2017 BAR EXAMINATION
LAW ON TAXATION (2009), p.5) [hereinafter RECALDE]
PART I. GENERAL PRINCIPLES OF TAXATION
A. DEFINITION, CONCEPT, AND PURPOSE OF
TAXATION
Definition
Taxation is the power by which the
sovereign, through its lawmaking body, raises
revenue to defray the necessary expenses of the
government. It is merely a way of apportioning the
costs of government among those who in some
measure are privileged to enjoy its benefits and must
bear its burdens (51 Am. Jur. 34).
It is described as destructive, that which
interferes with the personal and property rights of the
people and takes from them a portion of their
property for the support of the government (Paseo
Realty and Development and Development
Corporation v. CA, G.R. No. 119286).
Three Elements of Taxation:
1. It is an enforced proportional contribution from
persons and properties;
2. It is imposed by the State by virtue of its
sovereignty; and
3. It is levied for the support of the government
(PCGG v. Cojuangco, G. R. No. 147062,
December 14,2001)
Two Concepts of Taxation:
1. Power to tax; and
2. The act or process by which the taxing power is
exercised (VITUG & ACOSTA, Tax Law and
Jurisprudence (2014), p.1) (hereinafter VITUG &
ACOSTA)
Purposes and Objectives:
1. Revenue-raising- revenues derived from taxes
are intended primarily to finance the government
and its activities (VITUG & ACOSTA, supra)
2. Non-revenue/Sumptuary purposes
a. Promotion of General Welfare- taxation may
be used as an implement of police power in
order to promote the general welfare of the
people (ABAN, Law of Basic Taxation in the
Philippines, Revised Edition, p.5)
[ hereinafter ABAN]
Illustration: Sugar Adjustment Act was
imposed to strengthen the economic sugar
industry (Lutz v. Araneta, G.R. No. L-7859,
December 22,1955).
b. Regulation- to discourage certain business
or the use of certain products that are not
illegal but considered as inimical to the
society-as illustrated by the high taxes, on
tobacco and alcohol products (RECALDE, A
Treatise on Tax Principles and Remedies
Illustration: Taxes imposed to rehabilitate and
stabilize a threatened industry, which is affected
with public interest, like the oil industry (Caltex
Philippines v. COA, G.R. No. 92585, May 8,
1992).
c. Reduction of social inequality/compensatory
purpose- to implement the social justice
provisions of the Constitution through the
progressive system of taxation, which would
result to equal distribution of wealth
(Southern Cross Cement Corporation v.
Cement Manufacturers Association of the
Philippines, G. R. No. 158540, August 3,
2005).
Illustration: The tax imposed on a person gets
higher as his income gets higher.
d. Encourage economic growth- as illustrated
by the grant of preferential tax treatment for
businesses that are registered with
Philippine Economic Zone Authority (PEZA),
Subic Bay Metropolitan Authority (SBMA)
and the like (RECALDE, supra at 5).
e. Protectionism- as illustrated by the
imposition of special tariffs
B. NATURE AND CHARACTERISTICS OF
TAXATION
Nature of Taxation
The nature of the states power to tax is two-
fold. It is both an inherent power and legislative
power.
1. Inherent power
Taxation is inherent in nature, being an
attribute of sovereignty. (Chamber of Real Estate
and Builders Association, Inc. v. Romulo, 614
SCRA 605 (2010))
As an incident of sovereignty, the power to
tax has been described as unlimited in its range,
acknowledging in its very nature no limits, so
that security against its abuse is to be found only
in the responsibility of the legislature which
imposes the tax on the constituency who are to
pay it. (Mactan Cebu International Airport
Authority v. Marcos, 261 SCRA 667 (1996))
The power of taxation is an essential and
inherent attribute of sovereignty, belonging as a
matter of right to every independent
government, without being expressly conferred
by the people. (Pepsi-Cola Bottling Company of
the Phil. V. Mun. of Tanauan, Leyte, 69 SCRA
460)
The power to tax is inherent in the State,
such power being inherently legislative, based
on the principle that taxes are a grant of the
 people who are taxed, and the grant must be
made by the immediate representative of the
people, and where the people have laid the
power, there it must remain and be exercised.
(Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, 559 SCRA 160 (2008))
2. Legislative power
The power of taxation is essentially a legislative
function. The power to tax includes the authority
to:
(1) determine the
(a) nature (kind);
(b) object (purpose);
(c) extent (amount of rate);
(d) coverage (subjects and objects);
(e) apportionment of the tax (general or
limited application);
(f) situs (place) of the imposition; and
(g) method of collection;
(2) grant tax exemptions or condonations; and
(3) specify or provide for the administrative as
well as judicial remedies that either the
government or the taxpayer may avail
themselves in the proper implementation of the
tax measure. (Petron v. Pililla, GR No. 158881,
April 16, 2008)
In other words, the legislature wields the
power to define what tax shall be imposed, why
it should be imposed, how much tax shall be
imposed, against whom (or what) it shall be
imposed and where it shall be imposed.
(Chamber of Real Estate and Builders
Association, Inc. v. Romulo, 614 SCRA 605
(2010))
Characteristics of Taxation
1. Comprehensive- It covers persons, businesses,
activities, professions, rights and privileges.
2. Unlimited- It is so unlimited in force and
searching in extent that courts scarcely venture
to declare that it is subject to any restrictions,
except those that such rests in the discretion of
the authority which exercises it (Tio v.
Videogram Regulatory Board, G.R. No. 75697,
June 18, 1987).
3. Plenary- It is complete. Under the NIRC, the
BIR may avail of certain remedies to ensure the
collection of taxes.
4. Supreme- It is supreme insofar as the selection
of the subject of taxation is concerned.
C. POWER OF TAXATION AS DISTINGUISHED
FROM POLICE POWER AND POWER OF
EMINENT DOMAIN
1. Purpose:
a. Taxation- To raise revenue
b. Police Power- To promote public
welfare through regulations
c. Eminent Domain- To facilitate the
taking of private property for public use
2. Amount of Exaction:
a. Taxation- No limit, but as much as
possible, must be equal to the needs of
the government in order to avoid a
deficit scenario for the State.
b. Police Power- Limited to the cost of
regulation, issuance of the license or
surveillance fee, except for non-usfeul
occupations wherein the exaction may
be very large (Physical Theraphy
Organization of the Philippines, Inc. v.
Municipality Board of the City of Manila,
G. R. No. L-10448, August 30, 1957).
c. Eminent Domain- No amount imposed;
just compensation is given the owner of
the expropriated property.
3. Benefits Received:
a. Taxation- No direct benefit is received
by the taxpayer, merely general benefit
of protection and promotion of public
welfare
b. Police Power- No direct benefit is
received, yet a healthy economic
standard of society is maintained.
c. Eminent Domain- A direct benefit
results in the form of just compensation
to the property owner
4. Non-impairment of Contracts:
a. Taxation- Contracts may not be
impaired
b. Police Power- Contracts may be
impaired
c. Eminent Domain- Contracts may be
impaired
5. Transfer of Property Rights:
a. Taxation- Taxes paid form part of public
funds
b. Police Power- No transfer but only
restraint on the exercise of property
rights
c. Eminent Domain- Transfer is effected
in favor of the State
6. Scope:
a. Taxation- Covers all persons, property
and excises
b. Police Power- Covers all persons,
property, rights and privileges
c. Eminent Domain- Covers only a
particular property
7. Who exercises the Power:
a. Taxation- May be exercised only by the
government or its political subdivisions
b. Police Power- May be exercised only
the government or its political
subdivisions
c. Eminent Domain- May be:
i. Exercised by the government or
its political subdivisions; or
ii. Granted to public service,
companies or public utilities
D. THEORY AND BASIS OF TAXATION
1. Life- blood theory- taxation is the
indispensable and inevitable price for civilized
society; without taxes, the government would be
paralyzed for lack of the motive power to
activate and operate it (CIR v. Algue, G.R. No. L-
28896, February 17, 1988). Thus, the collection
of taxes must be made without hindrance if the
State is to maintain its orderly existence.
