TX01 | General Principles of Taxation

LECTURE NOTES

A. Define 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 a 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.

B. What are the PURPOSES of taxation?

1. Primary purposes to raise funds for the expenses of the government: (also called Revenue
Purpose)
2. Secondary purpose: as a tool for general social and economic welfare (also called
Regulatory/sumptuary/Compensatory purpose)

C. Give the NATURE or CHARACTERISTICS of the taxing power

1. It is inherent power of a sovereign state – being inherent in sovereignty, the state has the
power to tax even if not expressly granted by the constitution.
2. It is legislative in character – taxation in generally exercised by the lawmaking body of a state.
3. It is subject to inherent and constitutional limitations.

D. What is SCOPE of the power of taxation?

In the absence of inherent and constitutional limitations, the power to tax is comprehensive &
unlimited. As a 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 / Importance of Taxation

E. Where does the power of taxation proceed from?

It proceeds from the necessity of the existence of the government, and since it exists for the
People, it can compel them to pay taxes.

F. What is the basis of taxation?

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. Benefit-Protection Theory.

G. Power of judicial REVIEW/ROLE OF COURTS IN TAX CASES (CTA & SC)

Courts cannot inquire into the wisdom of a taxing act. Courts can only review the legality of the
tax based on the constitutional as well as inherent limitations and other applicable laws.

H. Sources of tax laws:

1. Constitution
2. Statutes and Presidential Decrees
3. Revenue Regulations by DOF
4. Rulings issued by BIR Commissioner and opions by the Secretary of Justice
5. Decisions of the Supreme Court and CTA
6. Provincial, city, municipal and barangay ordinances subject to limitations set forth in the Local
Government
7. Treaties or International Agreements

I. What are the three inherent powers of the state?

1. Taxation
2. Eminent Domain
3. Police Power
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J-1. Give the similarities and distinctions of Taxation, Police Power and Power of Eminent
Domain.
Three inherent powers of a state:
1. Power of Taxation – refer to letter A
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. 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.

SIMILARITIES:
1. They are indispensable to government existence.
2. They can exist independent of the constitution.
3. They are the means by which the state interferes with private rights and properties.
4. They are generally exercised by the legislature.
5. They contemplate an equivalent compensation or benefit.

J. What are the forms of avoiding a tax (tax escape)?

1. Tax Credit
2. Tax Exemption

DISTINCTIONS:

Taxation Eminent Domain Police Power

1. As to subject Imposed upon persons, Imposed upon private Imposed upon persons,
property, rights or real properties property, rights or
transaction transaction
2. As to purpose To raise revenue for To acquire For regulation and control
government expenses privateproperty for public
use
3. As to limitation Generally unlimited Limited to the fairvalue of Limited to the cost of
the expensesof regulation license fee and other
property control
4. As to act involved Taxpayers pays taxes Private property istaken Enforcement of laws for
for public use public welfare and
common good
5. As to benefits Protection & other Person receives a just Protection & other benefits
received benefits from the compensation from the
government government
6. As to relationship Inferior Superior Superior
tonon-impairment
clause of the
constitution

K. Enumerate the principles/characteristics of a SOUND TAX SYSTEM (FAT)

1. Fiscal Adequacy
2. Administrative Feasibility
3. Theoretical Justice

L. What are the limitations on the power of taxation?

1. Inherent limitations – those that restrict the power of taxation even though not provided in the
constitution.
a. Taxes must be for public purpose.
b. Exemption of government agencies and instrumentalities from taxation.
c. Power to tax cannot be delegated to private persons or entities.
d. Tax laws do not apply to properties of foreign government.
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 – those that limit the power of taxation as embodied in the
constitution.
a. Due process of law in taxation and equal protection of the laws.
b. Rule on uniformity and equity in taxation.
c. No imprisonment for non-payment of poll tax.
d. Non-impairment of the obligation of contracts.
e. No appropriation of public money for religious purposes.
f. Exemption of religious, charitable, educational entities, non-profit cemeteries and churches
from property taxation.
g. Exemption from taxation of non-stock, non-profit educational institutions and donations
for educational purposes.
h. Concurrence by a majority of the members of 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 Supreme Court in tax cases.
3. Contractual limitations – these are restrictions on the taxing power imposed by previously
existing contracts entered into by the government with another party who may be another
state or its own citizens.

