PRINCIPLES OF TAXATION

1.1 Nature, scope, classification, and essential characteristics

TAXATION
Inherent power by w/c the sovereign:
* through its law-making body
* raises income to defray expenses of government
* impose burdens on subject and objects w/in juridiction

CHARACTERISTICS (ILS)
a. Inherent power of the state.
b. Exclusively lodged with the legislative body
c. Subject to inherent and constitutional limitations

NATURE OF TAXATION
1. Inherent
- its exercise is guaranteed by the mere existence of the state.
- could be exercised even in the absence of a constitutional grant.
(The moment a state exists, the power to tax automatically exists.) - Life-blood doctrine
2. Legislative
- it involves promulgation of laws.
- determines the coverage, object, nature, extent and situs/place of the tax to be imposed.
***
1. Plenary – full and complete in all respect
2. Comprehensive – covers persons, businesses, professions, rights and privileges.
3. Supreme – ONLY insofar as the selection of the subject of taxation is concerned
4 Not Absolute – it is subject to limitations

INHERENT POWERS OF THE STATE

1. Power to Tax – power to enforce contribution to raise government funds
2. Eminent Domain – power to take private property for public use with just compensation.
3. Police Power – power to make and implement laws for the general welfare.
*no person shall be deprived of life, liberty, property w/o due process of law
POLICE TAXATION EMINENT DOMAIN

Power to MAKE and Power to ENFORCE Power to TAKE private

IMPLEMENT laws for the contribution to raise property for public use
general welfare government funds with just compensation

Broader in application
Plenary, comprehensive,
Merely to take private
and supreme BUT NOT
property
ABSOLUTE

Property is taken or
Money is taken to support Property is taken for
destroyed to promote
the government public use
general welfare
Cannot be delegated, if
delegated, it should be to
Can be expressly Can be expressly
the legislative department
delegated delegated
of the LGU (e.g. to make
ordinances)

No imposition as to
Limited to the cost of amount, instead, it is the
Generally, NO limit on
regulation, license and Government which is to
amount
other necessary expense compensate the property
taken.

Superior to and may

Relatively FREE from Subject to Constitutional
override Constitutional
Constitutional limitations and Inherent limitations
impairment provision

Superior to Non- Inferior to Non-

Impairment Clause Impairment Clause

PURPOSE OF TAXATION
1. Revenue – raising fund or property
2. Non-revenue
- Promotion of general welfare - Regulation of activities
- Reduction of social inequalities - Protectionism
- Encourage economic growth
1.2 Principles of sound tax system
PRINCIPLES OF SOUND SYSTEM (Canons of Taxation) FAT
1. Fiscal adequacy – sufficient; surplus (GR>GE) / deficit (GR<GE)
2. Administrative feasibility- clear, effective (economic growth); convenient
3. Theoretical justice / Equality– ability to pay; must be progressive

THEORIES AND BASIS OF TAXATION

1. Necessity Theory (Theory of Taxation)
- the power to tax is an attribute of sovereignty emanating from necessity (national
defence, health, education, public facilities, etc.).
2. Lifeblood Theory (Importance of Taxation)
- without taxes, the government would be paralyzed for lack of the motive power to
activate and operate it; w/o taxation gov’t can neither exist nor endure
3. Benefits – Protection Theory/ Reciprocal Duties (Basis of Taxation)
- there is a symbiotic relationship between the State and the citizens whereby in
exchange of the protection and benefits that the citizens received from the State, taxes
are paid; power to demand and receive taxes based on reciprocal duties (s/p)

1.3 Limitations on the power of taxation

SCOPE & LIMITATIONS OF TAXATION
1. Inherent Limitations (SPINE)
a. Situs/Territoriality – under jurisdiction
b. Purpose – public purpose
c. International comity – property outside Phil.
d. Non-delegability of taxing power
e. Exemption of government from taxes

