Module 1: Introduction To Taxation

MODULE 1: INTRODUCTION TO TAXATION
At the end of this module, the reader must understand and master the following:
1. Concept of taxation
2. Scope and limitations of taxation
3. Stages of taxation
4. Situs of taxation
5. Fundamental principles surrounding taxation
6. Double taxation
7. Various escapes from taxation
8. Tax amnesty and condonation
9. Types of taxation laws
10. Concept of tax
11. Elements and classification of tax
12. Distinction of tax from similar items
13. Tax collection systems
14. The principles of a sound tax system
15. Tax administration
What is taxation?
Taxation is one of the three inherent powers of the State (The other two are the police
power and the power of eminent domain) to enforce a proportional contribution from its
subjects for public purpose.
What are the rationales behind the imposition of taxes?

Under the theory of taxation, a system of government is indispensable to every society.
Without it, people will not relish the benefits of a civilized and orderly society. However, a
government cannot exist without a system of funding. Also, under the basis of taxation,
there is mutuality and support between the people and the government wherein the
government provides benefits to the people in the form of public services and the people
provide the funds that finance the government. Under the Lifeblood doctrine, taxes are the
lifeblood of the government. Taxes are essential and indispensable to the continued
subsistence of the government. Without taxes, the government would be paralyzed for
lack of motive power to activate or operate it.
What are the limitations of the taxation power?

The scope of taxation is widely regarded as comprehensive, plenary, unlimited and
supreme. However, it is not absolutely unlimited. Taxation has inherent and constitutional
limitations:
A. Inherent limitations
1. Territoriality of taxation – The government can only demand tax payment upon
its subjects or residents within its territorial jurisdiction. To do otherwise will amount
to encroachment of foreign sovereignty. However, by way of exception,
resident citizens and domestic corporations are taxable on income derived
within and outside the Philippines. Also, residents and citizens are taxable on
transfers of properties located within or outside the Philippines.
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2. International comity – Countries observe mutual courtesy or reciprocity among
them hence, government do not tax the income and properties of other
governments and governments give primacy to their treaty obligations over their
own domestic tax laws. Embassies or consular offices of foreign governments in
the Philippines including international organizations and their non-Filipino staff are
not subject to income taxes or property taxes.
3. Public purpose – Tax is intended for the common good. It cannot be exercised
to further any private interest.
4. Exemption of the government – The purpose of taxation is to raise funds for the
government so the government will not tax itself as this will not raise additional
funds. Note that under the National Internal Revenue Code (NIRC), government
properties and income from essential public functions are not subject to
taxation. However, income of the government from its properties and activiites
conducted for profit including income from government owned and controlled
corporations (GOCCs) are subject to tax.
5. Non-delegation of the taxing power – Taxation is a legislative power vested in
Congress and as a rule, cannot be delegated to the other branches of
government except in the following instances:
a. Under the Constitution, local government units (LGUs) are allowed to exercise
the power to tax to enable them to exercise their fiscal autonomy.
b. Under the Tariff and Customs Code, the President is empowered to fix the