M. Give the steps/stages involved under taxation system.

1st : Imposition of taxes
2nd : Collection of taxes
a. Assessment
b. Actual tax collection
c. Enforcement of tax laws/criminal prosecution for wilful violation of tax laws
3rd: Payment of taxes

N. Define TAXES
Taxes are enforced proportional contributions levied by the state for the support of the
government

O. CLASSIFICATION of taxes
1. What are the kinds of taxes as to subject matter?
a. Personal, poll or capitation tax – tax imposed on persons residing within a specific territory.
Example: Basic Community Tax
b. Property tax – tax imposed on property, whether real or personal.
Example: Real estate tax
c. Excise tax – tax imposed on the exercise of a right or privilege. Also called “Privilege tax”
Example: Income tax, estate tax, donor’s tax, etc.,

2. What are the kinds of taxes as to who bears the burden?

a. Direct tax – tax imposed upon a person who is directly bound to pay it; tax which the taxpayer
cannot shift to another.
Example: Income tax, estate tax, donor’s tax
b. Indirect tax – tax which forms part of the purchase price; tax which the taxpayer can shift to
another.
Example: Excise tax on certain goods, other percentage taxes, value added tax
3. What are the kinds of taxes as to determination of amount?
a. Specific tax – tax based on weight, number or some other standards of weight or
measurement.
Example: Excise tax on distilled spirits, wines, cinematographic films
b. Advalorem tax – tax imposed based on the value of the taxable item.
Example: Real estate tax
4. What are the kinds of taxes as to purpose?
a. General tax – tax imposed for general purposes of the government.
Example: Income tax, value added tax
b. Specific tax – tax imposed for a special purpose or purposes.
Example: Protective tariff and customs duties,
Special Educational Fund (SEF) Tax,
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Special Assessments
5. What are the kinds of taxes as to jurisdiction/scope or authority imposing tax?
a. National tax –tax imposed on a national and for the national government.
Example: National Internal Revenue taxes
b. Local tax – tax imposed on a local level for the support of local governments.
6. What are the kinds of taxes as to graduation or rate?
a. Proportional tax – the tax rate of which is fixed or constant.
Example: Corporate Income Tax, value added tax
b. Progressive tax – the tax rate increases as the taxable amount or tax bracket increases.
Example: Individual income tax, estate tax, donor’s tax
c. Regressive tax – the tax rate decreases as the taxable amount or tax bracket increases.
We have no regressive tax in the Philippines.

P. Tax distinguished from OTHER CHARGES and FEES

1. Differentiate tax from toll

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

2. Differentiate tax from special assessment

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

3. Differentiate tax from license fee

TAX
a. Imposed to raise revenue
b. Collected under the power
of government
c. Generally amount is unlimited
d. Imposed on persons, property,
rights or transaction
e. Non-payment does not make
LICENSE FEE
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 business illegal

4. Differentiate tax from penalty

TAX PENALTY
a. Imposed to raise revenue Imposed to regulate conduct
b. May be imposed by the May be imposed by the private entity
State only

5. Differentiate tax from custom’s duty

TAX CUSTOM’S DUTY
a. Imposed upon persons, property, Imposed on imported or
rights or transactions exported goods
b. It comprehends more than the It is also a tax
term custom’s duty

6. Differentiate tax from debt

TAX DEBT
a. Based on law Based on Contract
b. Not assignable Assignable
c. Payable in money Payable in kind or in money
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d. Not subject to set-off Subject to set-off

e. Non-payment may result to No imprisonment (except when
imprisonment debt arises from crime)
f. Bears interest only if Interest depend upon the
delinquent stipulation of the parties.

7. Differentiate tax from tithe

TAX TITHE
a. Based on law Based on religious obligation
b. Rates vary fixed at 10% of one’s earning

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

R. Powers and duties of the BIR

1. Assessment and collection of all national internal revenue taxes, fees and chargers
2. Enforcement of all forfeitures, penalties and fines connected therewith
3. Execution of judgement in all cases decided in its favor by CTA and ordinary courts
4. Give effect to and administer the supervisory and police power conferred to it by the NIRC or
other laws.

S. Official of the BIR

The BIR shall have a chief to be known as Commissioner of internal revenue and four assistant chiefs
to be known as Deputy Commissioners.

QUIZZER

Multiple Choice: In each of the following, choose the best answer.

1. All are characteristics of the power of taxation, EXCEPT:
a. It is an inherent power.
b. It is a legislative in character.
c. It is civil in character.
d. It is subject to inherent and constitutional limitations.

