The Inherent Powers of the State

Inherent power means existing as a natural or basic part

of every sovereign State, without being conferred or
granted by the people or the Constitution.

The 3 Inherent Powers of the State:

1. POWER TO TAX — The act of levying a tax. It's
the process or means by which the sovereign
(independent State), through its law-making body
(legislative branch), raises income to defray the
necessary expenses of the government. It is the
power by which the State raises revenue to defray
the necessary expenses of the government.

2. POLICE POWER - it is the power of the state

of promoting public welfare by restraining and
regulating the use of liberty and property. It may
be exercised only by the government. The
property taken in the exercise of this
power is destroyed because it is noxious or
intended for a noxious purpose.

3. EMINENT DOMAIN - it is the power to take

private property for public purpose upon
payment of just compensation.

SIMILARITIES among Taxation, Eminent

Domain and Police Power are inherent in
the State.
a. They are inherent in the State.
b. They exist independently of the
constitution although the conditions for
their exercise may be prescribed by the
constitution.
c. Ways by which the State Interfere
with private rights and property.
d. Legislative in nature and character.
e. Presuppose an equivalent
compensation received, directly or
indirectly, by the persons affected.

Purposes of Taxation

1. Primary Purpose —To raise revenues/funds to defray

the necessary expenses of the government (also called
Revenue or Fiscal Purpose).

2. Secondary Purpose:
a. Regulatory Purpose - Taxation is
employed as a devise for regulation or
control (to implement the police power of
the State for the promotion of the general
welfare) by means of which certain effects
or conditions envisioned by the
government may be achieved.
b. Compensatory Purposes
 Reduction of Social Inequality
 Economic Growth
 Protect local industries against unfair
competition
 Nature and Characteristics of Taxation
1. Inherent Power - may be exercised although not
expressly granted by the
constitution.
2. Essentially a legislative function - only the legislative
can impose taxes.
3. Subject to inherent and constitutional limitations - not
an absolute power,
4. For public purpose
5. The strongest of all the inherent powers of the State.
6. Subject to international treaty or comity
7. Generally payable in money
8. Territorial in scope

In the absence of inherent and constitutional limitations, the

power to tax is comprehensive, plenary, supreme and unlimited. It
is so comprehensive that in the words of justice Marshall, the
power to tax includes the power to destroy.

Taxes Defined
Are-enforced proportional contributions from persons and
property, levied by the State by virtue of its sovereignty for the
support of the government and for all its public needs.

ESSENTIAL CHARACTERISTICS OF TAX

a. A tax is a forced charge, imposition or contribution
b. It is a pecuniary burden payable in money
c. It is imposed for public purpose
d. It is imposed pursuant to a legislative authority
e. It is levied within the territorial and legal jurisdiction of a
state
f. It is assessed in accordance with some reasonable rule of
apportionment

Theory of Taxation
1. Necessity Theory —The existence of government is a
necessity. The government cannot Continue to
perform of serving and protecting its people without
means to pay its expenses. For this reason, the state has
the right to compel all its citizens and property within its
limits to contribute.
2. Lifeblood Doctrine - Taxes are the lifeblood of the
government without which it can neither exist nor
endure.

MANIFESTATION OF THE LIFEBLOOD THEORY:

 No Estoppel against the Government.
 Collection of taxes cannot be enjoined (Stopped) by
injunction.
 Taxes could not be the subject of compensation or set-
off.
 A valid tax may result in the destruction of the taxpayer's
property.

 Right to select objects (subjects) of taxation.

 Basis of Taxation
The Benefits-Protection Theory - The basis of
taxation is the reciprocal duties of "protection and support"
between the state and its inhabitants. The state collects taxes
from the subjects of taxation in order that it may be able to
perform the functions of government. The citizens, on the other
hand, pay taxes in order that they may be secured in the
enjoyment of the benefits of organized society. This theory
spawned the Doctrine of Symbiotic Relationship which means,
taxes are what we pay for a civilized society.

