Benefits-Protection Theory or Doctrine of Q.

May the legislature validly appropriate

Symbiotic Relationship public funds for a private purpose?

CIR vs. Algue, L-28896, February 17, 1988 A. No, the law appropriating public funds for
Taxes are what we pay for civilized society. the construction of feeder roads on land
Without taxes, the government would be belonging to a private person is not valid,
paralyzed for lack of the motive power to and donation to the government of the said
activate and operate it. Hence, despite the land made over five (5) months after the
natural reluctance to surrender part of one's approval and effectivity of the Act for the
hard-earned income to the taxing purpose of giving a semblance of legality to
authorities, every person who is able to the appropriation does not cure the basic
must contribute his share in the, running of defect. The rule is that if the public
the government. The government for its part advantage or benefit is merely incidental in
is expected to respond in the form of the promotion of a particular enterprise,
tangible and intangible benefits intended to such defect shall render the law invalid. On
improve the lives of the people and enhance the other hand, if what is incidental is the
their moral and material values. This promotion of a private enterprise, the tax
symbiotic relationship is the rationale of law shall be deemed for a public purpose.
taxation and should dispel the erroneous
notion that it is an arbitrary method of
exaction by those in the seat of power. Q: Define taxation.

A: It is an inherent power by which the

Pascual vs. Secretary of Public Works, sovereign:
December 29, 1960, 110 Phil 331 1. through its law-making body
Facts: Petitioner was the Provincial 2. raises income to defray the necessary
Governor of Rizal at the time of the expenses of government
institution of this petition. During his term,
R.A. 920 was enacted, appropriating 3. by apportioning the cost among those
P85,000 for the construction of projected who, in some measure are privileged to
feeder roads. Said feeder roads were, at the enjoy its benefits and, therefore, must bear
time of the passage of said act, private its burdens. (51 Am.Jur. 34)
property, since they were located in a
subdivision owned by Sen. Jose C. Zulueta. Note: Simply stated, the power of taxation is
Months after the enactment of the law, Sen. the power to impose burdens on subject
Zulueta executed a deed of donation over and objects within its jurisdiction.
the property in question in favor of the
TAXES – enforced proportional
Government. The deed contained a
contributions from the persons and property
condition that the property donated would
levied by the law-making body of the State
be used exclusively by the donee for street
by virtue of its sovereignty in support of
purposes and none other, otherwise the
government and for public needs.
said property would revert to the donor.