2. Also known as tax administration

a. Collection of taxes c. Payment of taxes
b. Levying of taxes. d. Incidence of taxation
3. Taxation is an inherent power because:
a. It is the life blood of the government.
b. Protection and benefit theory.
c. It co-exists with the existence of the state.
d. It is exercised for the general welfare of the people.
4. All are essential characteristics of a tax, EXCEPT:
a. It is an enforced contribution.
b. It is generally unlimited in amount.
c. It is generally payable in money.
d. It is a proportionate burden.
5. All are secondary purposes of taxation, EXCEPT:
a. Sumptuary purpose c. Compensatory purpose
b. Regulatory purpose d. Revenue purpose
6. In the absence of inherent and constitutional limitation, the power of tax is:
a. Comprehensive, unlimited and plenary
b. Unlimited and plenary
c. Broad and penal
d. Unlimited and political
7. All are similarities of taxation, police power, and power of eminent domain, EXCEPT:
a. All are necessary attributes of the Constitution
b. All exist independently of the Constitution
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c. All contemplate and equivalent benefit

d. All are superior to the non-impairment clause of the Constitution
8. Below are characteristics of a sound taxation system, EXCEPT:
a. Administrative feasibility and compliance
b. Fiscal Adequacy
c. Theoretical Justice or equality
d. Uniformity of taxation
9. It refers to a fraudulent act of minimizing taxes.
a. Tax avoidance c. Tax minimization
b. Tax evasion d. Multiple taxation
10. One of the following is NOT an inherent limitation:
a. Taxes must be for public purposes
b. Equality in Taxation
c. Territoriality rule
d. Rule on double taxation
11. The only tax where non-payment of which will not result to imprisonment:
a. Excise tax c. Personal tax
b. Donor’s tax d. Property tax
12. One of the following can be BOTH a progressive tax and a proportional tax:
a. Donor’s tax
b. Basic Income tax on individuals
c. Both a and b
d. Estate tax
13. Levied only on lands:
a. Tax c. Toll
b. Special Assessment d. License Fee
14. One of the following is NOT a source of our tax laws:
a. Administrative rulings and opinions
b. Judicial decisions
c. 1987 Constitution
d. Expert Opinion on Taxation

15. The government may not do all except one:

a. Tax itself
b. Delegate its power to tax to private agencies
c. Impose tax arbitrarily
d. Disregard uniformity in taxation

16. A form of tax escape through which one is given tax immunity wherein others are subjected to
tax:
a. Shifting c. Tax exemption
b. Tax immunity d. Tax avoidance
17. A form of tax escape by a manufacturer or producer who improves his proceeds of production
thereby minimizing his unit production cost:
a. Tax avoidance c. Transformation
b. Capitalization d. Shifting
18. A waiver by the government’s right to collect tax:
a. Tax exemption c. Tax avoidance
b. Tax amnesty d. Tax evasion
19. A tax imposed based on the number:
a. Income Tax c. Advalorem Tax
b. Specific Tax d. Custom’s Duties
20. The theory which most justifies the necessity of taxation:
a. Protection and benefits theory
b. Revenue purposes theory
c. Lifeblood theory
d. Ability to pay theory
21. One of the characteristics of internal revenue laws is that they are:
a. Criminal in nature
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b. Penal in nature
c. Political in nature
d. Generally prospective in application
22. Which of the following is not example of excise tax:
a. Transfer tax c. Real property tax
b. Sales tax d. Income tax
23. The following are similarities of the inherent power of taxation, eminent domain, and police power,
except one:
a. Are necessary attributes of sovereignty
b. Interfere with private rights and property
c. Superior to the non-impairment clause
d. Are legislative in character.
24.The power of taxation is inherent in sovereignty being essential to the existence of every
government. Hence, even if not mentioned in the Constitution the state can sill exercise the
power. It is essentially a legislative function. Even in the absence of any constitutional provision,
taxation power fails to Congress as part of the general power of law-making.
a. False; False c. True; True
b. False; True d. True; False
25. Which of the following is not a scheme of shifting the incidence of taxation?
a. The manufacturer transfer the tax to the consumer by adding the tax to the selling price of the
goods sold;
b. The tax forms part of the purchase price;
c. Changing the terms of the sale like FOB shipping point in the Philippines to FOB destination
abroad, so that the title passes abroad instead of in the Philippines.
d. The manufacturer transfer the sales tax to the distributor, then in turn to the wholesaler, in
turn to the retailer and finally to the consumer.
26. In case of conflict between the tax code and generally accepted accounting principles (GAAP):
a. Both tax codes and GAAP shall be enforced;
b. GAAP shall prevail over tax code;
c. Tax code shall prevail over GAAP;
d. The issue shall be resolved by the courts.
27. Which of the following statements is not correct?
a. Taxes may be imposed to raise revenues or to regulate certain activities within the state;
b. The state can have the power of taxation even if the Constitution does not expressly give it
the power to tax;
c. For the exercise of the power of taxation, the state can tax anything at any time;
d. The provisions of taxation in the Philippines Constitution are grants of power and not
limitations on taxing powers.
28. Tax as distinguished from license fee:
a. Non-payment does not necessary render the business illegal;
b. A regulatory measure;
c. Imposed in the exercise of police power;
d. Limited to cover cost of regulation.
29. Value-added tax is an example of:
a. Graduated tax;
b. Progressive tax;
c. Regressive tax;
d. Proportional tax.
30.Which statement refers to police power as distinguished from taxation?
a. It can only be imposed on specific property or properties;
b. The amount imposed depends on whether the activity is useful or not;
c. It involves the taking of property by the government;
d. The amount imposed has no limit.
31. 1st Statement – Tax exemptions are strictly construed against the government.
2nd Statement – When the tax law is not clear and there is doubt whether he is taxable or not, the
doubt shall be settled against the government.
a. Only the first statement is correct.
b. Only the second statement is correct.
c. Both statements are correct.
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d. Both statements are incorrect.

