I.

General Principles
Friday, 2 October 2020 10:41 am

A. CONCEPT AND PURPOSE OF TAXATION

Definition

Taxation is an enforced proportional contribution, imposed by the State by tis sovereign capacity, to support
the government (Ingles, 2018)

a. As a power - it is the inherent power of the State to demand an enforced contribution upon its
subjects and objects within its territorial jurisdiction for public purpose to support its Government.
b. As a process - it is the legislative act of levying a tax to raise income to defray it necessary expenses
(Lim, 2018)

Purpose

1. Primary purpose of taxation is to raise revenues and to mobilize resources.

2. Secondary purpose is regulatory, when imposed to regulate conduct of businesses/profession; to achieve
economic stability; and to protect industries.
3. Sometimes, tax is imposed for compensatory purpose.

Distinguish: tax and other forms of exactions

It is important to differentiate taxes from other exactions especially when it comes to problems and issues on
double taxation, tax exemptions, and the jurisdiction of the Court of Tax Appeals [CTA] (Ingles, 2018).

Tax v. License Fee

Tax License Fee

For revenue For regulation

Imposed as exercise of power of taxation Imposed by virtue of Police Power of

the State

Objects: Business, Interest, Transactions, Right, Acts, Persons, Object is the exercise of a privilege
Property, Privileges

No limit Only necessary to carry out

regulation

Tax v. Special Assesments

Tax Special Assessment

Objects: Business, Interest, Transactions, Right, Levied only on land

Acts, Persons, Property, Privileges

For revenue By reason of the public improvement which benefitted

the property and increased its value

Regular exaction Exceptional as to time and locality

Tax v. Toll Fees

Tax Toll Fees

Imposed as demand of Sovereignty Imposed as demand of proprietorship

For revenue For the use of property/facility

Taxation Law review Page 1

 For revenue For the use of property/facility

Imposed only by the State Can be imposed by private individuals

B. DISTINGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN

Taxations Police Power Eminent Domains

Purpose For revenue and support For promotion of the general Taking of private property for
of the Government welfare of the people public use

Persons Community of class of Community of class of individuals Owners of private property

covered individuals

Limitations Subject to its Limited to welfare of public interest Limited to public purpose and
constitutional and and subject to test reasonableness subject of payment of just
inherent limitations of exercise compensation

C. THEORY AND BASIS OF TAXATION

1. Lifeblood theory - Taxes are the lifeblood of the government. Without which it cannot support itself to
serve its citizens and deliver basic services to them.
2. Necessity theory - The existence of the Government is a necessity and it cannot continue without a
means to support itself.
3. Benefits-received theory*** - The government and the people have the reciprocal and mutual duty to
support and protect each other. Basis is the protection given by the State to its people.

D. JURISDICTION OVER SUBJECT AND OBJECTS

The limited powers of sovereignty are confined to objects within the respective spheres of governmental control.
These objects are the
proper subjects or objects of taxation and none else.

1. Tax laws cannot operate beyond a State’s territorial limits

2. The gov’t cannot tax a particular object of taxation which is not within its territorial jurisdiction
3. Property outside the State’s jurisdiction does not receive any protection of the State
4. If a law is passed by Congress, it must see to it that the object or subject of taxation is within the
territorial jurisdiction of the taxing authority

E. PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal adequacy - the sources of revenue must be adequate to meet government expenditures and their
variations
2. Theoretical justice - taxes levied must be based on the taxpayer's ability to pay
3. Administrative feasibility - tax laws should be capable of convenient, just and effective administrations
and enforced with the least inconvenience to the taxpayer.

F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION

➢ We should refer to this if what is being asked is the validity of the law enacted.

Inherent Limitation

1. For public purpose

2. Inherently legislative
3. Government entities, agencies and instrumentalities are exempt
4. Subject to international treaty or comity
5. Territorial in character

Constitutional Limitation

Taxation Law review Page 2

Constitutional Limitation

1. Observance of due process***

2. Equal protection***
3. Uniformity in taxation
4. Progressive - based on ability to pay
5. Non-imprisonment for nonpayment of poll taxes
6. Non-impairment of contracts
7. Free-worship clause
8. Exemption of religious, educational, non-profit cemeteries, churches and mosques from property taxes
9. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
including grants, endowments, donations or contributions for educational purposes
10. Non-appropriation of public funds or property for the benefit of any church, sect or any system of
religion
11. Non-delegation of powers of taxation

