GENERAL PRINCIPLES

OF TAXATION
Module No. 1

BAINCTAX
Income Taxation

LEARNING OUTCOMES TOPICS INCLUDED

At the end of this module, you are expected to: Included in this module are the following:
1. Identify and differentiate the three inherent 1. Inherent Powers of the State
powers of the state; 2. Definition of Taxation
2. Explain the definition of taxation; 3. Fundamental Theories and Doctrines in
3. Discuss the different fundamental theories and Taxation
doctrines in taxation; 4. Scope and Limitations of Taxation
4. Define the scope of taxation and classify the 5. Stages of Taxation
sources of its limitations; 6. Situs of Taxation
5. Explain the stages on the exercise of the power of 7. Double Taxation
taxation; 8. Escapes from Taxation
6. Identify the situs of taxable events;
7. Explain the characteristics of double taxation;
8. Identify the different methods of escaping from
taxation and explain the effects on government
revenue collections; and
9. Differentiate tax amnesty from tax condonation.
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Pre-Activity
Identify the words which are described by the following statements by filling out the boxes on the left.
1. This is the power of the State enforce proportional contribution from
its subjects to sustain itself.
2. Taxes are the main form of government _____________.
3. This is the place of taxation.
4. This is the process of transferring the tax burden to other taxpayers.

INHERENT POWERS OF THE STATE

A government has its basic needs and rights which co-exist with its creation. It has rights to
sustenance, protection and properties. The government sustains itself by the power of taxation,
secures itself and the well-being of its people by police power and secures its own properties to
carry out its public services by the power of eminent domain.

These rights dubbed as “powers” are natural, inseparable and inherent to every government.
No government can sustain or effectively operate without these powers. Therefore, the exercise
of these powers by the government is presumed understood and acknowledged by the people
from the very moment they establish their government.

Taxation
This is the power of the State to enforce proportional contribution from its subjects to sustain
itself.

Police Power
This is the inherent power of a sovereign state to legislate for the protection of the health,
general welfare, safety and morals of the public. It involves the power to regulate both liberty
and property for the promotion of the public good.

The police power of the State may be exercised through taxation because taxes may be levied
for the promotion of the welfare of the public.

Eminent Domain
This is the power of the State to take private property for public use after paying just
compensation. This is synonymous to expropriation.

Similarities of the Inherent Powers

The three inherent powers of the State are similar in the following senses.

1. They are all necessary attributes of the sovereignty.

2. They are all inherent to the State.

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3. They are all legislative in nature.

4. They are all ways in which the State interfere with private rights and properties.
5. They all exist independently of the Constitution. However, the Constitution may
impose condition or limits.
6. They all presuppose an equivalent form of compensation received by the persons
affected by the exercise of the power.

Comparison of the Inherent Powers

Point of
Taxation Police Power Eminent Domain
Difference
Exercising Government and
Government Government
Authority private utilities
For the support of the To protect the general
Purpose For public use
government welfare of the people
Persons Community or class of Community or class of
Owner of the property
Affected individuals individuals
Amount of Limited to cover cost of
Unlimited No amount imposed
Imposition regulation
Importance Most Important Most Superior Important
All persons, property,
All persons, property, Only upon specific
Scope rights, privileges and
rights and privileges property
liberties
No transfer, but only
Transfer of
Taxes collected become restraint on the Transfer is effected in
Property
part of public funds exercise of property favor of the State
Rights
rights
No special or direct A direct benefit results
No direct benefit but a
Benefits benefit but the general in the form of just
healthy economic
Received benefit of general compensation to the
standard of society
welfare property owner

TAXATION
Taxation is the inherent power of the state1, exercised through the legislature2, to impose
burdens3 upon subjects and objects4 within its jurisdiction5 for the purpose of raising revenues6
to carry out the functions7 of government.

