Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 2

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
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GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

Learning Objectives:
At the end of this modules, students must be able to:

a. Define taxation as an inherent power of the state;

b. Explain taxation as a power, process, and means;
c. Distinguish taxation from other inherent powers of the state; and
d. Explain various principles governing taxation in the Philippines.

Taxation, defined

Taxation is one of the inherent powers of the state. From the moment a State is born, it
automatically possesses the power to collect taxes from its inhabitants. Such power, being inherent,
did not emanate from any laws. The Constitution of the Philippines does not confer to the state its
power of taxation, but merely limits the exercise thereof.

A. Taxation as a power.

As a power, it co-exists with the creation of a state. The state shall demand contributions from
its inhabitants in order to raise funds to the government, and thus, support governmental activities.

B. Taxation as a process.

As a process, tax measures, before they can be enforced to the inhabitants, must undergo
the process of legislative undertaking through levying (Tax Policy)); to be implemented by the
executive branch of the government through assessment and collection (Tax Administration).

Figure 1. The Process of Taxation

LEGISLATIVE BRANCH EXECUTIVE BRANCH

TAX POLICY TAX ADMINISTRATION

LEVYING ASSESSMENT
The legislative branch The executive branch, thru the Bureau of Internal
of the government Revenues (BIR) appraises or determines the value of the
passes tax laws or subject of taxation to determine the value of the tax
ordinances (for local obligation. Generally, taxes are self-assessing. The
government units). taxpayers will be allowed to determine the value of their
tax obligations.

COLLECTION

The BIR, or other authorized collecting agents, such as

banks, will facilitate the collection of the tax payments
made by the taxpayer.

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 Fundamentals of Accountancy, Business and
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442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
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C. Taxation as a means.

As a means, taxation is the way as well as the source of government funds in order to support
its functions.

The Lifeblood Theory/ Bread and Butter Doctrine

The prompt and certain availability of taxes is essential to support the existence of a
government. The government cannot exist without funds sourced through taxes, and thus,
collection of taxes is a necessary burden to preserve State’s sovereignty.

The Three Inherent Powers of the State

Alongside Taxation Power, the state also inherently possesses Police Power and the Power of
Eminent Domain. The three inherent powers of the state are distinguished as follows:

Figure 2. Inherent Powers of the State

Taxation Police Power Eminent Domain

Concept
The power to enforce The power to make The power to take a
contribution and/or and enact laws, rules, private property for
collect funds from the regulations, or local public use, upon
people to raise ordinances to promote payment of just
government funds. the general welfare. compensation.

Purpose To take private

To raise government To promote public
property for public use
funds welfare
Branch of the
government exercising
Legislative Branch Legislative Branch Legislative Branch
the power

Subjects of the Power To all inhabitants or a

To all inhabitants or a To a particular private
particular class of
particular class of property of an
individuals
individuals individual

The three inherent powers of the state are all necessary attributes of Sovereignty. Simply stated,
no effective government will exist without these inherent powers of the state. While they operate to
deprive or interfere with the private properties of the inhabitants, or the community at large, they are
expected to bring compensatory equivalence in the form of government services or the welfare to the
general public.

Purpose of Taxation Power

A. Revenue Purpose

This is the primary purpose of the power of taxation. It gives the government the right to
demand and collect funds from the inhabitants of the state in order to raise funds which will
support its operations. The government projects and programs would necessarily need funds,
which funds will be provided by its internal revenue.

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 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
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B. Regulatory Purpose

As the sumptuary or secondary purpose, taxation works to regulate inflation, achieve

economic and social stability, serve as key instrument for social control. Economic stability may
be had through a protection mechanism in the international trade relations. For example, the
government may impose tariff or customs duties to control the entry of imported products
intended to be sold and compete with locally produced products of the country.

C. Compensatory Purpose

This is in consonance with the Benefits-received Principle. Under this principle, there exists
a symbiotic relationship between the government and its inhabitants. The payment of taxes
means helping the government to achieve its legitimate objectives: to serve the people for
whose benefit taxes are collected. Therefore, as a way of the people to compensate the
benefits provided by the government, taxes are paid.

Escape from Taxation: Tax Evasion vs. Tax Avoidance

The goal of the taxpayer in escaping taxation is to reduce the amount of tax liability. However,
the taxpayer must be careful in applying the reduction in order for such act not to be considered a
tax evasion. Tax Evasion refers to the unlawful means of evading or dodging tax payments. An example
of which is a deliberate omission of a certain amount of sales from the records of the business.