Excepetions:
a. Delegation to the President to fix tariff rates
b. Item-veto power of the president of appropriation, revenue or tariff bills
c. Delegated to LGUs under the LGC

12. Jurisdiction of SC to review tax laws

13. Origination rule

G. STAGES OR ASPECTS OF TAXATION

1. Levy or imposition - generally exercises by the legislative and cannot be delegated. This inclused the (1)
selecation of C-overage, O-bjects, N-ature, E-xtent and S-itus (CONES), (2) the purpose and (3)
prescribing of rules.
2. Assessment or collection
3. Payment of tax

H. REQUISITES OF A VALID TAX

1. It must be for a public purpose;

2. Rule of taxation should be uniform;
3. The person or property taxed is within the jurisdiction of the taxing authority;
4. Assessment and collection is in consonance with the due process clause; AND
5. The tax must not infringe on the inherent and constitutional limitations of the power of taxation.

I. KINDS OF TAXES

1. As to purpose
a. Fiscal - levied without a specific purpose
b. Regulatory
2. As to subject matter
a. Personal - fixed amount upon ass persons or class of persons
b. Property
c. Excise - a charge upon the performance of an act, enjoyment of privilege, or engaging in an
occupation
3. As to incidence
a. Direct - imposed on the person obliged to pay. Burden of payment cannot be shifted
b. Indirect - imposed upon a statory taxpayer which may shift the burden to another taxpayer
4. As to amount
a. Specific - fixed based on the volume, weights or quantity of goods as measure by tools,
instruments or standards
b. Ad valorem - based on the value of the object/subject matter
5. As to rate
a. Proportion or flat rat

Taxation Law review Page 3

 a. Proportion or flat rat
b. Progressive
c. Regressive
d. Mixed
6. As to imposing authority
a. National
b. Local

J. GENERAL CONCEPTS IN TAXATION

1. Prospectivity of tax laws

GENERAL RULE: Tax laws must be applied prospectively.

EXCEPTION: When expressly provided by law (Ingels, 2018).

2. Imprescriptibility

GENERAL RULE: Taxes are imprescriptible

EXCEPTION: When the law provides for its prescription (Lim, 2018).

3. Situs of taxation refers to the state which has jurisdiction to impose tax upon persons, property,
interest, rights, or transactions because it has extended benefits to the subject/subjects of tacxation
(Lim, 2018).

Factor in the determination of situs of taxation:

a. Nature, kind or classification of the tax

b. Subject matter of the tax
c. Citizenship of the taxpayer
d. Residence of the taxpayer
e. Source of income
f. Place of exercise of business or occupation being taxed
g. Place where activity that produced the income is located

4. Double taxation is defined as the taxing of the object/subject within the same territorial jurisdiction
twice, by the same taxing authority for the same period, with the same purpose and involving the same
or similar kind of tax.

Elements

i. Both taxes are of the same kind or character

ii. Imposed over the same object/subject matter
iii. By the same taxing authority
iv. Within the same jurisdiction
v. During the same taxing period
vi. For the same purpose

a. Strict sense - double taxation in it strict sense is the direct double taxation as defined above.
b. Broad sense - in its broad sense, it is indirect double taxation where two or more pecuniary
impositions on a subject matter, imposed by different taxing authorities (ie local and national)

5. Tax treaties as relief from double taxation

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and,
in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions."18 CIR v. S.C.
Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable

Taxation Law review Page 4

 elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with double taxation is to encourage the free
flow of goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate (Deutsche Bank Ag Manila Branch v. CIR).

6. Escape from taxation

Will result in loss of revenue on the part of the Will NOT result in loss of revenue
Government

Evasion - resorting to acts and devices that Shifting - process of transferring the tax burden
illegally reduce or totally escape payment of taxes from the statutory taxpayer to another without
violation of law
Avoidance - reduction or totally escaping payment
of taxes through legally permissible means Capitalization - the seller lowers the price of the
commodity provided the buyer will shoulder the
Exemption - an immunity, privilege or freedom from taxes
payment of a charge or burden to which others
are obliged to pay Transformation - manufacturer absorbs
additional taxes by increasing quantity of
production

7. Shifting of tax burden

Shifting - process of transferring the tax burden from the statutory taxpayer to another without
violation of law.

Note: All indirect taxes may be shifted. Direct taxes, cannot.

Ways of shifting the tax burden

a. Forward shifting - when the burden of the tax is transferred from a factor of productions
through the factors of distribution until finally it settles on the ultimate purchaser/consumer
b. Backward shifting - when the burden of the tax is transferred from the consumer/purchaser
through the factors of distribution to the factor of production
c. Onward shifting - when the tax is shifted two or more times either forward or backward.

