Module 1

Review on the
Principles of
Taxation
Prepared by Mrs. Nelia I. Tomas, CPA, LPT

Income Taxation Laws, Principles and Application 2021. Banggawan, Rex

LEARNING OBJECTIVES
After completing the lesson, the students must be able to comprehend and demonstrate mastery of the
following:

 Concept of taxation and its necessity for every government

 Lifeblood doctrine and its implication to taxation
 Theories of government cost allocation
 Inherent power of the State
 Scope of the taxation power
 Limitations of the taxation power
 Stages of taxation
 Concept of situs of taxation
 Fundamental principles surrounding taxation
 Various escapes from taxation
 Concept of tax amnesty and condonation
 Define taxation, tax and tax laws.
 Enumerate the types of taxation laws, administrative issuances and tax rulings.
 Identify and describe the elements of valid tax.
 Differentiate tax from revenue, license fee, toll, debt and similar items.
 Understand the nature and tax system of the Philippines.
 Discuss the principles of a sound tax system
 Identify other government agencies tasked with tax collections or tax incentives related functions.
Definition of Taxation
Taxation may be defined as a State power, a legislative process and
government cost distribution.

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

Government People

The government provide benefits to The people provide the funds that
the people in the form of public finance the government.
services.
 Theories of Cost Allocation

01 02 A
Benefit Received Ability to Pay The Lifeblood
Theory Theory Doctrine

the more benefit one one should be taxes are essential

receives from the required to contribute and indispensable to
government, the based on his relative the continued
more taxes he capacity to sacrifice subsistence of the
should pay for the support of the government, without
government it, the government
would be paralyzed
 Taxation

Inherent Powers
of the State Police Power

Eminent
Domain
Scope of Taxation Power
The scope of taxation is widely regarded as comprehensive, plenary,
unlimited and supreme.

Limitations of the Taxation Power

 Inherent Limitations
 Constitutional Limitations
Inherent Limitations
01 Territoriality of Taxation

02 International Comity

03 Public Purpose

04 Exemption of the Government

05 Non-delegation of the Taxing Power

Exceptions to the rule of non-delegation
 Under the Constitution, local government units are allowed to
exercise the power to tax to enable them to exercise their fiscal
autonomy.
 Under the Tariff and Customs Code, the President is
empowered to fix the amount of tariffs to be flexible to trade
conditions.
 Other cases that require expedient and effective administration
and implementation of assessment and collection of taxes.
 Constitutional Limitations
Due Process of law Progressive System
Aspects of Due Process:
 Substantive due process of Taxation
 Procedural due process

Equal Protection of Non-imprisonment for

Non-payment of debt
the Law or poll tax

Non-impairment of
Uniformity Rule in
obligation and
Taxation
contract
 Constitutional Limitations
Exemption from taxes of
Free Worship Rule non-profit, non-stock
educational institutions

Exemption from property taxes Concurrence of a majority

of religious or charitable of all members of Congress
entities, non-profit cemeteries, for the passage of law
churches, and mosques….
granting tax exemption

Non-appropriation of
public funds or property for Non-diversification
the benefit of any church, of tax collections
sect or system of religion
 Constitutional Limitations

The requirement that

Non-delegation appropriations, revenue or
of the power of tariff bills shall originate
exclusively in the
taxation House of Representatives

Non-impairment The delegation of taxing

of the jurisdiction of power to local
the supreme court to government units
review tax cases
Stages of the Exercise of
Taxation Power
01 Levy or Imposition
This process involves the enactment of a tax law by Congress and is
called impact of taxation. It is also called the legislative act in taxation.
Matters of legislative discretion in the exercise of taxation
 Determining the object of taxation
 Setting the tax rate or amount to be collected
 Determining the purpose for the levy which must be public use
 Kind of tax to be imposed
 Apportionment of the tax between the national and local government
 Situs of Taxation
 Method of collection

02 Assessment and collection

Tax law is implemented by the administrative branch of the government.
Implementation involves assessment of 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
The place of taxation….

Example of Business Situs Rules

a. Business Tax Situs – place where the business is conducted

Income Tax Situs on:

b. Services – services where they are rendered
c. Sale of goods – place of sale

d. Property tax situs – location of the property

e. Personal tax situs – place of residence
Other Fundamental Doctrines in Taxation

Marshall Doctrine “The power to tax involves the power to destroy”.

“Taxation power is not the power to destroy while

Holme’s Doctrine the court sits”.

Prospectivity of tax laws A law that retroacts is prohibited by the Constitution

Other Fundamental Doctrines in Taxation

Non-compensation
Tax is not a debt, hence, it is not subject to set-off.
or set-off

Non-assignment Tax obligations cannot be assigned or transferred to

of taxes another entity by contract.

Imprescriptibility The government’s right to collect taxes does not prescribe

in taxation unless the law itself provides such prescription.
Other Fundamental Doctrines in Taxation

Any misrepresentation made by one party toward another who

Doctrine of Estoppel relied in good faith will be held true and binding against that
person who made the misrepresentation.

Generally, the courts are not allowed to issue injunction

Judicial Non-interference against the government’s pursuit to collect tax.

Strict Construction Taxation is the rule; exemption is the exception. Vague tax
laws are construed against the government and in favor of the
of Tax Laws taxpayers. Vague tax exemption laws are construed against
the taxpayer and in favor of the government.
 Double Taxation
What is Double Taxation? What are the types of double
taxation?
Double taxation occurs when the
same taxpayer is taxed twice by a. Direct double taxation – occurs
the same tax jurisdiction for the when all the element of double
same thing. taxation exists for both
impositions.

b. Indirect double taxation – occurs

when at least one of the secondary
elements of double taxation is not
common for both impositions.

What are the elements of double How can double taxation be

taxation? minimized?
a. Primary element: same object a. Provision of tax exemption
b. Secondary elements: b. Allowing foreign tax credit
 Same type of tax c. Allowing reciprocal tax
 Same purpose of tax treatment
 Same taxing jurisdiction d. Entering into treaties or
 Same tax period bilateral agreements
 Escapes from Taxation
Categories

01 Those that result to loss of government revenue

a. Tax Evasion – also known as tax dodging, refers to any act or trick that
tends to illegally reduce or avoid the payment of tax.
b. Tax Avoidance – also known as tax minimization, refers to any act or trick
that reduces or totally escapes taxes by any legally permissible means.
c. 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. It may be granted by the Constitution, law or contract.

02 Those that do not result to loss of government revenue

a. Shifting – the process of transferring tax burden to other taxpayers.
b. Capitalization – pertains to the adjustment of the value of an asset caused by
changes in tax rates.
c. Transformation – 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
It 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 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
It is forgiveness of the tax obligation of a certain taxpayer under
certain justifiable grounds. This is referred to as tax remission.
 Taxation Law

Definition Types Sources

Taxation Law a. Tax Laws a. Constitution
b. Statutes and Presidential
refers to any law e.g. NIRC,
Decrees
that arises from the b. Tax Exemption c. Judicial Decisions
exercise of the Laws d. Executive Orders
taxation power of e.g. The Minimum e. Administrative Issuances
Wage Law f. Local Ordinance
the State. g. Tax Treaties and
Conventions
h. Revenue Regulations
 Tax
Definition
Tax is an enforced proportional contribution levied by the
lawmaking body of the State to raise revenue for public purpose.

Elements of a Valid Tax

1. Tax must be levied by the taxing power having jurisdiction
over the object of taxation.
2. Tax must not violate constitutional and inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.
 Distinction of Taxes with Similar Items

Tax vs. Revenue Tax vs. Tariff Tax vs. Toll Tax vs. Penalty

Tax refers to the

amount imposed by Tax is an amount Tax is a levy of
the government for imposed upon persons, government; hence, it Tax is an amount
public purpose. privilege, transactions is demand of imposed for the
or properties while sovereignty. support of the
Revenue refers to all tariff is the amount government while
income collections of imposed on imported Toll is a charge for the penalty is an amount
the government which or exported use of other’s property; imposed to discourage
includes taxes, tariff, commodities. hence, it is demand of an act.
licenses, toll, penalties ownership.
and others.
 Distinction of Taxes with Similar Items
Tax vs. Debt
Tax arises from law while debt
arises from private contracts.
Non-payments of tax leads to
imprisonment but not to debt.
Debt can be subject to set-off
but tax is not.
Debt can be paid in kind but tax
is generally payable in money.
Tax draws interest only when the
taxpayer is delinquent while
debt draws interest when it is so
stipulated by the contracting
parties or when the debtor incurs
legal delay.
Tax vs. Special Assessment Tax vs. License Fee
Tax is an amount imposed upon
persons, properties, or privileges. Tax emanates from taxation
power and imposed upon any
Special assessment is levied by
object such as persons, properties,
the government on lands adjacent
or privileges to raise revenue. It
to a public improvement.
is imposed after the
The basis of special assessment is
commencement of a business or
the benefit in terms of the
profession.
appreciation in land value caused
by the public improvement while License Fee emanates from
tax is levied without expectation police power and is imposed to
of a direct proximate benefit. regulate the exercise of a
privilege such as commencement
Non-payment of special
of a business or profession. It is
assessment will not result to
imposed before the engagement
imprisonment of the land owner,
in those activities.
unlike non-payment of taxes.
 Tax System
The tax system refers to the methods or schemes of imposing,
assessing and collecting taxes. It includes all tax laws, and
regulations, the means of their enforcement, and the
government offices, bureaus and withholding agents which are
part of the machineries of the government in tax collection.

The Philippine tax system is divided into two:

A. National tax system and
B. Local tax system.
 Tax System

Types of Tax Systems Types of Tax System

According to Imposition According to Impact
 Progressive  Progressive System
 Proportional  Regressive System
 Regressive
Principles of A
Sound Tax System
 Fiscal Adequacy
 Theoretical Justice or
Equity
 Administrative
Feasibility
Agents and Deputies for Collection
of National Internal Revenue Taxes
Commissioner of Customs and his subordinates with respect to
01 collection of national internal revenue taxes on imported goods

The head of appropriate government offices and his subordinates with

02 respect to the collection of energy tax

Banks duly accredited by the Commissioner with respect to receipts of

03 payments of internal revenue taxes authorized to be made thru banks
 Other Agencies Tasked with Tax
Collections or Tax Incentives Related Functions

01 Bureau of Customs

02 Board of Investments

03 Philippine Economic Zone Authority (PEZA)

04 Local Government Tax Collecting Units

 Questions to Ponder
1. What is taxation?
2. Explain the theory of taxation.
3. Discuss the basis of taxation.
4. Give the 3 theories of cost allocation and briefly
explain.
5. Discuss the inherent powers of the state.
6. Differentiate tax from debt, special assessment and
license fee.
7. Explain the tax system in the Philippines.
 Required Readings and Other
Learning Resources
1. Chapter 1, pp.1 – 20; 35-51:Banggawan, Rex B. 2021. INCOME
TAXATION LAWS, PRINCIPLES, AND APPLICATIONS. Real
Excellence Publishing., Pasay Default Barangay, Pasay City,
Philippines.

1. https://www.pwc.com/ph/en/publications/pdf/pwcph-tax-code-
2019.pdf
 Learning Activities/Self-Tests

Chapter 1, pp. 21 – 34 ; 52 - 62 :Banggawan, Rex B. 2021. INCOME

TAXATION LAWS, PRINCIPLES, AND APPLICATIONS. Real
Excellence Publishing., Pasay Default Barangay, Pasay City, Philippines.
 Appendix: Course Materials Evaluation
Adopted: BEST PRACTICES AND SAMPLE QUESTIONS FOR COURSE EVALUATION SURVEYS. Retrieved from
https://assessment.provost.wisc.edu/best-practices-and-sample-questions-for-courseevaluation-surveys//.