Saint Louis University

SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES

Department of Business Laws and Taxation

INCTAXA_MODULE_1:

INTRODUCTION
POWER OF TAXATION

Elements of a state:
1. People
2. Territory
3. Government
4. Sovereignty

Fundamental powers of a state

POLICE POWER POWER OF TAXATION POWER OF EMINENT DOMAIN

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

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 Saint Louis University
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES
Department of Business Laws and Taxation

POLICE EMINENT DOMAIN TAXATION

Concept Enact laws to Take private property To collect taxes as

promote public for public purpose government revenue
welfare
Scope Much broader than Private property Comprehensive, plenary,
taxation unlimited, supreme

Authority Government Government / public Government

utilities
Delegation Expressly to LGUs Expressly to LGUs Cannot be delegated
except:
a) to LGUs,
b) by the Constitution,
c) tax administration
aspect only
Amount Recover cost of No cost No limit in general
service (limited) (unlimited)

Relationship with the Superior to the non- Superior Inferior (with limitations)
Constitution impairment clause

Limitation Public interest and Public purpose and just Constitutional and
due process compensation inherent limitations

Importance Most superior Important Most important

Similarities of The Three Powers:

1. Necessary attributes of sovereignty
• Sovereignty means supreme power to govern itself.
• Freedom from control
2. Inherent to the state
• Cannot be taken away as long as the state exists.
• It is permanent and essential to the existence of the state.
3. Legislative in nature
• Exercised through the legislative department by the enactment of laws.
4. Way the state interferes with private rights and properties
• Private rights and properties are affected by these powers.
5. Exists independently with the Constitution
• They are not granted in the Constitution because they are inherent.

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

Property of and
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 Saint Louis University
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES
Department of Business Laws and Taxation
• The provisions in the Philippine Constitution are NOT grant of powers but only
LIMITATIONS to the powers.
6. With equivalent form of compensation
• With consideration/award
7. May be exercised by the local government, with limits.

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POWER OF TAXATION

• Taxation as a “power” – inherent power

• Taxation as a “process” – act of levying and collecting taxes

3 Stages/Aspects of Taxation:
1. Levy – power to enact the tax law
2. Assessment
3. Collection Tax administration

• Taxation as a “mode of cost distribution”

✓ Taxation is a mode of allocating government costs or burden to the people.
✓ In distributing the cost or burden, the government regards Benefit Received and
Ability to Pay Theories as general considerations in the exercise of its taxation
power.
✓ Benefit Received Theory presupposes that the more benefit one received from the
government, the more taxes he should pay. Taxes are what we pay for a civilized
society (CIR v. Algue).
✓ The ability-to-pay philosophy of taxation maintains that taxes should be levied
according to a taxpayer's ability to pay. The idea is that people, businesses, and
corporations with higher incomes can and should pay more in taxes.

• The “theory” of taxation- necessity of funding of the government.

Q: What is so-called “Lifeblood Doctrine”?
✓ Consistent is the Supreme Court in ruling that “taxes are the lifeblood of the
government, and their prompt and certain availability is an imperious need.
✓ Taxes are the nation’s lifeblood through which government agencies continue to
operate and which the State discharges its functions for the welfare of its
constituents.”
✓ “without taxes, the government would be paralyzed for lack of the motive
power to activate and operate it.”

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

Property of and
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 Saint Louis University
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES
Department of Business Laws and Taxation

• Basis of taxation- mutual support between the people and the government (reciprocal
duties)
• Purpose/s of taxation
1. Revenue
2. Regulatory
3. Compensatory

• Objects of taxation
1. Persons
2. Properties
3. Excise

• Scope of Taxation
1. Comprehensive
2. Plenary (complete)
3. Unlimited
4. Supreme

• Nature of the power of taxation

1. Inherent power
2. Essentially legislative
3. For public purpose
4. Territorial in operation
5. Government is tax exempt
6. Subject to constitutional and inherent limitations

• Inherent limitations
1. Public purpose
2. May not be delegated
3. Territorial in jurisdiction
4. Subject to international comity
5. Government is tax exempt, in general

• Constitutional limitations
1. Due process clause (Art.III, Sec.1)
Section 1. No person shall be deprived of life, liberty, or property without due process
of law, nor shall any person be denied the equal protection of the laws.
a. Substantive - (public purpose, with authority, with legal basis)
b. Procedural – not arbitrary in assessment and collection.