Similarities of the Taxing Power of the Legislative

1. They are inherent in the State,

2. Underlie and exist Independently of the constitution although
the conditions for their exercise may be prescribed by the
constitution.
3. Ways by which the State Interfere with private rights and
property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received, directly or
indirectly, by the persons affected.

Scope of the Taxing Power of the Legislative

The Supreme Court held that the power of taxation is the
most absolute of all powers of the government. It has the broadest
scope of all the powers of the government because in the absence
of limitations, it is considered as comprehensive, unlimited,
plenary and supreme (130 SCRA 654). The matters within the
competence of the legislature include the determination of the
following:
 1. The subject or object to be (person, taxed. property, or
excises/privileges) to be taxed, Excises or privileges
2. The purpose of the tax as long as it is a public purpose.
3. The amount or rate of the tax.
4. Kind of tax
5. Apportionment of the tax (i.e., whether the tax shall be
general OF limited to a particular locality or partly
general and partly local)
6. Situs of taxation
7. The manner or method of collection

Stages/Aspects of Taxation

1. Levying or Imposition – This process involves the

passage of tax laws or ordinances through the
legislature.
2. Assessment and Collection -This process involves the
act of administration and implementation of tax laws
by the executive through its administrative agencies
such as the Bureau of Internal Revenue or Bureau of
Customs.
3. Payment of Tax - This process involves the act of
compliance by the taxpayer in contributing his share
to pay the expenses of the government.

Principles of Sound Tax System

1. Fiscal Adequacy - The sources of government revenue

must be sufficient to meet government expenditures and
other public needs.
2. Administrative Feasibility - Tax laws must be capable of
convenient, Just and effective administration- free from
confusion and uncertainty.
3. Theoretical Justice - A good tax system must be based on
the taxpayer's ability to pay. This suggests that taxation
must be progressive conformably with the constitutional
mandate that congress shall evolve a progressive system
of taxation.

LIMITATIONS ON THE TAXING POWER

A. Inherent Limitations - inherent limitations proceed

from the very nature of the taxing power itself. The
taxing power has very distinct and positive limitations
some of which inhere in its very nature and exist
whether declared or not declared in the written
constitution.
1. Public purpose
Proceeds from tax must be used for:
a. Support of the government.
b. Some of the recognized objects of
government.
c. To promote the welfare of the community
(not individuals).
 2. Situs of taxation or territoriality - the taxing
power of a country is limited to person and
property within and subject to its jurisdiction.
PLACE OF TAXATION
a. The state where the subject to be taxed
has a situs may rightfully levy and collect
the tax.
b. The situs is necessarily in the State which
has jurisdiction or which exercises
dominion over the subject in question.

FACTORS TO CONSIDER IN DETERMINING SITUS OF TAXATION

a. Subject matter (person, property, or activity)
b. Nature of the tax
c. Citizenship
d. Residence of the taxpayer

Application of the Situs of Taxation

Subject Matter Situs

 Persons  Residence of the

taxpayer
 Real Property  Location
 Tangible Personal  Location
Property

 Intangible Personal  Domicile of the

Property owner
 Income  Residence,
citizenship, source
of income

 Business  Place of business

 Gratituitous  Residence of
Transfer of Property citizenship of the
property

3. International comity or treaty - a State cannot tax

another State based on the principle of Sovereign
Equality among States. i.e. tax law passed imposing taxes
on foreign ambassadors is not a valid law.

