CHAPTER 1 

 
Taxation – mode of raising revenues for public purposes; the exercise of sovereign power to raise
revenues for the govt.'s expenses 
 
Stages or Coverage of Taxation 
 
(Legislative) 
1. Levying/Imposition of the Tax - involves the passage of tax laws; exercised by Congress. 
(Executive/Administrative) 
   2. Assessment - determining the correct amount of tax due 
   3. Collection and payment - act of compliance with the tax law by the taxpayer 
 
Bureau of Internal Revenue - national agency charged with the function of collecting internal revenue
taxes in the Philippines. 
 
The Power to Tax 
  
Inherent powers of Government: 
Power to tax - Independent State's power, through its law making body, to raise and accumulate
revenue from its inhabitants to pay the necessary expenses of government. 
 Necessary to the existence and prosperity of a nation 
 Subject to inherent and constitutional limitations, it is regarded as supreme, plenary, unlimited,
and comprehensive. 
 As long as the legislature does not violate applicable constitutional limitations, the courts have
no concern with the wisdom/policy of the exaction, the political/collateral motives behind it, the
amount to be raised, or the persons, property, or other privileges to be taxed. 
 The 1987 Constitution (Article VI) - has vested the power to tax in Congress 
Police power - inherent power of a sovereign state to legislate for the protection of the health, general
welfare, safety and morals of the public.  
 Power to regulate both liberty and property for the promotion of public good 
 May be exercised through taxation because taxes may be levied for the promotion of the
public's welfare 
Power of eminent domain - inherent power of a sovereign state to take private property for a public
purpose 
 "Private property shall not be taken for public use without just compensation."  (The 1987
Constitution, Article 3, Section 9) 
 
All 3 powers need not be granted by any fundamental law. They exist independently of the Constitution
which instead provides limits to the exercise of such powers. 
 
Distinctions Among the 3 Inherent Powers 
 
Purpose 
 Taxation – to raise revenues for the expenses of the State 
 Police power – to promote general welfare through regulations 
 Eminent domain – to facilitate the State's need of property for public use 
 
 Amount of exaction 
Taxation – no limit 
Police power – limited to the cost of regulation, issuance of license, and/or surveillance 
Eminent domain – no exaction but private property is taken for public use 
 
Benefits received 
Taxation – no direct benefit to the individual taxpayer; general benefit of protection of person, property
and the promotion of the general welfare to the public 
Police power – no direct benefit to the individual; a healthy economic standard of society is attained 
Eminent domain – a direct benefit in the form of just compensation to the property owner 
 
Non-impairment of Contracts 
Taxation – obligations of contracts may not be impaired 
Police power - obligations of contracts may  be impaired 
Eminent Domain - obligations of contracts may  be impaired 
 
Transfer of property rights 
Taxation  - taxes paid become part of public funds 
Police power – no transfer but only restraint in the exercise of property rights 
Eminent domain – transfer is effected in favour of the State 
 
Scope 
Taxation – all persons, property, rights, and privileges 
Police power - all persons, property, rights, privileges, and liberties 
Eminent domain – only upon specific property 
 
Authority which exercises the power 
Taxation – government/its political subdivisions 
Police power - government/its political subdivisions 
Eminent domain – public services corporations/private entities operating public utilities if granted by
law 
 
Limitations on the Power to Tax 
 
I. Constitutional limitations - imposed by the 1987 Constitution: 
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 laws. 
  
Types of due process 
1. Substantive process - a law shall not be unreasonable, arbitrary, or capricious; means selected
shall have a reasonable and substantial relation to the object being sought 
2. Procedural due process – guarantees fairness in the enforcement of laws; essential elements
are notice and opportunity to be heard/defend in an orderly proceeding 
 
B. No person shall be imprisoned for debt/non-payment of a poll tax - a direct head tax; easier to
collect than other forms of taxes but ignores the ability to pay factor 
C. The rule of taxation shall be uniform and equitable. 
 
o Uniformity  - the same class of persons/properties with the same circumstances should be taxed
the same kind and rate of tax 
o Equality - the same means/methods be applied impartially to all the constituents of each class 
     - is not a disembodied equality  
     - doesn’t deny the state the power to recognize and act upon factual differences between
individuals and classes; inherent in the right to legislate is the right to classify 
o Equal protection of the law - subject to valid or reasonable classification 
o Equitability - progressive system of taxation; the total tax burden be apportioned based on the
taxpayer's ability to bear the tax burden  
 
Perfect uniformity and equality of taxation cannot be achieved. 
 
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. 
o The exemption is only for taxes assessed as property taxes, as contra-distinguished
from exercise taxes. 
 
E. No law granting tax exemption shall be passed without the concurrence of a majority of all the
members of Congress. 
F. No law impairing the obligation of contracts shall be passed. 
 
o When the tax exemption is bilaterally agreed upon by the government and the taxpayer, the
exemption cannot be withdrawn without violating the non-impairment clause. 
o 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. 
o When tax exemption is granted by a franchise, the same may be withdrawn anytime. 
 
