GENERAL PRINCIPLES

INHERENT POWERS OF THE STATE

The following are the three inherent powers of the State.

1. Police Power – It is power of the state of promoting public welfare by restraining and regulating the use of both
liberty and property. It may be exercised only by the government. Usually when the property is taken in the
exercise of this power, it is destroyed because it is noxious or intended for harmful purpose.

This power lies primarily in the discretion of the legislature. Hence, the President, and administrative boards as
well as the lawmaking bodies on all municipal levels, including the barangay may not exercise it without a valid
delegation of legislative power. Municipal governments exercise thispower by virtue of the general welfare
clause of the Local Government Code of 1991. Even the courts cannot compel the exercise of this power
through mandamus or any judicial process. Most pervasive of all, least limitable and most demanding among
the powers.

Requisites of a valid police measure:

a. Lawful Subject – the activity or property sought to be regulated affects the public welfare. It requires the
primacy of the welfare of the manyover the interests of the few.
b. Lawful Means – the means employed must be reasonable and must conform to the safeguards guaranteed
by the Bill of Rights.
c. Additional limitations when police power is exercised by a virtue of valid delegation:
o Express grant by law
o Within the territorial limits of enacting body
o Must not be contrary to law
o The President
o Law making bodies of the local government unit

2. Eminent Domain Power or Expropriation Power – It is the power to take private property for public use with just
compensation. It affects only property rights. It may, however, be exercised by some private entities in
expropriating properties. The property forcibly taken under this power, upon payment of just compensation, is
needed for conversion to public use or purpose.

The taking of property in law may include:

a. Trespass without actual eviction of the owner;
b. Material impairment of the value of the property; or
c. Prevention of the ordinary uses for which the property was intended.

The property that may be subject for appropriation shall not be limited to private property. Public property
may be expropriated provided there is a specific grant of authority to the delegate. Money and a chose in action
are the only things exempt from expropriation. Although it is also lodged primarily in the national legislature,
the courts have the power to inquire the legality of the right of eminent domain and to determine whether or
not there is a genuine necessity therefore.

3. Taxation Power – It is the power to enforce contribution to raise government funds; it is an inherent power and
a mode or means by which the sovereign through its law-making body raises revenue to defray the necessary
expenses of the government. It affects only property rights and may be exercised only by the government. The
property taken under this power shall likewise be intended for a public use or purpose. Hence, it cannot be
allowed to be confiscatory, except if it is intended for destruction as an instrument of the police power. It must
conform to the requirements of due process. Therefore, taxpayers are entitled to be notified of the assessment
proceedings and to be heard therein on the correct valuation to be given the property. It is also subject to the
general requirements of the equal protection clause that the rule of taxation shall be uniform and equitable.

Page 1 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

Similarities of the Inherent Powers

Similarities among Taxation Power, Eminent Domain Power and Police Power:
1. They are inherent in the State.
2. They exist independently of the Constitution although the conditions for their exercise may be prescribed by
the Constitution.
3. They are the ways by which the State interfere with private rights and property.
4. They are legislative in nature and character.
5. They presuppose an equivalent compensation received, directly or indirectly, by the persons affected.

Differences of the Inherent Powers

POLICE POWER TAXATION POWER EMINENT DOMAIN POWER

Power to make and Power to enforce contribution Power to take private
Concept implement laws for the to raise government funds property for public use with
general welfare just compensation
Government only or its Government only or its May be granted to public
Authority
political subdivisions political subdivisions service/utility companies
Promotion of general welfare For the support of the The taking of private
Purpose
through regulation government property for public use
Community or a class of Community or a class of On an individual as the owner
individuals. individuals. of personal property. Only
particular property is
Persons
Applies to all persons, Applies to all persons, comprehended.
Affected
property and excises or property and excises or
privileges that may be subject privileges that may be subject
thereto. thereto.
Broader in application Plenary, comprehensive, and Merely to take private
Scope supreme but not absolute property
Property is taken or Money is taken to support the Property is taken for public
destroyed to promote government. use. There is a transfer of
general welfare. However, no title of the property.
Effect
transfer of title; there may
just be a restraint on the
injurious use of property
Can be expressly delegated Cannot be delegated, if Can be expressly delegated
delegated, it should be to the
Delegation legislative department of the
LGU (e.g. to make ordinances)
Limited to the cost of Generally, no limit on amount No imposition as to amount,
Amount regulation, license and other instead, it is the government
Imposed necessary expense which is to compensate the
property taken.

Relatively free from Subject to constitutional and Superior to and may override
Constitutional limitations. inherent limitations. Inferior constitutional impairment
Constitutional
Superior to non-impairment to non-impairment clause. provision because the
Limitation Or
clause. welfare of the State is
Prescription
superior to any private
contract.
Sources: Valencia and Roxas, Income Taxation 6th Edition (2013-2014), Valencia Educational Supply

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Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

CONCEPT OF TAXATION POWER

Purpose of Taxation

1. Raising Revenue – The primary purpose of taxation is to raise government funds to support government’s needs.
Most of the money collected by the government is derived from the exercise of taxation power.
2. Regulatory or Sumptuary Purpose – Taxation power may also be exercised for regulatory purpose such to
control inflation and deflation, economic and social stability, and social control among others. For instance, in
times of deflation, prices of basic commodities are generally low; as such, the general market would tend to
spend more on these goods leading to shortage of supply. To regulate this, the government may impose a
higher consumption tax (VAT) to influence the price to increase.
3. Compensatory Purpose – Taxation power may also be exercised to compensate the benefits provided by the
government to the people. This is in accordance with the Benefit-Received Theory.

Characteristics (ILL)

The following are the characteristics of taxation power:

1. Inherent power of the state.
2. Exclusively lodged with the legislative body
3. Subject to inherent and constitutional limitations

In the absence of inherent and constitutional limitations, the power to tax becomes:
a. Plenary – full and complete in all respect (as to the subject and manner to collect the tax)
b. Comprehensive – it covers persons, businesses, activities, professions, rights and privileges. It is the power
that includes the power to destroy.
c. Supreme – it is supreme only in so far as the selection of the subject (what to be taxed) of taxation is
concerned

That is why, the exercise of taxation power must be not violate the inherent and constitutional limitations.

