General Principles of Taxation 7

Distinctions of the Inherent Powers

Eminent Taxation
Police Power Domain
Compensation Most indirect: Most direct: Indirect: A
altruistic just com¬ civilized
feeling of pensation society,
contributing support of
to society, the State,
feeling of governmenta
safety and 1 works and
security aid.
Restriction Most Least Limits
restrictive: restrictive: property,
Limits covering
Only limits
property and multiple
particular
liberty transactions
private
property
Persons General A particular General
affected public property public
owner
Amount Fees are Citizens do Taxes are
collected limited to the not make unlimited in
cost of payments nature
regulation
Amount No amount Equal to the No amount
given given to fair market given to
citizens value of citizens
property
taken
 8
Your Taxmate Says

Taxation is inherent because of the theory and basis

of taxation.
Lifeblood Doctrine
Taxes are the lifeblood of the nation through which
the government agencies continue to operate and with
which the State effects its functions for the welfare of its
constituents.4 The government chiefly relies on taxation to
obtain the means to carry on its operations. Taxes are essential
to its very existence.5
Taxes are the lifeblood of the government, and their
prompt and certain availability is an imperious need.6 It is
said that taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for lack of the
motive power to activate and operate it.7
Necessity Theory
A principal attribute of sovereignty, the exercise of
taxing power derives its source from the very existence of
the state whose social contract with its citizens obliges it to
promote public interest and common good. The theory behind
the exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of promoting
the general welfare and well-being of the people.8
Benefits-Received Theory
Despite the natural reluctance to surrender part of

4 Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 106611, July 21,
1994.
5 Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191,
November 25, 2003.
6 Commissioner of Internal Revenue v. Pineda, G.R. No. L-22734, September 15, 1967.
7 Commissioner of Internal Revenue v. Algue, Inc., G.R. No. L-28896,
February 17,
1988.
8
Commissioner of Internal Revenue v. Bank of the Philippine Islands, G.R. No. 134062,
April 17, 2007
 General Principles of taxation 9

one's hard-earned Income to the taxing authorities, every

person who is able to must contribute his share in the
running of the government. The government for its part, is
expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and
enhance their moral and material values.9
This is otherwise known as the doctrine of symbiotic
relationship. The basis of taxation is the existence of a
social contract, characterized as a symbiotic relationship between
—
the State and its citizens which compel reciprocal duties
of protection and support between the parties.10
The subjects of every state ought to contribute towards
the support of the government, as nearly as possible, in
proportion to their respective abilities; that is, in proportion
to the revenue which they respectively enjoy under the
protection of the state.11
Mandatory Nature of Taxation
Taxation is obligatory. Non-compliance with tax laws
is dealt with civil penalties (such as interest and surcharges)
and criminal penalties (such as fine and imprisonment).
Tax laws are civil in nature.12
Exception: Provisions of the National Internal Revenue
Code (NIRC) and other laws that imposes criminal penalties
(e.g., Sections 253-282, NIRC)

9 Commissioner of Internal Revenue v. Algue, Inc., supra note 7.

10 Dissenting Opinion of J. Javier in Saint Wealth Ltd. v. Bureau of Internal Revenue,
G.R. Nos. 252965 & 254102, December 7, 2021.
Saint Wealth Ltd. v. Bureau of Internal Revenue, id.
”
” Commissioner of Internal Revenue v. Reyes, G.R. Nos. 159694 & 163581, January
27, 2006.
10 Yi tun Taxman Says

