A REVIEW OF THE GENERAL PRINCIPLES OF TAXATION

By: Atty. Rommel Mirasol

A. Three Inherent Powers of the State

1. Police Power (Salus Populi Est Suprema Lex) – power of the state to enact rules and regulations
for the general welfare of the people;

2. Eminent Domain – power of the state to take private property for public use, upon payment of
just compensation

3. Taxation - is the process or means by which the sovereign, through its lawmaking body, raises
income to defray the necessary expenses of the government.

B. Two-fold Nature of Taxation

1. Inherent in character – it means that it co-exists with the State.

- if there is a state, it is understood that the State ,thru its government has the power to tax its
citizens
- it dusnt need a law.

2. Legislative in Character – the power to tax is EXCLUSIVELY lodged in the Congress.

- what are the three branches of the govt? What are its functions?
- example , law saying that wearing a BLUE shirt is illegal.
Congress makes the law, administrative dept, enforces the law, judiciary settles conflict whether
the law means Dark Blue, or Light Blue.

C. Doctrines or Theories about the Importance of Taxation

1. Lifeblood Theory

- Taxes are the lifeblood of the government and their prompt and certain availability are an
imperious need. A government cannot continue to exist and operate without financial means.
This inherent power gives the government the right to tax citizens and properties within its
jurisdiction.

Taxation is likened to a human body’s blood. With out blood, we cannot survive. In the same
way, the state, the country cannot survive without taxes

2. Necessity Theory
- Taxation is a power predicated upon necessity. It is a necessary burden to preserve the State’s
Sovereignty.
Ex.
a. Navy to defend the state’s shores from invasion;
b. Public improvement for the enjoyment of its citizens and those who are within its
territory;
c. Army to resist aggression.
 3. Benefits-protection Theory
- Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed
for the lack of the motivation to activate and operate it. Hence, despite of the natural reluctance
of a person to surrender part of their hard-earned income to the government, 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 value.

This theory should dispel or eradicate the notion that taxes are nothing but arbitrary methods of
exacting money from the people. Taxation is viewed as a give and take system between the
people and the government. We give taxes, the govt takes them. In turn, the govt gives us
protection thru its projects and services

D. Objectives of Taxation

1. Revenue Objectives
You are all familiar with the term revenue right? Revenue means raising money, profit or income.
So, one objective of taxation is of course raising money to defray the expenses of the
government.
2. Non Revenue Objectives (PIER)
Aside from raising money for govt expenses, taxation is also used for purposes other than money.
How?
a. Protection of Local Industries;
How can taxes protect local industries from foreign competition?
- high tariff rates on imported products
- our local industries and products are protected
b. Implementation of the Police Power of the State;
- rmember Police Power? The power to enact laws that regulate private rights?
-clue, night clubs, gambling businesses
c. Encourage local industry for economic progress;
By granting tax exemptions to local industries
d. Reduce Social Inequality by the equitable distribution of property.
Inequality is ever present..taxes aim to reduce this.
Higher income tax base, higher income tax rate. Lower, lower.

E. Aspects of Taxation

1. Levying of the Tax – Legislative; By Congress

2. Collection of the Tax levied – Administrative; Through BIR
We discussed the three branches earlier. Making of tax laws, by the congress, collection, by
administrative dept.

F. Basic Principles of a Sound Tax System (FAT)

1. Fiscal Adequacy – revenue raised must be sufficient to meet government expenditures;

 This is simple and practical. If the revenue raised thru taxation duz not meet the expenses, then
there is no use for taxes at all.
2. Administrative Feasibility – tax laws must be clear and concise; capable of proper and effective
enforcement and not burdensome;
What does this mean. By the term feasible, what do u understand by the phrase Administrative
feasibility..Feasible...to administer.

The most dramatic sounding principle of taxation. It sounds like a title of a john grisham novel or
a movie...