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1. Inherent Power of the State

Taxation is one of the three inherent powers of the state, with police power and eminent
domain. Inherence means that even with the absence of an express grant of the
Constitution, the State can still exercise the power to levy and collect taxes.

2. Exercised through the Legislature

Only the legislative branch of the government can levy taxes, meaning, tax laws can only
originate, specifically, from the House of Representatives. The Senate, however, may
propose tax laws to the House of Representatives.
The executive branch is tasked in the enforcement of said tax laws through the assessment
and collection of taxes, whilst, the judiciary branch is concerned with any tax-related cases
that may emanate from the administration of taxes.

3. Impose Burdens
The imposition of taxes to individuals, objects or privileges normally would cause a
financial burden to the taxpayer.

4. Subjects and Objects

Different subjects may be considered in the levying of taxes. Common are those taxes on
individuals, properties and privileges. Taxation serves as a mode by which the state
allocate its costs to its subjects who are benefited by its spending.

5. Within its Jurisdiction

The state can only tax a subject that is within its territoriality. This is true since it is one of
the inherent limitations of taxation. Taxing outside its jurisdiction would constitute
impossibility of collection and immorality of taxing subjects which do not receive benefit
from the government’s services.

6. Purpose of Raising Revenues

Taxes are the main source of funds which the state needs to conduct its public services.
Though the government also receives inflows from other sources, taxes generate the most
to fund said services.

7. Carry Out the Functions

The government is the one responsible for the various public services like education and
health. In the conduct of said services, the government needs taxation to defray the costs
associated to said services.

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Purposes of Taxation
The exercise of the power of taxation may be classified as to its purpose.

Revenue or Fiscal
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.

Non-Revenue or Regulatory
Taxation may also be employed for purposes of regulation or control, e.g., imposition of tariffs
on imported goods to protect local industries, the adoption of progressively higher tax rates to
reduce inequalities in wealth and income and the increase or decrease of taxes to prevent
inflation or ward off depression.

FUNDAMENTAL THEORIES AND DOCTRINES

Theory of Taxation
A system of government is indispensable to every society. Without it, the people will not relish
the benefits of a civilized and orderly society. The power of taxation proceeds upon the theory
that the government has the necessity for funding; that it cannot continue without means to pay
its expenses; and that for these means, it has a right to compel all its citizens and properties
within its limits to contribute.

Basis of Taxation
The basis of taxation is found in the reciprocal duties of protection and support between the
State and its inhabitants. In return for his contribution, the taxpayer receives benefits and
protection from the government. In short, both the government and the people receive
mutuality of benefits.

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Benefit Received Theory

This theory bases the power of the State to demand and receive taxes on the reciprocal duties of
support and protection. The citizen supports the State by paying the portion from his property
that is demanded in order that he may, by means thereof, be secured in the enjoyment of the
benefits of an organized society. Thus, the taxpayer cannot question the validity of the tax law
on the ground that payment of such tax will render him impoverished, or lessen his financial or
social standing, because the obligation to pay taxes is involuntary and compulsory, in exchange
for the protection and benefits one receives from the government.

In return for his contribution, the taxpayer receives the general advantages and protection
which the government affords the taxpayer and his property. One is compensation or
consideration for the other; protection for support and support for protection.

However, it does not mean that only those who are able to and do pay taxes can enjoy the
privileges and protection given to a citizen by the government.

In fact, from the contribution received, the government renders no special or commensurate
benefit to any particular property or person. The only benefit to which the taxpayer is entitled is
that derived from the enjoyment of the privilege of living in an organized society established
and safeguarded by the devotion of taxes to public purpose. The government promises nothing
to the person taxed beyond what may be anticipated from an administration of the laws for the
general good.

