Chapter 1

INTRODUCTION
OF TAXATION
 What is taxation?
Taxation may be defined as state power, a legislative
process, and a mode of government cost distribution.

1. AS A STATE POWER
- Taxation is an inherent power of the state to enforce a
proportional contribution from its subjects for public purpose.
2. AS A PROCESS
- Taxation is a process of levying taxes by the legislature of the
state to enforce proportional contributions form its subjects for public
purpose.
3. AS A MODE OF COST DISTRIBUTION
- Taxation is a mode by which the state allocates its costs or burden
to its subject who are benefited by its spending.
• The primary purpose of taxation on the part of the
government is to provide funds or property with which to
promote the general welfare and the protection of its
citizens and to enable it to finance its multifarious
activities. A government can run its administrative set UD
only through public funding which is collected in the form
of tax.
 THE THEORY OF TAXATION
Every government provides a vast array of public services
including defense, public order and safety, health, education,
and social protections among others.

THE BASIS OF TAXATION

The government provides benefits to the people
in the form of public services, and the people
provide the funds that finance the government.
 THEORIES OF COST ALLOCATION
Taxation is a mode of allocating government costs or
burden to the people
1. BENEFIT RECEIVED THEORY
- Presupposes that the more benefit one receives from the
government, the more taxes he should pay.

2. ABILITY TO PAY THEORY

- Presupposes that taxation should also consider the taxpayer’s ability
to pay.
ASPECTS OF THE ABILITY TO PAY
THEORY
1. VERTICAL EQUITY
- Proposes that the extent of one’s ability to pay is
directly proportional to the level of his tax base.
2. HORIZONTAL EQUITY
- Requires consideration of the particular
circumstances of the taxpayer.
 THE LIFE BLOOD DOCTRINE
IMPLICATION OF THE LIFEBLOOD DOCTRINE IN TAXATION
1. Tax imposed even In the absence of a constitutional grant.
2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose the objects of
taxation
4. The courts are not allowed to interfere with the collection of taxes.
5. In income taxation.
 THE INHERENT POWER OF THE
STATE
1. TAXATION POWER
- Is the power of the state to enforce proportional contribution from its
subjects to sustain itself.
2. POLICE POWER
- Is the power of the state to enact laws to protect the well-being of the
people.
3. EMINENT DOMAIN
- Is the power of state to take private property for public use after paying just
compensation.
 SCOPE OF THE TAXATION POWER
The scope of taxation is widely regarded as comprehensive, plenary,
unlimited, and supreme.

The limitations of the taxation power

a. Inherent limitations
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. non-delegation of the taxing power
 THE LIMITATIONS OF THE TAXATION POWERS
B. CONSTITUTIONAL LIMITATIONS
9. Non-appropriation of public funds or property
1. Due process of law
for the benefit of any church, sect or system of
2. Equal protection of the law religion.
3. Uniformity rule in taxation 10. Exemption from taxes of the revenues and
4. Progressive system of taxation assets of non-profit, non-stock, educational
institutions.
5. Non-imprisonment for non-
payment of debt 11. Concurrence of a majority of all members of
congress of the passage of a law granting tax
6. Non-impairment of obligation and exemption.
contract
12. Non-diversifications of tax collections
7. Free worship rule
13. Non-delegation of the power of taxation
8. Exemption of religious or
14. Non-impairment of the jurisdiction of the
charitable entities, non-profit supreme court to review tax cases.
cemeteries, churches and mosque
from property taxes 15. The requirements that appropriations,
revenue, or tariff bills shall originate exclusively
in the house of representative.
 INHERENT LIMITATIONS
OF TAXATIONS
TERRITORIALITY OF TAXATIONS
- Public services are normally provided within the
boundaries of the state.
TWO-FOLD OBLIGATIONS OF TAXPAYERS:
1. Filling of returns and payment of taxes
2. Withholding of taxes on expense and its remittance to the
government.
 EXCEPTION TO THE
TERRITORIALITY PRINCIPLE
1. In income taxation, residents citizens and domestic
corporations are taxable on income derived within and outside
the Philippines.
2. In transfer taxation, residents or citizens such as residents
citizens, non-resident citizens residents aliens are taxable on
transfers of properties located within or outside the philippines.
 INTERNATIONAL COMITY
In the UN convention, countries of the world agreed to one fundamental
concept of co-equal sovereignty wherein all nations are deemed equal
with one another regardless of race, religion, culture, economic
condition or military power

