I.

TAXATION THE STRONGEST POWER OF THE STATE

INHERENT POWERS OF THE ESTATE The strongest power of the state is taxation because
without money, the government can neither survive nor
The Sovereign State is born and will continue to exist
dispense any of its other powers and functions
with its essential powers necessary for its survival.
effectively (Sison vs. Ancheta, G.R. No. 594131, 25 July
These powers are called inherent power because they
1984, 130 SCRA 199), it has the power to build and
exist as a central force in order that the government can
power to destroy.
command, maintain peace and orders, survive
irrespective of any constitutional provisions. Power to Destroy

Police Power Taxation is sometimes viewed as power to destroy in

such a way that lawful tax cannot be defeated just
Police power refers to the inherent power of the
because its exercise would be destructive or bring the
sovereign to legislate for the protection of health,
taxpayer into his insolvency.
welfare and morals of the community. It is exercised
usually to guard against excesses or abuses of individual The principle applies that an imposition of lawful
liberty. It is the power to protect citizens and provide regulatory taxes would be destructive to the taxpayers
for safety and welfare of the society. This power is and business establishments because the government
restricted by the “due process clause” of the can compel payment of t of taxes and forfeiture of
Constitution which provides that no person shall be property through the exercise of police power.
deprived of life, property and liberty without due
Power to Build
process of the law.
Tax is also a primary tool to creates, builds and sustain
This power may be exercised through taxation because
the upliftment of the general welfare as part of the
taxes may be levied for the enforcement of the public
continuous support to the other inherent power of the
welfare.
state that objectively promote the rights of every
Eminent Domain Power citizens.

Eminent domain is a power of the estate to take private DEFINITION OF TAXATION

property for the public purposes. It is founded upon the
A power by which an Independent State, through its
idea that the common necessities and interest of the
law-making body, raises and accumulate income from
community transcend individual rights in property as for
its inhabitants to defray the necessary expenditures of
the purpose of the general welfare. Since it is inherent
the government.
in sovereignty pertinent provisions in the Constitution
are not grants for the power, but upon limitation of the The taxation is a term from which the taxing authority,
exercise, provided that the property may not be taken usually a government, levies imposes a tax. The term
without just compensation (full monetary equivalent to taxation applies to all types of involuntary levies, from
the property taken for public purposes). income to capital gains to estate taxes. (Investopedia)
Taxation Power NATURE OF TAXATION
The power to enforce contributions to support the The nature of taxation refers to its basic concepts or
government, and other inherent power of the State is characters. It is the power of the state through the
the Power of Taxation. country’s legislative body, in the Philippines tax laws are
passed both in the House of Representatives and the
Senate. As part of the principle of taxation states that
DISTINCTIONS OF THE POWERS OF THE STATE taxes are collected to support the government
expenditures and support services for public welfare.

This is known as the reciprocal duties of protection and

support between the state and its citizens. In a small
sense, the constitute obliges every individual to pay
taxes as a platform to support the government, in turn,
the government will used these funds to protect and
serve its people. The government must make use of
taxes wisely, rightfully and effectively.

PURPOSE OF TAXATION

The purpose of taxation may be classified as to:

