INCOME TAXATION | CHAPTER 1 | @remi

CHAPTER 1: FUNDAMENTAL PRINCIPLLES OF TAXATION

What is Taxation?
As a power – inherent power of the state to demand enforced contribution
As a process – the legislative act of laying a tax to raise income for the government
As a mode of cost allocation – means of allocating government burden to the people

Three Inherent Powers of the State

Police Power – power to enact laws to promote the general welfare of the people.
Taxation – power by which the State raises revenue to defray the necessary expenses of the government.
Eminent Domain – power of the State to acquire private property for public purpose upon payment of
just compensation.

Similarities among the three (3) inherent power of the State

• Inherent in the State
• Exist independently of the constitution although the conditions for their exercise may be
prescribed by the constitution
• Ways by which State interferes with private rights and property
• Legislative in nature
• Presuppose an equivalent compensation received, directly or indirectly, by the persons affected.

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Theory and Basis of Taxation

• Lifeblood or Necessity Theory
➢ The existence of the government is a necessity. The government can neither exist nor endure
without taxation
➢ Taxes are the lifeblood of the government and their prompt and certain availability is an
imperious need.
➢ Government cannot continue to perform its basic functions of serving and protecting its
people without means to pay its expenses.
• Benefits Received/Reciprocity Theory
➢ Doctrine of Symbiotic Relationship or Benefits Protection Theory
➢ Taxes are what we pay for a civilized society

Manifestation of the Lifeblood Theory

• Rule of “No Estoppel against the government”
➢ The state cannot be stopped by the neglect of its agents/officers
➢ Erroneous application and enforcement of the law by public officers do not block the
subsequent correct application status.
• Collection of taxes cannot be enjoined (stopped) by injunction
➢ Except for the Court of Tax Appeals, no court shall have the authority to grant an
injunction to restrain the collection of any national internal revenue tax, fee or charge
imposed by the tax code
• Taxes could not be the subject of compensation or set-off
➢ Cannot be set-off for eminent domain; taxes are distinct from debt
➢ Set-off is only applicable if both obligations are liquidated and demandable, where the
exact amounts haven already been determined
• Right to select objects (subjects) of taxation
➢ The right to select the objects/subjects rest with the Congress
➢ The subject or object to be taxed
➢ The purpose of the tax as long as it is a public purpose
➢ The amount or rate of tax
➢ Kind of tax of the tax
➢ Situs (Place) of taxation
➢ The manner, means, and agencies of collection of the tax
• A valid tax may result in the destruction of the taxpayer’s property
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➢ Power to destroy

Scope of Taxation
Comprehensive – covers persons, businesses, activities, professions, rights and privileges
Unlimited – In the absence of restrictions, power to tax is unlimited and comprehensive
Plenary – complete; the BIR may avail of certain remedies to ensure collection of taxes
Supreme – In so far as the selection of the subject of taxation

Essential Elements of Tax

• Enforced contribution – it is not voluntary payment or donation
• Generally payable in money – must be in legal tender
• Proportionate in character – taxes should be based on ability to pay or theoretical justice
• It is levied on persons, property, or the exercise of a right or privilege
• Levied by the law-making body if the State – Congress cannot delegate such power (Doctrine of
separation of powers)
• Levied for public purpose

Aspects of Taxation
Levying – imposition of tax (Legislative)
Assessment – determination of the correct amount of applicable tax (Executive)
Collection – administrative in character (BIR)

Nature of the State’s Power to Tax

• Inherent in sovereignty – can enforce contribution even in the absence of a constitutional
provision; State has the supreme power to command and enforce
• Legislative in character – cannot be exercise by the executive or judicial branches of the
government
➢ Except: Congress may authorize by law, the President to fix, within specified limits and
subject to such limitations and restriction as it may impose (Section 28 Article VI of the
1987 Constitution)
o Tariff rates
o Import and export quotas
o Tonnage and wharfage dues
o Other duties and imposts
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➢ Delegation to local government units – LGUs do not have inherent power to tax (Section 5,
Art. X)
o Delegation to Administrative Agencies – not legislative in nature
➢ Value property
➢ Assess and collect taxes
➢ Perform details of computation, appraisement or adjustment

o Subject to Constitutional and Inherent Limitations

• Exemptions of government entities, agencies and instrumentalities – the government will be
taxing itself to raise money for itself
o Agencies performing government functions are tax exempt unless expressly taxed
o Agencies performing proprietary functions are subject to tax unless expressly exempted
o Government owned and controlled corporation performing proprietary functions are
subject to tax except for: GSIS, SSS, PHIC, Local Water Districts, HDMF
• International Comity – polite and friendly agreement among nations; Under international law,
property of a foreign State may not be taxed by another State due to:
➢ Sovereign quality of States
➢ When on State enters the territory of another State, there is an implied understanding
that the former does not intend to denigrate its dignity by placing itself under the
jurisdiction of another State
➢ Immunity from suit of a State
• Limitation on territorial jurisdiction – tax laws cannot operate beyond a state’s territorial limits.
• Strongest among the inherent powers of the State, most important