1. Governments do not tax the income and properties of

other governments.
2. Governments give primacy to their treaty obligations
over their own domestics tax laws.
 PUBLIC PURPOSE
Tax is intended for the common good. Taxation must be
exercised absolutely for public purpose. It cannot be
exercised to further any private interest
EXEMPTION OF THE
GOVERNEMNT
The taxation power is broad. The government can exercise
the power upon anything including itself
 EXEMPTION OF THE
GOVERNEMNT
The taxation power is broad. The government can
exercise the power upon anything including itself

NIRC (National Internal Revenue Code)

- under NIRC, government properties and income

from essential public functions are not subject to
taxation.
 NON-DELEGATION OF THE
TAXING POWER
The legislative taxing power is vested exclusively in
Congress and non-delegable pursuant to the
doctrine of separation of the branches of the
government to ensure a system of checks and
balances.
EXEMPTIONS TO THE RULE OF NON-
DELEGATION
1. Under the Constitution, local government units are
allowed to exercise the power to tax to enable them to
exercise their fiscal autonomy.

2. Under the Tariff and Custom Code, the President

is empowered to fix the amount of tariffs to be flexible
to trade conditions.

3. Other cases that require expedient and effective

administration and implementation of assessment and
 CONSTITUTIONAL
LIMITATION OF TAXATION
Observances of due process of law
-No one should be deprived of his life, liberty, or
property without due process of law. Tax laws
should neither be harsh nor oppressive.
 ASPECTS OF DUE PROCESS
1. Substantive due process
Tax must be imposed only for public purpose,
collected only under authority of a valid law and only by
taxing power having jurisdiction.

2. Procedural due process

There should be no arbitrariness in assessment and
collection of taxes, and the government shall observe the
tax payer's right to notice and hearing.
 EQUAL PROTECTION OF THE
LAW
No person shall be denied the equal protection of the law.
Tax payers should be treated equally both in terms of
rights conferred and obligations impose.
UNIFORMITY RULE IN
TAXATION
The rule of taxation shall be uniform and equitable.
Taxpayers under dissimilar circumstances should not be
taxed the same.
 PROGRESSIVE SYSTEM OF
TAXATION
Congress shall evolve a progressive system of taxation.
Under the progressive system, tax rates increase as the tax
base increases.
NON- IMPRISONMENT FOR NON-PAYMENT OF
DEBT OR POLL TAX
As a policy, no one shall be imprisoned becase of his
poverty, and no one shall be imprisoned for mere inability
to pay debt.
IS NON-PAYMENT OF TAX EQUIVALENT TO
NON-AYMENT OF DEBT?
Tax arises from law and is a demand of sovereignty.
It is distinguished from debt which arises from
private contacts.

Poll, personal, community or residency

Poll has two components

A. Basic community tas
B. Additional community tax
 NON-IMPAIRMENT OF OBLIGATION
AND CONTRACT
The state should set an example of good faith
among its constituents.
FREE WORSHIP RULE

The Philippine government adopts free exercise

of religion and does not subject its exercise to
taxation.
 EXEMPTION OF RELIGIOUS, CHARITABLE OR
EDUCATIONAL ENTITIES, NON-PROFIT
CEMETERIES, CHURCHES AND MOSQUES,
LANDS, BUILDINGS, AND IMPROVEMENTS FORM
PROPERTY TAXES