Primary Purpose
 The primary purpose of taxation is to raise revenues it cannot continue without means to pay its
from all possible sources to support the government expenditures; and that it has a right to compel all its
expenditures and services and to promote the general inhabitants and property within its limit to contribute.
well- being and protection of its citizens. Without taxes, the government would be incapable in
performing its main functions.
Secondary Purposes
Basis - The basis of taxation is founded on the reciprocal
a) To strengthen anemic enterprises by giving tax
duties of protection and support between the State and
exemptions;
its citizens. The State receives taxes that will enable
b) To protect local industries against foreign
them to carry out its mandates into effect on the other
competition through imposition of high custom
hand the inhabitants will pay taxes portioned by his
duties on imported goods;
means.
c) To reduce inequalities on wealth and income by
imposing progressively higher tax rates; and A. Lifeblood Theory (Importance of Taxation)
d) To prevent inflation by increasing taxes or ward
It is said that taxes are what we pay for civilized
off depression by decreasing them.
society. Without taxes, the government would be
SCOPE OF TAXATION paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural
In the absence of restriction provided by the
reluctance to surrender part of one’s hard earned
Constitutions, the power of taxation is unlimited,
income to the taxing authorities, every person who
plenary (complete), comprehensive (wide extent of
is able to must contribute his share in running of
application), and supreme (highest degree).
the government.
If there is limitation at all, it is the sense of responsibility
B. Necessity Theory (Theory of Taxation)
by the members of the legislatives to the people that
restricts its exercise. Taxation reaches every subjects The power to tax is an attribute of sovereignty
and objects to be taxed, it may be trade or occupation, emanating from necessity.
persons whether natural or juridical, property whether
It is a necessary burden to preserve the State’s
real and personal, tangible or intangible, and the like.
sovereignty and a means to give the citizenry an
It is of course to be admitted for all its plenitude, the army to resist an aggression, a navy to defend its
power to tax is not without restrictions (Comm. vs. shores from invasion, a corps of civil servants to
Algue, G.R. No. L-28896, 17 Feb. 1988). Despite all its serve, public improvements designed for enjoyment
tenacity, taxation is nonetheless subject to established of the citizenry and those which come within the
limitations, such as those inherent in the power itself or State’s territory, and facilities and protection which
mandated by the constitutional precepts (Vitug, Tax a government is supposed to provide
Law and Jurisprudence, 3 Ed., p.4).
C. Benefit-Received Principle (Basis of Taxation)
CANON OF TAXATION
Taxation is described as a symbiotic relationship
The canon of taxation refer to the basic principles of a whereby in exchange of the benefits and protection
sound tax system. It includes the following; that the citizens get from the government, taxes are
paid.
a) Fiscal Adequacy- means that the taxes collected by
the BIR must be capable of adjusting to the variability of INHERENT VS. CONSTITUTIONAL LIMITATIONS
public expenditures.
Although taxation is a supreme therefore its exercise is
b) Theoretical Justice- refer to as “ability-to-pay” not absolute making it also limited to certain provisions.
principle, this means that the tax burden must be There are two types of limitations- the inherent and
proportionate to the taxpayer’s income. Thus, the constitutional limitations.
person who earns PHP 25,000 per month should not
INHERENT LIMITATIONS
pay the same amount of tax as a person earning PHP
60,000 monthly. Those which restricts the power although they are not
embodied in the constitutions. This are natural
c) Administrative Feasibility- means that the payment of
restrictions to safeguard and ensure that the power of
the taxes must be taxpayer’s friendly, i.e. tax laws must
taxation shall be exercised by the government only for
be capable of simple, just and effective administration.
the betterment of the people whose interest should be
Moreover, payment of taxes must also be accessible
reserved, enhanced and protected. (69 SCRA 460).
and convenient.
A. Taxes may be levied only for Public Purposes.
THEORIES AND BASES OF TAXATION
This means that the revenues collected from the
Theory - the power of taxation come along the theory people must be returned to them in the form of
that the existence of the government is a necessity; that security, peace and order maintenance, social and
 economic welfare. Such as the construction of Those limitations provided in the Constitutions. These
government hospitals, learning institutions, public limitations are more prone to change when a new
roads and bridges, etc. Constitutions are introduced in the country.

