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Taxation Notes

Chapter 1 General Principles


A. Concept, Nature, and Characteristics of Taxation
and Taxes

e) It is levied by the state having jurisdiction over


the person or property the object to be taxed
must be subject to the jurisdiction of the taxing
state so that it may be enforced therein; the
taxing power necessarily stops at the state
boundary lines;

1. What is taxation?
f)
Taxation is an act of laying taxes, i.e., the process or
means by which the sovereign, through its lawmaking body, raises income to defray the necessary
expenses of the government. It is merely a way of
apportioning the cost of government among those
who in some measure are privilege to enjoy its
benefits and, therefore, must bear its burden.
As a power, taxation refers to the inherent power of
the state to demand enforced contribution for public
purpose or purposes.
2. What is the purpose of taxation?
The primary purpose of taxation on the part of the
government is to provide funds and property with
which promote the general welfare and protection of
its citizens. Aside from raising revenues for
governmental needs, taxation may also be exercised
to attain various social and economic (non-revenue)
objectives.
3. What is the scope of taxation?
In its broadest and most general sense, taxation
includes every imposition or charge or burden by the
sovereign power upon persons, property, or property
rights for the use and support of the government to
enable it to discharge its appropriate functions.
4. What are taxes?
Taxes are enforced proportional and pecuniary
contributions from persons and property levied by the
law-making body of the state having jurisdiction of the
subject of the burden for the support of the
government and all public needs.
5. What are the essential characteristics of tax?
EP-MP-JLP
a) It is an enforced contribution not a voluntary
payment or donation; not dependent upon will or
assent of taxpayer; principle of representation
(satisfied by adequate representation in the
legislative body which votes the tax);
b) It is proportionate in character ordinarily based
on ability-to-pay;
c) It is generally payable in money unless
qualified by law (such as backpay certificates), it
is understood to be a pecuniary burden; an
exaction discharged alone in the form of money
which must be in the legal tender;
d) It is levied on persons or property may also be
levied on acts, transactions, rights or privileges;
in each case however, it is only a person who
pays the tax;

It is levied by the law-making body of the state


power to tax is a legislative power which under
the constitution, only congress can exercise
through enactment of statutes; an obligation of
tax is a statutory liability; Local legislative bodies
are now given direct authority to levy taxes, fees,
and other charges pursuant to the constitution
but subject to such guidelines and limitations as
may be provided by law;

g) It is levied for public purpose or purposes


taxation involves, and a tax constitutes, a charge
or burden imposed to provide income for public
purposes the support of the government, the
administration of the law, or the payment of
public expenses; it cannot be used for purely
private purposes or for the exclusive benefit of
private persons;
6. What are the theory and basis of taxation?
ERP
(a) Existence of government taxation proceeds
from the theory that the existence of the
government is a necessity and it cannot continue
without the means to pay its expenses;
(b) Reciprocal duties of state and inhabitants
(benefits-received principle) protection for
support and support for protection;
(c) Public purpose requirement what matters in
taxation is that the imposition is for a public
purpose;
7. What is the nature of the power of taxation?
IL
(a) Inherent in sovereignty power of taxation is an
incident and attribute of sovereignty; it exists
apart from the constitution and without being
expressly conferred by the people;
(b) Legislative in character the power to tax is
particularly and exclusively legislative and cannot
be exercised by the executive or judicial branch
of the government;
Note: it may also be exercised by a local
legislative body subject to such limitations as
may be provided by law.
(c) Subject to constitutional and inherent limitations
the power of taxation is not absolute; it subject
to certain limitations or restrictions;
Note: the mere fact that taxation is unjust or
oppressive with respect to a particular taxpayer
does not of itself render a tax law invalid, where
no constitutional provision has been violated.
8. What are the two aspects of taxation?