Escape from Taxes

1. Tax evasion - Also: Tax dodging - Illegal means of
non-payment of taxes. In such case, there is a
positive obligation to pay, but the taxpayer willingly,
consciously, and feloniously refused or neglected
to pay.
Tax evasion is a scheme used outside of those
lawful means and when availed of, it usually subjects
the taxpayer to further or additional civil or criminal
liabilities.*13
Tax evasion connotes the integration of three factors:14
a. the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally
due, or the non-payment of tax when it is shown
that a tax is due;
b. an accompanying state of mind which is
described as being "evil," in "bad faith,"
"willful," or "deliberate and not accidental"; and
c. a course of action or failure of action which is
unlawful.
2. Tax avoidance - Also: Tax minimization - Legal
means of reducing, eliminating, or deferring the tax
burden.
Tax avoidance is the tax saving device within the
means sanctioned by law. This method should be
used by the taxpayer in good faith and at arms
length.15

of Internal Revenue v. Estate of Toda, Jr., G.R. No. 147188,

” Commissioner
September 14, 2004.
"Ibid.
15 Ibid.
 General Principles of Taxation 11

3. Tax exemption - Also: Tax holiday - It is the

provisions of law which provide for non-payment.
XT z
Illustration:
° Wonwoo wants to part ownership with his parcel
of land.
• If he sells it for a gain and did not pay income tax,
then such is tax evasion.
• If instead of selling the parcel of land, he donated it
to his friend so that he may be required to pay a
reduced amount of tax, then such is tax
minimization.
• If he donates it to a non-stock non-profit institution,
then such is tax exemption, subject to specific
requirements.
4. Tax Shifting - The burden of payment of tax is
passed from one person to another
There are three kinds of tax shifting:
a. Forward shifting - the burden falls entirely on
the user, rather than the supplier, of the commodity
or service
b. Backward shifting - the price of the article
taxed remains but the cost of the tax is borne by
those engaged in producing it.
c. Onward shifting - a mix of forward and backward
shifting done multiple times.
 12 Your Taxmate Says

Illustration:
In value-added tax (VAT):

Incidence pertains to the actual liability to pay the tax.

In this case, it is the seller who is statutorily required to
pay the taxes with the BIR. Impact pertains to the
economic burden of the tax incident. In this case, the
seller can augment their selling price to include the VAT,
effectively passing the tax burden to the buyer. This is
an example of forward shifting.
This shifting process, otherwise known as ’passing on,1 is
largely a contractual affair between the parties.16
5. Tax capitalization - This occurs if the burden of the
tax is incorporated in the value of long-term assets.
The present owner of the asset takes a capital loss
because the value of the asset will be lowered by
the capitalized value of the tax.
For instance, if a production tax on minerals cannot
be shifted, then the tax will be absorbed by the
mineral deposits thereby decreasing their actual
value. A higher corporate income tax will reduce
net income after tax, and it will consequently
reduce the value of corporate stock. It is as if the tax
is capitalized as part of the value of the asset.

’♦ Pilipinas Shell Petroleum Corp. v. Commissioner of Internal Revenue, G.R. No.

211303, June 15, 2021.
 General Principles of Taxation 13

6. Tax transformation - after absorbing taxes, the

producer improves process of production thereby
reducing cost.
7. Tax amnesty - it partakes of an absolute waiver by
the government of its right to collect what is due it
and to give tax evaders who wish to relent a chance
to start with a clean slate.17
8. Compensation - Compensation or set-off shall take
place when two persons, in their own right, are
creditors and debtors of each other.18
General rule: Taxes cannot be subject to compensation
because the government and the taxpayer are not
creditors and debtors of each other.19
Exception: Offsetting can be allowed only if the
determination of the taxpayer's liability is intertwined
with the resolution of the claim for tax refund of
erroneously or illegally collected taxes. However, it
will not be allowed if the period to assess deficiency
taxes in the excess of the amount claimed for refund
had already prescribed.20
Related concept: Equitable recoupment
Tax adjustments where a charge or credit on one
side would ordinarily be barred but equitably should
be allowed against a nonbarred liability asserted on
the other. This allows the interposing of an equitable

17 Philippine Banking Corporation v. Commissioner of Internal Revenue, G.R. No.

170574, January 30,2009.
18 Article 1278, Civil Code.