B. Non- delegation of the Legislative power to tax. Constitutional limitations restrict the supreme, plenary,
What has been delegated cannot be delegated. The unlimited and comprehensive exercise by the State of
people created a legislative department for the its inherent power to tax. Here are the Constitutional
exercise of legislative power. Since peculiarly and limitations of taxations;
exclusively legislative in nature, the power to tax
A. Observance of Due Process. No person shall be
laws cannot be exercised by the executive or
deprived of life, liberty, or property without due process
judicial branches of the government. Thus, his
of the law, nor shall any person be denied the equal
power should not be delegated to any other person
protections of the laws (Art. III, Sec. 1). This may be
nor body. However, the 1987 Constitution
applied to a taxpayer accused by tax evasion. Before the
delegates to local government units (LGU’s) the
person is penalized for the act, he must first be
power to tax subject to such limitations as may be
accorded his right to due process of law. Likewise, a
provided by Congress (Art. X, Sec. 5). Likewise, the
taxpayer may not be deprived of his property because
Congress cannot delegated the power to tax, except
of non- payment of taxes without giving a notice to him
to authorize the president, subject to limitations
as required by law by his tax liability. The purpose of
and restrictions, to improve tariff rates, import and
due process is to secure the individual from the abusive
export quotas, and other duties, etc. (Art. VI, Sec.
exercise of the taxing power of the government.
28, No.
B. Equal Protection of the Law. This means that all
C. The government entities are exempted from
persons must be treated alike under similar
taxation. The government obtains its revenues from
circumstances and conditions, both in the privileges
taxing the people. Taxing the government itself will
enjoyed and liabilities imposed. The purpose of this
not generate income, making it exempted from
Constitutional mandate is to protect persons belonging
taxation. However, the government agencies
to the same class against intentional and arbitrary
performing proprietary functions, like Land Bank of
discriminations. There is denial of equal discrimination
the Philippines (LBP) or Philippine National Railways
in the implementation of tax laws. For instance, a tax
(PNR), are generally subject to tax, except when
ordinance applicable to similar persons, firms or
exempted by their charter or the law creating them.
corporations in the same class which are subject to the
Likewise, all tax exemptions enjoyed by
same tax rates are tax impartially imposing the
government-owned or controlled operations
ordinance to some and favoring the others.
(GOCC’s) have been abolished. As a rule, Agencies
performing governmental functions are exempt C. Rule of Uniformity and Equity in Taxation. The rule
from tax unless expressly taxed, while those of taxation must be uniform, equitable, and progressive
performing proprietary functions are subject to tax (Article VI, Section 28.1). The reason for this is that all
unless expressly exempted (De Leon, persons, properties, or transactions are identical or
Comprehensive Review of Taxation [988], p. 28). similarly situated. This means that all taxable articles or
properties at the same class shall be taxed at the same
D. Territorial Jurisdictions. Only those persons,
rate. The classifications of subject of taxation must be
properties, and transactions situated within the
based on reasonable and substantial grounds.
territorial limits of the state are taxable. But all
Moreover, the tax laws and implementations must be
Filipino citizens who work abroad are still subject to
fair, just, reasonable and proportionate to one’s ability
taxation as long as they remain Filipino citizens.
to pay.
E. International Comity. Is the righteous
D. Non- Imprisonment of Non- Payment of Poll Tax. No
recognition, friendly agreement, interactions and
person shall be imprisoned for debt or non- payment of
respect accorded by one nation to the laws and
poll tax (Art. III, Sec. 20). A poll tax (personal or
institutions of another. Foreign ambassadors and
capitation tax) is a fixed amount imposed on individuals
their properties enjoy reciprocal tax exemptions. As
residing within specified territory. Individuals are not
a matter of international courtesy, property of one
required to pay community tax unless needed for job
state may not be taxed by another because of the
applications or other purposes.
principle of sovereign equality among states under
international law (Art. II, Sec. 2, Philippine E. Non- Impairment of the Obligations of Contract. No
Constitution). Since one State cannot exercise its law impairing the obligation of contracts shall be passed
sovereign dominion over another, a nation cannot (Art. III. Sec. 10). There is impairment if the law
impose taxes to the properties of other nations. substantially invalidates, releases, or extinguishes the
obligations of a contract, or that derogates substantial
CONSTITUTIONAL LIMITATIONS
contractual rights.
F. No Appropriation for Religious Purposes. Article VI,
Section 29 of the Constitution provides that no public
money or property shall be appropriated, paid or
employed for the use, benefit or support of any sect,
church, denomination, sectarian institution, or system
of religion, or of any priest, preacher, minister, or other II. TAXES
religious teacher, except when such priest, preacher Taxes are enforced proportional contribution from the
minister is assigned to the armed forces, or to any penal persons and property levied by the law-making body of
institution, or government orphanage or leprosarium. the State by virtue of its sovereignty in support of
This limitation is fundamentally supported by the government and all public needs.
principle that taxes can only be levied for public
purposes. NATURE OF TAXES

G. Exemption of Religious, Charitable or educational 1. Taxes are obligations created by law. Taxes arise
Entities, Non- Profit Cemeteries and Churches from from law and could only be imposed by the government
Taxation. These institutions are exempted from real and must be imposed even without previous agreement
property tax. between the government and the tax payers. Hence,
this creates the following:
H. Exemption of Revenues and Asset of Non- Stock,
Non- Profit Educational and Donations for Educational • Civil Liability. All taxpayers are civilly liable to pay
Purposes from Taxation. All revenues and assets of taxes because it is regarded as a forced charge assessed
non- stock, non- profit educational institutions used in accordance with some legislative rule of
actually, directly, and exclusively for educational apportionment.
purposes shall be exempt from taxes and duties. • Criminal Liability. Failure or refusal to pay give rise to
I. Non- Infringement of Religious Freedom. No law a criminal liability that could be the subject of criminal
shall be made respecting the establishment of religion, prosecution under existing laws.
or prohibiting the free exercise thereof. The free In taxation, it is one’s civil liability to pay taxes that give
exercise of religious profession and worship, without rise to criminal liability, unlike criminal cases where
discrimination or preference, shall forever be allowed. criminal liability give rise to civil liability. (Republic vs.
No religious test shall be required for the exercise of Patanao, July 12, 1967).
civil or political rights.
Note: Failure to pay tax does not render the business or
J. Congress Granting the Tax Exemption. Art. VI, Sec. occupation illegal. Moreover, tax liability may also be
28, paragraph 4 of the Constitution provides that “no retroactive in application through Tax Amnesty which
law granting any tax exemption shall be passed without will later be discussed on this book.
the concurrence of a majority of all the members of the
congress.” It shall be observed that the above 2. Taxes are generally personal to the taxpayer. Their
constitutional provisions requires the concurrence of a payment should be borne specifically by the person
majority of all the members of the Congress. with tax liability.

