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Tax1a Basic Principles of Taxation 1

Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA

NATURE, SCOPE, CLASSIFICATION, AND ESSENTIAL CHARACTERISTICS


1. What is taxation?
Taxation is an act, process, or means by which the sovereign (Independent State) through its
law-making body (legislative branch of the government) makes demand for revenue in order
to support its existence and carryout its legitimate objectives,
2. Explain the nature of taxation power
The power of taxation generally refers to the combination of the following natural qualities.
1. Inherent power of Sovereignty
2. Essentially a legislative Function
3. For Public Purposes
4. The strongest of all the inherent powers of the State
5. Subject to International Treaty or Comity
6. Normally Payable in Money
7. Territorial in Scope

Definition:
1. Inherent power of Sovereignty – the power of taxation is co-extensive with sovereignty. It
is existing inseparably with the State. The government could exercise this power
even without any provision in the Constitution mentioning it.
i. Taxation begins its existence from the time a state is born with the
concurrence of its four elements which are people, territory, sovereignty and
government.
2. Essentially a legislative Function – The Law-making body of the government and its
political subdivisions exercise the power of taxation.
3. For Public Purposes – Taxes are public money, and its appropriation to be valid must be for
the common good of the people, such that no individual or particular entity shall
primarily be enriched or benefited from its use.
4. The strongest of all inherent powers of the State - Without money, the government cannot
exist permanently and cannot dispense and exercise any of its powers and / or functions
for its people.
i. In the absence o the limitations provided by the Constitutions, the power of
taxation is unlimited, complete, and supreme. The members of the law-
making body could impose taxes on things and rights at appropriate rates
within boundaries of its inherent restrictions.
5. Subject to Inherent International Treaty or Comity – As a matter of international courtesy,
property of a foreign state may not be taxed by another state based on principle of
sovereign equality among states of international law. One state cannot exercise its
sovereign dominion over another, therefore, a nation cannot impose enforced
contribution to the properties of other nations.
6. Normally payable in Money – Taxes are contributions normally payable in the form of
money.
7. Territorial in Scope – As a rule, tax laws do not operate beyond a country’s
jurisdictional limits unless there exists a privity of relationship between the taxing State
and the object of the tax. Where privity of relationship exists, the state can still exercise
its taxing powers over its citizens outside its territory because the personal jurisdiction of
his government over him still remains.

3. What is the basis of taxation?


Taxation is based on “necessity” and reciprocal duties of protection and support” between
the state and its inhabitants. Taxation is the “lifeblood” or the “bread and butter” of the
government. Therefore, it is necessary that every citizen must pay his taxes. The government
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
cannot exist without means to pay its necessary expenses. The citizen pays taxes to support
the government in order that he may continuously be sustained with security and benefits of
an organized society.

PURPOSE OF TAXATION
4. What are the two main purposes of the exercise of taxation power?
Taxation power is exercised for two main purposes; to raise revenue (fiscal) and to regulate
certain activities or consumption (regulatory)
1. Fiscal purpose – taxes are imposed primarily to raise the necessary revenue to finance
various activities of the government in the promotion of the general welfare and
promotion of the public.
2. Regulatory purpose – taxation power could also be exercised to regulate inflation, achieve
economic and social stability, and to serve as a key instrument for social control.

STAGES (ASPECTS) OF TAXATION


5. What are the three (3) stages of taxation process?
1. Levy or imposition aspect
2. Assessment aspect
3. Collection

Definition:
1. Levy – pertains to the passage of tax laws and tax ordinances to
legislature
2. Assessment – refers to the appraisal and valuation process of the subject
or object of taxation to arrive at total amount of collectible tax.
3. Collection – involves the effective administrative implementation of
obtaining payment of tax from the taxpayer.
6. Which of the aspects of taxation process could not be delegated to other
branches of the government?
The levying or imposition aspect of taxation could not in anyway to be delegated and which
should be exclusively exercised by the law-making body; while the other stages of taxation
may lawfully be delegated to other branches of the government. The collection aspect of
taxation could even be delegated to private entity.

BASIC PRINCIPLES OF A SOUND TAXATION SYSTEM


7. What are the three basic principles of a sound taxation system?
The taxation to be effective is guided by three basic principles
1. Fiscal Adequacy
2. Theoretical Justice
3. Administrative Feasibility
Definition
1. Fiscal Adequacy – which requires that the sources of government revenue should be
capable of raising the amount that should be sufficient to meet the demand of
public expenditures regardless of business condition.
2. Theoretical Justice – which requires that the tax burden must be proportionate to
the taxpayer’s ability to pay.
3. Administrative Feasibility – which should enable the system to conveniently
implement a just and an effective tax administration.

