Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

TAX.3201-1 NARANJO/SIAPIAN/GUDANI
GENERAL PRINCIPLES IN TAXATION OCTOBER 2022

LECTURE NOTES
TAX
- An enforced proportionate contribution imposed upon persons, properties, businesses, rights,
interests, privileges, transactions and acts within the territorial jurisdiction of the taxing authority
exercise by the legislature for a public purpose and generally payable in money.
- It is a compulsory contribution to state revenue, levied by the government on workers' income
and business profits or added to the cost of some goods, services, and transactions.
- The enforced proportional contributions from persons and property levied by the lawmaking
body of the State by virtue of its sovereignty for the support of the government and all public needs
- It is a sum of money demanded by a government for its support or for specific facilities or services,
levied upon incomes, property, sales, etc.
- An involuntary fee levied on corporations or individuals that is enforced by a level of government
in order to finance government activities.
- A contribution for the support of a government required of persons, groups, or businesses within
the domain of that government.
TAXATION
AS A POWER:
- is the power by which the sovereign raises revenue to defray the expenses of government.
- is the inherent power of the state to demand enforced contribution for public purpose to support
the government.
- Is the destructive power which interferes with the personal and property rights of the people and
takes from them a portion of their property for the support of the government.

AS A MEANS OR PROCESS:
- is the process or means by which the sovereign, through its lawmaking body, raises income to
defray the necessary expenses.
- Is the means by which governments finance their expenditure by imposing charges on citizens and
corporate entities.
- is the process or means by which the sovereign through its law-making body, imposes burdens
upon subjects or objects within its jurisdiction for the purpose of raising revenues to carry out the
legitimate objects of the government.

AS A PRICE:
- is the indispensable and inevitable price for civilized society.

AS AN ACT:
- is the legislative act of levying/imposing a tax to raise income for the government to defray its
necessary expenses
- refers to the act of a taxing authority actually levying tax.
- is the practice of collecting taxes (money) from citizens based on their earnings and property.

AS A MODE OF COST ALLOCATION:

- is a way of apportioning the cost of government among those who in some measures are privileged
to enjoy its benefits and must bear its burden.
ELEMENTS OF A VALID TAX (LP-PLUG)
1. must not violate the constitutional, inherent and or contractual limitation of the power of taxation
2. must be for a public purpose
3. must be proportionate in character
4. must be levied by the taxing power (legislature) having jurisdiction over the object of taxation
5. must be uniform and equitable, not unjust, excessive, oppressive, confiscatory or discriminatory
6. generally payable in money
PURPOSES/OBJECTIVES OF TAXATION
1. Primary (Revenue or Fiscal) – to raise revenue to promote the general welfare and protection of its
citizens
2. Secondary
a. Regulatory – to provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the police power of the State.
b. Compensatory – to provide some sort of compensation to an activity
c. Promotion of general welfare – as an implement of police power
d. Reduction of social inequality – progressive system of taxation prevents the undue concentration
of wealth in the hands of the few (those who have more should pay more)
e. Encourage economic growth by granting incentives and exemptions
f. Protect local industries from foreign competition

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THEORY OR UNDERLYING BASIS OF TAXATION/PRINCIPLES BEHIND THE POWER OF

TAXATION
1. Lifeblood Theory –
- The existence of the government is a necessity; it cannot exist nor endure without means
to pay its expenses; and for those means, the government has the right to compel all its
citizens and property within its limits to contribute in the form of taxes.
- Taxes are indispensable to the existence of the State. Without taxation the State cannot
raise revenue to support its operations
- 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.
- Principles of Necessity/Theory of Taxation
2. Benefit-Received Theory or Benefits-Protection Theory or Reciprocity Theory
- the government and the people have the reciprocal and mutual duties of support and
protection
- Basis of Taxation
- Doctrine of Symbiotic Relationship – 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 non-tangible benefits intended to improve the lives of the people
and enhance their moral and material values.
INHERENT POWERS OF THE GOVERNMENT
1. Power of Taxation – the power to take property for the support of the government and for public
purpose
2. Police Power – the power to enact laws to promote the general welfare of the people. It is wider
in application because it is the general power to make laws.
3. Power of Eminent Domain – the power to take private property for public use upon payment of
just compensation (Power to Expropriate)
Elements:
a. Permanent taking of private property (not temporary)
b. Payment of Just Compensations (Market value / zonal / assessed)
c. Public use