Receipt of benefits conclusively presumed

Every citizen and resident of the state directly or indirectly benefits from the public services
rendered by the government. These benefits can be in form of daily free usage of public
infrastructures, access to public health or educational services, the protection and security of
person and property, or simply the comfort of living in a civilized and peaceful society which
is maintained by the government.
While most public services are received indirectly, their realization by every citizen and
resident is undeniable. In taxation, the receipt of these benefits by the people is conclusively
presumed, thus, taxpayers cannot avoid payment of taxes under the defense of absence of
benefit received. The direct receipt or actual availment of government services is not a
precondition to taxation.

Ability to Pay Theory:

The ability to pay theory presupposes that taxation should also consider the taxpayer’s ability to
pay. Taxpayers should be required to contribute based on their relative capacity to sacrifice for
the support of the government. In short, those who have more should be taxed more even if

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they benefit less from the government. Those who have less shall contribute less even if they
received more of the benefits from the government.

Lifeblood Doctrine:
Taxes are the lifeblood of the government and should be collected without necessary hindrance.
They are what we pay for a civilized society. Without taxes, the government would be
paralyzed for lack of motive power to activate and operate it. The government, for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. Taxes are the lifeblood of the
government and their prompt and certain availability is an imperious need. Put simply, taxes
are needed by the government to carry out its functions.

Other Fundamental Doctrines

Marshall Doctrine
“The power to tax is the power to destroy.” Taxation power can be used as an instrument of
police power. It can be used to discourage or prohibit undesirable activities or occupation.

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.

Prospectivity of Tax Laws

Tax laws are generally prospective in operation. However, tax laws may operate retrospectively
if so intended by Congress under certain justifiable conditions.

Non-Compensation or Set-Off
Taxes are not subject to automatic set-off or compensation. The taxpayer cannot delay payment
of tax to wait for the resolution of a lawsuit involving the pending claim against the
government. Tax is not a debt; hence, it is not subject to set-off.

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

Non-Assignment of Taxes
Tax obligations cannot be transferred to another entity by contract. Contracts executed by the
taxpayer to such effect shall not hinder the government to collect taxes.

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Imprescriptibility in Taxation
The government’s right to collect taxes does not prescribe unless the law itself provides.

In the Philippines, 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 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 a fraudulent returns do not prescribe.

Doctrine of Estoppel
The error of any government employee does not bind the government. It is held that the neglect
or omission of government officials entrusted with the collection of taxes should not be allowed
to bring harm or detriment to the interest of the people.

Judicial Non-Interference
Generally, courts are not allowed to issue injunction against the government’s pursuit to collect
tax as this would unnecessarily defer tax collection.

SCOPE OF TAXATION
The power of taxation is the most absolute of all powers of the government. It has the broadest
scope of all the powers of government because in the absence of limitations, it is considered as
comprehensive, unlimited, plenary and supreme.

However, the power of taxation should be exercised with caution to minimize injury to the
proprietary rights of the taxpayer. It must be exercised fairly, equally, and uniformly, lest the
tax collector kill “the hen that lays the golden egg”.

LIMITATIONS OF TAXATION
Despite the unseemingly unlimited nature of taxation, it is not absolutely unlimited. Taxation
has its own inherent limitations and limitations imposed by the Constitution.

Inherent Limitations
Territoriality
Public services are normally provided within the boundaries of the State, thus, tax can be
imposed only within its territories. It cannot tax outside because foreigners do not derive
benefits from our government. The Philippines would not tax objects from foreign States as this
would amount to encroachment of foreign sovereignty.

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International Comity
This pertains to mutual courtesy or reciprocity between states. When a state enters into treaties
with other states, it is bound to honor the agreements as a matter of mutual courtesy and in case
such treaties are in conflict with local laws, the treaties are given primacy.

Public Purpose
Proceeds from the collection of tax is intended for the common good, thus, tax must be
exercised absolutely for public purpose and cannot be exercised to further any private interest.

Exemption of the Government

Taxation, being broad, the government can exercise the power to tax including upon itself.
However, taxing itself would not raise additional funds rather will only impute additional
costs.