4. Non-delegability of the Taxing power (Enactment of Tax

Laws) - Power of taxation is purely legislative, hence the
power cannot be delegated either to the executive or
judicial departments. The limitation arises from the
doctrine of separation of powers among the three
branches of the government.
EXCEPTIONS TO THE RULE AGAINST DELEGATION:
a. Delegation to specified the President, limits, tariff
subject rates to some and tonnage limitations or
wharfage duties and other duties and imposts.
b. Delegation to local governments the power to
create its own sources of revenues and to levy
taxes, subject to such limitations as may be
provided by law.
c. Delegation to administrative agencies certain
aspects of the taxing process that are not legislative
such as:
 the power to fix value of property for purposes
of taxation pursuant to fixed rules
 the power to assess and collect taxes,

5. Exemption of the Government

a. Agencies performing governmental functions are
tax exempt expressly taxed
b. Agencies performing proprietary functions are
subject to tax unless expressly exempted.
c. GOCCs performing proprietary functions are
subject to tax, however the following are granted
exemptions:
 Government Service Insurance System (GSIS)
 Social Security System (SSS)
 Philippine Health Insurance Corporation (PHIC)
 Local Water Districts (RA 10026)
 Philippine Charity Sweepstakes Office (PCSO) — already
taxable beginning Jan. 1, 2018 under the TRAIN Law

Constitutional Limitations on the Taxing Power- the

following provisions may be said to be limitations
prescribed in the Constitution on the taxing power of the
government.
1. Observance of due process of law
2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of poll tax
6. Non-impairment of the obligations of contracts
7. Free-worship clause
8. Exemption of charitable institutions, churches,
parsonages, or convents appurtenant thereto,
mosques, and non-profit cemeteries, and all
lands, buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes.
9. Exemption from taxes of the revenues and
assets of non-profit, nonstock educational
institutions including grants, endowments,
donations or contributions for educational
purposes,
10. Non-appropriation of public funds or property
for the benefit of any church, sect or system of
religion, etc.
11. No money shall be paid out of the Treasury
except in pursuance of an appropriation made
by law.
12. Concurrence of a majority of ALL MEMBERS
OF CONGRESS for the passage of a law
granting tax exemption.
 13. Non-diversification of tax collections
14. The President shall have the power to veto any
particular item(s) in an appropriation,
revenue or tariff, but the veto shall not affect
the item(s) to which no objection has been
made.
15. Non-impairment of the jurisdiction of the
Supreme Court to review tax cases
16. Appropriations, revenue or tariff bills shall
originate exclusively in the House of
Representatives but the Senate may propose
or concur with amendments.
17. Each local government unit Shall exercise the
power to create jts own sources of revenue
and shall have a just share in the national
taxes.

NATIONAL TAXES vs. LOCAL TAXES

National Local

AUTHORI Inherent Power Delegated Power

TY

NATURE Legislative in nature Legislative in nature

through enactment of tax through enactment of local
laws by the Congress and ordinances by the local
the Senate. legislative branch.

PROCESS 1. Levying = 1. Levying =

Congress legislative
2. Assessment/Coll branch of the
ection = BIR & LGU
BOC 2. Assessment/Coll
ection =
treasurer

National Internal Revenue Taxes under the administration of the

BIR:
a. Income Tax
b. Estate and donor's tax
c. Value-added tax
d. Other percentage taxes
e. Excise taxes
f. Documentary stamp taxes

DOUBLE TAXATION

KINDS OF DOUBLE TAXATION:

a. Direct Duplicate Taxation, this is objectionable and

prohibited because it violates the constitutional provision
on uniformity and equality. It means:
- Taxing twice
- By the same taxing authority
- Within the same jurisdiction or taxing district
- For the same purpose
- In the same year or taxing period
- Same kind or character of tax
b. Indirect Duplicate Taxation, Is not legally objectionable.
It extends to all cases in which there is a burden of two
or more pecuniary imposition but imposed by different
taxing authorities.
SOURCES OF TAX LAWS

a. Constitution
b. Tax Treaties and Conventions with Foreign
Countries
c. The "Tax Code" (RA No. 8424 - National Internal
Revenue Code, as amended; i.e., RA 10963-
TRAIN Law), Tariff and Customs Code, and
portion of the Local Government Code
d. Statutes and laws like RA 1125 (an Act Creating
the Court of Tax Appeals), RA 7716 (E-VAT Law)
e. Presidential Decrees
f. Executive Orders
g. Court Decisions
h. Revenue regulations promulgated by the
Department of Finance
i. Administrative issuances of the BIR like Revenue
Memorandum Circulars, and those of the Bureau
of Customs like Customs Memorandum Orders
j. BIR Rulings
k. Local Tax Ordinances