Distinctions of the Inherent Powers of the State

Taxation Police Power Eminent Domain
Who exercises State State state or private entities
authority or power? (quasi-public
corporations or public
utilities)
Necessity of Delegation is not Valid delegation thru Valid delegation thru
Delegation necessary since it is legislative act (law) legislative act (law) e.g.
inherent franchise
Purpose Revenue to support Protection or Property is taken for
the government regulation for general public use
welfare
Persons affected Community or class of Community or class Specific person (owner of
individuals of individuals the property)

Effect of transfer of Tax paid goes to There is no transfer There is transfer of right
property rights treasury (becomes of title, at most there to property whether it be
part of the public is restraint on the of ownership or lesser
fund) injurious use of right
property
Amount of Imposition Generally, unlimited Sufficient to cover the No imposition, the owner
costs of regulation is paid the fair market
value of his property
Importance Most important of the Most superior
three
Relationship with the Inferior to the “Non- Superior to the “Non- Superior and may
Constitution Impairment Clause” of Impairment Clause” override the “Non-
the Constitution of the Constitution Impairment Clause”
because the welfare of
the state is superior to
private contracts
Limitation Constitutionally and Public interest and Public purpose and just
inherently restricted the observance of compensation
due process

SIMILARITIES OF THE THREE POWERS

1. All are inherent powers of the State
2. All are legislative in nature
3. All three powers are necessary attributes of sovereignty

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4. They are means by which the State interferes with private rights of persons
5. They exist independently with the Constitution although the condition for their exercise may be
prescribed or limited by the Constitution
6. The exercise of these powers by the local government units may be limited by national legislature
Notes:
• Taxation power can be used as an implement of Police power.
• Police power can be used to raise revenue for the government (ex: license fee)
• If generation of revenue is the primary purpose and regulation is secondary or incidental, the
imposition is a tax. If the regulation is the primary purpose, if the revenue is raised incidentally,
the imposition is not a tax e.g. Collection of universal charge pursuant to EPIRA Law is an
exercise of police power not power of taxation.
NATURE OR CHARACTERISTICS OF THE POWER OF TAXATION
1. It is an attribute of sovereignty
2. It is legislative in character
3. It is subject to international comity or treaty
4. It is subject to constitutional and inherent limitations
5. It is generally payable in money
6. It is territorial
7. It is for public purpose
SCOPE OF THE POWER OF TAXATION
Taxation is (CUPS):
1. Comprehensive – it covers practically everything e.g. persons, businesses, activities, etc.
2. Unlimited – in the absence of limitations, the power to tax is unlimited
3. Plenary – it is complete
4. Supreme – as to the selection of the subject/object of taxation
DISCRETION OF THE TAXING POWER (Legislative Branch of Government)
1. Determine the following: NOPE-SCAM
a. Nature or kind of tax (whether income tax, VAT, or documentary stamp tax, etc.)
b. Object to be taxed (person, property, business, transaction, activity and excisable articles
to be taxed)
c. Purpose of taxation (e.g. imposition of sin tax to discourage use or consumption of sin
products or use of collected tax for the purpose of augmenting hospital budget)
d. Extent (amount or rate of tax)
e. Situs or place of the imposition
f. Coverage of those to be taxed (subjects or objects)
g. Apportionment of the tax (general or limited application or setting aside portion for special
use)
h. Method of collection (e.g. withholding tax system)
2. Grant tax exemptions or condonations or amnesty
3. Specify or provide for the administrative as well as judicial remedies that either the government or
the taxpayers may avail themselves in the proper implementation of the tax measure (Petron v
Pililla, 198 SCRA 82)

Note: Administrative matters (assessment and collection) are not part of legislative discretion
LEGISLATION OF TAX LAWS
How a Tax Bill becomes a law:
1. A tax bill (proposal) is filed or introduced by a member of the House of Representatives and a
number is assigned to it.
2. 1st Reading – reading the title, the bill number and the author on the floor and referral to
appropriate committee (Ways and Means Committee).
3. Committee Hearings - The Committee schedules the hearings. The Committee members vote on
the Bill after hearings. If it is rejected, the bill is transferred to the archives. If it is approved,
the Committee Report is submitted to the Plenary for Debates
4. The Committee Report is calendared for 2nd Reading
5. 2nd Reading – debates by the members of the contents of the bills.
6. Voting, as a whole, will be made after deliberations through ayes and nays (viva voce) or nominal
voting
7. 3rd reading – Final reading of the Bill as approved by the members
8. Transmission to the Senate for concurrence
9. If the Senate has its own version, the Bill goes through the same version (from 1-7)
10. If there are differences in the final bills/conflicting provisions, the Senate and the House of
Representatives appoint members of the Bicameral Conference Committee to consolidate the
Bill. The consolidated bill is enrolled and transmitted to the President for signature after
ratification of the respective “Houses”. The enrolled bill is the final copy as certified as correct
by the Secretary of the Senate and HOR and duly signed by the Senate President and Speaker
of the House of Representatives. Then proceed to 12.
11. If Senate concurs in whole, the bill is enrolled or the HOR may concur with the Senate version,
in which case, the bill is enrolled. After ratification, the enrolled bill is transmitted to the President
for signature.
12. President’s action:

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a. When the president signs it, it becomes a law

b. After 30 days without the President signing it, it lapses into law 30
c. Vetoes the bill and sends it back to the HOR and Senate with veto message
Note:
1. Bills are general measures, which if passed upon by the legislative body, may become laws.
2. The Bill in the HOR is pre-fixed by a HB No. (House Bill) while SB No. (Senate Bill) in the Senate.
3. Congress may override the veto by 2/3 vote of both “Houses” voting separately.
4. Generally, laws take effect 15 days after publication in the Official Gazette or in at least two (2)
national newspapers of general circulation.
ASPECTS OF TAXATION (PHASES/STAGES/PROCESS)
1. Levy or Imposition – legislative – enactment of law imposing tax
2. Assessment of tax – administrative (BIR)
3. Collection of the tax – administrative (BIR)

Assessment and collection refer to tax administration. Payment refers to the act of compliance by the
taxpayer.
PRINCIPLES OF A SOUND TAX SYSTEM (FAT)
1. Fiscal Adequacy – sources of revenue should be sufficient to meet the demand for public
expenditure
2. Administrative Feasibility- tax laws must be capable of convenient, just and effective
administration
Examples:
a. Establishment of Revenue District Offices throughout the Philippines
b. Introduction of electronic Filing (Electronic Filing and Payment System (EFPS) or e-BIR
Forms Package)
c. Accreditation of Authorized Agent Banks (AABs)
d. Substituted Filing of Qualified Compensation Income Earners
e. Payment of tax thru credit/debit/prepaid cards/G-Cash or other portals
f. Electronic Tax Payment System (eTPS)/Land Bank Remittance System (LBRS)
g. Introduction of the e-AFS, an online system of the BIR which lets taxpayers submit their
Filed ITR and its Attachments through BIR's webpage
h. Introduction of NewBizReg, a gateway in the electronic submission of application for
registration through email which is available to individual and non-individual business
taxpayers (Head Office and Branches) pursuant to Ease of Doing Business Law
3. Theoretical Justice- considers the taxpayers’ ability to pay (ability-to-pay principle)
Manifested through the following:
• Use of progressive tax scheme (schedular or graduated tax rates)
• Equity in taxation
LIMITATIONS OF POWER OF TAXATION
A. Inherent Limitations
1. territoriality of taxation
2. international comity or treaty
3. exemption of the government from taxation
4. tax is for public purpose
5. non-delegation of the power of taxation
Exceptions:
a. power to tax was delegated to the President under the Flexibility Clause of the Tariff and
Customs Code (amended by R.A. 10863 or the Customs Modernization and Tariff Act)
Note: Delegated power to executive department is called administrative regulation or
subordinate legislation
b. power to tax was delegated to the local government units thru respective Sanggunian under
the Local Government Code (R.A.7160)

B. Constitutional Limitations
1. Due process of law – notice and hearing
2. equal protection of the law –equality among equals
3. uniformity in taxation – taxation of same class
4. progressive system of taxation – use of graduated tax table
5. non-imprisonment for non-payment of debt or poll tax
6. non-impairment of obligation and contract
7. freedom to exercise religion
8. freedom of the press
9. non-appropriation of public funds or property for the benefit of any church, sect or system
of religion
10. exemption of religious, charitable or educational entities, non-profit cemeteries, churches
and mosque from property taxes
11. exemption from taxes of the revenues and assets of non-profit, non-stock educational
institutions for educational purposes
12. concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption (voting separately)

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13. non-impairment of the jurisdiction of the Supreme Court to review tax cases – final arbiter
14. appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments
15. each local government unit shall exercise the power to create its own sources of revenue
and shall have a share in the national taxes (Internal Revenue Allotments)
SITUS OF TAXATION
The place of taxation, or jurisdiction, or source of income.