LC
a) Levying or imposition of the tax it is a
legislative act;
b) Collection of the tax levied it is essentially
administrative in character;
The first is taxation, strictly speaking, while the
second (including the payment by the taxpayer) may
be referred to as tax administration. The two
processes together constitute the taxation system.
9. What is the extent of the legislative power to tax?
The power of taxation being legislative, all its
incidents are naturally within the control of the
legislature. Subject to constitutional and inherent
restrictions, the legislature has discretion to
determine:
SPAM
(a) Subjects or objects to be taxed;
(b) The purpose or object of the taxed so long as it is
public purpose;
(c) The amount or rate of the tax;
(d) The manner, means, and agencies of collection
of the taxes;
10. Which has the power to determine whether the
purpose is public or private?
It is the courts.
11. What is the limitation of judicial review?
Judicial action is limited only to a review where it
involves:
(a) Determination of the validity of the tax in relation
to constitutional precepts or provisions;
(b) Determination in an appropriate case of the
application of a tax law.
12. What are some of the non-revenue objectives of
taxation?
(a) It can strengthen anemic enterprise or provide
incentive to greater production;
(b) Taxes on imports may be increased to protect
local industries against foreign competition or
decreased to encourage foreign trade;
(c) Taxes on imported goods may also be used as a
bargaining tool to enhance its bargaining power;
(d) Taxes may be increased in times of prosperity in
order to curb spending power and halt inflation or
decreased in times of slump to expand business
and ward off depression;
(e) Taxes may be levied to reduce inequalities in
wealth and income;
(f) Taxes may be levied to promote science and
invention;
(g) Taxation may be used as an implement of police
power;
(h) Tax provisions may be enacted so that low
income individuals pay little or no income taxes
through a system of exclusions, exemptions,
deductions and tax credits;

(i) Tax provisions may provide incentives for certain


desirable activities to encourage investments in
productive assets or facilities that will lead to
increased employment particularly low- and
middle-income workers; or are designed to
discourage certain socially undesirable practices;
13. What are the basic principles of a sound tax system?
FEA
(a) Fiscal adequacy the sources of revenues, that
is, receipts therefrom, taken as a whole, should
be sufficient to meet the demands of public
expenditure;
(b) Equality or theoretical justice the tax burden
should be distributed in proportion to the
taxpayers ability to pay;
(c) Administrative feasibility tax laws should be
capable of convenient, just and effective
administration or enforcement at a reasonable
cost.
B. CLASSIFICATIONS AND DISTINCTIONS
14. What are the classifications of taxes?
1.) As to subject matter or objective
(a) Personal, poll or capitation tax of a fixed
amount imposed on persons residing within
a specified territory, whether citizens or not,
without regard to their property or the
occupation or business in which they may be
engaged;
(b) Property tax imposed on property, whether
real or personal, in proportion either to its
value, or in accordance with some other
reasonable methods of apportionment.
(c) Excise any tax which does not fall within
the classification of a poll tax or a property
tax; it is a charge imposed upon the
performance of an act, the enjoyment of a
privilege, or the engaging in an occupation,
profession, or business.
Note:
- excise tax synonymous with privilege tax
- the excise tax referred is not the same as
the excise tax imposed on certain specified
articles which are manufacture or produced
in, or are imported into, the Philippines for
domestic sale or consumption or for any
other disposition;

2.) As to who bears the burden:


(a) Direct tax which is demanded or exacted
from the very person who also shoulders the
burden of the tax; or a tax which a taxpayer
is directly or primarily liable or which he
cannot shift to another;
(b) Indirect tax which is demanded from, or
paid by, one person in the expectation and
intention that he shall indemnify himself at

the expense of another by passing on the


burden to the latter, falling finally upon the
ultimate purchaser or consumer;
3.) As to determination of amount:
(a) Specific tax of a fixed amount imposed by
the head or number, or by some standard of
weight or measurement; it requires no
assessment of valuation other than a listing
or classification of the objects to be taxed
(e.g. taxed on distilled spirits, wines,
fermented liquors, cigars and cigarettes, etc)
(b) Ad valorem tax of a fixed proportion of the
value of the property with respect to which
the tax is assessed; it requires intervention
of assessors or appraisers (e.g. real property
taxes)
4.) As to purpose:
(a) General, fiscal, or revenue tax imposed for
the general purpose of the government, i.e.,
to raise revenue for governmental needs;
(b) Special or regulatory tax imposed for
special purpose, i.e., to achieve some social
or economic ends irrespective of whether
revenue is actually raised or not;
5.) As to scope:
(a) National tax imposed by the national
government;
(b) Municipal or local tax imposed by
municipal corporations or local government
units;
6.) As to graduation or rate:
(a) Proportional tax based on a fixed
percentage of the amount of the property,
receipts, or other bases to be taxed; the rate
of the tax remains constant for all levels of
the tax base or any given income level; it is
also called uniform or flat tax (e.g. real estate
taxes, value-added tax and other percentage
tax)
(b) Progressive or graduated tax the rate of
which increases as the tax base or bracket
increases;
(c) Regressive tax rate of which decreases as
the tax base or bracket increases; there is no
regressive tax in the Philippines.
15. What is a toll?