LIMITATIONS OF THE POWER OF TAXATION


8. Taxation is the most supreme among the inherent powers of the government.
Could taxation be regarded as an absolute power which the government could
exercise without restriction?
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
No. Although the power of taxation is supreme, plenary and comprehensive, it is till subject to
some inherent and constitutional limitations.
9. What are the inherent limitations on the exercise of power of taxation?
1. It is exercised primarily for public purposes.
2. It is legislative in nature (non-delegation of the legislative power)
3. Its exercise limited to the territorial jurisdiction of the state.
4. It honors and gives due respect to international comity
10. What are the constitutional limitations on the exercise of power of
taxation?
1. Due process of law
2. Equal protection of law
3. Rule of uniformity and equity in taxation
4. Non-impairment of obligations and contracts
5. Non-imprisonment for non-payment of poll tax
6. President’s power to veto tax bills
7. Non appropriation for religious purposes
SIMILARITIES AND DISTINCTION AMONG INHERENT POWERS OF THE GOVERNMENT
11. What are the three inherent powers of the government?
The following powers are inherent to the existence of the government:
1. Taxation power – a power by which an Independent Sate, through its law-making body,
raises and accumulates revenue from its inhabitants to pay the necessary expenses of
the government.
2. Police power – a power of the Sovereign State to legislate for the protection of the
health, welfare and morals of the community.
3. Eminent domain – a power of the Sovereign State to take private property for a public
purpose even without the owner’s consent.

12. What are the three basic similarities of the three inherent powers of the
government?
1. Inherent to the existence of the government
2. Exercised for public purposes
3. Legislative in nature and character
4. Presuppose equivalent compensation
5. All underlie and exist independently on the Constitution, but their exercise can only be
limited by the Constitution.
6. All are necessary attributes of the Sovereign State

13. What are the basic distinctions of the three inherent powers of the government?
1. Police power is broader than taxation and eminent domain because it involves a general
power to make and implement laws.
2. The law on public service or public utility entity may grant eminent domain while police
power and taxation power are to be exercised only by government units.
3. Both taxation and eminent domain are limited by the non-impairment clause in the
Constitution, but not police power.
4. The exercise of police power merely restricts the use of property, while eminent domain
requires the take over of specific property. In taxation, now specific property is being
taken, because this requires payment, generally in money.
5. The exercise of eminent domain requires payment of just compensation to the private
property owner, while in taxation and police power, the government has to receive tax or
fee for its exercise.

SITUS OF TAXATION
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
14. What is situs of taxation?
Situs of taxation refers to the place of taxation, or to the State or political unit which has
jurisdiction to impose tax.

15. The following are the factors which are determinant to the situs of taxation
1. Citizenship of the taxpayer
2. Residency of the taxpayer
3. Nature, kind or classification of tax being imposed
4. Subject or object of taxation
5. Source of income
6. Place of exercise, business or occupation being taxed

Additional Note: The following situs of taxation apply


• Persons- residence of the taxpayer
• Real property or tangible personal property – location of the property
• Intangible personal property – as a rule, situs is the domicile of the owner unless he
has acquired a situs elsewhere
• Income – Taxpayer’s residence or citizenship, or place where the income was
earned.
• Business, occupation and transaction – place where business is being operated,
occupation being practiced and transaction completed
• Gratuitous transfer or property – taxpayer’s residence or citizenship, or location of
the porperty

NATURE, CHARACTERISTICS, KINDS OF TAXES

16. What does the term “taxes” means?


Taxes are obligations created by law. These are civil liabilities of the taxpayer which may
give rise to his criminal liability if he refuses to pay. Taxes are the lifeblood of the government
because these are main sources of government revenues. These are forced contributions from
those who are receiving protections directly or indirectly from the government to support its
multiple functions.

17. What are the characteristics of taxes?


1. A forced contribution
2. Proportionate in character
3. Imposed by the legislative boy
4. Generally payable in money
5. For public purposes
6. Levied on person, property or right
7. Imposed by the sovereign state which has jurisdiction

18. What are classifications of taxes?


1. Local and national, as to authority collecting it
2. Direct or indirect, as to who bears the burden
3. Specific and advalorem, as to determination of the amount
4. Fiscal and regulatory, as to purpose
5. Personal, property, or excise, as to object
6. Proportionate, prorgressive and regressive as to rate
Tax1a Basic Principles of Taxation 5
Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
TAX INVASION AS DISTINGUISED FROM TAX AVOIDANCE

19. What is the main distinction between tax avoidance and tax invasion?
• Tax avoidance is the legal means to lessen or totally eliminate the tax liability.
Examples are tax shifting, transformation, and other exercise of legal options, which
reduce the tax burden.
• Tax evasion is the illegal means to reduce tax payment.
Example is the willful understatement of the income or the overstatement of
deductions from what is lawfully
authorized or permitted.

