TAXATION NOTES

Atty. Mendoza
I. TAXATION
1. DEFINITION OF TAXATION
Taxation as a power:
Taxation is the inherent power of the sovereign, exercised through
the legislature, to impose burdens upon subjects and objects within
its jurisdiction for the purpose of raising revenues to carry out the
legitimate objects of government.
Taxation as a process:
It is the act of levying the tax, i.e., the process or means by which
the sovereign, through its law-making body, raises income to defray
the necessary expenses of the government.
It is merely a way of apportioning the cost if the government among
those who in some measures are privileged to enjoy its benefits and,
therefore, must bear its burdens. (71 Am Jur. 2nd 342; 1 Cooley 7273)
Note:
The power of taxation is inherently legislative. Thus, congress has the
power to determine: [CONES]
1. Coverage of taxation
2. Object or purpose of taxation
3. Nature or kind of product taxed
4. Extent or rate of tax
5. Situs of taxation
2. NATURE OF INTERNAL REVENUE LAWS
Hilado v CIR and CTA (1956)
Petitioners contention that during the last war and as a consequence of
enemy occupation in the Philippines there was no taxable year within
the meaning of our internal revenue laws because during that period they
were unenforceable, is without merit. It is well known that our internal
revenue laws are not political in nature and as such were continued in
force during the period of enemy occupation and in effect were actually
enforced by the occupation government. As a matter of fact, income tax
returns were filed during that period and income tax payment were

effected and considered valid and legal. Such tax laws are deemed to be
the laws of the occupied territory and not of the occupying enemy.
It is a legal maxim, that excepting that of a political nature,
Law once established continues until changed by some
competent legislative power. It is not changed merely by
change of sovereignty. (Joseph H. Beale)
As the same author says, in his Treatise on the Conflict of Laws
There can be no break or interregnun in law. From the time
the law comes into existence with the first-felt corporateness of a
primitive people it must last until the final disappearance of human
society. Once created, it persists until a change takes place, and
when changed it continues in such changed condition until the next
change and so forever. Conquest or colonization is impotent to bring
law to an end; inspite of change of constitution, the law continues
unchanged until the new sovereign by legislative act creates a
change. (Co Kim Chan vs. Valdes Tan Keh and Dizon)
The Secretary of Finance is vested with authority to revoke,
repeal or abrogate the acts or previous rulings of his
predecessor in office because the construction of a statute
by those administering it is not binding on their successors if
thereafter the latter become satisfied that a different construction
should be given.
(Association of Clerical Employees vs. Brotherhood of Railways &
Steamship Clerks)
An erroneous construction of the law by the Treasury Department or
the collector of internal revenue does not preclude or estop the
government from collecting a tax which is legally due.
(Ben Stocker, et al.)
Art. 2254. No vested or acquired right can arise from acts
or omissions which are against the law or which infringe
upon the rights of others. (New Civil Code)
3. SCOPE OF TAXATION
Must be: Comprehensive Unlimited Plenary Supreme

Restrictions: Practical Useful Lawful Published

a. Section 28, Art. VI, 1987 Constitution
(1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
(2) The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it
may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework of
the national development program of the Government.
(3) Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used
for religious, charitable, or educational purposes shall be exempt
from taxation.
(4) No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
b. 71 Am Jur 2nd 394-395 & 397-398
In the absence of constitutional restrictions, and subject to the will of
the legislative bodies and discretion of the authorities which exercise
it, the power of taxation is regarded as unlimited, plenary
and supreme, the principal check upon its abuse resting in the
responsibility of the members of the legislature to their constituents.
Although the power may be exercised even to the point of
destroying the commercial or use value of the thing taxed, it has
been said, on the other hand, that even in the absence of
constitutional restrictions, such exercise must rest upon justice.
Personal property belonging to a foreign sovereign and temporarily
located in a particular country is not subject to state taxation in that
country.
A sovereign state has inherent power to determine the subjects of
taxation for general or particular public purposes, and may take
appropriate changes in the selections and classifications of the
properties made subject to or exempted from taxation.
c. CREBA v Romulo (2010)
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and
is implemented by RR 9-98. Petitioner argues that the MCIT violates the