2. Constitutional Limitations - restrictions imposed by Constitution

a. General / Indirect
- Due process clause - Non-impairment of contracts clause
- Equal protection clause - Eminent domain
- Freedom of the speech & the press - Religious freedom
- Law-making process - Presidential power to grant pardons
b. Specific / Direct
- Non-imprisonment for non-payment debt and of poll tax
- Uniform (same class will be taxed the same)
Equitable (ability to pay)
*Progressive system of taxation - rate of tax increases as tax base increases
*Proportional - fix rate irrespective of the value
*Regressive - rate of tax decreases as tax base increases
- Limitation of congress/ Origin of revenue and tariff bills
- Tax exemption of properties religious and charitable institutions
- Voting req. for tax exemption
- Non - impairment of jurisdiction of SC
- Tax exemption of grants, donations or contributions used for educ. properties
- Tax exemption for non-stock educ. institutions
Other Specific Limit
- Veto power of president
- Delegated power of the Pres. to impose tariff rates import/export quotation

1.4 Tax evasion vs. tax avoidance

ESCAPE FROM TAXATION SCATE2
* Shifting – transfer of burden of tax by the payer to another; eg. VAT
* Capitalization – reduction in price of taxed object = to value of future tax
* Avoidance (tax minimization) – legal/permissible; not subject to criminal penalty*
* Transformation – improving his process of production turning to lower c.
* Evasion (tax dodging) – illegal; always results in absence of tax payment
* Exemption – grant of immunity to particular persons or corp.

1.5 Situs/place of taxation

SITUS/TERRITORIALITY OF TAXATION
- the place or authority that has right to impose and collects tax
Factors that determines the situs of taxation ReCiNS2
1. Residence of taxpayer
2. Citizenship of taxpayer
3. Nature of tax
4. Subject matter of tax
5. Source of income
1.6 Double taxation
DOUBLE TAXATION
- It is taxing the same property twice when it should be taxed once.
- is unconstitutional as it results in violation of substantive due process and equal
protection clause.
1. Direct Double Taxation – double taxation in the objectionable or prohibited sense; not
allowed in the Philippines. This constitutes a violation of substantive due process.
Elements:
Same property or subject matter is taxed twice
Same purpose Same jurisdiction
Same taxing authority Same taxing period
Same kind or character of tax
2. Indirect Double Taxation – legal/permissible. The absence of one or more of the above-
mentioned elements. Allowable

Set-off Taxes / Compensation - takes place when two persons are creditors and debtors to each other

1.7 Legislation of tax laws

STAGES/ASPECTS OF TAXATION
1. Tax Legislation (Levying/Imposition of tax)
– legislative act, exercise by the congress; making of tax laws
2. Tax Administration (Assessment [similar to audit] & Collection [enforcement])
– executive/administrative in nature; done by BIR; can be delegated
– determining the correct amount of tax due.
3. Payment – act of compliance by the taxpayer.
4. Refund – recovery of tax erroneously collected
Note:
a. Levy is often called as tax legislation.
b. Assessment and collection are collectively termed as tax administration.
c. Levy and assessment comprise the impact of taxation,
while tax collection comprises the incidence of taxation.
d. An impact of taxation is a point on which tax is originally imposed.
e. An incident of taxation is a point on which the tax burden finally rests or settles down.