On the other hand, tax avoidance refers to the legitimate measures of reducing the tax liability.
The law allows certain ways on how to reduce the amount of tax liability. An example of which is a
claim for tax exemption. Tax exemption is a grant of immunity to pay taxes. In order to be exempted
from paying taxes, however, the one claiming for exemption must prove and justify his qualification to
be tax exempt. Other forms of tax avoidance may be in the form of tax options (applying varying tax
rates allowed by law) or tax shifting (In case of VAT or OPTs).

Classification of Tax as to Who Bears the Burden

A. Direct Taxes

These are taxes demandable from persons, who by law, are bound to pay tax. Both the
liability and the burden of paying tax falls on the same person. An example of a direct tax is an
income tax. Income taxation will be discussed in the subsequent modules.

B. Indirect Taxes

As distinguished from direct taxes, the liability of paying the tax is on a particular person/
entity, but the tax burden may be shifted to another person/ entity. An example of an indirect
tax are business taxes such as Value-added Tax (VAT) and Other Percentage Taxes (OPT). In
practice, VAT and OPTs form part of the purchase price because the burden of paying the tax
is shifted from the producer to the consumers. This is the reason why VAT and OPTs are called
taxes on commodities. Business taxation will be discussed in the subsequent modules.

Situs of Taxation

As a rule, taxation power is territorial. Therefore, tax laws may only be imposed within the
Philippine Territory. The rule is applied in determining whether a person or a property must be subjected
to the tax laws of the Philippines. In applying the rule, it is important to consider the citizenship and
residency of the taxpayer and the source or location of the object.

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 Fundamentals of Accountancy, Business and
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Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 7- FABM 2 Subject Teacher:

Figure 3. Situs of Taxation for Individual Taxpayers

Source of the Object of Tax

Nature of Tax Citizenship Residency
Within the Philippines Outside the Philippines
Resident Taxable Taxable
Filipino
Nonresident Taxable Not taxable
Income Tax
Resident Taxable Not taxable
Alien
Nonresident Taxable Not taxable

Business Tax Taxable Not taxable

Figure 4. Situs of Taxation for Corporations

Citizenship/ Source of the Object of Tax

Nature of Tax
Residency Within the Philippines Outside the Philippines
Income Tax Domestic Taxable Taxable
Resident Foreign Taxable Not taxable

Business Tax Taxable Not taxable

Classification of Taxpayers.

The terms Filipino and Alien, Resident or Non-resident, and Domestic or Foreign Corporations will
be defined in accordance with Sec. 22 of RA No. 8424 or the National Internal Revenue Code (NIRC)
of the Philippines, as amended by RA No. 10963 or the Tax Reform for Acceleration and Inclusion Law
(TRAIN Law).

A. Resident Citizen
- A Filipino who permanently resides or is domiciled in the Philippines. Under Section 1, Article
IV of the 1987 Constitution, the following persons are citizens of the Philippines:

1. Those who are citizens of the Philippines at the time of the adoption of the 1987
Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship
upon reaching the age of majority; and
4. Those who are naturalized in accordance with law.

B. Nonresident Citizen (Sec. 22 (E), NIRC)

- The following are nonresident citizens:

1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein;
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis;
3. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year; and
4. A citizen of who has been previously considered as nonresident and who arrives in the
Philippines at any time during the taxable year with the intention to permanently reside
in the Philippines, shall be treated as nonresident with respect to any income derived from
abroad until his arrival in the Philippines; and

C. Resident Alien (Sec. 22 (F), NIRC)

- An individual whose residence is within the Philippines and who is not a citizen thereof.
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 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 7- FABM 2 Subject Teacher:

D. Nonresident Alien (Sec. 22 (G), NIRC)

- An individual whose residence is within the Philippines and who us not a citizen thereof.

E. Domestic Corporation (Sec. 22 (C), NIRC)

- Corporations created or organized in the Philippines under its laws.

For purposes of taxation, the following are considered “corporations” (Sec. 22 (B), NIRC):

1. Partnerships, except General Professional Partnerships;

2. Joint-stock companies;
3. Joint accounts;
4. Associations; and
5. Insurance Companies.

F. Foreign Corporation
- Corporations created and organized under foreign laws.

G. Resident Foreign Corporation (Sec. 22 (H), NIRC)

- A foreign corporation engaged in trade or business within the Philippines.

H. Nonresident Foreign Corporation (Sec. 22 (I), NIRC)

- A foreign corporation not engaged in trade or business in the Philippines.

References

RA No. 8424, National Internal Revenue Code of the Philippines, as amended by RA No. 10963, Tax
Reform for Acceleration and Inclusion Law

Valencia, E, & Roxas, G. (2014). Income Taxation. Baguio City: Valencia Educational Supply.

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