TAXATION

Basic Principles of Taxation TX01

LECTURE NOTES

BASIC PRINCIPLES OF MODERN TAXATION G. Power of judicial REVIEW/ROLE OF COURTS IN TAX

A. Define Taxation CASES (CTA & SC)
1. As a state power: Taxation refers to the inherent power of Courts cannot inquire into the wisdom of a taxing act. Courts
a sovereign state acting through its legislature to impose a can only review the legality of the tax based on the
proportionate burden upon persons, property rights or constitutional as well as inherent limitations and other
transaction to raise revenue to support government applicable laws.
expenditure and as a tool for general and economic
welfare. H. Sources of tax laws:
2. As a process: Taxation refers to the act of imposing a tax 1.
by a sovereign state to raise revenue for government 2.
expenses. 3.
4.
B. What are the PURPOSES of taxation? 5.
1. Primary purposes to raise funds for the expenses of the 6.
government: (also called Revenue 7.
Purpose) 8.
2. Secondary purpose: as a tool for general social and 9.
economic welfare (also called 10.
Regulatory/sumptuary/Compensatory purpose) 11.

C. Give the NATURE or CHARACTERISTICS of the taxing I. What are the three inherent powers of the state?
power 1.
1. It is inherent power of a sovereign state – being inherent in 2.
sovereignty, the state has the power to tax even if not 3.
expressly granted by the constitution.
2. It is legislative in character – taxation in generally J-1. Give the similarities and distinctions of Taxation, Police
exercised by the lawmaking body of a state. Power and Power of Eminent Domain.
3. It is subject to inherent and constitutional limitations. Three inherent powers of a state:
1. Power of Taxation – refer to letter A
D. What is SCOPE of the power of taxation? 2. Power of Eminent Domain – it refers to the inherent power
In the absence of inherent and constitutional limitations, the of a sovereign state to take private property for public use
power to tax is comprehensive& unlimited. As a rule, the state upon payment of a just compensation.
thru the congress can tax any thing at any time and at any 3. Police Power – it refers to the inherent power of a
amount. sovereign state to enact laws to promote public health,
1. Subject matter of the tax. public safety, public morals and the common good.
2. Situs of taxation.
3. Purpose of the tax. SIMILARITIES:
4. Amount or rate of tax 1. They are indispensable to government existence.
5. Method of collection / Importance of Taxation 2. They can exist independent of the constitution.
3. They are the means by which the state interferes with
E. Where does the power of taxation proceed from? private rights and properties.
It proceeds from the necessity of the existence of the 4. They are generally exercised by the legislature.
government, and since it exists for thePeople, it can compel 5. They contemplate an equivalent compensation or benefit.
them to pay taxes.
J. What are the forms of avoiding a tax (tax escape)?
F. What is the basis of taxation? 1.
The reciprocal obligation of protection and support between the 2.
state and its citizens. InReturn for the protection provided by 3.
the state, the people pay taxes. Benefit-ProtectionTheory. 4.
5.
6.
 DISTINCTIONS:
M. Give the steps/stages involved under taxation system.
Taxation Eminent Domain Police Power 1st : Imposition of taxes
1. As to subject Imposed Imposed upon Imposed upon 2nd : Collection of taxes
upon private persons, a. Assessment
persons, real properties property, rights b. Actual tax collection
property, or c. Enforcement of tax laws/criminal prosecution for wilful
rights or transaction violation of tax laws
transaction 3rd: Payment of taxes
2. As to purpose To raise To acquire private For regulation
revenue for property for public and N. Define TAXES
government use control Taxes are enforced proportional contributions levied by the
expenses state for the support of the government
3. As to limitation Generally Limited to the fair Limited to the
unlimited value of the cost of O. What are the essential characteristics, requisites or
expenses license fee and elements of a tax?
of regulation other 1.
property control 2.
4. As to act Taxpayers Private property is Enforcement of 3.
involved pays taxes taken for public laws for 4.
use public welfare 5.
and 6.
common good
5. As to benefits Protection & Person receives a Protection & P. CLASSIFICATION OF TAXES
received by other just compensation other 1. What are the kinds of taxes as to subject matter?
the benefits from benefits from a. Personal, poll or capitation tax – tax imposed on
people the the persons residing within a specific territory.
government government Example: Basic Community Tax
6. As to Inferior Superior Superior b. Property tax – tax imposed on property, whether real or
relationship personal.
to non– Example: Real estate tax
impairment c. Excise tax – tax imposed on the exercise of a right or
clause of the privilege. Also called “Privilege tax”
constitution Example: Income tax, estate tax, donor’s tax, etc.,
K. Enumerate and briefly define the principles/characteristics 2. What are the kinds of taxes as to who bears the burden?
of a SOUND TAX SYSTEM a. Direct tax – tax imposed upon a person who is directly
1. bound to pay it; tax which the taxpayer cannot shift to
2. another.
3. Example: Income tax, estate tax, donor’s tax
b. Indirect tax – tax which forms part of the purchase price;
L. What are the limitations on the power of taxation? tax which the taxpayer can shift to another.
1. Inherent limitations – those that restrict the power of Example: Excise tax on certain goods, other percentage taxes,
taxation even though not provided in the constitution. value added tax
a. Taxes must be for public purpose. 3. What are the kinds of taxes as to determination of amount?
b. Exemption of government agencies and a. Specific tax – tax based on weight, number or some other
instrumentalities from taxation. standards of weight or measurement.
c. Power to tax cannot be delegated to private persons Example: Excise tax on distilled spirits, wines, cinematographic
or entities. films
d. Tax laws do not apply to properties of foreign b. Advalorem tax – tax imposed based on the value of the
government. taxable item.
e. Tax laws should be applied within the territorial Example: Real estate tax
jurisdiction of the state. 4. What are the kinds of taxes as to purpose?
f. Double taxation should be avoided. a. General tax – tax imposed for general purposes of the
2. Constitutional limitations – those that limit the power of government.
taxation as embodied in the constitution. Example: Income tax, value added tax
a. Due process of law in taxation and equal protection of b. Specific tax – tax imposed for a special purpose or
the laws. purposes.
b. Rule on uniformity and equity in taxation. Example: Protective tariff and customs duties,
c. No imprisonment for non-payment of poll tax. Special Educational Fund (SEF) Tax,
d. Non-impairment of the obligation of contracts. Special Assessments
e. No appropriation of public money for religious 5. What are the kinds of taxes as to jurisdiction/scope or
purposes. authority imposing tax?
f. Exemption of religious, charitable, educational a. National tax –tax imposed on a national and for the
entities, non-profit cemeteries and churches from national government.
property taxation. Example: National Internal Revenue taxes
g. Exemption from taxation of non-stock, non-profit b. Local tax – tax imposed on a local level for the
educational institutions and donations for educational support of local governments.
purposes. 6. What are the kinds of taxes as to graduation or rate?
h. Concurrence by a majority of the members of a. Proportional tax – the tax rate of which is fixed or
Congress for passage of a law granting tax constant.
exemption. Example: Corporate Income Tax, value added tax
i. The power of the President to veto a revenue or tariff b. Progressive tax – the tax rate increases as the
bill. taxable amount or tax bracket increases.
j. Non-impairment of the jurisdiction of Supreme Court Example: Individual income tax, estate tax, donor’s tax
in tax cases. c. Regressive tax – the tax rate decreases as the
3. Contractual limitations – these are restrictions on the taxable amount or tax bracket increases.
taxing power imposed by previously existing contracts We have no regressive tax in the Philippines.
entered into by the government with another party
who may be another state or its own citizens.
 Q. Tax distinguished from OTHER CHARGES and FEES
1. Differentiate tax from toll
TAX TOLL
a. Demand of sovereignty Demand of proprietorship
b. Generally amount is unlimited Amount is limited to the cost and
maintenance of public improvement.
c. For the support of the government For the use of another’s property
d. May be imposed by the State only May be imposed by private individuals or entities

2. Differentiate tax from special assessment

TAX SPECIAL ASSESSMENT
a. Imposed on persons, property rights Levied only on lands
or transactions
b. For the support of the government Contribution to the cost of public improvement
c. Regular exaction Exceptional as to time and place