REQUISITES OF A VALID TAX

1. should be for a public purpose moment a state exists, the power to tax
2. the rule of taxation shall be uniform automatically exists.
3. that either the person or property
taxed be within the jurisdiction of Q: What are the purposes of taxation?
the taxing authority
4. that the assessment and collection A: 1. Revenue – to raise funds or property
of certain kinds of taxes guarantees to enable the State to promote the general
against injustice to individuals, welfare and protection of the people.
especially by way of notice and
opportunity for hearing be provided 2. Non-revenue [PR2 EP]
5. the tax must not impinge on the
inherent and Constitutional a. Promotion of general welfare – taxation
limitations on the power of taxation may be used as an implement of police
power to promote the general welfare of the
NATURE OF TAXATION
people.
Q: What is the nature of the power to
b. Regulation of activities/industries
tax?
c. Reduction of Social inequality – a
A: The nature of the power to tax is two-fold:
progressive system of taxation prevents the
1. inherent undue concentration of wealth in the hands
of few individuals. Progressivity is based on
2. legislative. the principle that those who are able to pay
more should shoulder the bigger portion of
Q: Why is the power of taxation
the tax burden. d. Encourage economic
considered inherent in nature?
growth – the grant of incentives or
A: It is inherent in character because its exemptions encourage investment thereby
exercise is guaranteed by the mere stimulating economic activity.
existence of the state. It could be exercised
e. Protectionism – In case of foreign
even in the absence of a constitutional
importations, protective tariffs and customs
grant. The power to tax proceeds upon the
are imposed to protect local industries.
theory that the existence of a government is
a necessity and this power is an essential Q: May legislative body enact laws to
and inherent attribute of sovereignty, raise revenues in the absence of
belonging as a matter of right to every constitutional provisions granting said
independent state or government (Pepsi- body the power of tax? Explain.
Cola Bottling Co. of the Philippines V.
Municipality of Tanauan, Leyte, G.R. No. L- A: Yes. It must be noted that Constitutional
31156, February 27, 1976). provision relating to the power of taxation do
not operate as grants of the power of
No sovereign state can continue to exist taxation to the government, but instead
without the means to pay its expenses; and merely constitute a limitation upon a power
that for those means, it has the right to which would otherwise be practically without
compel all citizens and property within its limit. (2005 Bar Question)
limits to contribute, hence, the emergence
of the power to tax. (51 Am. Jur. 42) The
Q: Distinguish National Government particular locality, or partly general and
from Local Government Unit as regards partly local)
the exercise of power of taxation.
f. Kind of tax to be collected
A: 1. National Government – inherent
g. Situs of taxation
2. Local Government Unit – not inherent
since it is merely an agency instituted by the 2. The grant tax exemptions and
State for the purpose of carrying out in condonations.
detail the objects of the government; can 3. The power to specify or provide for
only impose taxes when there is: administrative as well as judicial remedies
a. Constitutionally mandated grant
 1.            Purpose for the limitations on
b. Legislative grant, derived from the 1987 the power of taxation.
Constitution, Section 5, Article X. The inherent and constitutional limitations to
the power of taxation are
Q: Why is the power of taxation
safeguards which would prevent abuse in
legislative in nature?
the exercise of this otherwise unlimited and
A: It is legislative in nature since it involves plenary power.
promulgation of laws. It is the Legislature           The limitations also serve as a
which determines the coverage, object, standard to measure the validity of a tax law
nature, extent and situs of the tax to be or the act of a taxing authority.  A violation of
imposed the limitations serves to invalidate a tax law
Q: What is the scope of legislative power or act in the exercise of the power to tax.
in taxation?
INHERENT LIMITATIONS
A: The following are the scope of legislative
power in taxation:           1.   What are the inherent
1. The determination of: [SAP-MAKS] limitations on the power of taxation?
          SUGGESTED ANSWERS:   
a. Subjects of taxation (persons, property,           a.            Public purpose.  The
occupation, excises or privileges to be revenues collected from taxation should be
taxed, provided they are within the taxing devoted to a public purpose.
jurisdiction)           b.            No improper delegation of
b. Amount or Rate of tax legislative authority to tax.  Only the
legislature can exercise the power of taxes
c. Purposes for which taxes shall be levied unless the same is delegated to some other
provided they are public purposes governmental body by the constitution or
d. Method of collection Note: This is not through a law which does not violate any
exclusive to Congress. provision of the constitution.

e. Apportionment of the tax (whether the tax

shall be of general application or limited to a
          c.            Territoriality.  The taxing purposes, but under police power for the
power should be exercised only within general welfare of the community. This
territorial boundaries of the taxing authority. would still be for a public purpose.
          d.            Recognition of government            e.                      Public purpose
exemptions; and continually expanding.  Areas formerly left
          e.            Observance of the principle to private initiative now lose their
of comity.  Comity is the respect accorded by boundaries and may be undertaken by the
nations to each other because they are government if it is to meet the increasing
equals.  On the other hand taxation is an act social challenges of the times.
of sovereign. Thus, the power should be             f.                      Tax revenue must
imposed upon equals out of respect. not be used for purely private purposes or
          Some authorities include no double for the exclusive benefit of private persons.
taxation.             g.         Private persons may be
benefited but such benefit should be merely
          2.      What are the principles to incidental as its main object is the benefit of
consider in the determination of whether the community in general.
tax revenues are devoted for a public              h.        Determined at the time of
purpose ? enactment of tax law and not at the  time of
          SUGGESTED ANSWER: implementation.
          a.            The tax revenues are for a              i.         There is a presumption of
public purpose if utilized for the benefit of public purpose even if the tax law does not
the community in general.  An alternative specifically provide for its purpose.  (Santos
meaning is  that tax proceeds should be & Co., v. Municipality of Meycauayan, et al.,
utilized only to attain the objectives of 94 Phil. 1047)
government.         j.   Public use is no longer confined
          b.            Inequalities resulting from to the traditional notion of use by the public
the singling out of one particular class for but held synonymous with public interest,
taxation or exemption infringe no public benefit, public welfare, and public
constitutional limitation.  convenience.
           REASON:  It is inherent in the power
to tax that the legislature is free to select the
subjects of taxation.
           BASIS:   The lifeblood theory. Q: What are the basic principles of a
           c.                       An individual sound tax system (Canons of Taxation)?
taxpayer need not derive direct benefits
A: FAT 1. Fiscal adequacy
from the tax. 
           REASON:  The paramount a. Revenue raised must be sufficient to
consideration is the welfare of the greater meet government/public expenditures and
portion of the population. other public needs. (Chavez v. Ongpin, G.R.
           d.                      A tax may be No. 76778, June 6, 1990)
imposed, not so much for revenue
2. Administrative feasibility
a. Tax laws must be clear and concise. with its citizens obliges it to promote public
interest and the public good.
b. Capable of effective and efficient
enforcement. “Power to tax is the power to
destroy” (Marshall Dictum) – refers to
c. Convenient as to time and manner of the unlimitedness and the degree or
payment; must not obstruct business growth vigor with which the taxing power may
and economic development. be employed to raise revenue.
- the financial needs of the State may
3. Theoretical justice outrun any human calculation, so the
power to meet those needs by taxation
a. Must take into consideration the must not be limited even though taxes
taxpayer’s ability to pay (Ability to Pay become burdensome or confiscatory.
Theory).
Q: What is the Benefits-Protection Theory
b. Art. VI, Sec. 28(1), 1987 Constitution (Symbiotic Relationship Doctrine) in
mandates that the rule on taxation must be taxation?
uniform and equitable and that the State
A: It involves the power of the State to
must evolve a progressive system of
demand and receive taxes based on the
taxation.
reciprocal duties of support and protection
Lifeblood Theory between the State and its citizen.
Taxes are what we pay for civilized
society. Without taxes, the government Every person who is able must contribute
would be paralyzed for lack of the his share in the burden of running the
motive power to activate and operate it. government. The government for its part is
Hence, despite the natural reluctance to expected to respond in the form of tangible
surrender part of one's hard-earned and intangible benefits intended to improve
income to the taxing authorities, every the lives of the people and enhance their
person who is able to must contribute
material and moral values. (CIR v. Algue,
his share in the running of the
government. (CIR v. Algue, Inc.) G.R. No. L-28896, February 17, 1988)

