PURPOSES OF TAXATION SCOPE OF THE POWER OF TAXATION

Primary Purpose - Revenue or Fiscal Purpose A. Comprehensive

 To provide funds or property with which to - Has wide scope of coverage

promote the general welfare and protection - Covers persons, businesses, activities,
of the citizens professions, rights and privileges

Secondary - Regulatory Purpose B. Unlimited

(Sumptuary/Compensatory)
- Power to tax in unlimited and
 Taxation is also a way to regulate or control comprehensive unless limited by
(e.g. excise taxes) law/statute or Constitution.

The following are also achieved through taxation: C. Plenary

 Reduction of social inequality (taxation on - Complete; absolute (synonymous with

individuals) being unlimited).
 Economic growth (tax incentives
D. Supreme
THEORY AND BASIS OF TAXATION
- Has the highest degree of application
A. Theory and Basis of Taxation - Considered as the strongest among the
three inherent powers of the State
Government can neither exist nor endure
without taxation. Taxes are considered as the ESSENTIAL ELEMENTS OF A TAX
nation's lifeblood "through which government
 An enforced contribution
agencies continue to operate and with which the
- Not voluntary payment or donation
State effects its functions for the welfare of its
 Generally payable in money
constituents".
- Pecuniary burden payable in money
B. Necessity Theory (legal tender)
 Proportionate in character
Power of taxation is based on the theory
- Payment of taxes should be based
that the existence of the government is a necessity.
on the ability to pay theory or
It is a necessary burden to preserve the State's
theoretical justice Example is the
sovereignty.
graduated tax rates
 Levied on persons, property, or the
exercise of a right or privilege (subjects or
C. Benefits Received or Reciprocity Theory objects of taxation)
 Levied by the law-making body of the State
 Symbiotic relationship
- Power of imposing tax is purely
- Taxes are what we pay for a civilized
legislative function
society.
 Levied for public purpose
- Due to the symbiotic relationship
between the taxpayer and the ASPECTS OF TAXATION
govemment, "every person who is able
must contribute his share in the running 1. Levying
of the government."
Imposition of the tax
- The government, in return, "is expected
to respond in the form of tangible and 2. Assessment
intangible benefits intended to improve
Determination of the correct amount of the
the lives of the people and enhance
tax due
their moral and material values
3. Collection B. Constitutional Limitations

