Un ive rs ity of San to To mas

Alfredo M. Velayo
College of Accountancy
Atty. G. Sebastian

Taxation I

General Principles in Taxation

Introduction.

The power of taxation is a fundamental power of the State. It is a power that can be used by the State
through its government to interfere with the rights of its inhabitants. Its study will definitely provide meaning to
its continued use by the State.

The exercise of this power is often most controversial because of its far-reaching effects. The common
man and the rich alike are affected to the extent of their shirts on their back.

This was clearly demonstrated when the Legislature passed Republic Act No. 9337 which, among others,
expanded the coverage of the Value-Added Tax that could trigger a rippling effect on national economy.
Soothsayer even predicted that this law sealed the fate of the government.

Definition or Concept of the Power of Taxation

The Power of Taxation is:

§ The inherent power of the sovereign exercised through the Legislature. (Nature of Taxation)
§ To impose burdens upon the subject and objects within its jurisdiction. (Scope of Taxation)
§ For the purpose of raising revenues to carry out the legitimate objects of the government. (Purpose of
Taxation)
University of Santo Tomas Page: 2
AMV College of Accountancy Atty. G. Sebastian

Nature of Taxation.
The nature of the power of taxation is two-fold:
1. It is an inherent power. As long as the state exists, this power can never be taken away. Thus,
the 1987 Constitution cannot destroy this power but may only prescribe its limitations.
2. It is a Legislative power. Essentially, since the structure of our government is a presidential
system, tax laws can only be started by the branch of the government that creates laws. This is the
legislative branch.

Scope of Taxation.

Query: What is the scope of taxation?1

Answer: The Power of Taxation is an imposed burden upon the subject and objects within its jurisdiction.

Query: How is the scope of taxation phrased?

Answer: It is phrased in a very broad sense that makes everything taxable. The only limitation is that every
taxable item must be within the authority or jurisdiction of the government.

Query: Is there a basis for the assumption of a much wider scope of imposition of taxes?
Answer: In Antero Sison vs. Ruben Ancheta (Gr. No. 59431, July 25, 1984), the Supreme Court said that the field
of state activity has assumed a much wider scope.

Areas which used to be left to private enterprise and initiative and which the government was called upon
to enter optionally, and only because it was better equipped to administer for the public welfare than is any
private individual or group of individuals, continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet the increasing social
challenges of the times.

Hence, the need for more revenues. It has to be availed of to assure the performance of vital state
functions.

Purpose or Objectives of Taxation.

The objectives of taxation are:

1. Revenue purpose.
2. Sumptuary purpose.
3. Compensatory purpose.

Revenue purpose. Why do we need to taxes? This is for the legitimate objectives of the government. The
government is not in the business of making profit. It is there to serve the people. If the government is burdened
with the thought of making money for its objectives, then service to the people will be set aside until there are
sufficient funds created by the government.

Sumptuary purpose. The power of taxation can be used for purposes other than revenues.
1. The state increases taxes on harmful substances in order to make them more expensive, thus,
limiting their consumption.
2. Protection from unfair competition.
3. Implement the police power of the state.
4. Encourage growth of local industries.
5. Reduce social Inequalities.

Compensatory purpose.
1. To achieve social justice thru the redistribution of income using the progressive system of taxation.
2. Maintain high level of employment.
3. Control inflation.

1
The scope of taxation asks to what extent taxes maybe imposed.
University of Santo Tomas Page: 3
AMV College of Accountancy Atty. G. Sebastian

Principles behind the Power of Taxation

Theory of Taxation.

The theory behind the enforced contribution for expenditures is:

§ Acceptance that governmental existence is a necessity.
§ Performance of governmental functions is for the benefit of the public in general.

Lifeblood Theory.

The Honorable Supreme Court dramatically emphasized “governmental existence is a necessity” when
they created this principle of tax law—the lifeblood theory. "Taxes are the lifeblood of the nation. Without
revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes,
the government would be paralyzed for lack of motive power to activate and operate it." (Commissioner of
Internal Revenue vs. Algue, Inc., et al., 158 SCRA 8)

The principle demonstrated that the power to tax is an essential right of government. Without taxes,
basic services to the people can come to a halt. Economic progress will be stunted, and, in the long run, the
people will suffer the pains of stagnation and retrogression.

Basis or Rationale of Taxation.

The justification of the exercise of the power of taxation by the State is:
1. Symbiotic relationship.
2. Jurisdiction.