For this reason:
a. Injunction generally does not lie against
the collection of taxes (CIR v. Cebu
Portland Cement Company, G. R. No. L-
29059, December 15,1987);
b. Taxes are not subject to set-off, as a rule
(Republic v. Mambulao, G. R. No. L-
17725, February 28,1962);
c. The State is not estopped from
collecting taxes by the mistakes or
errors of its agents (Philippine Guaranty
Co., Inc. v. CIR, G. R. No. L-22074, April
30,1965)
d. Tax exemptions are never presumed
and are strictly construed against the
taxpayer (Smart Communications, Inc. v.
City of Davao, G.R. No. 155491,
September 16,2008);
e. Taxation is plenary and unlimited in its
range (Chamber of Real Estate and
Builders Associations, Inc. v. Romulo,
G.R. No. 160756, March 9,2010; and
f. A valid tax may result in the destruction
of the taxpayers property
2. Necessity theory- the existence of the
government is a necessity. It cannot continue
without a means to pay its expenses and
therefore has a right to compel all citizens and
property within its power to contribute (51 Am.
Jur. 42)
3. Benefit- protection/ Reciprocity theory
(Doctrine of Symbiotic Relationship)- taxes
are paid for the enjoyment of the benefits of
organized society. Such enjoyment as well
extends to those members of a State who do not
pay taxes because they are not able to do so
(51 Am. Jur. 42-43).
A person cannot object to or resist the
payment of taxes solely because no personal
benefit to him can be pointed out arising from
the tax (Lorenzo v. Posadas, et.al G.R. No. L-
43082, June 18, 1937).
4. Jurisdiction over subject and objects- the
power to tax can only be exercised within the
territorial jurisdiction of a taxing authority (51 Am
Jur. 88), except when there exists privity of
relationship between the taxing State and the
object of tax.
E. PRINCIPLES OF A SOUND TAX SYSTEM
1. Fiscal Adequacy- sources of government
revenue must be sufficient to meet government
expenditures and other public needs (Chavez v.
Ongpin, G.R. No. 76778, June 6, 1990; Abakada
Guro Party List v. Ermita, G.R.No. 168056,
September 1, 2005). This is in consonance with
the doctrine that taxes are the lifeblood of the
government.
2. Administrative Feasibility- tax laws must be
capable of being effectively enforced with the
least inconvenience to the taxpayer.
The principle requires that each tax should
be clear and plain to the taxpayers, capable of
enforcement by an adequate and well-trained
staff of public officials, convenient as to time and
manner of payment and not duly burdensome
upon or discouraging to business activity
(Report of the Tax Commission of the
Philippines, February 1939, Vol. 1, pp. 23-31).
However, even if the imposition is burdensome
to the taxpayer, the tax imposition is not
necessarily invalid unless some aspect of it is
shown to violate any law or the Constitution
(Diaz v. Secretary of Finance, G.R. No.193007,
July 19, 2011).
3. Theoretical Justice- a sound tax system must
be based on the taxpayers ability to pay (Ability-
to-pay Theory). Our laws mandate that taxes
must be reasonable, just, fair, and conscionable.
Taxation must be uniform and equitable
(CONST. Art. VI, Sec. 28, par. 1).
Effects of Violation of the Principles
A tax law will retain its validity even if it is not
in consonance with the principles of fiscal
adequacy and administrative feasibility because
the Constitution does not expressly require so.
These principles are only designed to make our
tax system sound. However, if a tax law runs
contrary to the principle of theoretical justice,
such violation will render the law unconstitutional
considering that under the Constitution, the rule
of taxation should be uniform and equitable
(DIMAAMPAO, Tax Principles and Remedies
(2015), p.30) [hereinafter DIMAAMPAO].
F. SCOPE AND LIMITATIONS OF TAXATION
1. INHERENT LIMITATIONS
2. CONSTITUTIONAL LIMITATIONS
G. STAGES OR ASPECTS OF TAXATION
1. Tax Legislation (Levy)- enactment of a law
by Congress authorizing the imposition of
tax on persons, property or excises. It
includes:
a. Determination of the subject of
taxation;
b. Determination of the purposes for
which taxes shall be levied;
c. Fixing the rate of taxation; and
 d. Discretion as to the manner, means payment of tax ( Borja v. Gella, G.R. No. L-
and agencies of collection 18330(July 31,1963);
(DIMAAMPAO, supra at 19).
