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TAXATION 1 Lecture Notes 2016-2017

GENERAL PRINCIPLES OF TAXATION


1. INHERENT POWERS OF THE STATE
Definition
Taxation - is the power by which the sovereign raises revenue to defray the necessary expenses of
the government.
Additional Notes: Taxes are the lifeblood of the government for without taxes, the
government can neither exist nor endure. The theory behind the exercise of the power to
tax emanates from necessity. The government cannot and must be estopped particularly in
matters involving taxes. On the other hand, collection of taxes should be made in
accordance with law as any arbitrariness will negate the very reason of government which is
to promote the common good.
Eminent Domain- affects only property RIGHTS. It may be exercised by some private entities. The
property forcibly taken under this power, upon payment of just compensation, is needed for
conversion to public use or purpose.
Police Power- is the power of promoting the public welfare by restraining and regulating the use of
both liberty and property of all the people.
Distinctions
1. As to who exercises
the Power

2. As to scope
3. As to purpose

4. As to Effect
5. As to amount of
Imposition

6. As to benefits
received

7. As to relation to the
constitution

TAXATION
Government only or its
political subdivision

All persons, properties


and rights
To raise revenue to
support the
government
Becomes public fund
No limit
(that is why taxation is
plenary provided that
it should not be
confiscatory)
Indirect benefit

Inferior to nonimpairment clause

EMINENT DOMAIN
Government or its
political subdivision or
public service company
or utilities
Sample. Telephone
companies
(PANTELCO), water
district and electric
companies (AKELCO)
Only a particular
property owner
For public use

Transfer of right to
property
No amount impose,
only the payment of
market values

Just compensation is
given to the owner of
the expropriated
property
Inferior to nonimpairment clause

POLICE POWER
Government only or
its political subdivision

All persons, properties


and rights
To promote general
welfare
There is restraint on
use of property
Amount is limited to
cover cost of license
and expenses of police
surveillance and
regulation
Indirect benefit

Superior to nonimpairment clause

2. THEORY OF (UNDERLYING BASES) TAXES


1.) Lifeblood theory
2.) Benefits protection theory (Symbiotic-relationship)

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3. PRINCIPLES OF A SOUND TAX SYSTEM (Canons of Taxation)
1.) Fiscal Adequacy revenue must be sufficient to meet the demands of public
expenditures (in consonance with lifeblood theory)
2.) Equality or theoretical justice based on ability to pay (ability-to-pay principle)
3.) Administrative feasibility - capable of convenient, just and effective administration
Note: The violation of Fiscal Adequacy and Administrative Feasibility does not invalidate the tax law,
however the violation of Equality or Theoretical Justice makes the tax law unconstitutional since the
Constitution mandates that the rule of taxation should be uniform and equitable.
4. ASPECTS OF TAXATION
1.) Levy or imposition of taxes (tax legislation)
2.) Collection of taxes (enforcement of tax laws by executive department aka tax
administration)
5. PURPOSE (OBJECTIVES) OF TAXATION
To raise revenue to finance government expenditures
Other purpose:
a. Reduce social inequality
b. Encourage the growth of local industries
c. Protect our local industries against unfair competition
d. Implement the police power of the state (regularity purpose)
6. LIMITATIONS ON THE TAXING POWER
A. INHERENT LIMITATIONS (SPEIN)
1.) Situx of taxation (territoriality)
Note: Mobilia Sequuntur Personam (Movables follow the person) - the situs of personal property,
wherever it was actually kept or located, was held to be at the domicile of its owner.
Section 104, Republic Act 8424 enumerates certain properties which have acquired actual situs in the
Philippines, viz.:
a. franchise exercised in the Philippines;
b. shares of stock, obligations, bonds issued by domestic corporations organized and constituted
in accordance with Philippine laws;
c. shares, obligations, bonds issued by a foreign corporation where 85% of its business is located
in the Philippines. It is subject to donor's tax and estate tax;
d. Shares, obligations, bonds issued by foreign corporations which has acquired business situs,
when such have been used in the furtherance of the business of the foreign corporation;
e. Shares/rights in a partnership business or industry established in the Philippines.
These properties are considered as situated, thus taxed, in the Philippines; the residence of their owners
is immaterial. Thus, the RULE: Irrespective of the owner, donor's tax or estate tax can be imposed upon
these properties. EXCEPT where the foreign country grants exemption or does not impose taxes on
intangible properties of Filipino citizens.
Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods
destined for consumption outside the territorial border of the taxing authority. Hence, actual export of
goods and services from the Philippines to a foreign country must be free of VAT while those destined for
use or consumption within the Philippines shall be imposed with 10% VAT (Now 12% under R.A. No.
9337). Export processing zones are to be managed as a separate customs territory from the rest of the
Philippines and, thus, for tax purposes, are effectively considered as foreign territory. For this reason,

