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Fundamental Principles OF Taxation

BS Accountancy (Urdaneta City University)

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FUNDAMENTAL PRINCIPLES OF TAXATION

A. Definition of Taxation

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.

B. Nature or Characteristics Taxation

Under American Jurisprudence, the power to tax is considered inherent in a sovereign State because
it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist or endure. The
power to tax proceeds upon the theory that the existence of a government is a necessity and this power
is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent
state or government. No sovereign state can continue to exist without the means to pay its expenses;
and that for those means, it has the right to compel all citizens and property within its limits to
contribute, hence, the emergence of the power to tax. (51 Am. Jur., Taxation 40).

NATURE OR CHARACTERISTICS OF TAXATION

a. Inherent Power

b. Legislative in Character

c. Subject to Inherent and Constitutional Limitations

NOTE: In the absence of inherent and constitutional limitations, the power to tax is comprehensive,
plenary, supreme and unlimited. It is so comprehensive that in the words of Justice Marshall, the power
to tax includes the power to destroy.

C. The Inherent Powers of the State

1. Police Power- it is the power to enact laws to promote the general welfare of the people.

2. Eminent Domain- it is the power to take private property for public use upon payment of just
compensation.

3. Power to Tax- it is the power to take property (generally money) for the support of the government
and for public purpose.

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Similarities and Distinctions among the Inherent Powers of the State

Similarities

1. They are inherent in the State.

2. Underlie and exist independently of the constitution although the conditions for their exercise may be
prescribed by the Constitution.

3. Methods by which State interferes with private rights and property

4. Presuppose equivalent compensation

5. Exercised primarily by the legislature

D. PURPOSES OF TAXATION

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1. Primary Purpose To raise revenue/funds to defray the necessary expenses of the government (also
called Revenue Purpose).

2. Secondary Purpose - As a tool for general, social and economic welfare (also called
Regulatory/Sumptuary/Compensatory Purpose).

1. Regulation

2. Promotion of General Welfare

3. Reduction of Social Inequality

4. Encourages Economic Growth

E. THEORY ON TAXATION

a) Necessity Theory - The existence of government is a necessity, it cannot continue without means to
pay its expenses, for this reason, it has the right to compel all its citizens and property to contribute.

b) The Benefits-Protection Theory- Taxes are what we pay for a civilized society. The government and the
people have a reciprocal and mutual duties of support and protection to one another (symbiotic
relationship between the government and the taxpayer).

c) Lifeblood Doctrine - Taxes are the lifeblood of the government without which it can neither exist nor
endure.

F. TAX DEFINED

Are enforced proportional contributions from persons and property, levied by the State by virtue of its
sovereignty for the support of the government and for all its public needs.

G. ESSENTIAL CHARACTERISTICS OF TAX

1. A tax is a forced charge, imposition or contribution;

2. It is a pecuniary burden payable in money;

3. It is imposed for public purpose;

4. It is imposed pursuant to a legislative authority;

5. It is levied within the territorial and legal jurisdiction of a state;

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6. It is assessed in accordance with some reasonablerule of apportionment.

H. SCOPE OF THE LEGISLATIVE TAXING POWER

1. The person, property, or occupation to be taxed, excises or privileges, provided they are within the
taxing jurisdiction, are also included;

2. The amount or rate of the tax;

3. The purposes for which taxes shall be levied provided they are public purposes;

4. The kind of tax to be collected;

5. The apportionment of the tax, i.e., whether the tax shall be general or limited to a particular locality or
partly general and partly local;

6. The situs of taxation; and

7. The method of collection.

I. STAGES OR PROCESS OF TAXATION (LAP)

1. Levy or Imposition- This process involves the passage of tax laws or ordinances through the legislature.

2. Assessment and Collection- This process involves the act of administration and implementation of tax
laws by the executive through its administrative agencies such as the Bureau of Internal Revenue or
Bureau of Customs.

3. Payment of Tax- This process involves the act of compliance by the taxpayer in contributing his share
to pay the expenses of the government.

J. BASIC PRINCIPLES OF A SOUND TAX SYSTEM (FAT)

1. Fiscal Adequacy- The sources of government government revenue must be sufficient to meet
expenditures and other public needs.

2. Administrative Feasibility- Tax laws must be capable of convenient, just and effective administration-
free from confusion and uncertainty.

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3. Theoretical Justice- A good tax system must be based on the taxpayer's ability to pay. This suggests
that taxation must be progressive conformably with the constitutional mandate that congress shall
evolve a progressive system of taxation.

K. LIMITATIONS ON THE TAXING POWER

1. Inherent Limitations- inherent limitations proceed from the very nature of the taxing power itself. The
taxing power has very distinct and positive limitations some of which inhere in its very nature and exist
whether declared or not declared in the written constitution.

(D-PINES)

1. Double taxation

Kinds of double taxation:

i. Direct Duplicate Taxation, this is objectionable and prohibited because it violates the
consitutional provision on uniformity and equality. It means:
- Taxing twice
- By the same taxing authority
- Within the same jurisdiction or taxing district
- For the same purpose
- In the same year or taxing period
- Same kind or character of tax

ii. Indirect Duplicate Taxation, is not legally objectionable. It extends to all cases in which there is a
burden of two or more pecuniary imposition but imposed by different taxing authorities.

ii. Public purpose

Proceeds from tax must be used for:

i. Support of the government.

ii. Some of the recognized objects of government.
iii. To promote the welfare of the community (not individuals).

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iii.International comity or treaty - a State cannot tax another State based on the principle of Sovereign
Equality among States. E.g. tax law passed imposing taxes on foreign ambassadors is not a valid law.

iv.Non-delegability of the Taxing power - Power of taxation is purely legislative, hence the power cannot
be delegated either to the executive or judicial departments. The limitation arises from the doctrine of
separation of powers among the three branches of the government.

Exceptions to the rule against the delegation of the taxing power:

1. Delegation to the President, subject to some limitations and restrictions, to fix within specified
limits, tariff rates and tonnage or wharfage duties and other duties and imposts.
2. Delegation to local governments the power to create its own sources of revenue and to levy
taxes, subject to such limitations as may be provided by law.
3. Delegation to administrative agencies certain aspects of the taxing process that are not
legislative such as:
-the power to fix value of property for
- purposes of taxation pursuant to fixed rules the power to assess and collect taxes.

V. Exemption of the government

i. Agencies performing govemmental functions are tax exempt unless expressly taxed

ii. Agencies performing proprietary functions are subject to tax unless expressly exempted. GOCCS
performing proprietary functions are subject to tax, however the following are granted exemptions:

- Government Service Insurance System (GSIS)

- Social Security System (SSS)

- Philippine Health Insurance Corporation (PHIC)

- Local water districts (LWD's) Under CREATE Law: Home Development

- Mutual Fund (HDMF; also known as Pag ibig)

vi.Situs of taxation or territoriality - the taxing power of a country is limited to person and property
within and subject to its jurisdiction.

Place of taxation

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i. The state where the subject to be taxed has a situs may rightfully levy and collect the tax. ii. The situs is
necessarily in the state which has jurisdiction or which exercises dominion over the subject in question.

Factors to consider in determining Situs of taxation

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

ii. Nature of the tax
iii. Citizenship
iv. Residence of the taxpayer

Application of Situs of Taxation

 Persons: Residence of the taxpayer

 Real Property: Location
 Tangible Personal Property: Location
 Intangible Personal Property: Domicile of the owner

NOTE: Shares of stock in a domestic corporation of a nonresident alien are taxable in the Philippines
because said shares receive the protection and benefit of the Philippine laws

 Income: Residence, or citizenship, or source of income

 Business: Place of the business

NOTE:

 Occupation: where the occupation is engaged in.

 Transaction: where the transaction took place.
 Gratuitous Transfer of Property: residence or citizenship of the taxpayer or location of the
property

2. Constitutional Limitations on the Taxing Power

-the following provisions may be said to be limitations prescribed in the Constitution on the
taxing power of the government.
a) Observance of due process of law
b) Equal protection of law
c) Uniformity in taxation
d) Progressive scheme of taxation

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e) Non-imprisonment for non-payment of poll tax

f) Non-impairment of the obligations of contracts
g) Free-worship clause
h) Exemption of charitable institutions, churches, parsonages, or convents appurtenant
thereto, mosques, and non-profit cemeteries, and all lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or 1educational purposes.
i) Exemption from taxes of the revenues and assets of non-profit, non-stock educational
institutions including grants, endowments, donations or contributions for educational
purposes.
j) Non-appropriation of public funds or property for the benefit of any church, sect or system
of religion, etc.
k) No money shall be paid out of the Treasury except in pursuance of an appropriation made by
law.
l) Concurrence of a majority of ALL members of Congress for the passage of a law granting tax
exemption
m) Non-diversification of tax collections
n) The President shall have the power to veto any particular item (s) in an appropriation,
revenue or tariff, but the veto shall not affect the item (s) to which no objection has been
made.
o) Non-impairment of the jurisdiction of the Supreme Court to review tax cases
p) Appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments.
q) Each local government unit shall exercise the power to create its own sources of revenue
and shall have a just share in the national taxes.

L. TAX LAWS
NATURE OF INTERNAL REVENUE LAWS - 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.

CONSTRUCTION OR INTERPRETATION OF TAX LAWS IN CASE OF DOUBT OR AMBIGUITY

1. Tax statutes are construed strictly against the government. Taxes, being burdens, are not to be
presumed beyond what the statute expressly and clearly declares.
2. Provisions granting tax exemptions are construed strictly against the taxpayer claiming tax
exemption.

APPLICATION OF TAX LAWS

General rule:
Tax laws are prospective in operation because the nature and amount of the tax could not be
foreseen and understood by the taxpayer at the time the transactions which the law seeks to tax
was completed.

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Exception:
While it is not favored, a statute may nevertheless operate retroactively provided it is expressly
declared or is clearly the legislative intent. But a tax law should not be given retroactive
application when it would be harsh and oppressive.

M. SOURCES OF TAX LAWS

i. Constitution
ii. Tax Codes such as the National Internal Revenue Code, Tariff and Customs Code, and
portion of the Local Government Code
iii. Statutes like RA 1125 (an Act Creating the Court of Tax Appeals), RA 7716 (E-VAT Law),
RA 8424 (Tax Reform Act of 1997), RA 10963 (TRAIN law)
iv. Presidential Decrees
v. Executive Orders
vi. Court Decisions
vii. Revenue regulations promulgated by the Department of Finance
viii. Administrative issuances of the BIR like Revenue Memorandum Circulars, and those
of the Bureau of Customs like Customs Memorandum Orders
ix. BIR Rulings
x. Local Tax Ordinances
xi. Tax Treaties and Conventions with Foreign Countries

N. CLASSIFICATION OF TAXES
1. According to Subject Matter:
a) Personal, Poll or Capitation Tax – tax of a fixed amount imposed upon individual, whether
citizens or not, residing within a specified territory without regard to their property or the
occupation in which he may be engaged (e.g. basic community tax)

b) Property Tax – 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 Tax – 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, VAT)

2. According to Who Bears the Burden:

a) Direct Tax – imposed on the person obliged to pay the same and this burden cannot be shifted
or passed on to another. (e.g. income tax, estate tax, donor’s tax)

b) Indirect Tax – the payment is demanded from a person who is allowed to transfer the burden
of taxation to another. (e.g. VAT)

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3. According to Determination of Amount:

a) Specific Tax – this is a fixed amount based on volume, weight or quantity of goods as
measured by tools, instruments or standards. (e.g. excise tax on cigars and liquors)
b) Ad Valorem Tax – this imposition is based on the value of the property subject to tax. (e.g. VAT,
income tax, donor’s tax and estate tax)

4. According to Purpose:
1. Fiscal/General/Revenue Tax – levied without a specific or pre-determined purpose. (e.g.
income tax, donor’s tax and estate tax)

2. Regulatory/Special/Sumptuary Tax – those intended to achieve some social or economic

goals. (e.g. tariff and certain duties on imports)

5. According to Jurisdiction/Scope or Authority

a. National Tax – imposed by the National Government

NATIONAL INTERNAL REVENUE TAXES UNDER THE ADMINISTRATION OF THE BIR:

a) Income Tax
b) Estate and donor’s tax
c) Value-added tax
d) Other percentage taxes
e) Excise taxes
f) Documentary stamp taxes
b. Local Tax - imposed by municipal corporations (e.g. real estate tax)

6. According to Graduation or Rate

a. Proportional/Flat Rate Tax – unitary or single rate. (e.g. VAT)
b. Progressive/Graduated Tax – as the tax base grows, the tax rate increases. (e.g. income tax on
individuals)
c. Regressive Tax – the tax rate increases as the tax base decreases.

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