BASIC PRINCIPLES OF TAXATION

LECTURE NOTES
1. THE INHERENT POWERS OF THE STATE (PET)  NOTE: Similarities among Taxation, Eminent
a. Police Power- it is the power to enact laws to Domain and Police Power
promote the general welfare of the people. 1. They are inherent in the State.
2. Underlie and exist independently of the
b. Eminent Domain- it is the power to take private constitution although the conditions for their
property for public use upon payment of just exercise may be prescribed by the
compensation. Constitution.
3. Methods by which State interferes with private
c. Taxation Power- it is the power to take property rights and property
for the support of the government and for public 4. Presuppose equivalent compensation
purpose. 5. Exercised primarily by the legislature

 NOTE: Distinctions among Taxation, Eminent Domain and Police Power

Police Power Eminent Domain Taxation

1. SCOPE Regulates both liberty Affects only property Affects only property
and property rights rights

2. AUTHORITY Exercised only by the May be exercised by Exercised only by the

Government private entities Governemnt

3. PURPOSE Promotion of general For public use For the support of the
welfare government

4. PERSONS Community or a class Only the owner of a Community or a class

AFFECTED of individuals private property of individuals

5. EFFECT No transfer or title; There is a transfer of Contribution becomes

there may just be a title to property part of public fund
restraint on the
injurious use of
property

6. TYPE OF Property is noxious or Property is wholesome Property is wholesome

PROPERTY intended for a noxious and is devoted to and is devoted to public
purpose and as such public use or purpose. use or purpose.
taken and destroyed.

7. BENEFITS Compensation is the Compensation is the Compensation is the

RECEIVED intangible, altruistic full and fair equivalent protection and public
feeling that the (FMV) of the property improvements
individual has taken. instituted by the
contributed to the government for the
public good. taxes paid.

8. AMOUNT OF Sufficient to cover No imposition. The No limit

IMPOSITION cost of the license and owner is paid FMV of
the necessary his property
expenses of police
surveillance and
regulation

3. NATURE OR CHARACTERISTICS OF
2. PURPOSES OF TAXATION TAXATION
a. Primary Purpose – To raise revenue/funds to a. Inherent Power
defray the necessary expenses of the government b. Legislative in Character
(also called Revenue Purpose). c. Subject to Inherent and Constitutional Limitations

NOTE: In the absence of inherent and constitutional

limitations, the power to tax is comprehensive,
b. Secondary Purpose – As a tool for general, social plenary, supreme and unlimited. It is so
and economic welfare (also called comprehensive that in the words of Justice Marshall,
Regulatory/Sumptuary/Compensatory Purpose). the power to tax includes the power to destroy.
1. Regulation
2. Promotion of General Welfare 4. THEORY ON TAXATION
3. Reduction of Social Inequality
4. Encourages Economic Growth Necessity Theory – The existence of government is a
necessity, it cannot continue without means to pay its

Page 1 of 6
 expenses, for this reason, it has the right to compel all conformably with the constitutional mandate that
its citizens and property to contribute. congress shall evolve a progressive system of
taxation.
5. BASIS OF TAXATION
11. LIMITATIONS ON THE TAXING POWER
a. The benefits-Protection Theory- Taxes are A. Inherent Limitations- inherent limitations
what we pay for a civilized society. The proceed from the very nature of the taxing power
government and the people have a reciprocal and itself. The taxing power has very distinct and
mutual duties of support and protection to one positive limitations some of which inhere in its very
another (symbiotic relationship between the nature and exist whether declared or not declared
government and the taxpayer). in the written constitution.
b. Lifeblood Doctrine - Taxes are the lifeblood of
the government without which it can neither exist (D-PINES)
nor endure. 1. Double taxation