amount of tariffs to be flexible to trade conditions.
c. Other cases that require expedient and effective administration and
implementation of assessment and collection of taxes.
B. Constitutional limitations
1. Due process of law – No one should be deprived of his life, liberty or property
without due process of law. Tax laws should neither be harsh nor oppressive.
Thus, there should be no arbitrariness in assessment and collection of taxes and
the government shall observe the taxpayer’s right to notice and hearing.
2. Equal protection of the law – Taxpayers should be treated equally both in terms
of rights conferred and obligations imposed. For example, Congress cannot
exempt sellers of “balut” while subjecting sellers of “penoy” to tax since they are
essentially the same goods.
3. Uniformity rule in taxation – Taxpayers should be classified according to
commonality in attributes, and the tax classification to be adopted should be
based on substantial distinction. Each class is tax differently but taxpayers falling
under the same class are taxed the same.
4. Progressive system of taxation – Congress shall evolve a progressive system of
taxation. Under this system, tax rates increase as the tax base increases. This is
demonstrated by our income tax scale.
5. Non-imprisonment for non-payment of debt or poll tax – This constitutional
guarantee applies only when the debt is acquired by the debtor in good faith.
Debt acquired in bad faith constitutes estafa. Also, this guarantee only applies to
the basic community tax (cedula) Non-payment of the additional community
tax is an act of tax evasion punishable by imprisonment.
6. Non-impairment of obligation and contract – Tax exemptions granted under
contract with the government should be honored and should not be cancelled
by a unilateral government action.
7. Free worship rule – The exercise of religion is free and should not be subject to
tax. Revenues of religious institutions such as tithes or offerings are not subject to
tax EXCEPT income from properties that are proprietary or commercial in nature.
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and
mosques from property taxes. – For this exemption to be applicable, the property
shall be actually, directly, and exclusively used for charitable, religious and
educational purposes.
9. Non-appropriation of public funds or property for the benefit of any church, sect
or system of religion – The government should not favor any particular system of
religion by appropriating public funds in support thereof. It should be noted,
however, that compensation to religious ministers working with the military, penal
institutions, orphanages or leprosarium is not considered religious appropriation.
10. Exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions. – This exemption applies only on revenues and assets
that are actually, directly and exclusively devoted for educational purposes.
11. Concurrence of a majority of all members of Congress for the passage of law
granting tax exemption – This is because tax exemption law counters against the
lifeblood doctrine as it deprives the government of revenues.
12. Non-diversification of tax collections – Taxes should only be used for public
purpose and not diversified or used for private purpose.
13. Non-delegation of the power of taxation – This has already been previously
discussed (A-5 Inherent limitation).
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. The requirement that appropriations, revenue or tariff bills should originate
exclusively in the House of Representatives – But the Senate may concur with
amendments even if it amends the entire house version.
16. The delegation of taxing power to local government units – This is a constitutional
recognition of autonomy of LGUs ( See discussion in A – 5)
What are the stages of the exercise of taxation power?