Classification of Taxes
Scope
• National – imposed by National Government (income tax, VAT)
• Local – imposed by LGUs (real estate tax, professional tax)
Subject Matter or Object
• Personal, poll or capitation – fixed amount imposed upon individual (community tax)
• Property – tax imposed on property (real property tax)
• Excise – exercise of certain rights and privileges; imposed on sin products and non-essential
goods
Who bears the burden
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• Direct – tax which is demanded from the person who also shoulders the burden of tax; cannot
shift to another (income tax, estate tax)
• Indirect – liability for the payment of the tax falls on one person but the burden can be shifted or
passed to another person (VAT, percentage tax, excise tax)
Determination of Amount
• Specific – tax of fixed amount imposed by the head or number, or by some standard of weight or
measurement (excise tax on cigars and liquors)
• Ad valorem – tax of fixed proportion of the value of the property with respect to which the tax is
assessed (VAT, income tax, donor’s tax, estate tax)
Purpose
• Primary – raise revenue for government purposes (income, donor’s)
• Secondary – for a specific purpose (tariff and certain duties on imports)
Graduation or rate
• Proportional – based on fixed percentages of amount of the property (VAT)
• Progressive or graduated – increases as the tax base increases (income tax)
• Regressive – decreases as the tax base increases
Taxing Authority
• National – imposed under the National Internal Revenue Code collected by BIR and other
government agencies. Includes custom duties, taxes on narcotic drugs, energy taxes, trave tax\
• Local – imposed by LGUs

Elements of Sound Tax System

• Fiscal Adequacy – Raise the revenue necessary to fund public services. It must be adequate to
meet government expenditures and sustain the level of public services
• Theoretical Justice or Equity – taxpayer’s ability to pay must be taken into consideration
• Administrative Feasibility – Informed stakeholders who understand how taxes are assessed,
collected and complied with. It should be simple as possible and should minimize gratuitous
complexity.
Inherent Limitations
• Purpose must be public – invalid tax if private purpose; need not be exclusively public if benefit
to private individuals is only incidental. Congress determines whether public or private purpose.
• Prohibition against delegation of the taxing power – legislative enactment/imposition/levying
cannot be delegated; only administrative implementation

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• Territorial limitation

Constitutional Limitations
• Due process of law – there must be a valid law and the measure should not be unconscionable
and unjust as to amount to confiscation of property. The power to tax should not be harsh,
oppressive or confiscatory; Right to Notice and Hearing
• Equal protection of laws – all persons subject to legislation shall be treated alike under similar
circumstances and conditions both in the privileges conferred and liabilities imposed.
• Rule of uniformity and equity in taxation – must be based on substantial distinction, apply both
to present and future conditions, germane to the purpose of law, apply equally to all members of
the same class
• Prohibition against imprisonment for non-payment of “poll tax” – only punishable by surcharge
• Prohibition against impairment of obligation of contracts – no law impairing the obligation of
contracts shall be passed; obligation of a contract is impaired when its terms or conditions are
changed by law or by a party without the consent of the other
• Prohibition against infringement of religious freedom – no law shall be made respecting an
establishment of religion or prohibiting the free exercise thereof.
• Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of any
church – No public money or property shall be appropriated, applied, paid or employed directly
or indirectly for the use, benefit, or support of any church, sectarian institution or any priest,
preacher, minister except the priest is assigned to the armed forces, or to any penal institution,
or government orphanage or leprosarium
• Prohibition against taxation of religious, charitable and educational entities – exclusively used
for religious, charitable, or educational purposes shall be exempt from real property tax only.
• Prohibition against taxation of non-stock, non-profit educational institutions – all revenues and
assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.
• Others
o Grant of tax exemption – must be concurrence of a majority of all Members of Congress.
o Veto of appropriation, revenue, tariff bills by the President – specific item
o Delegated authority of President to impose tariff rates, import and export quotas
o Non-impairment of the Supreme Court jurisdiction – cannot take away as final arbiter of
tax cases

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o Revenue Bills shall originate exclusively from the House of Representatives

o Infringement of press freedom – valid if taxed on the receipts or income of the press
o Revocation of tax exemptions – tax exemptions may be revoked by another law

Situs of Taxation
• Literally means “place” of taxation. It is the state or political unit which has jurisdiction to impose
a particular tax.
➢ Persons – Residence of the taxpayer
➢ Real Property – Location
➢ Personal Property – Location; place of sale or transaction
➢ Intangible property – Domicile of the owner except:
o Franchise, patents, copyrights, trademarks – where the intangibles are exercised
o Receivables – Domicile or residence of the debtor
o Bank deposits – location of the depositary bank
• Income - where the occupation is engaged in; where the transaction took place
• Business – place of business
• Gratuitous transfer – residence or citizenship of taxpayer; or location of the property

Tax Distinguished from Other Terms

• Tax vs. Toll
➢ Toll is a sum of money for the use of something, generally applied to the consideration,
which is paid of the use of a road, bridge, or the like of public nature

• Tax vs. Penalty

➢ Penalty is a sanction imposed as a punishment for violation of law or acts deem injurious.
The violation of tax may give right to imposition of penalty.

