzed for lack  Revenue raising
of motive power to activate and operate it. Hence, despite  Regulatory measure
the natural reluctance to surrender part of their hard-earned
 Reduction of social inequality
income to the government, every person who is able to,
must contribute his share in the running of the government.  Encourage economic growth by granting incentives
and exemptions
The government, for its part, is expected to respond in the
 Promotion of general welfare
form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material  Protectionism
values.
Other matters
 The power to tax is the power to destroy. The
“power to destroy” does not mean 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 (McCullogh
v. Maryland, US 4 Wheat. 316).
 Taxes are the enforced proportional contributions
from persons and property levied by the
lawmaking body of the State by virtue of its
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HANDOUT 1: GENERAL PRINCIPLES OF TAXATION Integrative Course for Taxation Instructor: K. J-Culajara

tax in the form of maintenance of a

III. TAXATION DISTINGUISHED FROM OTHER IMPOSITIONS protection and healthy economic
benefits he standard of
Taxation, eminent domain, and police power distinguished receives from the society.
POINT OF TAXATION EMINENT POLICE POWER government.
COMPARISON DOMAIN Amount of imposition Generally, there is No amount imposed Amount imposed
Who exercises the power The government (1) The government The government no limit on the but rather the should not be
or its political or its political or its political amount of tax that owner is paid the more than
subdivisions. subdivisions; and subdivisions. may be imposed. market value of the sufficient to cover
(2) Granted to property taken. the cost of the
public service license and
companies or public necessary
utilities. expenses.
Purpose The property The property is The use of the Relationship to Subject to certain Inferior to the Relatively free
(money) is taken “taken” for public property is Constitution constitutional impairment from constitutional
for the support of use; it must be “regulated” for the limitations. prohibition; limitations. It is
the government. compensated. purpose of Including the government cannot superior to the
promoting the prohibition against expropriate private impairment of
general welfare; it impairment of the property which is contract provision.
is not obligation of under a contract it
compensable. contracts. had previously
Persons affected Operates upon a Operates on an Operates upon a bound itself to
(1) Community; individual as the (1) Community; purchase from the
or owner of a or other contracting
(2) Class of particular property. (2) Class of party.
Individuals. Individuals.
Effect The money There is a transfer of There is no Tax and debt distinguished
contributed the right to transfer of title. POINT OF COMPARISON TAX DEBT
becomes part of property. At most, there is Basis Based on law. Based on contract or
the public funds. restraint on the judgment.
injurious use of the Effect of Non-payment Taxpayer may be imprisoned No imprisonment for failure
property. for his failure to pay the tax to pay a debt.
Benefits received It is assumed that He receives the The person (except poll tax).
the individual market value of the affected receives Mode of payment Generally payable in money. May be payable in money,
receives the property taken from indirect benefits as property or services.
equivalent of the him. may arise from the Assignability Not assignable. Can be assigned.

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HANDOUT 1: GENERAL PRINCIPLES OF TAXATION Integrative Course for Taxation Instructor: K. J-Culajara

Interest Does not draw interest Draws interest if stipulated of a business. commencement of the
unless delinquent. or delayed. business.
Authority Imposed by public authority. Can be imposed by private Effect of Non-payment Failure to pay the tax does Failure to pay license fee
individuals. not make the business illegal. makes the business illegal.
Prescription Prescriptive periods for tax Civil Code governs the Surrender Taxes, being the lifeblood of License fee may be with or
are determined under the prescriptive period of debts. the State, cannot be without consideration.
NIRC. surrendered except for
lawful consideration.
Tax distinguished from toll
POINT OF COMPARISON TAX TOLL Tax distinguished from penalty
Definition Enforced proportional A sum of money for the use POINT OF COMPARISON TAX PENALTY
contribution from persons of something, a consideration Definition Enforced proportional
Sanction imposed as a
and property. which is paid for the use of a contributions from persons punishment for violation of a
property which is of a public and property. law or acts deemed injurious;
nature. violation of tax laws may
Basis A demand of sovereignty. A demand of proprietorship. give rise to imposition of
Amount No limit as to the amount of Amount of toll depends upon penalty.
tax. the cost of construction or Purpose Intended to raise revenue. Designed to regulate
maintenance of the public conduct.
improvement used. Authority May be imposed only by the May be imposed by:
Authority May be imposed only by the May be imposed by the government. (1) Government; or
government. government of private (2) Private individuals or
individuals. entities.