3. Theoretical Justice – tax imposed must be based on the taxpayer’s ability to pay.

Now, taxation is a very intrusive and comprehensive power of the government. It is

comprehensive because, it affects us from the moment we are born until we die and even beyond that. So
from cradle to the grave, taxation affects our lives. That is why, it is important that there should be
limitations on the power of taxation. Otherwise, it may be abused by those who are in power...by the
government.

G. Limitations on the Power to Tax

1. Inherent Limitations (PINET)

They are inherent because it automatically attaches with the power of taxation. If there is
taxation, there are these limitations. They do not need a law for their existence.

a. Public Purpose;
b. International Comity;
c. Non Delegation of Taxing Power
d. Exemption of govt. Agencies and instrumentalities from taxation;
e. Territoriality.
2. Constitutional Limitations – Limitations provided for by the different provisions of the
Constitution.
As the name implies, these limitations, exist because they are provided for by the Constitution.
There are a lot actually, im just gonna discuss a few important ones.
Exemption of Religious Entities from taxation
- churches, sects, and other duly recognized religious organizations are exempt from paying taxes
in so far as their income from religion related activities are concerned. But if they engage in
businesses that are proprietary, and no longer connected with the spreading of the “good word”,
then they may be taxed
Take for example the Gideon Case

Another example would be the exemption of Educational Institutions from taxation. Basically it
follows the same principle as the religious entities.
H. Classification of Taxes

So what are the kinds of taxes? How are they classified? It is important for us to be familiar
with the classification because it affects the rates of taxes, their manner of collection and as to who
has the authority to collect these taxes.

1. As to subject matter
a. Personal, poll or capitation – tax of a fixed amount imposed on individuals
Ex. Community tax
b. Property tax – tax imposed on property whether real or personal
Ex. Real Estate Tax
c. Excise tax – tax imposed on the performance of an act, the enjoyment of a privilege or
engaging in an occupation.
Ex. Income tax, donor’s tax, value added tax.

2. As to who bears the burden

a. Direct – Tax demanded from persons who are intended or bound by law to pay the tax. Ex.
Community tax, income tax, estate tax.
b. Indirect tax – tax which the tax payer can shift to another. Ex. Value-added tax, customs duties.

Why is VAT called an Indirect tax?

- because in VAT, the person to be taxed is actually the seller. The tax is imposed on the
activity of SELLING. But, the seller in turn pushes this burden to the buyers by making it a
part of the cost of the goods or services purchased by the consumer or customers.

3. As to determination of amount
a. Specific – Tax imposed based on a physical unit of measurement, as by head or number,
weight, or length or volume.
Ex. Tax on wines, cigars, fireworks, etc.

b. Ad Valorem – Tax of a fixed proportion of the value of property; needs an independent

appraiser to determine its value.
Ex. Real Estate Tax, Gasoline Tax, etc.

4. As to Purpose
a. General, fiscal or revenue – tax with no particular purpose or object for which revenue is
raised, but is simply raised for whatever need may arise.
Ex. Income tax, value added tax.

b. Special or Regulatory – Tax imposed for a special purpose regardless of whether revenue is
raised or not, and is intended to achieve some social or economic end.
 Ex. Protective tariffs or customs duties on certain imported goods to protect local industries
against foreign competition.

5. As to authority imposing the tax or scope

a. National tax – tax imposed by the national government.
Ex. Internal revenue taxes, tariff and customs duties.

b. Municipal or local – tax imposed by the national governments for specific needs.
Ex. Real estate taxes, municipal licenses

6. As to graduation or rate
a. Proportional – tax based on a fixed percentage of the amount of property income or other
basis to be taxed.
Ex. Percentage taxes, real estate taxes

b. Progressive or graduated – tax rate increases as the tax base increases.

Ex. Income tax, estate tax, donor’s tax.

c. Regressive – tax rate decreases as the tax base increases.

Ex. Value-added tax.

I. Essential Characteristics of a Tax

1. It is an enforced contribution;

Why are taxes an enforced contribution? Its because there is law which mandates or tells us that
we must pay taxes, other wise, there are corresponding penalties for its non payment.

