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Cities of Mandaluyong and Pasig: Rizaltechnologicaluniversity
Cities of Mandaluyong and Pasig: Rizaltechnologicaluniversity
WEEK NO.2MODULE NO.1: FUNDAMENTAL through a sound knowledge of its basic principles. Taxation is
important to everyone. It encompasses every area of our daily life,
PRINCIPLES OF TAXATION
including property, family, employment, and our daily transaction as
1.1 Definition of Taxation
well as business affairs. That is why, it is very important that we
1.2 Three (3) Inherent Powers of the State
know the rules and principles in taxation.
1.3 Similarities and differences among the three (3) inherent
powers of the State 1.4 Purposes of Taxation
This module discusses the relevant principles of taxation which
1.5 Theory and Basis of Taxation
aims to fully understand the importance of tax system in the
1.6 Manifestation of Lifeblood Theory
Philippines. Included topics are the nature of taxation, its scope,
1.7 Scope of the Power of Taxation
classification of taxes and essential characteristics of tax, tax laws
1.8 Essential Elements of Tax and powers of BIR and CIR.
1.9 Aspects of Taxation
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Study Guide
Content
• Learning Outcomes
• Topic Presentation
• Exercises/Quizzes
• Assignment
• References
Learning Outcomes
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Topic Presentation
• It 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 legitimate objects of government. In simple terms, it is the act of
levying a tax to apportion the cost of government among those, in some measure, are privileged to
enjoy its benefits and must therefore bear its burden.
• It is the power inherent in every sovereign state being essential to the existence of every government.
Hence, even if not mentioned in the constitution, the state can still exercise the power. Therefore,
any constitutional provision regarding the state’s power to tax should not be interpreted as a “grant
of power”, but merely a limitation on the state’s power to tax.
Taxes are the enforced proportional contributions from persons and property levied by the law-
making body of the state by virtue of its sovereignty for the support of the government and all
public needs.
1. Police Power. It is the power of the state for promoting public welfare by restraining and regulating the
use of liberty and property. It may be exercise only by the government. The property taken in the
exercises of this power is destroyed because it is noxious or intended for a noxious purpose.
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.
1. 3 SIMILARITIES AND DIFFERENCES 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
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Examples of taxes imposed for raising revenues are income and business taxes.
Examples of Taxes imposed for regulation Examples of means of attaining some social or economic
objectives through taxation
1.5 THEORY and BASIS OF TAXATION ◉ Increasing taxes in periods of prosperity to curb spending power
◉ Excise taxes for sin products such as cigarettes and alcohols and halt inflation.
◉ Amusements taxes for "amusement places" such as night and
day clubs, cockpits and racetracks
◉ Granting tax incentives to promote new/pioneer industries and
encourage growth of local industries.
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from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the
citizenry, and those which come within the State’s territory and facilities and protection which a
government is supposed to provide.
• Lifeblood Theory
The power of taxation is essential because the government can neither exist nor endure
without taxation. “Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need” (Lifeblood Doctrine). The government cannot continue to
perform its basic functions of serving and protecting its people without means to pay its
expenses. Consequently, the state has the right to compel all its citizens and property within its
limits to contribute.
Taxes are the lifeblood of the government. Thus, it should be collected without unnecessary
delay. Its collection, however, should not be tainted with arbitrariness.
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b) Unlimited – In the absence of limitations prescribed by law or the constitution, the power of
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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.
doctrine of separation of powers among the three branches of the government. f) It is levied for
public purpose.
3. Collection 2. Assessment
(Executive Function) (Executive Function)
1. Levying (Legislative Function)
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2. It is legislative in character.
The power to tax (levying or imposition) is peculiarly and exclusively legislative in nature. It
cannot be exercise by the executive or judicial branches of the government.
within specified limits and subject to such limitations and restrictions as it may impose: ▪ Tariff
rates
▪ Import & export quotas
▪ Tonnage & wharfage dues; and
▪ Other duties or imposts within the framework of the national development program in the
government.
b) Delegation to local government units as provided under Section 5, Art. X of the Constitution. The
power of local government units to impose taxes and fees is always subject to the limitations
which Congress may provide, the former having no inherent power to tax.
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1. As to scope:
a. National - imposed by the National Government (e.g. income tax, estate tax, donor’s tax, VAT
other percentage taxes, documentary stamp tax)
b. Local – imposed by the local government units such as municipal corporations (e.g. real
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estate tax and professional tax receipts). The local government unit’s power to tax is based on
a constitutional grant that paved the way for the enactment of the Local Government Code of
the Philippines. Hence, the local government’s power to tax is not inherent.
b. Property – tax imposed on property, whether real or personal, in proportion either to its value, or
in accordance with some other reasonable method of apportionment (e.g. real estate tax)
c. Excise – any tax which does not fall within the classification of a poll tax or a property tax. This is
a tax on the exercise of certain rights and privileges (e.g. income tax, estate tax, donor’s tax).
Excise tax may also refer to the tax levied or imposed on sin products and non essential goods
such as cigars and liquors. Excise taxes of this nature are taxes applicable to certain specified
articles or products manufactured in the Philippines for domestic sale or consumption or any
other disposition and to specified things or goods imported into the Philippines. It may be
specific or ad valorem.
b. Indirect – tax which is demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another. These are taxes wherein the incidence of or
burden thereof can be shifted or passed on to another person (e.g. VAT, percentage tax, excise
tax on excisable articles).
4. As to determination of amount:
a. Specific- tax of fixed amount imposed by the head or number, or by some standard of weight or
measurement (e.g. excise tax on cigars and liquors)
b. Ad valorem – tax of fixed proportion of the value of the property with respect to which the tax is
assessed (e.g. vat, income tax, donor’s tax and estate tax).
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SPECIFIC TAX ON
Cigarettes packed by
machine where the NRP
(excluding excise and VAT
per pack is
• Ᵽ11.50 and below ₱12 ₱17 ₱21 ₱25 ₱30 • More than Ᵽ11.50 ₱25
₱27 ₱28 ₱29 ₱30
5. As to purpose:
a. Primary, Fiscal, or Revenue Purpose – tax imposed solely for the general purpose of the
government, i.e., to raise revenue for government purposes (e.g. income tax, donor’s tax and
estate tax).
b. Secondary, Regulatory, Special, or Sumptuary Purpose – tax imposed for a specific purpose,
i.e., to achieve some social or economic ends irrespective of whether revenue is actually raised
or not (e.g. tariff and certain duties on imports).
6. As to graduation or rate:
a. Proportional – tax based on fixed percentages of amount of the property, receipts, or other basis to
be taxed [e.g. VAT, Table 1:3 above (Ad-valorem tax on distilled spirits)]
b. Progressive or graduated – tax the rate of which increases as the tax base or bracket increases
(e.g. income tax on individual taxpayers)
c. Regressive - tax the rate of which decreases as the tax base or bracket increases.
7. As to taxing authority:
a. National – taxes imposed under National Internal Revenue Code (commonly known as Tax
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Code) collected by the national government through the Bureau of Internal Revenue (BIR) and
other national government agencies. Other national taxes other than those collected by the BIR
as provided for under special laws include butt not limited to:
▪ Customs duties
▪ Taxes on narcotic drugs
▪ Special education fund taxes
▪ Energy taxes on aircraft, motorized watercraft, and electric power consumption ▪
Sugar adjustment taxes
▪ Travel tax
▪ Private motor vehicle tax
c) Administrative Feasibility
Tax laws must be capable of effective and efficient enforcement. A good tax system requires
informed stakeholders who understand how taxes are assessed, collected and complied with. It
should be clear who and what is being taxed, and how tax burdens affect them.
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for a public purpose, otherwise, it will be declared as invalid. No tax law may be enacted for
the purpose of raising revenue for private purposes. The purpose should affect the
inhabitants of the state or taxing district as a community and not merely as individuals. It has
been said that the best test of rightful taxation is that the proceeds of the tax must be used.
a. For the support of the government; or
b. For some of the recognized objects of government; or
c. To promote welfare of the community.
2. Constitutional Limitations
a) Due process of law
There must be a valid law and the measure should not be unconscionable and unjust as to
amount to confiscation of property. Tax statute must not be arbitrary as to find no support in
the Constitution. The power to tax should not be harsh, oppressive or confiscatory. This
limitation is also known as the right to notice and hearing.
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taxes rather than on indirect taxes, with ability to pay as the principal criterion.
Regressive tax rates refer to tax rates which decreases as the tax base or bracket
increases. Regressive tax rates should be differentiated from a regressive system of
taxation which exists when there are more indirect taxes imposed than direct taxes.
g) Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of any
church
No public money or property shall be appropriated, applied, paid, or employed directly or
indirectly, for the use, benefit, or support of any church, denomination, sectarian institution
or system of religion, or of any priest, preacher, minister or other religious teacher, or
dignitary as such except when such priest, preacher, minister or dignitary is assigned to the
armed forces, or to any penal institution, or government orphanage or
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leprosarium.
i) Prohibition against taxation of non-stock, non-profit educational institutions. All revenues and
assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties. However, they
shall be subject to internal revenue tax on income from trade, business or other activity, the
conduct of which is not related to the exercise or performance by such educational institution
of its education purposes or functions.
j) OTHERS
1. Grant of tax exemption
No law granting any tax exemption (i.e., amnesties, condonations and refunds) shall
passed without the concurrence of a majority of all Members of Congress (voting
separately).
3. Delegated authority of President to impose tariff rates, import and export quotas, tonnage
and wharfage dues as delegated by Congress through a law (subject to Congressional
limits and restrictions) within the framework of national development program.
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in all cases involving the legality of any tax, impost, assessment, or toll, or any penalty
imposed in relation thereto.
5. REVENUE BILLS shall originate exclusively from the House of Representatives All
appropriation, revenue or tariff bills, bills authorizing an increase of the public debt, bills of
local application, and private bills shall originate exclusively in the House of Representatives,
but the Senate may propose or concur with amendments. The Constitution simply means
that the initiative for the filing of bills must come from the House of Representatives, on the
theory that, elected as they are from districts, the members of the House can be expected to
be more sensitive to the local needs and problems.
Situs means “place of taxation. It is the state or political unit which jurisdiction. It is the state or political
unit which has jurisdiction to impose a particular tax. The state where the subject to be taxed has a situs
may rightfully levy and collect the tax. The situs is necessary in the state which has jurisdiction or which
exercises dominion over the subject in question.
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TABLE 1.4: EXAMPLES OF SITUS OF TAXATION
Persons Residence of the taxpayer
Real Property Location
Personal Property Location; Place of sale or transaction
Intangible Personal
PropertyDomicile of the owner except when the intangible has a situs elsewhere such as: • Franchise, patents,
copyrights, trademarks: Situs is the place or country where such intangibles are exercised.
• Receivables: Domicile or residence of the debtor
• Bank deposits: Location of the depository bank.
***shares of stock in a domestic corporation of a nonresident alien are taxable in the
Philippines because the said shares receive the protection and benefit of the Philippines
laws.
Income ***Source of Income
• Occupation - where the occupation is engaged in
• Transaction - where the transaction took place
Business Place of the business
Gratuitous Transfer Residence or citizenship of the taxpayer; location of the property
TOLL TAX
Paid for the use of another’s property Paid for the support of government
Amount is based on cost of construction or
Amount is based on the necessities of the
maintenance of the public improvement
State
used
Maybe imposed by the government or
PENALTY TAX
Designed to regulate conduct Primarily aimed at rising revenue
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Revenue refers to all the funds or income derived by the government, whether from tax or any
other source.
PENALTY TAX
Designed to regulate conduct Primarily aimed at rising revenue May be imposed
by the government or
May imposed by the government only be
private individuals or entities
the government
It is not a tax measure intended to raise revenues for the government because the proceeds
thereof may be devoted to the specific purpose for which the special assessment was authorized.
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Imposed on the right of reward of an officer for specific services 7. TAX versus Debt
Imposed also on persons or property
Legal compensation or reward of an officer for specific services
Failure to pay license fee makes the act or business illegal As enforced contribution assesses by sovereign authority to defray
public expenses
As enforced contribution assesses by sovereign authority to defray
public expenses
DEBT TAX
Based on contract Based on law
May be paid in kind Generally payable in money Cannot generally be assignable/subject
of
Assignable/May be the subject of set-off or
set-off or computation
compensation
Imprisonment is a sanction for non
A person cannot be imprisoned for non
payment of tax (except poll tax)
payment of debt (except when it arises
from a crime)
Draw interest when stipulated oe when of
Does NOT draw interest except only when
prescription default
delinquent
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There is indirect double/duplicate taxation if any of the elements above is not present. Our
Philippine Constitution does not expressly prohibit direct double taxation. However, it is something
not favored. Such taxation should whenever possible, be avoided and prevented.
Example:
• Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the
retailer, who also shift to the final purchaser or consumer.
Taxes that may be shifted:
• VAT; Percentage Taxes; Excise taxes on excisable articles
• Ad-valorem taxes that oil companies pay to BIR upon removal of petroleum products from its
refinery
2. Transformation
An escape from taxation where the producer or manufacturer pays the tax and endeavor to
recoup himself by improving his process of production thereby turning out his units of products at a
lower cost.
3. Evasion
Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of a tax. It is also known as “tax dodging”. It is connotes fraud through the use of
pretenses or forbidden devices to lessen or defeat taxes.
4. Tax Avoidance
It is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income in order to avoid or reduce tax liability. It is politely called “tax
minimization” and is not punishable by law.
5. Exemption
It is the grant of immunity to a particular persons or corporations or to persons or corporations
of a particular class from a tax which persons and corporation generally within the same state or
taxing district are obliged to pay. It is an immunity or privilege: it is freedom from a financial charge
or burden to which others are subjected. Exemption is allowed only if there is a clear provision
therefore. It is not necessarily discriminatory as long as there is a
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reasonable foundation or rational basis. In the construction of tax statutes, exemptions are not
favored and are construed against the tax payer.
Kinds of Exemption
As to basis:
• Constitutional – Immunities from taxation which originate from the constitution. •
Statutory - Immunities from taxation which emanates from legislation.
As to form:
• Express – Exemptions expressly granted by statute.
• Implied – When particular persons, property, or rights are deemed exempt as they fall
outside the scope of the taxing provisions itself.
As to extent:
• Total – Connotes absolute immunity.
• Partial – One where a collection of a part of the tax is dispensed with.
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. It partakes of an
absolute forgiveness or waiver of the Government of its right to collect. It is a way to give tax
evaders, who wish to relevant and are willing to reform a chance to do.
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
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