DOCTRINES OF TAXATION
1. May the court interfere with tax legislation?
Answer: As long as the legislature, in imposing a tax;
- does not violate applicable constitutional limitations or restrictions,
- it is not within the province of the courts to inquire into the wisdom or policy of the exaction,
- the motives behind it,
- the amount to be raised or the persons, property or other privileges to be taxed.
- The court’s power is limited only to the application and interpretation of the law.
2. Is the doctrine of equitable recoupment followed in the Philippines?
Answer: No. A tax presently being assessed against a taxpayer may not be recouped or set-
off against an overpaid tax, the refund of which is already barred by prescription.
3. May a tax be subject of compensation or set-off?
Answer: Generally, no. Taxes cannot be the subject of compensation or set-off. Taxes are
not contractual obligations but one arising out of duty to the government.
4. What is a taxpayer suit?
Answer: It is a case fied by a bona fide taxpayer impugning the validity, legality or
constitutionality of a tax law or its implementation.
5. What is the nature of our tax laws?
Answer: Internal revenue laws are not political in nature. Tax laws are civil and not penal in
nature, although there are penalties provided for their violation.
6. A tax statute is construed against the government, liberally in favor of the taxpayer; while
tax exemptions are construed against the taxpayer and liberally in favor of the government.
7. Tax laws are special laws which prevail over a general law.
8. Tax laws operate prospectively unless the purpose of the legislature is to give a
retrospective effect; Prospectivity of Taxation - taxes must imposed prospectively.
* Retroactive application is allowed if it will not amount to denial of due process.

1.8 Impact of taxes in nation building

CONCEPT OF A TAX
It is an enforced proportional contribution from the persons and property levied by the
law-making body of the State.
 TAXATION VS. TAX
- Taxation is the process or means of imposing and enforcing contributions.
- Tax is the enforced contribution, itself, which generally payable in money.

CHARACTERISTICS OF TAXES SLEP4

1. Imposed by the States within its jurisdiction
2. Exclusively levied by the Law-making body (legislative)
3. It is an Enforced contribution
4. Generally Payable in money (not in kind)
5. Proportionate/uniform in character (ability-to-pay principle)
6. It is levied on Persons and property
7. It is levied for Public purpose

CLASSIFICATION OF TAXES
As to subject matter:
a. Personal tax – imposed upon persons of certain class with fixed amount (e.g. Poll tax)
b. Property tax – assessed on property of certain class (e.g. Real Property tax)
c. Excise tax – imposed on the exercise of privilege (e.g. income, donor, estate tax, etc.)
d. Custom duties – charged upon commodities imported/exported from a country (e.g. tariffs)
As to burden:
a. Direct tax – both incidence and liability for the payment of tax as well as the impact or
burden of the tax falls on the same person (e.g. income tax)
b. Indirect tax – the incidence or liability for the payment of tax falls on one person but the
impact or burden of the tax falls on another person (e.g. VAT)
As to purpose:
a. General tax – levied for the general or ordinary purposes of the government
b. Special tax – levied for special purpose
As to measure of application:
a. Specific tax – imposes a specific sum by the head or number or by some standard of
weight or measurement (e.g. excise tax on cigarettes)
b. Ad Valorem tax – tax upon the value of the article or thing subject to taxation (e.g. VAT of
12% regardless of the value of sales)
As to taxing authority:
a. National tax – levied by National Government (e.g. income, business taxes, transfer taxes)
b. Local tax – imposed by the Local Government (e.g. Poll tax, real property taxes)
As to rate:
a. Progressive – rate of tax increases as tax base increases (e.g. tabular tax of 5% - 32%)
b. Regressive – rate of tax decreases as tax base increases (not applicable in the Philippines)
c. Proportionate – fixed rate irrespective of the value (e.g. VAT of 12%)

IMPOSITIONS OTHER THAN TAX

a. Toll – charged for the cost and maintenance of the property used
b. Penalty – punishment for the commission of a crime
c. Compromise Penalty – amount collected in lieu of criminal prosecution in tax violation
d. Special Assessment – levied on land based entirely on the benefit accruing thereon as a
result of the improvements or public works undertaken by the government within the vicinity
e. License or Fee – regulatory imposition in the exercise of the police power
f. Margin Fee – exaction designed to stabilize the currency
g. Debt – a sum of money due upon contract or one which is evidenced by judgment
h. Subsidy – a legislative grant of money in private enterprise to promote the public welfare
i. Custom Duties and fees – duties charged upon commodities imported/exported.
j. Impost – general, signifies tax, tribute/duty; limited, duty on imported goods /merchandise
k. Tithe – contributions given to a church or sect
l. Tribute – imposed by a monarch.