G. No law shall be passed abridging the freedom of speech, of expression, or of the press.  
H.      No law shall be made respecting an establishment of religion or prohibiting the free exercise
thereof  
I.        All appropriation, revenue or tariff bills shall originate exclusively in the House of
Representatives, but the Senate may propose/concur with amendments.  
J.        The Congress may authorize the President to fix within specified limits 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.  
K.      The Supreme Court shall have the power to review, revise, reverse, modify, or affirm on appeal or
certiorari final judgments and orders of lower courts in all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto.  
L.       All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from tax and duties.  
  
Proprietary educational institutions may likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends and provision for reinvestment.  
  
Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used
actually, directly, and exclusively for educational purposes shall be exempt from tax.  
M.    The President shall have the power to veto any particular item/s in an appropriation, revenue or
tariff bill but not affect the item/s to which he does not object.  
N.     No public money/property shall be appropriated directly or indirectly for the use of any sect.
Church, denomination, sectarian institution, or system of religion or of any priest, preacher, etc. except
when assigned to armed forces/penal institution/govt. orphanage.  
O.     All money collected on any tax levied for a special purpose shall be treated as a special fund and
paid out for such purpose only. If such purpose has been fulfilled/abandoned, the balance, if any, shall
be transferred to the general funds of the Government.  
  
II. Inherent Limitations - restrictions arising from the very nature of the power to tax itself.  
A.      The levy must apply within territorial limits.  
B.      The tax must be for a public purpose.  
C.      Any political subdivision/agencies performing purely governmental functions are exempt from tax.   
When a public corporation/LGU acts in a proprietary character, it shall be regarded as having the rights
and obligations of a private corporation. For a govt. entity to be taxable, the ff. must concur:  
o    must not be performing an essential governmental function  
o    must be engaged in a similar business, industry or activity as performed by other taxable
corporations  
D.      The taxing power of the legislature may not be delegated. Exceptions to this non-delegability rule
are:  
o    The authority of the President to fix tariff rates, import and export quotas, tonnage,
and wharfare dues, and other duties and imposts.  
o    Each LGU shall have the power to create its own sources of revenues and to levy taxes, fees and
charges. Such taxes, fees, and charges shall accrue exclusively to the local govt.  
o    Delegation to administrative agencies for implementation of the tax laws and collection of the tax.  
E.       International comity - the Philippines adopts 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; the Phil. Govt. cannot tax foreign ambassadors/impose real property taxes
upon foreign embassies.  
F.       Direct Double Taxation   
o    Double Taxation  - taxing the same person twice by the same jurisdiction for the same purpose  
         - is obnoxious when it is a direct double duplication/direct duplicate taxation where:  
  The same subject is taxed twice  
  By the same taxing authority  
  Within the same jurisdiction  
  During the same taxing period  
  Covering the same kind/character of tax  
o    There is no constitutional prohibition against double taxation in the PH though it isn't favored.  
o    Indirect double taxation, which lacks one or more of the elements of direct double taxation is
permissible.  
 
Double taxation 
o Direct double taxation – taxing twice, for the same purpose, in the same year. To constitute
double taxation- two or more taxes must be: 
1. Imposed on the same property 
2. By the same state/govt. 
3. During the same taxing period, and 
4. For the same purpose 
o There is no express prohibition against double taxation. However, our tax laws provide for single
taxation only. 
 
Basic Principles of a Sound Tax System 
 
1. Fiscal Adequacy – sources of revenue should be sufficient to meet the demands of public
expenditures 
2. Equality or Theoretical Justice – tax imposed should be proportiante to the taxpayer's ability to pay 
3. Administrative Feasibility – tax laws should be capable of convenient, just and effective
administration. 
 
Theory/Basis of Taxation 
 
1. Life-blood theory – Taxes are the lifeblood of the govt. Without taxes, no govt. can function. 
2. Benefits protection theory (Symbiotic relationship)  - The State demands taxes from the
subjects of taxation within its jurisdiction so that it may be enabled to carry its mandate into effect
and perform the functions of govt.  
o The citizen pays from his property the portion demanded in order that he may be
secured in the enjoyment of benefits of organized society. 
 
Tax Defined 
 
o Tax has been defined as enforced, proportional, pecuniary contribution, from persons or
property within the taxing jurisdiction, levied by the State, by virtue of its sovereign power to tax, to
raise revenue for the support of the govt. and for its public needs. 
 