The following are the stages of the exercise of the taxation power:
1. Levy/imposition. This process involves the enactment of a tax law by Congress and
is called impact of taxation. Levy includes the following:
a. Determining the object of taxation
b. Setting the tax rate or amount to be collected
c. Determining the purpose for the levy which must be public use
d. Kind of tax to be imposed
e. Apportionment of the tax between the national and local government
f. Situs of taxation
g. Method of collection
2. Assessment and collection. The tax law enacted by Congress is implemented by
the administrative branch of the government. This stage involves the determination
of the tax liabilities of the taxpayers and collection. It is also referred to as incidence
of taxation.
The levy/imposition of tax includes determining the situs of taxation. What does situs
mean?
Situs is the place of taxation. It determines what authority has jurisdiction or power to tax
an object.
What are the rules regarding situs of taxation?

The following are the situs rules:
1. Business tax situs – Businesses are subject to tax in the place where the business is
conducted. For instance, the taxpayer has a restaurant abroad and a pet shop in
the Philippines. The pet shop will be subject to business tax in the Philippines while
the restaurant is exempt because it is conducted abroad.
2. Income tax situs on services – Service fees are subject to tax where they are
rendered.
3. Income tax situs on sale of goods – The gain on sale is subject to tax in the place of
sale (Where the sale is perfected).
4. Property tax situs – Properties are taxable in their location. Thus, real property tax
shall be paid in the place where the property is located.
5. Personal tax situs - Persons are taxable in their place of residence. People get
cedula or pay community tax in the place where they reside.
Aside from the Lifeblood doctrine and the situs rules, what are other fundamental doctrines
in taxation?
The following are other fundamental doctrines in taxation:
1. Marshall’s doctrine – The power to tax involves the power to destroy. Taxation can
be used as an instrument of police power. It can be used to discourage or prohibit
undesirable activities. For instance, taxes on cigarettes may be increased to
discourage smoking.
2. Holme’s doctrine – Taxation power is not the power to destroy while the court sits.
Taxation may be used to build/encourage beneficial activities or industries by the
grant of tax incentives. For instance, Ecozones may be created with tax holidays to
encourage foreign investments.
3. Prospectivity of tax laws – An ex post facto law or a law that retroacts is prohibited
by the Constitution.
4. Non-compensation or set-off – Taxes are not subject to automatic set-off or
compensation. The taxpayer cannot delay payment of tax to wait for the resolution
of a lawsuit involving his pending claim against the government EXCEPT in the
following cases:
a. Where the taxpayer’s claim has already become due and demandable
b. Where there is obvious overpayment of taxes
c. Local taxes
5. Non-assignment of taxes – Tax obligations cannot be assigned or transferred to
another entity by contract.
6. Imprescriptibility in taxation – The government’s right to collect taxes does not
prescribe unless the law itself provides for such prescription. Under the NIRC, tax
prescribes if not collected within 5 years from the date of its assessment. In the
absence of an assessment, tax prescribes if not collected by judicial action within 3
years from the date the return is required to be filed. However, taxes due from
taxpayers who did not file a return or those who filed fraudulent returns do not
prescribe.
7. Doctrine of estoppel – Under this doctrine, any misrepresentation made by one
person toward another who relied therein in good faith will be held true and binding
against that person who made the misrepresentation. However, the government is
not subject to estoppel. The error of an employee does not bind the government.
8. Judicial non-interference – Generally, courts are not allowed to issue injunction
against the government’s pursuit to collect tax as this would unnecessarily defer tax
collection.
9. Strict construction of tax laws – When the law clearly provides for taxation, taxation is
the general rule unless there is a clear exemption. When the law is vague, it is
construed against the government and if favor of the taxpayers. Vague tax
exemption laws are construed against the taxpayer and in favor of the government.
Is there a doctrine against double taxation?

Nothing in our law expressly prohibits double taxation. It is in fact prevalent in practice.
However, it is discouraged because it is oppressive and burdensome to taxpayers.
What is double taxation?

Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction
for the same thing.
What are the elements of double taxation?

The following are the elements of double taxation:
1. Same object (primary element)
2. Same type of tax
3. Same purpose of tax Secondary
4. Same taxing jurisdiction elements
5. Same tax period
What are the types of double taxation?
The following are the types of double taxation:
1. Direct double taxation. This occurs when all the elements of double taxation are
present. For instance, An income tax of 10% is imposed by the national government
on monthly sales and another 2% income tax is imposed by the same taxing
authority is imposed on the annual sales (total of monthly sales).
2. Indirect double taxation. This occurs when at least one of the secondary elements
of double taxation is not common for both impositions. For example, the national
government collects income tax from a taxpayer on his income while the local
government collects community tax upon the same income.
How can double taxation be minimized?