Non-Delegation of the Taxing Power

The legislative taxing power is vested exclusively in Congress and is non-delegable pursuant to
the doctrine of separation of the branches of the government.

Constitutional Limitations
As the power of taxation is inherent to every state, there is no need for an express stipulation of
law for the State to exercise it. In fact, the Constitution only tackles the power of taxation by
imposing limitations on its exercise.

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:

Substantive Due Process – Tax must be imposed only for public purpose, collected only under
authority of valid law and only by the taxing power having jurisdiction. An assessment
without legal basis violates the requirement of due process.
Procedural Due Process – There should be no arbitrariness in assessment and collection of taxes
and the government shall observe the taxpayer’s right to notice and hearing.

Equal Protection of the Law

No person shall be denied the equal protection of the law. Taxpayers should be treated equally
both in terms of rights conferred and obligations imposed. This rule applies where taxpayers
are under the same circumstances and conditions.

A common example of this would be the Congress cannot exempt sellers of “balot” while
subjecting sellers of “penoy” to tax since they are essentially the same goods.

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Uniformity Rule
Taxpayers under dissimilar circumstances should not be taxed the same. Taxpayers should be
classified according to commonality in attributes. Each class is taxed differently but taxpayers
falling under the same class are taxed the same.

Progressive System
In a progressive system, tax rates increase as the tax base increases. This is consistent with the
ability to pay theory. Moreover, the progressive system aids in an equitable distribution of
wealth to society by taxing the rich more than the poor.

Non-Imprisonment for Non-Payment of Debt or Poll Tax

As a policy, no one shall be imprisoned because of his poverty and no one shall be imprisoned
for mere inability to pay debt. It should be noted, however, that only the non-payment of Basic
Poll Tax (cedula) is within the scope of this limitation. Non-payment of other taxes may result to
imprisonment.

Non-Impairment of Obligation and Contract

The state should not set aside its obligations from contracts by the exercise of its taxation power.
Tax exemptions granted under contract should be honored and should not be cancelled.

Free Worship Rule

The Philippine government adopts free exercise of religion and does not subject its exercise of
taxation. The properties and revenues (not commercial in nature) of religious institutions are
not subject to tax.

Exemption of religious, charitable or educational entities, nonprofit cemeteries, churches and

mosques, lands, building, and improvements from property taxes
The constitutional exemption from property tax applies for properties actually, directly and
exclusively used for charitable, religious and educational purposes.

Non-appropriation of public funds or property for the benefit of any church, sect, or system
of religion
This constitutional limitation is intended to highlight the separation of the church and the state.
To support freedom of religion, the government should not favor any particular system of
religion by appropriating public funds or property in support thereof.

Exemption from taxes of the revenues and assets of non-profit, non-stock, educational
institutions
The Constitution recognizes the necessity of education in state building by granting tax
exemption on revenues and assets of non-profit educational institutions. This exemption,
however, applies only on assets and revenues actually, directly and exclusively devoted for
educational purposes.

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Concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption
The Constitution requires the vote of majority of all members of Congress in the grant of tax
exemptions. A quorum majority, however, is only required for the withdrawal of tax
exemption.

Non-diversification of tax collections

Tax collections should be used only for public purposes. It should never be diversified or used
in private purpose.

Non-delegation of Taxing Power

The impact of taxation cannot be delegated. The incidence, however, may be delegated on
matters involving expedient and effective administration.

Non-impairment of the jurisdiction of the Supreme Court to review tax cases

All cases involving taxes can be raised to and be finally decided by the Supreme Court of the
Philippines.

Appropriations, revenue and tariff bills shall originate exclusively from the House of
Representatives
Tax Laws should emanate from the House of Representatives, however, the Senate may
propose tax laws and may concur amendment.

Each LGU shall exercise 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 LGUs and an express delegation of
taxing power.

STAGES OF EXERCISE OF TAXATION POWER

Levy or Imposition
This process involves the enactment of a tax law by Congress. It is also referred to as the
legislative act in taxation.

