DE LA SALLE LIPA

College of Business, Economics, Accountancy, and Management

Accountancy and Accounting Information Systems Area

PHILIPPINE INCOME TAXATION

Basic Principles of Taxation

DEFINITION, NATURE, AND BASIS OF TAXATION

TAXATION is the process or means by which the sovereign, through its lawmaking body, raises income
to defray the necessary expenses of the government. Taxation as a power of the State is inherent in
sovereignty.

Nature of Taxation
1. It is inherent in nature
2. Legislative in character
3. Subject to constitutional and inherent limitations

Lifeblood theory
Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need
(Commissioner v. Pineda, 21 SCRA 105).

Taxation is indispensable and inevitable price for civilized society; without taxes, the government would
be paralyzed (Commissioner v. Algue, Inc., L-28896, Feb. 17, 1988, 158 SCRA 9).

Taxes are for public purpose

Upon taxation depends the Government’s ability to serve the people for whose benefit taxes are
collected (Vera v. Fernandez, 89 SCRA 199).

OBJECTIVES/PURPOSE OF TAXATION
Primary Purpose - is to provide funds or property with which the government discharges its appropriate
functions for the protection and general welfare of the its citizens.

Non Revenue Objectives

Aside from purely financing government operational expenditures, taxation is also utilized as a tool to
carry out the national objective of social and economic development.
1. to strengthen anemic enterprises by granting them tax exemptions or other conditions or
incentives for growth;
2. to protect local industries against foreign competition by increasing local import taxes;
3. as a bargaining tool in trade negotiations with other countries;
4. to counter the effects of inflation or depression;
5. to reduce inequalities in the distribution of wealth;
6. to promote science and invention, finance educational activities or maintain and improve the
efficiency of local police forces;
7. to implement police power and promote general welfare.

STATE POWERS
Taxation Power – the power of the State by which the sovereign raises revenue to defray the necessary
expenses of the government
Power of Eminent Domain – the power of the State to take private property for public use upon
payment of just compensation (e.g. road widening projects where portions of land of residents are taken
by the government to provide wider public roads).
Police Power – the power of the State to enact laws to promote public health, public morals, public
safety, and the general welfare of the people (e.g. Seatbelt Law, Universal Health Care Act, local
ordinances on curfew hours for minors).

ASPECTS OF TAXATION
Levy – The imposition of tax requires legist
Assessment and Collection - This is essentially an administrative function.
Payment of Tax – This process involves the act of compliance by the taxpayer in contributing his share
to pay the expenses of the government.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM (FAT)

1. Fiscal Adequacy- The sources (proceeds) of tax revenue should coincide with and approximate
needs of government expenditures. The sources of revenue should be sufficient and elastic to
meet the demands of public expenditures;
2. Administrative Feasibility- The tax system should be capable of being properly and efficiently
administered by the government and enforced with the least inconvenience to the taxpayer.
3. Theoretical Justice- The tax system should be fair to the average taxpayer and based upon his
ability to pay.

SCOPE OF TAXATION (CUPS)

1. Comprehensive
2. Unlimited
3. Plenary
4. Supreme

LIMITATIONS ON THE POWER OF TAXATION

Constitutional limitations (some examples only)

1. Observance of due process of law and equal protection of the laws. (sec, 1, Art. 3)
2. Rule of uniformity and equity in taxation (sec 28(1)Art VI).
3. No imprisonment for non-payment of poll tax (sec. 20, Art III).
4. Non-impairment of obligations and contracts, (sec 10, Art III).
5. Prohibition against infringement of religious freedom (Sec 5, Art III).
6. Prohibition against appropriations for religious purposes, (sec 29, (2) Art. VI)
7. exemption of all revenues and assets of non-stock, non-profit educational institutions
used actually, directly, and exclusively for educational purposes from income, property
and donor’s taxes and custom duties (sec. 4 (3 and 4) art. XIV.)
8. exemption of religious, charitable, or educational entities, non-profit cemeteries, and
churches from taxation
9. Concurrence by a majority of all members of Congress in the passage of a law granting
tax exemptions. Sec. 28 (4) Art. VI.
10. Power of the President to veto any particular item or items in a revenue or tariff bill
11. Congress may not deprive the Supreme Court of its jurisdiction to review, revise, reverse,
modify or affirm on appeal or certiorari, final judgments and orders of lower courts in all
cases involving the legality of any tax, impost, assessment or any penalty imposed in the
relation thereto.