2. Tax Administration- act of administration Reason: The taxpayer is not allowed to
and implementation of the tax law by the settle his tax liability by conveying property
executive department through its in view of the problem of assigning value to
administrative agencies. It includes: such property (MAMALATEO, Reviewer on
a. Assessment; and Taxation (2008), p.8 [hereinafter
b. Collection MAMALATEO, Reviewer].
Rules on Assessment and Collection: 5. It is proportionate in character- taxes must
a. The ltax law must designate which be based on ability to pay in accordance
agency will collect the taxes; and with the constitutional mandate to Congress
b. The circulars and regulations issued to evolve a progressive system of taxation;
by the Secretary of Finance or the 6. It is levied on persons, property, and excise;
BIR Commissioner must be in 7. It is levied for public purpose/s;
accordance with the tax measures 8. It is paid at regular periods or intervals; and
imposed by Congress Examples:
(DIMAAMPAO, supra at 22). a. Income Taxes are paid quarterly and
3. Payment- act of compliance by the annually;
taxpayer, including such options, schemes b. Value-Added Taxes are paid
or remedies as may be legally available to monthly and quarterly
him (VITUG & ACOSTA, supra at 26). 9. It is personal to the taxpayer
4. Refund- the recovery of any tax alleged to Examples:
have been erroneously or illegally assessed a. Restitution by the heirs in case of
or collected, or of any penalty claimed to estate tax deficiency (NIRC,
have been collected without authority, or of Sec.91(c)); and
any sum alleged to have been excessively, b. Exemption from liability of
or in any manner wrongfully collected. stockholders in case of the
corporations tax delinquency
If what is delegated is tax legislation, the Exceptions:
delegation is invalid. If what is delegated is tax i. Stockholders may be held liable
administration, the delegation is valid (ABAN, for the unpaid taxes of a
supra at 56). dissolved corporation if it
appears that the corporate
H. DEFINITION, NATURE AND assets have passed into their
CHARACTERISTICS OF TAXES hands (Tan Tiong Bio v. CIR,
Taxes G.R. No. L-15778, April 23,1962)
Enforced proportional contributions from ii. When stockholders have unpaid
persons and property levied by the law-making body subscriptions to the capital of the
of the State by virtue of its sovereignty for the corporation, they can be made
support of the government and for public needs (1 liable to the extent of their unpaid
Cooley 62). subscriptions (ABAN, supra at 4).
They are not arbitrary exactions by contributions
levied by authority of law, and by some rule of I. REQUISITED OF A VALID TAX
proportion which is intended to insure uniformity of
contribution and a just apportionment of the burdens 1. That either the person or property taxed be
of government (1 Cooley 64; Question No. 1(A), within the jurisdiction of the taxing authority;
2004 Bar Examination). 2. That the assessment and collection of
certain kinds of taxes guarantee against
Characteristics of Taxes: injustice to individuals, especially by
1. It is imposed by the State which has providing notice and opportunity for hearing;
jurisdiction over the person, property, or 3. That it should be for a public purpose;
excises; 4. The rule of taxation shall be uniform; and
2. It is levied by the law-making body of the 5. The tax must not impinge on the inherent
State; and constitutional limitations on the power of
3. It is an enforced contribution- not dependent taxation
on the will of the person taxed, not a
contract but a positive act of the J. TAX AS DISTINGUISHED FROM OTHER
government; FORMS OF EXACTIONS
4. It is generally payable in money- generally, it
is a pecuniary burden payable in money, bt Tax v. Debt
backpay certificates may be used in 1. Basis:
 a. Tax- an obligation based on law 1. Basis:
b. Debt- an obligation based on contract or a. Tax- levied in the exercise of the taxing
judgment power
2. Effect on Non- Payment: b. License fee- emanates from police
a. Tax- failure to pay tax (other than poll power
tax may result in imprisonment 2. Purpose:
b. Debt- no imprisonment for non-payment a. Tax- primarily for revenue
of debt b. License fee- for regulation
3. Mode of Payment 3. Limitation on Amount
a. Tax- generally payable in money a. Tax- no limit
b. Debt- payable in money, property, or b. License Fee- limited to the cost of:
service i. Issuance of license; and
4. Assignability ii. Inspection and surveillance,
a. Tax- not assignable except for non-useful
b. Debt- assignable occupation (Physical Theraphy
5. Payment Organization of the Philippines,
a. Tax- generally, not subject to Inc. v. Municipality Board of the
compensation or set-off City of Manila, G.R. No. L-
b. Debt- may be subject to compensation 10448, August 30, 1957).
