GENERAL PRINCIPLES OF TAXATION

TAXATION
Concept: Taxation is the inherent power of the State to impose and
demand contribution for public purpose. (Cooley 72-73
INHERENT POWER OF THE STATE means that taxation is essential
to the existence of the government. Thus, it exists without necessity
of any specifc grant of power by the constitution.
TO IMPOSE AND DEMAND CONTRIBUTION means that taxation is
not a voluntary payment or donation since its imposition is dependent
upon the will or assent of the taxpayer.
FOR PUBLIC PURPOSE means that taxation must have for objective
the support of the government in the performance of various services
and the satisfaction of recognized public network. Hence, proceeds of
the tax must be used
(a) for the s!!ort of the "o#er$%e$t&
!b" for some of the recognized objects of the government#
!c" to promote the welfare of the community.
PURPOSES OF TAXATION'
The purposes of taxation are the following
$. To raise revenue
%. To e&uitably distribute the wealth of the nation
'. To pick new industries !by providing tax exemption new or pioneering
industry"
(. To protect local procedures !by imposing higher custom on cheap
imported goods"
ESSENTIAL CHARACTERISTICS OF TAX ARE'
$. )t is an enforced contribution. )t*s payment not voluntary in nature,
and the imposition is not dependent upon the will of the person taxed.
!+( cjs'%"
%. )t is generally payable in money. This means that payment by checks,
promissory notes or in kind is not acceptable.
'. )t is proportionate in character. ,ayment of taxes must be based on
the -ability.to.pay/ principle# thus, the higher the income of the
taxpayer, the bigger the amount of the tax paid.
(. )t is levied on persons or property. 0lthough there are taxes that are
imposed or levied on acts, transactions, rights or privileges.
1xample. 2ocumentary tax
3. )t is levied by the 4tate which has jurisdiction over the person or the
property. 0s a general rule, only persons, properties, acts, rights,
transactions within the jurisdiction of the taxing 4tates are subject to
tax.
5. )t is levied by the law.making body of the 4tate. This means that the
prior law must be enacted frst by the 6ongress before assessment
and collection maybe implemented. !0rt. 5, 4ec. %7, par !$" of the
$777 6onstitution"
BASIC PRINCIPLES OF A SOUND TAX S(STEM
$. Fiscal adequacy which means that sources of revenue be su8cient
to meet the demands of public expenditures !Tax 9eport :ol. $ pg. %'"
%. Equality or Theoretical justice which means that the burden should
be in proportion to the taxpayer*s ability to pay. !,rinciples of ,ol. 1co.
:ol. $$"
'. Administrative Feasibility which means that the tax laws should be
capable of convenient, just e;ective and e;ective administration.
CLASSIFICATION OF TAXES
AS TO SUB)ECT MATTER'
(*) Perso$a+, or !o++ -a!.tat.o$ ta/ 0 is a tax of a fxed
important on persons residing within a specifed territory,
whether citizens not, without regard to their priority,
occupation or business in which they maybe engaged.
(1) ,roperty Tax < is tax imposed on property, whether real or
proportional and proportion either to its value, or in
accordance with some reasonable method of appointment.
1x. 9esidence Tax
(2) 1xcise Tax < is a charge imposed upon the performance of an
act, enjoyment of a privilege, or the engaging in a
occupation, professions or business. 1x. :0T
AS TO WHO BEARS THE BURDEN'
(3) D.re-t Ta/ 0 is tax which is demanded from the person who
also shoulders the burden of the tax# thus it is the tax for
which the taxpayer is directly liable or which he cannot shift
to another. 1x. )ncome Tax
(4) I$5.re-t Ta/ 0 refers to a tax imposed upon goods before
they reached the consumer who ultimately pays for it not as
tax but as part of purchased price.
1x. :at
AS TO DETERMINATION OF AMOUNT
(6) 4pecifc Tax . .s ta/ of a 7/e5 a%o$t .%!ose5 89 the
hea5 or $%8er, or 89 so%e sta$5ar5 of :e."ht or
%easre%e$t& .t re;.res $o assess%e$t other tha$
+.st.$" or -+ass.7-at.o$ of the o8<e-ts to 8e ta/e5= E/=
Ta/es o$ :.$es
(>) 0d :alorem !0ccording to :alue" .refers to tax of a fxed
proportion of the value of the property with respect to which
the tax is assessed. 6onse&uently, it re&uires the
intervention of assessors or appraisers estimate the value of
the property before amount due from taxpayer can be
determine. 1x. Taxes on cigarettes.
TAX DISTINGUISHED FROM DEBT
$. 0 tax is based from law, while debt is based on contract.
%. 0 tax may be not assignable# while debt is assignable.
'. 0 tax is generally payable in money, while a debt is payable
money or in kind.
(. 0 person may be imprisoned for non.payment of tax, but he
may not be imprisoned for non.payment of debt
Taxation . sjb,rior = $
ENTITIES EXEMTED FROM TAXATION
$. 9eligious institutions !church, mos&ues, parsonages"
%. 6haritable institutions
'. >on.proft, non.stock educational institutions
(. >on.proft cemeteries
3. ?overnment institutions
5. @oreign diplomats !by virtue of treaty"
!0rt $( 4ecs ( A ' $7+B 6onstitution 0rt + 4ec %+ !$" $7+B
6onstitution"
!rounds for Tax "xemption
Tax exemption may be based on the following grounds namely
$" 6ontract < )n this instance, the government is one of the contracting
parties. )n which case, the government must receive a full e&uivalent
for the exemption. ?enerally, the previous of a contract exemption are
contained in the charter of an exempted corporation.