Limitations in Taxation Power

As mentioned, taxation power is supreme and is vital in every active government as it is through which the funds
of the State majority come from. Without it, the State will be dead, and cannot continue to perform its duties and
functions to the sovereign. However, taxation power is not absolute as it is subject to inherent and constitutional
limitations as discussed below:

1. Inherent Limitations (PENTI)

These are limitations against the exercise of taxation power inherently existing even without the provision of
the Constitution. These limitations are:

a. Public purpose
o Proceeds from tax must be used for the support of the government and some of the recognized objects
of the government
o The exercise of taxation power must promote the welfare of the community, and not individual or
particular persons only.

b. Exemption of the Government

o Agencies performing government functions are tax exempt unless expressly stated.
o Agencies performing proprietary functions are subject to tax unless expressly exempted.
o Government-owned and controlled corporations (i.e. Philippine Amusement and Gaming Corp.)
performing proprietary functions are subject to tax similar to that imposed upon corporations or
associations engaged in a similar business, industry, or activity. However, the following are granted
exemptions: (a) Government Service Insurance System (GSIS), (b) Social Security System (SSS), and (c)
Philippine Health Insurance Corporation (PHIC).
o The Philippine Charity and Sweepstakes Office (PCSO) is now subject to income tax (NIRC Sec. 27 [c],
Revenue Regulations No. 08-2018)

Page 3 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

c. Non-delegability of the power to tax

o The power to tax is exclusively vested in the legislative body, and it may not be re-delegated (Delegata
potestas non potest delegari.)
o Taxation power cannot be delegated either to the executive or judiciary departments.
o The limitation arises from the doctrine of Separation of Powers among three branches of the
government.
o Exceptions to the rule against the delegation of the taxing power:
- Delegation to the President shall be subject to some limitations and restrictions, usually only to fix
within specified limits, tariff rates and tonnage or wharfage duties and other duties and imposts.
- Delegation to Local Government Units the power to create its own sources of revenues and to levy
taxes, subject to such limitations as may be provided by law.
- Delegation to administrative agencies certain aspects of the taxing process that are not legislative
such as:
a. The power to fix value of property for purposes of taxation pursuant to fixed rules
b. The power to assess and collect taxes.

d. Territoriality
o The taxing power of a country is limited to person and property within the Philippines, and those which
are subject to its jurisdiction.
o This means that proper determination of the situs of the taxable object is a necessity before a tax may
be imposed. For instance, the Philippine government cannot impose tax upon the subjects (person or
property) belonging to and located in another country as taxation power only pertains to our own
jurisdiction.
o However, these subjects may be subject to tax when they enter the Philippine jurisdiction.

e. International Comity
o A State cannot impose tax upon another State based on the Sovereign Equality among States. For
instance, a tax law passed imposing taxes on foreign ambassadors is not a valid law.
o This limitation prescribes that in the exercise of taxation power, international treaties and agreements
must be regarded with utmost respect.

2. Constitutional Limitations
Taxation power, being an inherent power of the State, is not a grant or provision written in the Constitution,
thus even if the Constitution ceases to exist or is amended, the power shall continue to exist. However, in the
exercise of taxation power, the State must accord to some Constitutional provisions which limit the exercise of
the power. These limitations are those expressly provided in the Constitution or implied from its provisions (De
Leon, 2017). To wit:

a. Observance of due process clause and equal protection clause (Philippine Constitution Art. III, Sec. 1)
o All acts of the State must be done under the authority of a law that is valid and not contrary to the
Constitution.
o No person shall be deprived of his life, liberty or property without due process of law, nor he shall be
denied the equal.
o Due process clause denotes adherence to the Constitutional process and compliance with the
reasonable methods of procedures as prescribed by the law.
o Equal protection clause signifies that ‘all persons subject to legislation shall be treated alike under the
similar circumstances and conditions both in the privileges conferred and liabilities imposed’ (1 Cooley
824- 825; De Leon, 2017).
o The equal protection clause doctrine does not require that persons or properties different in fact be
treated in law as though they were the same. What it prohibits is class legislation which discriminates
against some and favors others (De Leon, 2017).

Example 1:
An ordinance imposes a property tax on vehicles using the streets of Butuan. The tax is payable only by the
owners residing in Butuan. Such ordinance violates the rule of equal protection because owners of vehicles
Page 4 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

residing outside Butuan who may have also used the streets are not made to share the corresponding
burden.

b. Uniformity, equity, and progressivity of taxation (Philippine Constitution Art. VI, Sec. 28[1])
o Uniformity in taxation means that ‘all taxable articles or properties of the same class shall be taxed at
the same rate. Different articles or subjects like transactions, business and rights may be taxed at
different rates, provided that the rate is uniform on the same class everywhere.

Example 2:
A tax law imposed a tax of 20% on interest earned from bank deposits, while exempting those interests
earned from long-term bank deposits with a maturity of more than 5 years. The law is valid as far the rule
of uniformity is concerned since all interest incomes from short-term bank deposits are subject to the same
tax rate, while long-term deposits are exempted. In this case, there is an appropriate classification of tax
objects.

o Equity of taxation implies that the amount of tax must be just in the light of taxpayer’s ability to pay.
This limitation accords the Equality and Theoretical Justice principle of taxation.

Example 3:
A new tax law imposed a P 5,000 tax upon all income earners. The law violates the rule of equity of taxation
since, those who earn less will be more burdened than those who earn more. For instance, X earning P
20,000 a month, while Y earning P 10,000 a month. Between the two, Y will be more burdened because he
earns less than X.

Example 4:
A VAT law imposed a 15% tax on all consumptions made in the Philippines. The law is valid as far as equity
of taxation is concerned because the rate is proportional relative to the selling price of the good or service
consumed. Thus, regardless of the price, the buyer will have to pay only a tax of 15%.

o The rule of uniformity permits the classification of subjects to be taxed and the imposition of the same
rate of tax on the subjects belonging to the same class, provided (De Leon, 2017):
- It is based upon substantial distinctions which make real differences;
- It is relevant to the purpose of the legislation or ordinance;
- It applies not only to present conditions but also to future conditions substantially identical to those
present; and
- It applies equally to all those who belong to the same class.

c. Non-impairment of the obligations and contracts (Philippine Constitution Art. III, Sec. 10)
o The obligation of a contract is impaired when its terms or conditions are changed by law or by a party
without the consent of the other, thereby weakening the position or rights of the latter.

Example 5:
On January 3, 2018, X and Y entered into sale contract, X being the buyer purchasing a bulk of goods for a
total amount of P 100,000. Y agreed to receive the payment on installment beginning February 4, 2018. On
January 31, 2018, a new tax law was enacted imposing a consumption tax of 10% on all sales beginning
January 2018 and onwards. Having learned of the new law, Y adds 10% consumption tax on his collectibles
from X, thus increasing the amount to P 110,000.

The law violates the non-impairment clause of the Constitution adding burden to previously consumated
contract. Thus, the law is not valid by effecting it retrospectively because both the buyer and the seller
could not have foreseen the nature and impact of the tax at the time the contract is consumated.

d. Non-imprisonment for non-payment of poll tax (Philippine Constitution Art. III, Sec. 20)
o This limitation proceeds from the constitutional provision that, “No person shall be imprisoned for debt
or non-payment of poll tax”.
o A poll tax is local tax often referred to as the community tax.
o The provision, however, does not prohibit the imposition of interest and surcharge resulting to such
non-payment.