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• Tax vs. Special Assessment

➢ Enforced proportional contribution from owners of lands for special benefits resulting
from public improvements.
➢ It is not a tax measure intended to raise revenues for the government because the
proceeds thereof may be devoted to the specific purpose (finance the improvement) for
which the assessment was authorized
o Levied on the land
o Not a personal liability of the person assessed
o Based wholly on benefits
o Exceptional both as to time and place
• Tax vs. Revenue
➢ All the funds or income derived by the government, whether from tax or any other income

• Tax vs. Subsidy

➢ Pecuniary aid directly granted the government to an individual or private commercial
enterprise deemed beneficial to the public.
• Tax vs. License
➢ Permit or license is a charge imposed under the police power for purposes of regulation.

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• Tax vs. Debt

• Tax vs. Customs Duties

➢ Customs Duties are taxes imposed on goods exported rom or imported into a country.

• Tax vs. Tariff

➢ 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
➢ Duties paid on goods imported or exported
➢ The system or principle of imposing duties on the importation or exportation of goods.

Means of Avoiding or Minimizing Tax

• Shifting – transfer of burden of a tax by the original taxpayer or the one whom the tax was
assessed to someone else (indirect taxes only)
• Transformation – producer or manufacturer pays the tax and endeavor to recoup himself by
improving his process of production thereby turning out his units of products at a lower cost
• Evasion – illegal or fraudulent means to defeat or lessen the payment of a tax; “Tax dodging”
• Tax Avoidance – exploitation by the taxpayer of legally permissible alternative tax rates or
methods of assessing taxable property or income
• Exemption – grant of immunity to particular persons or corporation from a ta which persons and
corporations generally within the same state or taxing district are oblige to pay.
o In the construction of tax statutes, exemptions are not favored and are construed against
the taxpayer
o Grounds for exemption: May be based on contract; may be based on some ground of
public policy; may be grounds of reciprocity or lessen the rigors of international double
or multiple taxation
o Constitutional or Statutory (passed by law); Express or Implied, Total or partial

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o Inherent power of the state; delegate power by local governments unless forbidden by
law
o No law granting any tax exemption shall be passed without the concurrence of majority
of all members of Congress.
• Amnesty – general or intentional overlooking by the State of its authority to impose penalties on
persons guilty of tax evasion or violation of a revenue or tax law; immunity from all criminal, civil
and administrative liabilities from non-payment of taxes
• Capitalization – reduction in the selling price of income producing property by an amount equal
to the capitalized value of future taxes that may be paid by the purchaser

Double Taxation
• Direct double taxation - Taxing twice by the same taxing authority, jurisdiction, or taxing district
for the same purpose in the same year or taxing period, same subject or object, and same
kind/character of the tax.
• Indirect double taxation – if one of the elements above is not present

Sources of Tax Laws

• Constitution
• National Internal Revenue Code – Tax Code of the Philippines
• Tariff and Customs Code
• Local Government Code
• Local tax ordinances
• Tax treaties and international agreements – in order to avoid or minimize the effects of double
taxation
• Decisions of the Supreme Court and Court of Tax Appeals
• Revenue rules and regulations – properly enforce and execute the laws, clarify and explain the
law, providing details of administration and procedure
o Must not be contrary to law and Constitution, and must be published in the Official
Gazette or a newspaper of general circulation

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Nature of Internal Revenue Laws

• Not political in nature; Civil and not penal in nature although there are penalties provided for
their violation
• Purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of
taxes or to punish tax evasion

Construction of Tax Laws

• Public purpose is always presumed
• If the law is clear, apply the law in accordance to its plain and simple tenor
• A stature will not be construed an imposing a tax unless it does so clearly, expressly and
unambiguously
• In case of doubt, it is construed most strongly against the Government and liberally in favor of
the taxpayer.
• Provisions of a taxing act are not to be extended by implication
• Tax law operates prospectively unless the purpose of the legislature to give retrospective effect
is expressly declared or may be implied from the language used -> it should not be harsh and
oppressive which violates the taxpayer’s constitutional rights of equity and due process
• Tax laws are special laws and prevail over a general law

Taxpayer’s Suit
• Brought or filed by a taxpayer arguing the validity of a tax statute and its enactment or the
constitutionality of its alleged public purpose.
• It is a case where the act complained of directly involves the illegal disbursement of public funds
derived from taxation
• Individuals may question in the proper court the constitutionality of statutes requiring the
expenditure of public funds.
• Taxpayer is not relieved from the obligation of paying a tax because of his belief that it is being
misappropriated by certain officials, for otherwise collection of taxed would be hampered and
this may result in the paralyzation of important governmental functions.

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