Fundamental

Principles
of
TAXATION
 Taxation Defined

Taxation is the process or

means by which the sovereign
(independent state), through
its law making body (the
legislature), imposes burdens
upon subjects and objects
within its jurisdiction for the
purpose of raising revenues to
carry out the legitimate
objects of government.
In simple terms, it is
the act of levying a tax
to apportion the cost of
government among
those who, in some
measure, are privileged
to enjoy its benefits
and must therefore
bear its burdens.
 Purposes of Taxation

• Primary: Revenue/Fiscal
The primary purpose of taxation on the part of the
government is to provide funds or property with which to
promote the general welfare and the protection of its citizens
and to enable it to finance its multifarious activities.

• Secondary: Regulatory ( Sumptuary/ Compensatory)

While the primary purpose of taxation is to raise
revenue for the support of the government, taxation is often
employed as a devise for regulation or control
(implementation of State’s police power) by means of which
certain effects or conditions envisioned by the government
may be achieved as:
a. Promotion of General Welfare
b. Reduction of Social Inequality
c. Economic Growth
Inherent Powers of the State
1. Power of Taxation. It is the power by which the State
raises revenue to defray the necessary expenses of the
government.

2. Police Power. It is the power of the State for promoting

public welfare by restraining and regulating the use of
liberty and property.

3. Power of Eminent Domain. It is the power of the State to

acquire private property for public purpose upon
payment of just compensation.
Similarities among the 3 Inherent Powers of the State

1. They are inherent in the state.

2. They exist independently of the constitution although
the conditions for their exercise may be prescribed by
the constitution.
3. Ways by which the State Interfere with private rights
and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received,
directly or indirectly, by the persons affected.
 Distinctions Among the Three Inherent Powers
Taxation Police Power Eminent Domain
1. Nature Power to enforce Power to make and Power to take private
contributions to raise implement laws for property for public
gov’t funds the general welfare. use with just
compensation.

2. Authority Government only Government only May be granted to

public service/utility
companies

3. Purpose For the support of the Promotion of general The taking of private
government welfare through property for public
regulation use.

4. Persons Community or a class Community or a class On an individual as

affected of individuals. Applies of individuals. Applies the owner of
to all persons, to all persons, personal property.
property and excises property and excises Only particular
that may be subject that may be subject property is
thereto thereto comprehended.
 Taxation Police Power Eminent Domain
5. Scope Plenary, Broader in application. Merely a power to
Comprehensive, General power to take private property
Unlimited, Supreme make and implement for public use.
law.

6. Effect Contribution becomes No transfer or title. There is a transfer of

part of public fund. There may be just a title or property.
restrain on the
injurious use of
property.
7. Benefits In form of protection No direct and Market value of
received and benefits received immediate benefit but property taken
from government. only such as may arise
from the maintenance
of a healthy economic
standard of society.
8. Amount of No limit Sufficient to cover cost No imposition. The
imposition of license and the owner is paid
necessary expenses of equivalent to the fair
the police surveillance value of his property.
and regulation.
Theory and Basis of Taxation

1. Theory

 Lifeblood Theory – Taxation is the lifeblood

of the government.

 Necessity Theory – The existence of the

government is a necessity.
2. Basis

 Benefits Received or Reciprocity Theory –

Taxation is based on reciprocal duties of
protection and support between the
government and its people.
Scope of the Power of Taxation

a. Comprehensive – as it covers persons, businesses,

activities, professions, rights and privileges.
b. Unlimited – Its force is so searching to the extent that
the courts scarcely venture to declare that it is subject
to any restrictions.
c. Plenary – as it is complete.
d. Supreme – in so far as the selection of the subject of
taxation.
Elements/Characteristics of Tax

a) It is an enforced contribution
b) It is generally payable in money
c) It is proportionate in character
d) It is levied on persons, property, or the exercise of a
right or privilege (subjects or objects of taxation)
e) It is levied by the law-making body of the state.
f) It is levied for public purpose.
Nature of Taxation

a. It is inherent in sovereignty
b. It is legislative in character
Branches of the Government

1. Legislative branch (law-making body)

2. Executive branch (law-enforcing body)
3. Judiciary branch (law-interpreting body)
 ASPECTS OF TAXATION

3. Collection 1. Levying
(Executive Function) (Legislative Function)

2. Assessment
(Executive Function)

Table 1: Aspects of Taxation

Classification of Taxes

1. As to scope
a. National – Imposed by the National Government.
b. Local – Imposed by local government units such as
municipal.

2. As to subject matter or object

a. Personal, poll or capitation tax – tax of a fixed
amount imposed upon individual, whether citizens
or not, residing within a specified territory without
regard to their property or the occupation in which
he may be engaged.
 b. Property tax – tax imposed on property, whether
real or personal, in proportion either to its value, or
in accordance with some other reasonable method
of appointment.
c. Excise tax – any tax which does not fall within the
classification of a poll tax or a property tax.