Page 5 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

o A person may still be subject to imprisonment for other violations such as falsification of community
tax certificate.

e. Exemption from taxes of all revenues and assets of non-stock, non-profit educational institutions, including
grants, endowments, donations and contributions for educational purposes (Philippine Constitution Art. XIV,
Sec. 4[4])
o The exemption provided in the Constitution covers all revenues and assets, which means that all
incomes and properties of a non-stock, non-profit educational institutions (NSNPEI) are exempted from
income tax and property tax, respectively, provided that, those are actually, directly, and exclusively
used for educational purpose.
o To qualify for the exemption, incomes from the primary operation of the a non-stock, non-profit
educational institutions must compose the majority of the total income.
o Proprietary educational institutions including those cooperatively-owned may likewise be entitled to
the above exemption subject to the limitations provided by law including restrictions on dividends and
provisions for re-investment. The lands, building and improvements of such institutions actually,
directly, and exclusively used for educational purpose are exempt from property tax.
o Grants, endowments, donations and contributions are also exempt from tax if used actually, directly,
and exclusively used for educational purpose.

Example 6:
Bright University, a non-stock and non-profit educational institution, has a total income earned of 10 million
during the year 2017, 70% of which was earned from tuition fees while the other 30% was earned from
miscellaneous fees, rental of canteen concessionaire, and bookstore. The canteen and the bookstore is
located within the school campus. What would be tax implications?

Answer: Bright University is exempted from income tax since it is a non-stock and non-profit educational
institution, and majority of its income were derived from its primary purpose – that is, to render education.
To further qualify for the exemption, it must use its income actually, directly and exclusively for educational
purpose such as allocation for acquisition of books and construction of new building among others. Bright
University is also exempted from real property tax for the real properties it owned such as school buildings
and the land where the school buildings are erected. To be exempted from the tax, those properties must
be actually, directly and exclusively for educational purpose. As a rule, the term “actually, directly and
exclusively use” means that at maximum, only 30% of the portion of the incomes or properties are used for
administrative purpose. Conversely stated, should the amount or portion used for administrative use
exceed 30%, the non-stock, non-profit educational institution shall become liable to tax.

o The tax exemption of revenues of a non-stock, non-profit educational institutions includes, among
others, the following:
- Income from tuition fees, and other fees such as matriculation, library, laboratory fees, ROTC, etc;
- Incidental income from canteen, bookstore and dormitory provided that, these facilities are owned
and operated by the school itself and are located within the perimeter or inside the school campus;
and
- Interest income from bank deposits, provided that the said income are actually, directly and
exclusively used for educational purpose
o Where the school invests its income from tuition fees for an unrelated purpose such as money market
replacement, the invested income is exempt but the earnings therefrom by way of interests are subect
to income tax

Example 7:
Matalino University, a non-stock and non-profit educational institution, earned a total of P 50 million for
the year 2017, with the following breakdown: 40% from tuition, 20% from other school fees, 10% from
canteen, 15% from bookstore located at the front of the gate of the school, 10% from rentals paid by the
concessionaire selling in the canteens located inside the school, and 5% from interest on bank deposits.
The deposits are idle funds of the school. What would be tax implications?

Answer: The incomes earned from tuition (40%), other school fees (20%), and canteen (10%) are exempted
from the tax. The income earned from the bookstore is taxable since the facility is located outside the
Page 6 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

school perimeter. The rental income earned from concessionaires is likewise taxable since Matalino
University now enters into leasing business, which is not its primarily purpose. The interest from bank
deposits shall likewise be subject to tax as it is a form of income derived from investment; it may be
exempted if such income is actually, directly and exclusively used for educational purpose. However,
applying the rule of majority, the source of the majority of the entire income of Matalino comes from its
primary operation (40% + 20% + 10%), thus, the entire income is exempted from the income tax.

On the other hand, Matalino shall be exempted from payment for real property tax.

f. Exemption of the charitable institutions, 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 (Philippine Constitution Art. VI, Sec. 28[3]).
o The exemption provided in this section pertains only to the real property tax, a local tax.
o Charitable, religious and educational institutions are exempted on their real properties used actually,
directly, and exclusively for religious, charitable and educational purposes.
o If the religious, charitable and educational institutions sell these properties, they will be subject to 6%
capital gains tax on the sale of real properties.
o Income earned from leasing those properties which are used actually, directly, and exclusively for
religious, charitable and educational purposes shall still be subject from income tax.

Example 8:
DRP Inc., a new establish religion in Butuan founded by Bro. Joey, leased out its vacant lot to ABC Charity.
ABC Charity used the same to construct a concrete shelter for street children. In 2018, ABC Charity received
a donation from a very generous member, JC. The income earned by DRP Inc. Is subject to income tax
because the exemption pertains only to the real property. The vacant lot and the concrete shelter
constructed thereon shall be exempted from the real property tax. Moreover, the donation received from
JC by ABC Charity is not subject to tax, provided it is used actually, directly, and exclusively for religious and
charitable purposes

Suppose, DRP Inc. decided to sell the land to ABC Charity for an amount of P 2 million pesos. The sale of
the land to ABC shall be subject to capital gains tax of 6% imposed upon the seller – DRP Inc. Thus, ABC
shall withhold 6% capital gains tax or P 120,000 and shall remit the same to the BIR.

Summary of Rules:

Institution Real Properties Income Conditions

Exempted from Used actually, directly and exclusively
Charitable and Taxable, if there is
Real Property for charitable and religious purposes
Religious any.
Tax (subject to 30% limit)
Used actually, directly and exclusively
for educational purpose (subject to
30% limit)
Non-Stock, Non- Exempted from
Exempted from
Profit Educational Real Property
Income Tax For incomes: Majority of the income
Institutions Tax
must be coming from the primary
operation, otherwise the entire
income is taxable at 30%.
Used actually, directly and exclusively
for educational purpose (subject to
30% limit)
Generally taxable at
Proprietary Exempted from
10%, but may be For incomes: Majority of the income
Educational Real Property
exempted from must be coming from the primary
Institutions Tax
income tax operation, and restriction on dividend
distribution and re-investment,
otherwise the entire income is
taxable.

