TAXATION - MODULE 1

FUNDAMENTAL PRINCIPLES OF TAXATION

Taxation
1. As a power – refers to the inherent power of the state to demand enforced contribution for public
purpose to support the government.
2. As a process – the legislative act of laying a tax to raise income for the government to defray its
necessary expenses

Purpose of Taxation
1. Primary – to raise revenue
2. Secondary
a. Regulatory
- To regulate the conduct of businesses or professions
- To achieve economic and social stability
- To protect local industries
b. Compensatory
- Key instrument of social control - Check inflations
- Reduces inequities in wealth distributions - Tools on international bargains
- Strengthens anemic enterprises - Promotes science and inventions
- Provides incentives
- Uses as implement in the exercise of police power to promote general welfare

The Life Blood Doctrine

Taxes are indispensable to the existence of the state. Without taxation the state cannot raise revenue to
support its operations

Nature or Characteristics of the Power of Taxation

1. for public purpose 5. exaction payable in money
2. inherently legislative in nature 6. territorial
3. subject to international comity or treaty
4. not absolute being subject to constitutional and inherent limitations

How exercised:
- Legislation of laws by Congress and tax ordinances by the Local Sangguanian
- Tax collection by the administrative branch of the government

Scope of the Power of Taxation

Taxation is supreme, comprehensive, unlimited and plenary. It includes the power to destroy

Discretion of the Taxing Power- this extends to:

1. amount or rate of the tax 5. situs of taxation
2. kinds of tax to be collected 6. method of collection
3. apportionment of the tax 7. purposes for its levy, provided for public purpose
4. the person, property and excises to be taxed, provided within it jurisdiction

Underlying principles behind the power of taxation

1. Principles of Necessity – the existence of the government is a necessity and it cannot continue
without means to support itself – this is the Theory of Taxation
2. Benefit Received Theory – the government and the people have the reciprocal and mutual duties of
support and protection – this is the Basis of Taxation

Legal Basis of the Power of Taxation

1. Benefit-received theory
2. the sovereign power of the state over is people and property
3. the presumption of receipts or enjoyment of benefits and protection by the people
4. to protect new conditions by imposing special duties
5. to uplift social conditions by imposing regulatory taxes or licenses

Objects of Taxation
1. businesses 5. acts
2. interests 6. persons
3. transactions 7. properties
4. rights 8. privileges

Phases of Stages of Taxation

a. Levy or Imposition Impact of taxation Aspects of
b. Assessment of tax Taxation
c. Payment of the tax Incidence of Taxation
- these all comprise the taxation system

Elements of the tax system

a. Tax structure b. Tax administration c. Public tax consciousness

Principles of a sound tax system

a. Fiscal Adequacy – sources of revenue should be sufficient to meet the demand for public
expenditure
b. Administrative Feasibility- tax laws must be capable of convenient, just and effective administration
c. Theoretical Justice- tax must be imposed with equity and certainty and must consider the taxpayers
ability to pay and benefits received
- Non-observance of the principles does not necessarily render a tax levy unconstitutional.

Principal Approaches in the distribution of tax burden

a. Benefit Approach – tax payment should be based on benefits received
b. Ability to Pay Approach – tax payments should be based relative to the ability of taxpayers to pay

Taxation and Economic Efficiency

1. Income Effect – makes people economically efficient (ex: transformation)
2. Substitution Effect – makes people economically inefficient (ex: indirect taxes)

The Inherent Powers of the Government

1. Power of Taxation – the power to take property for the support of the government and for public
purpose
2. Police Power – the power to enact laws to promote the general welfare of the people. It is wider in
application because it is the general power to make laws.
3. Power of Eminent Domain – the power to take private property for public use upon payment of just
compensation

Point of Differences of the Inherent Powers of the State

 Point of Difference Taxation Police Power Eminent Domain
Exercising Authority Government Government Government or private
entities
Necessity of Delegation is not There must be There must be due
Delegation necessary since it is delegation before local delegation before local
inherent governments could government or private
exercised it party may exercise it
Purpose Revenue and support Property is taken for Property is taken for
of the government public use public use
Persons affected Community or class of Community or class of Operates on the owner of
individuals individuals the property

