Topic 1: Fundamental

Principles
Income Taxation by Enrico D. Tabag and Earl Jimson R. Garcia
 Taxation Defined
• Is the process or means by which the sovereign (independent state),
through its law-making body (legislature), imposes burdens upon subjects
and objects within its jurisdiction for the purpose of raising revenues to
carry out the legitimate objects of government.
• It is the act of levying a tax to apportion the cost of government among
those who, in some measure, are privileged to enjoy its benefits and must
therefore bear its burdens.
• It is a power inherent in every sovereign state being essential to the
existence of every government.
Taxes Defined
• Are the enforced proportional contributions or charges 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.
The Three (3) Inherent Powers of the State
• 1. Police Power – it is the power of the state for promoting public
welfare by restraining and regulating the use of liberty and property.
• 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.
Similarities 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 prescribed by the constitution.
• 3. Ways by which the State interfere with private rights and property.
• 4. Legislative in nature and character.
• 5. Presuppose an equivalent compensation received, directly or
indirectly, by the persons affected.
Purposes of Taxation
• 1. Primary: Revenue or Fiscal Purpose

• The primary purpose of taxation on the part of the government is

to provide funds or property with which to promote the general
welfare and the protection of its citizens and to enable it to finance its
multifarious activities. A government can run its administrative set up
only through public funding which is collected in the form of tax.
Purposes of Taxation cont.
• 2. Secondary: Regulatory Purpose (or Sumptuary/Compensatory)

• Often employed as a devise for regulation or control

(implementation of State’s police power) by means of which certain
effects or conditions envisioned by the government may be achieved
such as:
• a. Promotion of General Welfare
• b. Reduction of Social Inequality
• c. Economic Growth
Theory and Basis of Taxation
• 1. Theory (Authority): Lifeblood Theory or Necessity Theory

The power of taxation proceeds upon the theory that the existence of
government is a necessity (“Necessity Theory”).

It is a necessary burden to preserve the State’s sovereignty and a means to

give the citizenry an army to resist aggression, a navy to defend its shores
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.
Theory and Basis of Taxation cont.
• 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.
Theory and Basis of Taxation cont.
• 2. Basis of Taxation: Benefits Received or Reciprocity Theory

• The basis is the reciprocal duties of protection and support

between the state and its inhabitants. The state collects taxes from
the subjects of taxation in order that it may be able to perform the
functions of government. The citizens, on the other hand, pay taxes in
order that they may be secured in the enjoyment of the benefits of
organized society.
• This theory spawned the Doctrine of Symbiotic Relationship which
means taxes are what we pay for a civilized society.
Scope of the Power of Taxation
• A. Comprehensive – as it covers persons, businesses, activities,
professions, rights and privileges
• B. Unlimited- in the absence of limitations prescribed by 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 – 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
 Essential Elements of a Tax
• A. It is an enforced contribution. Payments of tax is not voluntary payment or
donation, but an enforced contribution, exacted pursuant to legislative authority.
• B. It is generally payable in money. It is a pecuniary burden payable in money which
must be in legal tender.
• C. It is proportionate in character. Payment of taxes should be based on the ability
to pay theory or theoretical justice. The use of a graduated tax rates is in
consonance with this rule.
• D. It is levied on persons, property, or the exercise of a right or privilege (subjects or
objects of taxation).
• E. It is levied by the law-making body of the state. The power of “imposing” a tax,
being purely legislative function. Congress cannot delegate such power. This
limitation arises from the doctrine of separation of powers among the three
branches of the government.
• F. It is levied for public purpose.
Aspects of Taxation
• 1. Levying or imposition of the tax which is a legislative act or
function.
• 2. Assessment or determination of the correct amount of applicable
tax.
• 3. Collection of the tax levied which is essentially administrative in
character. The national agency charged with the function of collecting
internal revenue taxes is the Bureau of Internal Revenue (BIR).
 Nature/Characteristics of the State’s Power to Tax
• 1. It is inherent in sovereignty.
• The state, having sovereignty, can enforce contribution (tax) even in the absence of a
constitutional provision because the state has the supreme power to command and enforce
obedience to its will from the people within its jurisdiction.

• 2. It is legislative in character.
• The power to tax (levying or imposition) is peculiarly and exclusively legislative in
nature. It cannot be exercised by the executive or judicial branches of the government.

• Exceptions to non-delegation rule:

• A. Delegation to the President
• B. Delegation to local government units
• C. Delegation to administrative agencies
• D. It is subject to Constitutional and inherent limitations
Nature/Characteristics of the State’s Power to
Tax cont.
• 3. Exemption of government entities, agencies and instrumentalities.
• Immunity is necessary in order that governmental functions will
not be impeded. Otherwise, the government will be taxing itself to
raise money for itself.

• 4. International comity (Polite and friendly agreement(s) among

nation(s)
• Under international law, property of a foreign state may not be
taxed by another state
Nature/Characteristics of the State’s Power to
Tax cont.
• 5. Limitation of territorial jurisdiction
• Tax laws cannot operate beyond a state’s territorial limits.
Property outside one’s jurisdiction does not receive any protection
from the state.

• 6. Strongest among the inherent powers of the state.

Classification of Taxes
• 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 local government units. The local government
unit’s power to tax is based on a constitutional grant.
 Classification of Taxes cont.
• As to subject matter or object:

• A. Personal, poll or capitation – 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. community tax).

• 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 (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.
 Classification of Taxes cont.
• As to who bears the burden:

• A. Direct – tax which is demanded from the person who also shoulders the
burden of tax or tax which the taxpayer cannot shift to another. Bothe the
incidence (liability for the payment of the tax) as well as the impact or burden
of the tax falls on the same person (e.g. income tax, estate tax, donor’s tax).
• 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 the liability for the payment of the tax falls
on one person but the burden thereof can be shifted or passed on to another
person (e.g. VAT, percentage tax, excise tax on exciseable articles).
Classification of Taxes cont.
• 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. income tax, donor’s tax,
estate tax)
Classification of Taxes cont.
• 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, 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).
Classification of Taxes cont.
• As to graduation or rate:

• A. Proportional – tax based on a fixed percentages of amount of the

property, receipts, or other basis to be taxed (e.g. value added tax, ad
valorem tax)

• 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.
Classification of Taxes cont.
• As to taxing authority:

• A. National – taxes imposed under the National Internal Revenue Code

(commonly known as the Tax Code) collected by the national government
through the Bureau of Internal Revenue (BIR) and other government agencies.
Other national taxes other than those collected by the BIR as provided for under
special laws include but 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
Classification of Taxes cont.
• As to taxing authority:

• B. Local – taxes imposed by local government units

Elements of Sound Tax System
• A. Fiscal Adequacy
• The fundamental purpose of taxation is to raise the revenue
necessary to fund public services. Consequently, it is necessary that the
sources of revenues must be adequate to meet government expenditures
and sustain the level of public services demanded by citizens and
policymakers.

• B. Theoretical Justice or Equity (“ability to pay principle”)

• Taxpayer’s ability to pay must be taken into consideration. This tax
burden should be proportionate to the taxpayer’s ability to pay.
Elements of Sound Tax System cont.
• 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. Therefore, the tax system should be as simple as
possible, and should minimize gratuitous complexity.
 Limitations on the State’s Power to Tax
• 1. Inherent Limitations – These are restrictions arising from the very nature of the
power to tax itself. Inherent limitations are those limitations which exist despite the
absence of an express constitutional provision.

• A. Purpose must be public in nature – A tax must always be imposed for a public
purpose, otherwise, it will be declared as invalid.

• B. Prohibition against delegation of the taxing power – What cannot be delegated is

the legislative “enactment/imposition/levying” of tax measure. However, as regards
to administrative implementation of a tax law (i.e., assessment, collection,
valuation of property for tax purposes), that can be delegated.

• C. Territorial limitation
 Limitations on the State’s Power to Tax cont.
• 2. Constitutional Limitations

• A. Due process of law – The power to tax should not be harsh, oppressive or
confiscatory. This limitation is also known as the right to notice and hearing.

• B. Equal protection of laws – All persons subject to legislation shall be treated alike
under similar circumstances and conditions both in the privileges conferred and
liabilities imposed. The doctrine does not require that persons or properties different
in fact be treated as though they were the same. What it prohibits is class legislation
which discriminates against some and favors others.

• C. Rule of uniformity and equity in taxation – “The rule of taxation shall be uniform
and equitable”. It requires the uniform application and operation, without
discrimination, of the tax in every place where the subject of the tax is found.
 Limitations on the State’s Power to Tax cont.
• 2. Constitutional Limitations cont.

• D. Prohibition against imprisonment for non-payment of “poll tax”

• E. Prohibition against impairment of obligation of contracts – No law impairing the

obligation of contracts shall be passed. The obligation of a contract is impaired
when its terms or conditions are changed by law or by a party without the consent
of the other, thereby weakening the position or rights of the latter. An example of
impairment by law is when a later taxing statute revokes a tax exemption based on
a contract.

• F. Prohibition against infringement of religious freedom

•

•
 Limitations on the State’s Power to Tax cont.
• 2. Constitutional Limitations cont.

• G. Prohibition against appropriation of proceeds of taxation for the use, benefit, or

support of any church.

• H. Prohibition against taxation of religious, charitable, and educational entities –

This is an exemption from real property tax only.

• 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
 Limitations on the State’s Power to Tax cont.
• 2. Constitutional Limitations cont.

• J. Others
• 1. Grant of tax exemption – no law granting any tax exemption (i.e.,
amnesties, condonations and refunds) shall be passed without the
concurrence of a majority of all Members of Congress (voting separately).
• 2. Veto of appropriation, revenue, tariff bill by the President – the President
shall have the power to veto any particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the item or items to which
he does not object.
 Limitations on the State’s Power to Tax cont.
• Others cont.

• 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

• 4. Non-impairment of the Supreme Court (SC) jurisdiction – Congress cannot

take away from the Supreme Court the power given to it by the Constitution
as the final arbiter of tax cases.

• 5. Revenue bills shall originate exclusively from the House of Representatives

Limitations on the State’s Power to Tax cont.
• Others cont.

• 6. Infringement of press freedom – Taxation constitutes an

infringement of press freedom when it operates as a prior restraint to
the exercise of this constitutional right.

• 7. Revocation of Tax Exemptions

Situs of Taxation
- Means “place” of taxation.
- It is the state or political unit which has jurisdiction to impose a
particular tax.
Factors to Consider in Determining the Situs
of Taxation
• A. Subject matter (person, property, or activity)
• B. Nature of the tax
• C. Citizenship
• D. Residence of the taxpayer
• E. Source of income
• F. Place of excise, business or occupation being taxed
Tax Distinguished from Other Terms or
Imposts
• 1. Tax vs. Toll
• A toll is a sum of money for the use of something, generally
applied to the consideration, which is paid of the use of a road, bridge
or the like of a public nature.

• 2. Tax vs. Penalty

• Penalty is a sanction imposed as a punishment for violation of
law or acts deem injurious. The violation of tax may give the right to
imposition of penalty.
 Tax Distinguished from Other Terms or Imposts
cont.
• 3. Tax vs. Special Assessment
• Special assessment is an enforced proportional contribution from
owners of lands for special benefits resulting from public improvements.

• 4. Tax vs. Revenue

• Revenue refers to all the funds or income derived by the
government, whether from tax or any other source.
Tax Distinguished from Other Terms or
Imposts cont.
• 5. Tax vs. Subsidy
• Subsidy is a pecuniary aid directly granted the government to
an individual or private commercial enterprise deemed beneficial to
the public. Subsidy is not a tax although tax may have to be imposed
to pay it.

• 6. Tax vs. Permit or License Fee

• Permit or License is a charged imposed under the police
power for purposes of regulation.
Tax Distinguished from Other Terms or
Imposts cont.
• 7. Tax vs. Debt

• 8. Tax vs. Customs Duties

• Customs duties are taxes imposed on goods exported from
or imported into a country

• 9. Tax vs. Tariff

• The term tariff and customs duties are used interchangeably
in the Tariff and Customs Code
 Double Taxation
• In its strict sense, double taxation referred to is direct duplicate taxation. In its broad
sense, double taxation is referred to as indirect double taxation. It extends to all
cases in which there is a burden of two or more impositions.

• Direct double taxation means taxing twice:

• 1. By the same taxing authority, jurisdiction or taxing district
• 2. For the same purpose
• 3. In the same year or taxing period
• 4. Same subject or object
• 5. Same kind/character of the tax

• There is indirect double/duplicate taxation if any of the elements described above is

not present
Double Taxation cont.
• The Constitution does not expressly prohibit direct double taxation.
• However, it is something not favored. Such taxation, whenever
possible, be avoided and prevented.
 Means of Avoiding or Minimizing the Burden of
Taxation
1. Shifting – is the transfer of the burden of a tax by the original payer or the one on
whom the tax was assessed or imposed to someone else. Taxes that may be
shifted: VAT, percentage taxes, excise taxes.

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 production 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”. Example:
Deliberate failure to report a taxable income or property; deliberate reduction.
 Means of Avoiding or Minimizing the Burden of
Taxation cont.
• 4. Tax Avoidance – is the exploitation by the taxpayer of legally permissible
alternative tax rates of 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 – freedom from a financial charge or burden to which others are

subjected.

• 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.
Sources of Tax Laws
• 1. Constitution
• 2. National Internal Revenue Code
• 3. Tariff and Customs Code
• 4. Local Government Code
• 5. Local tax ordinances/City or municipal tax codes
• 6. Tax treaties and international agreements
• 7. Special laws
• 8. Decisions of the Supreme Court and the Court of Tax Appeals
• 9. Revenue rules and regulations and administrative rulings and opinions
 Construction of Tax Laws
• Public purpose is always presumed.
• If the law is clear, apply the law in accordance to its plain and simple tenor.
• A Statute will not be construed as imposing a tax unless it does so clearly,
expressly and unambiguously.
• In case of doubt, it is construed most strongly against the Government, and
liberally in favor of the taxpayer.
• Provisions of a taxing act are not to be extended by implication.
• Tax laws operate prospectively unless the purpose of the legislature to give
retrospective effect is expressly declared or may be implied from the
language used.
• Tax laws are special laws and prevail over a general law.
Rule When there is Doubt in Statute or Law
• No person or property is subject to taxation unless within the terms
or plain import of a taxing statute.
• In every case of doubt, tax statutes are construed strictly against the
government and liberally in favor of the taxpayer.
• Taxes, being burdens, are not to be presumed beyond what the
statute expressly and clearly declares.
Provisions Granting Tax Exemptions
• Such provisions are construed strictly against the taxpayer claiming
tax exemption.
• When a tax is unquestionably imposed, a claim of exemption from tax
payments must be clearly shown and based on language in the law
too plain to be mistaken.
 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.

• 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 which violate the taxpayer’s constitutional rights regarding equity
and due process.
Taxpayer’s Suit
• It is one brought or filed by a taxpayer arguing the validity of a tax
statute and its enactment or the constitutionality of its alleged public
purpose.
• It is a case where the act complained of directly involves the illegal
disbursement of public funds derived from taxation.
End of Topic 1