Symbiotic relationship. It is the reciprocal duties of protection and support between the State and its citizens
and residents.2

"Taxes are what we pay for a civilized society. Without taxes, the government would be
paralyzed for lack of motive power to activate and operate it. Despite the natural reluctance to
surrender part of one's hard-earned income to the taxing authority, every person who is able
must contribute his share in running 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 vs. Algue, Inc., et al., 158 SCRA 8)

Jurisdiction. As a rule, the power of taxation can be exercised only within the State's territorial jurisdiction. The
symbiotic relationship can only be enforced by both parties if the government has some authority over the
territory. Otherwise, service that will be demanded by the taxpayer cannot be given by the government.

Situs of Taxation.

“Situs” means place of taxation. In tax, it means the state or political unit which has jurisdiction to
impose a particular tax. Situs of taxation is borne of the symbiotic relationship, as state or political unit that gives
protection has the right to demand support.

2
“I give that you may do.” The symbiotic relationship is demonstrated by this innominate contract. I give taxes to the government and the
government in return must protect me, provide service to me. It is symbiotic in character because the relationship will not be complete and
enforceable without cooperation from both parties. Dependence on the other party and vice-versa is called for. A party cannot exists without
the other party.
University of Santo Tomas Page: 4
AMV College of Accountancy Atty. G. Sebastian

As a general rule, the state or political unit that gives protection is also the situs of taxation. But it admits
of exceptions:
§ Where tax laws operate outside territorial jurisdiction (object outside but subject to tax). Example.
Taxation of resident citizens on their incomes derived from abroad. Protection is given while he is here in
the Philippines.
§ Where tax laws do not operate within the territorial jurisdiction of the state (object within territory but
not subject to tax). Examples. (1) When exempted by treaty obligations. (2) When exempted by
international comity.

General Principles of Taxation Illustrated

Theory of Taxation Basis of Taxation

§ Governmental Necessity § Symbiotic Relationship

§ Benefit to Populace § Jurisdiction

Lifeblood Theory Situs of Taxation

§ Taxes are the lifeblood of § State that gives the

the nation. Its availability protection has a right to
is an imperious need. demand support

Power of Taxation

Nature of Taxation Scope of Taxation Purpose of Taxation

§ Inherent attribute § Subject or Object § Revenue Raising

§ Legislative in character § Within Territory § Legitimate Objects

Principles of a Sound Tax System

[Based on Adam Smith’s Canons of Taxation]

Based on Adam Smith's Canons of Taxation, the principles of a sound tax system are:
1. Fiscal Adequacy.
2. Theoretical Justice.
3. Administrative Feasibility.

Fiscal Adequacy. The sources (proceeds) of tax revenue should coincide with, and approximate the needs of,
government expenditures. Neither an excess nor a deficiency of revenue vis-à-vis the needs of government
would be in keeping with the principle. [Sufficient]

Theoretical Justice. The tax system should be fair to the average taxpayer and based upon his ability to pay.
The 1987 Constitution requires taxation to be equitable. [Equality]

Administrative Feasibility. The tax system should be capable of being properly and efficiently administrative
by the government and enforced with the least inconvenient to the taxpayer. [Efficiency]

The non-observance of these canons does not render the tax impositions by the taxing authority invalid,
except to the extent that specific constitutional or statutory limitations are impaired.

Purpose: To ensure that the Lifeblood doctrine is met.

University of Santo Tomas Page: 5
AMV College of Accountancy Atty. G. Sebastian

LIMITATIONS TO THE POWER OF TAXATION

[ Taxation is an inherent power of the state. It need not be expressly conferred by the Constitution. Eh kung
hindi na kailangang isulat sa ating Konstitusyon ang kapangyarihang ito upang magamit ng ating gobyerno, hindi
kaya ito pagmulan ng pang-aabuso? ]

For all its plenitude, the power to tax is not without limitations. In this case, the function of the
Constitution is to set rules that will effectively limit this power. “The power to tax, to borrow from Justice
Malcolm, is an attribute of sovereignty. It is the strongest of all the powers of government. It is, of course, to be
admitted that for all its plenitude, the power to tax is not unconfined. There are restrictions. The Constitution
sets forth such limits. The Constitution as the fundamental law overrides any legislative or executive act that
runs counter to it. In any case, therefore, where it can be demonstrated that the challenged statutory provision
fails to abide by its command, then this Court must so declare and adjudge it null.” [ Sison vs. Ancheta ]

1. Inherent limitations
2. Constitutional limitations

Rationale: To prevent abuse on the exercise of the unlimited power of taxation

Inherent Limitations

A violation of these inherent limitations can amount to the taking of property without due process of law,
hence, in this sense, it can be said that any tax law contravening any limitation of taxation, in effect, will likewise
be unconstitutional. The inherent limitations are:
1. Taxation is for a public purpose.
2. No improper delegation of the taxing power.
3. Taxation is territorial.
4. Exemptions of government entities recognized.
5. Taxation is subject to international comity.