due process clause because it levies income tax even if there is no

realized gain. Petitioner also asserts that the enumerated provisions of
the subject revenue regulations violate the due process clause because,
like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal
protection clause as well because the CWT is being levied upon real
estate enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.
The MCIT on domestic corporations is a new concept introduced
by RA 8424 to the Philippine taxation system. It came about as
a result of the perceived inadequacy of the self-assessment
system in capturing the true income of corporations.
MCIT does not tax capital but only taxes income as shown
by the fact that the MCIT is arrived at by deducting the capital
spent by a corporation in the sale of its goods, i.e., the cost of
goods and other direct expenses from gross sales. Besides,
there are sufficient safeguards that exist for the MCIT:
(1) it is only imposed on the 4th year of operations;
(2) the law allows the carry forward of any excess MCIT paid
over the normal income tax; and
(3) the Secretary of Finance can suspend the imposition of MCIT
in justifiable instances.
The primary purpose of any legitimate business is to earn a
profit. Continued and repeated losses after operations of a
corporation or consistent reports of minimal net income render
its financial statements and its tax payments suspect. For sure,
certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on
such tax shelters. As a tax on gross income, it prevents
tax evasion and minimizes tax avoidance schemes
achieved
through
sophisticated
and
artful
manipulations of deductions and other stratagems. Since
the tax base was broader, the tax rate was lowered.
SC: MCIT is not violative of due process.
Taxes are the lifeblood of the government. Without taxes, the
government can neither exist nor endure. 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 the common good.
Taxation is an inherent attribute of sovereignty. It is a power that is
purely legislative. Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation. It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much tax
shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its
range, acknowledging in its very nature no limits, so that the
principal check against its abuse is to be found only in the
responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it. Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like any other statute,
tax legislation carries a presumption of constitutionality.
Income v Capital
Income means all the wealth which flows into the taxpayer other
than a mere return on capital.
Capital is a fund or property existing at one distinct point in time
while income denotes a flow of wealth during a definite period of
time.
Income is gain derived and severed from capital.
For income to be taxable, the following requisites must
exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.
Certainly, an income tax is arbitrary and confiscatory if it taxes
capital because capital is not income. In other words, it is income,

not capital, which is subject to income tax. However, the MCIT is not
a tax on capital.
The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its goods,
i.e., the cost of goods and other direct expenses from gross sales.
Clearly, the capital is not being taxed.
Creditable Withholding Tax (CWT) System
The withholding tax system is a procedure through which taxes
(including income taxes) are collected.[61] Under Section 57 of RA
8424, the types of income subject to withholding tax are divided into
three categories:
(a) withholding of final tax on certain incomes;
(b) withholding of creditable tax at source and
(c) tax-free covenant bonds.
The Secretary of Finance is granted, under Section 244 of RA 8424,
the authority to promulgate the necessary rules and regulations for
the effective enforcement of the provisions of the law. Such authority
is subject to the limitation that the rules and regulations must not
override, but must remain consistent and in harmony with, the law
they seek to apply and implement. It is well-settled that an
administrative agency cannot amend an act of Congress.
We have long recognized that the method of withholding tax at
source is a procedure of collecting income tax which is sanctioned by
our tax laws.
The withholding tax system was devised for three primary reasons:
1) to provide the taxpayer a convenient manner to meet his
probable income tax liability;
2) to ensure the collection of income tax which can otherwise be lost
or substantially reduced through failure to file the corresponding
returns and
3) to improve the governments cash flow.
This results in administrative savings, prompt and efficient collection
of taxes, prevention of delinquencies and reduction of governmental
effort to collect taxes through more complicated means and
remedies.

Respondent Secretary has the authority to require the

withholding of a tax on items of income payable to any
person, national or juridical, residing in the Philippines.
Passive Income
The BIR defines passive income by stating what it is not:
if the income is generated in the active pursuit and
performance of the corporations primary purposes, the same is
not passive income
It is income generated by the taxpayers assets. These assets can be
in the form of real properties that return rental income, shares of
stock in a corporation that earn dividends or interest income
received from savings.
Equal Protection Clause
The equal protection clause under the Constitution means that no
person or class of persons shall be deprived of the same protection
of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances. Stated differently, all persons
belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by
legislation based on a reasonable classification.
Classification, to be valid, must
(1) rest on substantial distinctions;
(2) be germane to the purpose of the law;
(3) not be limited to existing conditions only and
(4) apply equally to all members of the same class.
The taxing power has the authority to make reasonable
classifications for purposes of taxation. Inequalities which result from
a singling out of one particular class for taxation, or exemption,
infringe no constitutional limitation. The real estate industry is, by
itself, a class and can be validly treated differently from other
business enterprises.
d. Sison v Ancheta (1984)