Assessment and Collection

The tax law is implemented by the administrative branch of the government. Implementation
includes the assessment or determination of the tax liabilities of taxpayers and subsequent
collection. This stage is referred to as the administrative act of taxation.

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SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the
tax object. Situs rules serves as frames of reference in gauging whether the tax object is within or
outside the tax jurisdiction of the taxing authority.

Tax Imposed Situs Rule

Business Tax It is subject to tax in the place where the business is conducted
Income Tax on Services Service fees are subject to tax where they are rendered
Income Tax on Sale of Goods The gain on sale is subject to tax on the place of sale
Property Tax Properties are taxable in their location
Personal Tax Persons are taxable in their place of residence
Income Tax on Interests It is subject to tax on the debtor’s place of residence.

Other situs rules may be followed depending on the kind of tax being imposed.

Nash E. Mulan, a Chinese national, resides in Sampaloc, Manila. He has the following
endeavors:
 He has a car dealership business in Macau and a restaurant operation in Quezon City.
 He renders consultancy services in the main office of a domestic company.
 He casually sells jewelry stored in Pasay City. During his trip to Palawan, he agreed to
Kim Bong-Un to sell a piece of necklace. They stipulated that it will be delivered in
Pyongyang a week later.
 Mr. Mulan owns a hectare parcel of land in Chonburi, Thailand.

The Philippine government can only impose business taxes upon Mr. Mulan relating to his restaurant
operation since it is within the territory of the country. Income tax on his consultancy services may
also be collected since it is rendered within the Philippines considering it is a domestic company.
Regarding the sale of necklace to Kim Bong-Un, the Philippine government can tax the gain from said
sale since the sale was perfected in Palawan. The stipulation of delivery in North Korea is not
considered in this case. No local government unit in the Philippines can impose a real property tax on
the parcel of land owned by Nash since it is found in Thailand. Mr. Mulan, being a resident of the
country, shall be subject to personal tax, notwithstanding his Chinese nationality.

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DOUBLE TAXATION
Double Taxation can be either direct or indirect. For a double taxation to be considered direct,
all of the following characteristics should concur:

a. Taxing the same object twice;

b. By the same taxing authority;
c. Within the same jurisdiction;
d. For the same purpose;
e. In the same period.

An example of a direct double taxation is as follows:

The state taxes the income of self-employed individuals at 10% of its monthly gross receipts. In
addition, it also imposes a 2% annual income tax on the annual gross receipts.

In this case, self-employed individuals are burdened by paying the monthly and annual
income tax based on their gross receipts (the annual totaling all monthly gross receipts). It
was imposed by the same taxing authority within the same jurisdiction, with the same
purpose of taxing the income for the same period.

The absence of one or more of the given circumstances does not constitute direct double
taxation, thus, classifying it as an indirect double taxation.

Constitutionality of Double Taxation:

The Philippine Constitution does not prohibit double taxation. However, while it is not
forbidden, it is something not favored. Such taxation should, whenever possible, be avoided
and prevented. In addition where there is direct double taxation, there may be a violation of
the constitutional precepts of equal protection and uniformity in taxation.

ESCAPES FROM TAXATION

Escapes from taxation are the means available to the taxpayer to limit or completely avoid the
impact of taxation.

With Loss of Government Revenue

The following are the escapes from taxation that would result to loss of government revenue.

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Tax Evasion
Also known as tax dodging, it refers to any act or trick that tends to illegally reduce or avoid the
payment of tax.

Tax Avoidance
Also known as tax minimization, refers to any act or trick that reduces or totally escapes taxes by
any legally permissible means.

To further illustrate the difference between tax evasion and tax avoidance, refer to the table
below.

BASIS TAX AVOIDANCE TAX EVASION

What is it? Hedging of tax Concealment of tax

Immoral in nature, which Illegal and objectionable, both in

Attributes involves bending the law script and moral.
without breaking it.