3. Differentiate tax from license fee

TAX LICENSE FEE
a. Imposed to raise revenue For regulation and control
b. Collected under the power Collected under the police power
of government
c. Generally amount is unlimited Limited to the necessary expenses of
regulation and control
d. Imposed on persons, property, Imposed on the exercise of a right or
rights or transaction privilege
e. Non-payment does not make Non –payment makes the business illegal business illegal

4. Differentiate tax from penalty

TAX PENALTY
a. Imposed to raise revenue Imposed to regulate conduct
b. May be imposed by the May be imposed by the private entity
State only

5. Differentiate tax from custom’s duty

TAX CUSTOM’S DUTY
a. Imposed upon persons, property, Imposed on imported or
rights or transactions exported goods
b. It comprehends more than the It is also a tax
term custom’s duty

6. Differentiate tax from debt

TAX DEBT
a. Based on law Based on Contract
b. Not assignable Assignable
c. Payable in money Payable in kind or in money
d. Not subject to set-off Subject to set-off
e. Non-payment may result to No imprisonment (except when
imprisonment debt arises from crime)
f. Bears interest only if Interest depend upon the
delinquent stipulation of the parties.

7. Differentiate tax from tithe

TAX TITHE
a. Based on law Based on religious obligation
b. Rates vary fixed at 10% of one’s earning