Taxation is for a public purpose. - The proceeds of the tax must be used:
(1) For the support of the State or
(2) For some recognized objects of government or directly to promote the welfare of the community.

Discussion:
§ Tax revenues should be devoted solely for public purpose. It should be utilized for public purpose in
such a manner that it will benefit the community in general. However, if a private person is incidentally
benefited, it does not defeat the public purpose principle.

§ The public purpose must exist at the time the enactment of the tax measure, not at the time of
expenditure.

No improper delegation of the taxing power. - What is sought to be prohibited is the improper delegation
of the taxing power. The power of taxation is exercised by the legislature whose members are the mere
delegates of the people. This power could not therefore be delegated by the legislature to other departments of
government, like the executive.

Discussion:
§ Instances of Proper delegation:
a. When authorized by the Constitution, e.g., Flexible tariff rates
b. Administrative delegation subject to the completeness test and sufficient standards test.
c. Treaty stipulations and international agreements
d. Delegation to local governments

Taxation is territorial. - Taxation may be exercised only within the territorial jurisdiction of the taxing
authority. Within the territorial jurisdiction, the taxing authority may determine the place of taxation. Reason:
University of Santo Tomas Page: 6
AMV College of Accountancy Atty. G. Sebastian

Symbiotic relationship. In CIR vs. Lednicky, the so-called “Protection Test” was established where the question
“whether it is taxable or not?” can be answered by asking whether the subject or object enjoys the protection of
the government.

Exemptions of government entities recognized. - Exemption is the general rule. Taxation is the exception.
It is just an expression of policy. See Mactan Cebu case.

Taxation is subject to international comity. - The Philippine Constitution has expressly adopted the
generally accepted principles of international law of the land. Under such tenets, for example, is that sovereignty
and equality of States must be observed which limit the taxing authority to impose taxes on sovereign states and
its instrumentalities.

Respect should be accorded to other sovereign nations. The power of taxation is a high prerogative of
sovereignty. The properties of other sovereign nations within the territory of the taxing authority should not be
subject to taxation as a measure of respect to a co-equal body.

Constitutional Limitations

Being inherent in sovereignty, taxation need not be clothed with any constitutional authority for it to be
exercised by a sovereign state. Instead, constitutional provisions are meant and intended more to regulate and
define, rather than to grant, the power emanating therefrom.
1. General restrictions
2. Specific restrictions

General restrictions
1. Due process clause
1. Freedom of the press
2. Religious freedom
3. Non-impairment clause
4. Law-making process
a. Bill should embrace only one subject expressed in the title thereof
b. Three readings on three separate days
c. Printed copies in final form distributed three days before passage
5. Presidential powers to grant reprieves, commutations and pardons and remit fines and forfeitures
after conviction by final judgment

Due process clause

Discussion:
§ Aspects:
a. Substantive - no tax could be collected unless there is law which provides for its
imposition/collection
b. Procedural - there should be notice and hearing; opportunity to be heard [Banco Espanol vs.
Palanca]
§ When Due Process may be invoked:
a. When there is a clear contravention of inherent or constitutional limitations in the exercise of
the tax power
b. Where a tax measure becomes so unconscionable and unjust as to amount to confiscation of
property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to
tax cannot override constitutional proscriptions [Tan vs. Del Rosario; Carag vs. Del Rosario]
§ Doctrines on Due Process in Taxation:
a. A tax assessment unsupported by unsubstantial evidence amounts to deprivation of property
without due process of law.
b. Compliance with strict procedural requirements must be followed effectively to avoid a
collision course between the State's power to tax and the individual's recognized rights.
University of Santo Tomas Page: 7
AMV College of Accountancy Atty. G. Sebastian

c. Scales must tilts in favor of an individual with a constitutional right to due process and equal
protection instead of the State's power to tax and its right to prosecute perceived
transgressors of the law