that may be imposed


Imposable only by the
government

17. What is a penalty?


Penalty is any sanction imposed as a punishment for
violation of law or acts deemed injurious.
18. Distinguish penalty from tax.
PENALTY
Designed to regulate
conduct
May be imposed by the
government or private
individuals or entities

TAX
Intended
to
raise
revenue
Imposable only by the
government

19. What is a special assessment?


Special assessment is an enforced proportional
contribution from owners of lands especially or
peculiarly benefited by public improvements.
20. Distinguish special assessment form tax
SPECIAL ASSESSMENT
Levied only on land
Not a personal liability of
the person assessed, i.e.,
liability is limited only to
the land involved
Wholly on benefits (not
necessity)
Exceptional as to both
the time and place

TAX
May be levied on
anything
Personal liability of the
person assessed

Necessary
for
the
existence of government
Has general application

Note: an exemption from the payment of taxes does not carry


with it the exemption from the payment of special assessment;
however, the power to tax carries with it the power to levy
special assessment.
21. What is a license or permit fee?

A toll is a sum of money for the use of something,


generally applied to the consideration which is paid
for the use of a road, bridge or the like, of a public
nature.
16. Distinguish tax from toll
TOLL
Demand of propreitorship
Paid for the use of
anothers property
Amount depends on the
cost of construction or

maintenance of the public


improvement used
May be imposed by the
government or private
individuals

TAX
Demand of a sovereignty
Paid for the support of
the government
Generally, there is not
limit on the amount of tax

License or permit fee is a charge imposed under the


police power for purposes of regulation. License is in
the nature of a special privilege, of permission or
authority to do what is within its terms. It makes lawful
an act which would otherwise be unlawful. License
granted by the State is always revocable.
22. Distinguish license or permit fee from tax
LICENSE OR
PERMIT FEE
Legal compensation or
reward of an officer for
specific services

TAX
Enforced
contribution
assessed by sovereign
authority to defray public

Imposed for regulation


Involves police power
Limited to necessary
expenses of inspection
and regulation
Failure to pay a license
fee makes the act or
business illegal

expense
Levied for revenue
Involves exercise of
taxing powers
Generally no limit on the
amount of tax that may
be imposed
Failure to pay does not
necessarily make the act
or business illegal

23. Why is it important to distinguish between a license


and tax?
1) There are some limitations that apply only to one
and not to the other and that the exemption from
taxes may not include exemption from a license
fee;
2) The power to regulate as an exercise of police
power does not carry with it the power to impose
fees for revenue purposes;
3) An exaction may be considered both a tax and a
license fee. This is true in the case of car
registration fees which may be regarded as taxes
even as they also serve as an instrument for
regulation.
If the purpose is primarily revenue, or if revenue
is at least one of the real and substantial
purposes, then the exaction is properly called a
tax;
4) The general rule is that the imposition is a tax if
its primary purpose is to generate revenue and
regulation is merely incidental; but if the primary
purpose is to regulate, then it is deemed a
regulation and an exercise of police power of the
state and the fact that incidental revenue is also
obtained does not make the imposition a tax.
24. Distinguish debt from tax
DEBT
Generally based
contract, express
implied
Assignable

on
or

May be paid in kind


May be the subject of setoff or compensation
Cannot be imprison a
debtor for failure to pay
(unless it arose from a
crime)
Governed by ordinary
periods of prescription

TAX
Based on law

Cannot generally be
assigned
Generally payable in
money
Cannot be set-off or
compensated, generally
Imprisonment
is
a
sanction
for
nonpayment

Governed by special
prescriptive periods in
the tax code
Draws interest when it is Does not draw interest
so stipulated or when except
only
when
there is default
delinquent
A liability and an obligation
25. Can taxes be set-off with debts owed by the
government to the taxpayer?