Factors that determine the situs of taxation

1. nature, kind or classification of the tax
2. subject matter of the tax
3. citizenship of the taxpayer
4. residence of the taxpayer
5. sources of income
6. place of exercise, business or occupation being taxed (service)
7. place where income-producing activity was held or done
8. activity

Criteria in Imposing Tax Under Philippine Setting

1. Citizenship Principle (Nationality Theory) – considers the citizenship of taxpayer
2. Residence Principle (Domiciliary Theory) – considers the residence of taxpayer
3. Source Principle (Source of the Income) – considers the source of the income
DOUBLE TAXATION
Taxing the object or subject within the territorial jurisdiction twice, for the same period, involving the
same kind of tax by the same taxing authority

Kinds:
1. Direct Double Taxation/Direct Duplicate/Taxation in Strict Sense –
Elements:
a. Same object/subject (taxpayer)
b. Same type of tax
c. Same purpose
d. Same taxing authority
e. Same period
Note: If one of the elements is missing, then there is Indirect Double Taxation
2. Indirect Double Taxation/Indirect Duplicate/Taxation in Broad Sense –

International Double Taxation –a double taxation caused by two different taxing authorities, one
domestic and one foreign.
ELIMINATION OF DOUBLE TAXATION
1. Exclusive right to tax is conferred on one of the contracting states
2. Relief is given thru:
• Exemption method/principle – the income or capital which is taxable in the state of
source or situs is exempted in the state of residence; the focus is on the income or
capital itself
• Credit method/principle – the income or capital which is taxed in the state of source is
still taxable in the state of residence, the tax paid in the former is credited against the
tax levied in the latter; the focus is upon the tax
Other ways of relief:
• Tax sparing – taxes exempted or reduced are considered fully paid e.g. a non-resident may
obtain a tax credit for the taxes that have been “spared: under the incentive program of the
state if source
• Matching credit – the state of residence agrees, as a counterpart to the reduced tax, to allow a
deduction against its own tax of an amount fixed at a higher rate
• Application of the most favored nation clause:
o First, income derived from the Philippines by a resident of the other state and of the
third state must be of the same kind or class (e.g. royalty) in order to avail of the
lower tax enjoyed by the third state
Second, the tax consequences of the income payment under the two treaties must be under similar
circumstances which requires a showing that the method employed for eliminating or mitigating the
effects of double taxation under the treaty with the other state and the third state are the same
FORMS OF ESCAPE FROM TAXATION (ESCATE)
1. Evasion – tax dodging – is a scheme used outside of those lawful means and when availed
of it exposes taxpayers to criminal and administrative liabilities. It refers also to acts and
devices that illegally reduces or totally evade the payment of taxes.
Examples:
• Non-registration
• Non-issuance of receipts
• Non-filing of returns and non-payment of tax
• Understatement of sales or income or overstatement of expenses by more than 30%

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• Intentional non-declaration of income

• Unjustifiable refusal to pay the tax
2. Shifting –the process of transferring the tax burden from the statutory taxpayer to another
(e.g. VAT)
3. Capitalization – generally occurs at the time of selling process or exchange or transfer of
land or other assets which generate a flow of income and are subject to a series of successive
annual taxes during their lifetime. Tax capitalization is not common in the Philippines.
Common application is increase in capitalization to avoid payment of Improperly
Accumulated Earnings Tax (Note: IAET is repealed under CREATE Law)
4. Avoidance –tax minimization– tax saving device within the means sanctioned by law. It is
the reduction or totally escaping payment of taxes through legally permissible means.
Should be used in good faith and at arm’s length.
5. Transformation – the effective application of organizational design, process improvement,
and enabling technology to improve data integrity, tax function efficiency, and
performance—while driving value for the business (Deloitte). The manufacturer absorbs the
additional taxes imposed by the government without passing it to the buyers for fear of lost
of his market. Instead, it increases quantity of production, thereby turning their units of
production at a lower cost resulting to the transformation of the tax into a gain through the
medium of productions (Banggawan).
6. Exemption- an immunity, privilege or freedom from payment of tax by virtue of law (e.g.
income tax holidays for pioneer/non-pioneer PEZA-enterprises or under CREATE Law;
exemption from tax of minimum wage earners)
DISTINCTION BETWEEN TAX AMNESTY AND TAX CONDONATION
Tax Amnesty –is a limited time offer by the State to a specified group of taxpayers to pay a defined
amount (certain percentage) in exchange for forgiveness of a tax liability relating to a previous tax
period as well as freedom from criminal prosecution. It is a general pardon or intentional overlooking by
the state of its authority to impose penalties on persons. (e.g. Estate Tax Amnesty Law)

Tax Condonation – means to remit or to desist or refrain from exacting or imposing a tax.
condonation of a tax liability is equivalent to and is in the nature of a tax exemption.