K. President’s Veto Power. Art. VI, Sec. 27 (2) of the Note: Taxes may also be transferable on which will be
Constitution provides that “every bill passed by the paid by a person other than the one on whom they
Congress shall, before it becomes a law be presented to legally imposed (e.g. VAT, Custom duties, Amusement
the President. If he approves the same, he shall sign it; tax, Excise tax on specific goods, Withholding tax and
otherwise, he shall veto it and return the same with his Percentage Tax). This will be discussed on the later
objections at large in its journal and proceed to chapters.
reconsider it…”. The president shall communicate his
CHARACTERISTICS OF TAXES
veto of any bill to the House where it originated within
thirty days after the date of the receipt thereof; a. Enforced Contribution. The imposition shall not be
otherwise, it shall become a law as if he had signed it. dependent upon the will of the taxpayer.

L. Supreme Court’s Final Judgement in All Tax Cases. b. Generally payable in money. Money is the preferred
“The Supreme Court shall have the power to review, payment of taxes. If property is taken to satisfy tax
revise, reverse, modify or affirm on appeal or certiorari, liability, the property is sold through public auction to
as the laws or the Rules of Court may provide, final satisfy the tax obligation.
judgements and orders of lower courts in all cases
c. Exclusively levied by the legislature. All tax laws shall
involving the legality of any tax, impost, assessments, or
originate in the congress.
toll or any penalty imposed in relation thereto.” (Art.
VIII, Sec. 5, par. 2[b].) d. Enforced on persons, properties or rights. Objects of
taxation are either tangible or intangible properties,
including business transactions.
e. Proportionate in character. The “ability to pay a. National – imposed by national government
principle” is the basic rule in collecting taxes. Those who Ex: Internal Revenue Taxes, Custom Duties
earn more, contributes more than those who earn
b. Municipal or Local – imposed by local government
lesser.
units
f. Imposed for the purpose of raising revenue. Taxes Ex: Sand and Gravel Tax, Occupation Tax
are the primary source of government funds to finance
its expenditures and all public needs. ✓ As to graduation or rate:

g. Generally prospective in application. The dates for a. Proportional or Flat Rate – based on fixed percentage
paying taxes are fixed by the law to comply with the of property, receipts or other basis to be taxed.
principle of administrative feasibility. Ex: Value-added Tax