No, the government and the taxpayer are not mutually


creditors and debtors of each other. Obligations in the
nature of debts are due to the government in its
corporate capacity, whereas taxes are due to the
government in its sovereign capacity.
The exception to the general rule where both the
claims of the government and the taxpayer against
each other have already become due and
demandable as well as fully liquidated.
26. Can taxes be set-off with excess taxes paid?
No, excess taxes cannot be set-off with the current
tax due as a general rule. However, the
Commissioner of Internal Revenue is authorized by
law to grant refund or credit of taxes erroneously or
illegally paid.
27. Distinguish tax from (a) subsidy, (b) revenue, (c)
internal revenue, (d) customs duties, and (e) tariff.
(a) Subsidy is a pecuniary aid directly granted by the
government to an individual or private
commercial enterprise deemed beneficial to the
public. Therefore, it is not a tax although a tax
may have to be imposed to pay it;
(b) Revenue refers to all the funds or income derived
by the government, whether from tax or from
whatever source and whatever manner. While
revenue refers to the amount collected, tax refers
to the amount imposed;
(c) Internal Revenue refers to the amount imposed
by the legislature other than duties on imports
and exports;
(d) Customs duties (or simply duties) are taxes
imposed on goods exported from or imported into
a country. The term taxes is broader in scope
as it includes customs duties.
(e) Tariff may be used in one of the three senses,
viz:
(1) As book of rates drawn usually in
alphabetical order containing the names of
several kinds of merchandise with the
corresponding duties to be paid for the
same;
(2) As the duties payable on goods imported or
exported;
(3) As the system or principle of imposing duties
on the importation or exportation of goods;
However, the terms tariffs and customs duties
are used interchangeably in the Tariff and
Customs Code.
28. What is eminent domain?
The power of eminent domain is the power of the
state or those to whom the power has been delegated
to take private property for public use upon paying to

the owner a just compensation to be ascertained


according to law.
29. What are the requisites for the exercise of the power
of eminent domain?
(a) The existence of public use or benefit for the
taking;
(b) The payment of just compensation;
(c) The observance of due process in the taking;

Eminent domain operates on an entity or


individual as the owner of a particular property.
(d) As to effect:
In taxation, the money contributed in the concept
of taxes becomes part of the public funds.
In eminent domain, there is a transfer of the right
to property whether it be of ownership or a lesser
right (e.g. possession); and

30. What is police power?


Police power is the power of the state to enact such
laws in relation to persons and property as may
promote public health, public morals, public safety
and the general prosperity and welfare of its
inhabitants.
31. Give similarities among the three powers.
(a) They all rest upon necessity as there can be no
effective government without them;
(b) They all underlie and exist independently of the
Constitution although the conditions for their
exercise may be prescribed by the Constitution
and by law;
(c) They are ways by which the state interferes with
private rights and property;
(d) They are legislative in nature and character,
although the actual exercise of the powers is
given to the executive authorities, national or
local; and
(e) They all presuppose an equivalent compensation
received directly or indirectly by the persons
affected by the exercise of these powers by the
government;
32. Distinguish the three powers from each other.
(a) As to authority which exercises the power:
Taxation and police power may be exercised only
by the government or its political subdivisions.
The exercise of eminent domain may be granted
to public service companies or public utilities.

In police power, there is no transfer of title; at


most, there is restraint on the injurious use of the
property.
(e) As to benefits received:
In taxation, the person affected receives the
equivalent of the tax in the form of protection and
the benefits he receives from the government as
such.
In eminent domain, the person affected receives
the market value of the property taken from him.
In police power, the person affected receives no
direct and immediate benefit but only the
altruistic feeling that he has contributed to the
healthy economic standard of society and is often
referred to as damnun absque injuria (damage
without injury).
(f) As to amount of imposition:
In taxation, there is generally no limit on the
amount of tax that may be imposed.
In eminent domain, there is no amount imposed
but rather the owner is paid the market value of
the property taken.
In police power, the amount imposed should not
be more than sufficient to cover the cost of the
license and the necessary expenses of police
surveillance, inspection, examination, or
regulation as nearly as the same can be
estimated.

