BASIC PRINCIPLES OF TAXATION

Handout No. 1-01 A.G. DULAY

PART I: GENERAL PRINCIPLES

A. INHERENT POWERS OF A STATE

1. Police Power
It refers to the inherent power of a sovereign state to enact laws to promote public
health, public safety, public morals and the common good.

2. Power of Eminent Domain

It refers to the inherent power of a sovereign state to take private property for
public use upon payment of a just compensation.

3. Power of Taxation
(please refer to the succeeding sections)

Similarities:
a. Indispensable to government existence;
b. Can exist independent of the constitution;
c. The means by which the state interferes with private rights and properties;
d. Generally exercised by the legislature;
e. Contemplate and equivalent compensation or benefit; and
f. Provisions of the Constitution are just limitations on the exercise of these powers.

Distinctions:

Police Power Eminent Domain Taxation

1. Concept Power to make and Power to take private Power to enforce
implement laws for property for public contribution to raise
the general welfare use with just government funds
compensation
2. Scope Broad application Mere power to take Plenary,
private property for comprehensive and
public use supreme
3. Authority Exercised only by the May be granted to Exercised only by the
government and its public service or government and its
political subdivisions public utility political subdivisions
companies
4. Subject matter Persons, property, Private real Persons, property,
rights or transaction properties rights or transaction
5. Purpose For regulation and To acquire private To raise revenue for
control property for public government
use expenses
6. Delegation Power can be Power can be Power to make tax
expressly delegated expressly delegated laws cannot be
to the local to the local delegated
government units by government units by
the lawmaking body the lawmaking body
7. Persons affected Community or a class Particular private Community or a class
of individual property of an of individual
individual

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Handout No. 1-01 A.G. DULAY

Police Power Eminent Domain Taxation

8. Limitation on the Limited to the cost of Limited to the fair Generally unlimited
amount imposed license fee and other value of the expenses
property control of regulation
9. Act involved Enforcement of laws Private property is Taxpayers pay taxes
for public welfare taken for public use
and common good
10. Limitation Limited by the Bound by public Constraints by
demand for public purpose and just constitutional and
interest and due compensation inherent limitations
process
11. Relationship to Relatively free from Superior to and may Subject to
Constitution Constitutional override Constitutional and
limitations Constitutional Inherent limitations
impairment provision
because the welfare
of the state is
superior to any
private contract
12. Benefits received Protection and other Person receives Protection and other
benefits from the compensation benefits from the
government equivalent to the government
market value of the
property
expropriated

B. DEFINITION OF TAXATION
1. As a state power
Taxation refers to the inherent power of a sovereign state acting through its
legislature to impose a proportionate burden upon persons, property, rights or
transaction, to raise revenue to support government expenditure and as tool for
general and economic welfare.

2. As a process
Taxation refers to the act of imposing a tax by a sovereign state to raise revenue
for government expenses.

3. As a means
Taxation refers to the way of collecting and apportioning the cost of government
among those who are privileged to enjoy its benefits.

C. PURPOSES OF TAXATION
1. Primary purpose : To raise fund for the expenses of the government
(Revenue or Fiscal purpose)

2. Secondary purpose : A tool for general social and economic welfare

(Regulatory/Sumptuary/Compensatory purpose)

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Handout No. 1-01 A.G. DULAY

D. CHARACTERISTICS/NATURE OF THE POWER OF TAXATION

1. It is an inherent power of the state.
2. It is legislative in character.
3. It is for public purposes.
4. It is territorial in operation.
5. It is the strongest inherent power of the state.
6. It is subject to inherent and constitutional limitations.
7. Government is generally tax-exempt.

E. SCOPE OF THE POWER OF TAXATION

In the absence of inherent and constitutional limitations, the power to tax is:
C omprehensive
U nlimited
P lenary or absolute

Rule: The state thru the congress can tax any thing at any time and at any amount.

1. Subject matter of the tax

2. Situs of taxation
3. Purpose of the tax
4. Amount or rate of tax
5. Method of collection

Remember S2PAM!!

F. BASIS OF TAXATION
1. Benefits-Received Theory or Symbiotic Relationship Theory
The reciprocal obligation of protection and support between the state and its
citizens. In return for the protection provided by the state, the people pay taxes.

