I.

GENERAL PRINCIPLES OF TAXATION

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.

NATURE OF INTERNAL REVENUE LAWS

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. Such tax
laws are deemed to be the laws of the occupied territory and not of the occupying enemy. (Hilado v.
Collector of Internal Revenue)

PURPOSE AND OBJECTIVES OF TAXATION

• Taxation is no longer envisioned as a measure merely to raise revenue to support the existence
of the government; taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public interest as
to be within the police power of the state. (Caltex Philippines, Inc. v. Commission on Audit)

• Taxation may be made the implement of the state's police power. It is inherent in the power to
tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
"inequalities which result from a singling out of one particular class for taxation or exemption
infringe no constitutional limitation (Lutz v. Araneta)

• Motor vehicle registration fees as at present exacted pursuant to the Land Transportation and
Traffic Code are actually taxes intended for additional revenues of government.

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. (Philippine Airlines, Inc. v. Edu)

• The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The constitutional provision has been interpreted to mean simply that direct taxes are
to be preferred and as much as possible, indirect taxes should be minimized. (Tolentino v.
Secretary of Finance)

• The tax imposed is not only a regulatory but also a revenue measure prompted by the realization
that earnings of videogram establishments have not been subjected to tax, thereby depriving the
Government of an additional source of revenue. It is an end-user tax, imposed on retailers for
every videogram they make available for public viewing. (Tio v. Videogram Regulatory Board)
THEORY AND BASIS OF TAXATION
• 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.

The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power. (Commissioner of Internal
Revenue v. Algue)

• Taxes are the lifeblood of the government, for without taxes, the government can neither exist
nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source
from the very existence of the state whose social contract with its citizens obliges it to promote
public interest and common good. The theory behind the exercise of the power to tax emanates
from necessity; without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people. (National Power Corporation v. City of Cabanatuan)

• A taxpayer cannot object to or resist the payment of taxes solely because no personal benefit to
him can be pointed out as arising from the tax. (Lorenzo v. Posadas, Jr.)

NATURE OF TAXING POWER

• The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a
necessary burden to preserve the State's sovereignty and a means to give the 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.
(Phil. Guaranty Co., Inc. v. Commissioner of Internal Revenue)

• Taxation is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the government.
(Mactan Cebu International Airport Authority v. Marcos)

• The power of taxation is sometimes called also the power to destroy. It should, therefore, be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly (Roxas v. Court of Tax Appeals)
PRINCIPLES OF SOUND TAX SYSTEM
• Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources
of revenues must be adequate to meet government expenditures and their variations. (Chavez
v. Ongpin)

• Administrative feasibility which is one of the basic principles of a sound tax system requires that
tax laws should be capable of convenient, just and effective administration which is why it fixes
a standard or a uniform tax base upon which taxes should be paid. (Taganito Mining Corp. v.
Commissioner of Internal Revenue)

POWER OF TAXATION COMPARED WITH OTHER POWERS

TAXATION POLICE POWER EMINENT DOMAIN

as to purpose
To raise revenue To promote public purpose To facilitate the State‘s need of
through regulations property for public use

as to amount of exaction
No limit Limited to the cost of No exaction; but private
regulation, issuance of the property is taken by the State
license or surveillance for public purpose

as to benefits received
No special or direct benefit is No direct benefit is received; a A direct benefit results in the
received by the taxpayer; healthy economic standard of form of just compensation to
merely general benefit of society is attained the property owner
protection
as to non-impairment of contracts
Contracts may not be impaired Contracts may be impaired Contracts may be impaired

as to transfer of property rights

Taxes paid become part of No transfer but only Transfer is favor of the State
public funds restraint in its exercise

as to scope
All persons, property and All persons, property, rights and Only upon a particular
excises privileges property

• The basic aim of police power is public good and welfare. Taxation, in its case, focuses on the
power of government to raise revenue in order to support its existence and carry out its legitimate
objectives. Although correlative to each other in many respects, the grant of one does not
necessarily carry with it the grant of the other. The two powers are, by tradition and
jurisprudence, separate and distinct powers, varying in their respective concepts, character,
scopes and limitations. (Land Transportation Office v. City of Butuan)
• As a general rule, 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.

Accordingly, tax statutes must be construed strictly against the government and liberally in favor
of the taxpayer. But since taxes are what we pay for civilized society, or are the lifeblood of the
nation, the law frowns against exemptions from taxation and statutes granting the exemptions
are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing
authority. A claim of exemption from tax payments must be clearly shown and based on language
in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is
the exception. However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect of the
exemption is merely to reduce the amount of money that has to be handled by the government
in the course of its operation.||| (Mactan Cebu International Airport Authority v. Marcos, G.R.
No. 120082, [September 11, 1996], 330 PHIL 392-420)