or set-off 4. When paid
6. Interest: a. Tax- normally paid after the start of
a. Tax- tax does not draw interest expect business operations
in case of delinquency b. License fee- normally paid before the
b. Debt- debt draws interest if stipulated or commencement of business operations
if the debtor incurs legal delay 5. Surrender
7. Authority a. Tax- taxes, being the lifeblood of the
a. Tax- imposed by public authority State, cannot be surrendered except for
b. Debt- imposed by private individuals lawful consideration
8. Prescription b. License fee- license fee may be with or
a. Tax- determined by NIRC without consideration
b. Debt- determined by the Civil Code 6. Effect of Non-payment
a. Tax- non-payment does not make the
Tax v. Special Assessment business illegal but may be ground for
1. Definition: criminal prosecution
a. Tax- enforced proportional contribution b. License fee- non-payment makes the
from persons or property business illegal
b. Special Assessments- enforced
proportional contributions from owners Tax v. Penalty
of lands especially or peculiarly 1. Definition:
benefited by public improvements a. Tax- enforced proportional
2. Subject: contribution from persons and
a. Tax- Taxes are levied on persons, property
property (which includes land), income, b. Penalty- sanction imposed as a
business, etc. punishment for violation of law or
b. Special Assessments- levied only on acts deemed injurious; violation of
land tax laws may give rise to imposition
3. Liability: of penalty
a. Tax- personal liability of the taxpayer 2. As to nature of burden:
b. Special Assessments- cannot be made a. Tax- tax is a civil liability. A person is
a personal liability of the person criminally liable in taxation only
assessed when he fails to satisfy his civil
4. Basis: obligation to pay taxes (Republic v.
a. Tax- based on necessity and partially on Patanao, G.R. No. L-22356, July
benefits 21,1967)
b. Special Assessments- based solely on b. Penalty- it is a punishment for the
benefits commission of a crime
5. Application 3. Purpose:
a. Tax- general application a. Tax- intended to raise
b. Special Assessments- special b. Penalty- designed to regulate
application only as to a particular time conduct
and place 4. Authority:
Tax v. License Fee
 a. Tax- may be imposed only by the 9. KINDS OF TAXES
government
b. Penalty- may be imposed by the: Situs of Taxation
i. Government; or Construction and Interpretation of
ii. Private individuals or Tax Laws
entities Tax Exemption and Exclusion
Tax v. Tariff Tax Rules and Regulations
a. Tax- all embracing term to include Penal provisions of Tax Laws
various kinds of enforced contributions Non-retroactive application to Taxpayers
from persons for the attainment of public Sources of Tax Laws
purposes Doctrines in Taxation
b. Tariff- a kind of tax imposed on articles Prospectivity of Tax Laws
which are traded internationally Imprescriptibility of Taxes
Double Taxation
Tax v. Compromise Penalty Power to Tax involves Power to Destroy
a. Tax- basic imposition on persons, Escape from Taxation
property, and excises Shifting of Tax Burden
b. Compromise Penalty- collected as a Tax Avoidance
compromise in cases involving Tax Evasion
violations of the tax laws, rules or Exemption frm Taxation
regulations Doctrine of Equitable Recoupment
Compensation and Set-off
Tax v. Subsidy Compromise and Tax Amnesty
a. Tax- levied by the law-making body of Taxpayers Suit
the State for the support of the Nature and Concept
government and for public needs As distinguished from a citizen
b. Subsidy- a legislative grant of money in suit
aid of a private enterprise deemed to Requisites of a Taxpayers suit
promote the public welfare challenging the
constitutionality of a tax
Tax v. Revenue measure or act of a taxing
a. Tax- a source of revenue of the authority; concept of locus
government standi, doctrine of
b. Subsidy- a broad term that includes not transcendental importance and
only taxes but income from other ripeness for judicial
sources as well. determination