(b) As to purpose:
(g) As to relationship to the Constitution:
In taxation, the property (generally in the form of
money) is taken for the support of the
government;
In eminent domain, the property is taken for
public use or benefit; hence, must be
compensated; and
In police power, the use of property is regulated
for the purpose of promoting the general welfare;
hence, not compensable.
(c) As to persons affected:
Taxation and (usually) police power operate upon
a community or a class of entities or individuals.

The taxing power is subject to certain


constitutional limitations including the prohibition
against the impairment of the obligation of
contracts.
Eminent domain is also inferior to the impairment
prohibition so that the government cannot
expropriate property which under a contract, it
had previously bound itself to purchase form the
other contracting party.
Police power is relatively free from constitutional
limitations and is superior to the impairment
provision. In appropriate cases, the constitutional
injunction against impairment of the obligation of
contracts cannot be invoked as against the right
of the state to exercise its police power.

33. What is public finance?


Public finance refers to the financial operations of all
levels of the government. Such operations include
budgeting, taxing, appropriating, purchasing,
borrowing, disbursing funds, and regulating currency.

(b) Procedural due process after compliance with


fair and reasonable methods of procedure
prescribed by law;
37. What is the basis for the requirement of equal
protection of the laws?
Same as number 35.

So, taxation is merely a part of public finance.


38. What is meant by equal protection of the laws?
C. LIMITATIONS ON THE POWER OF TAXATION
34. What are the limitations of the power of taxation?
Give examples.
(1) Constitutional limitations those expressly found
in the Constitution or implied form its provisions;
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)

Due process of law;


Equal protection of the laws;
Rule of uniformity and equity in taxation;
No imprisonment for nonpayment of a poll
tax;
Non-impairment of the obligation of
contracts;
Non-infringement of religious freedom;
No appropriation for religious purposes;
Exemption of religious, charitable and
educational entities, non-profit cemeteries,
and churches from property taxation;
Exemption
of
non-stock,
non-profit
educational institutions from taxation;
Concurrence by a majority of all the
members of Congress for the passage of a
law granting tax exemption;
Power of the president to veto any particular
item or items in a revenue or tariff bill; and
Non-impairment of jurisdiction of the
Supreme Court in tax cases.

(2) Inherent limitations those which restrict the


power although they are not embodied in the
Constitution;
(a) Requirement that levy must be for public
purpose;
(b) Non-delegation of the legislative power to tax
(also implied from the Constitution);
(c) Exemption from taxation of government
entities;
(d) International comity; and
(e) Territorial jurisdiction.
35. What is the basis for the limitation on due process?
Proceeds from Sec.1, Art. III of the 1987 Constitution
which provides that: No person shall be deprived of
life, liberty or property without due process of law and
no person shall be denied the equal protection of the
laws.

The phrase signifies that all persons subject to the


legislation shall be treated alike under like
circumstances and conditions both in the privileges
conferred and liabilities imposed.
What the Constitution prohibits is class legislation
which discriminates against some and favors others.
Taxes are (uniform and) equal when imposed upon all
property of the same class or character within the
taxing authority.
39. What is the basis for the uniformity and equity in
taxation?
This limitations proceeds from the provision of the
Constitution (Sec. 28 [1], Art. VI) that: the rule of
taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
40. What is meant by uniformity in taxation?
It implies that all taxable articles or properties of the
same class shall be taxed at the same rate. It
therefore requires:
(a) Uniformity of operation throughout the tax unit it
requires that the uniform application and
operation, without discrimination, of the tax in
every place where the subject of it is found.
(b) Equality in burden uniformity implies equality in
burden, not equality in amount or equality in its
strict and literal meaning.
Therefore, all that is required is that the tax applies
equally to all persons, firms and corporations placed
in a similar situation.
41. What is meant by equity in taxation?
The concept of equity in taxation requires that such
apportionment be more or less just in the light of the
taxpayers ability to shoulder the tax burden (usually
measured in terms of the size of wealth or property
and income, gross or net) and if warranted (in certain
cases), on the basis of the benefits received from the
government.
Its cornerstone is the ability to pay.

