Chapter 1

Introduction to
Taxation
What is Taxation?

Taxation may be defined as a State power, a legislative process,

and a mode of government cost distribution.

1. As a state power
Taxation is an inherent power of the State to enforce a
proportional contribution from its subjects for public
purpose.

2. As a process
Taxation is a process of levying taxes by the legislature of
the State to enforce proportional contributions from its
subjects for public purpose.

3. As a mode of cost distribution

Taxation is a mode by which the State allocates its costs or
burden to its subjects who are benefited by its spending.
The Theory of Taxation

Every government provides a vast array of public

services including defense, public order and safety,
health, education, and social protection among others.

A system of government is indispensible to every

society. Without it, the people will not relish the
benefits of a civilized and orderly society. However, a
government cannot exist without a system of funding.
The government’s necessity for funding is the theory of
taxation.
The Basis of Taxation

The government provides benefits to the people in the form of public

services, and the people provide the funds that finance the
government. This is mutuality of support between the people and the
government is referred to as the basis of taxation.

The mutuality is illustrated as:

Public service

Government People
Taxes
Receipt of benefits is conclusively presumed

Every citizen and resident of the State directly or indirectly benefits

from the public services rendered by the government. These
benefits can be in the form of daily free usage of public
infrastructures, access to public health or educational services, the
protection and security of person and property, or simply the
comfort of living in a civilized and peaceful society which is
maintained by the government.

While most public services are received indirectly, their realization

by every citizen and resident is undeniable. In taxation, the receipt
of these benefits by the people is conclusively presumed. Thus,
taxpayers cannot avoid payment of taxes under the defense of
absence of benefit received. The direct receipt or actual availment
of government services is not a precondition to taxation.
Theories of Cost Allocation

Taxation is a mode of allocating government costs or burden to the people. In

distributing the costs or burden, the government regards the following general
considerations in the exercise of its taxation power:

1. Benefit received theory

The benefit received theory presupposes that the more benefit one
receives from the government, the more taxes he should pay.

2. Ability to pay theory

The ability to pay theory presupposes that taxation should also consider
the taxpayer’s ability to pay. Taxpayers should be required to
contribute based on their relative capacity to sacrifice for the support of
the government.

In short, those who have more should be taxed more even if they
benefit less from the government. Those who have less shall contribute
less even if they received more of the benefits from the government.
Aspects of the Ability to Pay Theory

1. Vertical equity
Vertical equity proposes that the extent of one’s ability to pay is directly
proportional to the level of his tax base.

For example, A has ₱200,000 income while B has ₱400,000. In taxing income,
the government should tax B more than A because B has greater income;
hence, a greater capacity to contribute.

2. Horizontal equity
Horizontal equity requires consideration of the particular circumstance of the
taxpayer.

For example, Businessman A and B both have ₱300,000 income. A incurred

₱200,000 in business expenses while B incurred only ₱50,000 business
expenses. The government should tax B more than A because he has lesser
expenses and thus greater capacity to contribute taxes.

Vertical equity is a gross concept while horizontal equity is a net

concept.
The Lifeblood Doctrine

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.

Taxes are the lifeblood of the government, and their

prompt and certain availability are an imperious
need. Upon taxation depends the government’s
ability to serve the people for whose benefit taxes
are collected.
Implication of the lifeblood doctrine in taxation:

1. Tax is imposed even in the absence of a Constitutional grant.

2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose the objects of
taxation.
4. The courts are not allowed to interfere with the collection of
taxes.
5. In income taxation:
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditures and prepayments is not
allowed as effectively defers the collection of income tax.
c. A lower amount of deduction is preferred when a
claimable expense subject to limit.
d. A higher tax base is preferred when the tax object has
multiple tax bases.
The Inherent Powers of the State

1. Taxation power is the power of the State to enforce proportional

contribution from its subjects to sustain itself.

2. Police power is the general power of the State to enact laws to

protect the well-being of the people.

3. Eminent domain is the power of the State to take private property

for public use after paying just compensation.

These rights, dubbed as “powers” are natural, inseparable, and

inherent to every government. No government can sustain or
effectively operate without these powers. Therefore, the exercise of
these powers by the government is presumed understood and
acknowledged by the people from the very moment they establish
their government. These powers are naturally exercisable by the
government even in the absence of an express grant of power in the
Constitution.
Comparison of the Three Powers of the State
Point of Difference Taxation Police Power Eminent Domain

Exercising Government Government Government and

Authority private utilities
Purpose For the support of To protect the For public use
the government general welfare of
the people
Persons affected Community or class Community or class Owner of the
of individuals of individuals property
Amount of Unlimited (Tax is Limited (Imposition No amount imposed.
Imposition based on is limited to cover (The government
government needs) cost of regulation) pays just
compensation)
Importance Most important Most superior Important

Relationship with Inferior to the “Non- Superior to the Superior to the

the Constitution impairment Clause” “Non-impairment “Non-impairment
of the Constitution Clause” of the Clause” of the
Constitution Constitution
Limitation Constitutional and Public interest and Public purpose and
inherent limitations due process just compensation
Similarities of the Three Powers of the State

1. They are all necessary attributes of sovereignty.

2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private
rights and properties.
5. They all exist independently of the Constitution and are
exercisable by the government even without Constitutional
grant. However, the Constitution may impose conditions or
limits for their exercise.
6. They all presuppose an equivalent form of compensation
received by the persons affected by the exercise of the power.
7. The exercise of these powers by the local government units
may be limited by the national legislature.
Scope of the Taxation Power

The scope of taxation is widely regarded as

comprehensive, plenary, unlimited and supreme.

However, despite the seemingly unlimited

nature of taxation, it is not absolutely unlimited.
Taxation has its own inherent limitations and
limitations imposed by the Constitution.
Inherent Limitations

1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power
Territoriality of taxation

Public services are normally provided within the boundaries of the State.
Thus, the government can only demand tax obligations upon its subjects or
residents within its territorial jurisdiction. There is no basis in taxing foreign
subjects abroad since they do not derive benefits from our government.
Furthermore, extraterritorial taxation will amount to encroachment of foreign
sovereignty.

Two-fold obligations of taxpayers:

1. Filing of returns and payment of taxes
2. Withholding of taxes on expenses and its remittance to the government

Exception to the territoriality principle

1. In income taxation, resident citizens and domestic corporations are
taxable on income derived within and outside the Philippines.
2. In transfer taxation, residents or citizens such as resident citizen, non-
resident citizen and resident aliens are taxable on transfers of properties
located within and outside the Philippines.
International comity

In the UN Convention, countries around the world agreed to one fundamental

concept of co-equal sovereignty wherein all nations are deemed equal with one
another regardless of race, religion, culture, economic condition or military
power.

No country is powerful than the other. It is by this principle that each country
observes international comity or mutual courtesy or reciprocity between them.
Hence,
1. Governments do not tax the income and properties of other governments.
2. 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. When a state enters into treaties with other states, it is
bound to honor the agreements as a matter of mutual courtesy with the treaty
partners even if the same conflicts with its local tax laws.
Public purpose

Tax is intended for the common

good. Taxation must be exercised
absolutely for public purpose. It
cannot be exercised to further any
private interest.
Exemption of the Government

The taxation power is broad. The government can

exercise the power upon anything including itself.
However, the government normally does not tax itself
as this will not raise additional funds but will only
impute additional costs.

Under the NIRC, government properties and income

from essential public functions are not subject to
taxation. However, income of the government from its
properties and activities conducted for profit including
income from government owned and controlled
corporations are subject to tax.
Non-delegation of the taxing power

The legislative taxing power is vested exclusively in Congress and is non-

delegable pursuant to the doctrine of separation of the branches of the
government to ensure a system of checks and balances.

The power of lawmaking, including taxation, is delegated by the people

to the legislature. So as not to spoil the purpose of delegation, it is held
that what has been delegated cannot be further delegated.

Exceptions to the rule of non-delegation

1. Under the Constitution, local government units are allowed to
exercise the power to tax to enable them to exercise their fiscal
autonomy.
2. Under the Tariff and Customs Code, the President is empowered to
fix the amount of tariffs to be flexible to trade conditions.
3. Other cases that require expedient and effective administration and
implementation of assessment and collection of taxes.
Constitutional Limitations of Taxation

1. Due process of law

2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and
mosque from property taxes
9. Non-appropriation of public funds or property for the benefit of any church, sect or
system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational
institutions
11. Concurrence of a majority of all members of Congress for the passage of law granting
tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. The requirement that appropriations, revenue, or tariff bills shall originate exclusively in
the House of Representatives
16. The delegation of taxing power to local government units
Observance of 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.

Aspects of due process

1. Substantive due process
Tax must be imposed only for public purpose, collected only under authority of
a valid law and only by the taxing power having jurisdiction. An assessment
without legal basis violates the requirement of due process.
2. Procedural due process
There should be no arbitrariness in assessment and collection of taxes, and the
government shall observe the taxpayer’s right to notice and hearing. The law
established procedures which must be adhered to in making assessments and in
enforcing collections.

Under the NIRC, assessments shall be made within three years from the due
date of filing of the return or from the date of actual filing, whichever is later.
Collection shall be made within five years from the date of assessment. The
failure of the government to observe these rules violates the requirement of due
process.
Equal protection of the law

No person shall be denied the equal protection of the

law. Taxpayers should be treated equally both in terms
of rights conferred and obligations imposed.

This rule applies where taxpayers are under the same

circumstances and conditions. This requirement would
mean Congress cannot exempt sellers of “balot” while
subjecting sellers of “penoy” to tax since they are
essentially the same goods.
Uniformity rule in taxation

The rule of taxation shall be uniform and

equitable. Taxpayers under dissimilar
circumstances should not be taxed the same.
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 taxed
differently, but taxpayers falling under the same
class are taxed the same. Hence, uniformity is
relative equality.
Progressive system of taxation

Congress shall evolve a progressive system of

taxation. Under the progressive system, tax rates
increase as the tax base increases. The
Constitution favors progressive tax as it is
consistent with the taxpayer’s ability to pay.
Moreover, the progressive system aids in an
equitable distribution of wealth to society by
taxing the rich more than the poor.
Non-imprisonment for non-payment of debt or poll tax

As a policy, no one shall be imprisoned because of his poverty, and no one shall be imprisoned for mere
inability to pay debt.

However, this Constitutional guarantee applies only when the debt is acquired by the debtor in good
faith. Debt acquired in bad faith constitutes estafa, a criminal offense punishable by imprisonment.

Is non-payment of tax equivalent to non-payment of debt?

Tax arises from law and is a demand of sovereignty. It is distinguished from debt which arises from
private contracts. Non-payment of tax compromises public interest while non-payment of debt
compromises private interest. The non-payment of tax is similar to a crime. The Constitutional
guarantee on non-imprisonment for non-payment of debt does not extend to non-payment of tax except
poll tax.

Poll, personal, community or residency tax

Poll tax has two components:
a. Basic community tax
b. Additional community tax

The Constitutional guaranteed of non-imprisonment for non-payment of poll tax applies only to the
basic community tax. Non-payment of the additional community tax is an act of tax evasion punishable
by imprisonment.
Non-impairment of obligation and contract

The State should set an example of good faith

among its constituents. It should not set aside its
obligations from contracts by the exercise of its
taxation power. Tax exemptions granted under
contract should be honored and should not be
cancelled by a unilateral government action.
Free worship rule

The Philippine government adopts free exercise

of religion and does not subject its exercise to
taxation. Consequently, the properties and
revenues of religious institutions such as tithes
or offerings are not subject to tax. This
exemption, however, does not extend to income
from properties or activities of religious
institutions that are proprietary or commercial in
nature.
Exemption of religious, charitable or educational entities, non-
profit cemeteries, churches and mosques, lands, buildings, and
improvements from property taxes

The Constitutional exemption from property tax applies for

properties actually, directly, and exclusively (i.e. primarily) used
for charitable, religious, and educational purposes.

In observing this Constitutional limitation, the Philippines follows

the doctrine of use wherein only properties actually devoted for
religious, charitable, or educational activities are exempt from real
property tax.

Under the doctrine of ownership, the properties of religious,

charitable, or educational entities whether or not used in their
primary operations are exempt from real property tax. This,
however, in not applied in the Philippines.
Non-appropriation of public funds or property for the
benefit of any church, sect, or system of religion

This Constitutional limitation is intended to highlight

the separation of religion and the State. To support
freedom of religion, the government should not favor
any particular system of religion by appropriating
public funds or property in support thereof.

It should be noted, however, that compensation to

priests, imams, or religious ministers working with the
military, penal institutions, orphanages, or leprosarium
is not considered religious appropriation.
Exemption from taxes of the revenues and assets of non-
profit, non-stock educational institutions including grants,
endowments, donations, or contributions for educational
purposes

The Constitution recognizes the necessity of education in

state building by granting tax exemption on revenues and
assets of non-profit educational institutions. This exemption,
however, applies only on revenues and assets that are
actually, directly, and exclusively devoted for educational
purposes.

Consistent with the constitutional recognition of education as

a necessity, the NIRC also exempts government educational
institutions from income tax and subjects private educational
institutions to a minimal 10% income tax.
Concurrence of a majority of all members of Congress for
the passage of a law granting tax exemption

Tax exemption law counters against the lifeblood doctrine

as it deprives the government of revenues. Hence, the grant
of tax exemption must proceed only upon a valid basis. As
a safety net, the Constitution requires the vote of the
majority of all members of Congress in the grant of tax
exemption.

In the approval of an exemption law, an absolute majority

or the majority of all members of Congress, not a relative
majority or quorum majority, is required. However, in the
withdrawal of tax exemption, only a relative majority is
required.
Non-diversification of tax collections

Tax collections should be used only for

public purpose. It should never be
diversified or used for private purpose.
Non-delegation of the power of taxation

The principle of checks and balances in a republican state requires that

taxation power as part of lawmaking be vested exclusively in
Congress.

However, delegation may be made on matters involving the expedient

and effective administration and implementation of assessment and
collection of taxes. Also, certain aspects of the taxing process that are
non-legislative in character are delegated.

Hence, implementing administrative agencies such as the Department

of Finance and the Bureau of Internal Revenue (BIR) issues revenue
regulations, rulings, orders, or circulars to interpret and clarify the
application of the law. But even so, their functions are merely intended
to interpret or clarify the proper application of the law. They are not
allowed to introduce new legislations within their quasi-legislative
authority.
Non-impairment of the jurisdiction of the
Supreme Court to review tax cases

Notwithstanding the existence of the Court

of Tax Appeals, which is a special court,
all cases involving taxes can be raised to
and be finally decided by the Supreme
Court of the Philippines.
Appropriations, revenue, or tariff bills shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments

Laws that add income to the national treasury and those

that allows spending therein must originate from the
House of Representatives while Senate may concur
with amendments. The origination of a bill by
Congress does not necessarily mean that the House bill
must become the final law. It was held constitutional by
the Supreme Court when Senate changed the entire
house version of tax bill.
Each local government unit shall exercise
the power to create its own sources of
revenues and shall have a just share in
the national taxes

This is a Constitutional recognition of the

local autonomy of local governments and
an express delegation of the taxing power.
Stages of the Exercise of
Taxation Power

1.Levy or imposition
2.Assessment and collection
Levy or Imposition

This process involves the enactment of a tax law by Congress and is called impact
of taxation. It is also referred to as the legislative act in taxation.

Congress is composed of two bodies:

1. House of Representatives; and
2. The Senate

As mandated by the Constitution, tax bills must originated from the House of
Representatives. Each may, however, have their own versions of a proposed law
which is approved by both bodies, but tax bills cannot originate exclusively from
the Senate.

Matters of legislative discretion in the exercise of taxation

1. Determining the object of taxation
2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which must be public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the national and local government
6. Situs of taxation
7. Method of collection
Assessment and Collection

The tax law is implemented by the

administrative branch of the government.
Implementation involves assessment or the
determination of the tax liabilities of
taxpayers and collection. This stage is
referred to as incidence of taxation or the
administrative act of taxation.
Situs of Taxation

Situs is the place of taxation. It is the tax jurisdiction that has the
power to levy taxes upon the tax object. Situs rules serve as frames of
reference in gauging whether the tax object is within or outside the tax
jurisdiction of the taxing authority.

Examples of Situs Rules:

1. Business tax situs: Businesses are subject to tax in the place
where the business is conducted.
Illustration
A taxpayer is involved in car dealership abroad and restaurant operation in the
Philippines.

The restaurant business will be subject to business tax in the Philippines since
the business is conducted herein, but the car dealing business is exempt
because the business is conducted abroad.
2. Income tax situs on services: Service fees are subject to tax where
they are rendered.
Illustration
A foreign corporation leases a residential space to a non-resident Filipino
citizen abroad.

The rent income will be exempt from Philippine taxation as the leasing service
is rendered abroad.

3. Income tax situs on sale of goods: The gain on sale is subject to

tax in the place of sale.
Illustration
While in China, a non-resident OFW citizen agreed with a Chines friend to sell
his diamond necklace to the latter. They stipulated that the delivery of the item
and the payment will be made a week later in the Philippines. The sale was
consummated as agreed.

The contract of sale is consensual and is perfected by the meeting of the minds
of the contracting parties. The perfection of the contract of sale is in China.
The situs of taxation is China. The gain on the sale of the necklace will be
taxable abroad and exempt in the Philippines.
4. Property tax situs: Properties are taxable in their location.
Illustration
An overseas Filipino worker has a residential lot in the Philippines.

He will still pay real property tax despite his absence in the Philippines
because his property is located herein.

5. Personal tax situs: Persons are taxable in their place of

residence.
Illustration
Ahmed Lofti is a Sudanese studying medicine in the Philippines.

Ahmed will pay personal tax in the Philippines even if he is an alien

because he is residing in the Philippines.
Other Fundamental Doctrines in Taxation

1. Marshall Doctrine – “The power to tax involves the power

to destroy”. Taxation power can be used as an instrument of
police power. It can be used to discouraged or prohibit
undesirable activities or occupation. As such, taxation power
carries with it the power to destroy.

2. Holme’s Doctrine – “Taxation power is not the power to

destroy while the court sits”. Taxation power may be used to
build or encourage beneficial activities or industries by the
grant of tax incentives.

3. Prospectivity of tax laws – tax laws are generally

prospective in operation. 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 pending claim
against the government. Tax is no a debt; hence, it is not subject to
set-off. This rule is important to allow the government sufficient
period to evaluate the validity of the claim.

Exceptions:
a. Where the taxpayer’s claim has already become due and demandable
such as when the government already recognized the same and an
appropriation for refund was made
b. Cases of obvious overpayment of taxes
c. Local taxes

5. Non-assignment of taxes – tax obligations cannot be assigned or

transferred to another entity by contract. Contracts executed by the
taxpayer to such effect shall not prejudice the right of the
government to collect.
6. Imprescriptibility in taxation – Prescription is the lapsing of a
right due to the passage of time. When one sleep on his right over
an unreasonable period of time, he is presumed to be waiving his
right. The government’s right to collect taxes does not prescribe
unless the law itself provides for such prescription. Under 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 party toward another who relied therein in good faith
will be held true and binding against the person who made the
misrepresentation. The government is not subject to estoppel. The
error of any government employee does not bind the government.
It is held that the neglect or omission of government officials
entrusted with the collection of taxes should not be allowed to
bring harm or detriment to the interest of the people.
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. This rule is anchored on the Lifeblood
Doctrine.

9. Strict Construction of Tax Laws – when the law clearly provides for
taxation, taxation is the general rule unless there is a clear exemption.
Hence the maxim, “Taxation is the rule, exemption is the exception”.

Vague tax laws

Vague tax laws are construed against the government and in favor of the taxpayers.
A vague tax law means no tax law. The Constitutional requirement of due process
requires laws to be sufficiently clear and expressed in their provisions.

Vague exemption laws

Vague tax exemption laws are construed against the taxpayer and in favor of the
government. A vague tax law means no exemption law. The claim for exemption is
construed strictly against the taxpayer in accordance with the lifeblood doctrine.
Double Taxation

Double taxation occurs when the same taxpayer is

taxed twice by the same tax jurisdiction for the same
thing.

Elements of double taxation

1. Primary element: Same object
2. Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
Types of Double Taxation

1. Direct double taxation – this occurs when all the element of double
taxation exists for both impositions.
Examples:
a. An income tax of 10% on monthly sales and a 2% income tax on the annual
sales (total monthly sales)
b. A 5% tax on bank reserve deficiency and another 1% penalty per day as a
consequence of such reserve deficiency

2. Indirect double taxation – this occurs when at least one of the secondary
elements of double taxation is not common for both impositions.
Examples:
a. The national government levies business tax on the sales or gross receipts of
business while the local government levies business tax upon the same sales or
receipts.
b. The national government collects income tax from a taxpayer on his income
while the local government collects community tax upon the same income.
c. The Philippine government taxes foreign incomes of domestic corporations and
resident citizens while a foreign government also takes the same income.
How can double taxation be minimized?

The impact of double taxation can be minimized by any one or a

combination of the following:
a. Provisions of tax exemption – only one tax law is allowed to
apply to the tax object while the other tax law exempts the same
tax object
b. Allowing foreign tax credit – both tax laws of the domestic
country and a foreign country tax the tax object but the tax
payments made in the foreign tax law is deductible against the tax
due of the domestic tax law
c. Allowing reciprocal tax treatment – provisions in tax laws
imposing a reduced tax rates or even exemption if the country of
the foreign taxpayer also give the same treatment to Filipino non-
residents therein
d. Entering into treaties or bilateral agreements – countries may
stipulate for a lower tax rates for their residents if they engage in
transactions that are taxable by both of them
Escapes from Taxation

Escapes from taxation are the means available to the taxpayer to

limit or even avoid the impact of taxation.

A. Those that result to loss of government revenue

1. Tax evasion, also known as tax dodging, refers to any act
or trick that tends to illegally reduce or avoid the payment
of tax.
Examples:
a. This can be achieved by gross understatement of income, non-
declaration of income, overstatement of expenses or tax credit.
b. Misrepresenting the nature or amount of transaction to take
advantage of lower taxes.
2. Tax avoidance, also known as tax minimization,
refers to any act or trick that reduces or totally
escapes taxes by any legally permissible means.
Examples:
a. Selection and execution of transaction that would
expose taxpayer to lower taxes.
b. Maximizing tax options, tax carry-overs or tax
credits
c. Careful tax planning

3. Tax exemption, also known as tax holiday, refers to

the immunity, privilege or freedom from being
subject to a tax which others are subject to. Tax
exemptions may be granted by the Constitution, law
or contract. All forms of tax exemptions can be
revoked by Congress except those granted by the
Constitution and those granted under contracts.
B. Those that do not result to loss of government revenue
1. Shifting – This is the process of transferring tax burden to
other taxpayers.
Forms of shifting
a. Forward shifting – this is the shifting of tax which follows the
normal flow of distribution (i.e., from manufacturer to wholesalers,
retailers to consumers). Forward shifting is common with essential
commodities and services such as food and fuel.
b. Backward shifting – this is the reverse of forward shifting.
Backward shifting is common with non-essential commodities
where buyers have considerable market power and commodities
with numerous substitute products.
c. Onward shifting – this refers to any tax shifting in the distribution
channel that exhibits forward shifting or backward shifting.

Shifting is common with business taxes where taxes imposed on

business revenue can be shifted or passed-on to customers.
2. Capitalization – this pertains to the adjustment of
the value of an asset caused by changes in tax
rates.

For instance, the value of a mining property will

correspondingly decrease when mining output is subjected
to higher taxes. This is a form of backward shifting of tax.

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.
Tax amnesty

Amnesty is a general pardon granted by the

government for erring taxpayers to give
them a chance to reform and enable them
to have a fresh start to be part of a society
with a clean slate. It is an absolute
forgiveness or waiver by the government
on its right to collect and is retrospective in
application.
Tax Condonation

Tax condonation is forgiveness of the tax

obligation of a certain taxpayer under certain
justifiable grounds. This is also referred to as tax
remission.

Because they deprive the government of

revenues, tax exemption, tax refund, tax
amnesty and tax condonation are construed
against the taxpayer and in favor of the
government.
Tax amnesty vs. Tax condonation

Amnesty covers both civil and criminal liabilities, but

condonation covers only civil liabilities of the taxpayer.

Amnesty operates retrospectively by forgiving past

violations. Condonation applies retrospectively to any
unpaid balance of the tax; hence, the portion already
paid by the taxpayer will not be refunded.

Amnesty is also conditional upon the taxpayer paying

the government a portion of the tax whereas
condonation requires no payment.