Q: Discuss the meaning and the Special benefits to taxpayers are not
implications of the statement: “Taxes are required. A person cannot object to or resist
the lifeblood of the government and their the payment of taxes solely because no
prompt and certain availability is an personal benefit to him can be pointed out
imperious need.” arising from the tax. (Lorenzo v. Posadas,
64 Phil. 353)
A: The phrase expresses the underlying
basis of taxation which is governmental Q: What are the principles involving the
necessity, for indeed, without taxation, a doctrine of symbiotic relationship/benefits
government can neither exist nor endure. protection?
Taxation is a principal attribute of
A: It is a legal duty on the part of the citizen
sovereignty. The exercise of the taxing
to pay taxes to support the Government. On
power derives its source from the very
the other hand, it is a reciprocal duty on the
existence of the State whose social contract
part of the Government to provide protection
and benefits.
 (g) Such other taxes as are or hereafter
may be imposed and collected by the
Q: Define double taxation. Bureau of Internal Revenue.

A: Otherwise described as “direct duplicate

taxation”, the two taxes must be imposed on
the same subject matter, for the same  
purpose, by the same taxing authority, INCOME
within the same jurisdiction, during the – all wealth which flows in the taxpayer
same taxing period; and the taxes must be other than a mere return of capital. It
includes all income specifically described as
of the same kind or character. (City of
gain or profit including gain derived from the
Manila v. Coca Cola Bottlers Philippines, sale or disposition of capital asset.
G.R. No. 181845, Aug. 4, 2009)  JUDICIAL DEFINITION
: It also means gains derived from (1) capital, (2)
labor, or (3) both labor and capital including gains
derived from the sale or exchange of capital asset.
Q: Is double taxation prohibited?
FOUR (4) Sources of INCOME;
A: No, there is no Constitutional prohibition  
against double taxation. However, direct [ClaBS]
double taxation is unconstitutional as it a. Capital
results in violation of substantive due b. Labor
process and equal protection clause. c. Both labor and capital
d. Sale of property

Example of income derived from capital >>>

SEC. 21.  Sources of Revenue. - The Interest Income
following taxes, fees and charges are
deemed to be national internal revenue Example of income derived from labor >>>
taxes: Compensation Income

Example of income derived from both

(a) Income tax;
capital and labor >>> Income of
anindependent  contractor. The indepe
(b) Estate and donor's taxes;  ndent contractor provides work force,p
rovides capital and derives income from such
capital.
(c) Value-added tax; 

Q: What is income tax?

