CHAPTER 1

INTRODUCTION TO TAXATION

WHAT IS TAXATION?
1. A state power
 Taxation is an inherent power of the State to enforce a proportional
contribution from its subjects for public purpose.
2. A process
 Taxation is a process of levying taxes by the legislature of the State
to enforce proportional contributions from its subjects for public
purpose.
3. A mode of cost distribution
 Taxation is a mode by which the State allocates its costs or burden
to its subjects who are benefited by its spending.

The Theory of Taxation

A system of government is indispensable to every society. However, a
government cannot exist without a system of funding. The government's
necessity for funding is the theory of taxation.

The Basis of Taxation

The mutuality of support between the people and the government (receipt
of benefits is conclusively presumed)

THEORIES OF COST ALLOCATION - 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. (proportional tax – same
rate is applied on the taxable income)
2. Horizontal equity - requires consideration of the particular circumstance
of the taxpayer. (graduated tax – low income, low tax rate; high income,
high tax rate)
The Lifeblood Doctrine - taxes are the lifeblood of the government.
Implications:
1. Tax is 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:
a. Income received in advance is taxable upon receipt
b. Deduction for capital expenditures and prepayments is not
allowed as it effectively defers the collection of income tax.
c. A lower amount of deduction is preferred when a claimable
expense is subject to limit.
d. A higher tax base is preferred when the tax object has multiple
tax bases.

INHERENT POWERS OF THE STATE

1. Taxation power
2. Police power
3. Eminent domain

Similarities of the three powers of the State:

1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and
properties.
5. They all exist independently of the Constitution and are exercisable by
the government even without Constitutional grant. However, the
Constitution may impose conditions or limits for their exercise.
6. They all presuppose an equivalent form of compensation received by
the persons affected by the exercise of the power.
7. The exercise of these powers by the local government units may be
limited by the national legislature.

SCOPE OF THE TAXATION POWER

The scope of taxation is widely regarded as comprehensive, plenary,
unlimited and supreme. However, it is not absolutely unlimited.

THE LIMITATIONS OF THE TAXATION POWER

1. Inherent limitations
  Territoriality of taxation. Tax can be imposed only within the
territories of the State.
o Exception to the territoriality principle
 In income taxation, resident citizens and domestic
corporations are taxable on income derived within and
outside the Philippines.
 In transfer taxation, residents or citizens such as
resident citizens, nonresident citizens and resident
aliens are taxable on transfers of properties located
within or outside the Philippines.
 International comity. Mutual courtesy or reciprocity between states.
 Public purpose. It is intended for the common good and cannot be
exercised to further any private interest.
 Exemption of the government. The government normally does not
tax itself. However, income of the government from its properties
and activities conducted for profit including income from
government owned and controlled corporations is subject to tax.
 Non-delegation of the taxing power. The legislative taxing power is
vested exclusively in Congress and is non-delegable.
o Exceptions to the rule of non-delegation
 Under the Constitution, local government units are
allowed to exercise the power to tax to enable them to
exercise their fiscal autonomy.
 Under the Tariff and Customs Code, the President is
empowered to fix the amount of tariffs to be flexible to
trade conditions.
 Other cases that require expedient and effective
administration and implementation of assessment and
collection of taxes.
2. Constitutional Limitations
 Due process of law
 Equal protection of the law
 Uniformity rule in taxation
 Progressive system of taxation
 Non-imprisonment for non-payment of debt or poll tax
 Non-impairment of obligation and contract
 Free worship rule
 Exemption of religious or charitable entities, non-profit cemeteries,
churches and mosque from property taxes
  Non-appropriation of public funds or property for the benefit of any
church, sect or system of religion
 Exemption from taxes of the revenues and assets of non-profit,
non-stock educational institutions
 Concurrence of a majority of all members of Congress for the
passage of a law granting tax exemption
 Non-diversification of tax collections
 Non-delegation of the power of taxation
 Non-impairment of the Jurisdiction of the Supreme Court to review
tax cases
 The requirement that appropriations, revenue, or tariff bills shall
originate exclusively in the House of Representatives
 The delegation of taxing power to local government units

STAGES OF THE EXERCISE OF TAXATION POWER

1, Levy or Imposition - involves the enactment of a tax law by Congress.
(The House of Representatives, and The Senate)
 Matters of legislative discretion in the exercise of taxation
o Determining the object of taxation
o Setting the tax rate or amount to be collected
o Determining the purpose for the levy which must be
public use
o Kind of tax to be imposed
o Apportionment of the tax between the national and
local government
o Situs of taxation
o Method of collection
2. Assessment and collection - tax law is implemented by the
administrative branch of the government (Department of Finance and
BIR).