Effect of transfer of Money paid as taxes There is no transfer of There is transfer of right
property rights becomes part of the title, at most there is to property whether it be
public fund restraint on the of ownership or lesser
injurious use of right
property
Amount of Imposition Unlimited Sufficient to cover the No imposition, the owner
costs of regulation is paid the fair market
value of his property
Importance Most important of the Most superior
three
Relationship with the Inferior to the “Non- Superior to the “Non- Superior and may override
Constitution Impairment Clause” of Impairment Clause” of the “Non-Impairment
the Constitution the Constitution Clause” because the
welfare of the state is
superior to private
contracts
Limitation Constitutionally and Public interest and the Public purpose and just
inherently restricted requirement of due compensation
process

Similarities of the Three Powers

1. All three powers are necessary attributes of sovereignty, resting upon necessity
2. all are inherent powers of the State
3. All are legislative in nature
4. They are ways in which the State interferes with private rights and property
5. They exist independently with the Constitution although the condition for their exercise may be
prescribed or limited by the Constitution
6. They all presuppose an equivalent compensation received by the persons affected by the exercise of
the power, whether directly, indirectly or remote.
7. The exercise of these powers by the local government units may be limited by national legislature
*Police power can be used to raise revenue for the government (ex: license fee)

LIMITATIONS OF TAXATION POWER

A. Constitutional Limitation
1. observance of due process of law
2. equal protection of the law
3. uniformity in taxation
4. progressive scheme of taxation
 5. non-imprisonment for non-payment debt or poll tax
6. non-impairment of obligation and contract
7. free worship rule
8. non-appropriation of public funds or property for the benefit of any church, sect or system of
religion
9. exemption of religious, charitable or educational entities, non-profit cemeteries, churches and
mosque from property taxes.
10. exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
including grants, endowments, donations or contributions for educational purposes
11. concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption
12. non-diversification of tax collections
13. non-delegation of the power of taxation
Exception:
a. power to tax was delegated to the President under the Flexibility Clause of the Tariff and
Customs Code
b. power to tax was delegated to the local government units under the Local Government Code
c. matters involving the expedient and effective administration and implementations of
assessment and collection of taxes or certain aspects of taxing process that are not legislative
in character
14. non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives
but the Senate may propose or concur with amendments
16. 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

B. Inherent Limitation
1. territoriality of taxation
2. subject to international comity or treaty
3. tax exemption of the government
4. tax is for public purpose
5. non-delegation of the power of taxation
*The last 2 limitations are also Constitutional limitations

SITUS OF TAXATION
The place of taxation

Factors that determine the situs of taxation

1. nature, kind or classification of the tax 5. sources of income
2. subject matter of the tax 6. place of exercise, business or occupation being taxed
3. citizenship of the taxpayer 7. place where income-producing activity was held or
done
4. residence of the taxpayer

Applications
1. persons – residence of the taxpayer
2. community development tax – residence or domicile of the taxpayer
3. business taxes – where the business was conducted or place where the transaction took place
4. privilege or occupation tax – where the privilege is exercised
5. real property tax – where the property is located
6. personal property taxes –
 a. tangible – where they are physically located
b. intangible – domicile of the owner unless the property has acquired a situs elsewhere
7. Income – place where the income is earned or residence or citizenship of the taxpayer
8. Transfer Taxes – residence or citizenship of the taxpayer or location of the property
9. Franchise Taxes – State that grants the franchise
10. Corporate Taxes – depend on the law of incorporation

DOUBLE TAXATION
Taxing the object or subject within the territorial jurisdiction twice, for the same period, involving the
same kind of tax by the same taxing authority

Kinds:
1. Direct Double Taxation – this objectionable and prohibited because it violates the constitutional
provision on uniformity and equality
2. Indirect Double Taxation – no constitutional violation. Ex: taxing the same property by two
different taxing authority