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

Property of and
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 Saint Louis University
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES
Department of Business Laws and Taxation

2. Equal protection of the law – those under same circumstances to be treated alike.

3. Rule on uniformity and equity (Art. VI., Sec. 28 par.1)

SECTION 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
a. Uniform – valid classification based on substantial distinction. Applicable to
those under dissimilar circumstances.
b. Equitable – based on a progressive system of taxation.

4. Non-impairment clause (Art. III, Sec. 10)

Section 10. No law impairing the obligation of contracts shall be passed.

5. Veto power of the president (Art. VI, Sec. 27 (2))

(2) The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to
which he does not object.

6. Exemption from PROPERTY tax of religious, charitable, educational entities, non-profit

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

Note: with exemption of all revenues and assets of a non-stock, non-profit

educational institution (Art. XIV, Sec. 4 (3)).
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided by law

7. No public money for religious purposes (Art.VI, Sec. 29)

(2) No public money or property shall be appropriated, applied, paid, or employed,
directly or indirectly, 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
religious teacher, or dignitary as such, except when such priest, preacher, minister, or
dignitary is assigned to the armed forces, or to any penal institution, or government
orphanage or leprosarium.

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

Property of and
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 Saint Louis University
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES
Department of Business Laws and Taxation

8. Tax exemption- by majority of congress (Art. VI, Sec. 28)

(4) No law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of the Congress.

9. Supreme Court’s final decision on LEGALITY of taxes (Art. VIII, Sec. 5)

SECTION 5. The Supreme Court shall have the following powers:
(b) All cases involving the legality of any tax, impost, assessment, or toll, or any
penalty imposed in relation thereto.

10. Non-imprisonment for non-payment of debt and poll taxes (Art. III, Sec. 20)
SECTION 20. No person shall be imprisoned for debt or non-payment of a poll tax.

11. Tax treated as general funds of the government (Art. VI, Sec. 29)
(3) All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government.

12. Free worship rule (Art.III, Sec.5)

SECTION 5. No law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof. The free exercise and enjoyment of religious
profession and worship, without discrimination or preference, shall forever be allowed.
No religious test shall be required for the exercise of civil or political rights.

• Stages/Aspects of Taxation
1. Levy
2. Assessment
3. Payment or collection

• Doctrines in taxation
1. Prospective application of tax laws
✓ Like other statutes, tax laws operate prospectively, whether they enact, amend or
repeal, unless the purpose of the legislature to give retrospective effect is expressly
declared or may be implied from the language used (Lorenzo v. Posadas, 64 Phil.
353)

2. Taxes are imprescriptible

✓ The principle of imprescriptibility of taxes provides that taxes will not prescribe
against the government because of the principle that taxes are lifeblood of the
government and their prompt and certain availability is an imperious need.

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

Property of and
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 Saint Louis University
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES
Department of Business Laws and Taxation

3. Double taxation
✓ What the law prohibits is the imposition of two taxes on the same subject matter,
for the same purpose, by the same taxing authority, within the same jurisdiction
and during the same taxing period; thus, double taxation must be of the same
kind or character to be a valid issue.
✓ In applying this definition, the CTA stated that while the business tax and the
franchise tax are both based on gross receipts and sales, they are different in
nature or character. The franchise tax is imposed on the exercise of enjoying a
franchise, while the business tax is imposed on the privilege of engaging in one’s
line of business.