R. Tax Administration B. If only the second statement is correct.

It is a system involving assessment, collection and enforcement of C. If both statements are correct.
taxes, including the execution of judgment in all tax cases decided D. If both statements are incorrect.
in favor of the BIR by the courts.
1. a. A person may refuse to pay a tax on the ground that he
S. Powers and duties of the BIR receives no personal benefit from it.
1. Assessment and collection of all national internal revenue b. Any citizen has a legal right to question illegal
taxes, fees and charges expenditures of public funds.
2. Enforcement of all forfeitures, penalties and fines 2. a. One of the essential characteristics of a tax is it is unlimited
connected therewith in amount..
3. Execution of judgement in all cases decided in its favor by b. A tax is generally unlimited because it is based on the
CTA and ordinary courts needs of the state.
4. Give effect to and administer the supervisory and police 3. a. A state has the power to tax even if not granted by the
power conferred to it by the NIRC or other laws. Constitution.
b. A state cannot exercise police power if not granted by the
T. Official of the BIR Constitution.
The BIR shall have a chief to be known as Commissioner of 4. a. There can only be a tax if there is a law imposing the tax.
internal revenue and four assistant chiefs to be known as Deputy b. Non delegation rule is absolute.
Commissioners. 5. a. Non-payment of tax makes the business illegal.
b. The non-payment of license fee makes the business illegal.
True or False: In each of the following, write: 6. a. Territoriality is one of the constitutional limitations on the
A. If only the first statement is correct. power of taxation.
 b. International comity is an inherent limitation in taxation. b. Basic Income tax on individuals
7. a. A progressive system of taxation means a tax structure c. Both a and b
where the tax base decreases as the tax rate increases. d. Estate tax
b. Tax exemption is a grant of immunity to a particular taxpayer
from tax where others are obliged to pay. 13. Levied only on lands:
8. a. Tax avoidance is a form of tax escape that is illegal. a. Tax c. Toll
b. Tax evasion is not punishable. b. Special Assessment d. License Fee
9. a. Taxation includes the power to destroy always.
b. A tax may be subjected to set-off or compensation. 14. One of the following is NOT a source of our tax laws:
10. a. Our national internal revenue laws are civil in nature a. Administrative rulings and opinions
b. A person cannot be imprisoned for non-payment of a tax b. Judicial decisions
c. 1987 Constitution
C. Multiple Choice: In each of the following, choose the best d. Expert Opinion on Taxation
answer.
1. All are characteristics of the power of taxation, EXCEPT: 15. A form of tax escape through which one is given tax immunity
a. It is an inherent power. wherein others are subjected to tax:
b. It is a legislative in character. a. Shifting c. Tax exemption
c. It is civil in character. b. Tax immunity d. Tax avoidance
d. It is subject to inherent and constitutional limitations.
17. A form of tax escape by a manufacturer or producer who
2. Also known as tax administration improves his proceeds of production thereby minimizing his
a. Collection of taxes c. Payment of taxes unit production cost:
b. Levying of taxes. d. Incidence of taxation a. Tax avoidance c. Transformation
b. Capitalization d. Shifting
3. Taxation is an inherent power because:
a. It is the life blood of the government. 18. A waiver by the government’s right to collect tax:
b. Protection and benefit theory. a. Tax exemption c. Tax avoidance
c. It co-exists with the existence of the state. b. Tax amnesty d. Tax evasion
d. It is exercised for the general welfare of the people.
19. The theory which most justifies the necessity of taxation:
4. All are essential characteristics of a tax, EXCEPT: a. Protection and benefits theory
a. It is an enforced contribution. b. Revenue purposes theory
b. It is generally unlimited in amount. c. Lifeblood theory
c. It is generally payable in money. d. Ability to pay theory
d. It is a proportionate burden.
20. One of the characteristics of internal revenue laws is that they
5. All are secondary purposes of taxation, EXCEPT: are:
a. Sumptuary purpose c. Compensatory purpose a. Criminal in nature
b. Regulatory purpose d. Revenue purpose b. Penal in nature
c. Political in nature
6. In the absence of inherent and constitutional limitation, the d. Generally prospective in application
power of tax is:
a. Comprehensive, unlimited and plenary 21. The following are similarities of the inherent power of taxation,