TAX LAWS
NATURE OF INTERNAL REVENUE LAWS - Tax
laws are civil and not penal in nature, although
there are penalties provided for their violation.
The purpose of tax laws in imposing penalties for
delinquencies is to compel the timely payment of
taxes or to punish evasion or neglect of duty in
respect thereof.

CONSTRUCTION OR INTERPRETATION OF TAX LAWS IN

CASE OF DOUBT OR AMBIGUITY
a. Tax statutes are construed strictly against the
government and liberally in favor-of-the
taxpayer. Taxes, being burdens, are not to be
presumed beyond what the statute expressly
and clearly declares.
b. Provisions granting tax exemptions are
construed strictly against the taxpayer
claiming tax exemption and liberally in favor
of the government.

APPLICATION OF TAX LAWS

Tax laws are prospective in Operation
because the nature and amount of the tax could not
be foreseen and understood by the taxpayer at the
time the transactions which the law seeks to tax
was completed.

EXEMPTION:
While it is not favored, a statute may
nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative
intent. But a tax law should not be given
retroactive application when it would be harsh
and oppressive.
CLASSIFICATION OF TAXES

A. According to Subject Matter:

 Personal, Poll or Capitation Tax — tax of a fixed amount
imposed upon individual, whether citizens or not,
residing within a specified territory without regard to
their property or the occupation in which he may be
engaged (e.g. basic Community tax)
 Property Tax — tax imposed on property, whether real
or personal, in proportion either to its value, or in
accordance with some other reasonable method of
apportionment (e.g. real estate tax)
 Excise Tax – any tax which does not fall within the
classification of a poll tax or a property tax. This is tax on
the exercise of certain rights and privileges (e.g., income
tax, estate tax, donor’s tax, VAT)

B. According to Who Bears the Burden:

 DIRECT TAX (e.g. income tax, estate tax, donor's tax)
 Imposed on the person same and this burden cannot
be shifted or passed on to another.
 A tax in which the taxpayer who pays the tax is
directly liable therefor, that is, the burden of paying
the tax falls directly on the person paying the tax:
 Demanded from the very person who, as intended,
should pay the tax which he cannot shift to another

 INDIRECT TAX (e.g. VAT and OPT)

 Payment is demanded from a person who allowed
the burden of taxation to another.
 A tax paid by a person. who is not direct liable
therefor, and who may therefore shift or pass the tax
to another person or entity, which ultimately
assumes the tax burden (Maceda V. Macaraig, 197
SCRA 771).
 Is demanded in the first instance form one person
with the expectation that he can shift the burden to
someone else, not as a tax but as part of the purchase
price

C. According to Determination of Amount:

 Specific Tax – this is a fixed amount based on volume,
weight or quantity of goods as measured by tools,
instruments or standards. (e.g. excise tax on cigars and
liquors)
 Ad Valorem Tax - this imposition is based on the value
of the property subject to tax. (e.g. VAT, income tax,
donor's tax and estate tax)

D. According to Purpose:
 Fiscal/General/Revenue Tax – levied without a specific
or pre-determined purpose, (e.g. income tax, donor’s
tax and estate tax)
 Regulatory/Special/Sumptuary Tax – those intended to
achieve some social or economic goals, (e.g. tariff and
certain duties on imports)
E. According to Jurisdiction/Scope or Authority
 National Tax - imposed by the National
Government
 Local Tax - imposed by municipal
corporations (e.g. real estate tax)

F. According to Graduation or Rate

 Proportional/F/at Rate Tax - unitary or single rate. (e.g.
VAT, OPT)
 Progressive/Graduated Tax - as the tax base grows the
tax rate increases. (e.g. income tax on individuals,
estates, trusts, estate tax donor's tax)
 Regressive Tax - the tax rate increases as the tax base
decreases.
  TARIFF

May be used in one of three (3) senses:

1. A book of rates drawn usually in alphabetical order
containing the names of several kinds of
merchandise with the corresponding duties to be
paid for the same; or
2. The duties payable on goods imported or exported;
or
3. The system or principle of imposing duties on the
importation (or exportation) of goods.