2. Ability-to-Pay Theory
Taxes should be imposed based on the taxpayers ability to pay.

G. LIMITATIONS ON THE POWER OF TAXATION

1. Inherent Limitations
refer to those that restrict power of taxation even if not provided in the
Constitution
a. Taxes must be for public purpose.
b. Exemption of government agencies from taxation.
c. Non-delegation of power to tax to private persons or entities.
d. Tax laws do not apply to properties of foreign government (referred to as
international comity).
e. Tax laws should be applied within the territorial jurisdiction of the state.
f. Double taxation should be avoided.

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2. Constitutional Limitations
refer to those that limit the power of taxation as embodied in the Constitution
a. Due process of the law and equal protection of the laws
b. Uniformity and equality rule in taxation
c. Non-imprisonment for non-payment of poll/personal/capitation tax
d. Non-impairment of the obligation of contracts
e. No appropriation of public money for religious purposes
f. Exemption of religious, charitable, education institutions, non-profit cemeteries
and churches from property tax
g. Exemption from taxation of educational institutions, whether for profit or not,
as well as donations for educational purposes
h. Concurrence by a majority of the members of the Congress for passage of a law
granting tax exemption
i. The power of the President to veto a revenue or tariff bill
j. Non-impairment of the jurisdiction of the Supreme Court in tax cases
k. Taxes as general funds of the government

3. Contractual Limitations
refer to those restrictions on the power of taxation imposed by previously existing
contracts entered into by the government with another party (e.g. another state or
its own citizens)

H. SOURCES OF TAX LAWS

1. Philippine Constitution (the 1987 Constitution)
2. Statutory Laws - Republic Act (RA) No. 8424, as amended - National Internal Revenue
Code (NIRC) of 1997
3. Bureau of Internal Revenue (BIR) Regulations
a. Revenue Regulations (RR)
b. Revenue Memorandum Circular (RMC)
c. Revenue Memorandum Order (RMO)
4. Administrative rulings and opinions
a. BIR Rulings beginning January 1, 1998
b. ITAD (International Tax Affairs Division) Rulings
c. SEC Rulings
d. BSP Rulings
5. Judicial Decisions
a. Court of Tax Appeals (CTA) Decisions
b. Supreme Court (SC) Decisions
6. International Treaties and Executive Agreements
7. Special Laws or Statutes
a. RA No. 7916 or the Special Economic Zone Act of 1995 (for Philippine Economic
Zone Authority (PEZA) entities)
b. Executive Order No. 226 or The Omnibus Investments Code of 1987 (for Board of
Investments (BOI) entities)
8. Local Tax Laws (c/o the Local Government Units)

A man who is strict with himself will never fail.

-Anonymous

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BASIC PRINCIPLES OF TAXATION
Handout No. 1-01 A.G. DULAY

PART II: THE TAXATION SYSTEM

A. PRINCIPLES OF A SOUND TAX SYSTEM (CANONS OF TAXATION)

1. Fiscal Adequacy
This means that the tax collected, which serves as the source of fund for the
government, is sufficient to meet the public expenses regardless of business
condition.

2. Administrative Feasibility
This means that the tax laws should be easy to understand, implement and follow
free from confusion and uncertainty.

3. Equality or Theoretical Justice

This means that tax must be proportionate to the taxpayers ability to pay.

4. Consistency with Economic Goals

This means that tax laws should conform to the economic goals of the state.

Remember FACT!!

B. STAGES/PROCESSES UNDER THE TAXATION SYSTEM

1. Levy or Imposition of Taxes
This involves the passage of tax laws through the legislative function of the
government or the Congress.

2. Assessment
This involves the act of administration and implementation of tax laws by the
executive through its administrative agencies such as the BIR or Bureau of Customs
(BOC).

3. Tax Payment or Tax Collection

This involves the act of compliance by the taxpayer in contributing his share to
defray the expenses of the government.

Remember LAP!!

Levy Assessment Payment

Impact of Taxation Incidence of Taxation
Tax Legislation Tax Administration
Cannot be delegated Can be delegated
Government Taxpayer

Tax Administration
A system involving the assessment, collection and enforcement of taxes, including
the execution of judgment in all tax cases decided in favor of the BIR by the courts.