b. Unlimited and plenary eminent domain, and police power, except one:
c. Broad and penal a. Are necessary attributes of sovereignty
d. Unlimited and political b. Interfere with private rights and property
c. Superior to the non-impairment clause
7. All are similarities of taxation, police power, and power of d. Are legislative in character.
eminent domain, EXCEPT:
a. All are necessary attributes of the Constitution 22. Which of the following is not a scheme of shifting the incidence
b. All exist independently of the Constitution of taxation?
c. All contemplate an equivalent benefit a. The manufacturer transfer the tax to the consumer by
d. All are superior to the non-impairment clause of the adding the tax to the selling price of the goods sold;
Constitution b. The tax forms part of the purchase price;
c. Changing the terms of the sale like FOB shipping point in
8. Below are characteristics of a sound taxation system, the Philippines to FOB destination abroad, so that the title
EXCEPT: passes abroad instead of in the Philippines.
a. Administrative feasibility and compliance d. The manufacturer transfer the sales tax to the distributor,
b. Fiscal Adequacy then in turn to the wholesaler, in turn to the retailer and
c. Theoretical Justice or equality finally to the consumer.
d. Uniformity of taxation
23. In case of conflict between the tax code and generally accepted
9. It refers to a fraudulent act of minimizing taxes. accounting principles (GAAP):
a. Tax avoidance c. Tax minimization a. Both tax codes and GAAP shall be enforced;
b. Tax evasion d. Multiple taxation b. GAAP shall prevail over tax code;
c. Tax code shall prevail over GAAP;
10. One of the following is NOT an inherent limitation: d. The issue shall be resolved by the courts.
a. Taxes must be for public purposes
b. Equality in Taxation 24. Which of the following statements is not correct?
c. Territoriality rule a. Taxes may be imposed to raise revenues or to regulate
d. Rule on double taxation certain activities within the state;
b. The state can have the power of taxation even if the
11. The only tax where non-payment of which will not result to Constitution does not expressly give it the power to tax;
imprisonment: c. For the exercise of the power of taxation, the state can tax
a. Excise tax c. Personal tax anything at any time;
b. Donor’s tax d. Property tax d. The provisions of taxation in the Philippines Constitution
are grants of power and not limitations on taxing powers.
12. One of the following can be BOTH a progressive tax and a
proportional tax: 25. Value-added tax is an example of:
a. Donor’s tax a. Graduated tax;
 b. Progressive tax; onerous taxes that leave them no other alternative but to stop
c. Regressive tax; operating.
d. Proportional tax.
The passage of the ordinance is a valid exercise of?
26. 1st Statement – Tax exemptions are strictly construed against a. Taxation b. Police power c. Eminent domain d. A and B
the government.
2nd Statement – When the tax law is not clear and there is 36. One of the following is a false statement about double taxation.
doubt whether he is taxable or not, the doubt shall be settled Which is it?
against the government. a. There is no constitutional prohibition on double taxation
a. Only the first statement is correct. b. Direct duplicate taxation is a valid defense against a
b. Only the second statement is correct. measure if it is violative of the equal protection clause
c. Both statements are correct. c. Absence of any of the elements of direct double taxation
d. Both statements are incorrect. makes it indirect duplicate taxation
d. A 20% final withholding tax on interest income on bank
27. Imposed based on religious obligation: deposits and a 5% gross receipts tax on banks is a direct
a. TITHE c. TRIBUTE duplicate taxation.
b. TAX d. TOLL
37. This stems from the principle that we pay taxes for the
28. 1st Statement To be exempt from taxation under the protection and services provided by the taxing authority which
Constitution land & buildings must be exclusively and actually could not be provided outside the territorial boundaries of the
used for religious, educational or charitable purpose, even if taxing state.
not directly. a. The tax imposed should be for public purpose
2nd Statement A taxpayer’s tax exempt status justifies the b. There should be no improper delegation of the taxing power.
non-keeping of books of accounts & other accounting records. c. The power to tax is limited to the territorial jurisdiction of the
a. True, True c. False, True taxing government
b. False, False d. True, False d. Exemption of government entities from taxation