%" ,ublic ,olicy < ?overnment need not receive any consideration return
for the tax exemption.
1x. ,olicy of encouraging new and necessary industries e.g. step
manufacturing
'" 9eciprocity < 1xemption many be created in a treaty on grounds
reciprocity or to lessen the rigors of international double or multiple
taxation.
Ta/ A#o.5a$-e #.s?@?#.s Ta/ E#as.o$
The distinction between tax avoidance and tax evasion is very clear in the
academe. Tax books have often defned tax avoidance as an attempt to
minimize the payment or altogether eliminate tax liability by lawful means,
while tax evasion refers to the elimination or reductions of oneCs correct and
proper tax by fraudulent means. The conse&uence of each case is also clear.
The former is not criminally punishable while the latter is criminally punishable.
Tax 1vasion is the use by the taxpayer of illegal or fraudulent means to defeat
or reduce the payment of a tax. )t is punishable by law.
1xamples 2eliberate failure to report taxable income or property# deliberate
reduction of income that has been received.
Tax 0voidance is the use by the taxpayer of legally permissible means or
methods in order to avoid or reduce tax liability. )t is not punishable by law.
1xamples 4ituations where a person refrains from engaging in some activity or
enjoying some privilege in order to avoid the incidental taxation or to lower his
tax bracket for a taxable year to avoid the higher rate of tax.
Tax evasion should be applied to the escape from taxation accomplished by
breaking the letter of the law for example deliberate omission to report a
taxable item. Tax avoidance on the other hand, covers escape, accomplished
by legal means which may be contrary to the intent of the sponsors of the tax
law but nevertheless do not violate the letter of the law.
Tax is the lifeblood of the government. Thus, it is not inconceivable to see that
the D)9 is vigorous on its tax collection e;orts. En whether this circumstance
is daunting on the part of the taxpayer depends on whether the taxpayer has a
reason to fear or has something to hide. 9emember that a taxpayer could only
have valid disputes against the D)9 if there is a violation of tax laws < moreso,
if the violation involves an unlawful avoidance of tax constituting a tax evasion
case.
0s cited in a 4upreme 6ourt !46" case, tax evasion connotes the integration of
three factors !$" the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non.payment of tax when it is
shown that a tax is due# !%" an accompanying state of mind which is described
as being Fevil,F in Fbad faith,F Fwillful,F or Fdeliberate and not accidentalF# and
!'" a course of action or failure of action which is unlawful !6ommissioner of
)nternal 9evenue, petitioner, vs. The 1state of Denigno ,. Toda, Gr., ?.9. >o.
$(B$++, 4eptember $(, %HH(".
9eading on the above three factors, it is undeniable that tax evasion is an act
of avoiding taxes that is not acceptable, in whatever way a taxpayer reIect on
it, as such act is unlawful.
En the other hand, in the same 4upreme 6ourt case cited above, the 46
di;erentiated tax evasion as against tax avoidance. )t went on to say the
following -Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation. Tax avoidance is the tax saving
device within the means sanctioned by law. This method should be used by
the taxpayer in good faith and at arm*s length. Tax evasion, on the other hand,
is a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities./
)t can be inferred from the foregoing that there are lawful means of avoiding
taxes. 0s a caution, however, these means should be used by the taxpayers in
-good faith/. 9emember that the state of mind of the taxpayer is not -evil/ as
described in the three factors constituting a tax evasion case.
How about an example of a tax avoidance that is permitted by tax rulesJ
6onsider this < 0n employer has numerous employees. He is evaluating on
providing his employees a higher amount of take.home pay. 0 concern
prompted him that if he raises the salaries of his employees, then there will be
conse&uent higher withholding taxes on compensation, as higher salaries may
fall under higher withholding tax rate bracket. Khat then could he do legally to
avoid the higher tax ratesJ )n this situation, the employer may take into
account the provisions of the -de minimis benefts/ rule !see recent 9evenue
9egulatio ns >o. 3.%H$$, Larch $5, %H$$, on de minimis benefts rule". The list
of employee benefts enumerated in the said rule is considered exempt from
withholding tax on compensation. Thus, by giving de minimis benefts to his
employees, the higher withholding tax rates on compensation could be
avoided, as permitted by the tax rules# while at the same time, the employer
will be able to meet his objective of providing higher amount of take.home pay
for his employees.
Taxation . sjb,rior = %
The above example is just a simple illustration of a tax avoidance scheme that
is allowed under the rules. En whether there are other situations of legal tax
avoidance, circumstances have to be carefully evaluated on a case to case
basis, to ensure that tax laws are not violated and to ensure that the taxpayers
are in good faith.
>ow, a taxpayer may wonder whether he has done in the past, acts of tax
evasion or acts of tax avoidance# or whether he has current plans of future
