GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

INHERENT POWERS OF THE STATE

Police Power refers to the inherent power of the sovereign state to legislate for the protection of
health, welfare and morals of the community. It is exercised usually to guard against excesses or abuses
of individual liberty.

- This power is restricted by the due process clause of the Constitution which
provides that no person may be deprived of life, liberty, or property without due
process of law
- It may be exercised through taxation because taxes may be levied for the promotion
of the welfare of the public.

Nature of Eminent Domain

Eminent Domain- refers to the power of the sovereign state to take private property for a public
purpose. It is founded upon the idea that the transcend individual right in property.

The State may expropriate private property when it is necessary to promote general welfare. Since
eminent domain, eminent domain is inherent in sovereignty pertinent

Taxation is defined as:

1. A power by which an Independent State, through its law-making body, raises and accumulates
revenue from its inhabitants to pay the necessary expenses of the government.
2. A process or act of imposing a charge by governmental authority on property, individuals or
transactions to raise money for public purposes.
3. A means by which the Sovereign State through its law making body demands for revenue in
order to support its existence and carry out its legitimate objectives.

NATURE OF TAXATION POWER:

1. Inherent power of sovereignty

2. Essentially a legislative function
3. For public purposes
4. Territorial in operation
5. Tax exemption of government
6. The strongest among the inherent powers of the government
7. Subject to Constitutional and inherent limitations

Non-delegation of Legislative Power to Tax- the power to make tax laws cannot be
delegated to other branches of the government.
 Privity of Relationship exists, the state can still exercise its taxing powers over its citizen
outside its territory. It is the fundamental basis of the right to tax is the capacity of the
government to provide benefits and protection to the object of the tax.
International Comity is the courteous recognition, friendly agreement, interaction and
respect accorded by one nation to the laws and institutions of another.
Exemption from Taxation is a grant of immunity to particular persons or corporations of a
particular class from a tax. The State immunity from taxation is inherent in its power to
impose tax.

Scope of Taxation

In the absence of limitations provided by the Constitution, he power to tax is unlimited,

complete (plenary), with wide extent of application (comprehensive) and with highest degree
(supreme). If there is any limitation at all, it is the sense of responsibility by the members of the
law-making body to the people that restricts its exercise.

Similarities among Taxation, Eminent Domain and Police Powers

1. They are inherent powers of the state

2. They constitute the three ways by which the state interferes with the private rights and
property
3. They are legislative in nature and character
4. They presuppose an equivalent compensation
5. They all underlie and exist independently of the Constitution
6. They are all necessary attributes of sovereignty
7. The provisions in the Constitution are just limitations on the exercise of these powers.

INHERENT POWERS OF SOVEREIGN STATE

Police Power
o The power to protect citizens and provide for safety and welfare of society.
Eminent Domain Power
o The power to take private property (with just compensation) for public use.
Taxation Power
o The power to enforce contributions to support the government and other inherent
powers of the State

DISTINCTION OF TAXATION, POLICE POWER, AND EMINENT DOMAIN

AS TO CONCEPT:
o TAXATION power to enforce contribution to raise government funds
o POLICE POWER power to make and implement laws for the general welfare
o EMINENT DOMAIN power to take private property for public use with just
compensation
 AS TO SCOPE:
o TAXATION plenary, comprehensive and supreme
o POLICE POWER broader in application General power to make and implement laws
o EMINENT DOMAIN merely a power to take private property for public use
AS TO AUTHORITY:
o TAXATION exercised only by government or its political subdivisions
o POLICE POWER exercised only by government or its political subdivisions
o EMINENT DOMAIN - may be granted to public service or public utility companies
AS TO PURPOSE:
o TAXATION money is taken to support the government
o POLICE POWER property is taken or destroyed to promote general welfare
o EMINENT DOMAIN private property is taken for public use
AS TO NECESSITY OF DELEGATION:
o TAXATION the power to make tax laws cannot be delegated
o POLICE POWER can be expressly delegated to the government units by the law
making body
o EMINENT DOMAIN can be expressly delegated to the government units by the law
making body
AS TO PERSON AFFECTED:
o TAXATION operates on a community or a class of individual
o POLICE POWER operates on a community or a class of individual
o EMINENT DOMAIN operates on the particular private property of an individual
AS TO BENEFITS:
o TAXATION continuous protection and organized society
o POLICE POWER healthy economic standard of society
o EMINENT DOMAIN market value of the property expropriated
AS TO AMOUNT IMPOSITION:
o TAXATION generally no limit
o POLICE POWER cost of regulation, license and other necessary expenses
o EMINENT DOMAIN no imposition
AS TO IMPORTANCE:
o TAXATION inseparable for the existence of a nation, it supports police power and
eminent domain
o POLICE POWER protection, safety, and welfare of society
o EMINENT DOMAIN common necessities and interest of the community transcend
individual rights in property.
AS TO RELATIONSHIP TO CONSTITUTION:
o TAXATION - subject to Constitutional and Inherent limitations; Inferior to
nonimpairment clause
o POLICE POWER relatively free from Constitutional limitations; Superior to
nonimpairment clause
 o EMINENT DOMAIN superior to and may override Constitutional impairment
provision because the welfare of the State is superior to any private contract
AS TO LIMITATION:
o TAXATION constraints by Constitutional and Inherent limitations
o POLICE POWER limited by the demand for public interest and due process
o EMINENT DOMAIN bounded by public purpose and just compensation

Inherent limitations- the natural restrictions to safeguard and ensure that the power of taxation shall be
exercised by the government only for the betterment of the people whose interest should be served,
enhanced and protected.