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Inherent limitations (SNIPE)
1. Situs (Territoriality). The State may tax persons and properties under its jurisdiction;
2. Non-delegability of the taxing power. The power to tax being legislative in nature may not be
delegated. (subject to exceptions)
3. International Comity. the property of a foreign State may not be taxed by another.
4. Purpose. Taxes may be levied only for public purpose;
5. Exemption of the Government. Government agencies performing governmental functions are
exempt from taxation

SOME DOCTRINES ON TAXATION

Prospectivity of Tax Laws
Taxes may be imposed retroactively by law but, unless so expressed by such law, these taxes must only
be imposed prospectively. (Hydro Resources v. Court of Appeals, G.R. 80276, Dec. 21, 1990,192 SCRA
604)

Double Taxation
Both taxes where imposed in the same year for the same purpose, upon property owned by the same
person and by the same taxing authority.

Direct duplicate taxation - the same property is taxed twice when it should only be taxed once.
Indirect duplicate taxation - not prohibited and usually allowed provided no violation of equal
protection and uniformity clauses in the constitution.

Remedies of Double or Multiple Taxation:

1. Provide for exemption;
2. Allowance for tax deduction
3. Allowance for tax credit for foreign taxes
4. Enter into treaties with other states
5. Allowance of the principle of reciprocity.

TAX EVASION VS. TAX AVOIDANCE

Tax Evasion - occurs when the taxpayer resorts to unlawful means to lessen or to get away with his tax
liability. This is also known as tax dodging.

Tax Avoidance - happens when the taxpayer minimizes his tax liability by taking advantage of a legally
available tax planning opportunities. This is otherwise known as tax minimization.

Distinction between Tax Evasion and Tax Avoidance

1. Tax avoidance is legal and not subject to criminal penalty WHILE tax evasion is illegal and
subject to criminal penalty.
2. Tax avoidance is minimization of taxes WHILE tax evasion always results in absence of tax
payments.

OTHER MEANS OF ESCAPE FROM TAXATIONS

Shifting – transfer of tax burden to another. The imposition of tax is transferred from the statutory
taxpayer to another without violating the law.
• Impact is the point at which a tax is originally imposed.
• Incidence is the point at which the tax burden finally rests or settles down
• Three kinds of Shifting
o Forward shifting

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 o Backward shifting
o Onward shifting

Capitalization – the seller is willing to lower the price if the commodity provided the taxes will be
shouldered by the buyer.

Transformation – the manufacturer absorbs additional taxes imposed by the government without
passing it to the buyers for fear of lost of their market. Instead, they increase 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 production.

Exemption – it is an immunity, privilege, or freedom from payment of a charge or burden to which others
are obliged to pay.

SITUS OF TAXATION
Situs of Taxation - literally means the place of taxation, or the country that has jurisdiction to levy a
particular tax on persons, property, rights or business.

Basis: Symbiotic relationship. The jurisdiction, state or political unit that gives protection has the right to
demand support.

The situs of taxation is determined by a number of factors:

a. Subject matter- or what is being taxed. He may be a person or it may be a property, an act or activity;
b. Nature of tax- or which tax to impose. It may be an income tax, an import duty or a real property tax;
c. Citizenship of the taxpayer
d. Residence of the taxpayer.

SITUS OF PERSONS
1. Residence tax- place where the person resides
2. Income Tax-
a. citizenship, or the country of which he is a citizen
b. legal residence
c. place where the income is derived.
3. Estate Tax- residence of the decedent at the time of his death
4. Donor’s Tax- residence of the donor at the time of donation
5. Business/occupation tax- where the business is done or the occupation is engaged in;

SITUS OF TAXATION OF PROPERTY

1. Real Property- location of the property
2. Tangible personal property- location of the property
3. Intangible personal property- domicile or residence of the owner

TAXES
Taxes are 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.

Tax in a general sense, is any contribution imposed by the government upon individuals for the use and
service of the state, whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid,
supply or other name. Tax, in its essential characteristics, is not a debt. (Black’s Law Dictionary)

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Essential characteristics of tax
1. it is an enforced contribution
2. it is generally payable in money
3. It is proportionate in character, usually based on the ability to pay
4. it is levied on persons and property within the jurisdiction of the state
5. it is levied pursuant to legislative authority, the power to tax can only be exercised by the
lawmaking body or congress
6. it is levied for public purpose
7. it is commonly required to be paid a regular intervals.