CLASSIFICATION OF TAXES b. Progressive or Graduated Rate– rate increases as the

tax base increases.
Taxes may be classified as follows: Ex: Income Tax, Estate Tax, Donor’s Tax c.
Regressive – rate decreases as the tax base increases.
✓ As to subject matter or object:
Note: Tax imposition must be progressive to observe
a. Personal, capitation or poll – imposed on persons
equality or theoretical justice.
residing within a specified territory without regard to
their property or occupation. IMPOSITIONS OTHER THAN TAXES
Ex: Community Tax
1. Toll – amount charged for the cost and
b. Property – imposed in property whether real or maintenance of the property used.
personal. 2. Penalty – punishment for the commission of a
Ex: Real Property Tax crime.
3. Compromise Penalty – amount collected in lieu
c. Excise or Privilege – imposed upon the performance
of criminal prosecution in cases of tax
of an act, enjoyment of privilege, or engaging in an
violations.
occupation.
4. Special Assessment – levied only on land based
Ex: Income Tax, Donor’s Tax, Estate Tax
wholly on benefit accruing thereon as a result
✓ As to burden: of improvements or public works undertaken by
government within the vicinity.
a. Direct – both the incidence of or liability for the 5. License or Fee – regulatory imposition in the
payment of or liability for the payment of tax as well as exercise of the police power.
the impact or burden of the tax falls on the same 6. Margin Fee – exaction designed to stabilize the
person. currency.
Ex: Income Tax, Estate Tax, Donor’s Tax 7. Debt – a sum of money due upon contract or
b. Indirect – the incidence of or liability for the payment one which is evidenced by judgement.
if tax falls on one person but the burden thereof can be 8. Subsidy – a legislative grant of money in aid of a
shifted or passed on to another (statutory taxpayer) private enterprise deemed to promote the
Ex: VAT, other percentage taxes public welfare.
9. Custom Duties and Fees – duties charged upon
✓ As to determination of amount: commodities on their being transported into or
exported from the country.
a. Specific – fixed amount by the head, number or some
10. Impost – in its general sense, it signifies any tax,
standard of weight or measurement.
tribute or duty. In its limited sense, it means a
Ex: Excise Tax on distilled spirits, wines, liquors
duty on imported goods and merchandise.
b. Ad Valorem – fixed proportion of the value of 11. TITHE – imposes by a church or sect
property with respect to which tax is assessed 12. TRIBUTE – imposes by a monarch
Ex: Real Estate Tax
REVENUE
✓ As to purpose: Revenue refers to all funds or income derived by the
a. General Tax – levied for the general or ordinary government whether from tax or any other source. It
purposes of the government may derived from the following source:
Ex: Corporate Income Tax 1. Grants received from another government.
b. Special Tax – levied for special purposes 2. Donations from non-governmental sources
Ex: Sweetened Beverage Tax 3. Loans from private entities or another
government entity;
✓ As to imposing authority: 4. Commercial revenues such as those received by
government-owned or controlled enterprises;
 5. Administrative revenues such as fines, penalties
and forfeitures; and
CERTAIN DOCTRINES IN TAXATION
6. Taxes such as internal revenues and custom
duties. In the exercise of taxation power, some underlying
doctrines for its implementation are as follows:
TAX AS DISTINGUISHED FROM LICENSE FEE, SPECIAL
ASSESSMENT,TOLL AND DEBT ✓ EQUITABLE RECOUPMENT
TAX AS DISTINGUISHED FROM LICENSE FEE The doctrine which states that a tax claim for refund,
which is prevented by prescription, may be allowed to
be used as a payment for unsettled tax liabilities if both
taxes arise from the same transaction in which
overpayment is made and underpayment is due. This
doctrine is not applicable to cases where the taxes
involved are totally unrelated

✓ SET-OFF TAXES

This doctrine states that taxes are not subject to set-off

or legal compensation because the government and the
taxpayer are not mutual creditor and debtor of each
other.

Exception to this rule are the following:

1. Where both the claims of the government and the

taxpayer against each other have already become due,
demandable, and fully liquidated.

2. When there is an actual compromise between the

taxpayer and the tax officer.

NOTE: No set-off or compensation is admissible against

demands for taxes levied for general or local purposes.

✓ TAXPAYER SUIT

A “taxpayer suit” effected through court proceedings

and could only be allowed if the act involves a direct
and illegal disbursement of public funds derived from
taxation.

Therefore, the following legal questions would be

improper to be classified as taxpayer suit:

1. Where the disbursement does not involve funds

raised by taxation.

2. To stop the Commission on Election from holding an

exercise of suffrage or question its inaction to call a
special election.

✓ COMPROMISES

This doctrine states that compromises are generally

allowed and enforceable when the subject matter
thereof is not prohibited from being compromised and
the person entering such compromised is duly
authorized to do so.

The law allows the following persons to do compromise

in behalf of the government:

1. Only the BIR Commissioner is expressly authorized by

the Tax Code to enter into compromise for both civil
and criminal liabilities subject to certain conditions.
2. The Collector of Customs is given the power to NOTE: A law is said to be ex post facto if it provides for
compromise with respect to custom duties limited to the infliction of punishment upon a person for an act
cases where legitimate authority is specifically granted, done which, when such act was committed, is not
such as in the remission of duties. subject to any punishment.

3. The Customs Commissioner, subject to approval by ✓ IMPRESCRIPTIBILITY OF TAXES

the Secretary of Finance, has the power to compromise
cases involving the imposition of fines, surcharges and This rule states that unless otherwise provided by the
forfeitures; and tax law itself, taxes in general are not cancelable.

4. The Local Government Code has no provision Although the tax code provides for the limitation in the
regarding compromise; however, tax liability (not assessment and collection of taxes imposed such
criminal liability) is not prohibited from being prescriptive period will only be applicable to those taxes
compromised. Even so, there is no specific authority that were returnable. The prescriptive period shall start
given to any public official to execute the compromise from the time the taxpayer files the tax return and
so as to render it effective. declares his tax liability.