Bureau of Internal Revenue is charged with Due process of law

the function of collecting internal revenue taxes
- Tax statute must not be arbitrary as to find
ELEMENTS OF SOUND TAX SYSTEM no support in the Constitution and the
power to tax must not be harsh, oppressive
A. Fiscal Adequacy
and confiscatory. Taxpayers must also have
It is necessary that the revenue raised the right to notice and hearing
through taxation is adequate for the expenditures - No person shall be deprived of life, liberty
of the government to provide the necessary or property without due process of law, nor
services demanded by the citizens. shall any person be denied the equal
protection of the laws. (Section 1, Article III
B. Theoretical Justice or Equity of the 1987 Constitution)
The tax burden must be proportionate to Equal protection of law
the taxpayer's ability to pay.
- All persons subject of a legislation (including
C. Administrative Feasibility tax legislation) must be treated alike under
similar circumstances and conditions both
Tax laws must be capable of effective and
in the privileges conferred and the liabilities
efficient enforcement. It should be capable of
imposed
being effectively administered and enforced with
the lease convenience to the taxpayer. Uniformity and equity in taxation
Tax laws cannot operate beyond a State's territorial - Requires uniform application and
limits operation, without discrimination.
Classification, if any, must be reasonable
LIMITATIONS ON THE STATE’S POWER TO TAX
and valid
A. Inherent Limitations
Prohibition against imprisonment for nonpayment
Purpose must be public in nature (governmental of poll tax
purpose)
- No person shall be imprisoned for debt or
non-payment of a poll tax. (Section 20,
Article III, 1987 Constitution)
Territorial limitation
Prohibition against impairment of contracts
- Tax laws cannot operate beyond a State's
territorial limits - No law impairing the obligation of contracts
shall be passed (Section 10, Article III, 1987
Prohibition against the delegation of the taxing
Constitution)
power
Prohibition against infringement of religious
- The enactment or imposition or levying of
freedom
tax cannot be delegated by the legislative
department - No law shall be made respecting an
- The assessment and collection establishment of religion, or prohibiting the
(administrative implementation) can be free exercise thereof.
delegated - The free exercise and enjoyment of
religious profession and worship, without
Territorial limitation
discrimination or preference, shall forever
- Tax laws cannot operate beyond a State’s be allowed.
territorial limits - No religious test shall be required for the
exercise of civil or political rights. (Section 5,
Article III, 1987 Constitution)
Prohibition against appropriation of proceeds of  Veto of appropriation, revenue, tariff bills
taxation for use, benefit or support of any church by the President
 The President shall have the power
- No public money or property shall be
to veto any particular item or items
appropriated, applied, paid, or employed,
in an appropriation, revenue, or
directly or indirectly, for the use, benefit, or
tariff bill, but the veto shall not
support of any sect, church, denomination,
affect the item or items to which he
sectarian institution, or system of religion,
does not object. (Section 27(2),
or of any priest, preacher, minister, or other
Article VI, 1987
religious teacher, or dignitary as such,
except when such priest, preacher,
 Delegated authority of President to impose
minister, or dignitary is assigned to the
tariff rates, import and export quotas,
armed forces, or to any penal institution, or
tonnage and wharfage dues
government orphanage or leprosarium.
 The Congress may, by law, authorize
(Section 29 (2), Article VI, 1987
the President to fix within specified
Constitution)
limits, and subject to such
Prohibition against taxation of religious, limitations and restrictions as it may
charitable and educational entities impose, tariff rates, import and
export quotas, tonnage and
- Charitable institutions, churches and wharfage dues, and other duties or
parsonages or convents appurtenant
imposts within the framework of the
thereto, mosques, nonprofit cemeteries, national development program of
and all lands, buildings, and improvements,
the Government (Section 28(2),
actually, directly, and exclusively used for Article VI, 1987 Constitution)
religious, charitable, or educational
 Non-impairment of the jurisdiction of the
purposes shall be exempt from taxation.
Supreme Court
(Section 28 (3), Article VI, 1987
 Supreme Court has the power to
Constitution)
Review, revise, reverse, modify, or
Prohibition against taxation of non-stock, non- affirm on appeal or certiorari, as the
profit educational institutions law or the Rules of Court may
provide, final judgments and orders
- All revenues and assets of non-stock, non- of lower courts in all cases involving
profit educational institutions used actually, the legality of an tax, impost,
directly, and exclusively for educational assessment, or toll, or any penalty
purposes shall be exempt from taxes and imposed in relation thereto. (Section
duties. 5(2)(b), Article VIII of the 1987
- Upon the dissolution or cessation of the Constitution)
corporate existence of such institutions,  Revenue bills shall originate exclusively
their assets shall be disposed of in the from the House of Representatives
manner provided by law. (Section 4(3),  All appropriation, revenue or tariff
Article XIV, 1987 Constitution) bills, bills authorizing increase of the
Others public debt, bills of local application,
and private bills shall originate
 Grant of tax exemption exclusively in the House of
 No law granting any tax exemption Representatives, but the Senate may
shall be passed without the propose or concur with
concurrence of a majority of all the amendments. (Section 24, Article VI
Members of the Congress. (Section of the 1987 Constitution)
28(4), Article VI, 1987 Constitution)  Revocation of tax exemptions
 See Section 11, Article XII of the
1987 Constitution on the
 amendments and revocation of 3. TAX versus SPECIAL ASSESSMENT
franchise by the Congress)
 Special assessment is an enforced
SITUS OF TAXATION proportional contribution from owners of
lands for special benefits resulting from
 Situs of taxation means “place” of taxation.
public improvements. In Republic v.
 It is the State or political unit which has
Bacolod, 17SCRA632, a special assessment
jurisdiction to impose a particular tax.
is a levy on property which derives some
 The State where the subject to be taxed has
special benefit from the improvement. Its
a situs may rightfully levy and collect the
purpose is to finance such improvement,
tax.
thus accruing only to the owners thereof
 The situs is necessarily in the State which
who, after all, pay the assessment.
has jurisdiction or which exercises dominion
 It is not a tax measure intended to raise
over the subject in question.
revenues for the government because the
FACTORS TO CONSIDER IN DETERMINING THE proceeds thereof may be devoted to the
SITUS OF TAXATION specific purpose for which the assessment
was authorized.
 Subject matter (person, property, activity)
 Nature of the tax Characteristics of Special Assessment:
 Citizenship
 Levied only on land
 Residence of the taxpayer
 Not a personal liability of the person
 Source of income
assessed
 Place of exercise, business or occupation
 Based wholly on benefits (not necessary)
being taxed
 Exceptional both as to time and place
TAX DISTINGUISHED FROM OTHER TERMS OR
4. TAX versus REVENUES
IMPOSTS
Revenue refers to all the funds or income derived
1. TAX versus TOLL
by the government, whether from tax or any other
 A toll is a sum of money for the use of source.
something, generally as a consideration,
which is paid for the use of a road, bridge or
the like of a public nature. 5. TAX versus SUBSIDY

Subsidy is pecuniary and directly granted the

government to an individual or private commercial
enterprise deemed beneficial to the public. Subsidy
is not a tax although tax may have to be imposed
to pay it.