1. Taxes may be levied only for public purposes

2. Being inherently legislative, taxation may not be delegated
3. Tax power is limited to territorial jurisdiction of the State
4. Taxation is subject to international comity
5. Government entities are generally tax-exempt

Constitutional Limitations- are provisions of the fundamental law of the land that restrict the supreme,
plenary, unlimited and comprehensive exercise by the State of its inherent power to tax.

As a rule, the Constitution does not create the power to tax on the State. Instead, it simply defines and
regulates the exercise of tax power in order to safeguard the interest of affected taxpayers.

It must be remembered that a tax law is of no legal force when it violates the Constitution.

The Constitutional Provisions that limit the exercise of the power to tax are as follows:

1. Due process of law ;

2. Equal protection of law
3. Rule of uniformity and equity
4. Presidents power to veto separate items in revenue or tariff bills
5. Exemption from property taxation of religious, charitable or educational
entities, nonprofit cemeteries, churches and convents appurtenant thereto
6. No public money shall be appropriated for religious purposes
7. Majority of all the members of the Congress granting tax exemption
8. The Congress may not deprive the Supreme Court of its jurisdiction in all cases
involving the legality of any tax, impost or assessment or toll or any penalty
imposed in relation to tax
9. No imprisonment for nonpayment of poll tax
10. Tax collection shall generally be treated as general funds of the government.

Due Process of Law

No person shall be deprived of life, liberty, or property without due process of law, nor shall any
person be denied the equal protection the laws
Equal Protection of Law it means that all persons subject to legislation shall be treated alike under
similar circumstances and conditions both in the privileges conferred and liabilitiesimposed.

Rule of Uniformity and Equity in Taxation

The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive a
progressive system of taxation

A tax is said to be uniform in application if it operates with the same force and effect in every
place where the subject may be found, not when it singles out one particular class for taxation or
exemption.

Presidents Veto

Every bill passed by the Congress shall, before it becomes a law be presented to the President. If
he approves the same, he shall sign it; otherwise, he shall veto it and return the same with his objections
at large in its journal and proceed to reconsider it

EXEMPTION FROM PROPERTY TAXATION

Art. VI , Section 28, Par 3

Religious, Educational, and Charitable pusposes
Idle lands or property used by others
o The issue of ownership is not relevant
Real EstateTax
Internal Revenue Taxes
Art XIV, Section 4 [3]

*CONGRESS GRANTING EXEMPTION

Art. VI, Section 28, Par 4

*TAXES AS GENERAL FUNDS OF THE GOVERNMENT

Art. VI, Section 29, Par 3

*IMPORTANCE OF TAXATION

For a continuous existence of a nation

Based on necessity: Primary source of government revenue
Without revenue, there can be no continuing government . Without government, there can
be no civilization.
 Based on reciprocal duties: Protection, Proper business climate and peace and order

*PURPOSES OF TAXATION

REVENUE PURPOSE
o To raise revenue for the support of the government in promoting general welfare and
protecting its inhabitants.
REGULATORY PURPOSE
o Known as sumptuary
o A secondary objective of imposing tax. This objective is accomplished to regulate
inflation, achieve economic and social stability and serve as key instrument for social
control.
COMPENSATORY PURPOSE
o A tax may be used to make up for benefit received

*OBJECTS OF TAXATION

PERSONS
o Natural Person
o Juridical Person
PROPERTIES
o Real Properties
o Personal Properties
o Tangible Properties
o Intangible Properties
EXCISE OBJECTS
o Transactions
o Privilege
o Right
o Interest

* CERTAIN DOCTRINES IN TAXATION

Prospectivity of tax laws Tax bill must only be applicable after becoming a law.
Imprescriptability of taxes Unless otherwise provided by the tax law itself, taxes in general
are not concelable .
o Direct Duplicate Taxation
o Indirect Duplicate Taxation
Double Taxation
Escape from Taxation
 o Tax Evasion
o Tax Avoidance
- Tax Option
- Shifting
- Transformation
Exemption from Taxation
o Generally granted the basis of:
- Reciprocity
- Public Policy
- Contracts

Forms of Tax Avoidance:

Tax Option taxpayers may choose to pay lower tax rate in some transactions as permitted by
Tax Laws.
Shifting it is the transfer of tax burden to another; the imposition of tax is transferred from the
statutory taxpayer to another without violating the law. (Exemplified by indirect taxes like VAT)
Transformation th producer absorbs the payment of tax to reduce prices and to maintain
market share. Tax transformed into a gain through the medium of production.
Exemption from Taxation- denotes a grant of immunity, expressed or implied, to a particular
person, corporations of a particular class, from a tax upon property or an excise which persons
and corporation generally within the same taxing district are obliged to pay.
It is generally granted in the basis of (a) Reciprocity (b) Public Policy (c) Contracts
Tax exemptions, including its equivalent provisions such as deductions, tax amnesty, and
tax condonations shall be governed by the following principles:
They are not presumed.
When granted, they are strictly construed against the taxpayer.
They are highly disfavore and may almost be said to be directly contrary to the
intention of tax laws.
Tax exemption as a privilege is personal and in any way cannot be transferred or
assigned by the person to whom it is given without the consent of the state.