The impact of double taxation can be minimized by any of the following:
1. Provision of tax exemption.
2. Allowing foreign tax credit. Tax payment in a foreign country on the same object in
deducted to the tax due in the Philippines.
3. Allowing reciprocal tax treatment. Enacting a law reducing tax or providing
exemption if the country of the foreign taxpayer also give the same treatment to
Filipino non-residents.
4. Entering into treaties or bilateral agreements. Countries may stipulate for a lower tax
rate for their residents if they engage in transactions that are taxable by both of
them.
Under the lifeblood doctrine, taxation is necessary for the continued subsistence of the
government but are there means to escape from the payment of tax?
Yes there are means to escape from tax but not all of them are legal.
A. Those that result to loss of government revenue
1. Tax evasion – This is an act or trick to illegally reduce or avoid the payment of tax like
non-declaration of income, underpricing, or overstatement of expenses. Tax
evasion/dodging is illegal.
2. Tax avoidance – This refers to any act or trick to reduce or escape taxes by legally
permissible means like careful tax planning or maximizing tax options, tax carry-overs
or tax credits.
3. Tax exemption. This refers to the immunity, privilege or freedom from being subject
to tax which others are subject to. This may be granted by the Constitution, law or
contract.
B. Those that do not result to loss of government revenue
1. Shifting – This is the process of transferring tax burden to other taxpayers. It may be
in any of the following forms:
a. Forward shifting – This is the shifting of tax which follows the normal flow of
distribution such as from manufacturer to wholesaler or from retailers to
consumers.
b. Backward shifting – This is the reverse of forward shifting.
c. Onward shifting – This refers to tax shifting that exhibits forward and backward
shifting.
2. Capitalization – This pertains to the adjustment of the value of an asset caused by
changes in tax rates.
3. Transformation – This pertains to the elimination of wastes or losses by the taxpayer to
form savings to compensate for the tax imposition or increase in taxes.
When a taxpayer illegally escapes the payment of tax such as by committing tax evasion,
are there any ways by which they can reform and start anew?
Yes the government can do either of the following:
1. Tax amnesty – This is a general pardon granted by the government. It is an absolute
forgiveness or waiver by the government on its right to collect and is retrospective in
application. It covers both civil and criminal liabilities but is subject to the condition
that the taxpayer pays the government a portion of the tax.
2. Tax condonation – This also refers to tax remission. It is forgiveness of the tax
obligation of a certain taxpayer under certain justifiable grounds. It covers only civil
liability and applies prospectively to any unpaid balance of the tax. Unlike in
amnesty, the taxpayer is not required to pay any portion of the tax to be condoned.
The power of taxation is lodged in the legislative branch of the government (Congress).
How do they exercise this power?
They exercise this power by the enactment of taxation laws.
What are the different types of taxation laws?
The following are the different types of taxation laws:
1. Tax laws – These laws provide for the assessment and collection of taxes such as the
NIRC, Tariff and Customs Code, Local Tax Code and the Real Property tax Code.
2. Tax exemption laws – These laws grant certain immunity from taxation such as the
Minimum Wage Law, the Omnibus Investment Code, Barangay Micro-Business
Enterprise Law and the Cooperative Development Act.
Is Congress the only source of Taxation laws?
No. Taxation laws can also be found in the following:
1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative issuances like revenue regulations and BIR rulings
6. Local ordinances
7. Tax treaties and conventions with foreign countries
We keep mentioning tax. What is a tax?

Tax is an enforced proportional contribution levied by the lawmaking body of the State to
raise revenue for public purpose.
What are the elements of a valid tax?

The following are the elements of a valid tax:
1. Tax must be levied by the taxing power having jurisdiction over the object of
taxation.
2. Tax must not violate constitutional and inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.
• Note that when one of the elements are missing, the tax is invalid.
What are the classifications of taxes?

The following are the classifications of taxes:
A. As to purpose
1. Fiscal or revenue tax – imposed to raise revenue
2. Regulatory – imposed to regulate business, conduct, acts or transaction
3. Sumptuary – levied to achieve some social or economic objectives.
B. As to subject matter
1. Personal, poll or capitation – a tax on persons who are residents of a particular
territory.
2. Property tax – a tax on properties, real or personal
3. Excise or privilege tax – a tax imposed upon the performance of an act or
enjoyment of a privilege or engagement in an occupation
C. As to incidence
1. Direct tax – When both the impact and incidence of taxation rest upon the same
taxpayer. The tax is collected from the person who is intended to pay the same.
2. Indirect tax – When the tax is paid by any person other than the one who is intended
to pay the same.
D. As to amount
1. Specific tax – a tax of a fixed amount imposed on a per unit basis such as per kilo,
liter, meter, etc.
2. Ad valorem – a tax of a fixed proportion imposed upon the value of the tax object.
E. As to rate
1. Proportional tax – This is a flat or fixed rate tax.
2. Progressive or graduated tax – This is a tax which imposes increasing rates as the tax
base increase.
3. Regressive tax – This tax imposes decreasing tax rates as the tax base increase.
4. Mixed tax – This is a combination of any of the above types of tax.
F. As to imposing authority
1. National tax – imposed y the national government such as income tax, estate tax,
donor’s tax, VAT percentage tax, excise tax and documentary stamp tax.
2. Local tax – tax imposed by the local government such as real property tax,
professional tax, business taxes, fees and charges, and community tax.
How is tax distinguished from other similar items?

