General Principles of Taxation

Presented by:
Atty. William P. Manzanares, Jr., CPA, MBA, MPF

Atty. Manzanares
 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.

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 Taxation Defined

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.

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 The three (3) Inherent Powers of the State
1. Police Power. It is the power of the state for promoting
public welfare by restraining and regulating the use of liberty
and property.
2. Power of Taxation. It is the power by which the State raises
revenue to defray the necessary expenses of the government.
3. Power of Eminent Domain. It is the power of the State to
acquire private property for public purpose upon payment of
just compensation.

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 Similarities among the Three (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 interferes with private rights and
property.
4.Legislative in nature and character.
5.Presuppose an equivalent compensation received, directly or
indirectly, by the persons affected.

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 Differences between Power of Taxation, Police
Power, and Eminent Domain
As to Taxation Police Power Eminent Domain
To promote public welfare through
Purpose To raise revenue. regulations. To take private property for public use.
May be granted to public service
Government or its political Government or its political companies or public utilities, if the power
Authority subdivisions only. subdivisions only. is granted by the law.
Persons Community or a class of
affected. individuals. Community or a class of individuals. Owner of private property
Amount of No limit as government No amount imposed against the private
imposition. needs are unlimited. Limited to the cost of license. owner.
No transfer of property or title; at There is transfer of the right of property
Tax collection becomes part most there is restraint in the injurious whether it be of ownership or a lesser
Effect of public funds. use of property. right or possession.
It is assumed that the The person affected received no Negotiated sale: Current Market Value
individual receives the direct and immediate benefits but among others.
equivalent of the tax in the only such as may arise from the
Benefits form of protection and maintenance of a healthy economic Expropriation: BIR zonal value among
received. benefits from the government standard of society. others.
Relation to
Impairment Inferior to Impairment
Clause Clause Superior to Impairment Clause Superior to Impairment Clause
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 PURPOSES OF TAXATION
1.Primary: Revenue or Fiscal Purpose

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.

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 PURPOSES OF TAXATION
2. Secondary: Regulatory Purpose (or 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 such as:

a) Promotion of General Welfare

b) Reduction of Social Inequality
c) Economic Growth
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 THEORY and BASIS OF TAXATION

1.Theory (Authority): LIFEBLOOD THEORY or NECESSITY

THEORY

2.BASIS of Taxation: BENEFITS RECEIVED or RECIPROCITY

THEORY

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MANIFESTATION OF THE LIFEBLOOD
THEORY:
a) Rule of “No Estoppel against the Government.”
b) Collection of taxes cannot be enjoined (stopped) by injunction.
c) Taxes could not be the subject of compensation or set-off.
d) Right to select objects (subjects) of taxation
e) A valid tax may result in the destruction of the taxpayer’s
property.

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 SCOPE of the Power of Taxation
a. Comprehensive – as it covers persons, businesses, activities, professions,
rights and privileges.

b. Unlimited – In the absence of limitations prescribed by law or the

constitution, the power to tax is unlimited and comprehensive. 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; BIR may avail of certain remedies to ensure

collection of taxes.

d. Supreme - in so far as the selection of the subject of taxation.

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 Essential Characteristics of Taxes
1. Levied by the State which has Jurisdiction over the persons or
property.
2. Levied and collected for Public Purpose/e.
3. Commonly required to be paid at regular periods or Intervals.
4. Assessed in accordance with some reasonable rule of
Apportionment.
5. Levied pursuant to Legislative authority.
6. An Enforced contribution.
7. Pecuniary burden payable in Money.
Atty. Manzanares
 Essential Characteristics of Taxes
1. Levied by the State which has Jurisdiction over the persons or
property.
2. Levied and collected for Public Purpose/e.
3. Commonly required to be paid at regular periods or Intervals.
4. Assessed in accordance with some reasonable rule of
Apportionment.
5. Levied pursuant to Legislative authority.
6. An Enforced contribution.
7. Pecuniary burden payable in Money.
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NATURE/CHARACTERISTICS of the State’s
Power to Tax

1. It is inherent in sovereignty.

2. It is legislative in character.

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 Classification of Taxes
• 1 As to scope:
a.National
b.Local
• 2. As to subject matter or object:
a. Personal
b. Property
c. Excise
• 3. As to who bears the burden:
a. Direct
b. Indirect

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 Classification of Taxes
4. As to determination of amount:
a. Specific
b. Ad valorem

5. As to purpose:

a. Primary, Fiscal, or Revenue imposed solely for the general

Purpose
b. Secondary, Regulatory, Special or Sumptuary Purpose

6. As to graduation or rate:
a. Proportional
b. Progressive or graduated
c. Regressive

7.As to taxing authority:

a. National
b. Local
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ELEMENTS OF SOUND TAX SYSTEM

a. Fiscal Adequacy
b.Theoretical Justice or Equity
c. Administrative Feasibility

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LIMITATIONS ON THE STATE’S POWER TO TAX

1.Inherent Limitations

2.Constitutional Limitations

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Inherent Limitations
1. Situs or territoriality of taxation

2. Public purpose

3. International comity

4. Non-delegability of the taxing power

5. Exemption of the Government

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Constitutional Limitations
Provisions indirectly affecting taxation
(Art. III, 1987 Constitution)
1. Due process (Sec. 1)
2. Equal protection (Sec. 1)
3. Freedom of the press (Sec. 4)
4. Religious freedom (Sec. 5)
5. Non-impairment of obligations of contracts (Sec.
10)

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Constitutional Limitations
Provisions directly affecting taxation
1. Prohibition against imprisonment for non-payment of poll tax (Art. III, Sec.
20)
2. Uniformity and equality of taxation (Art. VI, Sec. 28)
3. Grant by Congress of authority to the President to impose tariff rates (Art. VI
, Sec. 28)
4. Prohibition against taxation of religious, charitable entities, and educational
entities (Art. VI, Sec. 28)
5. Prohibition against taxation of non-stock, non-profit educational institutions
(Art. IX, Sec. 4)
6. Majority vote of Congress for grant of tax exemption (Art. VI, Sec. 28)
7. Prohibition on use of tax levied for special purpose (Art. VI, Sec. 29)
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Constitutional Limitations
Provisions directly affecting taxation

8. President’s veto power on appropriation, revenue, tariff bills (Art. VI, Sec. 27)
9. Non-impairment of jurisdiction of the Supreme Court (Art. VI, Sec. 30)
10. Grant of power to the LGUs to create its own sources of revenue (Art. IX, Sec.
5)
11. Origin of Revenue and Tariff Bills (Art. VI, Sec. 24)
12. No appropriation or use of public money for religious purposes (Art. VI, Sec.
28)

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 SITUS OF TAXATION
Commonly known as “place of taxation.”
It is the place or authority that has the right to impose and collect taxes.

Rule: A State may not tax property lying outside its borders or lay an
excise or privilege tax upon the exercise or enjoyment of a right to
privilege derived from the laws of another State and therein exercised or
enjoyed.

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Factors that determine Situs:

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

2. Nature of the tax
3. Citizenship
4. Residence of the taxpayer
5. Source of income
6. Place of excise, business or occupation being taxed

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TAX DISTINGUISHED FROM OTHER FORMS 0F
EXACTION - Debt
Tax Debts
As to basis
Obligation based on law. Obligation based on contract or judgment.

As to Effect of Non-Payment
Failure to pay tax (other than poll tax) No imprisonment for non-payment of
may result in imprisonment. debt.
As to Assignability
Not assignable Assignable
As to Payment
Generally, not subject to compensation May be subject to compensation or set-off.
or set-off.
As to Drawing of Interest
Tax does not draw interest except in case Debts draw interest if stipulated or if the
of delinquency. debtor incurs legal delay.
As to Imposing Authority
Imposed by public authority. Imposed by private individuals.
As to Prescription
Determined by NIRC. Determined by the Civil Code.
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TAX DISTINGUISHED FROM OTHER FORMS 0F
EXACTION - Toll
Tax Toll Fees
As to Definition
Enforced proportional contribution A consideration which is paid for the
from persons or property. use of a property which is of a public
nature.
As to Basis
Demand of sovereignty A demand of proprietorship
As to Purpose
Taxes are levied for the support of Tolls are compensation for the cost
the government. and maintenance of the property
used.
As to Determination of Amount
The amount of tax is determined by The amount of the toll is determined
the legislature. by the cost of the property or of the
improvement.
As to Who may Impose
May only be imposed by the State. Imposed by the government or
private individuals. Atty. Manzanares
 TAX DISTINGUISHED FROM OTHER FORMS 0F
EXACTION – Special Assessment
Tax Special Assessment
As to Definition
Enforced proportional contribution from Enforced proportional contributions from
persons or property. owners of lands especially or peculiarly
benefited by public improvements.
As to Subject
Taxes are levied on persons, property Levied only on land.
(which includes land), income, business,
etc.
As to Liability
Personal liability of the taxpayer. Cannot be made a personal liability of the
person assessed.
As to Basis
Based on necessity and partially on Based solely on benefits.
benefits.
As to Application
General application. Special application only as to particular
time and place. Atty. Manzanares
 TAX DISTINGUISHED FROM OTHER FORMS 0F
EXACTION – License Fees
Tax License Fees
As to Basis
Levied in the exercise of the taxing Emanates from police power.
power.
As to Purpose
Primarily for revenue. For regulation.
As to Limitation on Amount
No limit. Limited to the cost of:
1. Issuance of license; and
2. Inspection and surveillance, except
for non-useful occupation
As to When Paid
Normally paid after the start of business Normally paid before the
operations. commencement of business operations.
Taxes, being the lifeblood of the State, License fee may be surrendered with or
cannot be surrendered except for lawful without consideration.
consideration.
As to Effect of Non-payment Atty. Manzanares
TAX DISTINGUISHED FROM OTHER FORMS 0F
EXACTION – Penalties

Tax Penalties
As to Definition
Enforced proportional contribution from Sanction imposed as a punishment for
persons and property. violation of law or acts deemed injurious;
violation of tax laws may give rise to
imposition of penalty.
As to nature of burden
Tax is civil liability. A person is
criminally liable in taxation only when It is a punishment for the commission of a
he fails to satisfy his civil obligation to crime.
pay taxes.
Intended to raise revenue. Designed to regulate conduct.
Imposing Authority
May be imposed only by the May be imposed by the
government. 1. Government; or
2. Private individual or entities.
Atty. Manzanares
 TAX DISTINGUISHED FROM OTHER FORMS 0F
EXACTION – Tariff; Compromise Penalties; Subsidies;
Revenues
Tax
All embracing term to include various kinds
of enforced contributions from persons for
the attainment of public purposes.
Tax
Basic imposition on persons, property, and
excises.
Tax
Levied by the law-making body of the State
for the support of the government and for
public needs.
Tax
A source of revenue of the government.
Tariff
A kind of tax imposed on articles which are
traded internationally.
Compromise Penalties
Collected as a compromise in cases involving
violations of the tax laws, rules or regulations.
Subsidies
A legislative grant of money in aid of a
private enterprise deemed to promote the
public welfare.
Revenue
A broad term that includes no only taxes but
income from other sources as well.
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MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF
TAXATION

1. Shifting- the transfer of the burden of tax by the original payer or the one
on whom the tax was assessed or imposed to another or someone else
without violating the law.

2. Transformation – the manufacturer or producer upon whom the tax has

been imposed, fearing for the loss of his market share if he should add
the tax to the price, pays the tax and endeavors to recoup himself by
improving his process of production , thereby turning out his units at a
lower cost.

3. Evasion - is a scheme where the taxpayer uses illegal or fraudulent

means to defeat or lessen payment of a tax.

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MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF
TAXATION
4. Tax Avoidance - is a scheme where the taxpayer uses legally
permissible alternative method of assessing taxable property or
income, in order to avoid or reduce tax liability.

5. Amnesty - It is the general or intentional overlooking by the State

of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law

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

7. Exemption - It is the grant of immunity, express or implied, to

particular persons or corporations, from a tax upon property or
an excise tax which persons or corporations generally within the
same taxing districts are obliged to pay.
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Kinds of Exemption

As to basis:
1. Constitutional. Immunities from taxation which originate from the
constitution.
2. Statutory. Immunities from taxation which emanates from legislation.

As to form:
1. Express. Exemptions expressly granted by statute.
2. Implied. When particular persons, property, or rights are deemed
exempt as they fall outside the scope of the taxing provision itself.

As to extent:

1. Total. Connotes absolute immunity.

2. Partial. One where a collection of a part of the tax is dispensed with.

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PRINCIPLES GOVERNING TAX EXEMPTIONS

• Exemptions from taxation are highly disfavored in law.

• He who claims an exemption must be able to justify his claim
by the clearest grant of organic or statute law because tax
exemptions are not presumed.
• If ambiguous, there is no tax exemption.
• He who claims exemption should convincingly prove that he
is exempted. Therefore, tax exemption must be strictly
construed.
• No law granting any tax exemption shall be passed without
the concurrence of majority of all members of Congress.

Atty. Manzanares
 SOURCES of Tax Laws
1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances/ City or municipal tax codes
6. Tax treaties and international agreements - A tax treaty is one of
the sources of our law on taxation. The Philippine Government
usually enters into tax treaties in order to avoid or minimize the
effects of double taxation. A treaty has the force and effect of law.
7. Special laws
8. Decisions of the Supreme Court and the Court of Tax Appeals
9. Revenue rules and regulations and administrative rulings and
opinions
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 Nature of Internal Revenue Laws

Internal revenue laws are not political in nature.

Tax laws are civil and not penal in nature,
although there are penalties provided for their
violation.
The purpose of tax laws in imposing penalties for
delinquencies is to compel the timely payment of
taxes or to punish evasion or neglect of duty in
respect thereof.

Atty. Manzanares
Construction of Tax Laws

1. Public purpose is always presumed.

2. If the law is clear, apply the law in accordance to its plain and simple
tenor.
3. A statute will not be construed as imposing a tax unless it does so clearly,
expressly and unambiguously.
4. In case of doubt, it is construed most strongly against the Government,
and liberally in favor of the taxpayer.
5. Provisions of a taxing act are not to be extended by implication.
6. Tax laws operate prospectively unless the purpose of the legislature to
give retrospective effect is expressly declared or may be implied from the
language used.
7. Tax laws are special laws and prevail over a general

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 THE END
T H A N K Y O U ! ! !

Atty. Manzanares