Tax distinguished from license fees

POINT OF COMPARISON TAX LICENSE FEE
Purpose Imposed for revenue Imposed for regulatory
purposes. purposes.
Basis Imposed under the power of Imposed under the police
taxation. power of the State
Amount No limit as to the amount of Amount of license fee that
tax. can be collected is limited to
the cost of the license and the
expenses of police
surveillance and regulation.
Time of payment Normally paid after the start Normally paid before the

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HANDOUT 1: GENERAL PRINCIPLES OF TAXATION
Double Taxation
Double taxation happens when the same property
is 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 jurisdiction or taxing
district, during the same taxing period, and they must be
the same kind or character of tax. This is referred to as
“direct double taxation” (or otherwise called as “double
taxation in a strict sense”) which is prohibited. (Villanueva
v. City of Iloilo)
Imposition of a penalty and a tax on one taxpayer
does not amount to double taxation. (Republic Bank v.
Court of Tax Appeals) Indirect double taxation (otherwise
referred to as “double taxation in a broad sense”) is one
where there are merely two (2) or more pecuniary
impositions on a subject matter. This is not prohibited by
law.
SAMPLE PROBLEM
Mr. Alas sells shoes in Makati through a retail store. He pays
the VAT on his gross sales to the BIR and the municipal
license tax based on the same gross sales to the City of
Makati. He comes to you for advice because he thinks he is
subjected to double taxation.
Suggested answer: That is not prohibited double taxation.
Double taxation is allowed where one tax is imposed by the
national government and the other by the local government
The usual methods of avoiding double taxation are:
 Allowing reciprocal exemption either by law or by
treaty;
 Allowance of tax credit for foreign taxes paid;
 Allowance of deduction for foreign taxes paid; and
Integrative Course for Taxation
 Reduction of the Philippine tax rate.
Double taxation means taxing for the same tax
period the same thing or activity twice, when it should be
taxed but once, by the same taxing authority for the same
purpose and with the same kind or character of tax.
Other matters
Regulation and taxation are two different things,
the first being an exercise of police power, whereas the
latter involves the exercise of the power of taxation.
Both a license fee and a tax may be imposed on the
same business or occupation, of for selling the same article.
This is not being in violation of the rule against double
taxation.
Tax exemptions
An “exemption from taxation” is a grant of
immunity, express or implied, to particular persons or
corporations or to persons or corporations of a particular
class, from a tax upon a property or an excise which persons
and corporations generally within the same taxing district
are obliged to pay. It is a freedom from a charge or burden
to which others are subject.
Exemptions from taxation are construed in
strictissimi juris against the taxpayer and liberally in favor of
the taxing authority.
Tax exemptions are strictly construed against the
taxpayer because such provisions are highly disfavored and
may almost be said to be odious to the law.
Retroactive application
As a rule, taxing statutes must be applied
prospectively, except by express provision of the law.
Tax evasion and tax avoidance distinguished
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Instructor: K. J-Culajara
 Tax evasion is a scheme used outside of those
lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil
or criminal liabilities. Tax evasion connotes three
factors: (1) The end to be achieved; (2) An
accompanying state of mind which is described as
being evil, in bad faith, willful or deliberate and
not accidental; and (3) A course of action which is
unlawful.
 Tax avoidance on the other hand, is the saving
device within the means sanctioned by law. This
method should be used by the taxpayer in good
faith and at arm’s length.
Other matters
 Taxes cannot be the subject of set-off or
compensation for the following reasons:
o Taxes are of distinct kind, essence and
nature, and these impositions cannot be
classified in merely the same category as
ordinary obligations.
o The applicable laws and principles
governing each are peculiar, not
necessarily common, to each.
o Public policy is subserved, if the integrity
and independence of taxes are
maintained. Note: However, if the
obligation to pay taxes and the taxpayer’s
claim against the government are both
overdue, demandable, as well as fully
liquidated, compensation takes place by
operation of law and both obligations are
extinguished to their concurrent amounts.
(Domingo v Garlitos 8 SCRA 443)
 The obligation to pay tax is pecuniary or payable in
money.
HANDOUT 1: GENERAL PRINCIPLES OF TAXATION
IV. INHERENT LIMITATIONS
The power to tax is the strongest of all the powers
of government (Hongkong & Shanghai Banking Corporation
v. Commissioner, 39 Phil. 145). The power to tax is an
incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security
against its abuse is to be found only in the responsibility of
the legislature which imposes the tax on the constituency
who are to pay it. Nevertheless, effective limitations