The court held that there is no time limit on the right of

✓ POWER TO DESTROY
the BIR Commissioner to assess taxes on unreasonable
The power of taxation is sometimes viewed as the accumulated earnings of the corporation.
power to destroy in the sense that a lawful tax cannot
NOTE: The law on prescription being a remedial
be defeated just because its exercise would be
measure should be interpreted liberally in order to
destructive or would bring about insolvency to a
protect the taxpayer.
taxpayer. The principle implies that an imposition of
lawful regulatory taxes would be destructive to the DOUBLE TAXATION
taxpayers and business establishments because the
government can compel payment of tax and forfeiture Double taxation means an act of the sovereignty by
of property through the exercise of police power taxing twice for the same purpose in the same year
upon the same property or activity of the same person,
✓ POWER TO BUILD when it should be taxed once, for the same purpose and
with the same kind of character of tax.
While tax power is so extensive that it seems it can
destroy, it is primarily a tool that creates, builds and The Supreme Court held that there is no constitutional
sustains the upliftment of social condition of the people
KINDS OF DOUBLE TAXATION
in general as it continuously supports the other inherent
powers of the State that preserve the fundamental A. Direct Duplicate Taxation/Obnoxious – double
rights of the people. Therefore, so as long as the tax is taxation in the objectionable or prohibited sense/ - This
exercised with caution to minimize injury to the constitutes a violation of substantive due process.
proprietary rights of a taxpayer and does not violate any
constitutional and inherent limitations, it is valid and Elements:
cannot be judicially restrained merely because of its 1. The same property or subject matter is taxed
prejudicial effects to a particular taxpayer. twice when it should be taxed only once.
2. Both taxes are levied for the same purpose
✓ PROSPECTIVITY OF TAX LAWS
3. Imposed by the same taxing authority
This principle states that a tax bill must only be 4. Within the same jurisdiction
applicable and operative after becoming a law. Thus, 5. During the same taxing period
the effectivity of the tax law commences upon its 6. Covering the same kind or character of tax
approval and its scope would only cover the present
and future transactions.
B. Indirect Duplicate Taxation/ Legal or permissible –
The retroactive application of tax laws shall only be
The absence of one or more of the above mentioned
applied unless there is a clear intent of the legislature
elements makes the double taxation indirect.
that such law shall also be imposed on past
transactions. REMEDIES AGAINST DOUBLE TAXATION
Consequently, the rule of “ex post facto” is not a. Tax sparing rule
applicable for tax purposes. However, when it comes to
civil penalties like fines and forfeiture (excluding b. Tax deductions
interest), tax laws may be applied retroactively unless c. Tax credits
they produce harsh and oppressive consequences that
violate the taxpayer’s constitutional rights regarding d. Exemptions
equity and due process. e. Treaties with other states
f. Principle of reciprocity TAX LAWS

NOTE: Double Taxation is not prohibited in the Tax Law is that body of laws which codifies all national
Philippines, it is only being discouraged. tax laws including income, estate, gift, excise, stamp
and other taxes. Such law compromises of the Republic
FORMS OF ESCAPING
Act 10963 otherwise known as the “Tax Reform for
A. SHIFTING – the process by which the tax burden is Acceleration and Inclusion (TRAIN) Law” which
transferred from the statutory taxpayer (impact of amended the old Republic Act 8424 or the “National
taxation) to another (incident of taxation) without Internal Revenue Code of 1997” on January 1, 2018
violating the law. under the presidency of Rodrigo Duterte.

IMPACT OF TAXATION – point on which tax is originally INTERNAL REVENUE LAW

imposed.
It includes all laws legislated pertaining to the national
INCIDENT OF TAXATION- point on which the tax burden government taxes, which is embodied in the TRAIN Law.
finally rests or settles down. Such legislation is commonly referred to under the
general term “revenue measures”.
B. CAPITALIZATION – a mere increase in the value of the
property is not income but merely an unrealized The main purpose of promulgating internal revenue
increase in capital. No income until after the actual sale laws is to raise money to meet the pecuniary needs by
or other disposition of the property in excess of its the government. Generally, it is imposed by the State
original cost. C. TAX AVOIDANCE – the exploitation by over its subjects without giving any direct and
the taxpayer of legally permissible alternative tax rates immediate equivalent in return for the payment.
or methods of assessing taxable property or income, in
INTERNAL REVENUE TAXES
order to avoid or reduce tax liability. D.
TRANSFORMATION – the manufacturer or producer Taxes imposed by the legislative body other than
upon whom the tax has been imposed, fearing the loss custom duties on imports. The following national taxes
of his market if he should add the tax to the price, pays are classified as Internal Revenue Taxes under the
the tax and endeavors to recoup himself by improving administration of BIR:
his process of production, thereby turning out his units
1. Income Tax
at a lower cost. E. TAX EVASION – the use by the
taxpayer of illegal or fraudulent means to defeat or 2. Transfer Taxes (Estate and Donor’s Tax)
lessen the payment of the tax.
3. Business Tax (VAT, Percentage Tax, and Excise Tax)
F. TAX EXEMPTION – a grant of immunity to particular
persons or corporations from the obligation to pay 4. Documentary Stamps Tax (DST); and
taxes. 5. Such other taxes as may be imposed and collected by
KINDS OF TAX EXEMPTION the BIR.