DOUBLE TAXATION

20. Define double taxation


Double taxation is an act by the sovereign of taxing twice for the same purpose in the
same year upon the same property or the same person with the same nature or character
of tax.

21. What are the classifications of double taxation?


• Direct duplicate taxation – This is double taxation in its strict sense. It is prohibited
because it consists imposition of the same tax on the same property for the same
purpose by the same State during the same taxable period.
This kind of double taxation violates the constitutional provision of uniformity and
equal protection, as well as the principle that tax must not be excessive,
unreasonable and equitable. Therefore, such taxation should, whenever and
wherever possible, be avoided to prevent injustice or unfairness.
• Indirect duplicate taxation – This is double taxation in its broad sense. It extends to
all cases in which there is a burden of two or more pecuniary impositions. It is
usually allowed as long as there is no violation of equal protection and uniformity
clauses of the Constitution.

TAX ADMINISTRATION

22. What are the main agency implementing the National Internal Revenue
Laws?
The Bureau of Internal Revenue is the administrative agency of the government in charge
with the primary function of administering the National Internal Revenue laws and
regulations. It is responsible for the collection of National Internal Revenue taxes. It is
under the executive supervision and control of the Department of Finance. The Internal
Revenue Commissioner heads it (Sec. 2)

23. What are the powers of the Commissioner of Internal Revenue


1. To interpret tax laws and to decide on tax cases.
2. To obtain information, to summon and take testimony to effect tax collection
3. To make assessment and prescribe additional requirements for tax administration and
enforcement
• Examination of returns and determination of tax due.
• Failure to submit required returns, statements, reports and other documents
• Authority to conduct inventory-taking, surveillance and prescribe presumptive
gross sales and receipts
• Authority to terminate taxable period.
• Authority to prescribe real property values.
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
• Authority of the Commissioner to inquire deposit accounts
• Authority to accredit and register tax agents.
• Authority of the Commissioner to prescribe additional procedural or
documentary requirements.

