THE LAW ON TRANSFER AND BUSINESS TAXATION
INTRODUCTION
Definition of taxation.
Taxation is the process or means by which the sovereign, through its lawmaking body, raises income to
defray the necessary expenses of government.
Expressed in another way, it is a method of apportioning the cost of government among those who in
some measures are privileged to enjoy its benefits and must, therefore, bear its burdens.
(51 Am. Jur. 34; 1 Cooley 72–93)
Purpose of taxation.
(1) Primary purpose. — The purpose of taxation by the government is to raise funds with which to
promote the general welfare and protection of its citizens and to enable it to finance its multifarious
activities.
(51 Am. Jur. 34–35)
(2) Non-revenue objectives. — Aside from purely financing government operational expenditures,
taxation is also utilized as a tool to carry out the national objective of social and economic development.
(a) For instance, taxation can encourage investments in enterprises engaged in preferred areas of
activities by giving a tax exemption to these enterprises. Conversely, certain industries and activities may
be discouraged by the imposition of heavy taxes.
(b) Local industries may be protected against foreign competition through imposition of high customs
duties on imported goods.
(c) Taxation may be used to reduce inequalities in wealth and income by imposing progressively higher
tax rates as in the case of income taxes.
(d) Likewise, taxation may be employed to prevent or reduce inflation by increasing taxes, or to expand
business during periods of slump by decreasing them.
If the tax is for a public purpose, its validity is not affected by incidental or secondary purposes of
Congress in imposing the levy and notwithstanding that the revenue collected from the tax is very
negligible.
Definition of taxes.
Taxes are the enforced proportional and pecuniary contributions levied by the lawmaking body of the
State, by virtue of its sovereignty, upon the persons or property within its jurisdiction for the support of
the government and all public needs.
Essential characteristics of taxes.
As stated in the above definition, the essential characteristics of tax are:
1. It is an enforced contribution, for its imposition is not dependent upon the will or assent of the
person taxed;
2. It is generally payable in money, although the law may provide payment in kind;
3. It is laid by some rule of apportionment, usually based on ability to pay;
4. It is levied on persons or property and on acts, transactions, rights, or privileges. In each case,
however, it is only a person who pays the tax;
5. It is levied by the State which has jurisdiction over the person or property. It is necessary that
the State has jurisdiction or control over the objects to be taxed so the tax can be enforced or
collected;
6. It is levied by the lawmaking body of the State. The power to tax is a legislative power which
only Congress can exercise.
However, it can also be exercised by local governments “subject to such guidelines and limitations as the
Congress may provide” (Sec. 5, Art. X, Constitution.); and
(7) It is levied for public purpose. Taxation involves, and a tax constitutes, a charge or burden imposed to
provide public revenue for the support of the government, the administration of the law, or the payment
of public expenses. (51 Am. Jur. 36.) A tax levied for a private purpose constitutes a taking of property
without due process of law. It is unconstitutional and void.
Underlying theory and basis of taxation.
(1) The power of taxation proceeds upon the theory that the existence of government is a necessity,
that it cannot continue without means to pay its expenses; and that for those means it has the right to
compel all citizens and property within its limits to contribute.
The power of taxation proceeds upon the theory that the existence of government is a necessity, that it
cannot continue without means to pay its expenses; and that for those means it has the right to compel
all citizens and property within its limits to contribute.
Nature of taxation.
(1) The power of taxation is inherent in sovereignty being essential to the existence of every
government; hence, the State can still exercise the power even if not mentioned in the Constitution.
(2) It is essentially a legislative function. Even in the absence of any constitutional provision, the power
falls to the legislature as a part of the more general power of law making.
However, it can also be exercised by local governments “subject to such guidelines and limitations as the
Congress may provide” (Sec. 5, Art. X, Constitution.); and
(7) It is levied for public purpose. Taxation involves, and a tax constitutes, a charge or burden imposed to
provide public revenue for the support of the government, the administration of the law, or the payment
of public expenses. (51 Am. Jur. 36.) A tax levied for a private purpose constitutes a taking of property
without due process of law. It is unconstitutional and void.
Underlying theory and basis of taxation.
(1) The power of taxation proceeds upon the theory that the existence of government is a necessity,
that it cannot continue without means to pay its expenses; and that for those means it has the right to
compel all citizens and property within its limits to contribute.
(2) The basis of taxation is found in the reciprocal duties of protection and support between the State
and its inhabitants. The State receives taxes that it may be enabled to carry its mandates into effect and
perform the functions of government and the citizen pays the portion of taxes demanded in order that
he may, by means thereof, be secured in the enjoyment of the benefits of organized society.
