TAX 1 The exercise of the powers is presumed understood and
acknowledged by the people from the very moment they
INTRODUCTION TO TAXATION
TAXATION
 State power – inherent power to enforce a proportional
contribution from its subjects for public purpose.
 Process – process of levying taxes by the legislature of the
state to enforce proportional contributions from its subjects
for public purpose.
 Mode of government cost distribution – the state
allocates its costs or burden to its subjects who are
benefited by its spending.
THE THEORY OF TAXATION
 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. ( mutual )
 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
1. Benefit Received Theory – the more benefit he receives;
the more taxes he should pay.
2. Ability To Pay Theory – based on their capacity to
sacrifice for the support of the government.
ASPECTS OF ABILITY TO PAY THEORY
1) Vertical equity – directly proportional to the level of his
tax base. (Gross concept)
2) Horizontal equity – requires consideration for the
particular circumstance of the taxpayer. (Net concept )
THE LIFEBLOOD DOCTRINE
 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.
IMPLICATION OF THE LIFEBLOOD DOCTRINE OF
TAXATION
1. Tax is imposed even if the absence of Constitutional grant.
2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose 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 it effectively defers the collection of
income tax.
c. A lower amount of deduction is preferred when a
claimable expense is subject to limit.
d. A higher tax base is preferred when the tax objects has
multiple tax bases.
INHERENT POWERS OF THE STATE
1. Taxation Power – to enforce proportional contribution
from its subjects to sustain itself.
2. Police Power – to enact laws to protect the well-being of
the people.
3. Eminent Domain – 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.
establish their government.
SIMILARITIES OF THE (3) POWERS OF THE STATE
1. Necessary attributes of sovereignty.
2. Inherent to the State.
3. Legislative in nature.
4. Ways in which the State interferes with private rights and
properties.
5. Exist independently of the Constitution/ and are exercisable
by the government even without Constitutional grant.
6. 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 ( CPUS )
 Comprehensive
 Plenary
 Unlimited
 Supreme
Despite the seemingly unlimited nature of taxation, it is not
absolutely unlimited.
THE LIMITATIONS OF THE TAXATION POWER
A. INHERENT LIMITATIONS
1. Territoriality Of Taxation – it cannot enforce upon subjects
outside its territorial jurisdiction.
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 citizens, non-resident citizens and resident
aliens are taxable on transfers of properties located
within or outside the Philippines
Two-Fold Obligations Of Taxpayers
1. Filing of returns and payments of taxes
2. Withholding of taxes on expenses and its remittance
to the government.
These obligations can only be enforced upon citizens
and residents
2. International Comity – mutual courtesy or reciprocity
between countries (no country is powerful than the other).
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.
Not Subject To Philippine Taxation
1) Embassies or consular offices of foreign governments
in the Philippines - including international
organizations and their nonFilipino staff
2) Income of foreign government and foreign
government owned and controlled corporations
[under National Revenue Code (NIRC)]
3. Public Purpose - tax is intended for the common good, must
be exercised absolutely for public purpose and it can’t be
exercised to further any private interest
4. Exemption Of The Government – this will not raise
additional funds but will only impute additional costs.
 Income of the government from its properties and activities
conducted for profit including income from government
owned and controlled corporations is subject to tax.
  government properties and income from essential public
functions are NOT subject to taxation (under NRC):
5. Non-Delegation Of The Taxing Power – 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
 What has been delegated cannot further be 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.
B. CONSTITUTIONAL LIMITATIONS
1. Due Process Of Law - No one should be deprived of his life,
liberty, or property without due process of law. Tax law 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.
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.
 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.
2. Equal Protection Of The Law – taxpayers should be treated
equally both in terms of rights conferred and obligations
imposed (same circumstances).
 Congress cannot exempt sellers of “balot” while
subjecting sellers of “penoy” to tax since they are
essentially the same goods.
3. 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.
 Uniformity is relative equality.
4. Progressive System Of Taxation – tax rates increase as the
tax base increases.
 Aids in an equitable distribution of wealth t society by
taxing the rich more than the poor.
5. Non-Imprisonment For Non-Payment Of Debt/Poll Tax
 Applies only when the debt is acquired by the debtor in
good faith.
 Debt is acquired by the debtor in bad faith constitutes a
estafa, a criminal offense punishable by imprisonment.
As a policy, no one shall be imprisoned because of his poverty,
and no one shall be imprisoned for mere inability to pay debt.
 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?
 Non-payment of tax compromises public interest while the
non-payment of debt compromises private interest.
 The non-payment of tax is similar to a crime.
 The Constitutional guarantee on non-imprisonment for
nonpayment 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 guarantee of non-imprisonment for
nonpayment of poll tax applies only to the basic
community tax.
 Non-payment of the additional community tax is an act or
tax evasion punishable by imprisonment.
6. Non-Impairment Of Obligation And Contract – it should
no set aside its obligations from contracts by the exercise of its
taxation power.
7. Free Worship Rule – does not extend to income from
properties or activities of religious institutions that are
proprietary or commercial in nature.
 Not subject to taxation: the properties and revenues of
religious institutions such as tithes or offerings
 Subject to taxation: income from properties or activities
or religious institutions that are proprietary or commercial
in nature
8. Exemption of religious or charitable entities, non-profit
cemeteries, churches and mosques, lands, buildings and
improvements from property taxes – actually, directly and
exclusively used for charitable, religious, and educational
purposes.
 Doctrine Of Use – properties actually devoted for religious,
charitable, or educational activities are exempt from real
property tax.
 Doctrine Of Ownership – properties of religious,
charitable, or educational entities whether or not used in
their primary operations are exempt from real property tax
9. Non-appropriation of public funds or property for the
benefit of any church, sect or system of religion – intended to
highlight the separation of religion and the State.
 Compensation to priests, imams, or religious ministers
working with the military, penal institutions, orphanages or
leprosarium is not considered religious appropriation.
10. Exemption from taxes of the revenues and assets of non-
profit, non-stock educational institutions including grants,
endowments, donations, or contributions for educational
purposes – applies only on revenues and assets that are actually,
directly and exclusively devoted for educational purposes.
 Exempts government educational institutions from
income tax and subjects’ private educational institutions
to a minimal 10% income tax.
11. Concurrence of a majority of all members of Congress
for the passage of a law granting tax exemption – requires the
vote of the majority of all members of Congress.
 In the approval of an exemption law, an absolute majority
or the majority of all members of Congress is required.
 In the withdrawal of tax exemption, only a relative
majority or quorum majority is required.
12. Non-Diversification Of Tax Collections – it should never
be diversified for private purposes.
13. Non-Delegation Of The Power Of Taxation – requires that
taxation power as part of lawmaking be vested exclusively in
Congress.
14. 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 raise to and be finally decided by the
Supreme Court of the Philippines.
15. The requirement that appropriations, revenue, or tariff
bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with
amendments
16. The delegation of taxing power to local government units
shall exercise the power to create its own sources of revenue
and shall have a just share in the national taxes – this is a
constitutional recognition of the local autonomy of local
government and an express delegation of the taxing power.
STAGES OF HE EXERCISE OF TAXATION POWER
1. Levy Or Imposition – enactment of a tax law by Congress
and is called impact of taxation or legislative act in taxation.
2. Assessment And Collection – referred to as incidence of
taxation or the administrative act of taxation.
Congress is composed of two bodies:
1. The House of Representatives
2. The Senate
Tax bills cannot originate exclusively from the Senate.
SITUS OF TAXATION – the place of the taxation.
 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:
1. Business tax situs – where the business is conducted.
2. Income tax situs on services – where they are rendered.
3. Income tax situs on sale of goods – place of sale.
4. Property tax situs – location.
5. Personal tax situs – place of residence.
OTHER FUNDAMENTAL DOCTRINES IN TAXATION
1. Marshall Doctrine – “the power to tax involves the power to
destroy”.
 Does not include the power to destroy if it is used solely
for the purpose of raising revenue
 Imposition of excessive tax on cigarettes.
Taxation power
- can be used as an instrument of police power
- it can be used to discourage or prohibit undesirable
activities or occupation - carries with it the power to
destroy
- does not include the power to destroy if it is used solely
for the purpose of raising revenue (Roxas vs. CTA)
2. Holme’s Doctrine – “taxation power is not the power to
destroy while the court sits”
 Include the creation of Ecozones with tax holidays
and provision of incentives.
Taxation power
- may be used to build activities or industries by the grant
of tax incentives.
- both are employed in practice even though they appear to
contradict each other
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 – tax is not a debt; hence, it is
not subject to set-off.
 Exceptions:
a. Taxpayer’s claim has already become due and demandable
b. Cases of obvious overpayment of taxes.
c. Local taxes
5. Non-assignment of taxes – tax obligations cannot be
transferred to another entity by contract.
6. Imprescriptibility in taxation – prescription is the lapsing of
a right due to the passage of time.
 Tax prescribes if not collected within 5 years from the
date of its assessment.
 In the absence of assessment, tax prescribes if not
collected by judicial action within 3 years from the date
the return is required to be filed.
 Taxes due from taxpayers who did not file a return or
those who filed fraudulent returns do not prescribe.
7. Doctrine of Estoppel – any misrepresentation made by one
party toward another who relied therein in good faith will
be held true and binding against that person who made the
misrepresentation.
 The error of any government employee does not bind the
government.
8. Judicial Non-interference – courts are not allowed to issue
injunction against the government’s pursuit to collect tax
as this would unnecessarily defer tax collection (Lifeblood
Doctrine).
9. Strict Construction of Tax Laws – “taxation is the rule;
exemption is the exemption”
 There is no room for interpretation, there is only room for
application.
 When taxation laws are vague, the doctrine of strict legal
construction is observed.
 Vague tax laws – construed against the government
and in favor of the taxpayers.
 It means no tax law.
 Obligation arising from law is not presumed.
 Vague exemption laws – construed against the
taxpayer and in favor of the government.
 It means no exemption law.
 Construed strictly against the taxpayer in
accordance with the lifeblood doctrine.
 Tax Exemption - cannot arise from vague inference and
must be clear and unequivocal.
A taxpayer claiming a tax exemption must
point to a specific provision of law conferring on the
taxpayer, in clear and plain terms, exemption from a
common burden. Any doubt whether a tax exemption
exists is resolved against the taxpayer.
 Right of Taxation - is inherent to the State
- It is a prerogative essential to the perpetuity of the
government
He who claims exemption from the common
burden must justify his claim by the clearest grant of
organic or statute law.
When exemption is claimed, it must be shown
indubitably to exist. At the outset, every presumption is
against it. A wellfounded doubt is fatal to the claim; it
is only when the terms of the concession are too
explicit to admit fairly of any other construction that
the proposition can be supported.
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 elements:
a. 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 – all element of double taxation
exists for both impositions.
 Discouraged because it is oppressive and burdensome to
taxpayers.
Examples:
a. An income tax of 10% on monthly sales and a 2% income
tax on the annual sales (total of 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 – at least one of the secondary
elements of double taxation is not common for both
impositions.
 Prevalent in practice.
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 taxes the same income
(international double taxation).
B. Those That Do Not Result To Loss Of Government
Revenue
1. Shifting – transferring tax burden to other taxpayers.
 Common with business taxes where taxes imposed on
business revenue can be shifted or passed-on to customers.
a. Forward – normal flow of distribution (manufacturer
to customers).
 common with essential commodities and services
such as foods and fuel.
b. Backward – reverse of forward shifting.
 Common with non-essential commodities where
buyers have considerable market power and
commodities with numerous substitute products.
c. Onward – any tax shifting in the distribution channel
that exhibits forward or backward shifting.
3. Capitalization – adjustment of the value of an asset cause by
changes in tax rates.
 This is a form of backward shifting of tax.
4. Transformation – elimination of wastes or losses by the
taxpayer to form savings to compensate for the tax imposition
or increase in taxes.
TAX AMNESTY – general pardon granted by the government
for erring taxpayer 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.
 Absolute forgiveness or waiver by the government on its
right to collect and is retrospective in application.
Covers both civil and criminal liabilities.
 Conditional upon the taxpayer paying the government of a
portion of the tax.

Nothing in our law expressly prohibits double taxation. TAX CONDONATION – forgiveness of the tax obligation of a
certain taxpayer under certain justifiable grounds.
How Can Double Taxation Be Minimized?  Also referred to as tax remission.
a. Provision Of Tax Exemption – only one tax law is  Construed against the taxpayer and in favor of the
allowed to apply to the tax object while other tax law government.
exempts the same tax object.  Covers civil liabilities of the taxpayer.
b. Allowing foreign tax credit – tax payments in the foreign  Applies prospectively to any unpaid balance of the tax;
tax law is deductible against the tax due of the domestic hence, the porting already paid by the taxpayer will not be
tax law. refunded.
c. Allowing reciprocal tax treatment – provisions in tax  Requires no payment.
laws imposing a reduced tax rates or even exemption if the
country of the foreign taxpayer also give the same
treatment to Filipino nonresidents 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 – available to the taxpayer to
limit or even avoid the impact of taxation.

CATEGORIES OF ESCAPES FROM 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.
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.
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.
 All forms of tax exemptions can be revoked by
Congress except those granted by the Constitution and
those granted under contracts.