(d) Other percentage taxes; 
A: A tax on all yearly profits arising from
property, profession, trade or business, or a
(e) Excise taxes;  tax on person’s income, emoluments, profits
and the like. (Fisher v. Trinidad, GR L-
19030. Oct. 20, 1922)
(f) Documentary stamp taxes; and 
Q: What is the basis of income tax?
A: Income tax is based on income, either 4. Interests;
gross or net, realized in one taxable year.
Q: What is interest income?
Q: What is the nature of income tax? A: It is the amount of compensation paid for
the use of money or forbearance from such
A: It is generally regarded as an excise tax. use.
It is not levied upon persons, property, Q: How is interest income taxed?
funds or profits but on the privilege of A: Interest income is considered as passive
receiving said income or profit. income subject to final tax.

Q: What are the purposes of income tax? Note: Tax rate is seen on the table
provided.
A: To: 1. Provide large amounts of revenue
5. Rents;
2. Offset regressive sales and consumption
taxes Q: What is rental income and what is its
scope?
3. Mitigate the evils arising from the A: Rental income is a fixed sum, either in
inequality in the distribution of income and cash or in property equivalent, to be paid at
wealth which are considered deterrents to a definite period for the use or enjoyment of
social progress, by a progressive scheme of a thing or right.
taxation All rentals derived from lease of real estate
or personal property, of copyrights,
Q: What is gross income taxation? trademarks, patents and natural resources
under lease.
A: It is a system of taxation where the Q: When is prepaid rent taxable?
income is taxed at gross. The taxpayer A: Prepaid or advance rental is taxable
under this system is not entitled to any income to the lessor in the year received, if
deduction. received under a claim of right and without
restriction as to its use, regardless of
method of accounting employed.
Q: What is the definition of “gross
income” under the NIRC?
Note: Security deposit applied to the rental
of terminal month or period of contract must
A: Except when otherwise provided, gross
be recognized as income at the time it is
income means all income derived from
applied. Security deposit is to ensure
whatever source, including (but not limited
contract compliance, it is not income to the
to) to the following items: [CG2 I- R 2
lessor until the lessee violates any provision
DAP3 ]
of the contract.
1. Compensation for services in whatever
6. Royalties;
form paid, including, but not limited to fees,
salaries, wages, commissions and similar
items; Q: What are royalties?

2. Gross income derived from the conduct A: Royalties are sums of money paid to a
of trade or business or the exercise of a creator or a participant in an artistic work,
profession; based on individual sales of the work. In
order to receive royalties, the work must
generally have a copyright or patent.
3. Gains derived from dealings in property;
7. Dividends time, whichever is longer, in consideration
of capital paid by him.
Q: Define dividend.
The portion representing return of premium
A: Dividend is any distribution made by a is not taxable while that portion that
corporation to its shareholders out of its represents interest is taxable.
earnings or profits and payable to its
shareholders, whether in money or in other Q: What is an annuity?
property. A: It refers to the periodic installment
payments of income or pension by
Q: What is dividend income? insurance companies during the life of a
A: Dividend income is a corporate profit set person or for a guaranteed fixed period of
aside, declared and distributed by the board time, whichever is longer, in consideration
of director of a corporation to be paid to of capital paid by him.
stockholders on demand or at a fixed time.
Q: How is dividend income taxed? The portion representing return of premium
A: Dividend income is considered as is not taxable while that portion that
passive income subject to final tax. represents interest is taxable.
Note: Tax rate is seen on the table
provided. 9. Prizes and winnings;
Q: Are stock dividends taxable?
A: Q: What is the meaning of prizes and
GR: No, stock dividends are considered winnings for the purposes of income
unrealized gain since there is a mere taxation?
transfer of surplus to the capital account. A: It refers to amount of money in cash or in
Thus, it is not subject to income tax until kind received by chance or through luck and
that gain has been realized. are generally taxable except if specifically
A stock dividend, when declared is merely a mentioned under the exclusion from
certificate of stock which shows the interest computation of gross income under Sec.
of the stockholder in the increased capital of 32[B] of NIRC.
the corporation. Q: What prizes and winning are subject
XPN: A stock dividend constitutes taxable to Philippine income tax?
income if it gives the shareholder a higher A:
interest compared with what his former 1. Prizes derived from sources within the
stockholdings represented. Philippines not exceeding P10,000 is
included in the gross income; if over
Note: A stock dividend does not constitute P10,000, it is subject to final tax on passive
taxable income if the new shares did not income.
confer new rights nor interests than those 2. Winning from sources within is subject to
previously existing, and that the recipient final tax on passive income except PCSO
owns the same proportionate interest in the and lotto winnings which are tax exempt;
net assets of the corporation 3. Prizes and winnings from sources outside
the Philippines.
8. Annuities
10. Pensions;
Q: What is an annuity?
A: It refers to the periodic installment Q: What is pension?
payments of income or pension by A: It refers to amount of money received in
insurance companies during the life of a lump sum or on staggered basis in
person or for a guaranteed fixed period of consideration of services rendered given
after an individual reaches the age of a system employed where the tax system
retirement. views
Q: When is pension taxable? indifferently the tax base and generally
treats in
A: Pension being part of gross income is common all categories of taxable income of
taxable to the extent of the amount received the individual.
except if there is a BIR approved pension
plan. (Sec. 32 B [6], NIRC) A system which taxes all categories of
income except certain passive incomes and
11. Partner’s distributive share from the net capital gains. It
income of the general professional prescribes a unitary but progressive rate
partnership. (Sec. 32 [A], NIRC) Note: for the taxable aggregate incomes and flat
Gross income under Sec. 32 is different rates for
from the limited meaning of Gross Income certain passive incomes derived by
for purpose of Minimum Corporate Income individuals.
Tax (MCIT), which means Gross Sales less
Sales Returns, Discounts, and Allowances SCHEDULAR SYSTEM
and Cost of Goods Sold. A system employed where the income tax
treatment varies and is made to depend on
The above enumeration can be simplified the kind or category
into 5 categories: of taxable income of the taxpayer.

