YAL-CBA 2nd Year Batch Council

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Taxation

TAXATION

Module 1: Basic Principles

Learning objectives
1. Nature, scope, classification, and
essential characteristics
2. Principles of sound tax system
3. Limitations on the power of taxation
4. Tax evasion vs. tax avoidance
5. Situs / place of taxation
6. Double taxation
7. Legislation of tax laws
The Inherent Powers of the State (PET)
Police Power - it is the power to enact laws
to promote the general welfare of the
people.
Eminent Domain - it is the power to take
private property for public use upon
payment of just compensation.
Taxation Power - it is the power to take
property (generally money) for the support
of the government and for public purpose.
Similarities Among Inherent Powers of
the State
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

Distinctions Among Inherent Powers of the State

Police Power Eminent Domain Taxation Power

1. Scope Regulates both liberty Affects only property Affects only property
and property rights rights

2. Authority Exercised only by the May be exercised by Exercised only by the

Government private entities Government

3. Purpose Promotion of general For public use For the support of the
welfare Government

4. Persons Community or a class Only the owner of a Community or a class

Affected of individuals private property of individuals

5. Effect No transfer of title; There is a transfer of Contribution becomes

there may just be a title to property part of public fund
restraint on the
injurious use of
property

6. Type of Property is noxious or Property is Property is

Notes compiled by: Kyna D. Hosillos

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Taxation

Property intended for a wholesome and is wholesome and is

noxious purpose and devoted to public use devoted to public use
as such taken and or purpose. or purpose.
destroyed.

7. Benefits Compensation is the Compensation is the Compensation is the

Received intangible, altruistic full and fair protection and public
feeling that the equivalent (FMV) of improvements
individual has the property taken. instituted by the
contributed to the government for the
public good. taxes paid.

8. Amount of Sufficient to cover No imposition. The No limit

Imposition cost of the license owner is paid Fair
and the necessary Market Value (FMV)
expenses of police of his property
surveillance and
regulation

Purposes of Taxation unlimited. It is so comprehensive that in the

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)
a. Regulation
b. Reduction of social inequality
c. Encourage economic growth
d. Promotion of general welfare
Nature or Characteristics of Taxation
1. Inherent Power
2. Legislative in Character
3. Subject to Inherent and
Constitutional Limitations
In the absence of inherent and constitutional
limitations, the power to tax is
comprehensive, plenary, supreme, and
words of Justice Marshall, the power to tax
includes the power to destroy.
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.
2. Constitutional Limitations
Inherent Limitations (D-PINES)
1. Double Taxation
a. Direct Duplicate Taxation - this
is objectionable and prohibited
because it violates the
constitutional provision on
uniformity and equality. It means:
● Taxing twice
● By the same taxing authority

Notes compiled by: Kyna D. Hosillos

 YAL-CBA 2nd Year Batch Council
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Taxation

● Within the same jurisdiction wharfage duties and other duties

or taxing district and imposts.
● For the same purpose b. Delegation to Local
● In the same year or taxing Governments - the power to
period create its own sources of
● Same kind or character of tax revenues and to levy taxes,
subject to such limitations as
b. Indirect Duplicate Taxation - is may be provided by law.
not legally objectionable. It c. Delegation to Administrative
extends to all cases in which Agencies - certain aspects of
there is a burden of two or more the taxing process that are not
pecuniary imposition but legislative such as:
imposed by different taxing ○ The power to fix value of
authorities. property for purposes of
taxation pursuant to fixed
2. Public Purpose rules
● Proceeds from tax must be used for: ○ The power to assess and
○ Support of the government; collect taxes
○ Some of the recognized
objects of government; 5. Exemption of the Government
○ To promote the welfare of the ● Under this limitation, the following
community (not individuals). rules will apply:
a. Agencies performing
3. International Comity or Treaty governmental functions - are
● A State cannot tax another State tax exempt unless expressly
based on the principle of Sovereign taxed
Equality among States. b. Agencies performing
proprietary functions - are
4. Non-delegability of the Taxing subject to tax unless expressly
Power exempted
● Power of taxation is purely c. GOCCs performing
legislative, hence the power cannot proprietary functions - are
be delegated either to the executive subject to tax, however the
or judicial departments. The following are granted
limitation arises from the doctrine of exemptions:
separation of powers among the ○ Government Service
three branches of the government. Insurance System (GSIS)
● Exceptions to the rule against the ○ Social Security System
delegation of the taxing power: (SSS)
a. Delegation to the President - ○ Philippine Health Insurance
subject to some limitations and Corporation (PHIC)
restrictions, to fix within specified ○ Local water districts (LWD’s)
limits, tariff rates and tonnage or