SITUS OF TAXATION - is the place of taxation. Situs rules serve as

frames of reference in gauging whether the tax object is within or outside
the tax jurisdiction of the taxing authority.
Examples of Situs Rules:
1. Business tax situs - Businesses 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 to destroy." It
can be used to discourage or prohibit undesirable activities or
occupation. (e.g. sin tax)
2. Holme's Doctrine - "Taxation power is not the power to destroy while
the court sits." Taxation power may be used to build or encourage
beneficial activities or industries by the grant of tax incentives. (e.g.
Ecozones with tax holidays and provision of incentives, such as the
Omnibus Investment Code (EO 226) and the Barangay Micro-
Business Enterprise (BMBE) Law)
3. Prospectivity of tax laws. An ex post facto law or a law that retroacts is
prohibited by the Constitution.
4. Non-compensation or set-off. The taxpayer cannot delay payment of tax
to wait for the resolution of a lawsuit involving his pending claim
against the government.
Exceptions:
a. Where the taxpayer's claim has already become due and
demandable such as when the government already
recognized the same and an appropriation for refund was
made
b. Cases of obvious overpayment of taxes
c. Local taxes
5. Non-assignment of taxes. Tax obligations cannot be assigned or
transferred to another entity by contract.
6. Imprescriptibility in taxation. Prescription is the lapsing of a right due to
the passage of time. Under the NIRC, tax prescribes if not collected
within 5 years from the date of its assessment. In the absence of an
assessment, tax prescribes if not collected by judicial action within
3 years from the date the return is required to be filed. However,
taxes due from taxpayers who did not file a return or those who
filed fraudulent returns do not prescribe.
7. Doctrine of estoppel. Any misrepresentation made by one party toward
another who relied therein in good faith will be held true and binding
 against that person who made the misrepresentation. The error of
any government employee does not bind the government.
8. Judicial Non-interference. Generally, courts are not allowed to issue
injunction (an authoritative warning or order) 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. Hence the maxim, "Taxation is the rule, exemption is
the exception."

Vague tax laws. Vague tax laws are construed against the government
and in favor of the taxpayers. A vague tax law means no tax law.
Obligation arising from law is not presumed. The Constitutional
requirement of due process requires laws to be sufficiently clear and
expressed in their provisions.

Vague exemption laws. Vague tax exemption laws are construed against
the taxpayer and in favor of the government. A vague tax exemption law
means no exemption law. The claim for exemption is construed strictly
against the taxpayer in accordance with the lifeblood doctrine.

DOUBLE TAXATION
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: Same object
2. Secondary elements:
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 exists for both impositions. Direct double taxation is
discouraged because it is oppressive and burdensome to
taxpayers.
2. Indirect double taxation - this occurs when at least one of the secondary
elements of double taxation is not common for both impositions.
Indirect double taxation is prevalent in practice.

How can double taxation be minimized?

a. Provision of tax exemption
b. Allowing foreign tax credit (deduction for taxes paid abroad)
c. Allowing reciprocal tax treatment between the home country and a
foreign country
d. Entering into treaties or bilateral agreements.

ESCAPES FROM TAXATION - Escapes from taxation are the means

available to the taxpayer 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
2. Tax avoidance
3. Tax exemption
B. Those that do not result to loss of government revenue
1. Shifting - This is the process of transferring tax burden to other
taxpayers. Shifting is common with business taxes where
taxes imposed on business revenue can be shifted or
passed-on to customers.
2. Capitalization - This pertains to the adjustment of the value of an
asset caused by changes in tax rates.
3. Transformation - This pertains to the elimination of wastes or
losses by the taxpayer to form savings to compensate for the
tax imposition or increase in taxes.

Tax Amnesty - is an absolute forgiveness or waiver by the government on

its right to collect and is retrospective in application.

Tax Condonation - is forgiveness of the tax obligation of a certain taxpayer

under certain justifiable grounds. It applies prospectively to any unpaid
balance of the tax; hence, the portion already paid by the taxpayer will not
be refunded.