2. It is levied by the law making body (legislative department);

As we have discussed last meeting, it is the legislative department or the congress who enacts tax
laws. Why is this? It is because taxation is grant by the people who allow themselves to be taxed.
It is only fitting that it should be enacted by the very people who we elected to represent us in the
government...namely the congressmen.

3. It is proportionate in character;
Meaning it depends on the tax payer’s ability to pay. Rmember theoretical justice?
4. It is generally payable in money;
Question. Why is it that taxes are payable in money? Why not in kind? Like, when its time to file
ur income tax returns but u don’t have cash to pay the BIR, why cant u insist that ull use ur
chickens, or ur cellphones or laptops to pay ur taxes?
 - the answer is Administrative feasibility. Who can rmember what that means?
- it means that, our tax system must be one that is practicable and easy to administer. Imagine if
taxes could be paid in kind? It would be utter chaos.

5. It is imposed for the purposes of raising revenues; and

6. It is to be used for public purpose.

J. Situs of taxation

this refers to the place of taxation. The rule is that the State may rightfully levy
and collect the tax where the subject being taxed has a situs under its jurisdiction.
The situs of taxation is determined by a number of factors:

This is in accordance with the principle of Territoriality of Taxation.

1. Subject matter – or what is being taxed. He may be a person or it may be a property, an

act or activity;
2. Nature of the tax – or which tax to impose. It may be an income tax, an import duty or a
real property tax;
3. Citizenship of a tax payer; and
4. Residence of the tax payer.

Rules on the situs of taxation

1. Persons – residence of a tax payer

Take for example the community tax, it is a personal tax as we have discussed. So the
rule is that only the municipality or the city in which the person resides can tax him with
the community tax

2. Real property or tangible personal property – location of the property

Example for this is ur real estate tax. If a land property is located in dgte, then only the
city of dgte may tax it..not any other city or municipality.

3. Intangible personal property – as a rule, situs is the domicile of the owner unless he has
acquired a situs elsewhere.
Examples are trademarks, patents, copywrights. These are intangible properties..meaning
u cannot see them, touch them, feel them but they are capable of ownership. The rule is
that the place that can tax these is the place where the owners of these properties reside.

4. Indome – taxpayer’s residence or citizenship, or place where the income was earned.

5. Business, occupation and transaction – place where business is being operated,

occupation being practiced and transaction completed.
 6. Gratuitous transfer of property – taxpayer’s residence or citizenship, or location of the
property.

K. Tax Laws

Sources of tax laws

1. Constitution;
2. Statutes and Presidential Decrees;
3. Revenue Regulations by the Department of Finance;
4. Rulings issued by the Commissioner of Internal Revenue and Opinions by the Secretary
of Justice;
5. Decisions of the Supreme Court and the Court of Tax Appeals;
As i have mentioned during our last meeting, Decisions of the Supreme Court become
law, and you can no longer appeal from it. Which means that if u have a case, and it
reaches the supreme court, and the court decides on it...it becomes final. You can no
longer appeal.
There’s this joke that goes around the legal community. Girls, rmember, if a lawyer..or a
law student hits on you..and uses pick up lines, one of which is “ur so beautiful, your face
is like the supreme court” it may sound really flattering... u myt think na “this guy really
thinks im beautiful coz im compared to the highest court in the country..” girls, think
again.
Since u are compared to the SC, what he myt be saying is that, “ur face no longer has an
appeal”

6. Provincial, city, municipal and barangay ordinances subject to limitations set forth in the
Local Government Code; and

7. Treaties or international agreements the purpose of which is to avoid or minimize double

taxation.

Interpretation and Construction of Tax Statutes

The recognized rules in interpretations of other laws also apply to tax laws. As in
other laws, the intention of the law makers is the primary concern. However, if there is a doubt as to
in determining the law makers’ intentions, the doubt must be resolved in favour of the tax payers
and against the taxing authority (government).
 Taxation is a very intrusive power of the state. From the day a person is born, till the day
he dies and even beyond that, taxation is ever present. From cradle to the grave. Because of the
comprehensiveness of this power, interpretation of tax laws is in favour of the taxpayer so as to avoid any
abuses on the part of the government.

