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 72-73)

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)
Petitioner’s 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 man’s 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 State’s 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
State’s 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 one’s 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 2nd 395-397)
POLICE POWER:
 TAXATION
Exercised for the purpose of raising
revenue
Subject to certain designated
constitutional limitations
POLICE POWER
Exercised for the promotion of the public
welfare by means of regulation of
dangerous or potentially dangerous
businesses, occupations, or activities
Not subject to constitutional 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 EMINENT DOMAIN
No compensation. 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 NAPOCOR’s 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 plaintiff’s 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.