 The power to tax is not unconfined. There are restrictions set forth
by the Constitution. As it adversely affects property rights, both the
due process and equal protection clauses may be properly invoked.
Justice Marshall: The power to tax involves the power to destroy.
Justice Frankfurter: The power to tax is not the power to destroy
while this Court sits. According to C.J. Fernando, so it is in the
Philippines.
Equality and uniformity in taxation means that all taxable
articles of kinds of property of the same class shall be taxed
at the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation. There
is a similarity to the standard of equal protection for what is required
is that the tax applies equally to all persons, firms and corporations
placed in a similar situation.
It is undoubted that the due process clause may be invoked
where a taxing statute is so arbitrary that it finds no support
in the Constitution. An obvious example is where it can be shown
to amount to the confiscation of property. That would be a clear
abuse of power. It then becomes the duty of this Court to say that
such an arbitrary act amounted to the exercise of an authority not
conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure is
beyond the jurisdiction of the state, or is not for a public purpose, or,
in case of a retroactive statute is so harsh and unreasonable, it is
subject to attack on due process grounds.
e. Sarasola v Trinidad (1919)
The broad principle is that every taxpayer has a right to a remedy
for any actual wrong he may have suffered in the collection of taxes.
Usually a party will find a plain and sufficient remedy for the injuries
complained of, or threatened, in the courts of law; in such instances,
equity will not take jurisdiction. "Presumptively," Judge Cooley says,
"the remedy at law is adequate." (Cooley on Taxation)
Where, as in the Philippines, the taxpayer is permitted to pay the
amount demanded of him under protest and then maintain an action
at law to recover back the whole amount paid or so much of it as

was illegally exacted, this is ordinarily regarded as an adequate

remedy.
Sec. 1578 of the Administrative Code: No court shall have authority
to grant an injunction to restrain the collection of any internal
revenue tax.
Public policy decrees that, since upon the prompt collection of
revenue there depends the very existence of government itself,
whatever determination shall be arrived at by the Legislature should
not be interfered with unless there be a clear violation of some
constitutional inhibition.
Re: Payment of Interest
Taxes only draw interest as do sums of money when expressly
authorized: Interest is not to be awarded against a sovereign
government, unless its consent has been manifested by an
Act of its legislature or by lawful contract of its executive officers.
If there be doubt upon the subject, that doubt must be resolved in
favor of the State. There is no ground for charging the Crown with
interest. Interest is only payable by statute or by contract. The State
never pays interest unless she expressly engages to do so. But when
an illegal tax has been collected, the citizen who has paid and is
obliged to bring suit against the collector is entitled to interest from
the time of the illegal exaction. The difference lies in the fact that
the suit is against the collector and not the State, although the
judgment is not be paid by the collector but directly from the
treasury.
4. UNDERLYING THEORY AND BASIS
a. 71 Am Jur 2nd 346-347
The existence of government is a necessity; it cannot continue
without means to pay its expenses; and for those means it has the
right to compel all citizens and property within its limits to
contribute.
The state demands and receives taxes so that it may be enabled to
carry its mandates into effect and perform the functions of
government. The citizen pays from his property the portion
demanded, in order that he may, by means thereof, be secured in
the enjoyment of the benefits of organized society.
The general levy of taxes is understood to exact contributions in
return for the general benefits of government, and it promises
nothing to the person taxed beyond what may be anticipated from

