TAXATION

Fundamental Principles of Taxation

 Fundamental Principles of Taxation
• Definition
• Three Inherent Powers of State
• Purposes of Taxation
• Theory and Basis of Taxation
– Lifeblood Theory
• Scope and Limitations of the Power of Taxation
• Elements
• Aspects
• Nature/ Characteristics of State’s Power to Tax
• Exceptions to Non Delegation Rule
• Classification of Taxes
• Elements of Sound Tax System
• Situs of Taxation
• Tax distinguished from other Terms
• Double Taxation
• Means of Avoiding or Minimizing the Burden of Taxation
• Sources of Tax Law
 Definition
• Taxation - process or means by which the sovereign
through its law making body imposes burdens upon
subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the
legitimate objects of the government.
 Three Inherent Powers of the State
• Police Power- promoting public welfare by restraining and
regulating the use of liberty and property.
• Power of Taxation – the State raises revenue to defray the
necessary expenses of the government.
• Power of Eminent Domain - power of the state to acquire
private property for the public purpose upon payment of
just compensation.
 Similarities among the Three Inherent Powers of the State
• Inherent in the state
• Exist independently in the constitution
– conditions for their exercise may be prescribed by the constitution
• State interferes with private rights and properties
• Legislative in nature and character
• Presuppose an equivalent compensation received, directly or
indirectly, by the persons affected.
 Taxation Police Power Eminent Domain

Nature Power to enforce Power to make and Power to take private

contributions to raise implement laws for property for public
government funds. the general welfare. use with just
compensation.
Authority Government only Government only May be granted to
public service/utility
companies
Purpose For the support of the Promotion of general The taking of private
government welfare through property for public
regulation use.
Persons affected Community or a class Community or a class
of individuals. of individuals. On all individuals as
Applies to all Applies to all the owner of the
persons, property and persons, property and personal property.
exercises that may be exercises that may be Only particular
subject thereto subject thereto property is
comprehended.
 Taxation Police Power Eminent Domain
Scope Plenary, Broader in Merely to take a
comprehensive, application. General private property for
supreme power to make and public use.
implement law.

Effect Contribution becomes No transfer or title. There is a transfer of

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

Benefits received In form of protection No direct and

and benefits received immediate benefit but Market value of
from government only such as may property taken.
arise from the
maintenance of a
healthy economic
standard society

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

cost of the license owner is paid
and the necessary equivalent to the fair
expenses of police value of his property.
surveillance and
regulation
 Purposes of Taxation
• Primary : Revenue
– Provide funds of property to promote general
welfare
• Secondary : Regulatory
– Device for regulation or control
 Theory of Taxation
• Necessity Theory
– Preserve the state’s sovereignty
– To give protection and facilities

• Lifeblood Theory
– Government’s basic function
 Basis of Taxation

• Reciprocal duties of protection and support between

the state and its inahabitants.
 Manifestation of Lifeblood Theory
• No estoppel against the government
• Collection of taxes cannot be stopped by injunction
• Taxes could not be the subject of compensation or set-off
• Right to select objects (subjects) of taxation
• A valid tax may result in the destruction of the taxpayer’s
property.
 Scope of the Power of Taxation
• Comprehensive
• Unlimited
• Plenary
• Supreme
 Essential Elements of Tax
• Enforced contribution
• Payable in money
• Proportionate
• Levied on persons, property, rights
• Levied by the law-making body
• Levied for public purpose
 Aspects of Taxation
• Levying or imposition of Tax
• Assessment of the correct amount
• Collection of tax
 Nature/ Characteristics of the State’s Power to Tax
• Inherent in sovereignty
• Legislative
• Exemptions of government entities, agencies and
instrumentalities
• International Comity
• Limitation of Territorial Jurisdiction
• Strongest among the inherent powers
 Exceptions to Non-Delegation Rule
• President
• Local government
• Administrative agencies
• Constitutional and inherent limitations
• Exception of government entities , agencies and instrumentalities
– Agencies performing governmental functions
– Agencies performing propriety functions
– GOCCs
– GSIS
– SSS
– PHIC
– PCSO
– Local water District
 Classification of Taxes
• Scope
– National • Determination of fixed amount
– Local – Specific Tax
• Subject matter – Ad valorem
– Personal • Purpose
– Property – Primary
– Excise – Secondary
• Who bears the burden • Graduation /rate
– Direct – Proportional
– Indirect – Progressive
– Regressive
• Taxing authority
– National
– local
 Elements of Sound Tax System
• Fiscal adequacy
• Theoretical justice or equity
• Administrative feasibility
 Limitations on the State Power to Tax
• Inherent limitations
• Constitutional limitations
 Situs of Taxation
• Place of taxation
• the state or political unit which has jurisdiction to
impose a particular tax.
 Factors in Determining Situs of Taxation
a. Subject matter ( person, property, or activity)
b. Nature of 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
• Toll- sum of money for the use of something
• Penalty - a sanction imposed as a punishment
• Special Assessment – proportional contribution from owners of lands for special benefits
• Revenue- all funds or income derived by the government
• Subsidy- pecuniary aid directly granted the government to an individual or private
commercial enterprise
• Permit/license fee - charge imposed under the police power
• Custom duties- taxes imposed exported from or imported into a country.
• Tariff- book of rates containing kinds of merchandise with corresponding duties to pay
Tax Distinguished From Other Terms Or Imposts
 Double Taxation
• 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 or character of the tax
 Avoiding/Minimizing the Burden of Tax
• Shifting- transfer of tax burden
• Transformation - producer pays the tax and endeavor to
recoup himself by improving his process of production
• Evasion- use of illegal means
• Tax avoidance – exploitation of legally permissible alternative
• Exemption – grant of immunity
• Capitalization – reduction in the selling price
 Sources of Tax Laws
1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances/ City or municipal tax codes
6. Tax treaties and international agreements
7. Special Laws
8. Decision of the Supreme Court and the Court of Tax Appeals
9. Revenue rules and regulations and administrative ruling and opinion