TAX DISTINGUISHED FROM OTHER FEES

TAX CUSTOMS DUTY
Coverage
More comprehensive than customs duty Only a kind of tax therefore limited coverage
Object
Persons, property, etc. Goods imported or exported

TAX TOLL
Definition
An enforced proportional contribution A consideration paid for the use of a road,
from persons and property for public bridge or the like, of a public nature.
purpose/s.
Basis
Demand of sovereignty Demand of proprietorship
 Amount
Generally the amount is unlimited Amount is limited to the cost and maintenance
of public improvement
Purpose
For the support of the government For the use of another’s property
Authority
May be imposed by the State only May be imposed by private individuals or entities

TAX LICENSE FEE/PERMIT

Purpose
Imposed to raise revenue For regulation and control
Basis
Collected under the power of taxation Collected under police power
Amount
Generally, amount is unlimited Limited to the necessary expenses of regulation
and control
Subject
Imposed on persons, property, rights or Imposed on the exercise of a right or privilege
transaction
Effect of Non-payment
Non-payment does not make the business Non-payment makes the business illegal
illegal
Time of Payment
Normally paid after the start of business Normally paid before the commencement of the
business

TAX SPECIAL ASSESSMENT

Nature
An enforced proportional contribution An enforced proportional contribution from
from persons and property for public owners of lands especially those who are
purpose/s. peculiarly benefited by public improvements
Subject
Imposed on persons, property rights or Levied only on land
transactions
Person Liable
A personal liability of the taxpayer Not a personal liability of the person assessed
Purpose
For the support of the government Contribution to the cost of public improvement
Scope
Regular exaction Exceptional as to time and locality

TAX PENALTY
Definition
An enforced proportional contribution Sanction imposed as a punishment for a
from persons and property for public violation of the law or acts deemed injurious;
purpose/s. violation of tax laws may give rise to imposition
of penalty.
Purpose
To raise revenue To regulate conduct
Authority
Maybe imposed by the State only Maybe imposed by private entities

TAX DEBT
Basis
Obligation created by law Obligation based on contract, express or implied
Assignability
Not assignable Assignable
Mode of Payment
Payable in money or in kind Payable in kind or in money
Set-off
Not subject to set-off Subject to set-off
Effect of Non-payment
May result to No imprisonment (except when debt arises from
imprisonment crime)
Interest
Bears interest only if delinquent Interest depends upon the written stipulation of
the parties
Prescription
Governed by the special prescriptive Governed by the ordinary periods of prescription
periods provided for in the NIRC
1.9 Ethical tax compliance and administration
TAX LAWS
- A tax law is a set of rules that provide means for the State to raise revenues.
- All revenue bills must originate from the House of Representatives (Congress). After
passing 3 readings by a majority vote in technical committee, it shall be elevated to the
Senate which needs to pass the same 3 readings. The President’s signature is necessary
so that the bill becomes a law.
- In case of doubt, tax statutes are construed against the Government in favor of the
taxpayer.
- In case of doubt, tax exemptions are construed against the taxpayer in favor of the
Government.

1.10 Organization of the Bureau of Internal Revenue, Bureau of Customs,

Local Government Tax Collecting Units, Board of Investments, Philippine
Economic Zone Authority
REVENUE REGULATIONS
- These are interpretations of an administrative body (BIR) intended to clarify or explain the
tax laws and carry into effect its general provisions by providing details of administration and
procedure.
- It is promulgated (made) by the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue (quasi-legislative function).
- It must be reasonable, within the authority conferred, not contrary to laws, must be
published and prospective in application.

BIR RULINGS
- The BIR issues a general interpretation of tax laws usually upon a requrest of a taxpayer
to clarify a provision of law.