Notes compiled by: Kyna D. Hosillos

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Taxation
6. 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:
a) The state where the subject
to be taxed has a situs may
rightfully levy and collect the
tax.
b) 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:
a) Subject matter (person,
property, activity)
b) Nature of the tax
c) Citizenship
d) Residence of the taxpayer
Application of Situs of Taxation:
a) Persons - residence of the
taxpayer
b) Real Property - location
c) Tangible Personal Property -
location
d) Intangible Personal Property
- domicile of the owner
● 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.
e) Income - residence, or
citizenship, or source of
income
Notes compiled by: Kyna D. Hosillos
f) Business - place of the
business
g) Occupation - where the
occupation is engaged in
h) Transaction - where the
transaction took place
i) Gratuitous Transfer of
Property - residence or
citizenship of the taxpayer or
location of the property
Constitutional Limitations
The following provisions may be said to be
limitations prescribed in the Constitution on
the taxing power of the government.
1. Observance of due process of law
2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment
of poll tax
6. Non-impairment of the obligations of
contracts
7. Free-worship clause
8. 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
educational purposes.
9. Exemption from taxes of the
revenues and assets of non-profit,
non-stock educational institutions
including grants, endowments,
donations, or contributions for
educational purposes.
10. Non-appropriation of public funds or
property for the benefit of any
church, sect, or system of religion,
etc.
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Taxation
11. No money shall be paid out of the
Treasury except in pursuance of an
appropriation made by law.
12. Concurrence of a majority of ALL
members of Congress for the
passage of a law granting tax
exemption
13. Non-diversification of tax collections
14. 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.
15. Non-impairment of the jurisdiction of
the Supreme Court to review tax
cases
16. Appropriations, revenue, or tariff bills
shall originate exclusively in the
House of Representatives but the
Senate may propose or concur with
amendments.
17. 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.
Theories on Taxation
1. 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.
2. Lifeblood Doctrine - Taxes are the
lifeblood of the government without
which it can neither exist nor endure.
3. 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
Notes compiled by: Kyna D. Hosillos
between the government and the
taxpayer).
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.
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;
6. It is assessed in accordance with
some reasonable rule of
apportionment.
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.
Stages or Process of Taxation (LAP)
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Taxation
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.
Basic Principles of a Sound Tax System
(FAT)
1. Fiscal Adequacy - The sources of
government revenue must be
sufficient to meet government
expenditures and other public
needs.
2. Administrative Feasibility - Tax
laws must be capable of convenient,
just, and effective administration–
free from confusion and uncertainty.
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.
SOURCES OF TAX LAWS
1. Constitution
2. Tax Codes such as the National
Internal Revenue Code, Tariff and
Customs Code, and portion of the
Local Government Code
3. Statutes
Notes compiled by: Kyna D. Hosillos
● Examples:
○ RA 11534, otherwise known as
Corporate Recovery and Tax
Incentives for Enterprises
(CREATE)
○ RA 7716 (E-VAT Law)
○ RA 8424 (Tax Reform Act of
1997)
4. Presidential Decrees
5. Executive Orders
6. Court Decisions
7. Revenue regulations promulgated by
the Department of Finance
8. Administrative issuances of the BIR
like Revenue Memorandum
Circulars, and those of the Bureau of
Customs like Customs
Memorandum Orders
9. BIR Rulings
10. Local Tax Ordinances
11. Tax Treaties and Conventions with
Foreign Countries
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.
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Taxation
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.
CLASSIFICATION OF TAXES
According to Subject Matter
1. Personal, Poll, or Capitation Tax -
tax of a fixed amount imposed upon
individual, whether citizens or not,
residing within a specified terrier
without regard to their
property or the occupation in which
he may be engaged (e.g. basic
community tax)
2. 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)
3. 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)
According to Who Bears the Burden
Notes compiled by: Kyna D. Hosillos
1. 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)
2. Indirect Tax - the payment is
demanded from a person who is
allowed to transfer the burden of
taxation to another. (e.g. VAT)
According to Determination of Amount
1. Specific Tax - this is determined
based on volume, weight, or quantity
of goods as measured by tools,
instruments, or standards. (e.g.
excise tax on cigars and liquors)
2. 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)
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)
According to Jurisdiction / Scope or
Authority
1. 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
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Taxation

f. Documentary stamp taxes 3. Regressive Tax - the tax rate

increases as the tax base
2. Local Tax - imposed by municipal decreases.
corporations (e.g. real estate tax).