Tax is distinguished from the following:
1. Revenue – This refers to all income collections of the government while tax refers to
the amount imposed by the government for public purpose.
2. License fee – This is imposed as an exercise of police power to regulate the exercise
of a privilege while taxes are imposed to raise revenue. License is collected before
the commencement of a business or profession while tax is imposed after its
commencement.
3. Toll – This is a charge for the use of other’s property, it is a demand of ownership
while tax is a demand of sovereignty.
4. Debt – Debt arises from private contracts. Its non-payment does not lead to
imprisonment and it can be subject to set-off while the non-payment of tax may
lead to imprisonment and cannot be subject to set-off.
5. Special assessment – This is levied by the government on lands adjacent to a public
improvement. The basis of special assessment is the benefit in terms of the
appreciation in land value caused by the public improvement. Tax on the other
hand is levied without expectation of a direct proximate benefit.
6. Tariff – This is the amount imposed on imported or exported commodities. Tax is
broader as it is an amount imposed upon persons, privilege, transactions or
properties.
7. Penalty – This is imposed to discourage an act. It may be imposed by the
government or private individuals. It may arise from law or contract. Tax is imposed
to raise money for the government and it is imposed by the government only. Tax
arises from law.
How does the government collect the taxes?

The government collects taxes through the following tax collection systems:
1. Withholding system of income tax – under this system, the payor of the income
withholds or deducts the tax on the income before releasing the same to the payee
and remits the same to the government
2. Withholding system on business tax – When the national government and its
instrumentalities including GOCCs purchase goods or services from private suppliers,
the law requires deducting or withholding of the relevant business tax (VAT or
percentage tax) before releasing the payment to the private supplier.
3. Voluntary compliance system – Under this system, the taxpayer himself determines
his income, reports the same through income tax returns and pays the tax to the
government. This system is also referred to as the self-assessment method.
4. Assessment or enforcement system – Under this collection system, the government
identifies non-compliant taxpayers, assesses their tax dues including penalties,
demands for taxpayer’s voluntary compliance or enforces collections by coercive
means such as summary proceeding or judicial proceedings when necessary.
How do we determine if we have a sound tax system?

The following are the principles of a sound tax system:
1. Fiscal adequacy – This requires that the sources of government funds must be
sufficient to cover government costs. The government must not incur a deficit.
2. Theoretical justice – This suggests that taxation should consider the taxpayer’s ability
to pay. The exercise of taxation should not be oppressive, unjust or confiscatory.
3. Administrative feasibility – Administrative feasibility suggests that tax laws should be
capable of efficient and effective administration and should be made easy for the
taxpayer to encourage compliance.
Who administers our tax system?

Administration of the national tax system in the Philippines is entrusted to the Bureau of
Internal Revenue (BIR) which is under the supervision and administration of the Department
of Finance. Basically the BIR has the power to assess and collect taxes, enforce all
forfeitures, penalties and fines and judgments in cases decided in its favor by the courts.
The BIR is headed by the Commissioner of Internal Revenue.
Other agencies are also tasked with tax collection or tax incentives related functions such
as the following:
1. Bureau of Customs – It is tasked to administer collection of tariffs on imported articles
and collection of the VAT on importation.
2. Board of Investments – It is tasked to lead the promotion of investments in the
Philippines.
3. Philippine Economic Zone Authority – This was created to promote investments in
export-oriented manufacturing industries in the Philippines and supervise the grant of
both fiscal and non-fiscal incentives.
4. Local Government Tax Collecting Unit – LGUs also impose and collect various taxes
to rationalize their fiscal autonomy

Module 1: Introduction To Taxation

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Module 1: Introduction To Taxation

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MODULE 1: INTRODUCTION TO TAXATION

What are the rationales behind the imposition of taxes?

What are the limitations of the taxation power?

What are the stages of the exercise of taxation power?

What are the rules regarding situs of taxation?

Is there a doctrine against double taxation?

What is double taxation?

What are the elements of double taxation?

How can double taxation be minimized?

What are the different types of taxation laws?

We keep mentioning tax. What is a tax?

What are the elements of a valid tax?

What are the classifications of taxes?

How is tax distinguished from other similar items?

How does the government collect the taxes?

How do we determine if we have a sound tax system?

Who administers our tax system?

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