Check-up Quiz 6. Which of the following statement is


NATURE, SCOPE, CLASSIFICATION, AND not correct?
ESSENTIAL CHARACTERISTICS a. In the absence of any
1. Which of the following statements is Constitutional provisions, the
not correct? power of taxation is unlimited
a. The power of tax is inherent to except for the restrictions of its
the existence of the inherent limitations.
government which could be b. The power of taxation is plenary
exercised even without its (full, complete), comprehensive,
provision in the Constitution. and most supreme among the
b. Taxation is the strongest among inherent powers of the State.
the inherent powers of the state c. The exercise of taxation is also
and considered as an absolute restricted by the sense of
power. responsibility of the members of
c. Constitutional provisions the law-making body.
regarding taxation may limit the d. The power of taxation is
exercise of the power of separably existing from the
taxation. State, and such could be
d. Taxes appropriated for National exercised by the President even
Defense may be regarded as for without provision in the
public purpose. constitution.
2. Taxes are public money which should PURPOSE OF TAXATION
be used for public purposes. Which o 7. Which of the following is generally
the following is not regarded as for serving the regulatory function of
public purposes? taxation?
a. Appropriation for public a. real estate tax
education b. income tax
b. Appropriation for c. custom duties
Comprehensive Agrarian d. estate tax
Reform Program of the 8. Which of the following could not be
government considered as a purpose of taxation?
c. Appropriation for the Church a. To raise revenue to support the
d. Appropriation for governmental government
projects b. To distribute wealth of the
3. Which of the following could not nation
exercise the levying function of c. To check inflation
taxation? d. To impose monetary burden to
a. City council the people
b. Provincial board 9. Which of the following business taxes
c. Provincial governor serve more the regulatory functions of
d. Congress taxation?
4. Statement: Taxation power could a. Value Added Tax
readily be exercised by the State upon b. Percentage Tax
its existence. True or False c. Excise Tax
5. Statement: Any provision in the d. All of the above
Constitution regarding taxation merely STAGES (ASPECTS) OF TAXATION
constitutes limitations upon the 10.Fixing the rate to be imposed is best
supremacy of taxation power. described as a (an)
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
a. Tax administration aspect LIMITATIONS OF THE POWER OF
b. Tax legislative function TAXATION
c. Aspect of taxation which could 17.Which constitutional limitation is being
be delegated complied with the serving of
d. Function that could be assessment notice to delinquent
exercised b the executive taxpayer?
branch a. Due process of law
11.Which of the following is considered as b. Equal protection of law
tax administrative function? c. Rule of uniformity
a. Collection of taxes d. Non-impairment clause
b. Fixing of tax rates 18.What constitutional provision is
c. Prescribing the date and place described when tax bill is required to
of payment of tax be presented for the approval of the
d. Determination of the subject or executive branch of the government?
object of taxation a. Legislative in nature
b. Non-impairment clause
12.The determination of the tax base in c. Due process of law
accordance with the pertinent law is a d. President’s power to veto
(an) 19.Which of the following pertains to the
a. Imposition aspect of taxation provision in the fundamental law of
b. Assessment aspect of taxation the land restricting the exercise of
c. Collection aspect of taxation power of taxation?
d. Payment of taxes a. International comity
13.Which of the following could exercise b. Territorial jurisdiction
the levying aspect of taxation? c. Inherent limitation
a. Barangay council d. Constitutional limitation
b. City Mayor
c. Judiciary 20.Which of the following pertains to the
d. The President of the Philippines Constitutional provision requiring that
tax apportionment must be more or
BASIC PRINCIPLES OF A SOUND less just in light with the taxpayer’s
TAXATION SYSTEM ability to shoulder the taxpayer in
14.Which tax principle dictates that the accordance to his wealth, property
government must maintain an ideal and income, or proportionate to the
budgetary system? benefits received from the
a. Fiscal adequacy government?
b. Theoretical justice a. Due process of law
c. Administrative feasibility b. Equal protection of law
d. All of the above c. Equity in taxation
15.Which tax principle is described in the d. Rule of uniformity in taxation
statement: The more income earned 21.Which of the following pertains to the
by the taxpayer, the more tax he has Constitutional guaranty which
to pay. provides that all taxable articles and
a. Fiscal adequacy properties of the same class, should
b. Theoretical justice be taxed at the same rate?
c. Administrative feasibility a. Equity in taxation
d. All of the above b. Rule of uniformity in taxation
16.Which of the following is not in c. Equal protection of law
harmony with the basic tax principles? d. Due process of law
a. Clear and concise 22.Which Constitutional provision
b. Vague and burdensome requires that all persons subject to
c. Convenient to the taxpayer legislation should be treated alike
d. Convenient to the government under similar circumstances and
Tax1a Basic Principles of Taxation 8
Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
conditions both in privileges conferred c. International comity
and liabilities imposed? d. Non-impairment clause
a. Equity in taxation SIMILARITIES AND DISTINCTION AMONG
b. Equal protection of law INHERENT POWERS OF THE
c. Due process of law GOVERNMENT
d. For public purposes 28.Which of the following is a
23.Which limitation on the power of characteristic of taxation which
taxation inherently implied that the distinguishes it from police power and
State’s primary concern is for the eminent domain?
common good of the people? a. For public purposes
a. Equity in taxation b. Legislative in nature
b. Equal protection of law c. Generally payable in money
c. Due process of law d. Inferior to non-impairment
d. For public purposes clause in the Constitution

24.Which of the following restrictions on 29.Which of the following generally does