6. TAX DEFINED Kinds of double taxation:

a. Direct Duplicate Taxation, this is objectionable
Are enforced proportional contributions from persons and prohibited because it violates the
and property, levied by the State by virtue of its consitutional provision on uniformity and
sovereignty for the support of the government and for equality. It means:
all its public needs. - Taxing twice
- By the same taxing authority
7. ESSENTIAL CHARACTERISTICS OF TAX - Within the same jurisdiction or taxing
a. A tax is a forced charge, imposition or contribution; district
b. It is a pecuniary burden payable in money; - For the same purpose
c. It is imposed for public purpose; - In the same year or taxing period
d. It is imposed pursuant to a legislative authority; - Same kind or character of tax
e. It is levied within the territorial and legal
jurisdiction of a state; b. Indirect Duplicate Taxation, is not legally
f. It is assessed in accordance with some reasonable objectionable. It extends to all cases in which
rule of apportionment. there is a burden of two or more pecuniary
imposition but imposed by different taxing
8. SCOPE OF THE LEGISLATIVE TAXING authorities.
POWER
a. The person, property, or occupation to be taxed. 2. Public purpose
Excises or privileges, provided they are within the
taxing jurisdiction, are also included; Proceeds from tax must be use for:
b. The amount or rate of the tax; a. Support of the government.
c. The purposes for which taxes shall be levied b. Some of the recognized objects of
provided they are public purposes; government.
d. The kind of tax to be collected; c. To promote the welfare of the community (not
e. The apportionment of the tax, i.e., whether the tax individuals).
shall be general or limited to a particular locality or
partly general and partly local; 3. International comity or treaty - a State cannot tax
f. The situs of taxation; and another State based on the principle of Sovereign
g. The method of collection. Equality among States. E.g. tax law passed
imposing taxes on foreign ambassadors is not a
9. STAGES OR PROCESS OF TAXATION valid law.
(LAP)
a. Levy or Imposition- This process involves the 4. Non-delegability of the Taxing power - Power of
passage of tax laws or ordinances through the taxation is purely legislative, hence the power
legislature. cannot be delegated either to the executive or
judicial departments. The limitation arises from
b. Assessment and Collection- This process the doctrine of separation of powers among the
involves the act of administration and three branches of the government.
implementation of tax laws by the executive Exceptions to the rule against the delegation of the
through its administrative agencies such as the taxing power:
Bureau of Internal Revenue or Bureau of Customs. a. Delegation to the President, subject to some
limitations and restrictions, to fix within
c.Payment of Tax- This process involves the act of specified limits, tariff rates and tonnage or
compliance by the taxpayer in contributing his wharfage duties and other duties and imposts.
share to pay the expenses of the government. b. Delegation to local governments the power to
10. BASIC PRINCIPLES OF A SOUND TAX create its own sources of revenues anD to levy
SYSTEM (FAT) taxes, subject to such limitations as may be
a. Fiscal Adequacy- The sources of provided by law.
government revenue must be sufficient to meet c. Delegation to administrative agencies certain
government expenditures and other public needs. aspects of the taxing process that are not
legislative such as:
b. Administrative Feasibility- Tax laws i. the power to fix value of property for
must be capable of convenient, just and effective purposes of taxation pursuant to fixed
administration- free from confusion and rules
uncertainty. ii. the power to assess and collect taxes.

c. Theoretical Justice- A good tax system 5. Exemption of the government

must be based on the taxpayer’s ability to pay.
This suggests that taxation must be progressive

Page 2 of 6
 a. Agencies performing governmental functions 9. Exemption from taxes of the revenues and
are tax exempt unless expressly taxed assets of non-profit, non-stock educational
b. Agencies performing proprietary functions are institutions including grants, endowments,
subject to tax unless expressly exempted. donations or contributions for educational
c. GOCCs performing proprietary functions are purposes.
subject to tax, however the following are 10. Non-appropriation of public funds or property
granted exemptions: for the benefit of any church, sect or system of
i. Government Service Insurance System religion, etc.
(GSIS) 11. No money shall be paid out of the Treasury
ii. Social Security System (SSS) except in pursuance of an appropriation made
iii. Philippine Health Insurance Corporation by law.
(PHIC) 12. Concurrence of a majority of ALL members of
iv. Philippine Charity Sweepstakes Office Congress for the passage of a law granting
(PCSO) tax exemption
13. Non-diversification of tax collections
6. Situs of taxation or territoriality - the taxing power 14. The President shall have the power to veto any
of a country is limited to person and property particular item (s) in an appropriation, revenue
within and subject to its jurisdiction. or tariff, but the veto shall not affect the item
(s) to which no objection has been made.
Place of taxation 15. Non-impairment of the jurisdiction of the
a. The state where the subject to be taxed has a Supreme Court to review tax cases
situs may rightfully levy and collect the tax. 16. Appropriations, revenue or tariff bills shall
b. The situs is necessarily in the state which has originate exclusively in the House of
jurisdiction or which exercises dominion over Representatives but the Senate may propose
the subject in question. or concur with amendments.
17. Each local government unit shall exercise the
Factors to consider in determining Situs of taxation power to create its own sources of revenue and
a. Subject matter (person, property, or activity) shall have a just share in the national taxes.
b. Nature of the tax
c. Citizenship 12. SOURCES OF TAX LAWS
d. Residence of the taxpayer a) Constitution
b) Tax Codes such as the National Internal Revenue
Application of Situs of Taxation Code, Tariff and Customs Code, and portion of the
a. Persons - Residence of the taxpayer Local Government Code
b. Real Property - location c) Statutes like RA 1125 (an Act Creating the Court of
c. Tangible Personal Property - location Tax Appeals), RA 7716 (E-VAT Law), RA 8424 (Tax
d. Intangible Personal Property - domicile of the Reform Act of 1997)
owner d) Presidential Decrees
e) Executive Orders
NOTE: Shares of stock in a domestic corporation of f) Court Decisions
a nonresident alien are taxable in the Philippines g) Revenue regulations promulgated by the
because said shares receive the protection and Department of Finance
benefit of the Philippine laws h) Administrative issuances of the BIR like Revenue
Memorandum Circulars, and those of the Bureau of
e. Income - residence, or citizenship, or Customs like Customs Memorandum Orders
source of income i) BIR Rulings
f. Business - place of the business j) Local Tax Ordinances
k) Tax Treaties and Conventions with Foreign
NOTE: Countries
i. Occupation – where the occupation is
engaged in.
ii. Transaction – where the transaction took
place. 13. TAX LAWS