thereon may be imposed by the people through their
Constitution (Roxas y Cia v Court of Tax Appeals).
Accordingly, no matter how broad and encompassing the
power of taxation, it is still subject to inherent and
constitutional limitations.
The inherent limitations are those limitations
which exist despite the absence of an express constitutional
provision thereon. These include the following:
 International comity
 Non-delegation of the legislative power to tax
 Territorial jurisdiction
 Exemption from taxation of government entities
 The levy must be for a public purpose
A. The levy must be for a public purpose
The right of taxation can only be used in aid of a
public object, an object which is within the purpose for
which government is established. It cannot be exercised in
aid of enterprises strictly private, for the benefit of
individuals, though in a remote or collateral way, the public
may be benefited thereby.
Cases
Integrative Course for Taxation
A statute which authorizes towns to issue bonds in
aid of manufacturing enterprises of individuals is void,
because the taxes necessary to pay bonds would, if collated,
be a transfer of the property of individuals to aid the
projects of gain and profit of others, and not for public use
(Citizens Savings and Loan Association of Cleveland, Ohio
v. Topeka City, 20 Wall 655, 22 L. Ed. 455).
The entrusting of collection of fees does not
destroy the public purpose of the ordinance. So long as the
purpose is public, it does not matter whether the agency
through which the money is dispensed is public or private.
The right to tax depends upon the ultimate use, purpose and
object for which the fund is raised, it does not depend on
the nature and character of the person or corporation whose
intermediate agency is to be used in applying it. The people
may be taxed for a public purpose although it is under the
direction of an individual or private corporation. (Bagatsing
v Ramirez, 74 SCRA 306).
B. Non-delegation of the legislative power to tax
In one case, the ordinance passed by the
Municipality of Malolos imposing a tax on the sale or
transfer of real property was declared to be void. The Local
Tax Code only allows provinces and cities to impose a tax
on the transfer of ownership of real property (Secs. 7 and
23, Local Tax Code). Municipalities are prohibited from
imposing said tax that provinces are specifically authorized
to levy (Sec. 22, Local Tax Code)
C. Exemption from taxation of government entities
In one case, the Municipality of Pateros was
declared not subject to any donor’s tax on the value of land
it subsequently donated, it being exempt from taxes as a
political subdivision of the National Government.
D. Internal comity
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Instructor: K. J-Culajara
It is a practice among different political entities
involving the mutual recognition of legislative, executive,
and judicial acts within their particular territories or
jurisdiction. Sir Kelvin Says (“SKS”): More of comity as we proceed
further to income taxation.
E. Territorial jurisdiction
The tax laws only take effect within the territorial
jurisdiction of the Philippines, regardless of who sojourns in
the country (i.e. resident Filipino citizen or a resident alien).
Generally, it cannot be enforceable and binding as against
persons in foreign territories. SKS: By way of exception,
resident Filipino citizens are taxable over their income earned
abroad. Exhaustive discussions about exceptions to the territoriality
rule await us in later tax lectures.
V. CONSTITUTIONAL LIMITATIONS
 No person shall be deprived of life, liberty or
property without due process of law. (Sec. 1, Art.
III, 1987 Constitution)
 Nor shall any person be denied the equal
protection of the laws (Sec. 1, Art. III, 1987
Constitution).
 The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of
taxation (Sec. 28[1], Art. III, 1987 Constitution).
 No law impairing the obligation of contracts shall
be passed (Sec. 10, Art. III, 1987 Constitution).
 The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed (Sec. 5, Art.
III, 1987 Constitution).
 Freedom of the press
HANDOUT 1: GENERAL PRINCIPLES OF TAXATION
 Tax exemption of properties for religious,
charitable, and educational purposes (Sec. 28[3],
Art. III, 1987 Constitution).
 All appropriation, revenue or tariff bills shall
originate from the House of Representatives, but
the Senate may propose or concur with
amendments (Sec. 24, Art. VI, 1987
Constitution).
 No law granting any tax exemption shall be passed
without the concurrence of a majority of all
members of the Congress (Sec. 28[4], Art. VI,
1987 Constitution).
 Every bill passed by Congress shall embrace only
one subject, which shall be expressed in the title
thereof (Sec. 26[1], Art. IV, 1987 Constitution).
 Congress shall evolve a progressive system of
taxation.
 Supremacy of the national government over local
governments in taxation.
A. No person shall be deprived of life, liberty or property
without due process of law
Adversely affecting as it property rights, both the
due process and equal protection clauses may be invoked to
invalidate a revenue measure. Where the due process and
equal protection clauses are invoked, considering that they
are not fixed rules but rather broad standards, there is a
need for proof of such persuasive character as would lead to