Page 7 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

g. Rule requiring that appropriations, revenue and tariff bills shall originate exclusively from the House of
Represenatatives (Philippine Constitution Art. VI, Sec. 24)
o Appropriation means the fund or money devoted for special government purpose, or simply budgets
contained in the General Appropriations Act which is annually legislated.
o The Congress is divided into two houses: the House of Senate and the House of Representatives.
o All appropriation, revenue or tariff bills, bills authorizing increase of public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the Senate
may propose or concur with amendments (Ibid.)

h. Necessity of an appropriation before money may be paid out of the public treasury (Philippine Constitution
Art. VI, Sec. 29[1])
o All government funds cannot be disbursed without a prior appropriation which shall originate from the
House of Representatives.

i. Non-appropriation of public money or property for the use, benefit or support of any sect, church or system
of religion (Philippine Constitution Art. VI, Sec. 29[2])
o As a law, 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.
o Exception to the rule is when such priest, preacher, minister, or other religious teacher, or dignitary is
assigned to the armed forces or to any penal institution, or government orphanage or leprosarium.

j. Voting requirement of majority of all members of Congress in connection with the legislative grant of tax
exemption (Philippine Constitution Art. VI, Sec. 28[4])
o Now law granting any tax exemption shall be passed without the concurrence of a majority of all
members of the Congress (Representatives and Senate in separate readings)
o Tax exemptions claimed by any taxpayer must be construed strictissimi juris against such taxpayer, in
that, the burden of proof for such exemption lies on the hand of the taxpayer.

k. Non-impairment of the jurisdiction of the Supreme Court in tax cases (Philippine Constitution Art. VIII, Secs.
1, 2, 4 and 5)
o The judicial powers shall be vested in the Supreme Court.
o Judicial power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not there has been a
grave abuse of jurisdiction amounting to lack or excess of jurisdiction on the part of any branch or
instrumentalities of the Government.
o All cases involving the constitutionality of a treaty, international or executive agreement, or law, which
shall be heard by the Supreme Court en banc, and all other cases which under the Rules of Court are
required to be heard en banc, including those involving the constitutionality, application, or operation
of president decress, proclamations, orders, instructions, ordinances, and other regulations, shall be
decided with the occurence of a majority of the members who actually took part in the deliberation on
the issues in the case and voted thereon.

l. President’s Power to Veto (Philippine Constitution Art. VI, Sec. 27[1] & [2])
o Every bill passsed by the Congress shall, before it becomes a law, be presented to the President. If he
approves the same, he shall sign it; otherwise, he shall veto it and return the same with his objections
to the House where it originated.
o Such House where the bill originated and returned shall enter the objections at large in its Journal and
proceed to reconsider it.
o If, after such reconsideration, two-thirds (2/3) of all Members of such House shall agree to pass the bill,
it shall be sent, together with the objections, to the other House by which it shall likewise be
considered.
o If the other House approved by two-thirds (2/3) of all Members of that House, it shall become a law.
o 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.
Page 8 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

o When the President vetoes only a particular item or items such veto is called item veto; when the
President vetoes the entire bill, such is called pocket veto.
o The President shall communicate his veto of any bill to the House where it originated within thirty (30)
days after the receipt thereof; otherwise, it shall become a law as if he had signed it.

PRINCIPLES OR CANONS OF A SOUND TAXATION SYSTEM (FEA)

The principles of taxation are the wisdom to which the exercise of such power is anchored upon. In the exercise of
this power, and consequently the imposition of tax, the State must accord to the following:

1. Fiscal Adequacy
Taxes collected from the exercise of taxation power must be sufficient to meet government expenditures and
other public needs. This is also in consonance of the Lifeblood Theory. Sufficiency of taxes demands that the
government revenue must be at least equal to the government’s expenses, hence a budget balance.
o Budget Deficit = Government Revenues < Government Expenditures
o Budget Surplus = Government Revenues > Government Expenditures

2. Equality or Theoretical Justice

Taxes must be collected based on the taxpayer’s ability to pay. It must be progressive. The ability-to-pay
principle states that tax collected must be fair and must justify the tax imposed on the basis of the taxpayer’s
capacity to pay the tax. That is, the more capable the taxpayer can pay, the higher the tax that he may be
imposed upon him. This principle actually justifies the imposition of graduated rates on income tax and the
proportional tax on consumption (VAT).

3. Administrative Feasibility
Taxation and the collection of taxes must be capable of being effectively enforced. Tax laws, when implemented,
should not obstruct business growth and economic development.

However, despite non-accordance to the above principles, tax laws remain valid, unless such laws are held
unconstitutional.

THEORIES OF TAXATION
Taxation power is based on the following theories or ideas:

1. Necessity Theory (Theory of Taxation)

The power of taxation proceeds upon theory that the existence of government is a necessity; that it cannot
continue without means to pay its expenses. And that for those means, it has the right to compel all citizens
and property within its limits to contribute.

2. Lifeblood Theory (Importance of Taxation)

Taxes are deemed to be the lifeblood of the government. Without taxes, the government would be paralyzed
for the lack of the motive power (or simply, funds) to activate and operate it.

Manifestation of the lifeblood theory:

a. No estoppel against the government.
b. Collection of taxes cannot be enjoined or stopped by injunction.
c. Taxes cannot be the subject of compensation or set-off.
d. A valid tax may result in the destruction of the taxpayer’s property.
e. Right to select objects (subjects) of taxation.

3. Benefits – Protection Theory/ Reciprocal Duties (Basis of Taxation)

The basis of taxation is found in the reciprocal duties of protection and support between the State and its
inhabitants. In return for his contribution, the taxpayer receives benefits and protection from the government.

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Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

This, however, does not mean that only those who are able to and do pay taxes can enjoy the privileges and
protection given to a citizen by the government. Protection is a duty owed by the State to every citizen.

This theory underscores the symbiotic relationship between the State and its citizens, whereby in exchange of
the protection and benefits that the citizens received from the State, taxes are imposed by the State and paid
by them. To flourish the relationship between the State and its citizens, both must continue to support and
help each other – the State continues to provide protection and benefits, and the citizens pay the tax.

4. Jurisdiction Over Subject and Objects

The limited powers of sovereignty are confined to objects within the respective spheres of governmental
control. These objects are the proper subjects or objects of taxation and none else. Under this theory, a State
cannot tax a subject or object of another State, but it can, however, continue to tax its own subjects or objects
in another State (situs of taxation). This is true as in the case of taxing the incomes earned by a resident citizen
in another State or country outside the Philippines. The reason is that, tax laws do not operate beyond the
country’s jurisdictional limits unless there is, between the taxing State and the object of the tax, a privity of
relationship justifying the levy.

DOCTRINES OF TAXATION
1. Prospectivity of Tax Laws
General rule: Tax laws are prospective in operation. This means that a tax law is effected only from the time of
its approval onwards, and cannot be effected backwards. The reason for this generally lies on the constitutional
provision that tax laws should not impair contracts. The nature and amount of the tax could not be foreseen
and understood by the taxpayer at the time the transaction.

Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the legislative intent
(e.g increase taxes on income already earned). When the legislature intends for retroactive application, it would
generally be so harsh and oppressive.

Example 9:
The TRAIN law was enacted and approved on December 19, 2017. Its effectivity begins on January 1, 2018,
though laws must be effected 30 days after the bills are signed by the President. The enactment of such law is
still valid, and as such, all tax subjects as prescribed by and provided for in the new TRAIN law will be taxable
beginning January 1, 2018. The law cannot be given retroactive effect, meaning it cannot be applied for tax
subjects already taxed by the old law. In a more particular sense, the new law cannot subject those incomes
already earned in 2017.

2. Non-retroactivity of Rulings
Rulings are administrative interpretation of the tax law issued upon by the BIR to resolve taxes cases raised by
a taxpayer against the state.