32. 1st Statement – The income from bank deposit of a Tax-exempt Catholic Church is taxable.
2nd Statement – Donations for educational purposes are tax exempt under the NIRC.
a. True; False c. True; True
b. False; True d. False; False

33. 1st Statement – Tax imposed outside the situs of Taxation is voidable.
2nd Statement – International Comity is an exception to the territoriality doctrine.
a. True; False c. True; True
b. False; True d. False; False
34. Imposed based on the control & superiority of one country over another:
a. TITHE
b. TAX
c. TRIBUTE
d. TOLL
35. Imposed based on religious obligation:
a. TITHE c. TRIBUTE
b. TAX d. TOLL
36. Taxes are:
a. Retroactive
b. Prospective
c. Generally proportional
d. Personal to the taxpayer
37. 1st Statement Government owned and controlled corporation are exempt from tax.
2nd Statement Tax liabilities of a corporation will also extend to the stockholders as a rule.
a. True, True c. False, True
b. False, False d. True, False
38. All are objectives of taxation except:
a. Revenue purpose
b. Regulation
c. Increase of social inequity
d. Encourage economic growth
39. 1st Statement Courts can review or inquire into the wisdom or advisability of a tax law under the
Power of Judicial Review in Taxation
2nd Statement Our constitution does not contain any provision granting tax exemption to the
provision granting tax exemption to the government.
a. True, True c. False, True
b. False, False d. True, False
40. 1st Statement To be exempt from taxation under the Constitution land & buildings must be
exclusively and actually used for religious, educational or charitable purpose, even if not directly.
2nd Statement Exemptions of non-profit schools are only limited to revenue and assets derived
from strictly school operations.
a. True, True c. False, True
b. False, False d. True, False
41. 1st Statement A taxpayer’s tax exempt status justifies the non-keeping of books of accounts &
other accounting records.
2nd Statement Fiscal tax and regulatory tax are the same.
a. True, True c. False, True
b. False, False d. True, False
42. 1st StatementOur Civil Code prevails over the Tax Code.
2nd Statement Tax regulations promulgated by the Secretary of Finance need not be published in
a newspaper of general circulation.
a. True, True c. False, True
b. False, False d. True, False
43. Our tax laws are both:
a. Progressive and prospective
b. Civil and prospective
c. Penal and regulatory
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d. Personal and regulatory

44. All are indirect constitutional limitations except:
a. Non imprisonment for non-payment of poll tax
b. Due process clause
c. Equal protection clause
d. Religions freedom
45. All are sources of Public Revenues except:
a. Grants and Foreign aids
b. Administrative revenues
c. Commercial revenues
d. Taxes and tithes
46. 1st statement- Taxation as a rule is unlimited, plenary, comprehensive but not supreme.
2nd statement- Taxation has a dual nature, legislative in character & subject to limitations.
a. True, True c. False, True
b. False, False d. True, False
47. 1st statement- As a rule, the non-observance of the canons of taxation will make the tax
imposition invalid.
2nd statement- According to US Supreme Court Justice Malcolm, Police Power is the strongest of all
the powers of the government.
a. True, True c. False, True
b. False, False d. True, False
48. 1st statement- A revenue regulation without approval of Congress does not have the force and
effect of law.
2nd statement- Tax avoidance & Tax shifting are two of the most common methods of tax escape.
a. True, True c. False, True
b. False, False d. True, False
49. The following are the inherent powers of the state, except:
a. Taxation
b. Power of the purse
c. Police power
d. Eminent domain
50. Which of the following inherent powers of the government is inferior to the non-impairment clause
of the constitution?
a. Taxation
b. Police power
c. Eminent Domain
d. None

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