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sales by persons from the Philippine customs territory to those inside the export processing zones are
already taxed as exports.
2.) Public purpose - They cannot be used for purely private purposes or for the
exclusive benefit of private persons.
3.) Exemption from taxation of government
4.) International comity (in principles of international law, states are regarded as
equal)
Note: One principle of international law which has attained wide recognition is the principle of Sovereign
Equality Among States. According to this principle, "states are juridically equal, enjoy the same rights,
and have equal capacity in their exercise. The rights of each one do not depend upon the power which it
possesses to assure its exercise, but upon the simple fact of its existence as a person under international
law."50 This principle, in turn, finds its roots in the rule of par in parem non habet imperium, where
even the strongest state cannot assume jurisdiction over another state, no matter how weak, or question
the validity of its acts in so far as they are made to take effect within its own territory.
5.) Non-delegability
Note: Withholding tax in private corporation is not considered as delegation of
taxing power
B. CONSTITUTIONAL LIMITATIONS (7)
1.) Due process of law (Sec.1 of Art. 3)
2.) Equal Protection Clause (Sec.1 of Art. 3)
3.) Taxation and Freedom of the Press (Sec.4 of Art.3)
4.) Taxation and Freedom of Religion (Sec.5 of Art.3)
5.) Non impairment Clause (Sec.10 of Art.3)
6.) Non imprisonment/Non-payment of Poll tax (Sec.20 of Art.3)
7.) Bills originate from House of Representatives (Sec.24 of Art.6)
Sample Case Tolentino vs. Sec. of Finance
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills,
bills authorizing an increase of the public debt, private bills and bills of local application must come
from the House of Representatives on the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to the local needs and problems. On
the other hand, the senators, who are elected at large, are expected to approach the same problems
from the national perspective. Both views are thereby made to bear on the enactment of such laws.
Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its
receipt of the bill from the House, so long as action by the Senate as a body is withheld pending
receipt of the House bill.

8.) Constitutional Requirement on the Subject and Title of Bills (Sec.26 Par.1 of Art.
6)
9.) Veto Power of the President (Sec 27 par.2 Art. 6)
10.) Uniformity and Equitability (Sec.28 par.1 Art.6)
11.) Progressive system of Taxation (Sec. 28 par.1 Art.6)
12.) Presidents Power to Tax (Sec.28 par.2 Art.6)
13.) Exemption from real property taxes (Art VI, Sec 28 (3), 1987 Constitution)
14.) Tax Exemptions (Sec.28. par.4 of Art. 6)
Sample Case John Hay vs. Lim
More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the
legislature, unless limited by a provision of the state constitution, that has full power to exempt any
person or corporation or class of property from taxation, its power to exempt being as broad as its