General rule: Any revocation, modification or reversal of rules and regulations promulgated in accordance with
Sections 244 and 245 of the Tax Code and rulings or circulars promulgated by the Commissioner of Internal
Revenue, that is prejudicial to the taxpayer, shall not be given retroactive effect.

Exceptions:
a. Where the taxpayer deliberately misstates or omits material facts from his return or any document required
of him by BIR;
b. Where the facts subsequently gathered by the BIR are materially different from the facts on which the
ruling is based; or
c. Where the taxpayer acted in bad faith. (Sec. 246, NIRC)

Example 10:
KZ, a faithful taxpayer, questioned the validity of a certain ruling promulgated by the previous Commissioner
Depito. The new Commissioner Gulay responded favoring KZ, and reversing the previous ruling. Such reversal
Page 10 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

cannot be given a retroactive effect as it will affect previously consummated transactions (non-impairment of
contracts clause).

3. Imprescriptibility of Taxes
Unless otherwise provided by the tax itself, taxes are imprescriptible which means that they cannot be
cancelled. Cancellation of taxes will violate the Lifeblood Theory which states implies the necessity of money
or fund to support the government’s expenditures. When taxes owing to State are cancelled such as unpaid
taxes accruing to the taxpayer, a legislation is necessary to cancel or grant tax amnesty for such unpaid taxes.

Example 11:
The State previously taxed all income earners in the Philippines for all sources of income. In 2018, the Congress
decided to abolish the old law, and to make a new one removing the tax on incomes. Evangeline, being
previously taxed, has not yet paid her income tax in 2015 and 2016. With the new law, she claimed that her tax
must be canceled because there is no more income tax imposed.

In this case, the contention of Evangeline is wrong. Taxes, by nature and consistent with the lifeblood theory,
are imprescriptive, meaning they cannot be canceled nor reduced, unless the law so provides. Taxes accruing
in the past which remain unpaid will still be collectible unless there is a law granting the cancelation or amnesty
of those taxes.

4. Power of Judicial Review and the Interference of the Court

The power of judicial review is the authority of the Supreme Court to examine an executive or legislative act
and to invalidate that act if it is contrary to constitutional principles. This power is subject to limitations, to wit:
a. There must be an actual case or controversy calling for the exercise of judicial power;
b. The person challenging the act must have the standing to question the validity of the subject act or issuance;
otherwise stated, he must have a personal and substantial interest in the case such that he has sustained,
or will sustain, direct injury as a result of its enforcement;
c. The question of constitutionality must be raised at the earliest opportunity; and
d. The issue of constitutionality must be the very lis mota (litigation moved or the cause or motivation of a
legal action) of the case.

Example 12:
The Congress made a law taxing the production of sin products, the proceeds of which will be used for the
development public hospitals and improvement of their services. The Supreme Court questions the validity of
such law due to its destructive nature increasing the production costs and destroying the industry in general.
Is the Supreme Court correct?

Answer: No. As long as the legislature, in imposing the tax, does not violate applicable constitutional limitations
or restrictions, it is not within the province of the courts to inquire into the wisdom or policy of the exaction,
the motives behind it, the amount to be raised or the persons, property or other privileges to be taxed. The
court’s power is limited only to the application and interpretation of the law.

5. Equitable Recoupment
It is a 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.This doctrine is not currently followed in the Philippines. A tax presently being assessed against a taxpayer
may not be recouped or set-off against an overpaid tax, the refund of which is already barred by prescription.

Example 13:
Lyndon overpaid his tax in 2009 by P 20,000. He forgot to claim for tax refund by not acting on it. In 2018, the
BIR assessed Lyndon and demanded him to pay P 30,000 income tax for his income earned in 2017. Without
sufficient money at hand, Lyndon asked the officer to set-off his tax overpayment in 2009 with his tax due in
2018. Can he do so?

Page 11 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

Answer: No. The overpayment of tax in 2009 had already prescribed; Lyndon must have claimed for refund
within two (2) years after the payment, otherwise his right to refund would be prescribed. Moreover, the tax
due in 2018 cannot be compensated with a tax that has been prescribed.

6. Compensation or Set-Off of Taxes

General Rule: Internal revenue taxes cannot be the subject of set-off or compensation because the government
and the taxpayer are not mutual creditor and debtor of each other.

Exception: If the claims against the government have been recognized and an amount has already been
appropriated for that purpose. Where both claims have already become due and demandable as well as fully
liquidated, compensation takes place by operation of law under Art. 1200 in relation to Articles 1279 and 1290
of the NCC, and both debts are extinguished to the concurrent amount. For compensation, there must be an
actual compromise between the taxpayer and the Commissioner.

Example 14:
In the same example above, but assuming the tax previously overpaid has not been prescribed (say, the
overpayment was made in 2016). To reduce the tax liability, Lyndon asked for compensation, the overpayment
against the current tax liability.

With the approval of the Commissioner of Internal Revenue, Lyndon may ask for compensation, a compromise
to reduce tax liability by the overpaid tax not yet prescribed.

7. Taxpayer Suit
A taxpayer suit is a case filed by a bona fide taxpayer impugning the validity, legality or constitutionality of a tax
law or its implementation. It may be allowed also if the act involves a direct and illegal disbursement of public
funds derived from taxation.

8. Situs of Taxation
Situs of taxation refers to the place of taxation, or the state or political unit which has jurisdiction to impose tax
over its inhabitants. Tax laws of a State operates only within its jurisdiction, subjects or objects. The State cannot
subject to tax the object or subjects of foreign States.

9. Marshall Dictum Doctrine

According to this doctrine, “the power to tax includes the power to destroy”. It says that taxation is constitutional
if it is used validly as an implement of police power in discouraging certain acts and enterprises inimical to public
welfare. However, it is unconstitutional if in raising revenue, taxation is allowed to confiscate or destroy
properties.

10. Holmes Doctrine

In contrary to Marshall Dictum, this doctrine states that, “taxation power is the power to build”. The power to
tax should not be the power to destroy because destruction is merely a consequence of taxation.

11. Principle of “Strictissimi Juris”

The term “strictissimi juris” literally means “according to the strictest interpretation of the law.”This doctrine
holds that “taxation is the rule and exemption is the exception”. Tax exemption must be strictly construed
against the taxpayer and liberally in favor of the government. Tax exemptions are not favored in law, nor are
they presumed. Thus, any taxpayer claiming for exemption should prove his entitlement for the exemption.

12. Doctrine of Estoppel

The State cannot be estopped by the neglect, errors, or mistakes of its agents orofficers. Thus, the erroneous
application and enforcement of law by public officials do not block the subsequent correct application of the
statutes.The doctrine of estoppel operates only against the taxpayer.

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Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

DOUBLE TAXATION
In its strict sense (referred to as direct duplicate taxation or direct double taxation), it means taxing twice by same
public authority within the same jurisdiction or taxing district for the same purpose in the same year or taxing
period.