Freedom of the press

Discussion:
§ The press is not exempt from the taxing power of the State.
§ In granting a tax exemption, the law could take back the privilege anytime without offense to the
Constitution. By granting tax exemptions, the State does not forever waive the exercise of its
sovereign prerogative.
§ What is prohibited by the constitutional guarantee of free press are laws which single out the press or
target a group belonging to the press for special treatment or which in any way discriminates against
the press on the basis of the content of the publication. [Tolentino vs. Secretary of Finance, 249 SCRA
628 ]

Religious freedom
Discussion:
§ In American Bible Society vs. City of Manila, 101 P 386, an ordinance of the City of Manila imposing a
license fee on those engaged in the business of general merchandise could not be applied to ABS; sales
of bibles and other religious literature. Such license fee, when imposed, was actually imposed as a
condition for the exercise of the Sect's right under the Constitution.
§ VAT registration fee of P1,000.00 is not restrictive of religious freedom. It is imposed for the purpose
of defraying part of the cost of registration and not for the exercise of the privilege. It is a mere
administrative fee.
§ Free exercise of religion clause does not prohibit imposing a generally applicable sales and use tax on
the sale of religious materials by a religious organization.

Non-impairment clause
Discussion:
§ No law shall be passed impairing the obligation of contracts.
§ There must be a contractual relation between the State and the taxpayer.
§ Police power prevails over non-impairment clause.

Law-making process
a. Bill should embrace only one subject expressed in the title thereof
b. Three readings on three separate days
c. Printed copies in final form distributed three days before passage

Discussion:
§ The initiative for filing revenue, tariff or tax bills must come from the House of Representative on the
theory that, elected as they are from the districts, the member of the House can be expected to be
more sensitive to the local needs and problems.
§ It is not the law but the revenue bill which is required by the Constitution to "originate exclusively" in
the House of Representative.

Specific restrictions
(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system
of taxation. (Art. VI, Sec.28, par. 1)

Discussion:
§ Compliance with the criteria:
a. The laws operate uniformly on all persons under similar circumstances.
b. All persons are treated in the same manner, the conditions not being different both in
privileges conferred and liabilities imposed, favoritism and preference not allowed.
§ All taxable articles or kinds of property of the same class shall be taxed at the same rate.
§ But it allows valid classification. Here are the requisites:
University of Santo Tomas Page: 8
AMV College of Accountancy Atty. G. Sebastian

a. There is the existence of a substantial distinction;

b. The classification must be germane to the purpose of the law;
c. It must not be limited to the existing conditions;
d. It must be equally applicable to all the members of the same class.

(2) No person shall be imprisoned for non-payment of a poll tax. (Art. III, Sec.20)

(3) The Congress may, by law, authorize the President, to fix within specified limits, and subject to such
limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfages dues,
and other duties or imposts within the framework of the national development program of the Government. (Art.
VI, Sec.28, par. 2)

(4) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-
profit cemetery and lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation. (Art. VI, Sec.28, par. 3)

Note: It involves only property taxes. The phrase “actually, directly and exclusively used” means
primarily for such purpose.

Case: [1] YMCA vs. Collector; [2] Segovia vs. Commissioner of Internal Revenue; [3] Central Board of
Assessment Appeals vs. Herrera; [4] Abra vs. Aquino.

(5) No law granting any tax exemption shall be passed without the concurrence of a majority of all the
members of the Congress. (Art. VI, Sec.28, par. 4)

(6) 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 the purpose for which a special fund was created has been fulfilled or abandoned
the balance, if any, shall be transferred to the general fund of the Government. (Art. VI, Sec.29, par. 3)

(7) The President shall have the power to veto any particular item or items in an appropriation, revenue,
or tariff bill, but the veto shall not affect the item or items to which he does not object. (Art. VI, Sec.27, second
par.)

(8) The Supreme Court shall have the power to review and revise, reverse, modify or affirm on appeal or
certiorari, as the law or the Rules of Court may provide, find judgements or decrees of lower courts in xxx all
cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto. (Art.
VIII, Sec.5, par. 2)

(9) Each local government unit shall have the power to create its own sources of revenue and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with
the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local
governments. (Art. X, Sec.5)

(10) Local government units shall have a just share, as determined by law, in the national taxes which
shall be automatically released to them. (Art. X, Sec. 6)

All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively-owned, may likewise be entitled to such
exemptions subject to the limitations provided by law including restrictions on dividends and provisions for
reinvestments. (Art. XIV, Sec. 4[3])
*******
“I give you my word, if you are ready to believe that you will receive whatever you ask for in prayer, it shall be done for you.”