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power to tax.42 Other than Congress, the Constitution may itself provide for specific tax
exemptions,43 or local governments may pass ordinances on exemption only from local taxes.44
The challenged grant of tax exemption would circumvent the Constitution's imposition that a law
granting any tax exemption must have the concurrence of a majority of all the members of
Congress.45 In the same vein, the other kinds of privileges extended to the John Hay SEZ are by
tradition and usage for Congress to legislate upon.
Contrary to public respondents' suggestions, the claimed statutory exemption of the John
Hay SEZ from taxation should be manifest and unmistakable from the language of the law on
which it is based; it must be expressly granted in a statute stated in a language too clear to
be mistaken.46 Tax exemption cannot be implied as it must be categorically and unmistakably
expressed.47
If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and
incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227.
This Court no doubt can void an act or policy of the political departments of the government on either
of two grounds-infringement of the Constitution or grave abuse of discretion. 48
This Court then declares that the grant by Proclamation No. 420 of tax exemption and other
privileges to the John Hay SEZ is void for being violative of the Constitution. This renders it
unnecessary to still dwell on petitioners' claim that the same grant violates the equal protection
guarantee.

15.)
16.) No appropriation or use of public money (Sec.29 par.3 Art.6)
17.) Special Fund (Sec.29 par.3 Art.6)
18.) Non-impairment of Sovereign Courts, Jurisdiction over tax cases (Sec.5 of Art.8)
Sample Case Mactan Cebu Internation Airport (MCIA) vs. Hon. Marcos
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5, Article X of the Constitution. 22 Under the latter, the
exercise of the power may be subject to such guidelines and limitations as the Congress may provide
which, however, must be consistent with the basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the
payment of realty taxes imposed by the National Government or any of its political subdivisions,
agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the
exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only
exception to this rule is where the exemption was granted to private parties based on material
consideration of a mutual nature, which then becomes contractual and is thus covered by the nonimpairment clause of the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by
local government units of their power to tax, the scope thereof or its limitations, and the exemption
from taxation.
The supreme court held that the real properties of MIAA are owned by the Republic of the
Philippines and thus exempt from real estate tax. A government instrumentality like MIAA falls under
Section 133(o) of the Local Government Code, which states xxx, the exercise of the taxing
powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the
following: xxx (o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.

19.) Local Taxation (Sec. 5 of Art.10)


20.) Provisions regarding Allotments to Local Governments (Sec.6 of Art. 10)

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7. DOUBLE TAXATION means taxing the same subject twice when it should be tax only once.
5 Elements:
1.) Same kind of tax
2.) Impose on the same subject/object of taxation
3.) By the same taxing authority
4.) For the same purpose
5.) Within the same taxable period
KINDS OF DOUBLE TAXATION
1.) Indirect Double Taxation permissible kind of double taxation because taxes imposed are of
different character or by different taxing authority. In short, indirect double taxation are
allowable.
2.) Direct Double Taxation Objectionable or prohibited double taxation because it violates the
equal protection clause. When we speak double taxation, we usually refer to direct double
taxation.
Sample Case Villanueva vs. City of Iloilo
8. TAX is an enforced proportional contribution from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of the government and all
public needs.
Enforced meaning whether you like it or not if you are subject to a tax, you need to pay
From persons and property these are the subject to tax
Levied by the law making body of the State through tax legislation
By virtue of its sovereignty since it is inherent power of the state
For support of the government and all public needs because the purpose of taxation is to raise revenue

9.
1.
2.
3.
4.
5.
6.
7.

ATTRIBUTES OR CHARACTERISTICS OF TAX


Enforced contribution
Generally payable in money (not in kind)
Proportionate in character
Public purpose
Levied on persons and property
Levied by the law making body of the state
Levied by the state which has the jurisdiction over the person or property

10. CLASSIFICATION OF TAXES


a. As to subject matter/object
1.) Personal, Poll or Capitation Tax sample. Cedula/community tax certificate.
2.) Property tax sample. Real property tax
3.) Excise Tax /Privilege Tax a charge imposed upon a performance of an act, the
enjoyment of the privilege or engaging in an occupation, profession or a business.
example: you donate a property you pay a donors tax.
b. As to who bears the burden
1.) Direct tax is demanded from the person who also shoulders the burden of the tax.
2.) Indirect tax the burden is being shifted or passed on the others. (sample VAT)
c. As to determination of the amount
1.) Specific Tax - sample. In case liquor, tax is imposed amount according to the
number of bottles, say per bottle you pay 5php.