The exeption to the general rule stated above is with regards to tax exemptions.
Tax exemptions are highly disfavored by law and are not to be presumed nor implied but must be
clearly expressed. A tax exemption must be strictly interpreted against the tax payer and in favor of
the government and a grantee claiming exemption must clearly prove his right to such exemption in
pursuance to law.

Internal Revenue Laws

Revenue law is a law passed for the purpose of authorizing the levy and collection of
taxes in some form to raise revenue. A revenue law is said to be national revenue law when it is
applicable all over the country.

The Bureau of Internal Revenue

 A bureau of the Department of Finance (Administrative)

 Mission is to collect taxes efficiently and effectively, for and at the least cost to the
government, through impartial and consistent enforcement of internal revenue laws;

Tax Collection System

 RA 8424 (Tax Reform Act of 1997) retained the “self-assessment system” of the old law;
 The taxpayer calculates the tax by himself or through an accountant, fills up his tax
return, files it with the proper tax office, and pays the tax due upon filing.

Powers and Duties of the BIR

 Composed of the Commissioner and 7 Deputy Commissioners

Duties of Commissioner:
1. Interpret tax laws and decide tax cases;
2. Obtain information and to summon, examine, take testimony of persons;
3. Make assessments and prescribe additional requirement for tax administration
and enforcement.

Duties of the Deputy Commissioners

1. Assessment and collection of all national internal revenue taxes, fees and
charges;
2. Enforcement of all forfeitures, penalties, and fines;
3. Execution of judgments in all cases decided in its favour by the CTA and
ordinary courts; and
 4. Administration of supervisory and police powers conferred to it.

L. Miscellaneous Doctrines Regarding Taxation

Prospectivity of Tax Laws

Taxes must be imposed prospectively and not retroactively. But if the intent of the law
makers is to apply it retroactively, such law must clearly state that the intention is such.

Prospectivity simply means, if a tax law is enacted to day, it has to effect tomorrow and in the
years to come...and not to affect the past.

Double Taxation

Double taxation per se is not forbidden if it is only indirect double taxation.

However, if it is direct double taxation, it invalidates the law. There is direct double taxation
when the following occurs:

1. Same property is taxed twice

2. The purpose for the tax is the same
3. Imposed by the same taxing authority
4. Imposed within the same place or jurisdiction
5. Imposed during the same taxing period
6. Same kind or character of tax

Set Off of Taxes

Taxes are not subject to set off or legal compensation. A person cannot refuse to pay a
tax because the government owes him an amount equal to or greater than the tax being collected.

In law, u have this thing called “set off” or to put in more simpler terms..”quits”

Example, u owe her a dept of say 100, and she owes u the same amount. Now, u both can say that
since u owe each other the same amount, u can set off ur debts and it will have the effect of releasing you
from ur contractual obligation towards each other.

Now, taxes dus not work in the same way. U cannot say that because last year u over paid ur taxes, this
year, u can set off ur overpayments against the taxes u owe. This is not allowed. Why? Because taxes are
not ordinary contractual obligations unlike a simple debt. Taxes are obligations that are provided for by
law it self. Remember lifeblood theory?it tells that there is a need for the prompt and early collection of
taxes.

If taxation is that important, and it is the obligation of every Filipino citizen to pay taxes. U get to ask, is
there a way out of it? Is there any escape from taxation? There is. There’s the legal way out, and there is
the illegal way out.

Escape from Taxation

 Tax avoidance – this is legal and allowed. This happens when a tax payer minimizes his
tax liabilities by taking advantage of legally available tax planning opportunities. Otherwise
known as tax minimization.

Tax Evasion – illegal and prohibited. Occurs when the taxpayer resorts to unlawful means
to lessen or to get away from his tax liability.

One example of this..which is a sad reality prevailing today is the under valuation of properties
sold. How does this happen?

Say for example ...