g. Gratuitous Transfer of Property - residence
or citizenship of the taxpayer; or location of
the property
B. Constitutional Limitations on the Taxing
Power- the following provisions may be said to be
limitations prescribed in the Constitution on the
taxing power of the government.
1. Observance of due process of law
2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of poll tax
6. Non-impairment of the obligations of contracts
7. Free-worship clause
8. Exemption of charitable institutions, churches,
parsonages, or convents appurtenant thereto,
mosques, and non-profit cemeteries, and all
lands, buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes.
NATURE OF INTERNAL REVENUE LAWS - Tax laws are
civil and not penal in nature, although there are
penalties provided for their violation. The purpose of
tax laws in imposing penalties for delinquencies is to
compel the timely payment of taxes or to punish
evasion or neglect of duty in respect thereof.
CONSTRUCTION OR INTERPRETATION OF TAX LAWS
IN CASE OF DOUBT OR AMBIGUITY
a. Tax statutes are construed
strictly against the government. Taxes, being
burdens, are not to be presumed beyond what the
statute expressly and clearly declares.
b. Provisions granting tax
exemptions are construed strictly against the
taxpayer claiming tax exemption.
APPLICATION OF TAX LAWS
General rule:
Tax laws are prospective in operation because the
nature and amount of the tax could not be foreseen

Page 3 of 6
 and understood by the taxpayer at the time the  Specific Tax – this is a fixed amount based on
transactions which the law seeks to tax was completed. volume, weight or quantity of goods as
measured by tools, instruments or standards.
Exception: (e.g. excise tax on cigars and liquors)
While it is not favored, a statute may nevertheless
operate retroactively provided it is expressly declared  Ad Valorem Tax – this imposition is based on
or is clearly the legislative intent. But a tax law should the value of the property subject to tax. (e.g.
not be given retroactive application when it would be VAT, income tax, donor’s tax and estate tax)
harsh and oppressive.
d. According to
14. CLASSIFICATION OF TAXES Purpose:
 Fiscal/General/Revenue Tax – levied
a. According to Subject without a specific or pre-determined purpose.
Matter: (e.g. income tax, donor’s tax and estate tax)
 Personal, Poll or Capitation Tax – tax of a
fixed amount imposed upon individual,  Regulatory/Special/Sumptuary Tax –
whether citizens or not, residing within a those intended to achieve some social or
specified territory without regard to their economic goals. (e.g. tariff and certain duties
property or the occupation in which he may be on imports)
engaged (e.g. basic community tax)
e. According to
 Property Tax – tax imposed on property, Jurisdiction/Scope or Authority
whether real or personal, in proportion either  National Tax – imposed by the National
to its value, or in accordance with some other Government
reasonable method of apportionment (e.g. real
estate tax) NATIONAL INTERNAL REVENUE TAXES UNDER
THE ADMINISTRATION OF THE BIR:
 Excise Tax – any tax which does not fall a. Income Tax
within the classification of a poll tax or a b. Estate and donor’s tax
property tax. This is a tax on the exercise of c. Value-added tax
certain rights and privileges (e.g. income tax, d. Other percentage taxes
estate tax, donor’s tax, VAT) e. Excise taxes
f. Documentary stamp taxes

b. According to Who  Local Tax - imposed by municipal corporations

Bears the Burden: (e.g. real estate tax)
 Direct Tax – imposed on the person
obliged to pay the same and this burden f. According to
cannot be shifted or passed on to another. Graduation or Rate
(e.g. income tax, estate tax, donor’s tax)  Proportional/Flat Rate Tax – unitary or single
rate. (e.g. VAT)
 Indirect Tax – the payment is demanded
from a person who is allowed to transfer  Progressive/Graduated Tax – as the tax base
the burden of taxation to another. (e.g. grows the tax rate increases. (e.g. income tax
VAT) on individuals)

c. According to  RegressiveTax – the tax rate increases as the

Determination of Amount: tax base decreases.