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C. OBJECTS OF TAXATION
1. Persons
a. Natural person individual taxpayers
b. Juridical person corporations, partnerships and any association

2. Properties
a. Real properties immovable
b. Personal properties movable
c. Tangible properties maybe felt or touched and are necessarily corporeal,
either real or personal properties
d. Intangible properties rights rather than physical

3. Excise objects
a. Transaction the act of conducting activities related to any business
or profession
b. Privilege a benefit derived through gratuitous transfer by fact of
death or donation
c. Right a power, faculty or demand inherent in one person and
incidental to another
d. Interest an advantage accruing from anything

D. DOCTRINES OF TAXATION
1. Prospective application of tax laws
A tax bill must only be applicable and operative after becoming a law.
The effectivity of the tax law commences upon its approval and its scope would
only cover the present and future transactions.

~> Retrospective application of tax laws shall not be applied, UNLESS there is a clear
intent that such law shall also be imposed on past transactions.

2. Imprescriptibility of taxes
Taxes in general are not cancelable.

~> The concept of prescriptive period will only start from the time the taxpayer files the
tax return and declares his tax liability.

3. Double taxation
The act of taxing twice for the same purpose in the same taxable year by the same
taxing authority upon the same property or activity for the same person.

a. Direct - prohibited in the Philippines

b. Indirect - allowed in the Philippines

4. Escape from taxation

a. Tax Evasion
The taxpayer uses unlawful means to evade or lessen the payment of tax.
Is prohibited, therefore, civil and/or criminal penalties will be applied.

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b. Tax Avoidance or Tax Minimization

A means of reducing or totally escaping payment of taxes through legally
permissible means.

b1. Tax option

choosing to pay lower tax rate in some transactions as permitted by tax laws

b2. Shifting
transferring the tax burden to another

b3. Transformation
occurs when the manufacturer or producer upon whom the tax has been
imposed pays the tax and endeavor to recoup (make up for) himself by
improving his process of production

5. Exemption from taxation

The grant of immunity or freedom, whether expressed or implied, from a financial
charge or obligation or burden to which others are subjected.
Since this is a personal privilege of a taxpayer, such cannot, in any way, be
transferred or assigned without the consent of the state.

Principles:
a. Not presumed
b. When granted, it is strictly construed against the taxpayer
c. Highly disfavored and may almost be considered as directly contrary to the
intention of tax laws

~> equivalent provisions = deductions / tax amnesty / tax condonation

Grounds for tax exemption:

a. Contract, where the government is the contracting party
b. Public policy
c. Reciprocity

6. Equitable recoupment
Involves tax claim for refund which may be allowed to be used as payment for
unsettled tax liabilities IF both taxes arise from the same transaction in which
overpayment is made and underpayment is due.
Not applicable where the taxes involved are totally unrelated.

7. Set-off taxes
Taxes are not subject to set-off because the government and the taxpayer are not
mutual creditor and debtor of each other.

Exceptions:
a. When both claims become due, demandable and fully liquidated
b. When there is actual compromise between the taxpayer and the tax officer

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8. Taxpayer suit
A taxpayer may be allowed to sue where there is a claim that public funds are
illegally disbursed or that public money is being deflected to any improper purpose,
or that public funds are wasted through the enforcement of an invalid or
unconstitutional law or ordinance.

9. Compromise
A contract whereby the parties, by reciprocal concession, avoid litigation or put an
end to one already commenced.

10. Power to destroy

The power of taxation includes the power to destroy because the taxpayer has no
option but to pay the tax imposed to him.

E. SITUS or PLACE OF TAXATION

Factors:
1. Classification of the tax being imposed
2. Subject matter of tax
3. Source of income being taxed
4. Place of the excise, privilege, business or occupation being taxed
5. Citizenship of the taxpayer
6. Residency of the taxpayer

Remember C2PReSS!!

Application:

Location of Object
Nature of Tax Citizenship Residency (Taxable or Not?)
Within Without
Income Tax Filipino Resident RC Y Y
Filipino Non-resident NRC Y N
Alien Resident RA Y N
Alien Non-resident NRA Y N

Transfer Tax Filipino Resident RC Y Y

Filipino Non-resident NRC Y Y
Alien Resident RA Y Y
Alien Non-resident NRA Y N

Business Tax Y N

Whatever the mind of man can conceive and believe, it can achieve.
-N. Hill

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BASIC PRINCIPLES OF TAXATION
Handout No. 1-01 A.G. DULAY

PART III: THE CONCEPT OF TAX

A. DEFINITION OF TAXES
Taxes are enforced proportional contribution levied by the state for the support of the
government.