Tax Exemption Tax Amnesty

There is no tax liability at all but a grant of Connotes condonation from payment of existing
incentive tax liability
The grantee generally do not pay anything The grantee pays a portion
Can be availed of by any qualified taxpayer Not always available. Limited-offer only.
STATUTORY CONSTRUCTION AND INTERPRETATION OF TAX LAWS
Taxation
1. If tax laws are clear, there’s no need for interpretation, only application
2. If tax laws are vague, it shall be interpreted strictly against the taxing authority and in liberally in
favor of the taxpayer (statutes levying taxes are construed against the government)

Exemptions/Deductions
3. Exemptions shall be interpreted strictly against the taxpayer and liberally in favor of the taxing
authority
4. Deductions partake the nature of an exemption, hence strictly construed against the taxpayer

Presumption of Regularity
5. Tax assessments are presumed to be correct and done in good faith i.e. disputable presumption
only which can be overcome by evidence)

Application
6. Tax laws are generally prospective in application.
Exception: If the law so provides (e.g. Tax Amnesty Law, CREATE Law)

No compensation or set-off
7. Taxes are not subject to compensation or set-off (excess payments can be carried-over and credit
on same tax type, e.g. income tax to income tax and not income tax to VAT. If the excess
payment is converted to Tax Credit Certificate, the taxpayer can use the TCC to pay internal
revenue taxes except withholding taxes (expanded withholding tax (EWT)/Withholding Tax on
Compensation (WTC)/Final Withholding Taxes (FWT or FT)

Others
8. Construction of statute by predecessors is not binding on the successors.
9. Special laws prevail over the general laws (e.g. Bayanihan Laws over Tax Code)
INCOME TAX SYSTEMS
1. Global Tax System – all incomes regardless of classification e.g. as compensation, business or
professional income, passive income or capital gain, and the deductions are reported in the
income tax return and then the tax is computed thereon.

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2. Schedular Tax System – different types of income are subject to different sets of income tax
rates (graduated or flat). The basis may be gross income (without deductions) or net income
(gross income less allowable deductions).
3. Semi-Schedular or Semi-Global Tax System – regular or ordinary income including passive
income and capital gain not subjected to final tax are lumped or added together and after
deducting allowable deductions, the taxable income is subjected to tax in accordance with tax
rules i.e. graduated for individual or flat rate for non-individual. In this case, global system is
applied. For income not subjected to final tax, e.g. if passive income, it is subject to final tax; if
capital gains, it is subject to capital gains tax).
In this system, different returns are filed when reporting the income (e.g. Annual ITR for ordinary
incomes, final tax returns for passive incomes and capital gains tax returns for capital gains on
sale of real properties classified as capital asset and shares of stocks not traded in the stock
exchange. This is adopted in the Philippines.
TAX LAW
Any law that provides for the assessment and collection of taxes for the support of the government
and other public purposes

Sources of Tax Laws:

1. Constitution
2. Statutes and Presidential Decrees
3. Executive Orders and Batas Pambansa
4. Tax Treaties and conventions with foreign countries
5. Revenue Regulations issued by the Department of Finance
6. Supreme Court Decisions
7. Local Ordinances (Sangguniang Panlalawigan/Panglungsod/Bayan/Barangay)
NATURE OF PHILIPPINES TAX LAWS
1. Civil
2. Not Penal
3. Not criminal
MARSHALL VS HOLMES
A. Marshall Doctrine (US Justice John Marshall) – “The power to tax includes the power to destroy”
- Constitutional if taxation power is used validly as an implement of police power in discouraging
certain acts and enterprises inimical to public welfare.
- Unconstitutional if in raising revenue, taxation is allowed to confiscate or destroy properties
B. Holmes Doctrine (US Justice Oliver Wendell Holmes) – “Taxation power is the power to build”,
“The power to tax is not the power to destroy while this court sits”
The power to tax should not be the power to destroy. The power to destroy is merely a consequence
of taxation.
END

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