The Constitutional exemption from property tax

applies for properties actually, directly, and
exclusively (i.e primarily) used for charitable,
religious, and educational purposes.
 NON-APPROPRIATION OF UBLIC FUNDS OR
PROPERTY FOR THE BENEFIT OF ANY CHURCH,
SECT OR SYSTEM OF RELIGION.
This constitutional limitation is intended to highlight the
separation of religion and the state.
CONCURRENCE OF A MAJORITY OF ALL MEMBER OF
CONGRESS FOR THE PASSAGE OF A LAW GRANTING
TAX EXEMPTION

Tax exemption law counters against the lifeblood doctrine

as it deprives the government of revenues.
NON-DIVERSIFICATION OF TAX COLLECTION

Tax collection should be used only for public purpose. It

should never be diversified or used for private purpose.

NON-DELEGATION OF THE POWER OF

TAXATION
The principle of checks and balances in a republican state
requires that taxation power as part of lawmaking be
vested exclusively in Congress.
NON-IMPAIREMENT OF THE JURISDICTION
OF THE SUPREME COURT TO REVIEW TAX
CASES

Not with standing the existence of the Court of

Tax Appeals, which is a special court, all cases
involving taxes can be raised to and be finally
decided by the Supreme Court of the Philippines.
APPROPRIATIONS, REVENUE, OR TARIFF
BILLS SHALL ORIGINATE EXCLUSIVELY IN
THE HOUSE OF REPRESENTATIVES, BUT
THE SENATE MAY PROPOSE OR CONCUR
WITH AMENDMENTS

Laws that add income to the national treasury

and those that allows spending therein must
originate from the House Of Representatives
while Senate may concur with amendments
 EACH LOCAL GOVERNMENT UNIT SHALL
EXERCUSE THE POWER TO CREATE ITS OWN
SOURCES OF REVENUE AND SHALL HAVE A
JUST SHARE IN THE NATIONAL TAXES
This is a constitutional recognition of the local
autonomy of local government and an express
delegation of the taxing power
 STAGES OF THE EXERCISE OF
TAXATION POWER
1. Levy or imposition
2. Assessment and collection

LEVY OR IMPOSITION
This process involves the enactment of a tax paw by
Congress and its called impact of taxation.
MATTERS OF LEGISLATIVE DISCRATION
IN THE EXERCISE OF TAXATION
1. Determining the object of taxation
2. Setting the tax rate or amount to be collected
3. Determining purpose for the levy which must be
public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the national and
local government
6. Situs of taxation
7. Method of collection
 SITUS OF TAXATION

Situs is the place of taxation

Example of situs rules:

1. Business tax situs: Business are subject to

tax in the place where the business is conducted
2. INCOME TAX SITUS ON SERVICES
- Service fees are subject to tax where they are rendered.
3. INCOME TAX SITUS ON SALE OF GOODS
- The gain on sale is subject to tax in the place of sale.
4. PROPERTY TAX SITUS
- Properties are taxable in their location.
5. PERSONAL TAX SITUS
- Persons are taxable in their place of residence.
 OTHER FUNDAMENTAL DOCTRINES IN
TAXATION
1. MARSHALL DOCTRINE - The power to tax involves the power destroy.
2. HOLME’S DOCTRINE - taxation power is not the power to destroy while the court sits.
3. PROSPECTIVITY OF TAX LAWS – tax law are generally prospective in operation.
4. NON – COMPENSATION OR SET-OFF – taxes are not subject to automatic set-off or
compensation.
5. NON – ASSIGNMENT OF TAXES – Tax obligations cannot be assigned or transferred to
another entity by contact.
6. IMPRESCRIPTIBILITY IN TAXATION - Prescription is the lapsing of a right due to the
passage of time.
7. DOCTRINE OF ESTOPPEL – Under the doctrine of estoppel, any misrepresentation
made by one party toward another who relied therein in good faith will be
held true.
8. JUDICIAL NON-INTERFERENCE – Courts are not allowed to issue injunction against
the government’s pursuit to collect tax as this would unnecessarily
defer tax collection
9. STRICT CONSTRUCTION OF TAX LAWS – When the law
clearly provides for taxation, taxation is the general rule unless
there is a clear exemption.
10. VAGUE TAX LAWS – Are construed against the government
and in favor of the taxpayers.
11. VAGUE EXEMPTION LAWS – Are construed against the
taxpayers and in favor of the government.
 DOUBLE TAXATION
Occurs when the same taxpayer is taxed twice by the same tax
jurisdiction for the same thing