an administration of the laws for individual protection and the

general public good.
Although the duty to pay taxes by the individual is founded in his
participation in the benefits arising from the expenditure, it does not
mean that a mans property cannot be taxed unless some benefit to
him personally can be pointed out.
b. CIR v Algue (1988)
The petitioner contends that the claimed deduction of P75,000.00 was
properly disallowed because it was not an ordinary reasonable or
necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered.
The payment was in the form of promotional fees. These were collected
by the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent purchase of
the properties of the Philippine Sugar Estate Development Company.
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance On the other hand, such collection
should be made in accordance with law as any arbitrariness will
negate the very reason for government itself.
SC Decision: The Solicitor General is correct when he says that the
burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has
been discharged satisfactorily. The private respondent has proved that
the payment of the fees was necessary and reasonable in the light of
the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was no
mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society.
Without taxes, the government would be paralyzed for lack of the
motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of 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. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is
an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of
the tax collector, he may still be stopped in his tracks if the taxpayer
can demonstrate, as it has here, that the law has not been observed.
THEORIES:
NECESSITY THEORY
Taxation is a power predicated upon necessity. It is a necessary
burden to preserve the States sovereignty and a means to give the
citizenry an army to resist aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public
improvements for the enjoyment of the citizenry, and those which
come within the States territory and facilities and protection which a
government is supposed to provide.
BENEFITS RECEIVED PRINCIPLE
This theory bases the power of the State to demand and receive
taxes on the reciprocal duties of support and protection. The citizen
supports the State by paying the portion from his property that is
demanded in order that he may, by means thereof, be secured in the
enjoyment of the benefits of an organized society. Thus, the
taxpayer cannot question the validity of the tax law on the ground
that payment of such tax will render him impoverished, or lessen his
financial or social standing, because the obligation to pay taxes is
involuntary and compulsory, in exchange for the protection and
benefits one receives from the government.
DOCTRINE OF SYMBIOTIC RELATIONSHIP
This doctrine states 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. Hence, despite the natural
reluctance to surrender part of ones hard-earned income to the
taxing authorities, every person who is able must contribute his
share in the burden of running 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 material and moral values.
5. PRINCIPLES OF A SOUND TAX SYSTEM
1) Fiscal adequacy - means that the sources of revenues should be
sufficient to meet the demand of public expenditures.
2) Equality or theoretical justice - means that the tax burden should
be in proportion to the taxpayer's ability to pay. (ability-to-pay
principle).
3) Administrative feasibility - means that tax laws should be
capable of convenient, just and effective administration
Abakada Guro Party List v Ermita (2005)
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et
al., filed a petition for prohibition on May 27, 2005 questioning the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the National Internal Revenue
Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and
properties, Section 5 imposes a 10% VAT on importation of goods, and
Section 6 imposes a 10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a uniformp ro v is o
authorizing the President, upon recommendation of the Secretary of
Finance, to raise the VAT rate to 12%, effective January 1, 2006, after
specified conditions have been satisfied. Petitioners argue that the law is
unconstitutional.
For the delegation to be valid, it must be complete and it must fix a
standard. A sufficient standard is one which defines legislative
policy, marks its limits, maps out its boundaries and specifies the
public agency to apply it.
The principle of fiscal adequacy as a characteristic of a sound tax
system was originally stated by Adam Smith in his Canons of
Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to

keep out of the pockets of the people as little as possible over and
above what it brings into the public treasury of the state.

It simply means that sources of revenues must be adequate to meet

government expenditures and their variations.
a. Due Process and Equal Protection
The doctrine is that where the due process and equal protection
clauses are invoked, considering that they are not fixed rules but
rather broad standards, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail.
Input Tax is defined under Section 110(A) of the NIRC, as amended,
as the value-added tax due from or paid by a VAT-registered person
on the importation of goods or local purchase of good and services,
including lease or use of property, in the course of trade or business,
from a VAT-registered person, and
Output Tax is the value-added tax due on the sale or lease of
taxable goods or properties or services by any person registered or
required to register under the law.
As earlier stated, the input tax is the tax paid by a person, passed on
to him by the seller, when he buys goods. Output tax meanwhile is
the tax due to the person when he sells goods. In computing the VAT
payable, three possible scenarios may arise:
1) If at the end of a taxable quarter the output taxes charged by the
seller are equal to the input taxes that he paid and passed on by
the suppliers, then no payment is required;
2) When the output taxes exceed the input taxes, the person shall be
liable for the excess, which has to be paid to the Bureau of
Internal Revenue (BIR); and
3) If the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively zero-rated
transactions, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal
revenue taxes, at the taxpayers option.