B. ESSENTIAL CHARACTERISTICS OF TAXES

1. Enforced contribution
2. Enforced on persons, properties or rights
3. Generally payable in money
4. Proportionate in character
5. Paid at regular intervals
6. Used for public purpose
7. Levied by the Legislature
8. Territoriality rule
9. Source of government funds

Remember E2GP3LTS!!

C. CLASSIFICATION OF TAXES
1. As to Purpose
a. Primary - Revenue/Fiscal
Ex. Income Tax, Value-added Tax

b. Secondary - Regulatory/Sumptuary/Compensatory
Ex. Protective tariff and customs duties, Special Educational Fund (SEF) Tax

2. As to Subject Matter
a. Personal/Poll/Capitation tax imposed on persons residing within a specific
territory
Ex. Basic Community Tax

b. Property tax imposed on property, whether real or personal

Ex. Real Estate Tax

c. Excise tax imposed on the exercise of a right or privilege (also called privilege
tax)
Ex. Income Tax, Estate Tax, Donors Tax

3. As to Determination of Amount
a. Specific tax imposed based on weight, number or some other standards of weight
or measurement
Ex. Excise tax on distilled spirits, wines or cinematographic films

b. Ad Valorem tax imposed based on the value of the taxable item

Ex. Real Estate Tax

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4. As to Who Bears the Burden

a. Direct tax imposed upon a person who is directly bound to pay it; a tax which the
taxpayer cannot shift to another
Ex. Income Tax, Estate Tax, Donors Tax

b. Indirect tax which forms part of the purchase price; a tax which the taxpayer can
shift to another
Ex. Value-added Tax

5. As to Jurisdiction/Scope or Authority Imposing Tax

a. National tax imposed on a national level and for the national government
Ex. National Internal Revenue Taxes

b. Local/Municipal tax imposed on a local level for the support of local government
units or LGUs
Ex. Local Business Tax, Basic Community Tax, Real Estate Tax

6. As to Graduation or Rate
a. Proportional or Flat tax rate which is fixed or constant
Ex. Corporate Income Tax, Value-added Tax

b. Progressive or Graduated tax rate increases as the taxable amount or tax

bracket increases
Ex. Individual Income Tax, Estate Tax, Donors Tax

c. Regressive tax rate decreases as the taxable amount or tax bracket increases
Ex. We have no regressive tax in the Philippines.

D. TAX VS. OTHER CHARGES AND FEES

TAX
Demand of sovereignty
Generally amount is unlimited
For the support of the government
May be imposed by the State only
TOLL
Demand of proprietorship
Amount is limited to the cost of maintenance of
public improvement
For the use of another's property
May be imposed by private individuals or entities

TAX SPECIAL ASSESSMENT

Imposed on persons, property, rights or Levied only on lands
transactions
For the support of the government Contribution to the cost of public improvement
Regular exaction Exceptional as to time and place

TAX CUSTOMS DUTIES

Imposed on imported or exported goods
Imposed upon persons, property, rights or transactions
It comprehends more that the term custom's duty It is also a tax

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TAX LICENSE FEE

Imposed to raise revenue
Collected under the power of the government
Generally amount is unlimited
Imposed on persons, property, rights or
transaction
Non-payment does not make the business illegal
For regulation and control
Collected under the police power
Limited to the necessary expenses of regulation and
control
Imposed on the exercise of a right or privilege
Non-payment makes the business illegal

TAX PENALTY
Imposed to raise revenue Imposed to regulate conduct
May be imposed by the State only May be imposed by private entities

TAX DEBT
Based on law Based on contract
Not assignable Assignable
Payable in money Payable in kind or in money
Not subject to set-off Subject to set-off
Non-payment may result to imprisonment No imprisonment (except when debt arises from
crime)
Bears interest only if delinquent Interest depend upon the stipulation of the parties

TAX TITHE
Based on law Based on religious obligation
Rates vary Generally fixed at 10% of one's earnings

Other Charges:
1. Revenue
This refers to all funds or income derived by the government whether from tax or
from other sources.

2. Subsidy
A monetary aid directly granted or given by the government to individual or private
commercial enterprises deemed beneficial to public.

3. Tariff
A schedule or list of rates, duties or taxes imposed on imported goods.

4. Margin fee
A tax on foreign exchange designated to curb the excessive demands upon our
international reserves.

We are what we think. All that we are arises with our thoughts.
With our thoughts we make our world.
-Buddha

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