CAVITE STATE UNIVERSITY INCOME TAXATION

CCAT CAMPUS

LESSON 1
Fundamental Principles of Taxation

Instructional Objectives

After the completion of the lesson, students will be able to:

1. Comprehend the concept of taxation and its necessity for every government.
2. Understand the inherent power of the state.
3. Distinguish the inherent and constitutional limitation of taxation power.
4. Identify the various escapes from taxation.

Inherent power of the state

A government has its basic needs and rights which co-exist with its creation. It has rights to
sustenance, protection and properties. The government sustains itself by the power of taxation, secures itself
and the well-being of its people by police power, and secures its own properties to carry out its public services
by the power of eminent domain.
These rights, dubbed as “powers” are natural, inseparable and inherent to every government. No
government can sustain or effectively operate without the powers. Therefore, the exercise of these powers by
the government is presumed understood ad acknowledged by the people from the very moment they
established their government. These powers are naturally exercisable by the government even in the absence
of an express grant of power in the constitution.
The inherent powers of the state
1. Taxation power – is the power of the state to enforce proportional contribution from its subjects to
sustain itself.
2. Police power – is the general power of the state to enact laws to protect the well-being of the people.
3. Eminent domain – Is the power of the state to take private property for public use after paying just
compensation.
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Similarities of the three powers of the state
1. They are all necessary attributes of sovereignty
2. They are inherent to the state
3. They are all legislative in nature
4. They are all ways in which the state interferes with private rights and properties.
5. They all exist independently of the constitution and are exercisable by the government even without
Constitutional grant. However, the Constitution may impose conditions of limits for their exercise.
6. They all 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

Inherent limitation of taxation

I. Territoriality of taxation
Public service are normally provided within the boundaries of the state. Thus, the government can only
demand tax obligations upon its subjects or residents within its territorial jurisdiction. There is no basis in
taxing foreign subjects since they do not derive benefits from our government. Furthermore, extraterritorial
taxation will amount to encroachment of foreign sovereignty.

Two-fold obligations of taxpayers

1. Filling of returns and payment of taxes
2. Withholding of taxes on expenses and its remittance to the government.
These obligations can only be demanded and enforced by the Philippine government upon its citizens and
residents. It cannot enforce these upon subjects outside its territorial jurisdiction as this would result in
encroachment of foreign sovereignty.
II. International comity
No country is powerful than the other. It is by this principle that each country observes international comity or
mutual courtesy or reciprocity between them. Hence,
1. The government do not tax the income and properties of other governments
2. Governments give primacy to their treaty obligations over their own domestic tax laws.
Embassies and consular offices of foreign governments in the Philippines including international organizations
and their non-Filipino staff are not subject to income taxes or property taxes. Under the National Internal
revenue code (NIRC), the income of foreign government and foreign-government and foreign government-
owned and controlled corporation are not subject to income tax. When a state enters into treaties with other
states, it is bound to honor the agreements as a matter of mutual courtesy with the treaty partners even if the
same conflicts with its local tax laws.
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III. Public purpose

Tax is intended for the common good. Taxation must be exercised absolutely for public purpose. It cannot be
exercised to further any private interest.
IV. Exemption of the government
Under the NIRC, government properties and income from essential public functions are not subject to taxation.
However, income of the government from its properties and activities conducted for profit including income
government owned and controlled corporations is subject to tax.
V. Non – Delegation of the taxing power
The legislative taxing power is vested exclusively in congress and is non-delegated 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. So as not to spoil the purpose of
delegation, it is held that what has been delegated cannot be further delegated.
Exceptions to the rues 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.