Nature of taxation.
(1) The power of taxation is inherent in sovereignty being essential to the existence of every
government; hence, the State can still exercise the power even if not mentioned in the Constitution.
(2) It is essentially a legislative function. Even in the absence of any constitutional provision, the power
falls to the legislature as a part of the more general power of law making.
(3) It is subject to constitutional and inherent limitations.
The first are those provided in the fundamental law (e.g., equal protection of the laws, due process of
law, rule of uniformity and equity in taxation, etc.) or implied therefrom, while the second spring from
the nature of the taxing power itself.
The inherent limitations are:
(a) territoriality, which requires that the person or property taxed must be subject to the jurisdiction of
the taxing State;
(b) international comity, under which the property of a foreign state may not be taxed by another;
(c) exemption of governmental agencies (performing governmental functions) from taxation (but there is
no prohibition against the government taxing itself);
(d) prohibition against the delegation of the legislative power; and
(e) the requirement that the levy of tax must be for a public purpose.
The last two (2) are also limitations implied from the Constitution.
Scope or aspects of taxation.
Subject to constitutional and inherent restrictions, the power of taxation is regarded as supreme,
unlimited, and comprehensive.
The principal check on its abuse rests only on the responsibility of the members of the legislature to
their constituents.
Taxation includes two (2) aspects:
(1) Levying or imposition of the tax, which is a legislative act; and
(2) Collection of the tax levied, which is essentially administrative in character.
The two (2) processes together constitute the taxation system.
Basic principles of a sound tax system.
They are:
(1) Fiscal adequacy, which means that the sources of revenue should be sufficient to meet the demands
of public expenditures;
(2) Equality or theoretical justice, which means that the tax burden should be proportionate to the
taxpayer’s ability to pay (this is the ability to pay principle); and
(3) Administrative feasibility, which means that the tax laws should be capable of convenient, just, and
effective administration.
(Report of 1st Tax Commission, Vol. I, pp. 21–23.)
Classification of taxes
Taxes may be classified:
(1) As to subject matter or object:
(a) Personal, poll, or capitation. — A personal tax is a tax of a fixed amount imposed on individuals
residing within a specified territory, without regard to their property or the occupation in which they
may be engaged.
(51 Am. Jur. 66)
Example: community tax (formerly residence tax);
(b) Property. — A property tax is a tax imposed on property, whether real or personal, in proportion
either to its value or in accordance with some other reasonable method of apportionment. (ibid., 57)
Example: real estate tax; and
(c) Excise. — An excise tax is a tax imposed upon the performance of an act, the enjoyment of a
privilege, or the engaging in an occupation. The term is used synonymously with privilege tax.
Examples: estate tax; donor’s tax; income tax; value-added tax; other percentage taxes; and professional
tax.
(2) As to who bears the burden:
(a) Direct. — A direct tax is a tax demanded from the person who is intended or bound to pay it.
Examples: community tax (formerly residence tax); income tax; and
(b) Indirect. — An indirect tax is a tax imposed upon goods before they reach the customer who
ultimately pays for it not as a tax but as part of the purchase price; or a tax which the taxpayer can shift
to another.
Examples: taxes on business such as value-added tax; other percentage taxes; excise taxes; customs
duties.
(3) As to determination of amount:
(a) Specific. — A specific tax is a tax of a fixed amount imposed by the head or number, or by some
standard of weight or measurement; it requires no assessment other than a listing or classification of the
subjects to be taxed. (ibid., p. 53)
Examples: excise taxes on distilled spirits, wines, fermented liquor, cigars, and cigarettes; and
(b) Ad valorem. — An ad valorem tax is a tax of fixed proportion of the value of the property with
respect to which the tax is assessed. (ibid., p. 61)
Examples: real estate tax; excise taxes on automobiles and non-essential goods such as jewelry and
perfumes.
(4) As to purpose:
(a) General, fiscal or revenue. — A general tax is imposed for the general purposes of the government,
i.e., to raise revenue for governmental needs.
Examples: income tax; value-added tax, and practically all business taxes; and
(b) Special or regulatory. — A special tax is imposed for a special purpose, i.e., to achieve some social or
economic ends, irrespective of whether revenue is raised or not.
Example: protective customs duties or tariffs.
(5) As to authority imposing the tax:
(a) National. — A national tax is imposed by the national government.
Examples: national internal revenue taxes; customs duties; national taxes imposed by special laws;
(b) Municipal or local. — A local tax is imposed by municipal corporations (local government units).