transactions wherein he is unsure to which act would these fall under. ,erhaps,
a time is also needed to reIect. @or acts done in the past, a tax compliance
review of past transactions could be thought of to be a prudent course of
action. Leanwhile, for plans in the future, a cautious tax study may have to be
considered. The objective is straightforward < to recoil from the distressing
conse&uences of unlawful avoidance of tax.
Tax avoidance and tax evasion are the two ways by which tax payers try to
reduce the amount they have to pay to the Dureau of )nternal 9evenue. Khile
both these terms have the same objective, tax avoidance and tax evasion
di;er in the means by which the purpose of paying lesser amount of tax is
obtained.
Khat is tax avoidanceJ
This is the means by which tax payers try to reduce tax within the means
allowed by law. Tax avoidance should be made in good faith and at arm*s
length, otherwise it will not be regarded as such.
Tax evasion vs. Tax avoidance
Khat is an example of tax avoidanceJ
0 good example of tax avoidance is the use of the depreciation method in
claiming deductible expenses to lessen the income tax.
Khat are the elements of tax evasionJ
Tax evasion connotes the integration of three factors !$" end to be achieved,
i.e. the payment of less than that known by the taxpayer to be legally due, or
the non.payment of tax when it is shown that the tax is due# !%" an
accompanying state of mind which is known as -evil,/ in -bad faith,/ -willful,/
or -deliberate and not accidental/# and !'" a course of action or a failure of
action which is unlawful.
Khat is tax evasionJ
Tax evasion is the opposite of tax avoidance. Mnder this scheme, the taxpayer
employs means outside the lawful means and will merit the tax payer civil and
even criminal sanctions for his fraudulent acts.
Khat is an example of tax evasionJ
0 simple example of this method is the understatement by the tax payer of his
revenues in order to minimize or reduce the taxes which will be imposed
thereon. 0s an illustration, Lr. 4alazar reported only ,hp$ million as his income
when in truth he was able to earn ,hp$H million.
The case of 6ommissioner of )nternal 9evenue vs. The 1state of Denigno ,.
Toda et al, decided by the 4upreme 6ourt on $( 4eptember %HH(, is illustrative
of the concepts of tax evasion and tax avoidance. )n the said case 6ibeles
)nsurance 6orporation !6)6" authorized Denigno ,. Toda, J,resident and owner
of 77.7N of its issued and outstanding capital stock to sell the 6ibeles Duilding,
located in 0yala 0venue, to a certain 9afael 0ltonaga for ,hp$HH million. The
latter sold the building to 9L) for ,hp%HH million. This transaction was
evidenced by 2eeds of 0bsolute 4ale notarized by the same notary public on
the same day.
The 6ourt noted that Lr. 0ltonaga was a mere dummy and that the transaction
was actually between 6)6 and 9L). 6)6 sought to avoid the payment of
corporate income tax on the additional ,hp$HH million by changing the income
from income structure from corporate income tax to individual capital gain.
Thus, the whole transaction was considered as tax evasion and not a mere tax
avoidance.
Ta/ Assess%e$t
The Dureau of )nternal 9evenue !D)9" recently revised the rules and procedures
relative to the due process re&uirements in the issuance of tax assessment
with the issuance of 9evenue 9egulations !99" >o. $+.%H$'. 0 notable
amendment introduced by D)9 is the removal of the >otice of )nformal
6onference.
Mnder the Tax 6ode, the >otice of )nformal 6onference is not a re&uirement#
nevertheless, it was institutionalized under 99 >o. $%.77 as part of the
procedural due process. 0mong the salient features of the revised rules in 99
>o. $+.%H$' are as follows
$" 9emoval of the re&uirement to issue >otice of )nformal 6onference prior to
the issuance of preliminary assessment notice !,0>". ,0> will directly be issued
to the taxpayer if the 6ommissioner of )nternal 9evenue or his duly authorized
representative fnds su8cient basis to assess the taxpayer for any defciency
tax or taxes after review and evaluation of taxpayers* records.
%" @ormal Oetter of 2emand !@O2" and @inal 0ssessment >otice !@0>" will be
issued if the taxpayer fails to respond within $3 days from receipt of the ,0>.
)n case the taxpayer responds to the ,0> within the $3.day period, the
@O2P@0> shall be issued within $3 days from the flingPsubmission of the
taxpayer*s response.
'" 9e&uirement to state the nature of protest of the taxpayer to the @O2P@0>,
whether the taxpayer is seeking reconsideration or reinvestigation.
(" )t introduced the remedy of administrative appeal with the 6ommissioner of
)nternal 9evenue on @inal 2ecision on 2isputed 0ssessment !@220" issued by
Taxation . sjb,rior = '
the authorized representatives of the 6ommissioner through the fling of
re&uest for reconsideration.
3" )t prescribed the modes of service for ,0>P@O2P@0>P@220, which may be
served by the 6ommissioner or his duly authorized representative through
personal service, substituted service or by mail.
5" )mposition of defciency and delin&uency interest < the %H percent defciency
interest will be assessed from the date prescribed for the payment of the tax
until the full payment thereof while the %H percent delin&uency interest shall
be collected from the due date appearing in the notice and demand of the
6ommissioner of )nternal 9evenue until the amount is fully paid.
Do8+e Ta/at.o$