Elements of Direct Duplicate Taxation:

a. Taxing twice
b. Same taxing authority
c. Same jurisdiction or district
d. Same purpose
e. Same taxing period or year
f. Same kind or character of tax

In its broad sense (referred to as indirect duplicate taxation or indirect double taxation), which is taxation other than
direct duplicate taxation such as absence of one or more of the above-mentioned elements. It extends to all cases
in which there is a burden of two or more pecuniary impositions.

Double taxation in its strict sense is undoubtedly unconstitutional. But while double taxation in its broad sense is
not forbidden, such taxation should be avoided and prevented whenever possible to avoid injustice or unfairness.
Where it occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee.

CONSTRUCTION AND INTERPRETATION

Tax Laws

A tax law is a set of rules that provide means for the State to raise revenues. All revenue bills must originate from
the House of Representatives (Congress). After passing 3 readings by a majority vote in technical committee, it shall
be elevated to the Senate which needs to pass the same 3 readings. The President’s signature is necessary so that
the bill becomes a law.

General Rule: Tax laws are construed strictly against the government and liberally in favor of the taxpayer.

Exceptions:
1. The rule of strict construction as against the government is not applicable where the language of the statute is
plain and there is no doubt as to the legislative intent. In such case, the words employed are to be given their
ordinary meaning. Ex. Word “individual” was changed by the law to “person”. This clearly indicates that the tax
applies to both natural and juridical persons, unless otherwise expressly provided.
2. The rule does not apply where the taxpayer claims exemption from the tax.

Tax Exemption and Exclusion

General Rule: In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris
against the taxpayer.

Exceptions:

1. When the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be resolved in
favor of exemption; and
2. When the exemption is in favor of the government itself or its agencies, or of religious, charitable, and
educational institutions because the general rule is that they are exempt from tax.
3. When the exemption is granted under special circumstances to special classes of persons.
4. If there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative
intent, the rule on strict construction does not apply. [Comm. V. Arnoldus Carpentry Shop, Inc., 159 SCRA 19
(1988)].

Tax Rules and Regulations

The Secretary of Finance, upon recommendation of the CIR, shall promulgate all needful rules and regulations for
the effective enforcement of the provisions of the NIRC. (Sec. 244)
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Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

The power to interpret the provisions of the Tax Code and other tax laws is under the exclusive and original
jurisdiction of the Commissioner of Internal Revenue subject to review by the Secretary of Finance (Sec. 4, par.1,
NIRC).

1. Revenue Regulations
These are issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal
Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions
of the National Internal Revenue Code (NIRC) and related statutes. They are also interpretations of an
administrative body (BIR) intended to clarify or explain the tax laws and carry into effect its general provisions
by providing details of administration and procedure. Revenue regulations must be reasonable, within the
authority conferred, not contrary to laws, must be published and prospective in application.

2. Revenue Memorandum Circulars

These are issuances that publish pertinent and applicable portions as well as amplifications of laws, rules and
regulations, and precedents issued by the BIR and other agencies or offices.

3. Revenue Memorandum Order

These are issuances that provide directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods and procedures necessary in the implementation of stated policies,
goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing.

4. BIR Revenue Rulings

The are issuances by BIR as a general interpretation of tax laws usually upon a request of a taxpayer to clarify a
provision of law.

5. Revenue Administrative Orders

These are issuances that cover subject matters dealing strictly with the permanent administrative set-up of the
Bureau, more specifically, the organizational structure, statements of functions and/or responsibilities of BIR
offices, definitions and delegations of authority, staffing and personnel requirements and standards of
performance.

Decisions of the Supreme Court and Court of Tax Appeals

Decisions of the Supreme Court applying or interpreting existing tax laws are binding on all subordinate courts and
have the force and effect of law. As provided for in Article 8 of the Civil Code, they “form part of the law of the
land”. They constitute evidence of what the law means. (People v. Licera, 65 SCRA 270 [1975]).

Penal Provisions of Tax Laws

Penal provisions of tax laws must be strictly construed. It is not legitimate to stretch the language of a rule, however
beneficent its intention, beyond the fair and ordinary meaning of its language.

ESCAPE FROM TAXATION

Tax Avoidance (Tax Minimization)

It is the use of legal and permissible alternative means, tax rates, or methods of assessing taxable property or
income in order to avoid or reduce tax liability.

a. Shifting – It is the process by which the tax burden is transferred from the statutory taxpayer to another without
violating the law. All indirect taxes may be shifted; direct taxes cannot be shifted.
Example: The imposition of VAT comes with a scheme that it can be shifted from the seller-taxayer to the buyer
that is, the seller shifts the burden of paying the VAT to the buyer by adding the 12% in the selling price.

b. Transformation – The manufacturer or producer pays the tax imposed upon him and endeavors to recoup
himself by improving his process of production, thereby turning out his units of production at a lower cost.

Page 14 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

c. Capitalization – A mere increase in the value of the property is not an income but merely an unrealized increase
in capital.
Example: The taxpayer’s invested money on real properties and the corresponding gains thereon by way of
increases in the value of the land are not subject to income tax. But upon sale, said transaction shall be subject
to 6% capital gains tax. Here, the taxpayer merely delays the payment of income tax.

d. Tax-exemption – A grant of immunity to a particular persons or corporations from the obligation to pay taxes.
Tax exemption may ble classified into:
o Expressed exemptions are those which are expressly indicated or provided by laws or by the Constitution
such as the exemption granted to non-stock and non-profit educational institutions.
o Implied exemption or exemption by omission occurs when a tax imposed is on certain class of persons,
properties or transactions without mentioning other classes; those not mentioned are deemed exempted
by omission.
o Contractual exemptions are those lawfully entered into by the government in contracts under existing laws.

Example: A minimum wage earners are specially exempted from paying income tax by virtue of a legal provision.

e. Tax Amnesty – The State may grant general pardon or intentionally overlooked its authority to impose penalties
on persons guilty of tax evasion or violation of the tax law. The government may allow absolute forgiveness or
waiver to its right to collect what is due in order to give the tax evader.

Tax Evasion (Tax Dodging)

It is the use of illegal or fraudulent means to defeat or lessen the payment of tax. It is punishable by law.

Elements of Tax Evasion:

1. The end to be achieved.
2. An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate and not
accidental.
3. A course of action (or failure of action) which is unlawful.