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2.) Ad valorem (Latin phrase which means according to value) sample. In case of liquor,
if for example one bottle cost 20php, the rate of excise tax is 20% per bottle.
Note: The higher the value of per bottle, the higher the tax is while if it is specific, per bottle is 5pesos
only regardless of the amount.
d. As to the purpose
1.) General sample. Income tax
2.) Special/Regulatory impose for special purpose sample. Customs duties, sin taxes
(Used for Philhealth)
e. As to the taxing authority
1.) Local/Municipal impose by the local government
2.) National impose by the national government
f. As to rate
1.) Proportionate/Proportional tax fixed percentage sample is VAT (12%), corporate
tax (35%).
2.) Progressive as the tax base increases the rate also increases (applicable in PH use
in income tax, donors tax and estate tax)
3.) Regressive as the tax base increase the rate decreases (not applicable in PH)
11. DISTINCTIONS BETWEEN TAX AND OTHER IMPOSITIONS
Special Assessment
Based fully on direct benefit
Exceptional both as to time and locality
Such exemption does apply

Levied only on land.


Imposed because of an increase in value of land
benefited by public improvement.
Contribution of a person for the construction of a
public improvement

Tax
Based on special or direct benefit
Tax can be paid annually
Exemption granted under Article 6 Section 28
paragraph 2 does not apply
(Presidents power to tax)
Levied not only on land.
Imposed regardless of public improvements
Contribution of a taxpayer for the support of the
government.

Special Assessment is in the nature of a tax upon property levied according to benefits conferred on the
property. The whole theory of a special assessment is based on the doctrine that the property against
which it is levied derives some special benefit from the improvement.
Sample: If you have a land however it is inaccessible, then the government constructed a road which
eventually made the same accessible. The effect makes the value of your land increase. In such case, the
government may impose a special assessment for you as the property owner because of the benefit
brought by the construction of the road.
Note: The power to levy such assessments is undoubtedly an exercise of the taxing power, but the
exercise of the taxing power in imposing an assessment does not necessarily make the assessment a tax.
License Fee or Regulatory Fee
A license fee is paid before the start of business
(sample payment of business permit)
A license fee may be surrendered with or without
consideration
Non-payment of license fee makes the business
illegal
Levied under the police power of the state.

Tax
A tax is normally paid after the start/operation of
business
Taxes cannot be surrendered except for lawful
consideration
Non-payment of tax does not make the business
illegal but a ground for criminal prosecution
Imposed under the taxing power of the state for
purposes of revenue.
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Exacted primarily to regulate certain businesses or
occupations.
Should not unreasonably exceed the expenses of
issuing the license and of supervision.
Imposed only on the right to exercise a privilege

Forced contributions for the purpose of


maintaining government functions.
Generally, unlimited as to amount

Toll
Paid for the use of anothers property.
Demand of proprietorship
Amount paid depends upon the cost of
construction or maintenance of the public
improvement used
Imposed by the government or by private
individuals or entities.

Tax
Paid for the support of the government
Demand of sovereignty
Generally, no limit on the amount collected as long
as it is not excessive, unreasonable or confiscatory

Imposed on persons, property and to exercise a


privilege.

Imposed only by the government


(because tax is non-delegable)

Toll Sample. Mag agi ka sa Express ways hay gabayad ka dahil ana it private entities ron.
Tariff
A kind of tax imposed on articles which are traded
internationally

Tax
All embracing term to include various kinds of
enforced contributions upon persons for the
attainment of public purposes

Tariff tax for importation and exportation


Penalty
Any sanction imposed as a punishment for
violation of law or acts deemed injurious
Designed to regulate conduct
May be imposed by the government or private
individuals or entities
Can be a subject of set off or compensation (see
Art. 1279, Civil Code)

Tax
Violation of tax laws may give rise to imposition of
penalty.
Generally intended to raise revenue
May be imposed only by the government