36. What are the two due process requirements?


42. What is meant by a progressive system of taxation?
(a) Substantive due process under the authority of
law which is valid;

The Constitution enjoins Congress to evolve a


progressive system of taxation. This means that tax
laws shall place emphasis on direct rather than

indirect taxation, with ability to pay as the principal


criterion.
43. What is therefore the relationship or the difference
between the equal protection guarantee and
uniformity and equity?
While equal protection refers to like treatment of
persons in like circumstances, uniformity and equity
refer to the proper relative treatment for tax purposes
of persons in unlike circumstances.
44. What is the basis for the prohibition against
imprisonment for non-payment of poll tax?
Sec. 20, Art. III of the Constitution provides that No
person shall be imprisoned for debt or non-payment
of poll tax.
45. What is the basis for the prohibition against
impairment of obligation of contracts?
No law impairing the obligation of contracts shall be
passed. (Sec. 10, Art. III)
46. What is meant by impairment of obligation of
contract?
It occurs when the terms and conditions of a contract
are changed by law or by a party without the consent
of the other, thereby weakening the position or rights
of the latter.
47. What is the basis for the prohibition against taxation
of religious, charitable, and educational entities, etc.?
Charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and
improvements actually, directly and exclusively used
for religious, charitable or educational purposes shall
be exempt from taxation. (Sec. 23, Art. VI)
Note: this covers only property taxes and not other
taxes.

institutions used actually, directly, and exclusively for


educational purposes shall be exempt from taxes and
duties.
Subject to conditions prescribed by law, all grants,
endowments, donations or contributions used
actually, directly, and exclusively for educational
purposes shall be exempt from tax. (Sec. 4[4], Ibid.)
52. What are other constitutional limitations?
Granting of tax exemption no law granting any tax
exemption shall be passed without the concurrence of
a majority of all the members of the Congress.
Veto of appropriation, revenue, or tariff bills by the
president The President shall have the power to
veto any particular item or items in an appropriation,
revenue or tariff bill, but the veto shall not affect the
item or items to which he does not object.
Non-impairment of the jurisdiction of the Supreme
Court The Congress shall have the power to
define, prescribe, and apportion the jurisdiction of the
various courts but may not deprive the Supreme
Court of its jurisdiction over cases enumerated in
Section 5 hereof.
53. What is the meaning of requirement for public
purpose?
It is synonymous with governmental purpose. It
means a purpose affecting the inhabitants of the state
or taxing district as a community and note merely as
individuals.
D. SITUS OF TAXATION AND DOUBLE TAXATION
54. What is meant by situs of taxation?
It literally means place of taxation. The basic rule is
that the state where the subject to be taxed has a
situs may rightfully levy and collect the tax; and the
situs is necessarily in the state which has jurisdiction
or which exercises dominion over the subject in
question.

48. What is the test for the exemption?


It is the use of the property and not ownership. To be
tax-exempt, the property must be actually, directly,
and exclusively used for the purposes mentioned.
49. What is the scope of such exemption?
It exemption is not limited to property actually
indispensable for religious, charitable, or educational
purposes. It extends to facilities which are incidental
to or reasonable necessary for the accomplishment of
said purposes. (e.g. athletic field, etc.)

A person may be subject to taxation in several taxing


jurisdicitions.
55. What are the factors affecting situs of taxation?
(1) Nature of the tax;
(2) The subject matter thereof (persons, property, act
or activity);
(3) Possible protection and benefit that may accrue
both to the government and the taxpayer;
(4) The residence or the citizenship of the taxpayer;
and
(5) Source of income.

50. What is meant by the word exclusively?


It means primarily rather than solely.
51. What is the basis for the prohibition against taxation
of non-stock, non-profit educational institutions?
Sec. 4[3], Art. XIV of the Constitution: All revenues
and assets of non-stock, non-profit educational

56. What is double taxation?


In its strict sense (referred to as direct duplicate
taxation or direct double taxation), double taxation
means:

(a)
(b)
(c)
(d)
(e)
(f)

Taxing twice;
By the same taxing authority;
Within the same jurisdiction or taxing district;
For the same purpose;
In the same year (taxing period);
Some of the property in the territory.