Philex Mining Corporation v. Commissioner of Internal Revenue, G.R. No. 125704,

” August 28, 1998; CIR v. Toledo Power Company, G.R. No. 196415, December 2,
2015.
20 Commissioner of Internal Revenue v. Toledo Power Company, id.
 14 Your Taxmate Says

defense in the nature of set-off.21 However, take

note that the doctrine of equitable recoupment is
not applicable in the Philippines.22
Principles of a Sound Tax System
There are three principles of a sound tax system. These
are:

Fiscal adequacy J}

Fiscal adequacy
This requires that sources of revenues must be
adequate to meet government expenditures and their
variations.23
Administrative feasibility
It means that the tax system should be
capable of being effectively administered
and enforced with the least inconvenience
to the taxpayer.24
Examples of manifestations of administrative feasibility:
1. Electronic filing

21 University of Santo Tomas v. Collector of Internal Revenue, C.T.A. Case No. 10,
June 4, 1956.
“See Investors Finance Corp. v. CIR, C.T.A. Case No. 3717, May 10, 1993.
23 Chavez v.
Ongpin, G.R. No. 76778, June 6, 1990.
24 Municipality of
Cainta v. Pasig City, G.R. Nos. 176703 & 176721, June 28, 2017.
 General Principles of Taxation 15

2. Removal of penalties for wrong venue of filing

3. Substituted filing of returns where many employees
were exempted from the requirement to file returns
4. Other online platforms of the Bureau of Internal
Revenue (BIR), such as the Online Registration and
Update System (ORUS).
Theoretical justice
This finds basis in the Constitution
which provides that "the rule of taxation shall
be uniform and equitable, and that the
Congress shall evolve a progressive system of taxation."25
Progressive taxation is built on the principle of the
taxpayer's ability to pay. The subjects of every state ought
to contribute towards the support of the government, as
nearly as possible, in proportion to their respective abilities;
that is, in proportion to the revenue which they respectively
enjoy under the protection of the state.26
This is also known as the ability-to-pay principle.
Effect of Non-Compliance with the Principles
The principles of a sound tax system are not binding.
As the words imply, these are merely principles that our
tax system must ideally follow in order to be considered
sound. Any law which runs counter against these principles
is not necessarily void, just unsound, and it is not up for
the courts to question the wisdom of the legislature unless
the enactment goes against the Constitution.

25 Section 28(1), Article VI, Constitution.

26 Abakada Guro Party List v. Ermita, G.R. Nos. 168056, 168207, 168461, 168463 &
168730, September 1, 2005; quoting Book V, chapter 2 of Adam Smith's The
Wealth of Nations (1776).
 16 Your Taxmate Says

Arguably, compliance with the principle of theoretical

justice is mandatory, for it finds its basis in the Constitution.
However, the Supreme Court has described the said
constitutional provision as a mere directive, such that the
Congress may still enact regressive taxes.
In Tolentino v. Secretary of Finance,27 the Supreme Court
said:
It means that "direct taxes are to be preferred and as
much as possible, indirect taxes should be minimized."
The mandate of Congress is not to prescribe but to evolve a
progressive tax system. This is a mere directive.
What it simply provides is that Congress shall evolve
a progressive system of taxation. We cannot avoid regressive
taxes but only minimize them.
Regressivity is not a negative standard for courts to
enforce. What Congress is required by the Constitution to
do is to "evolve a progressive system of taxation." This is a
directive to Congress, just like the directive to it to give
priority to the enactment of laws for the enhancement of
human dignity and the reduction of social, economic and
political inequalities, or for the promotion of the right to
"quality education". These provisions are put in the
Constitution as moral incentives to legislation, not as
judicially enforceable rights.
Monetary Nature of Taxation
Taxes are generally payable in money.
However, the Congress is not prohibited from enacting
a law that taxes will be payable in any other form than
money. It is to be noted that such will run counter against
the principle of administrative feasibility, considering that

^C.R. No. 115455, October 30, 1995.