CLASSIFICATIONS OF TAX EXEMPTION

1. Expressed exemption-this tax exemption are statutory laws in nature as provided by constitution,
statute, treaties, ordinances, franchises, or similar legislative acts. Examples are:
a. Inter-corporate dividends by a domestic corporation from another domestic corporation
b. Section 105 of Tariff and Customs Code;
c. Section 234 of the Local Government Code ; and
d. Other Special laws such as Omnibus Investment Code of 1987; Philippine Overseas
Shipping Act
 2. Implied Exemption or by omission these exemptions are either intentional or accidental. These
occur when tax as imposed on a certain class of persons, properties, or transactions without the
mentioning other classes; those not mentioned are deemed exempted by omission.
3. Contractual Exemption- are those lawfully entered into by the government in contracts under
existing laws.

Equitable Recoupment states that a tax claim for refund which is prevented by prescription
may be allowed to use as payment for unsettled tax liabilities if both taxes arise from the same
transaction in which overpayment is mad and underpayment is due.
Set-off Taxes states that taxes are not subject to set-off or legal compensation because the
government and the taxpayer are not mutual creditor and debtor of each other.
Taxpayer Suit effected through court proceedings and could only be allowed if the acts
involves a direct and illegal disbursement of public funds derived from taxation.
Compromises provides that compromises generally allowed and enforceable when the subject
matter thereof is not prohibited from being compromised and the person entering such
compromise and the person entering such compromise is duly authorize to do so.
Power to Destroy- it implies that an imposition of lawful regulatory taxes would bedestructive
to the taxpayers and business establishments because the government can compel payment of
tax and forfeiture of property through the exercise of the police power.
Power to Build it is a primary tool that creates, builds, and sustains the upliftment of social
condition of the people.

Situs of Taxation- place of taxation

o Nature, kind or classification of tax being imposed
o Subject matter of the tax
o Source of income being taxed
o Place of the excise, privilege, business or occupation being taxed
o Residence and Citizenship of the taxpayer
General rule: the State has the power to impose tax only within its territorial jurisdiction

Nature of Taxes

Taxes- are burdens, charges, exactions, impositions or contributions assessed in accordance with some
reasonable rule of appointment, by authority of a sovereign state, upon the person, property, or rights
exercised, within its jurisdiction, to provide public revenues for the support of the government, the
administration of the law, or the payment of the public expenses.

Taxes are obligations created by law

Taxes are generally personal to the taxpayer

Essential characteristic of taxes

1. Enforced contribution
 2. Imposed by the legislative body
3. Proportionate in character
4. Payable in the form money
5. Imposed for the purpose of raising revenue
6. Used for a public purpose
7. Enforced on some persons, properties or rights
8. Commonly required to be paid at regular intervals
9. Imposed by the sovereign state with its jurisdiction

CLASSIFICATON OF TAXES

2.) As to purpose:
a. Revenue or Fiscal
b. Regulatory, Special or Sumptuary
3.) Subject Object or Subject Matter
a. Personal, Poll, or Capitation
b. Property
c. Excise
4.) As to determination of Amount:
a. Ad Valorem
b. Specific
5.) As to who bears the burden
a. Direct
b. Indirect
6.) As to scope or authority Collecting the tax
a. National
b. Local or Municipal
7.) As to rate or graduation
a. Proportional or Flat rate
b. Progressive or graduated Rate
c. Mixed tax

OTHER CHARGES/FEES

1. Penalty
2. Revenue
3. Debt
4. Toll
5. License Fee
6. Custom duties
7. Subsidy
8. Tariff
9. Margin fee
 10. Special Assessment

TAX LAW DEFINED

Tax law- is that body of laws which codifies all the national tax laws including income, estate,
gift, excise, stamp and other taxes.
Internal Revenue- taxes imposed by the legislative body other than custom duties on imports

NATURE OF TAX LAWS GENERALLY CIVIL IN NATURE; THEY ARE NEITHER POLITICAL NOR PENAL IN
NATURE

Interpretation and Application of Tax Laws

1. Tax statute must be enforced as written

2. Imposition of tax burdens is not presumed
3. Doubts should be resolved liberally in favor of the taxpayer
4. Tax exemptions are strictly construed against the taxpayer
5. Tax laws are applied prospectively
6. Tax laws prevail over civil laws

SOURCES OF PHILIPPINE TAX LAWS

Constitution of the Philippines

Statutes
Executive Orders
Tax Treaties and Conventions with foreign countries
Revenue Regulations promulgated by Department of Finance
BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum Orders
BIR Rulings
Judicial Decisions
Local Tax Ordinances