ELEMENTS OF DOUBLE TAXATION

1. Primary element :
A. Same object
2. Secondary element:
A. Same type of tax
B. Same purpose of tax
C. Same taxing jurisdiction
D. Same tax period
 TYPES OF DOUBLE TAXATION

1. DIRECT DOUBLE TAXATION

-This occurs when all the element of double taxation exist for
both imposition
2. INDIRECT DOUBLE TAXATION
-Occurs when at least one of the secondary elements of double
taxation is not common for both impositions.
 HOW CAN DOUBLE TAXATION BE MINIMIZED?
The impact of double taxation can be minimized by any one
or a combination of following:
A. PROVISION OF TAX EXEMPTION - Only one tax law is allowed to apply to
the tax object while the other tax law exempts the same tax objects.
B. ALLOWING FOREIGN TAX CREDIT - Both tax laws of the domestic
country and a foreign country tax the tax object but the payments made in the
foreign tax law is deductible against the tax due of the domestic tax law.
C. ALLOWING RECIPROCAL TAX TREATMENT - Provisions in tax law
imposing a reduces tax rates or even exemption if the country of the foreign
taxpayers also give the same treatment to Filipino non-residents therein.
D. ENTERING INTO TREATIES OR BILATERAL AGREEMENTS – Countries
may stipulate for a lower tax rates for their residents if they engage in
transactions that are taxable by both of them.
 ESCAPES FROM TAXATION
Escapes from taxation are the means available to the taxpayers to limit or even
avoid the impact of taxation.

CATEGORIES OF ESCAPES FROM TAXATION

a. Those that result to loss of government revenue
1. TAX EVASION – Also known as tax dodging, refers to any act or trick that
tends to illegally reduce or avoid the payment of tax.
2. TAX AVOIDANCE – Also known as tax minimization, refers to any act or
trick that reduces or totally escapes taxes by any legally permissible means.
3. TAX EXEMPTION – Also know as tax holiday, refers to the immunity,
privilege or freedom from being subject to a tax which others are subject to.
B. Those that do not results to loss of government revenue
1. Shifting – This is the process of transferring tax burden to other taxpayers.

FORMS OF SHIFTING
a. FORWARD SHIFTING – This is shifting of tax which follows the normal flow
of distribution.
b. BACKWARD SHIFTING – This is the reverse of forward shifting. Backward
shifting is common with non-essentials commodities where buyers have
considerable market power and commodities with numerous substitute products.
c. ONWARD SHIFTING – This is the reverse of any tax shifting in the distribution
cannel that exhibits forward shifting or backward shifting.
2. CAPITALIZATION – This pertains to the adjustments of the
value of an assets caused by changes in tax rates.
3. TRANSFORMATION - This pertains to the elimination of
wastes of loses by the taxpayers to form savings to
compensate for tax imposition or increase in taxes.
TAX AMNESTY - is a general pardon granted by the government for erring
taxpayers to give then a chance to reform and enable them to have a fresh start to
be part of society with a clean slate.
TAX CONDONATION – Is forgiveness of the tax obligation of a certain
taxpayer under certain justifiable grounds.
TAX AMNESTY VS. TAX CONDONATION – Amnesty covers both civil
and criminal liabilities, but condonation covers only civil liabilities of the
taxpayers.