Constitutional limitations of taxation

I. 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 oppressive.
II. Aspects of due process
1. Substantive due process
Tax must be imposed only for public purposes, collected only under authority of a valid law and only by the
taxing power having jurisdiction. An assessment without a legal basis violates the requirements of due
process.
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. The law established procedures which must be adhered to in making
assessment and enforcing collections.
III. Equal protection of the law
No person shall be denied the equal protection of the law. Taxpayers should be treated equally both in terms of
rights conferred and obligations imposed.
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IV. 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.
V. Progressive system of taxation
Congress shall evolve a progressive system of taxation. Under the progressive system, tax rates increase as
the tax base increases. The constitution favors progressive tax as it is consistent with the taxpayer’s ability to
pay.
VI. Non-imprisonment for non-payment of debt or poll tax
As a policy, no one shall be imprisoned because of his poverty, and no one shall be imprisoned for mere
inability to pay debt.
VII. Non- impairment of obligation and contract
The state should set an example of good faith among its constituents. It should not set side its obligations from
contracts by the exercise of its taxation power. Tax exemptions granted under contract should be honored and
should not be cancelled by a unilateral government action.
VIII. Free worship rule
The Philippine government adopts free exercise of religion and does not subject its exercise its exercise to
taxation. Consequently, the properties and revenues of religious institutions such as tithes or offerings are not
subject to tax. This exemption, however, does not extend to income from properties or activities of religious
institutions that are proprietary or commercial in nature.
IX. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches
and mosques, lands, building, and improvements from property tax
The constitutional exemption from property tax applies for properties actually, directly, and exclusively (i.e.
primarily) used for charitable, religious and educational purposes. In observing this constitutional limitation, the
Philippines follows the doctrine of use wherein only properties actually devoted for religious, charitable, or
educational activities are exempt from real property tax.
X. Non-appropriation of public funds or property for the benefit of any church, sect, or system
of religion
This constitutional limitation is intended to highlight the separation of religion and the state. To support freedom
of religion, the government should not favor any particular system of religion by appropriating public funds or
property in support thereof.
XI. Exemption form taxes of the revenues and assets of non-profit, non-stock educational
institutions including grants, endowments, donations, or contributions for educational
purposes.
The constitution recognizes the necessities of education in state building by granting tax exemption in
revenues and assets that are actually, directly, and exclusively devoted for educational purposes.
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XII. Concurrence of a majority of all members of congress for the passage of a law granting tax
exemption
Tax exemption law counters against lifeblood doctrine as it deprives the government of revenues. Hence, the
grant of tax exemption must proceed only upon a valid basis as a safety net, the constitution requires the vote
of the majority of all members of congress in the grant of tax exemption.
XIII. Non-diversification of tax collections
Tax collections should be used only for public purposes. It should never be diversified or used for private
purposes.
XIV. Non-delegation of the power of taxation
The principle of checks and balances in a republican state requires that taxation power as part of lawmaking
be vested exclusively in Congress. However, delegation may be made on matters involving the expedient and
effective administration and implementation of assessment and collection of taxes also, certain aspects of the
taxing process that are non-legislative in characters and delegated.
XV. 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 raised to and be finally decided by the Supreme Court of the Philippines.
XVI. Appropriations, revenue, or tariff bills shall originate exclusively in the House of
Representatives, nut the senate may propose or concur with amendments
Laws that add income to the national treasury and those that allows spending therein must originate from the
House of Representatives, while Senate may concur with amendments. The origination of a bill by Congress
not necessarily mean that the House bill must become the final law. It was held constitutional by the Supreme
Court when senate changed the entire house version of a tax bill.
XVII. 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.
This is a constitutional recognition of the local autonomy of local governments and an express delegation of the
taxing power.

Double taxation
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Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing.
Types of Double Taxation
1. Direct double taxation
This occurs when all the elements of double taxation exists for both impositions.
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
This occurs when at least one of the secondary elements of double taxation is not common for both
impositions.
Example:
a. The national government collects income tax from a taxpayer on his income while the local
government collects community tax upon the same income.

How can double taxation be minimized?

The impact of double taxation can be minimized by any one or a combination of the following:
1. Provision of tax exemption – only one tax law is allowed to apply to the tax object while the other tax
law exempts the same tax objects
2. Allowing foreign tax credit – both tax laws of the domestic country and foreign country tax the tax object
but the tax payments made in the foreign tax law is deductible against the tax due of the domestic tax
law
3. Entering into treaties or bilateral agreements – countries may stipulate for a lower tax rates for their
residents of they engage in transactions are taxable by both of them.

Escapes from taxation

Escapes from taxation are the means 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
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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
Examples:
- Misrepresenting the nature or amount of transaction to take advantage lower taxes.

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
Examples:
- Selection and execution of transaction that would expose taxpayer to lower taxes.

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. Tax exemptions may be granted by the constitution, law, or
contract.

B. Those that do not result to loss of government revenue

1. Shifting – this is the process of transferring tax burden to other taxpayers.

Forms of shifting
a. Forward shifting - this is the shifting of tax which follows the normal flow of distribution (i.e. from
manufacturers to wholesalers, retailers to consumers). Forward shifting is common with essential
commodities and services such as food and fuel.
b. Backward shifting – this is the reverse of forward shifting. Backward shifting is common with non-
essential commodities where buyers have considerable market power and commodities with numerous
substitute products.
c. Onward shifting - this refers to any tax shifting in the distribution channel that exhibits forward shifting
or backward shifting

2. Capitalization – this pertains to the adjustments of the value of an asset caused by changes in tax
rates. For instance, the value of a mining property will correspondingly decrease when mining output is
subjected to higher taxes. This is a form of backward shifting of tax.

3. Transformation – this pertains to the elimination of waste or losses by the taxpayer to form savings to
compensate for the tax imposition or increase in taxes.
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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 state. It is an absolute forgiveness or
waiver by the government on its rights to collect and is retrospective in application.
Tax Condonation
Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. This
is also referred to as tax remission. Because they deprive the government of revenues, tax exemption, tax
refund, tax amnesty and tax condonation are construed against the taxpayer and in favor of the government.
Tax Amnesty vs Tax Condonation
Amnesty covers both civil and criminal liabilities, but condonation covers only civil liabilities of the taxpayer.
Amnesty operates retrospectively by forgiving past violations. Condonation applies prospectively to any unpaid
balance of the tax; hence, the portion already paid by the taxpayer will not be refunded.
Amnesty is also conditional upon the taxpayer paying for the government a portion of tax whereas condonation
requires no payment.

References for further reading

Banggawan, Rex B. INCOME TAXATION: Laws, Principles and Applications. 2019

Reyes, Virgilio D., A study on Income Tax Law and Accounting. 2019

Valencia, Edwin G., Roxas, Gregorio, Roxas F., INCOME TAXATION: Principles and Laws with
accounting applications. 2013

Tabag, Enrico D. CPA REVIEWER IN TAXATION with Special Topics. 2019

Outcome Based – Assessment

For Week 1:
Enumerate and explain the Inherent powers of the state.
For Week 2:
 CAVITE STATE UNIVERSITY INCOME TAXATION
CCAT CAMPUS
Explain double taxation, its elements, and its types.