Examples: real property taxes; professional tax.
(6) As to graduation or rate:
(a) Proportional. — A proportional tax is based on a fixed percentage of the amount of the property,
income, or other basis to be taxed.
Examples: real estate taxes; value-added tax; other percentage taxes;
(b) Progressive or graduated. — A progressive tax is a tax where the rate increases as the tax base
increases.
Example: income tax; and
(c) Regressive. — A regressive tax is a tax where the rate decreases as the tax base increases. We have
no regressive taxes.
Remedies available to the government to collect tax.
The remedies available to the government to collect the tax are:
(1) Administrative:
(a) Distraint of personal property, either actual or constructive (Secs. 205–212, 217.);
(b) Levy of real property (Secs. 213–217.);
(c) Enforcement of forfeiture of property (Secs. 224 and 225.);
(d) Enforcement of tax lien (Sec. 219.);
(e) Entering into compromise of tax cases (Sec. 204.);
(f) Requiring proof of filing of bonds to assure compliance with certain tax laws or regulations (e.g., Secs.
91, 130, 137, 144, 159, and 160.);
(g) Requiring proof of filing income tax returns before a license to engage in business or occupation or to
practice a profession is issued (R.A. No. 1538.);
(h) Giving of rewards to informers who give information regarding violations of any tax law (Sec. 282.);
(i) Imposition of surcharge and interest for non-payment or late payment of tax (e.g., Secs. 249, 51, 52,
56, 77, 90, and 103.);
(j) Making arrest, search, and seizure in certain cases (Sec. 15.);
(k) Deportation of aliens who violate any tax law (R.A. No. 1093.);
(l) Inspection and examination of books of accounts and other accounting records of the taxpayer (Secs.
233, 235.);
(m) Use of the national tax register (R.A. No. 2070, as amended by R.A. No. 5268; P.D. No. 379, as
amended by P.D. Nos. 417 and 631);
(n) Obtaining information on potential taxpayers from government offices and officers and from other
persons (Sec. 5);
(o) Inventory taking of stock-in-trade and conducting surveillance of business operations of a taxpayer
(Sec. 6[c]);
(p) Prescribing presumptive gross sales and receipts (ibid.);
(q) Termination of the taxable period (Sec. 6[d]);
(r) Prescribing real property values (Sec. 6[e]);
(s) Inquiring into bank deposit accounts of a decedent, a taxpayer who offers to compromise his tax
liability, or a specific taxpayer subject of a request for the supply of tax information from a foreign tax
authority pursuant to an international convention or agreement on tax matters to which the
Philippines is a signatory or party (Sec. 6[f]); and
(t) Requiring the registration of taxpayers (Sec. 236).
(2) Judicial:
(a) Ordinary civil action; and
(b) Criminal action (Secs. 205, 220, 221).
Remedies available to the taxpayer in connection with the collection of tax.
The remedies available to the taxpayer in connection with the collection of the tax are:
(1) Administrative:
(a) Before payment. —
1. Filing of petition for reconsideration or reinvestigation (Sec. 228; Secs. 7, 11, R.A. No. 1125, as
amended by R.A. No. 9282); and
2. Entering into compromise (Sec. 204).
(b) After payment. —
1. Filing of claim for credit; and
2. Filing of claim for refund. (Secs. 204, 230)
(2) Judicial:
(a) Civil action. —
1. Appeal to the Court of Tax Appeals (Sec. 11, R.A. No. 1125, as amended by R.A. No. 9282);
2. Action to contest forfeiture of chattel (Sec. 21); and
3. Action for damages (Sec. 227).
(b) Criminal action. —
1. Filing of criminal complaint against erring Bureau of Internal Revenue officials and employees
(Sec. 269).
Construction of provisions of our Tax Code.
Many of the provisions of our Tax Code are basically American in origin. Hence, the interpretations or
constructions they have received in the United States have persuasive effect in our jurisdiction.
The rule is that where a local rule is patterned or copied from that of another country, then the decisions
of the courts in such country, construing the rule are entitled to great weight in interpreting the local
rule. (People vs. Pagpaguitan, 315 SCRA 226 [1999].)
CASE to digest and read:
1. Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue
G.R. No. L-22074, August 30, 1968
2. Lutz v. Araneta
G.R. No. L-7859, December 22, 1955
3. CIR v. Court of Appeals and CTA (Yabut v. CIR)
G.R. No. 108576, January 20, 1999
4. Ormoc Sugar Company v. Treasurer of Ormoc City
G.R. No. L-24322, February 17, 1968