* the term tariff and customs duties are used interchangeably in

the Tariff and Customs Code.

SYSTEMS OF “INCOME” TAXATION

a. Global System – all items of gross income, deductions are
reported in one income tax return and the applicable tax
rate is applied on the tax base.
b. Schedular System - Different types of income are subject
to different sets of graduated or flat income tax rates.

OTHER DOCTRINES/RULES IN TAXATION

Equitable Recoupment — Claim for refund which is prevented by
prescription may be allowed to be used as payment for unsettled
tax liabilities if both taxes arise from the same transaction in which
overpayment is made and underpayment is due.

Set-off taxes - Taxes are not subject b set-off or legal compensation

because the government and the taxpayer are not mutual credit
and debtors of each other.

Taxpayer Suit - This provides that a taxpayer suit can only be

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

Exemptions from Taxation

It is a grant of immunity, express or implied, to
particular persons, or corporations of a particular class,
from a tax upon property or an excise tax which persons and
corporations generally within the same taxing district, are
obliged to pay.

CLASSIFICATION OF EXEMPTION:

a. Express or affirmative — these are express provisions in

the Constitution, statues, treaties, ordinances, franchises
or contracts
b. Implied or exemption by omission — this occurs when a
tax is levied on certain classes of persons, properties or
transactions without mentioning other classes. Those not
mentioned are deemed exempted by omission

INTERPRETATION OF EXEMPTION GRANT

Exemption grants are strictly construed against the
person or entity claiming exemption. One must justify such claim
by clear and positive grant.
ESCAPE FROM TAXATION

1. Evasion or Dodging, the taxpayer uses unlawful means

to evade or lessen the payment of tax.
2. Avoidance, also called tax minimization, it is the
reduction or totally escaping payment of tax through
legally permissible means.
3. Shifting, basically, it is the transfer of tax burden to
another. The imposition of tax is transferred from the
statutory taxpayer to another without violating the law.
• Impact is the point at Which a tax is Originally imposed,
• Incidence is the point at which the tax burden finally
rests or settles down.

THREE (3) KINDS SHIFTING

a. Forward shifting
b. Backward shifting
c. Onward shifting
4. Capitalization, the seller is willing to lower the price of
the commodity provided the taxes will be shouldered by
the buyer.
5. Transformation, the manufacturer absorbs the
additional taxes imposed by the government without
passing it to the buyers for fear of loss of his/its market.
Instead, he/it increases quantity of production, thereby
turning their units of production at a lower cost resulting
to the transformation of the tax into a gain through the
medium of production.
6. Exemption, it is an immunity, privilege or freedom from
payment of a charge or burden to which others are
obliged to pay.

Taxpayer’s Suit
A case where the act complained of directly involves the
illegal disbursement of public funds derived from taxation.
Taxpayers have locus standi to question the validity of tax
measures or illegal expenditures of public money. In such cases,
they are parties in interest who will be prejudiced or benefited by
the avails of the suit. The general rule is that not only persons
individually affected but also taxpayers have sufficient interest of
preventing the illegal expenditures of money raised by taxation.
They may, therefore, question in the proper court the
constitutionality of statutes requiring the expenditure of public
funds. But a taxpayer is not relieved from the obligation of paying
a tax because of his belief that it is being misappropriated by
certain officials, for otherwise, collection of taxes would be
hampered and this may result in the paralyzation of important
governmental functions.