2) Backward shifting from the consumer or


purchaser through the factors of distribution to
the factor of production;
3) Onward shifting this occurs when the tax is
shifted to two or more times either forward or
backward;
65. What is capitalization?

In its broad sense (referred to as indirect duplicate


taxation or indirect double taxation) means taxation
other than direct duplicate. It extends to all cases in
which there is a burden of two or more pecuniary
impositions.
57. Is double taxation unconstitutional?
Double taxation in its narrow sense is undoubtedly
unconstitutional but in its broad sense is not
necessarily so.
E. ESCAPE FROM TAXATION
58. What are the forms of escape from taxation?
(1) Shifting
(2) Capitalization
(3) Transformation
(4) Evasion
(5) Avoidance
(6) Exemption
59. What is shifting?
Shifting is the transfer or passing on of the burden of
a tax by the original payer or the one on whom the tax
was assessed or imposed to another or someone
else.
Like capitalization, shifting is only possible only when
there is exchange of commodities.

Tax capitalization mans the reduction in the price of


the taxed object (which is an income-producing
property) equal to the capitalized value of future taxes
which the purchaser expects to be called upon to pay.
66. What is transformation?
Transformation is a method of escape from taxation
whereby the manufacturer or producer upon whom
the tax has been imposed, fearing the loss of his
market if he should add the tax to the price, pays the
tax and endeavors to recoup himself by improving his
process of production thereby turning his units of
products at a lower cost.
Losses occasioned by the tax may be offset by the
gains from the economics of production.
67. What is meant by tax evasion?
Tax evasion is the use by the taxpayer of illegal or
fraudulent means to defeat or lessen the payment of
a tax. It is also known as tax dodging.
68. What are the factors in tax evasion?
a) End to be achieved;
b) Accompanying state of mind (willful, evil; bad
faith, and deliberate and not accidental);
c) A course of action (or failure of action) which is
unlawful;

60. What is meant by impact of taxation?


69. How is tax evasion proved?
It is that point on which a tax is originally imposed.
The taxpayer here is also termed as statutory
taxpayer or the one on whom the tax is formally
assessed. He is the subject of taxation.

It is proved by direct evidence inferred from the


circumstances of the case.
70. What is tax avoidance?

61. What is meant by incidence of taxation?


It is that point on which the tax burden finally rests or
settles down.
62. What is the relation between impact, shifting and
incidence of taxation?
The impact is the initial phenomenon, the shifting is
the intermediate process, and the incidence is the
result.
63. May direct taxes be shifted?
No, it is purely personal.
64. What are the kinds of shifting?
1) Forward shifting from the factors of production
to the factors of distribution until it finally settles
on the ultimate purchaser or consumer;

Tax avoidance, often called tax planning, is the use of


legally permissible alternative tax rates or methods of
assessing taxable property or income, in order to
avoid or reduce tax liability.
Tax avoidance is sometimes called tax minimization.
71. What is exemption from taxation?
It is the grant of immunity to particular persons or
corporations or to persons or corporations of a
particular class from a tax which person and
corporations generally within the same state or taxing
district are obliged to pay.
72. What is the rationale of tax exemption?
a) Tax exemption rests upon the theory that such
exemption will benefit the body of people and not

upon the idea of lessening the burden of


individual owners of property;
b) Its avowed purpose is some public benefit or
interest, which the law-making body considers
sufficient to offset the monetary loss entailed in
the grant of exemption;
73. What are the grounds for tax exemption?
1) Based on contract it is usually contained in the
charter of the corporation to which the exemption
is granted;
2) Based on some ground of public policy e.g. to
encourage new and necessary industries;
3) Created in a treaty on grounds of reciprocity, or
lessen the rigors of international double or
multiple taxation;

thereto, mosques and non-profit cemeteries, and


all lands and buildings, and improvements
actually, directly and exclusively used for
religious, charitable, or educational purposes.
(b) From taxes and duties all revenues and assets
of non-stock, non-profit cemeteries and all lands,
buildings and improvements actually, directly and
exclusively used for educational purposes and
subject to conditions prescribed by law, all
grants, endowments, donations, or contributions
used actually, directly and exclusively for
educational purposes.
78. What is the rule on tax exemption?
General rule: tax exemptions are construed strictly
against the taxpayer because taxes are the rule and
exemptions are the exception.