International Double Taxation –a double taxation caused by two different taxing authorities, one
domestic and one foreign

Remedies to Double Taxation

1. provision for tax exemption
2. allowance for tax credit
3. allowance for principle of reciprocity
4. enter into treaties with and agreement with foreign government

Forms of Escape from Taxation

A. Those that will not result in loss of revenue to the government
1. Shifting –the process of transferring the tax burden from the statutory taxpayer to another
without violating the law.
2. Capitalization – the seller is willing to lower the price of the commodity provided the taxes will
be shouldered by the buyers
3. Transformation – the manufacturer absorbs the additional taxes imposed by the government
without passing it to the buyers for fear of lost of his market. Instead, 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 productions.

B. Those that will result to loss of revenue to the government

1. Tax Evasion – tax dodging – resorting to acts and devices that illegally reduces or totally escape
the payment of taxes that are due to the taxpayer. They are prohibited and are therefore are not
subject to penalties.
2. Tax Avoidance –tax minimization scheme – the reduction or totally escaping payment of taxes
through legally permissible means, that are not prohibited and therefore are not subject to
penalties.
3. Tax Exemption- an immunity, privilege or freedom from payment of a charge or burden to
which others are obliged to pay.

Kinds of Exemptions:
1. Express- granted by the constitution, statute, treaties, ordinance, contracts or franchise
a. constitutional
b. statutory
 c. contractual
2. Implied – exempted by accidental or intentional omission
3. Total-exemption from all taxes (OFWs)
4. Partial –exemption from certain taxes, partially or totally

Grounds for Exemption

1. It may be based on a contract
2. It may be based on grounds of public policy - ex: granting of exemptions to rural banks, and
sweepstakes or lotto winnings
3. It may be based on some grounds to foster charitable and other benevolent institutions
4. It may be created under a treaty on grounds of reciprocity
5. It may be created to lessen the rigors of international double or multiple taxation

Distinction between tax evasion and tax avoidance

Tax Evasion Tax Avoidance
It is a scheme used outside of those lawful means It is a tax saving device within the means sanctioned by
and when availed of, it usually subjects the taxpayer law
to penalties
It is accomplished by breaking the law Accomplished by legal procedures and do not violate
the law
It connotes fraud, deceit and malice No fraud is involved

Tax Exemptions:
 is not automatic
 is non-transferable
 is revocable by the government (except when granted under a valid contract or by the Constitution)
 rule shall be uniform
 does not contravene the LifeBlood Doctrine
 is always disfavored
 is allowed only under a clear and unequivocal provision of the law
 on real property tax will be based on the Doctrine of Usage and not Doctrine of Ownership, except
for real properties owned by the government which is absolutely exempt form taxation
 on real property tax cannot be granted by local governments but can condone real property tax
liabilities in special cases
 on local taxes can be granted by local governments but they cannot condone existing liabilities on
local taxes

Fundamental Doctrine in Taxation

1. No court may enjoin the collection of taxes
2. Claim for exemptions shall be interpreted strictly against the taxpayer
3. A law that permit deduction from the tax base is strictly construed against the taxpayer
4. Tax assessment are presumed to be correct and done in good faith
5. Tax laws are generally prospective in application
6. Tax are not subject to compensation or set-off
7. Refund of taxes do not earn interest because interest do not run against the government

Distinction between Tax Amnesty and Tax Condonation

Tax Amnesty – a general pardon or intentional overlooking by the state of its authority to impose
penalties on persons otherwise guilty of tax evasion or violation of tax laws. The purpose is to give the
erring taxpayer a chance to reform and become part of the society with a clean slate.
Tax Condonation – means to remit or to desist or refrain form exacting or imposing a tax. It cannot
extend to refund of taxes already paid when obtaining condonation.

Tax Exemption Tax Amnesty

There is no tax liability at all Connotes condonation from payment of existing tax
liability
The grantee need not pay anything The grantee pays a portion
Can be availed of by any qualified taxpayer Not always available

Prepared by: JEANETTE R. MANIA, CPA