Equal Protection Clause

The equal protection clause under the Constitution means that no
person or class of persons shall be deprived of the same protection
of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances.
The equal protection clause does not require the universal
application of the laws on all persons or things without distinction.
This might in fact sometimes result in unequal protection. What the
clause requires is equality among equals as determined according to
a valid classification. By classification is meant the grouping of
persons or things similar to each other in certain particulars and
different from all others in these same particulars.
b. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. Different
articles may be taxed at different amounts provided that the rate is
uniform on the same class everywhere with all people at all times.
c. Progressivity in Taxation
Progressive taxation is built on the principle of the taxpayers ability
to pay. This principle was also lifted from Adam Smiths Canons of
Taxation, and it states:
I. 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.
Taxation is progressive when its rate goes up depending on the
resources of the person affected.
The VAT is an antithesis of progressive taxation. By its very nature, it
is regressive. The principle of progressive taxation has no relation
with the VAT system inasmuch as the VAT paid by the consumer or

business for every goods bought or services enjoyed is the same

regardless of income.
The Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive. What it simply provides is
that Congress shall evolve a progressive system of taxation. The
constitutional provision has been interpreted to mean simply that
direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized.
6. COMPARISON WITH POLICE POWER AND EMINENT DOMAIN
a. Similarities and Distinctions (71 Am Jur 2 nd 395-397)
POLICE POWER:
TAXATION
POLICE POWER
Exercised for the purpose of
Exercised for the promotion of the
raising revenue
public welfare by means of
regulation of dangerous or
potentially dangerous businesses,
occupations, or activities
Subject to certain designated Not subject to constitutional
constitutional limitations
restrictions applicable to taxing
power
The power of taxation and the police power are both distinct,
coexistent powers of a state.
An exaction which is invalid as an exercise of the taxing power may
not be upheld as an exercise of police power where it is clear that
the legislative body imposing it did not intend it as such.
An exaction which would be invalid as an exercise of the taxing
power may be upheld as a regulatory measure where the primary
purpose of the legislature in imposing it was the regulation of some
calling or activity which is potentially adverse, unless, of course, the
legislature, in imposing such an exaction, acts in an arbitrary and
unreasonable manner.
EMINENT DOMAIN:
TAXATION
No compensation.

EMINENT DOMAIN
Requires compensation for
private property taken for public
use.

b. Gerochi v DOE (2007)

RA 9136, otherwise known as the Electric Power Industry Reform Act of
2001 (EPIRA), which sought to impose a universal charge on all end-users
of electricity for the purpose of funding NAPOCORs projects, was enacted
and took effect in 2001. Petitioners contested the constitutionality of the
EPIRA, stating that the imposition of the universal charge on all end-users
is oppressive and confiscatory and amounts to taxation without
representation for not giving the consumers a chance to be heard and be
represented.
The power to tax is an incident of sovereignty and is unlimited in
its range, acknowledging in its very nature no limits, so that security
against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency that is to pay
it. It is based on the principle that taxes are the lifeblood of the
government, and their prompt and certain availability is an
imperious need.
On the other hand, police power is the power of the state to
promote public welfare by restraining and regulating the use of
liberty and property. It is the most pervasive, the least limitable, and
the most demanding of the three fundamental powers of the State.
The justification is found in the Latin maxims salus populi est
suprema lex (the welfare of the people is the supreme law) and sic
utere tuo ut alienum non laedas (so use your property as not to
injure the property of others).
If generation of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the
primary purpose, the fact that revenue is incidentally raised does
not make the imposition a tax.
The taxing power may be used as an implement of police power. 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.
c. Matalin Coconut Co. v Municipal Council of Malabang (1986)

The Municipal Council of Malabang, Lanao del Sur enacted a Municipal

Ordinance which made it unlawful for any person, company or group of
persons "to ship out of the Municipality of Malabang, cassava starch or
flour without paying to the Municipal Treasurer or his authorized
representatives the corresponding fee fixed by (the) ordinance." The
validity of the ordinance was challenged by the Matalin Coconut, Inc.
alleging that the ordinance is not only ultra vires, being violative of RA No.
2264 (Local Autonomy Act), but also unreasonable, oppressive and
confiscatory.
The amount collected under the ordinance in question partakes of
the nature of a tax, although denominated as "police inspection fee"
since its undeniable purpose is to raise revenue.
However, the tax imposed under the ordinance can be stricken down
on another ground. According to Section 2 of the abovementioned
Act, the tax levied must be "for public purposes, just and uniform.
As correctly held by the trial court, the so-called "police inspection
fee" levied by the ordinance is "unjust and unreasonable."
The Court ruled that tax should be based on sales, not in the
quantity of goods that have yet to be sold. Moreover, for taxes to be
valid, it should be levied for public purposes, just, and uniform.
d. Lutz v Araneta (1955)
Commonwealth Act No. 567, otherwise known as Sugar Adjustment Act
was promulgated in 1940 to stabilize the sugar industry so as to prepare
it for the eventuality of the loss of its preferential position in the United
States market and the imposition of export taxes. Walter Lutz seeks to
recover from the Collector of Internal Revenue the sum paid by the estate
as taxes alleging that such tax is unconstitutional and void, being levied
for the aid and support of the sugar industry exclusively, which in
plaintiffs opinion is not a public purpose for which a tax may be
constitutionally levied.