According to Graduation or Rate

1. Proportional / Flat Rate Tax -
unitary or single rate. (e.g. VAT)
2. Progressive / Graduated Tax - as
the tax base grows, the tax rate
increases. (e.g. income tax on
individuals)

TAX DISTINGUISHED FROM OTHER CHARGES AND FEES

1. Differentiate Tax from Toll

TAX TOLL

- It is a demand of sovereignty - It is a demand of proprietorship

- It is one’s support for the government
- It is imposed only by the government
- It is based on governmental needs
- It is a compensation for the use of
somebody else’s property
- It may be imposed by the government
or private individuals
- It is determined by the cost of property
or improvement thereon

2. Differentiate Tax from Penalty

TAX PENALTY

- It is imposed to raise revenue - It is imposed to regulate conduct

- It is imposed only by the government
- It arises from law
- Generally payable in money
through punishment and suppression
of injurious act
- May be imposed by the government or
by private individuals
- It may arise from law or contract
- May be paid in money or in kind

3. Differentiate Tax from Special Assessment

TAX SPECIAL ASSESSMENT

Notes compiled by: Kyna D. Hosillos

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- Levied on business, interests, - Levied on land

transactions, rights, persons,
properties, or privileges
- May be made a personal liability of the
person assessed
- Based on necessity with no hope of
direct or immediate benefit to the
taxpayer
- Is of general application
- Cannot be made the personal liability
of the person assessed, because it is
the land that answers for the liability
- Based wholly on benefits received
- It is exceptional in application for the
recovery of cost and / or maintenance
of improvement

4. Differentiate Tax from License Fee

TAX LICENSE FEE

- Levied in the exercise of the taxing
power
- The purpose is to generate revenue
- Generally, amount is unlimited
- Imposed on person, property, right, or
transaction
- Non-payment does not make the
business illegal
- Emanate from the police power of the
state
- The purpose is regulatory
- Limited to the necessary expenses of
regulation and control
- Imposed on the exercise of a right or
privilege
- Non-payment makes the business
illegal

5. Differentiate Tax from Custom Duties

TAX CUSTOM DUTIES

- Imposed on person, property, right, or - Imposed on imported or exported

transaction goods
- It comprehends more than the term - It is also a tax
custom duties

6. Differentiate Tax from Debt

TAX DEBT

- Based on law - Based on contract

- Not assignable - Assignable
- Payable in money - Payable in kind or in money
- Not subject to set-off - Subject to set-off
- Non-payment may result to - No imprisonment
imprisonment - Interest depend upon the stipulation of
- Bears interest only if delinquent the parties

7. Differentiate Tax from Subsidy

TAX SUBSIDY

Notes compiled by: Kyna D. Hosillos

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Taxation

Subsidy is:
- A pecuniary aid directly granted by the government to an individual or private
commercial enterprise deemed beneficial to the public.
- NOT A TAX although tax may have to be imposed to pay it.

8. Differentiate Tax from Revenue

TAX REVENUE

- Amount imposed in the exercise of - Refers to all the funds or income

taxation power derived by the government, whether
from tax or any other source
- Amount collected

9. Differentiate Tax from Internal Revenue

Internal Revenue means taxes imposed by the legislature other than duties on imports
and exports.

10. Differentiate Tax from Tariff

TARIFF - may be used in one of three (3) senses:

1. A book of rates drawn usually in alphabetical order containing the names of several
kinds of merchandise with the corresponding duties to be paid for the same; or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation (or exportation) of
goods.

*The term tariff and customs duties are used interchangeably in the Tariff and Customs Code.

SYSTEMS OF INCOME TAXATION

1. Global System - All items of gross
income and deductions are reported
in one income tax return and the
applicable tax rate is applied on the
tax base.
2. Schedular System - Different types
of income are subject to different
sets of graduated or flat income tax
rates.
ESCAPE FROM TAXATION
1. Evasion or Dodging - the taxpayer
uses unlawful means to evade or
lessen the payment of tax.
2. Avoidance - also called tax
minimization; it is the reduction or
totally escaping payment of tax
through legally permissible means.
3. Shifting - it is the transfer of tax
burden to another. The imposition of
tax is transferred from the statutory
taxpayer to another without violating
the law.
● Impact
○ Is the point at which a tax is
originally imposed
● Incidence

Notes compiled by: Kyna D. Hosillos

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Taxation

○ Is the point of which the tax
burden finally rests or settles
down
● Three Kinds of Shifting:
○ Forward shifting
○ Backward shifting
○ Onward shifting
4. Capitalization - the seller is willing
to lower the price of the commodity
provided the taxes will be
shouldered by the buyer.
2. Set-off Taxes - taxes are not
subject to set-off or legal
compensation because the
government and the taxpayer are
not mutual creditors and debtors of
each other.
3. Taxpayer Suit - this provides that a
taxpayer suit can only be allowed if
the act involves a direct and illegal
disbursement of public funds derived
from taxation.

5. Transformation - the manufacturer

absorbs the additional taxes
imposed by the government without
passing it to the buyers for fear of
loss his/its market. Instead, he/it
increases quantity of production,
thereby turning their units of
production at a lower cost resulting
to the transformation of the tax into a
gain through the medium of
production.

6. Exemption - it is an immunity,
privilege, or freedom from payment
of a charge or burden to which
others are obliged to pay.

OTHER DOCTRINES / RULES IN

TAXATION

1. Equitable Recoupment - claim for

tax refund which is prevented by
prescription may be set off against
current tax assessment.

Notes compiled by: Kyna D. Hosillos