Taxation - defined as a state process, a legislative process and a mode of government cost

of distribution.
- As a state process - taxation is an inherent power of the state to enforce a
proportional contribution from its subject for public purpose.
- As a legislative process - taxation is a process of levying taxes by the legislative of
the state to enforce proportional contribution from its subject for public purpose.
- As a mode of cost distribution - taxation is mode by which the state allocates its
cost or burden to its subjects who were benefited by its spending.
GOVERNMENT CANNOT EXIST WITHOUT TAXATION
Basis of taxation - the government provides benefits to the people in the form of public
service and the people provide the fund that finance the government.
Theory of taxation - every government provides a vast amount of public services including
defense, public order and safety, health, education, and social protection among others.
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Theories of Cost Allocation - taxation is a mode of allocating government costs or burden
to the people. In distributing cost or burden, the government regards the following general
consideration in the exercise of its taxation power.
- Benefit Received Theory - presupposes that the more benefit one receives from the
government, the more taxes he should pay.
- Ability to Pay Theory - taxpayers should be required to contribute based on their
relative capacity to sacrifice for the support of the government.
- Vertical Equity - the extent on ones ability to pay is directly proportional to
the level of his tax base.
- Horizontal Equity - requires consideration of the particular circumstances of
the taxpayer.
The Lifeblood Theory - taxes are essential and indispensable to the continued subsistence
of the government. Without taxation, the government will be paralyzed for lack of motive
power to activate or operate it.
WITHOUT TAXATION, GOVERNMENT WILL BE PARALYZED
Implication of the lifeblood theory
1. Tax is imposed even in the absence of a constitutional grant.
2. Claims for tax exemption is 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;
- Income received in advance is taxable upon receipt
- Deduction for capital expenditures and prepayments is not allowed as it
effectively defers the collection of income tax.
- A higher tax base if preferred when the tax object has multiple tax bases.
Subject and Object of Taxation
- Person
- Property
- Privilege
Inherent Powers of the State
1. Police Power - is the general power of the state to enact laws to protect the
well-being of the people.
2. Eminent Domain - is the power of the state to take private properties for public use
after paying just compensation.
 3. Taxation - is the power of the state to enforce proportional contribution from its
subject to sustain itself.
The Limitations of the Taxation Power
Inherent Limitations - these are limitations or restrictions that spring from its very own
power. While the power of taxation is inherent in sovereignty, there are also limitations or
safeguards which spring from its own inherent power.
Territoriality of Taxation - public services are normally provided within boundaries of the
state. Thus, tax can be imposed only within the territories of the state.
Exemption 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 residents are taxable on transfers of properties located within or outside
the Philippines.
International Comity - pertains to mutual courtesy or reciprocity between states. It is a
basic principle of international law that all states are equally sovereign.
Public Purpose - tax is intended for the common good. Taxation must be exercised
absolutely for public purposes. It cannot be exercised to further any private interest.
Exemption of the Government - the government can exercise power upon anything
including itself. However, the government normally does not tax itself as this will not raise
additional funds but will only impute additional costs.
Non-delegation of the Taxing Power - the power to tax is purely legislative and it cannot be
delegated by the legislature to the executive or judicial department of the government.
Exemption to the Rule of Non-delegation
1. Under the constitution, local government units are allowed to exercise power to tax to
enable them to exercise their fiscal autonomy
2. Under the Tariff and Custom Code, the president is empowered to fix the amounts of
tariffs to be flexible to trade conditions.
3. Other cases that require expedient and effective administration implementation of
assessment and collection of taxes.
Constitutional Limitations - the constitution of a country should contain provisions to limit
the authority of the government so that they don’t override the constitution and act in an
arbitrary manner.
Observance of Due Process of Law - no one should be deprived of his life, liberty, or
property without due process of law. Tax laws should neither be harsh or oppresive.
Aspects of Due Process
1. Tax must be imposed only for public purpose, collected only under authority of a valid
law and only taxing power of jurisdiction. An assessment without a legal basis
violates the requirement of due process.
2. There should be no arbitrariness in assessment and collection of taxes and the
government shall observe that taxpayer’s right to notice and hearing.
Equal Protection of the Law - no person shall be denied the equal protection of law.
Taxpayers should be treated equally both in terms of rights conferred and obligations
imposed.
Uniformity Rule in Tax - the rule of taxation shall be uniform and equitable. Tax under
dissimilar circumstances should not be taxed the same.
Progressive System of Taxation - the tax rate should be based on the taxpayer’s ability to
pay.
Non-imprisonment for non payment of debt or poll tax - no one shall be imprisoned
because of his poverty and no one shall be imprisoned for mere inability to pay debts.
Non-impairment of Obligations and Contracts - the state should set an example of good
faith among its constituents. It should not set aside its obligations from contracts by the
exercise of its taxation power.
Free Worship Rule - the Philippines adopts free exercise of religion and does not subject its
exercise to taxation.
Situs of Taxation - place of taxation.
Taxes - are enforced proportional contribution from persons and property levied by the
lawmaking body of the state by virtue of its sovereignty for the support of the government
and all public needs.
Application of Situs of Taxation
Business - are subject to tax in the place where business is conducted/operated.
Income - income tax is subject to tax in the taxpayer’s residence, or citizenship, or place
where the income was earned.
Property - properties are taxable on their current location.
● Real Property - is a parcel of land and everything that is permanently attached to the
land.
● Personal Property - movable properties
● Intangible Personal Property - taxable on the domicile of the owner unless he/she
acquired a situs elsewhere.
Person - persons are taxable in the place of their residence.
Transaction - taxable in the place where the transaction is completed.
Gratuitous Transfer of Property - taxable in the taxpayer’s residence or citizenship or
location of the property.
Fundamental Doctrines of Taxation
Marshall Doctrine - “The power to tax involves the power to destroy.” Taxation power can
be used as an instrument of police power. It can be used to discourage or prohibit
undesirable activities or occupation.
Holme’s Doctrine - “Taxation power is not the power to destroy while the court sits.”
Taxation power may be used to build or encourage beneficial activities or industries by the
grant of tax incentives.
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.
Non-compensation or Set-off - taxes are not subject to automatic set-off or compensation.
The taxpayer cannot delay payment of tax to wait for the resolution of the law suit involving
his pending claim against the government.
Non-assignment of Taxes - tax obligation cannot be transferred to another entity by
contract. Contracts executed by the taxpayer to such effect shall not prejudice the right of
the government to collect.
Imprescriptivity in Taxation - prescription is the lapsing of a right due to the passage of
time.
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.
Judicial Non-interference - generally, courts are not allowed to issue injunction against the
government’s pursuit to collect tax as this would unnecessarily defer tax collection.
Strict Construction of Tax Laws - when the language of the law is clear and categorical,
there is no room for interpretation, there is only room for application.
Strict Construction of Tax Laws - tax laws are not open for interpretation. It must be clear,
not vague.
● Vague Tax Laws - means no tax law. Obligation arising from law is not presumes
● Vague Exemption Laws - means no exemption law. Tax exemption cannot arise
from vague inference.
Double Taxation - occurs when the same taxpayer is taxed twice by the same tax
jurisdiction for the same thing.
Tax Amnesty - amnesty 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 a society
with a clean slate.
Tax Condonation - is forgiveness of the tax obligation of a certain taxpayer under certain
justifiable grounds. This is also referred to as tax remission.
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Taxation Law - refers to any law that arises from the experience of the taxation power of the
state.
Tax Laws - these are laws that provide for the assessment and collection of taxes.
● NIRC
● The tariff and custom code
● The local tax code
● The real property tax code
Tax Exemption Laws - these are the laws that grant certain immunity from taxation.
● The Minimum Wage Law
● The Omnibus Investment Code of 1987 (E.O. 226)
● BMBE Law
● Cooperative Development Act
Sources of Taxation Laws
● Constitution
● Statutes and Presidential decrees
● Judicial Decisions or Case Laws
● Executive Orders or Batas Pambansa
● Administrative Issuance
● Local Ordinances
● Tax treaties and Conventions with foreign countries
● Revenue Regulations
Elements of Valid Tax
- Tax must be levied by the taxing power having jurisdiction over the object of taxation.
- Tax must not violate Constitutional and inherent limitations.
- Tax must be uniform and equitable
- Tax must be for public purpose
- Tax must be proportional in character
- Tax is generally payable in money
Classification of Taxes
● As to purpose
○ Fiscal or revenue tax
○ Regulatory
○ Sumptuary
 ● As to subject matter
○ Person
○ Property
○ Privilege
● As to incidence
○ Direct tax
○ Indirect tax
● As to amount
○ Specific tax
○ Ad valorem
● As to rate
○ Proportional tax
○ Progressive or graduated tax
○ Regressive tax
○ Mixed tax
● As to imposing authority
○ National tax
○ Local tax
National Tax
● Income tax
● Estate tax
● Donor’s tax
● Value added tax
● Other percentage tax
● Excise tax
● Documentary stamp tax
Local Tax
● Real property tax
● Professional tax
● Business taxes, fees, and charges
● Community tax
● Tax on banks and other financial institutions
Tax System - refers to the methods or schemes of imposing, assessing, and collecting
taxes.
Type of Tax System according to imposition
● Progressive
● Proportional
● Regressive
Type of Tax System according to impact
● Progressive - emphasizes direct tax
● Regressive - emphasizes indirect tax
The Principle of Sound Tax System
Fiscal Adequacy - requires that the source of government funds must be sufficient to cover
government costs.
Theoretical Justice - suggests that taxation should consider the taxpayer’s ability to pay. It
also suggests that the exercise of taxation should not be oppressive, unjust, or confiscatory.
Administrative Feasibility - suggests that tax laws should be capable of efficient and
effective administration to encourage compliance.
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INCOME TAXATION
Income - is regarded as the best measure of a taxpayer's ability to pay tax. It is an excellent
object of taxation in the allocation of government costs.
Gross Income - simply means taxable income in layman’s terms. Under the NIRC however,
the term “taxable income” refers to certain items of gross income less deductions and
personal exemption allowable by law.
Elements of Gross Income
● It is a return on capital that increases net worth.
● It is a realized benefit.
● It is not exempted by law, contract, or treaty.
Return on Capital - capital means any wealth or property. Gross income is a return of
wealth property that increases the taxpayer’s net worth.
Capital Items Deemed With Infinite Value
1. Life - the value of life is immeasurable by money. Under Sec. 32 of NIRC proceeds of
life insurance policies paid to the heirs or beneficiaries upon death of the insured,
whether in a single sum or otherwise, are exempt from income taxation.
2. Health - Any compensation received in consideration for the loss of health such as
compensation for personal injuries or tortuous acts is deemed a return of capital.
3. Human Reputation - the value of one’s reputation cannot be measured financially.
Any indemnity received as a compensation for its impairment is deemed a return of
capital exempt from income tax.
Realized Benefit - the term “benefit” means any form of advantage derived by the taxpayer.
There is benefit when there is an increase in the net worth of the taxpayer. The term
“realized” means earned. It requires that there is a degree of undertaking or sacrifice from
the taxpayer to be entitled to the benefit.
Types of Transfer
● Bilateral
○ Sale
○ Barter
○ These are also referred to as “onerous transactions”
● Unilateral
○ Succession
○ Donation
○ These are also referred to as “gratuitous transactions”
● Complex Transactions - which are partly gratuitous and partly onerous. These are
commonly referred to as “transfers for less than full and adequate consideration”.
Unrealized Gains or Holding Gains - have not yet materialized in an exchange transaction.
Examples of Unrealized Gains or Holding Gains
● Increase in value of investments in equity or debt securities
● Increase in value of real properties held (revaluation increment)
● Increase in value of foreign currencies held or receivable
● Decrease in value of foreign currencies denominated debt by virtue of favorable
fluctuation in exchange rates
● Birth of animal offspring, accruals of fruit in an orchard or growth of farm vegetables
● Increase in value of land due to the discovery of mineral reserves.
Types of Income Taxpayers
● Natural Being
○ Citizen
■ Resident Citizen
■ Non-resident Citizen
○ Alien
■ Resident Alien
■ Non-resident Alien
■ ETB
■ NETB
● Artificial Being
○ Domestic Corporation
○ Foreign Corporation
■ Resident Foreign Corporation
■ Non-resident Foreign Corporation
Citizens - under the constitution, citizens are:
● Those who are citizens of the Philippines at the time of adoption of the Constitution
on February 2, 1987
● Those whose fathers and mothers are citizens of the Philippines
● Those born before January 17, 1973 of Filipino mothers who elected Filipino
citizenship upon reaching the age of majority
● Those who are naturalized in accordance with the law
Resident Citizen - a Filipino residing in the Philippines.
Non-resident Citizen - a citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite intention to reside
therein;
Resident Alien - an individual who is residing in the Philippines but is not a citizen thereof;
Non-resident Alien - an individual who is not residing in the Philippines and who is not a
citizen thereof; NRA ETB, NRA NETB
Estates - refers to the properties, rights, and obligation of a deceased person not
extinguished by his death.
Trusts - is an arrangement whereby one person transfer property to another person, which
will be held under the management of a third party.
Domestic Corporation - owned by Filipino
Foreign Corporation - owned by other nationalities
● Resident Foreign Corporation
● Non-resident Foreign Corporation
Situs of Income - is the place of taxation of income. It is the jurisdiction that has the
authority to impose tax upon the income.
Gain on Sale of Properties
● Personal Properties
○ Domestic Securities - presumed earned in the Philippines
○ Other Personal Properties - earned in the place where the property is sold.
● Real Properties - earned where the property is located.
Dividend Income
● Domestic Corporation - presumed earned within
● Foreign Corporation
○ RFC - depends on the predominance test
 ○ NRFC - earned abroad
Merchandising Income - earned where the property is sold.
Manufacturing Income - earned where the goods are manufactured and sold.
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