The act is primarily an exercise of the police power. It is shown in

the Act that the tax is levied with a regulatory purpose, to provide
means for the rehabilitation and stabilization of the threatened
sugar industry.

 This Court can take judicial notice of the fact that sugar production is
one of the great industries of our nation, sugar occupying a leading
position among its export products; that it gives employment to
thousands of laborers in fields and factories; that it is a great source
of the state's wealth, is one of the important sources of foreign
exchange needed by our government, and is thus pivotal in the
plans of a regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore redounds greatly
to the general welfare. Hence it was competent for the legislature to
find that the general welfare demanded that the sugar industry
should be stabilized in turn; and in the wide field of its police power,
the lawmaking body could provide that the distribution of benefits
therefrom be readjusted among its components to enable it to resist
the added strain of the increase in taxes that it had to sustain.
The protection of a large industry constituting one of the great
sources of the state's wealth and therefore directly or indirectly
affecting the welfare of so great a portion of the population of the
State is affected to such an extent by public interests as to be within
the police power of the sovereign.
e. NTC v CA (1999)
Sometime in 1988, the NTC served on PLDT the following assessment
notices and demands for payment of Supervision and regulation fee
under Section 40 (e) of the PSA for the said year, 1988; Permit fee under
Section 40 (f) of the PSA for the approval of the protestants increase of its
authorized capital stock; and Permit fees under Section 40 (g) of the PSA
in connection with the Commissions decisions in NTC Cases approving the
Protestants equity participation in the Fiber Optic Interpacific Cable
systems and X-5 Service Improvement and Expansion Program. PLDT
challenged the aforesaid assessments alleging that the assessments were
being made to raise revenues and not as mere reimbursements for actual
regulatory expenses.
Succinct and clear is the ruling of this Court in the case of Philippine
Long Distance Telephone Company vs. Public Service Commission,
66 SCRA 341, that the basis for computation of the fee to be charged
by NTC on PLDT, is the capital stock subscribed or paid and not,
alternatively, the property and equipment.

 The law in point is clear and categorical. There is no room for

construction. It simply calls for application. To repeat, the fee in
question is based on the capital stock subscribed or paid, nothing
less nothing more.
It bears stressing that it is not the NTC that imposed such a fee. It is
the legislature itself. Since Congress has the power to exercise the
State inherent powers of Police Power, Eminent Domain and
Taxation, the distinction between police power and the power
to tax, which could be significant if the exercising authority
were mere political subdivisions (since delegation by it to
such political subdivisions of one power does not necessarily
include the other), would not be of any moment when, as in
the case under consideration, Congress itself exercises the
power. All that is to be done would be to apply and enforce the law
when sufficiently definitive and not constitutional infirm.
II. TAXES
1. DEFINITION
Republic v Philippine Rabbit Bus Lines
Cooley: "Taxes are the enforced proportional contributions from
persons and property levied by the state by virtue of its sovereignty
for the support of government and for all public needs."
As distinguished from other pecuniary burdens, the differentiating
factor is that the purpose to be subserved is the raising of revenue.
A tax then is neither a penalty that must be satisfied or a liability
arising from contract.
2. ESSENTIAL CHARACTERISTICS OF TAXES
1) It is an enforced contribution.
2) It is generally payable in money.
3) It is proportionate in character.
4) It is levied on persons, property, or the exercise of a right or
privilege (Excise tax).
5) It is levied by the State which has jurisdiction over the subject or
object of taxation.
6) It is levied by the law-making body of the State.
7) It is levied for public purpose or purposes.

3. TAXES DISTINGUISHED FROM: