FUNDAMENTAL PRINCIPLES AND

CONCEPTS OF TAXATION
 INHERENT POWERS OF THE STATE

When a Sovereign State is born, it exists with

indispensable powers necessary for its survival. These
powers are called “inherent powers.” They naturally
exist as essential force in order that a government can
command, maintain peace and order, and survive,
irrespective of any constitutional provision.
 INHERENT POWERS OF THE STATE

• POLICE POWER
The power to protect citizens and provide for safety and welfare of
society.
• EMINENT DOMAIN POWER
The power to take private property (with just compensation) for public
use.
• TAXATION POWER
The power to enforce contributions to support the government, and
other inherent powers of the State.
 NATURE OF POLICE POWER

• Police power refers to the inherent power of the sovereign state to legislate
for the protection of the health, welfare and morals of the community.
• It is exercised usually to guard against excesses or abuses of individual
liberty.
• This is restricted by the “due process clause” of the Constitution which
provides that no person may be deprived of “life, liberty, or property, without
due process of law.
• Examples of police power are preservation of natural resources,
segregation of lepers from the public imprisonment of convicted criminals,
and regulation of various professions.
 NATURE OF EMINENT DOMAIN

• Eminent domain refers to the power of the sovereign state to take

private property for public purpose.
• It is founded upon the idea that the common necessities and interest of
the community transcend individual rights in property. Consequently, the
state may expropriate private property when it is necessary in the
interest of national welfare.
• The Constitution limits the exercise of the power by providing that
property may not be taken without just compensation. “Just
compensation” means paying the owner the full monetary equivalent the
property taken for public use.
 TAXATION DEFINED

• A power by which an Independent state, through its lawmaking body, raises

and accumulates revenue from its inhabitants to pay the necessary expense
of the government. As a power, it refers to the inherent power of a state,
coextensive with sovereignty to demand contributions for public purposes
to support the government.
• A process or act of imposing a charge by governmental authority on
property, individuals or transactions to raise money for public purposes. As
a process, it passes a legislative undertaking through the enactment of tax
laws by the congress which will be implemented by the executive branch of
the government through its Bureau of internal Revenue (BIR) to raise revenue
from the inhabitants in order to pay the necessary expenses of the
government.
 TAXATION DEFINED

• A means by which the sovereign state through its law-making body

demands for revenue in order to support its existence and carry out its
legitimate objectives. As a means, it is a way of collecting and
apportioning the cost of government among those who are privileged to
enjoy its benefits.
 SIMILARITIES AMONG TAXATION, EMINENT
DOMAIN AND POLICE POWERS

• They are inherent in sovereignty (they can be exercised even without being
expressly granted in the Constitution)
• They are all necessary attributes of sovereignty because there can be no
effective government without them.
• They constitute the three ways by which the state interferes with the private
rights and property;
• They are all legislative in nature and character;
• They presuppose an equivalent compensation; and
• The provisions in the constitution are just limitations on the exercise of
these powers.
 DISTINCTION OF TAXATION, POLICE POWER,
AND EMINENT DOMAIN

Taxation Police Power Eminent Domain

As to concept Power to enforce Power to make and Power to take

contribution to raise implement laws for private property for
government funds the general welfare public use with just
compensation
As to a scope Plenary, Broader in Merely a power to
comprehensive and application take private
supreme property for public
use
As authority Exercised only Exercised only by May be granted to
government or its government its public service or
political political public utility
subdivisions subdivisions companies
 DISTINCTION OF TAXATION, POLICE POWER,
AND EMINENT DOMAIN

Taxation Police Power Eminent Domain

As to purpose Money is taken to Property is taken or Private property is

support the destroyed to taken for public use
government promote general
welfare
As to necessary The power to make Can be expressly Can be expressly
delegation tax laws cannot be delegated to the delegated to the
delegated local government local government
units by the law- units by the law-
making body making body
As to person Operates on Operates on Operates on the
affected community or a community or a particular property
class of individuals class of individuals of an individual
 DISTINCTION OF TAXATION, POLICE POWER,
AND EMINENT DOMAIN

Taxation Police Power Eminent Domain

As to benefits Continuous No direct and Market value of the

protection and immediate benefit but property
organized society only such as may expropriated
arise from the
maintenance of a
healthy economic
standard society
As to amount of Generally no limit Cost of regulation No imposition
imposition license and other
necessary expenses

As to importance Inseparable for the Protection, safety and Common necessities

existence of a nation welfare of society and interest of the
– it supports police community
power and eminent transcend individual
domain rights in property
 DISTINCTION OF TAXATION, POLICE POWER,
AND EMINENT DOMAIN

Taxation Police Power Eminent Domain

As to relationship to Subject to Relatively free from Superior to and

Constitution Constitutional and Constitutional may override
Inherent limitations limitations Constitutional
Inferior to non- Superior to non- impairment
impairment clause impairment clause provision because
the welfare
As to limitation Constrains by Limited by the Bounded by public
Constitutional and demand for public purpose and just
Inherent limitations interest and due compensation
process
 NATURE OF TAXATION POWER

• Inherent power of sovereignty

• Essentially a legislative function
• Non-delegation of legislative power to tax
• For public purposes
• Territorial in operation
• Tax exemption of the government
• Strongest among the inherent powers
 IMPORTANCE OF TAXATION

Taxation power exists inseparably with the state. It is essential for the
existence of the government. Taxation is very important for the continuous
existence of a nation. It is the primary source of the government revenue that
is used to effectively and permanently perform government functions. The
power to tax may be used as an implement of police power in order to
promote the general welfare of the people, Taxation is exercised to raise
revenue for the very existence of the government to serve the people for who’s
these reasons make the payment of taxes compulsory. Without taxation, the
other inherent powers (police and eminent domain powers) would be
paralyzed. For this reason, even the police power of the government may be
exercised through taxation power. Without revenue, there can be no continuing
government without government, there can be no civilization.
 BASIS OF TAXATION

• Principles of Necessity
Taxation is power emanating from necessity to preserve the State’s
sovereignty. The government has a right to compel all its citizen, residents
and property within its territory to contribute money. It is because the
government cannot exist without any means to pay its expense – a
necessary burden to preserve the state’s sovereignty.
Taxation is the “lifeblood” or the “bread and butter” of the government
and every citizen must pay his taxes. Taxes, being the lifeblood of the
government, their prompt and certain availability are of the essence.
 BASIS OF TAXATION

• Principles of Benefits-Received or Benefits-Protection Theory.

Based on the reciprocal duties, the government collects taxes from the
subjects of taxation in order that it may be able to perform its function and
provide service to them.
The governments’ right to tax income emanates from its being a silent
partner in the production of income through means of providing protection,
proper business climate, and peace and orders to the taxpayers in the
making of earnings. The citizen, on the other hand, pays taxes to support
the government in order that he may continuously be sustained with
security and benefits of an organized society.
 PURPOSES OF TAXATION

• Revenue Purpose
The primary purpose of the taxation is to raise revenue by collection
funds or property for the support of the government in promoting the
general welfare and protecting its inhabitants. The fiscal policy of the
government is based on the rule that receipts or revenue should be equal
to annual government expenditures. The significant portion of the required
receipts is raised from taxation.
 PURPOSES OF TAXATION

• Regulatory Purpose
Regulatory purpose, also known as sumptuary is a secondary objective
of imposing tax. This objective of accomplished to
a. Regulate inflation
b. Achieve economic and social stability, and
c. Serve as key instrument for social control.
 PURPOSES OF TAXATION

• Compensatory Purpose
A tax may be used to make up for the benefits received. For example, a
tax on gasoline consumed is imposed on vehicle owners using roads. In
the case, the tax is compensatory for the use of road.
 OBJECTS OF TAXATION - refer to the subject
to which taxes are imposed

• Persons, whether natural or juridical persons

a. Natural person – refers to individual taxpayers.
b. Juridical person – includes corporations, partnership and any association.
• Properties, whether real, personal, tangible or intangible properties.
a. Real properties – immovable properties such as land and buildings.
b. Personal properties – movable properties such as car and other personal
belongings.
c. Tangible properties – that which may be felt or touched and re necessarily
corporeal, either real or personal properties.
d. Intangible properties – properties that are “rights” rather than physical
objects. Examples are patents, stocks, bonds, goodwill, trademarks, franchises,
and copyrights.
 OBJECTS OF TAXATION - refer to the subject
to which taxes are imposed

• Excise objects, such as;

a. Transaction – the act of conducting activities related to any business
or profession. It may involve selling, servicing, leasing, borrowing,
mortgaging, lending
b. Privilege – a benefit derived through gratuitous transfer by fact of
death or donation.
c. Right – a power, faculty or demand inherent in one person and
incidental to another.
d. Interest – an advantage accruing from anything.
 SCOPE OF TAXATION POWER

The power of taxation is the most absolute of all the powers of the
government.
a) Comprehensive – covers all (persons, businesses, professions, right and
privileges)
b) Unlimited – In the absence of limitations provided by the 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 – 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
 LIMITATIONS TO THE POWER OF THE
TAXATION

Although taxation power is supreme, its exercise is not absolute because it

is subject to inherent and constitutional restrictions. While taxation is said
to be the power to destroy, it is by no means unlimited.
Our Constitution assumes the existence of taxation and it also provides
some provisions to limit the exercise of tax power. Its main purpose is to
protect the objects of taxation against its abusive implementation.
Therefore, if a tax violates the Constitution, such law shall be declared null
and void. Any tax law that contradicts the limitation of taxation is also
unconstitutional.
 INHERENT LIMITATIONS

Inherent limitations are the natural restrictions to safeguard and ensure

that the power of taxation shall be exercised by the government only for
the betterment of the people whose interest should be served, enhanced
and protected.
1. Taxes may be lot levied only for public purpose;
2. Being inherently legislative, taxation may not be delegated;
3. Tax power is limited to territorial jurisdiction of the state;
4. Taxation is subject to international comity; and
5. Government entities are generally tax-exempt
 CONSTITUTIONAL LIMITATIONS

Constitutional limitations are provisions of the fundamental law of the land

that restrict the supreme, plenary, unlimited and comprehensive power to
tax by the state.
As a rule, the Constitution does not require the power to tax on the state.
Instead, it simply defines and regulates the exercise of tax power in order
to safeguard and interest of affected taxpayers. It must be remembered
that a tax law is of no legal force when it violates the constitution.
 CONSTITUTIONAL LIMITATIONS

The 1987 Philippine constitution sets limitations in the exercise of the power to tax as follow:
1. Due process of law;
2. Equal protection of laws;
3. Rule of uniformity and equity;
4. Non-impairment of contracts;
5. Origination of appropriation, revenue and tariff bills;
6. President’s power to veto separate items in revenue or tariff bills;
7. Congress granting tax exemption;
8. Exemption from taxation of properties actually, directly and exclusively used for religious,
charitable or educational purposes;
9. No public money shall be appropriated for religious purposes;
10. The power to judicial review;
11. No imprisonment for nonpayment of poll tax; and
12. Tax collection shall generally treat as general funds of the government.
 STAGES, ASPECTS, OR PROCESSES OF
TAXATION

• Levy or imposition of taxes involves the passage of tax laws or

ordinances through the legislature. Strictly speaking, it refers to taxation
of the tax policy of the Sovereign State.
• Assessment involves the act of administration and implementation of
the tax laws by the executive through its administrative agencies as the
BIR or Bureau of Customs.
• Payment of tax is the process involving the act of compliance by the
taxpayer in contributing his share to defray the expenses of the
government. It is also called “tax collection,” the process of obtaining
payment of tax.
 STAGES, ASPECTS, OR PROCESSES OF
TAXATION

IMPORTANT:
The first two stages of taxation (levy and assessment) are referred to as
the impact of taxation, and the third phase is referred to as the incidence of
taxation.
 PRINCIPLES OF A SOUND TAX SYSTEM - based
on Adam Smith’s Canons of Taxation

• Fiscal Adequacy - The principle of fiscal adequacy states that the sources of revenues of the
government should be sufficient to meet the demand of public expenditures regardless of
business condition.
• Equality/Theoretical Justice - This principle states that the tax burden must be proportionate
the tax payer’s ability to pay. It is based on the philosophy that “he who received more should
give more.”
• Administrative Feasibility - Tax laws must be convenient, just, uniform and effective in their
administration – free from confusion and uncertainty. Their exercise should be convenient as
to the place, time and mode of payment, and not burdensome or discouraging to business.

IMPORTANT: The principles of fiscal adequacy and theoretical justice represent the nature of the
government’s tax policy and the administrative feasibility represents tax administration.
 CERTAIN DOCTRINES IN TAXATION

• Prospective application of tax laws

• Imprescriptibility of taxes
• Double taxation
• Escape from taxation
• Exemption from taxation
• Equitable recoupment
• Set-off taxes
• Taxpayer suit
• Compromises
• Power to destroy
• Situs of taxation
 DOUBLE TAXATION

Double Taxation means an act of the sovereign by taxing twice for the same
purpose in the same year upon the same property or activity of the same
person, when it should be taxed once for the same purpose and with the same
kind of character of tax.
• Indirect Duplicate Taxation - This is double taxation in its broad sense. It
extends to all cases in which there is a burden of two or more pecuniary
impositions. It is usually allowed as long as there is no violation of the equal
protection and uniformity clauses of the Constitution.
• Direct Duplicate Taxation - This is double taxation in its strict sense. It is
prohibited because it comprises imposition of the same tax on the same
property for the same purposes by the same state during the same taxing
period.
 ESCAPE FROM TAXATION

“A tax evader breaks the law (tax evasion), the tax avoider sidesteps it (tax
avoidance)” (Schultz & Harris, American Public Finance). The “doctrine of
escape from taxation” permits the taxpayer to minimize (if not to escape)
payment of tax by lawful means.
• Tax evasion - unlawful means
• Tax avoidance/tax minimization - lawful means; under this method, the
tax payer uses legal or unlawful means to defeat, evade or lessen the
payment off tax.
 SITUS OF TAXATION

• Refers to the place of taxation, or the state or political unit which has
jurisdiction to impose tax over its inhabitants.
• It is the application of the principle of territorial jurisdiction which limits
the exercise of tax power in defining the objects of taxation.
• It defines boundaries of the taxing power over the objects of taxation in
terms of location whether or not they shall be subject to tax.
 FACTORS IN DETERMINING THE SITUS OF
TAXATION

• Subject matter ( person, property, or activity)

• Nature of tax
• Citizenship
• Residence of the taxpayer
• Source of Income
• Place of excise, business or occupation being taxed
TAXES
 TAXES DEFINED

Forced burdens, charges, exactions, impositions or contributions assessed

in accordance with some reasonable rule of apportionment, by authority of
a sovereign state, upon the person, property, or rights exercised, within its
jurisdiction, to provide public revenues for the support of the government,
the administration of the law, or the payment of public expenses.
 NATURE OF TAXES

• Taxes are obligations created by law - Taxes arise from law and could
only be imposed even without previous agreement between the
government and the taxpayers.
• Taxes are generally personal to taxpayer - Their payment should be
borne specifically by the person with tax liability.
 ESSENTIAL CHARACTERISTICS OF TAXES

• Enforced contribution. The imposition shall not be dependent upon the

will of a taxpayer;
• Imposed by the legislative body. The congress makes tax laws;
• Proportionate in character. The “ability to pay principle” is the basic rule
in collecting taxes. Those who earn more contribute to the government’s
coffer more than those with lesser earnings;
• Payable in form of money. Money is the preferred payment of taxes. If
property is taken to satisfy tax liability, the property is sold through public
auction to satisfy the tax obligation;
• Imposed for the purpose of raising revenue. Taxes are the primary
source of government funds to finance its expenditures and projects;
 ESSENTIAL CHARACTERISTICS OF TAXES

• Used for a public purpose. Money is taken from the public so it can be
returned to them in the form of public benefits;
• Enforced on some persons, properties or rights. Objects of taxation are
either tangible or intangible properties, including business transactions.
• Commonly required to be paid at regular intervals. The dates for paying
of taxes are fixed by the law to comply with the principle of
administrative feasibility.
• Imposed by the sovereign state within its jurisdiction. The enforcement
of tax is subject to territorial jurisdiction and international comity
 CLASSIFICATION OF TAXES

As to purpose:
a) Revenue or Fiscal. These taxes are imposed solely for the purpose of
raising revenue for the government (e.g. Income tax, value added tax, and
transfer tax).
b) Regulatory, Special or Sumptuary. These taxes are imposed for the purpose
of achieving some social or economic goals having no relation to the raising
revenue (e.g. customs duties, Protective tariff on imports to control foreign
trade and excise tax).
c) Compensatory. Taxes may be imposed for the equitable distribution of
wealth and income in the society.
 CLASSIFICATION OF TAXES

As to Object or Subject Matter:

a) Personal, Poll or Capitation. These taxes are fixed in amount and imposed
on persons residing within a specified territory regardless of the amount of
their property on their occupation or business (e.g. Community Tax);
b) Property. These taxes are imposed on personal or real property based on its
proportionate value or in accordance with some reasonable method of
apportionment. (e.g. Real Estate Tax); and
c) Excise. These taxes are imposed upon the performance of a right or act, the
enjoyment of a privilege or the engagement in an occupation (e.g. Professional
tax, Income Tax, Estate Tax, Donor’s tax and Value-Added Tax).
 CLASSIFICATION OF TAXES

As to Determination of Amount:
a) Ad Valorem. These taxes are fixed amounts in proportion to the value of the
property with respect to which the tax is assessed. It requires the intervention
of Assessors to estimate the value of such property before the amount due
from each taxpayer can be determined (e.g. Real Estate Tax, Custom Duties
and Excise Tax on fermented liquors, cigars, cigarettes gasoline and
automobiles).
b) Specific. These taxes are fixed amounts imposed and based on some
standard of weight or measurement, head or number length or volume. It
requires independent assessment other than listing a classification of the
subject taxed like excise taxes on distilled spirits, wines, fireworks, and
cinematographic films.
 CLASSIFICATION OF TAXES

As to who Bears the Burden:

a) Direct. These taxes are non-transferable. They are demanded from
persons who are bound by law to pay the tax. The liability for the payment
of tax as well as the burden of the tax falls on the same person (e.g.
Community Tax, Income Tax, Transfer taxes Traveler’s Tax and Corporate
Income Tax).
b) Indirect. These taxes are transferable. The liability for the payment of
tax falls on one person, but the burden thereof can be shifted or passed to
another.
 CLASSIFICATION OF TAXES

As to Scope or Authority Collecting Tax

a) National. Those taxes collected by the National Government. Example of national taxes are:
• Estate and Donor’s Taxes;
• Income Tax;
• Value – Added Tax;
• Excise Tax;
• Customs Duties; and
• Documentary stamp Taxes.
b) Local or Municipal. Those taxes collected by the Municipal Governments. Examples of local or
municipal taxes are:
• Community tax;
• Municipal licenses taxes;
• Professional tax; and
• Real estate tax.
 CLASSIFICATION OF TAXES

As to Rate or Graduation:
a) Proportional or Flat Rate. The rate of the tax is based on a fixed percentage of the
amount of the property, receipt or other basis to be taxed (e.g. Real estate tax and
VAT).
b) Progressive or Graduated Rate. The rate of the tax increases as the tax base or
bracket increases (e.g. Income Taxes)
c) Regressive Rate. The rate of tax decreases as the tax base or bracket increases.
There is no regressive tax in the Philippines.
d) Digressive rate. A fixed rate is imposed on a certain amount but diminishes
gradually on sums below it. In digressive rate, the tax rate is arbitrary because the
increase in tax rate is not proportionate to the increase of tax base.
e) Mixed Tax. It is a tax system that uses a combination of the different tax rates.
 OTHER CHARGES/FEES

• Penalty is any sanction imposed as a punishment for violations of law or

acts deemed injurious. It arises from law and / or contracts.
• Revenue refers to all funds or income derived by the government whether
from tax or from other sources.
• Debt is an obligation to pay or render service for a definite future period of
time based on contract.
• Toll is a compensation for the use of somebody else’s property determined
by the cost of improvement.
• License Fee is a contribution enforced by the government primarily to
restrain and regulate business or occupation.
 OTHER CHARGES/FEES

• Special Assessment is an amount collected by the government for the

purpose of reimbursing itself for certain extended benefits regarding
construction of public works.
• Custom duties are imposition on imported goods brought into the country
to protect local industry.
• Subsidy is a monetary aid directly granted or given by the government to an
individual or private commercial enterprise deemed beneficial to the public.
• Tariff is a schedule of list of rates, duties or taxes imposed on imported
goods.
• Margin Fee is a tax on foreign exchange designed to curb the excessive
demands upon our international reserves.
TAX LAWS
 TAX LAW DEFINED

Tax Law is that body of laws which codifies all national tax laws including
income, estate, gift, excise, stamp and other taxes. Such law comprises of
the Republic Act 8424 entitled “The Comprehensive Tax Reform Act of the
Philippines,” otherwise known as the “National Internal Revenue Code of
1997” or the “Tax Code.” It also includes Republic Act 9337 – “The VAT
Reform Law, and local tax ordinances issued by the local government.
• Internal Revenue Law – It includes all laws legislated pertaining to the
national government taxes, which is embodied in the NIRC.
• Internal Revenue Taxes – taxes imposed by the legislative body other
than custom duties on imports. The following national taxes are
classified as Internal Revenue Taxes under the administration of BIR:
• Income tax;
• Transfer Taxes (Estate tax and Donor’s Tax);
• Business Taxes (VAT, Percentage tax and Excise tax);
• Documentary Stamp Tax (DST); and
• Such other taxes as may be imposed and collected by BIR.
 NATURE OF TAX LAWS

The Philippine Internal Revenue laws are generally civil in nature; they
are neither political nor penal in nature.
Although tax laws deal with the fundamental symbiotic relationship of
people with the government, basically they are not political in nature. The
tax code (1997, NIRC) are special laws which prevail over general laws
such as Civil Code or Rules of Court. Accordingly, the provisions of the
NIRC on the prescription are given priority over the provisions of Civil Code.
 INTERPRETATION AND APPLICATION OF TAX
LAWS

The Supreme Court has the exclusive power of constructing and

interpreting tax laws. As a rule, tax laws must be construed with view to
carrying out their purpose and intent. Specifically, the following rules are
generally followed for the interpretation and application of various tax laws:
• Tax statute must be enforced as written.
• Imposition of tax burdens is not presumed.
• Doubts should be resolved liberally in favor of the taxpayer.
• Tax exemptions are strictly construed against the taxpayer.
• Tax laws are applied prospectively.
• Tax laws prevail over civil laws
 SEQUENCE OF THE INTERPRETATION OF TAX
LAWS

The BIR Commissioner issues BIR Rulings o particular tax case which
could be overruled by BIR Rulings of succeeding BIR Commissioner. The
Revenue Regulations are issued by the Department of Finance to cover the
implementing guidelines pertaining to a particular Section of Tax Code.
The Revenue Regulations are overruled by Court decisions upon issuance
of such resolution.
 SOURCES OF PHILIPPINE TAX LAWS

• Constitution of the Philippines;

• Judicial Decisions;
• Executive Orders;
• Special Laws;
• Tax Treaties and Conventions with foreign countries;
• Revenue Regulations promulgated by the Department of Finance;
• BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum Orders;
• BIR Rulings; and
• Local Government Code (Book II)
COMPREHENSIVE TAX REFORM PROGRAM

https://taxreform.dof.gov.ph/
>> END <<