4. Escape from taxation (tax evasion vs. avoidance)

✓ Tax avoidance and tax evasion are the two most common ways used by
taxpayers in escaping from taxation.
✓ Tax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms-length.
✓ Tax evasion, on the other hand, is a scheme used outside of those lawful means
and when availed of, it usually subjects the taxpayer to further or additional civil
or criminal liabilities (Commissioner of Internal Revenue v. The Estate Of Benigno P.
Toda, Jr., G.R. NO. 147188 : September 14, 2004)

5. Exemption from taxation

✓ "Laws granting exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception."
✓ The law "does not look with favor on tax exemptions and that he who would seek
to be thus privileged must justify it by words too plain to be mistaken and too
categorical to be misinterpreted." (Sea-Land Service, Inc. v. CA, G.R. No. 122605
April 30, 2001)

6. Equitable recoupment
✓ The doctrine of equitable recoupment allows a taxpayer whose claim for refund
has prescribed to offset tax liabilities with his claim of overpayment.
✓ Tax refund cases are based on the civil law principle of solutio indebiti.
Jurisprudence holds that the time-honored doctrine that no person shall unjustly
enrich himself or herself at the expense of another is enshrined in the basic legal
principles. The government is not exempted from the application of this doctrine
(The Tax Disputes and Litigation Review, Chap.22: Philippines)

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

Property of and
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 Saint Louis University
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES
Department of Business Laws and Taxation

7. Set-off of taxes
✓ Taxes are not debts.
✓ Taxes arise from compulsory obligation imposed upon citizens or inhabitants of the
state.
✓ If a taxpayer owes something to the government by way of taxes, and the
government has a debt which it has to pay to the taxpayer, set-off or
compensation is not allowed.
✓ Taxpayers and the government do not have a debtor and creditor relationship.
Taxes cannot operate like a debt or indebtedness of a taxpayer.
✓ It is not subject to set-off or compensation.
(https://sites.google.com/site/lawpinoy/tax1)

8. Taxpayer suit
✓ A taxpayer's suit is an action filed by a taxpayer to challenge an unlawful
disbursement of funds raised by taxation.
✓ “In the case of taxpayers’ suits, the party suing as a taxpayer must prove that he
has sufficient interest in preventing the illegal expenditure of money raised by
taxation.
✓ Thus, taxpayers have been allowed to sue where there is a claim that public funds
are illegally disbursed or that public money is being deflected to any improper
purpose, or that public funds are wasted through the enforcement of an invalid
or unconstitutional law.
✓ More particularly, the taxpayer must establish that he has a personal and
substantial interest in the case and that he has sustained or will sustain direct injury
as a result of its enforcement or that he stands to be benefited or injured by the
judgment in the case, or is entitled to the avails of the suit.”
(G.R. No. 125509, January 31, 2007)

9. Compromises
✓ A tax compromise is an agreement whereby the taxpayer offers to pay something
less than what is due and the government accepts it as a full settlement of his tax
liability.
✓ Section 204 of the NIRC authorizes the CIR to compromise, abate, and refund or
credit taxes.

10. Tax amnesty

✓ A tax amnesty can be defined as a limited time offer by the government to a
specified group of taxpayers to pay a defined amount, in exchange for
forgiveness of a tax liability (https://asean.elibrary.imf.org)

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

Property of and
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 Saint Louis University
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES
Department of Business Laws and Taxation

11. Power to destroy vs. power to build

• Situs/place of taxation
✓ Situs of taxation literally means place of taxation.
✓ The general rule is that the taxing power cannot go beyond the territorial limits of the
taxing authority.
✓ Basically, the state where the subject to be taxed has a situs may rightfully levy and
collect the tax.

• Principles of a sound tax system

1. Fiscal adequacy
✓ Fiscal adequacy means the sources of revenue must be sufficient to meet
government expenditures and other public needs.

2. Theoretical justice
✓ Theoretical justice means that a sound tax system must be based on the
taxpayers’ ability to pay.

3. Administrative feasibility
✓ Administrative feasibility means tax laws and regulations must be capable of
being effectively enforced with the least inconvenience to the taxpayer.

-END OF MODULE_1-

By: Atty. Rosemarie Pitan-Areno,CPA,MBA

Property of and
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