3. As to who bears the burden

a. Direct – imposed directly on the person (both natural
and artificial) liable to pay tax. It cannot be shifted
to another person.
b. Indirect – can be passed or shifted to another
4. As to determination of amount
a. Specific – Tax based on volume, weight or quantity
of goods as measured by tools, instruments or
standards.
b. Ad valorem – Tax imposed based on the value of the
property subject to tax.

5. As to purpose
a. Revenue – tax imposed solely for the general
purpose of the government
b. Regulatory – tax imposed for a specific purpose
6. As to graduation or rate
a. Proportional – tax based on a fixed percentages of
amount of the property, receipts, or other basis to
be taxed.
b. Progressive or graduated – tax rate of which
increases as the tax base or bracket increases
c. Regressive – tax rate of which decreases as the tax
base or bracket increases
Elements of a Sound Tax System

a) Fiscal Adequacy
The fundamental purpose of taxation is to
raise the revenue necessary to fund public services.
Consequently, it is necessary that the sources of revenues
must be adequate to meet government expenditures and
sustain the level of public services demanded by citizens
and policy maker.

b) Theoretical Justice or Equity (“ability to pay principle”)

Taxpayer’s ability to pay must be taken into

consideration. The tax burden should be proportionate to
c) Administrative Feasibility
Tax laws must be capable of effective and
efficient enforcement. A good tax system requires
informed stakeholders who understand how taxes are
assessed, collected, and complied with. It should be clear
who and what is being taxed, and how tax burdens affect
them. Therefore, the tax system should be as simple as
possible, and should minimize gratuitous complexity.
 Limitations on the
Power of Taxation
 Inherent Limitation

1) Public Purpose. Raising funds through taxes may be

used for public purpose only.
2) Territoriality. The state may only tax persons and
property under its territorial power.
3) Double Taxation. No property shall be taxed twice by
the state for the same reason.
4) Exemption. Agencies of the government are tax
exempt.
5) Non-delegation. The power to tax by the legislative
body may not be delegated to any other branch.
 Constitutional Limitation

1) Due process of law. There must be a valid law and the

measure should not be unconscionable and unjust as
to amount to confiscation of property.
2) Equal protection of laws. All persons subject to
legislation shall be treated alike under similar
circumstances and conditions both in the privileges
conferred and the liabilities imposed.
3) Rule of uniformity and equity in taxation. It requires
the uniform application and operation, without
discrimination, of the tax in every place where the
subject of the tax is found.
4) Prohibitions against imprisonment for non-payment of
“poll tax”. The non-imprisonment rule applies to non-
payment of poll tax which is punishable only by a
surcharge.
5) Prohibitions against impairment of obligations of
contracts. No law impairing the obligation of contracts
shall be passed.
6) Prohibitions against infringement of religious freedom.
No law shall be made respecting an establishment of
religion, or prohibiting the free exercise thereof.
7) Prohibitions against appropriation of proceeds of
taxation for the use, benefit, or support of any church.
8) Prohibitions against taxation of religious, charitable
and educational entities.
9) Prohibitions against taxation of non-stock, non-profit
educational institutions.
10) Grant of tax exemption. No law granting any tax
exemption shall be passed without the concurrence of
a majority of all Members of the Congress.
11) Veto of appropriation, revenue, tariff bills by the
President. The President shall have the power to veto
any particular item/s in appropriation , revenue, or
tariff bill, but the veto shall not affect the item/s to
which he does not object.
12) Delegated authority of President to impose tariff rates,
import and export quotas, tonnage and wharfage
dues as delegated by Congress through a law w/in the
framework of national development program.
13) Non-impairment of the Supreme Court jurisdiction.
Congress cannot take away from the Supreme Court
the power given to it by the Constitution as the final
arbiter of tax cases.
14) Revenue bills shall originate exclusively from the house
of representatives.
 SITUS OF TAXATION

Literally, situs of taxation means "place" of

taxation. It is the State or political unit which has
jurisdiction to impose a particular tax. The State
where the subject to be taxed has a situs may
rightfully levy and collect the tax. The situs is
necessarily in the State which has jurisdiction or
which exercises dominion over the subject in
question.
 Factors to Consider in Determining the Situs of
Taxation

a. Subject matter (person, property, or activity)

b. Nature of the tax
c. Citizenship
d. Residence of the taxpayer
e. Source of income
f. Place of excise, business or occupation being taxed
INCOME

Citizenship Residency Source w/in Source outside

PH PH

Filipino Resident Taxable Taxable

Filipino Non-Resident Taxable Not taxable
Alien Resident Taxable Not taxable
Alien Non-Resident Taxable Not taxable
TRANSFER TAXES

Citizenship of Residency of Source w/in Source outside

transferor transferor PH PH

Filipino Resident Taxable Taxable

Filipino Non-Resident Taxable Taxable
Alien Resident Taxable Taxable
Alien Non-Resident Taxable Not taxable
 TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS

1) TAX versus TOLL

A Toll is a sum of money for the use of something, generally
applied to the consideration, which is paid of the use of a
road, bridge or the like of a public nature.