6. TAX versus PERMIT or LICENSE FEE

Permit or License is a charge imposed under the

2. TAX versus PENALTY police power for purposes of regulation.
 Penalty is a sanction imposed as a TEST IN DETERMINING IF THE IMPOSITION IS A
punishment for violation of law or acts TAX OR LICENSE FEE:
deemed injurious. The violation of tax may
give right to imposition of penalty. If the purpose is primarily or if revenue is, at least,
one of the real and substantial purposes, then the
exaction is a tax. If the purpose is regulatory in
nature, it is a license.
 Taxes that may be shifted:

❖ VAT; Percentage taxes; excise taxes on excisable

articles

❖ Ad-valorem taxes that oil companies pay to BIR

upon removal of petroleum products from its
refinery

7. TAX versus DEBT 2. TRANSFORMATION

An escape from taxation where the

producer or manufacturer pays the tax and
endeavor to recoup himself by improving his
process of production thereby turning out his units
of products at a lower cost.

3. EVASION
8. TAX versus CUSTOMS DUTIES
Tax evasion is the use by the taxpayer of
Customs duties are taxes imposed on goods illegal or fraudulent means to defeat or lessen the
exported from or imported into a country. payment of a tax. It is also known as “tax dodging”.
It connotes fraud through the use of pretenses or
9. TAX versus TARIFF
forbidden devices to lessen or defeat taxes.
Tariff may be used in on of three (3) senses:
Example:
a. A book of rates drawn usually in alphabetical
❖ Deliberate failure to report a taxable income or
order containing the names of several kinds of
property; deliberate reduction
merchandise with the corresponding duties to be
paid for the same, or

b. The duties payable on goods imported or ELEMENTS OF TAX EVASION

exported, or
Tax evasion connotes the integration of three
c. The system or principle of imposing duties on the factors:
importation (or exportation) of goods
a. The end to be achieved, i.e., the payment of
MEANS OF AVOIDING OR MINIMIZING THE less than that known by the taxpayer to be
BURDEN OF TAXATION legally due, or the non-payment of tax
when it is shown that a tax is due;
1. SHIFTING
b. An accompanying state of mind which is
- Shifting is the transfer of the burden of a described as being “evil” In “bad faith”,
tax by the original payer or the one on whom the “willful” or “deliberate and non-accidental”,
tax was assessed or imposed to someone else. and
c. A course of action or failure of action which
- Transferred is not the payment of the tax
is unlawful.
but the burden of the tax. Only indirect taxes may
be shifted; direct taxes cannot be shifted. 4. TAX AVOIDANCE

Example: Tax avoidance is the exploitation by the

taxpayer of legally permissible alternative tax rates
Manufacturer or producer may shift tax assessed
or methods of assessing taxable property or
to wholesaler, who in turn shifts it to the retailer,
income in order to avoid or reduce tax liability. It is
who also shifts it to the final purchaser or
politely called “tax minimization” and is not
consumer.
punishable by law.
5. EXEMPTION Partial

It is the grant of immunity to particular One where a collection of a part of the tax
persons or corporations or to persons or is dispensed with.
corporations of a particular class from a tax which
Exemptions from taxation are highly disfavored in
persons and corporations generally within the
law
same jurisdiction are being taxed.
PRINCIPLES GOVERNING TAX EXEMPTIONS
Grounds for granting tax exemptions
Amnesty
 May be based on contract. In such a case,
the public which is represented by the - It is the general or intentional overlooking
government is supposed to receive a full by the State of its authority to impose
equivalent therefore, i.e. character of a penalties on persons otherwise guilty of
corporation evasion or violation of a revenue or tax law.
 May be based on grounds of reciprocity or - It partakes of an absolute way to give tax
to lessen the rigors of international double evaders, who wish to relent and are willing
or multiple taxation. to reform a chance to do so.
 May be based on some ground of public - Amnesty involves immunity from all
policy, i. e., to encourage new industries or criminal, civil and administrative liabilities
to foster charitable institutions. Here, the from non-payment of taxes.
government need not receive any
consideration in return for the tax 6. CAPITALIZATION
exemption. The reduction in the selling price of income
producing property by an amount equal to the
KINDS OF EXEMPTION
capitalized value of future taxes that may be paid
As to basis by the purchaser.