Classification of taxes
1. As to subject matter or object
a. personal, poll or capitation- tax of a fixed amount on individuals residing within a specified
territory, without regard to their property, occupation or business. Ex. Community tax (basic)
b. property- imposed on property, real or personal, in proportion to its value, or in accordance with
some reasonable method or apportionment. Ex. Real estate Tax
c. Excise- imposed upon the performance of an act, the enjoyment of a privilege, or the engaging
in an occupation, profession or business. Ex. Income tax, VAT, Estate Tax, Donor’s Tax

2. As to who bears the burden of the tax

a. Direct- the tax is imposed on the person who also bears the burden thereof
Ex. Income tax, community tax, estate tax
b. Indirect – imposed on the taxpayer who shifts the burden of the tax to another, Ex. VAT,
customs duties.

3. As to determination of amount
a. specific – imposed and based on a physical unit of measurement as by head number, weight,
length or volume. Ex. Tax on distilled spirits, fermented liquors, cigars
b. ad valorem of a fixed proportion of the value of the property with respect to which the tax is
assessed. Ex. Real estate tax, excise tax on cars, non essential goods.

4. As to purpose
a. general, fiscal, or revenue- imposed for the general purpose of supporting the government. Ex.
Income tax, percentage tax
b. special or regulatory- imposed for a special purpose, to achieve some social or economic
objective. Ex. Protective tariffs or custom duties on imported goods intended to protect local
industries.

5. As to scope or authority imposing the tax

a. national- imposed by the national government ex. NIRC, custom duties
b. municipal or local- imposed by municipal corporations or local governments ex. Real estate tax

6. As to graduation of rates.
a. proportional- based on a fixed percentage of the amount of the property, receipts or on other
basis to be taxed ex. Real estate tax, VAT
b. progressive and graduated- the rate of the tax increases as the tax base or bracket increases
ex. Income tax, estate tax, donor’s tax
c. regressive- the rate of tax decreases as the tax base or bracket increases.
d. degressive- increase of rate is not proportionate to the increase of tax base.

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TAX DISTINGUISHED FROM OTHER FEES
1. From TOLL. Toll is a sum of money for the use of something, generally applied to the consideration
which is paid for the use of a road, bridge or the like, of a public nature.

A toll is a demand of proprietorship, is paid for the use of another’s property and may be imposed by the
government or private individuals or entities; while a tax is a demand of sovereignty, is paid for the
support of the government and may be imposed only by the State.

2. From PENALTY. Penalty is any sanction imposed as a punishment for violation of law or acts deemed
injurious. Violation of tax laws may give rise to imposition of penalty.

A penalty is designed to regulate conduct and may be imposed by the government or private individuals
or entities. Tax, on the other hand, is primarily aimed at raising revenue and may be imposed only by the
government.

3. From SPECIAL ASSESSMENT. Special Assessment is an enforced proportional contribution from

owners of lands for special benefits resulting from public improvements.

Special Assessment is levied only on land, is not a personal liability of the person assessed, is based
wholly on benefits and is exceptional both as to time and place. Tax is levied on persons, property, or
exercise of privilege, which may be made a personal liability of the person assessed, is based on
necessity and is of general application.

4. From PERMIT or LICENSE FEE. Permit or License Fee is a charge imposed under the police power
for purposes or regulation.

License fee is imposed for regulation and involves the exercise of police power while tax is levied for
revenue and involves the exercise of the taxing power. Failure to pay a license gee makes an act or a
business illegal, while failure to pay a tax does not necessarily make an act or a business illegal.

5. From DEBT. Debt is generally based on contract, is assignable and may be paid in kind while a tax is
based on law, cannot generally be assigned and is generally payable in money. A person cannot be
imprisoned for non-payment of debt while he can be for non-payment of tax except poll tax.

A tax is considered a debt for purposes of remedies for its enforcement;

6. From REVENUE. Revenue is broader that tax since it refers to all funds or income derived by the
government taxes included. Other sources of revenues are government services, income from public
enterprises and foreign loans.

7. From CUSTOM DUTIES. Custom duties are taxes imposed on goods exported from or imported to a
country. Custom duties are actually taxes but the latter is broader in scope.

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