29. Our tax laws are both: 38. Which limitation on the power of taxation inherently implied that
a. Progressive and prospective the State’s primary concern is for the common good of the
b. Civil and prospective people?
c. Penal and regulatory a. Equality in taxation
d. Personal and regulatory b. Equal protection of law
c. Due process of law
30. Guillen is a mining operator. His mineral lands are not covered d. For public purposes
by any lease contract. The tax Guillen has to pay based on the
actual value of the gross output or mineral products extracted 39. A tax must be imposed for a public purpose. Which of the
is following is not a public purpose?
a. Mining tax b. Royalties c. Rental d. Ad valorem tax a. National Defense
b. Public education
31. It literally means “place of taxation” the country that has the c. Improvement of sugar industry
power and jurisdiction to levy and collect the tax d. None of the choices
a. Basis of taxation
b. Situs of taxation 40. A fundamental rule in taxation is that “the property of one
c. Scope of taxation country may not be taxed by another country”. This is known
d. Theory of taxation as
a. International law
32. Which of the following statements correctly described “Equal b. Reciprocity
protection” clause of the Constitution regarding the c. International comity
government’s power to tax? d. International inhibition
I. All persons subject to legislation shall be treated alike under
dissimilar circumstances and conditions, both in the privileges 41. That taxation is based on the principle of reciprocal duties of
conferred and liabilities imposed. protection and support between the State and its inhabitants
II. The purpose is to protect persons belonging to the same a. Government is a necessity theory
class against intentional and arbitrary discrimination. b. Ability to pay
III. There is denial of equal protection of laws if there is c. Benefits received theory
discrimination in the implementation of tax laws. d. Severane Test
a. I and II only
b. I and III only 42. It is an enforced contribution levied by the State by virtue of the
c. II and III only sovereignty on persons and property within its jurisdiction for
d. I, II and III the support of the government and all public needs.
a. Tax b. Toll c. Special Assessment d. License
33. No law granting any tax exemption shall be passed without the
concurrence of: 43. One of the following is not a characteristic or an element of tax
a. Majority of all members of the Congress a. It is levied by the legislature
b. 2/3 vote of all members of the Congress b. It is payable in money or in kind
c. ¾ vote of all members of the Congress c. It is proportionate in character
d. Unanimous vote of all members of Congress d. It is an enforced contribution

34. Which of the inherent powers maybe exercised even by public 44. Tax which is demanded from one person in the expectation
utility companies? and intention that he shall indemnify himself at the expense of
a. Taxation another
b. Eminent Domain a. Direct b. Indirect c. Excise d. Value-added tax
c. Police power
d. A and B 45. Tax levied for particular or specific purpose irrespective of
whether revenue is actually raised or not
35. After having been informed that some massage parlors are a. Revenue tax
being used as fronts for prostitution, the b. Regulatory tax
SanguniangPanlungsod of Manila passed a tax ordinance c. Specific tax
subjecting massage parlors within its jurisdiction to such d. Ad valorem tax