Constitutional 7. AVOIDANCE

Immunities from taxation which originate - Tax avoidance is the tax saving device
from the constitution. within the means sanctioned by law.
- This method should be used by the taxpayer
Statutory
in good faith and at arm’s length.
Immunities from taxation which emanates - Tax evasion, on the other hand, is a scheme
from legislation. used outside of those lawful means which is
not acceptable.
As to form
SOURCES OF TAX LAWS
Express
1. Constitution
Exemptions expressly granted by statute
2. National Internal Revenue Code
Implied
3. Tariff and Customs Code
When particular persons, property or rights
are deemed exempt as they fall outside the scope 4. Local Government Code (Book II)
of the taxing provision itself.
5. Local tax ordinances/City or municipal tax codes
As to extent
6. Tax treaties and international agreements
Total
A tax treaty is one of the sources of our law on
Connotes absolute immunity taxation. The Philippine Government usually enters
into tax treaties in order to avoid or minimize the
effects of double taxation. A treaty has the force RULE WHEN THERE IS DOUBT IN STATUTE OR LAW
and effect of law.
- No person or property is subject to taxation
7. Special Laws unless within the terms or plain import of a
taxing statute.
8. Decisions of the Supreme Court and the Court of
- In every case of doubt, tax statutes are
Tax Appeals
construed strictly against the government
9. Revenue rules and regulations and and liberally in favor of the taxpayer (Davao
administrative rulings and opinions Gulf Lumber Corporation v. Commissioner
of Internal Revenue, et al. 93 SCRA 76, 88).
Effectivity of revenue rules and regulations - Taxes being burdens are not to be
presumed beyond what the statue
Except when the law otherwise expressly
expressly and clearly declares (Lincoln
provides, the aforesaid revenue tax issuances shall
Philippine Life Insurance Company, Inc.,
not begin to be operative until after due notice
etc..,v. Court of Appeals, et al., 293 SCRA
thereof may be fairly assumed.
92, 99)
Purpose of rules and regulations
PROVISIONS GRANTING TAX EXEMPTIONS
a. To properly enforce and execute the laws
- Such provisions are construed strictly
b. To clarify and explain the law against the taxpayer claiming tax
exemption.
c. To carry into effect the law’s general provisions
- When a tax is unquestionably imposed, a
by providing details of administration and
claim of exemption from tax payments
procedure
must be clearly shown and based on
Requisites for validity of rules and regulations language in the law too plain to be
mistaken. (Davao Gulf Lumber Corporation)
a. They must not contrary to law and the Manila Electric Company v. Vera [67
Constitution SCRA351]
b. They must be punished in the Official Gazette or APPLICATION OF TAX LAWS
a newspaper of general circulation
General Rule:
CONSTRUCTION OF TAX LAWS
Tax laws are prospective in operation
 Public purpose is always presumed. because the nature and amount of the tax could
 If the law is clear, apply the law in not be foreseen and understood by the taxpayer at
accordance to its plain and simple tenor the time the transactions which the law seeks to
 A statute will not be construed as imposing tax was completed
a tax unless it does so clearly, expressly and
unambiguously. Exception:
 In case of doubt, it is construed most
- While it is not favored, a statute may
stringly and against the Government and
nevertheless operate retroactively provided
liberally in favor of the taxpayer.
it is expressly declared or is clearly the
 Provisions of a taxing act are not to be
legislative intent.
extended by implication.
- But a tax law should not be given
 Tax laws operate prospectively unless the
retroactive application when it would be
purpose of the legislature to give
harsh and oppressive which violate the
retrospectively effect is expressly declared
taxpayer’s constitutional rights regarding
or may be implied from the language used.
equity and due process. (Fernandez vs
 Tax laws are special laws and prevail over a
Fernandez – 99 Phil. 934; CIR vs Filipinas Cia
general law.
de Seguros – 107 Phil. 1055)
 - Section 246 of the Tax Code also provides
that any revocation, modification or
reversal of any of the rules and regulations
promulgated in accordance with Sections
244 and 255 or any of the rulings or
circulars promulgated by the Commissioner
shall not be given retroactive application. If
the revocation, modification or reversal will
be prejudicial to the taxpayers.

TAXPAYER’S SUIT

- It is one brought or filed by a taxpayer

arguing the validity of a tax statute and its
enactment or the constitutionality of its
alleged public purpose.
- It is a case where the act complained of
directly involves the illegal disbursement of
public funds derived from taxation.
- Taxpayers have locus standi to question the
validity of tax measures or illegal
expenditures of public money.
- In such cases, they are parties in interest
who will be prejudiced or benefited by the
avails of the suit.
- The general rule is that not only persons
individually affected but also taxpayers
have sufficient interest of preventing the
illegal expenditures of money raised by
taxation.
- They may, therefore, question in the proper
court the constitutionality of statutes
requiring the expenditures of public funds.
- But a taxpayer is not relieved from the
obligation of paying a tax because of his
belief that it is being misappropriated by
certain officials, for otherwise, collection of
taxes would be hampered and this may
result in the paralyzation of important
governmental functions.
- In Lozada vs. Comelec, “It is only when an
act complained of which may include a
legislative enactment of a statute, involves
the illegal expenditure of public money that
the so-called taxpayers’ suit may be
allowed.