1. Compensation Income - income derived A system which itemizes the different

from rendering of services under an incomes and provides for varied
employer-employee relationship. percentages of taxes, to be applied thereto.

2. Professional Income - fees derived from Commissioner vs. Algue

engaging in an endeavor requiring special
training as professional as a means of
livelihood, which includes, but not limited to, 158 SCRA 9
the fees of CPAs, lawyers, engineers and
the like. Facts: 

3. Business Income - gains or profits                 The Philippine Sugar Estate

derived from rendering services, selling Development Company
merchandise, manufacturing products,
(PSEDC).  Appointed Algue Inc. as its’
farming and long-term contracts.
agent. Algue received a commission of
4. Passive Income - income in which the ₱125,000.00 and it was from their
taxpayer merely waits for the amount to commission that it paid organizers of VOICP
come in, which includes, but not limited to ₱75,000.00 in proportional fees. He
interest income, royalty income, dividend received an assessment from the CIR. He
income, prizes and winnings. filed a letter of protest or reconsideration.
The CIR contends that the claimed
5. Gains from Dealings in Property – It deduction was properly disallowed because
includes all income derived from the
disposition of property whether real, it was not an ordinary, reasonable or
personal or mixed. necessary expense.

GLOBAL TAX Issue: Is the CIR correct?

 occupied by the streets, made by its owner
Ruling: to the government.

ISSUE: Should incidental gains by the

                No. taxes are the lifeblood of the
public be considered "public purpose" for
government and should be collected without the purpose of justifying an expenditure of
unnecessary hindrance. Every person who the government?
is able to pay must contribute his share in
the running of the government. The HELD: No. It is a general rule that the
government for its part is expected to legislature is without power to appropriate
respond in the form of tangible and public revenue for anything but a public
purpose. It is the essential character of the
intangible benefits intended to improve the
direct object of the expenditure which must
lives of the people and enhance their moral determine its validity as justifying a tax, and
and material values. This symbiotic not the magnitude of the interest to be
relationship is the rationale of taxation and affected nor the degree to which the general
should dispel the erroneous notion that is an advantage of the community, and thus the
arbitrary method of exaction by those in the public welfare, may be ultimately benefited
seat of power. by their promotion. Incidental to the public
or to the state, which results from the
promotion of private interest and the
                On the other hand, such collection prosperity of private enterprises or
should be made in accordance with law as business, does not justify their aid by the
any arbitrariness will negate the very reason use public money.
for government itself.    The test of the constitutionality of a statute
requiring the use of public funds is whether
the statute is designed to promote the public
interest, as opposed to the furtherance of
the advantage of individuals, although each
FACTS: Governor Wenceslao Pascual of
Rizal instituted this action for declaratory advantage to individuals might incidentally
serve the public.
relief, with injunction, upon the ground that
RA No. 920, which apropriates funds for
public works particularly for the construction
and improvement of Pasig feeder road
terminals. Some of the feeder roads,
however, as alleged and as contained in the
tracings attached to the petition, were
nothing but projected and planned
subdivision roads, not yet constructed within
the Antonio Subdivision, belonging to
private respondent Zulueta, situated at
Pasig, Rizal; and which projected feeder
roads do not connect any government
property or any important premises to the
main highway. The respondents' contention
is that there is public purpose because
people living in the subdivision will directly
be benefitted from the construction of the
roads, and the government also gains from
the donation of the land supposed to be