Debt
Generally based on contract, express or implied.
Assignable
May be paid in kind (dacion en pago)

Tax
Based on laws
Generally cannot be assigned
Generally paid in money

Sample. May utang ka nga 5k, nag abot ing tv tig


5k man. TV lang ing ginbayad.
Dacion en pago one of the form of payment
Can be a subject of set off or compensation (see
Art. 1279, Civil Code)
Imprisonment is a sanction for nonpayment of tax,
except poll tax.
Governed by the ordinary periods of prescription.
Draws interest when it is so stipulated or where
there is default.
Can be imposed by private individual

Cannot be a subject of set off or compensation

Cannot be a subject of set off or compensation


A person cannot be imprisoned for nonpayment of
debt (except when it arises from a crime),
Governed by the special prescriptive periods
provided for in the NIRC.
Does not draw interest except only when
delinquent
Imposed only by public authority

Sample case Republic vs. Mambulao Lumber Company


A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the

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remedy in an action or any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out
of the contract or transaction sued on. ...
The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts between the party and party
but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of
which, the personal consent of individual taxpayers is not required. ... If the taxpayer can properly
refuse to pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate and
necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the tax
must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government
will be thrown into great confusion.

Note: internal revenue taxes cannot be the subject of compensation. Government and taxpayer are not
mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off.
Sample case Melecio R. Domingo v. Lorenzo c. Garlitos
The court having jurisdiction of the estate had found that the claim of the estate against the
Government has been recognized and an amount of P262,200 has already been appropriated for the
purpose by a corresponding law. (R.A. 2700) Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by
operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both
debts are extinguished to the concurrent amount.
TAX PURSUIT is in a case where the act complaint of directly enforces the illegal disbursement
of public funds derived from taxation.
Requisites
1.) The money is being extracted and spent in violation of specific constitutional protections against
causes of legislative power
2.) The money is being neglected to any improper purpose
3.) The petitioner seeks to restrain respondents from wasting public funds thru the enforcements
of an invalid or unconstitutional law
Sample Case Pascual vs. Sec. of Public Works et.al.
Note: also applicable in Inherent Limitations of Tax Power under Public Purpose)
Nevertheless, in the case of Pascual v. Secretary of Public Works which challenges the law appropriating
a certain amount for the construction of a feeder road on a land owned by a private individual, the Court
held the law to be an invalid imposition since it results in the promotion of a private enterprise, it
benefits the property of a particular individual. The provision that the land shall thereafter be donated to
the government does not cure this defect. The rule is that, if the public advantage or benefit is merely
incidental in the promotion of a particular enterprise, such defect shall render the law invalid. On the
other hand, if what is incidental is the promotion of a private enterprise, the tax law shall be deemed "for
a public purpose."
12. FORMS OF TAX ESCAPE
1.) Shifting transfer of burden to tax payer. (but cannot be paid by direct taxes)
Sample: VAT in fast food

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2.) Capitalization reduction in the price of tax object equal to the capitalized value of future
taxes which the purchasers expects to pay
3.) Transformation - manufacturer or producer absorbs the tax
4.) Avoidance tax payer uses legally permissible alternative methods. The purpose of which is
to avoid or reduce tax liability.
5.) Evasion to lessen or defeat taxes. (illegal)
Sample: non-issuance of official receipts
6.) Exemption
Tax Avoidance (Tax minimization)
As to Validity
Legal and not subject to criminal liability
As to effect
Minimization of taxes
Tax Amnesty
Immunity from all criminal, civil and administrative
liability
Note: Granted to delinquent tax payers, du
bayaran it tax payer hay basic tax wala ng fines
and penalties
Retroactive application, applies only to past tax
periods

Tax Evasion (Tax Dodging)


Illegal and subject to criminal penalty
Absence of Tax Payments
Tax Exemption
Immunity from civil liability only
Note: wa ta gabayad du tax payer, Sample are
those charitable and religious institutions
Prospective in application

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