Essential elements/characteristics  
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 
 
Canons of a tax 
1. Proportional to one's ability to pay 
2. Certain and not arbitrary 
3. Convenient to pay 
4. Economical to collect 
 
Classifications of Taxes 
 
A. According to scope/exercising authority 
1. National tax - tax is levied and collected by the national government; enforced throughout the
country 
o Examples: income tax, estate tax, donor's tax, value-added tax 
2. Municipal or local tax – imposed and collected by local governments 
 o Ex. Occupation tax, real estate tax, local business tax 
 
B. According to subject matter/object 
1. Personal, capitation, or poll tax - tax is a fixed amount imposed upon persons, or upon persons
of a certain class, residing within the jurisdiction of the taxing authority, without regard to their
property/occupation/business 
o Limited in the amount of revenues it can produce 
o Ex. Community tax 
2. Propery tax – tax is imposed on property, in proportion to its value or some other reasonable
method of apportionment 
o Ex. Real estate tax 
3. Excise tax - tax upon performance of an act, or the exercise of a right or privilege, or the
enganging in business, practice of profession, or pursuit of occupation 
o Ex. VAT, donor's tax, income tax, occupation tax, estate tax 
 
C. According to who bears the burden of the tax 
1. Direct tax - liability for the tax (impact) and the burden of the tax (incidence) falls on the same
taxpayer 
o tax payable by the person upon whom it is directly or originally imposed by law 
o Ex. Income tax 
2. Indirect tax - liability for the tax falls on the original taxpayer, but the burden is shifted to
another person 
o Ex. VAT, excise tax, custom duties 
 
D. According to purpose 
1. General/revenue tax - tax is levied without a specific/predetermined purpose; generated for
general public purposes 
o Ex. Income tax, VAT 
2. Special tax - imposed for a special purpose 
o Ex. Protective tariffs 
 
E. According to the rate of applied 
1. Proportional - tax is based on a fixed percent of the property or amount of income/receipts 
o Ex. Real estate tax, VAT, donor's tax, estate tax 
2. Progressive - tax rate increases as the tax base increases 
o Ex. Income tax 
3. Regressive - rate of tax decreases as the tax base increases. There are no regressive taxes in the
Phil. 
 
F. According to measurement of the amount due 
1. Specific - tax is a fixed amount measured by the head/number/some standard of weight or
measurement 
o Requires no assessment other than a listing/classification of the subjects to taxed 
o Ex. Excise taxes on cigarettes, processed gas, waxes and petrolatum 
2. Ad valorem - tax is a fixed proportion of the value of the property with respect to which the tax
is assessed, and requires the intervention of assessors/appraisers 
o Ex. Real estate tax, excise taxes on automobiles 
 
Nature/Construction of Tax Laws 
 
1. Tax laws are prospective, generally. - 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. 
2. Tax emeptions are to be construed strictly against the taxpayer. 
3. Revenue laws are not political in nature. - Our internal revenue laws are not political in nature
and were continued in force during the period of enemy occupation and enforced by the occupation
govt. 
4. Legislative intention must be considered. 
5. A statute will not be construed as imposing a tax unless it does so clearly, and
unambiguously. - Accordingly, the provisions of a taxing act are not to be extended by implication. 
6. In case of doubt, tax statutes are construed most strongly against the Government, and
liberally in favor of the citizen. 
7. Tax laws are special laws. - prevail over general laws. 
8. Tax laws are not penal in character. - Constitutional prohibition against the passage of ex post
facto legislation doesn't apply to tax laws. In taxation, it is one's civil liability to pay taxes that gives
rise to criminal liability. 
o Ex post facto (after the fact) - New laws cannot apply to people operating before the
new law was passed. 
 
Sources of Tax Laws 
 
1. The 1987 Constitution 
2. Tax statutes such as the NIRC, the CMTA, and the LGC 
3. Executive orders on taxation, and local tax ordinances 
4. Tax treaties and conventions with foreign countries 
5. Judicial decisions 
6. Rules and reguations promulgated by the Department of Finance, the BIR, Bureau of Customs,
etc. 
7. Administrative interpretations and opinions of tax officials particularly those of the
Commissioner of Internal Revenue 
 
Forms of escape from taxation 
 
1. Shifting the burden of the tax. Transferring the burden of tax from the statutory taxpayer to
another without violating the tax law. 
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. 
3. Transformation. The manufacturer upon whom the tax has been imposed, fearing the loss of his
market if he should add tax to the price, pays the tax. He then endeavors to recroup the tax paid by
making his production more efficient and lowering his cost of production. 
4. Tax emeption. Exemption must be anchored firmly on an express provision of law. 
5. Tax avoidance. Means are legal. 
6. Tax evasion. Connotes fraud through the use of pretenses and forbidden devices to lessen or
defeat taxes. 
 
Taxes and Licenses Distinguished 
 
Tax  License 
Revenue derived is for the support of the govt.  Regulate certain acts, businesses, industries, or
  professions which, unless regulated, may become
  harmful to the public 
 
Is an exercise of the power of taxation  Exercise of the police power to guard and safeguard
  the interest and welfare of the public 
Subject to the constitutional and inherent  
limitations on the power to tax.  Is not subject to the limitations on taxation 
 
Amount of tax is unlimited  Amount of license fee is limited to the cost of
regulation and maintenance of regulatory body 
Non-payment of tax doesn’t make the business Non-payment of the license fee makes the business
illegal but may be ground for criminal prosecution illegal. 
under the Tax Code.