15. TAX DISTINGUISHED FROM OTHER CHARGES AND FEES

a. Differentiate Tax from Toll

TAX
 it is a demand of sovereignty
 it is one’s support for the government
 it is imposed only by the government
 it is based on governmental needs
TOLL
 it is a demand of proprietorship
 it is a compensation for the use of
somebody else’s property
 it maybe imposed by the government or
private individuals
 it is determined by the cost of property or
improvement thereon

b. Differentiate Tax from Penalty

TAX
 it is imposed to raise revenue
 it is imposed only by the government
 it arises from law
 generally, payable in money
PENALTY
 it is imposed to regulate conduct through
punishment and suppresion of injurious act
 may be imposed by the government or by
private individuals
 it may arise from law or contract
 may be paid in money or in kind

c. Differentiate Tax from Special Assessment

TAX SPECIAL ASSESSMENT
 levied on business, interests, transactions,  levied on land

Page 4 of 6
 rights, persons, properties or privileges
 may be made a personal liability of the
person assessed
 based on necessity with no hope of direct or
immediate benefit to the taxpayer
 is of general application
 cannot be made the personal liability of the
person assessed, because it is the land that
answers for the liability
 based wholly on benefits received
 it is exceptional in application for the
recovery of cost and/or maintenance of
improvement

d. Differentiate Tax from License Fee

TAX
 tax is levied in the exercise of the taxing
power
 the purpose of it is to generate revenue
 generally amount is unlimited
 imposed on person, property, rights or
transaction
 non-payment does not make the business
illegal
LICENSE FEE
 license fee emanate from the police power
of the state
 the purpose of it is regulatory
 limited to the necessary expenses of
regulation and control
 imposed on the exercise of a right or
privileges
 non-payment makes the business illegal

e. Differentiate Tax from Custom Duties

TAX CUSTOM DUTIES
 imposed on person, property, rights or  Imposed on imported or exported goods
transaction  it is also a tax
 it comprehends more than the term custom
duties

f. Differentiate Tax from Debt

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
 bears interest only if delinquent from crime)
 interest depend upon the stipulation of the
parties

g. Differentiate Tax from Subsidy

Subsidy is:
 a pecuniary aid directly granted by the government to an individual or private commercial
enterprise deemed beneficial to the public.
 NOT A TAX although tax may have to be imposed to pay it.

h. Differentiate Tax from Revenue

TAX REVENUE
 Amount imposed  Refers to all the funds or income derived by
the government, whether from tax or any
other source.
 Amount collected

i. Differentiate Tax from Internal Revenue

Internal Revenue means taxes imposed by the legislature other than duties on imports and exports.

j. Differentiate Tax from Tariff

TARIFF - May be used in one of three (3) senses:

1. A 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; or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation (or exportation) of goods.

*The term tariff and customs duties are used interchangeably in the Tariff and Customs Code.

Page 5 of 6
16. SYSTEMS OF INCOME TAXATION
a. Global System – All items of gross income,
deductions are reported in one income tax
return and the applicable tax rate is applied on
the tax base.
b. Schedular System – Different types of income
are subject to different sets of graduated or flat
income tax rates.
17. OTHER DOCTRINES/RULES IN
TAXATION
- Equitable Recoupment – Claim for refund
which is prevented by prescription 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.
- Set-off taxes- Taxes are not subject to set-off
or legal compensation because the government
and the taxpayer are not mutual creditors and
debtors of each other.
- Taxpayer Suit- This provides that a taxpayer
suit can only be allowed if the act involves a
direct and illegal disbursement of public funds
derived from taxation.
15. Escape from Taxation
a) Evasion or Dodging, the taxpayer uses
unlawful means to evade or lessen the
payment of tax.
b) Avoidance, also called tax minimization, it
is the reduction or totally escaping payment
of tax through legally permissible means.
c) Shifting, basically, it is the transfer of tax
burden to another. The imposition of tax is
transferred from the statutory taxpayer to
another without violating the law.
 Impact is the point at which a tax is
originally imposed.
 Incidence is the point at which the tax
burden finally rests or settles down.
 Three (3) kinds shifting
i. Forward shifting
ii. Backward shifting
iii. Onward shifting
d) Capitalization, the seller is willing to lower
the price of the commodity provided the
taxes will be shouldered by the buyer.
e) Transformation, the manufacturer absorbs
the additional taxes imposed by the
government without passing it to the buyers
for fear of lost of his/its market. Instead,
he/it increases quantity of production,
thereby turning their units of production at a
lower cost resulting to the transformation of
the tax into a gain through the medium of
production.
f) Exemption, it is an immunity, privilege or
freedom from payment of a charge or
burden to which others are obliged to pay.