Taking unfair advantage of the Deliberate manipulations in

Concept
shortcomings in the tax laws. accounts resulting in fraud.

Use of Justified means Use of such means that are

Legal implication
forbidden by law

Before the occurrence of tax After tax liability arises.

Happened when
liability.

Type of act Legal Criminal

Consequences Deferment of tax liability Penalty or imprisonment

To reduce tax liability by To reduce tax liability by

Objective
applying the script of law. exercising unfair means.

Tax Exemption
Also known as tax holiday, refers to immunity, privilege or freedom from being subject to a tax
which others are subject to.

Without Loss of Government Revenue

Escaping from taxation, however, may not result into loss of government revenue. Common
examples of which are as follows.

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Shifting
This is the process of transferring the tax burden to other taxpayers.

Capitalization
This pertains to the adjustment of the value of an asset caused by changes in tax rates.

Transformation
This pertains to the elimination of wastes and losses by the taxpayer to form savings to
compensate for the tax imposition or increase in taxes.

Tax Amnesty vs. Tax Condonation

Tax amnesty is a general pardon given by the government to erring taxpayers. It generally
operates retrospectively by forgiving past violations. It is conditional upon the taxpayer
paying a portion of the tax. On the other hand, tax condonation or tax remission
prospectively applies to forgiving any unpaid balance of tax. The portion already paid is not
refunded and no further payment is necessary.

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Self-Check
Basing on your readings, answer the following questions.
1. Identify and differentiate the three inherent powers of the State.
2. What is the difference between the theory and basis of taxation?
3. What is the scope of taxation and what are the sources of its limitations?
4. What are the acts considered as stages in the exercise of the power of taxation?
5. Explain the concept of situs and how it affects taxability of a transaction.
6. What constitutes a double taxation? Is it permitted?
7. How can a taxpayer escape from paying taxes?

Exercise 1.1 TRUE OR FALSE

Determine whether the following statements are true or false.
___________1. Though the Senate is part of the Philippine Congress, tax bills cannot
originate from it.
___________2. The primary purpose of taxation is to raise revenues of the government in
order to defray its expenses on its performance of public goods.
___________3. The basis of taxation is the government’s necessity for funding.
___________4. Tax laws are generally retrospective in application, meaning, application of
which starts when the statute is enacted.
___________5. The Marshall Doctrine states that the power to tax is not the power to destroy
while the court sits.
___________6. The administrative act of taxation is primarily the duty of the Bureau of
Internal Revenue.
___________7. The police power of the State may be exercised through taxation because taxes
may be levied for the promotion of the welfare of the public
___________8. A person cannot be imprisoned for non-payment of tax.

Exercise 1.2 IDENTIFICATION

Identify the terminologies best described by the following statements.
___________1. The enforced proportional contributions from persons and property levied by
the lawmaking body of the State
___________2. The power of the State to take private property for public use after paying just
compensation
___________3. This refers to any act or trick that tends to illegally reduce or avoid the
payment of tax
___________4. This pertains to the elimination of wastes and losses by the taxpayer to form
savings to compensate for the tax imposition or increase in taxes

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Exercise 1.3 MULTIPLE CHOICE

Choose the best answer from the choices provided.
______1. A tax must be imposed for public purposes. Which of the following is not a public
purpose?
a. Procurement of army weapons
b. Construction of rehabilitation centers for drug addicts
c. Construction of a satellite for a telco company
d. Expenses on the President’s state visits to other countries

______2. Persons or things belonging to the same class shall be taxed at the same rate
a. Simplicity in taxation
b. Equality in taxation
c. Reciprocity in taxation
d. Uniformity in taxation

______3. For double taxation to be considered direct, it should meet the following criteria,
except
a. Taxing the same object twice
b. Same period
c. Same amount of tax
d. Same jurisdiction