2ouble taxation in the strict sense v. double taxation in the broad sense

)n its strict sense, referred to as direct duplicate taxation, double taxation
means

$. Taxing twice#

%. by the same taxing authority#

'. within the same jurisdiction or taxing district#

(. for the same purpose#

3. in the same year or taxing period#

5. 4ome of the property in the territory.

)n its broad sense, referred to as indirect double taxation, double taxation is
taxation other than direct duplicate taxation. )t extends to all cases in which
there is a burden of two or more impositions.

6onstitutionality of double taxation

Mnlike the Mnited 4tates 6onstitution, our 6onstitution does not prohibit double
taxation.
However, while it is not forbidden, it is something not favored. 4uch taxation
should, whenever possible, be avoided and prevented.
)n addition, where there is direct double taxation, there may be a violation of
the constitutional precepts of e&ual protection and uniformity in taxation.
The argument against double taxation may not be invoked where one tax is
imposed by the 4tate and the other is imposed by the city, it being widely
recognized that there is nothing inherently obnoxious in the re&uirement that
license fees or taxes be exacted with respect to the same occupation, calling,
or activity by both the 4tate and a political subdivision thereof. 0nd where the
statute or ordinance in &uestions applies e&ually to all persons, frms and
corporations placed in a similar situation, there is no infringement of the rule
on e&uality. Q6ity of Daguio v. 2e Oeon, %3 4690 7'+R

:illanueva v. 6ity of )loilo, %53 4690 3%+

0n ordinance imposing a municipal tax on tenement houses was challenged
because the owners already pay real estate taxes and also income taxes under
the >)96. The 4upreme 6ourt held that there was no double taxation. The same
tax may be imposed by the >ational ?overnment as well as the local
government. There is nothing inherently obnoxious in the exaction of license
fees or taxes with respect to the same occupation, calling, or activity by both
the 4tate and a political subdivision thereof. @urther, a license tax may be
levied upon a business or occupation although the land used in connection
therewith is subject to property tax.

)n order to constitute double taxation in the objectionable or prohibited sense

$. The same property must be taxed twice when it should be taxed once#

%. Doth taxes must be imposed on the same property or subject matter#

'. for the same purpose#

(. by the same 4tate, ?overnment, or taxing authority#

3. within the same jurisdiction or taxing district#

5. 2uring the same taxing period# and

B. of the same kind or character of tax.

0t any rate, there is no constitutional prohibition against double taxation in the
,hilippines. )t is something not favored but is permissible, provided that some
other constitutional re&uirement is not thereby violated.
Taxation . sjb,rior = (