A. As to basis NATURE OF TAX LAWS

• Constitutional – immunities from the taxation The Philippine Internal Revenue laws are generally civil
which originate from the constitution. in nature;
• Statutory – those which emanate from
legislation. Basically, tax laws are not political in nature. They
B. As to form remain effective even if foreign invaders occupy our
• Express – expressly granted by organic or country.
statute law Although there are some penalties imposed for
• Implied - when particular persons, property or violations of tax laws, they are not penal in nature. This
excises are deemed exempt as the fall outside imposition is done only to effect timely payments of
the scope of the taxing provision itself. taxes or punishes tax evasion for neglect of duty by
C. As to extent those subjects of taxation.
• Total – absolute immunity
• Partial – one where a collection of a part of INTERPRETATION AND APPLICATION OF TAX LAWS
the tax is dispensed with
The supreme court has the exclusive power of
D. As to object
constructing and interpreting tax laws. As a rule, tax
• Personal – granted directly in favor of certain
laws must be construed with view to carrying out their
purposes
purpose and intent.
• Impersonal – granted directly in favor of a
certain class of property. The well-settled doctrine of “strict interpretation in the
imposition of taxes and other burdens”
General rule: In case of doubt as to whether a taxpayer 1. A tax bill is introduced in the House of
is covered or not, the doubt shall be resolved in favor of Representatives and is referred to the House
the taxpayer and strictly against the government. Committee on Ways and Means (First Reading).
2. The proposal is considered by the Committee
However, doubts as to validity of tax exemptions, are
on Ways and Means. Committee hearing and
resolved liberally in favor of the government and strictly
Public Hearings are held.
against the taxpayer
3. Tax bill is voted by the committee and is
Exceptions: reported out to the House of Representatives
for a vote. Deliberations by the members of the
1. When the statute granting exemption provides for house are held (Second Reading)
liberal constructions thereof; 2. Exemptions in favor of 4. If passed, the bill is transmitted to the Senate
the government, political subdivisions or for consideration and public hearings are also
instrumentalities. 3. Exemptions in favor of exemptees made.
traditionally exempt such as churches and educational 5. Upon approval by the Senate, both Senate and
institutions; and 4. Special circumstances to special House versions are sent to Bicameral
classes of persons such as the granting of exemptions to Conference Committee.
victims of eruption of Mount Pinatubo. 6. Two versions are generally dissimilar. Thus,
SITUS OF TAXATION conflict is reconciled in the Bicameral
Conference Committee.
Situs is a Latin term for “place” or “location”. It refers 7. A final bill, as approved by the Bicameral, is
to the place where taxes are to be paid. As a general then transmitted to the House and Senate for
rule, the taxing power cannot go beyond the territorial approval (Third Reading).
limits of the taxing authority. Taxes are paid where 8. If approved by the house and senate, it is sent
taxable entity can be found. to the president for approval or veto (Enrolled
Bill)
9. If the President approves the bill, he shall sign it
and the bill becomes a law. When vetoed, both
houses may override the veto by 2/3 votes of all
members.

The bill may become a law when President does not act
SOURCES OF TAX LAWS upon the measure within 30 days after it shall have
been presented to him.
A. The Constitution. The provisions of the Constitution
regulates the exercise of power of taxation. A revenue bill is one that levies taxes and raises funds
for the government, while a tariff bill specifies the rates
B. Statutory Requirements. This refers to the tax laws or duties to be imposed on imported articles (Cruz,
passed by the Congress. Philippines Political Law).
C. Administrative Rulings. Administrative Rulings are NOTES
the less general interpretation of tax laws which are
issued from time to tome by the Commissioner on A. Taxation
Internal Revenue. Regulations are intended to clarify or Taxation is the process or means by which the
explain the law and carry into effect its general sovereign, through its lawmaking body, raises income to
provisions by providing the details of administration and defray the necessary expenses of the government.
procedure.
Taxation is the inherent power of the sovereign,
D. Judicial Decisions. This refers to decisions of Court of exercised through the legislature, to impose taxes upon
Tax Appeals and the Supreme Court applying or subjects and objects within its jurisdiction to raise
interpreting tax laws. They constitute major part of the revenues for carrying out the legitimate objects of
jurisprudence on taxation. government.
LEGISLATIVE PROCESS Taxation is the action, process, or system of taxing
Generally, all revenue bills (proposal) must originate people or things.
from the House of Representatives. After passing 3 Taxation is a means of government to increase revenue
readings by a majority vote in technical committee, by collection of a share of individual and organizational
deliberation, and journals of congress. It shall be income under the authority of the law, purposely used
elevated to Senate, which needs to pass the same 3 to promote welfare and protection of its citizens.
readings. Normally, the president signs a bill to law for
its implementation.
PRIMARY AND SECONDARY PURPOSES OF TAXATION because it will result to a clear reduction in the
tax liability of the taxpayer.
1. Revenue or Fiscal Objective: Primary purpose of
taxation is to provide funds or properties to be TAX AMNESTY- This is immunity from all
able promote the general welfare and criminal and civil obligations arising from
protection of its citizens and to finance its nonpayment of taxes. It is general pardon given
multifarious activities. to all taxpayers; it applies only to past periods,
hence of retroactive application.