Because of the rampant cases of evasion, the Bureau of Internal Revenue and the Bureau of Customs established
some initiatives to minimize the evasion cases.

a. Run After Tax Evaders (RATE) - It is a program initiated by the DOF and BIR to investigate and prosecute
individuals and entities engaged in tax evasion and other criminal violations of the National Internal Revenue
Code of 1997. In March 2005, the BIR and the DOF launched the Run After Tax Evaders (RATE) Program. Since
March 2005, 87 complaints of tax evasion have been submitted to the Department of Justice (DOJ) for
preliminary investigation under the RATE Program, including those filed against actors, businessmen, public
officials and other high profile personalities. The BIR registered a record income tax collection in 15 April 2005
of P21.4 Billion or a 43.6% increase from the P14.8 Billion collected compared to the previous year.
o The objectives of the RATE program are:
o generate the maximum deterrent effect on the taxpaying public by impressing the fact that tax evasion is
a crime and violators will be caught and punished
o enhance voluntary compliance among taxpayers
o promote confidence of the public in the tax system.
o Fraudulent activities or criminal tax violations covered by the RATE Program

Offenses relating to income:

o Failure to file tax returns
o Failure to pay taxes
o Deliberate underdeclaration of income by more than 30% of that declared per return (substantial
underdeclaration)
o Hiding or transferring assets or income
o Non-remittance of withholding taxes

Offenses relating to deductions:

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Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

o Deliberate overstatement of amountof deductions by more than 30% of actual deductions (substantial
overstatement of deductions)
o Claiming personal expenses as business expenses
o Claiming false deductions

Other violations:
o Use of fake Certificate Authorizing Registration (CAR), Tax Clearance Certificate (TCC) or other accountable
forms.
o Failure to register with the BIR
o Keeping more than one (1) set of books of accounts
o Making false entries in books and records

b. Run After The Smugglers (RATS) – It is designed not only to collect taxes but also to ensure that importers comply
with existing laws and regulations on tariff and customs which complements the post-audit power of the BOC
under RA 9135, which took effect on June 2, 2001. In 2005, the Bureau of Customs launched an aggressive
battle against smugglers who pose serious and direct threat to the national economy by depriving the
government of its much- needed revenues. To boost its collection, the BOC introduced the Run After the
Smugglers (RATS) Program which aimed to file customs cases against high profile smugglers.

c. Oplan Kandado – On January 23, 2009, the BIR issued Revenue Memorandum Order No. 3 – 2009 to implement
a nationwide “Oplan Kandado” Program. Under the program, business operations of non-compliant taxpayers
will be suspended and their establishments will be temporarily closed if they will be found to have violated
certain tax laws. The programs aims to intensify the Bureau’s enforcement operations through strict imposition
of prescribed administrative sanctions for non-compliance with the basic tax requirements.

Grounds for suspension:

o Failure to issue receipts or invoices by a VAT-registered or registrable taxpayer,
o Failure to file a VAT return;
o Understatement of taxable sales or receipts by 30% or more of the correct amount thereof in the case of
a VAT-registered or registrable taxpayer;
o Failure to register

The closure of the business establishment shall last for a period of not less than five (5) days, and shall be in
force until the violation is rectified by the concerned taxpayer. The suspension and temporary closure of
business shall not preclude the BIR from filing the appropriate charges under the RATE Program of the Bureau,
if evidence so warrants the taxpayer concerned or responsible office of the corporations.

The closure order shall only be lifted by the BIR when there has been:
o A subsequent filing or amendment of returns with the payment of the tax inclusive of statutory penalties;
o Subsequent registration with the payment of the corresponding compromise penalties
o Payment of deficiency taxes inclusive of penalties corresponding to the sales where no invoices/receipts
have been issued; and
o Payment of deficiency taxes inclusive of penalties corresponding to the understatement of taxable sales
or receipts.

SOURCES OF TAX LAWS

1. The Philippine Constitution – The pertinent provisions of the Constitution which relate t taxation are embodied
in the different articles thereof. Although the Constitution never really provides for the imposition of tax, those
constitutional provisions regulate or limit the exercise of the power to tax.

2. Statutes and Presidential Decree – The main statutory law on taxation is Presidential Decree No. 1158 (as
amended particularly by RA 8424) otherwise known as the National Internal Revenue Code of 1997 which
consolidated and codified the internal revenue laws of the Philippines superceding the Commonwealth Act No.
466 (as amended). Such NIRC, also known as the Tax Code, is futher amended by RA 10963 otherwise known
as the Tax Reform Acceleration and Inclusion (TRAIN).

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Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

3. Revenue Regulations – Under the Section 244 of the National Internal Revenue Code, it is provided that that
the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, shall promulgate
all needful rules and regulations for the effective enforcement of the provisions of the Tax Code. The most
formal pronouncements of the Department of Finance in this respect are known as the “Revenue Regulations”.

4. Administrative Rulings and Opinions – Administrative rulings are the less general interpretations of tax laws
being issued from time to time by the Commissioner of Internal Revenue. They are usually rendered on request
of the taxpayers to clarify certain provisions of a tax law. They are known as “BIR Rulings”. Rulings in the form
of opinions are also given by the Secretary of Justice who is the chief legal officer of the Government.

5. Judicial Decisions – The decisions of the Supreme Court and the Court of Tax Appeals applying or interpreting
tax laws constitute a major part of the jurisprudence on taxation. They form a part of the legal system of the
Philippines. The decisions, however, of the Court of Tax Appeals are still appealable to the Supreme Court, the
decision of which on any matter is final.

6. Provincial, City, Municipal, and Barangay Ordinances – The local government units such as provinces, cities,
municipalities, barangays may also impose taxes subject to such limitations as provided by the Local
Government Code.

7. Treaties and International Agreements – The Philippines may enter into an agreement or treaties with other
countries regarding a particular matter, and such treaty has the force and effect of a law.

STAGES OR ASPECTS OF TAXATION

The aspects of taxation are shared by both executive and legislative body.

1. Levy – It is the imposition or making of tax laws. It is at this point when the object and situs of tax is determined.
This point is otherwise known as the tax legislation.
2. Assessment – It is the execution of the tax law by which the correct tax is computed. It is the point of the
taxation system where the taxpayers calculate their tax due. When the taxpayer erroneously or fraudulently
miscalculated the tax due, the BIR would normally assess the taxpayer with the correct tax, plus the
corresponding penalty and surcharges.
3. Collection – It is the enforcement of tax from the taxpayer. Tax must be paid in money. If the taxpayer fails to
pay the tax, the BIR would normally exercise its administrative remedies for the collection of the tax such as
distraint, garnishment, and levy.

Levy and assessment comprise the impact of taxation, while tax collection comprises the incidence of taxation. An
impact of taxation is a point on which tax is originally imposed. . In so far as the law is concerned, the taxpayer, the
subject of tax, is the person who must pay the tax to the government. An incident of taxation is a point on which
the tax burden finally rests or settles down.

NATIONAL TAXES VS. LOCAL TAXES

NATIONAL TAXES LOCAL TAXES
Authority Inherent Power Delegated Power
Nature Legislative in nature through enactment of Legislative in nature through enactment of local
tax laws (NIRC) by the Congress and the ordinances by the local legislative branch
Senate
Process a. Levying = done by the Congress a. Levying = done by the local legislative
b. Assessment and Collection = done by the branch
BIR and BOC b. Assessment and Collection = done by the
City Treasurer

(A detailed discussion on local taxation is available on the other material.)