the power of taxation recognizes that not raise money to the government?
the country’s tax laws shall not be a. Taxation power
applied to the property of foreign b. Police power
government? c. Eminent Domain
a. Taxation is inherently a d. None of the above
legislative function
b. Exercise of taxation is subject to
international comity 30.Which statement refers to police
c. Due process of law power as distinguished from taxation?
d. Equal protection of law a. The benefit derived by the
payer is the protection provided
25.Which restriction on the power of by the state
taxation limits its imposition on b. It is inherent to the existence of
properties which are within physical the State
boundaries of the State imposing it? c. It involves only restriction on
a. Inherently legislative the usage of property
b. Territorial jurisdiction d. Specific property is being taken
c. International comity over by the government
d. Equal protection of law
31.The following are similarities of
26.Which of the following limitations on taxation, police power and eminent
the power of taxation restricts the domain, except
delegation of taxation power to those a. All are inherent to the existence
ministerial and advisory in nature, of the State
such as valuation and assessment of b. All have a corresponding form
object of taxation of compensation
a. Inherently legislative c. All are superior to the non-
b. Due process of law impairment clause
c. International comity d. All are limited for public
d. Non-impairment clause purposes
27. Which restriction is described in the
non-taxability of the property within SITUS OF TAXATION
the foreign country’s embassy which is
located within the territorial 32.Which of the following income is
jurisdiction of the taxing State? taxable in the Philippines?
a. Inherently legislative a. Salary received for working
b. Territorial jurisdiction abroad by non-resident citizen
Tax1a Basic Principles of Taxation 9
Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
b. Interest income earned by a 37.Which of the following is the general
non-resident alien the classification of Income Tax?
Philippines a. Regulatory tax
c. Business income earned in the b. Indirect tax
USA by an American corporation c. Advalorem tax
d. Cash dividend received by a d. Proportionate as to rate
non-resident citizen from a
foreign corporation 38.Which of the following is not an excise
tax?
33.Which of the following is subject to a. Value Added tax
Philippine estate tax? b. Income Tax
a. Personal property of a non- c. Real estate tax
resident citizen decendent d. Donor’s tax
located outside the Philippine at
date of death 39. Which of the following is the
b. Real property of a non-resident classification of value-added tax?
alien decedent located outside a. Progressive as to rate
the Philippines at date of dearth b. Proportionate tax rate
c. All of the above c. Transfer tax
d. None of the above d. Specific tax
34.Where is the place of payment of real
property tax for a building located in 40.All of the following, except one is an
Baguio, owned by an individual whose example of direct tax.
residence is in Manila, and those a. Income tax
working place is in Quezon City? b. Donor’s tax
a. Treasurer’s office of Baguio c. Value Added Tax
b. Treasurer’s office of Manila d. Estate tax
c. Treasurer’s office of Quezon
City TAX INVASION AS DISTINGUISED FROM
d. Treasurer’s office of any of the TAX AVOIDANCE
three mentioned cities
35.Value Added Tax is a national business 41.In which of the following taxes could
tax. Where should this tax be paid for an income tax be classified?
the sales of a business entity doing a. Regulatory tax
business in Baguio, whose owner is a b. Local tax
resident of Makati? c. Progressive tax rate
a. City treasurer of Baguio d. Indirect tax
b. Revenue District of Baguio 42. Which of the following is to be
c. Revenue District Office of regarded as to tax minimization
Makati through legal means?
d. Wherever of the three a. Not declaring all taxable income
mentioned offices at the b. Padding of expenses for
convenience of the taxpayer deduction from income
NATURE, CHARACTERISTICS, KINDS OF c. Opting to transfer the property
TAXES through sale rather through
36.Which of the following is not a donation where tax liability
characteristic of a tax? would higher
a. Generally payable in money d. All of the above
b. Generally based on a contract 43.Which of the following could be
c. Forced contribution described as tax evasion?
d. Proportionate to the capability a. Using two sets of books of
of the taxpayer to pay accounts
Tax1a Basic Principles of Taxation 10
Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
b. Non-issuance of commercial a. To exercise the levying function
invoice of taxation
c. All of the above b. To interpret tax laws
d. None of the above c. To assess and collect BIR taxes
DOUBLE TAXATION d. To decide cases involving
National Internal Revenue taxes
44.Which of the following is not an 48.Which of the following is within the
example of double taxation? scope of authority of the BIR
a. Taxing a fringe benefit which Commissioner?
has been subjected to final a. To inquire into bank deposit
withholding income tax accounts
b. Taxing gain on sale of real b. To terminate taxable period
estate (capital asset) based on c. To prescribe real property
normal tax which has been values
subjected to final tax. d. All of the above
c. Taxing stockholders’ dividend 49.The BIR Commissioner has the
income derived from the same authority to delegate powers vested
corporation whose income has on him under the Tax Code, which of
been subjected to income tax the following powers of the
d. All of the above Commissioner could not be delegated?
45. Which of the following remedies would a. The power to recommend the
counter-act double taxation? promulgation of rules and
a. Reciprocity and/or tax credit regulations by the Secretary of
b. Tax exemption and allowable Finance, and the power to issue
deductions rulings of first impression or to
c. Tax benefit agreements reverse, revoke or modify any
d. All of the above existing ruling of the Bureau of
Internal Revenue
TAX ADMINISTRATION b. The power to compromise or
46. Which of the following is not a National abate tax liability
Internal Revenue Tax? c. The power to assign or re-assign
a. Income tax internal revenue officers to
b. Donor’s tax establishments where articles
c. Estate tax subject to excise tax are
d. None of the above produced or kept.
47. Which of the following is not within the d. All of the above
scope of authority of the BIR
Commissioner?
e.