DOCTRINE OF EQUITABLE RECOUPMENT- It

states where the refund of a tax illegally or
erroneously collected or overpaid by the
taxpayer is barred by prescription, a tax being
assessed against a taxpayer may be recouped or
set- off against the tax whose refund is now
barred by prescription.

RULE ON SET OFF OR COMPENSATION- A claim

for taxes is not such debt, demand, contract or
THE BASIC FORM OF ESCAPE FROM TAXATION judgement as is allowed to be set-off, neither
are they a proper subject of recoupment since
A. Those that do not reduce the revenue collection
they do not arise out of the contract or
of the government
transaction.
1. Shifting- transfer of the tax burden by one on TAXPAYER’S SUIT- A taxpayer has sufficient
whom the tax is assesed to another. personality and interest to seek judicial
2. Capitalization- reduction in the selling price of assistance with a view of restraining what he
income- producing property by an amount believes to be an attempt to unlawfully disburse
equal to the capitalized value of future taxes public funds.
that may be paid by purchaser.
3. Transformation- the manufacturer or producer Illustration: X filed a taxpayer’s suit before the
strives to recover the tax that has been paid RTC questioning a loan contract entered into by
through lower production cost without the government because the interest expense
sacrificing the quality of the product therein is deemed to be higher than the lowest
bid. The court dismissed the case for reason
Shifting and Capitalization- escape through process that X has no personality to question the
of exchange contract as he was not a party to the contract.
In addition X failed to prove that he is directly
Transformation- through process of production
injured by the contract. Is the dismissal valid?
B. Those that result in loss of revenue to the (Mamba vs., Lara, 608 SCRA 149)
government
Answer: Under a taxpayer’s suit, the taxpayer
need not be a party to the contract to challenge
1. Tax Evasion (tax dodging) - fraudulent or
its validity. As long as taxes are involved, people
forbidden schemes or devices designed to
have a right to question contracts entered into
lessen taxes.
by the government. The "old direct injury test”
2. Tax Avoidance (tax minimization) - exploitation
in taxpayer’s suit has been relaxed as it involved
by the taxpayer of legally permissible tax rates
procedural technicality. It now uses
or methods of assessing taxable property or
“transcendental importance”, “paramount
income in order to reduce tax liability.
public interest” or “far reaching implication”
3. Exemption from taxation- grant of immunity to
where ordinary citizens and taxpayers were
particular persons or corporations from the
allowed to sue even if they failed to show direct
obligation to pay taxes.
injury to them as long as there is
Illustration: B who wishes to avoid the payment misappropriation of public funds, the class
of taxes assessable on the transaction was action of taxpayers’ suit may be availed of to
adviced by his tax consultant to make it appear question illegal disbursement. Hence, the
on the deed of sale that the selling price was dismissal is not correct.
only P 200,000 although it was actually
P300,000. Is ths tax evasion or tax avoidance?

Answer: This is tax evasion. Intentionally

decreasing the income without basis is illegal
 STEPS IN LEGISLATIVE PROCESS

Under 1987 Constitution, all 1revenue and

2tariff bills shall originate from the House of
Representatives

1Levies taxes and raises funds for the

government

2 Specifies the rates or duties to be imposed on

imported articles

FIRST READING

Committee Hearings, Public Hearings

SECOND READING in the HOUSE

SECOND READING in the SENATE

Upon Approval by the Senate, Senate and

House versions are sent to the Bicameral
Conference Committee

RECONCILIATION

THIRD READING (Reading of Title)

If Bicameral Conference Committee bill is

approved by House and Senate it is sent to the
President for approval or veto (Enrolled bill)
TAX LAW

The bill may become law if the President does

not act upon the measure within thirty (30)
days after it shall have been presented to him.