74. Is equity a ground for tax exemption?


No. Exemption from tax is allowed only if there is
clear provision therefor.
75. What is the nature of tax exemption?
a) It is a mere personal privilege of the grantee;
b) It is generally revocable by the government
unless the exemption is founded on a contract
which is protected from impairment; (note:
franchise may be repealed or amended)
c) It implies a waiver on the part of the government
of its right to collect what otherwise would be due
it;
d) It is not necessarily discriminatory so long as the
exemption has a reasonable foundation or
rational basis (otherwise, the equal protection
clause may be violated);
76. What are the kinds of tax exemption?
1) As to manner of creation:
(a) Express or affirmative by express provision
of law;
(b) Implied exemption or exemption by omission
tax levied on certain classes of persons
without mentioning other classes;
2) As to scope or extent:
(a) Total exemption exemption from all taxes;
(b) Partial exemption certain taxes, either
entirely or a part;
3) As to object:
(a) Personal granted directly in favor of such
persons contemplated in the grant;
(b) Impersonal directly in favor of certain class
of property;
Note: there can be no simultaneous exemption;
one partial and the other total;

77. What are the constitutional exemptions?


(a) From property tax charitable institutions,
churches, parsonages or convents appurtenant

Exception: tax exemptions may be liberally construed


when:
(1) When the law itself expressly provides for a
liberal construction;
(2) When the exemption is in favor of the
government itself or its agencies, or of religious,
charitable and educational institutions;
79. What is tax amnesty?
Tax amnesty is 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 revenue or tax laws.
80. Differentiate tax amnesty from tax condonation.
In tax condonation, only the civil aspect is pardoned.
In tax amnesty, both the civil and criminal aspects are
pardoned.
81. What is the nature of internal revenue law?
(1) They are not political in nature they are the
laws of the occupied territory and not of the
occupying enemy (e.g. tax laws remained in
force during the Japanese occupation);
(2) They are civil and not penal in nature although
there are penalties provided for their violation;
82. What is the application of tax laws?
General rule: prospective
Exception:It is expressly declared or is clearly the
legislative intent.
83. What are the mandatory and directory provisions of
tax law?
(a) Mandatory provisions intended for security of
the citizens;
(b) Directory provisions designed merely for the
information or direction of officers or to secure
methodical and systematic modes of
proceedings;
84. What is the authority of the secretary of finance?
The secretary of finance upon recommendation of the
Commissioner of Internal Revenue (now BIR

commissioner) shall promulgate all needful rules and


regulations for the effective enforcement of provisions
of the tax code.
Note: the power to recommend the promulgation of
internal revenue rules and regulations by the
Secretary of Finance is given solely to the
Commissioner.
85. Why are regulations necessary?
They are intended to clarify or explain the law and
carry into effect its general provisions by providing the
details of administration and procedure.
86. What are the valid requisites for regulation?
(a) They are necessary to the proper enforcement of
the laws;
(b) They must not be contrary to law and
constitution;
(c) They must be published in the Official Gazette or
newspaper in general circulation;

Note: RR may be effected prior to publication in


Official Gazette
Rulings are issued exclusively by the Commissioner
but may be invalidated by the Secretary of Finance.
87. What is the rule on non-retroactivity of repeal of
regulations?
As a rule, revocation, modification, or reversal of any
RR or rulings or circulars are not given retroactive
application.
Exception:
(1) Where the taxpayer deliberately misstates or
omits material facts from his return or in any
document required of him by the BIR;
(2) When facts subsequently gathered by BIR are
materially different from the facts on which the
ruling is based;
(3) Where the taxpayer acted in bad faith;
Note: decision of the CTA may also constitute as
evidence of interpretation of what the law means but
may be subjected to certiorari to the Supreme Court.