Factors of determining tax shifting

i. Elasticity of demand and supply

ii. Nature of markets
iii. Government policy on pricing
iv. Geographical location
v. Nature of tax
vi. Rate of tax
vii. Time available for adjustment
viii. Tax point

Incidence of taxation v. Impact of taxation

a. Impact of taxation - the point where the tax is originally imposed

b. Incidence of taxation - the point on whom the tax burden finally rests.

NOTE: It is essential to know where the impact of taxation lies because it generally determines:

The proper party to claim a refund of erroneously imposed indirect taxes

Taxation Law review Page 5

 ➢ The proper party to claim a refund of erroneously imposed indirect taxes
➢ Indirect taxes can be passed on to an exempt buyer (Ingels, 2018)

8. Distinguish: tax avoidance and tax evasion

Avoidance Evasion

Employment of methods ithin the means sanctioned by law Use of methods utside of the lawful means

Not punishable Punishable

Connotes fraud, deceit and malice No fraud involved

9. Exemption from taxation

Exemption - an immunity, privilege or freedom from payment of a charge or burden to which others
are obliged to pay. It is the waiver of the government/s right to collect the amount that would have
been collectible under our laws. (Ingles, 2018)

Grounds

a. Based on contract
b. Based on some ground of public policy
c. Created in a treaty on grounds of reciprocity
d. Created to lessen rigors of international or multiple taxation

Nature

i. Personal
ii. Generally revocable, unless based on a contract
iii. Not discriminatory

Principles

a. Never presumed
b. When granted, strictly construed against taxpayer

10. Equitable recoupment

Under the doctrine of equitable recoupment, where the refund of taxes are barred by prescription which
can no longer be claimed by the taxpayer but there is a present tax being assessed against said
taxpayer, such present tax may be recouped or set-off against the tax refund which has been barred.

➢ This doctrine is NOT applied in our jurisdiction (Lim, 2018).

11. Prohibition on compensation and set-off

The following are reasons why national taxes are not allowed to be subject of compensation or set-off:

a. Lifeblood doctrine
b. The government and taxpayer are not creditors and debtors of each other
c. Taxes are not in the nature of contracts but a duty (Lim, 2018)

EXCEPTIONS:
i. Legal compensation by operation of law when both claims have become due, demandable and fully
liquidated
ii. In case of overpayment of taxes, the BIR may refund or off-set the same.

12. Compromise

Taxation Law review Page 6

 A compromise is a contract whereby the parties, by making reciprocal concessions, avoid litigation or
put an end to one already commenced (Art. 2028, Civil Code).

Requisites of a tax compromise:

a. The taxpayer must have a tax liability.

b. There must be an offer (by the taxpayer or Commissioner) of an amount to be paid by the
taxpayer.
c. There must be acceptance (by the Commissioner or the taxpayer, as the case may be) of the
offer in settlement of the original claim.

13. Tax amnesty - the general pardon or intentional overlooking by the state of its authority to impose
penalties on persons otherwise guilty of tax evasion or violation of a tax law. The purpose is to give
the erring taxpayer a chance to reform and become part of the society with a clean slate (Lim, 2018)

K. CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES AND

REGULATIONS

Hornbook Doctrine - A tax cannot be imposed without a clear and express words for that purpose and the
provisions of a taxing act are not to be extended by implication, thus -

a) It is the duty of the courts to adopt a construction of a tax statute which will bring into harmony
with the Constitution
b) Must be interpreted in connection with other legislation
c) It must be given reasonable construction with the view of carrying out their purpose and intent
d) It must be construed to avoid possibilities of tax evasion
e) The legislative must be determined and should prevail
f) Where there are 2 possible construction of a tax statute, one which does not produce unfair, arbitrary
or oppressive results should be preferred
g) Doubts as to legislative intent must be resolved liberally in favor of the taxpayer and strongly against
the government, in as much as revenue laws are impose special burden upon the taxpayer
h) Every doubt in the statute in regard the power to tax is to be construed in favor of the State
i) Doubts on the validity of the tax measure are resolved in favor of the government
j) Exceptions are construed strictly against the taxpayer
k) Penal statute of revenue statute are not to be rigidly construed
l) Non-retroactivity of rules and regulations when prejudicial to taxpayer
m) Administrative interpretation applied over a long period of time is given great weight and although not
conclusive should be followed

Taxation Law review Page 7