Page 17 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

CONCEPT OF A TAX
Tax is an enforced proportional contribution imposed upon persons, property and rights, and levied by the law-
making body of the State. Characteristics of a tax.

a. It is a forced charge.
b. It is generally payable in money.
c. It is exclusively levied by the legislative body.
d. It is assessed in accordance with some reasonable rule of apportionment (ability-to-pay principle).
e. It is imposed by the State within its jurisdiction.
f. It is levied for public purpose.

CLASSIFICATION OF TAXES
1. As to subject matter:
a. Personal tax – imposed upon persons of certain class with fixed amount (example: Community tax or Poll
tax)
b. Property tax – assessed on property of certain class (example: Real Property Tax)
c. Excise tax – imposed on the exercise of privilege (example: Income tax, Donor’s Tax, Estate tax, etc.)
d. Custom duties – charged upon the commodities being imprted into or exported from a country (example:
Tariffs)

2. As to burden:
a. Direct tax – both incidence or liability for the payment of tax as well as the impact or burden of the tax falls
on the same person (example: Income Tax)
b. Indirect tax – the incidence or liability for the payment of tax falls on one person but the impact or burden
of the tax falls on another person (example: Value Added Tax)

3. As to purpose
a. General tax – levied for the general or ordinary purposes of the government (example: Income tax is levied
for the support of the government in general)
b. Special tax – levied for special purpose (example: Mining Tax is imposed upon mining companies specially
for the rehabilitation of the area after the exhaustion of mineral reserves)

4. As to measure of application
a. Specific tax – imposes a specific sum by the head or number or by some standard of weight or measurement
(example: Excise tax on Cigarettes)
b. Ad Valorem tax – tax upon the value of the article or thing subject to taxation (example: VAT of 12%
regardless of the value of sales)

5. As to taxing authority
a. National tax – levied by the National Government (example: Income Tax, Business Taxes, Transfer Taxes)
b. Local tax – imposed by the Local Government (example: Poll tax, Real Property Taxes, Professional Tax)

6. As to rate
a. Progressive tax – rate or amount of tax increases as the amount of income increases (example: normal or
tabular or schedular tax of 20% - 35%)
b. Regressive tax – rate dcreases as the amount of income to be taxed increases (not applicable in the
Philippines)
c. Digressive tax – a fixed rate is imposed on a certain amount and diminishes gradually on sums below it. The
tax rate in this case is arbitrary because the increase in tax rate is not proportionate to the increase of tax
base.
d. Proportionate tax – based on fixed proportion or rate of the value of the property assessed (example: VAT
of 12%)

Page 18 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

IMPOSITIONS OTHER THAN TAX

The following are some impositions collected by the Government, but they are not tax per se.

1. Toll – It is a charged for the cost and maintenance of the property used.
2. Penalty – It is punishment for the commission of a crime or negligence.
3. Compromise Penalty – It is amount collected in lieu of criminal prosecution in cases of tax violation
4. Special Assessment – It is levied on land based entirely on the benefit accruing thereon as a result of the
improvements or public works undertaken by the government within the vicinity.
5. License or Fee – It is a regulatory imposition in the exercise of the police power.
6. Margin Fee – It is an exaction designed to stabilize the currency.
7. Debt – It is a sum of money due upon contract or one which is evidenced by judgment
8. Subsidy – It is a legislative grant of money in aid of a private enterprise deemed to promote the public welfare
9. Custom Duties and fees – They are duties charged upon commodities on their being transported into or
exported from the country.
10. Impost – In general sense, it signifies any tax, tribute or duty; in limited sense, it means a duty on imported
goods and merchandise.
11. Tithe – It is a contribution given to a church or sect.
12. Tribute – It is imposed by a monarch.

Page 19 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
GENERAL PRINCIPLES

SUMMARY OF DISCUSSIONS IN TAXATION

National Internal Revenue Taxes

Income Taxes Transfer Taxes Business Taxes

Individual Taxpayers: Graduated rates (20% - 35%) and/or Value Added Tax: 12% on domestic sale of goods and
8% Optional Rate (applicable both to RC, NRC, RA, and Gratuitous Transfers Onerous Transfers services. Taxpayers with annual gross sales or receipts
NRAETB). exceeding 3 million pesos should be registered under the
VAT system. Taxpayers with annual gross sales or
Individual Taxpayers: 25% on all gross incomes within the Mortis Causa: Estate receipts not exceeding 3 million pesos may register under
Philippines (applicable only NRANETB). tax of 6% the VAT system. Radio and television broadcasting
companies shall register under VAT system if their annual
gross receipts exceeds 10 million pesos.
Individual Taxpayers: Graduated rates (20% - 35%) on the
gross compensation income at the option of a Filipino Inter Vivos: Donor’s tax
taxpayer who are employed in OBUs, ROHQs, RAHQs, Value Added Tax: Sale or Lease of Real Properties (subject
of 6%, first P 250,000 is
petroleum contractor and subcontractor to 12%):
exempt per annum
o Commercial spaces, regardless of the amount
Corporate Taxpayers: 30% on their net taxable income o Residential Lots, exceeding P1,919,500
within and outside (DC); 30% on their net taxable income o Residential House and Lots, exceeding P 3,199,200
within only (RFC); 30% on their gross income within only Residential Property: inventory, if o Adjacent residential lots sold to the same buyer by
(NRFC) the selling price is: the same seller within the same year, if the selling
o Not more than P 500,000, price exceeds the threshold above.
Other Creditable 1.5% CWT o Lease of residential units with a monthly rental per
Corporate Taxpayers: 5% of the gross income of those unit P 15,000.00 and the total annual receipts
Withholding Taxes: o More than P 500,000 but not
registered under the PEZA and BOI, 10% of the net o 5% on rent payments exceeds 3 million pesos.
income OBUs and PEIs, 7.5% lessor of aircraft, 4.5% more than 2 million, 3% CWT
o 5% or 10%-15% on
lessor of vessel, and 25% lessor of cinematographic films. o More than 2 million, 5% CWT
professional incomes
Value Added Tax: 0% on export sale of goods, services
o 1% sale of Service
o ½% sale of goods Real Property: Non-inventory but and lease of properties.
Passive Incomes: 20%, 10% or 15% final taxes on certain used in trade or business,
passive incomes Other Final Withholding regardless of the price, subject to Percentage Taxes: Applicable only if the taxpayer is not
Taxes: 6% CWT subject to VAT – (0%, 6/10 of 1%, 3%, 4%, 7%, 10%, 15%,
o Fringe Benefit Tax, 35% 18%, and 30%)
Capital Gains: 6% based on the FMV or assessed value on o Withdrawals from bank
the sale of Real Properties not used in business or held as Real Property: Non-inventory and
accounts under estate
capital assets; 15% on capital gains on sale of shares settlement, 6% not used in trade or business, no Excise Taxes: Imposed only on manufacturers and/or
stocks not traded in stock exchange. VAT, but subject to 6% CGT importers of sin products.

Documentary Stamp Tax: Applicable to certain documents required by law to have DST affixed.
Page 20 of 20
Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963