______4. This is an inherent limitation on the power of taxation

a. Rule on uniformity and equity in taxation
b. Due process of law and equal protection of tine laws
c. Non-impairment of the jurisdiction of the Supreme Court in tax cases
d. Exemption of the government

______5. Taxation as distinguished from police power and power of eminent domain
a. Property is taken to promote the general welfare
b. May be exercised only by the government
c. Operates upon the whole citizenry
d. There is generally no limit as to the amount that may be imposed

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Exercise 1.4 SITUS RULES APPLICATION

Dina B. Nalican, Spanish by citizenship, obtained the income from the following during the
year.
 Having posted in Shoppy, a customer browsing the online shopping application in
General Santos City asked if she could inspect the car personally. It was after the
inspection in Zamboanga City that the customer agreed to buy the car. It is to be
delivered to and paid by the customer in Davao City.
 Dina has a hardware store located in Mactan, Cebu. She decided to close the main
branch in Leyte five years ago.
 She also lends thru the 5-6 system of lending in her residence in Quiapo. A debtor
residing in Quezon City owes her P60,000, inclusive of interests. They are to meet in
Sampaloc for the payment of said debt.
 Dina owns a condo unit in Laoag City. A student from Cagayan rents said property
and pays to Dina’s son (residing in Vigan City) the rent when they meet up in Batac
City.

Determine the situs of:

____________________________1. Tax on the gain on sale of her car
____________________________2. Tax on her hardware store
____________________________3. Tax on interest income earned
____________________________4. Tax on rental income earned
____________________________5. Personal Tax

Exercise 1.5 LIMITATIONS

Identify the source of the limitation on the power of taxation. Write C if it is constitutional, I if it is
inherent, B if it is both constitutional and inherent and N if it is not a limitation.
_____1. Taxes collected must be used for public purposes
_____2. Taxes can only be imposed within the territory of the State
_____3. Taxes cannot be assigned
_____4. Tax treaties entered into with other contracting States must be honored
_____5. Imprisonment for non-payment of income tax
_____6. Non-delegation of the taxing power
_____7. Exemption from taxes of the revenues and assets of religious, charitable or
educational entities, nonprofit cemeteries, churches and mosques
_____8. No arbitrariness in assessment and collection of taxes

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Case Study 1.1 THE SWEET TAX

To provide means for the rehabilitation and stabilization of the sugar industry so as to
prepare it for the eventuality of the loss of the quota allocated to the Philippines resulting
from the lifting of U.S. sanctions against African countries, Congress passes a law increasing
the existing tax on the manufacture of sugar on a graduated basis. All collections made under
the law are to accrue to a special fund to be spent only for the purposes enumerated herein,
among which are to place the sugar industry a living wage and to improve their working
conditions.

Sweet, a sugar planter, files a suit questioning the constitutionality of the law alleging that the
tax is not for a public purpose as the same is being levied exclusively for the aid and support
of the sugar industry.

Is the contention of Sweet tenable?

Case Study 1.2 WHO IS TO BLAME?

Many consider that it was untimely that the internal revenue office of Wakanda issued a
memorandum circular during the pandemic reminding guidelines on the registration of
online businesses for tax filing. As enacted under Wakanda’s revenue code, online businesses
are liable to income tax on the gains from their sales.

One of Wakanda’s officials, Senator Jack A. Moon, questioned the internal revenue office on
its issuance indicating that it was not moral for it to run after online businesses and impose
taxes on their income, more so that they are normally conducting such endeavors for mere
subsistence.

Is the senator’s contention tenable?

Case Study 1.3 IS IT EXEMPT?

A congregation owns a parcel of land. Most of it is directly used for its religious and
educational endeavors. A small commercial space was built beside the school it operates to
rent out to businesses which would cater the needs of its students. The proceeds from rentals
are being used for charitable purposes.

Should the rental income and property be subjected to tax?

GENERAL PRINCIPLES | Module No. 1