such a conclusion. It is undoubted that the due process
clause may be invoked where a taxing statute is so arbitrary
that it finds no support in the Constitution. Absent such a
showing, however the presumption of validity must prevail
(Sison v. Ancheta, 130 SCRA 654I).
B. Nor shall any person be denied the equal protection of the
laws
Integrative Course for Taxation
In its most basic and purest form, equal protection
of the laws guarantees the same rights, privileges, and
protections to all citizens.
Under this breadth, persons are supposed to be
burdened by tax alike, and enjoy the same exemptions,
reliefs and privileges that the government may afford every
citizen.
This rule, however, is not absolute. Where there
are reasonable classifications and substantial distinctions
among classes of persons, a tax law may distinguish between
said classes respecting the imposition of tax burdens or the
awarding of privileges and reliefs.
C. The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation
“Uniformity” has been defined as that principle by
which all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing power has
the authority to make a reasonable and natural classifications
for purposes of taxation, but the government’s act must not
be prompted by a spirit of hostility, or at the very least
discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all
persons under similar circumstances or that all persons must
be treated in the same manner, the conditions not being
different both in the privileges conferred and the liabilities
imposed.
Uniformity in taxation does not prohibit the
classification of the objects of taxation or the entities or
subjects upon which taxes are imposed. The classification
made in the exercise of this authority, to be valid, must,
however, be reasonable and this requirement is not deemed
satisfied, unless: (1) it is based upon substantial distinctions
which make real differences; (2) these are germane to the
purpose of the legislation or ordinance; (3) the classification
applies, not only to present conditions, but also to future
conditions substantially identical to those of the present; and
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Instructor: K. J-Culajara
(4) the classification applies equally to all those who belong
to the same class.”
D. No law impairing the obligation of contracts shall be
passed
The power of taxation cannot be exercised in a
manner that would impair the obligations and contracts.
What is prohibited is that a taxing statute be passed that
would alter the relative rights of the parties with each other.
The mere fact that a tax makes the conduct of a business
more expensive or makes an activity more difficult does not
result in the impairment of the obligation of contracts.
Contract is impaired only if the relative position of the
parties to a contract is disturbed by the operation of the
taxing statute.
E. The free exercise and enjoyment of religious profession
and worship, without discrimination or preference, shall
forever be allowed
F. Freedom of the press
G. Tax exemption of properties for religious, charitable, and
educational purposes
Charitable Institutions, churches, personages, or
convents appurtenant thereto, mosques, and 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 (Sec. 28[3], Art III, 1987 Constitution). SKS: More
of this in our income tax lecture.
H. All appropriation, revenue or tariff bills shall originate
from the House of Representatives, but the Senate may
propose or concur with amendments
HANDOUT 1: GENERAL PRINCIPLES OF TAXATION Integrative Course for Taxation Instructor: K. J-Culajara

I. No law granting any tax exemption shall be passed

without the concurrence of a majority of all members of
the Congress

J. Every bill passed by Congress shall embrace only one

subject, which shall be expressed in the title thereof

K. Congress shall evolve a progressive system of taxation

Regressivity is not a negative standard for courts to
enforce. What Congress is required by the Constitution to
do is to “evolve a progressive system of taxation”. This is a
directive to Congress, just like the directive to it to give
priority to the enactment of laws for the enhancement of
human dignity and the reduction of social, economic and
political inequalities, or for the promotion of the right to
quality education. These provisions are put in the
Constitution as moral incentives to legislation, not as
judicially enforceable rights.

L. Supremacy of the national government over local

governments in taxation
When local governments invoke the power to tax
on national government instrumentalities, the exercise of
such is construed strictly against local government. The rule
is that a tax is never presumed and there must be clear
language in the law imposing the tax (MIAA vs. CA).
Congress has the power of control over local
governments. If Congress can grant municipal corporation
the power to tax certain matters, it can also provide for
exemptions or even take back the power. The power of
local governments to impose tax is always subject to the
limitations which Congress may provide by law. Local
government units have no power to tax instrumentalities of
the national government, such as PAGCOR, it being an
instrumentality of the government.