2) TAX versus PENALTY

Penalty is a sanction imposed as a punishment for violation of
law or acts deem injurious. The violation of tax may give right
to imposition of penalty.

3) TAX versus SPECIAL ASSESSMENT

Special assessment is an enforced proportional contribution
from owners of lands for special benefits resulting from
public improvements.
 It is not a tax measure intended to raise revenues for the
government because the proceeds thereof may be devoted to
the specific purpose for which the assessment was authorized.

Characteristics of Special Assessment:

a. Levied only on land
b. Not a personal liability of the person assessed
c. Based wholly on benefits (not necessary)
d. Exceptional both as to time and place

4) TAX versus REVENUE

Revenue refers to all the funds or income derived by the
government, whether from tax or any other source.
5) TAX versus SUBSIDY
Subsidy is a pecuniary aid directly granted the government to an
individual or private commercial enterprise deemed beneficial
to the public. Subsidy is not a tax although tax may have to be
imposed to pay it.

6) TAX versus PERMIT or LICENSE FEE

Permit or License is a charge imposed under the police power for
purposes of regulation.

7) TAX versus DEBT

- Arises from contract
- payable in kind of money
- assignable
- A person cannot be imprisoned for non-payment of debt
(except when it arises from a crime)
- Draw interest when stipulated or when of prescription default
 TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS

8. TAX versus CUSTOMS DUTIES

Customs duties are taxes imposed on goods exported
from or imported into a country.

9) TAX versus TARIFF

The duties payable on goods imported or exported. The term
tariff and customs duties are used interchangeably in the
tariff and customs code.
 DOUBLE TAXATION

1) Direct duplicate or direct double taxation

- means taxing twice
• By the same taxing authority, jurisdiction or taxing district
• For the same purpose
• In the same year or taxing period
• Same subject or object
• Same kind/character of the tax

2) Indirect duplicate or indirect double taxation

There is indirect double/duplicate taxation (Broad Sense - which is
not prohibited by the constitution) if any of the elements
described above is not present. Unlike the United States
Constitution, our Constitution does not expressly prohibit direct
double taxation. However, it is something not favored. Such
taxation should, whenever possible, be avoided and prevented.
Means of avoiding tax or minimizing the burden of taxation

1) Shifting
Shifting is the transfer of the burden of a tax by the original
payer or the one on whom the tax was assessed or imposed to
someone else. Transferred is not the payment of the tax but the
burden of the tax. Only indirect taxes may be shifted; direct taxes
cannot be shifted.

Example:
 Manufacturer or producer may shift tax assessed to wholesaler, who
in turn shifts it to the retailer, who also shifts it to the final purchaser
or consumer.
Taxes that may be shifted:
 VAT; Percentage taxes; excise taxes on excisable articles
 Ad-valorem taxes that oil companies pay to the BIR upon removal of
petroleum products from its refinery
2) Transformation
An escape from taxation where the producer or
manufacturer pays the tax and endeavor to recoup himself by
improving his process of production thereby turning out his
units of products at a lower cost

3) Evasion
Tax evasion is the use by the tax payer of illegal or fraudulent
means to defeat or lessen the payment of a tax. It is also known
as “tax dodging.” It is connotes fraud through the use of
pretenses or forbidden devices to lessen or defeat taxes.

Example:
 Deliberate failure to report a taxable income or property; deliberate
reduction
4) Tax Avoidance
It is the exploitation by the tax payer of legally permissible
alternative tax rates or methods of assessing taxable property or
income in order to avoid or reduce tax liability. It is politely
called “tax minimization” and is not punishable by law.

5) Exemption
It is the grant of immunity to particular persons or corporations or
to a person and corporation generally within the same State or
taxing district are obliged to pay.

6) Capitalization
The reduction in the selling price of income producing property
by an amount equal to the capitalized value of future taxes that
may be paid by the purchaser.
 Sources of Tax Laws

1) Constitution
2) Statutes and Presidential Decrees
3) Revenue Regulations by the department of Finance
4) Rulings issued by the Commissioner of Internal Revenue
and Opinions of the Secretary of Justice
5) Decisions of the Supreme Court and Court of tax Appeal
6) Provincial, city, municipality and barangay ordinances
subject to limitations set forth in the Local Government
Code
7) Treaties or international agreements the purpose of which
is to avoid or minimize double taxation.
Taxpayer’s Suit

It is one brought or filed by a taxpayer

arguing the validity of a tax statute and its
enactment or the constitutionality of its
alleged public purpose. Taxpayer have locus
standi to question the validity of tax
measures or illegal expenditures of public
money.