TAXATION

Dr. Manny Dy
What is the distinction between tax evasion and tax avoidance?
TAX EVASION
''Tax evasion is the use of the tax prayer of illegal means to avoid or minimize payment of the tax ''e.g.
deliberate understatement of revenues or deliberate or overstatement of expenses to lessen the taxes''
TAX AVOIDANCE
''Tax avoidance on the other hands is the use of the taxpayer of legally permissible methods to reduce his tax
liability'' e.g. proper use of depreciation methods in claiming deductible expenses to lessen income taxes. (Co
Untian, p. 6)
Why pay taxes?
*Answer will ultimately point to the state or political society
POLITICAL SOCIETY
Source: Martin G. Plattel, Social Philosophy
Why a Political Society?
As an embodied spirit, man is essentially directed to the other in the personal realm (neighbor) and in the social realm
(functional). There are certain values & goods which can be attained only organically, by a group of individuals, such as
economic goods, cultural goods, peace& order. Because of the compelling way in which these needs impose themselves
upon man, the group has a necessary, unconditional and close character. Political organization: formal organization of a
community by means of which community takes cognizance of the common good and reflects & acts upon possible
solution to these problems. Distinction between community & political organization: community may have interests
other than common good. To effect this common good , need for authority: Legal power & physical power to exact
obedience from citizen in view of the common good. Machiavelli, the first political philosopher to use the term 'state' in
its specific sense, referring to the government apparatus which guides the political society and is at the service of this
society .
TAXATION
Sources: Crescenio P. Co Untian, Jr. Tax Digest (2009), Hector S. De Leon & Hector M. De leon , Jr., The Law on Income
Taxation (2013)
Definitions:
"Taxes are the enforced proportional contribution, generally payable in money , levied by the law making body
of the state by virtue of its sovereignty upon the persons or property within its jurisdiction for the support of the
government and all public needs. Taxation is the inherent power by which the sovereign state imposes financial
burden upon persons and property as a means of raising revenue to defray the necessary expenses of the
government.
Purpose of Taxation:
Primary: to raise revenue to satisfy government needs
"Aside from financing purely governmental operational expenditures, taxation is also utilized as a tool to carry
out the national objectives of social and economic development. Thus, basis of taxation is twofold:
A. necessity: government cannot exist and function without means to pay its expenditures.
B. Reciprocal duties of protection and support between the state and its inhabitants
Two aspects of taxation:
a. Levy: legislative act of imposing the tax, exercised by Congress
b. Collection: administrative act of collecting the tax, exercised by executive branch with:
1. Bureau of internal revenue- national taxes
2. Bureau of customs- customs duties
 3. Local government Units-local taxes and real property taxes
4. Appropriate government agencies-fees &charges
Essential characteristics of a tax:
 Enforced contribution
 Payable in the form of money
 Laid by some rule of apportionment which is usually based on ability to pay
 Levied on persons, property, acts privileges or transactions
 Levied by the state which has jurisdiction or control over the subject to be taxed
 Levied by law making body of the state
 Levied for public purpose
Basic Principles of a Sound tax System
Fiscal adequacy: “the sources of revenue should be sufficient to meet the demands of public expenditures”.
Equality or theoretical justice: “the tax imposed should be proportionate to the taxpayer's ability to pay”.
Administrative feasibility: "tax laws should be capable of convenient, just and effective administration” tax must be
plain and clear to the taxpayer and should be capable of efficient enforcement by government officials.
Does our income tax system meet these requirements?
NATURE OF THE POWER OF TAXATION
“The power of taxation is inherent in sovereignty being essential to the existence of every government “
"It is essentially a legislative function" "It is subject to constitutional and inherent limitations.
3 Constitutional Limitations:
Due process clause: taxpayer may not be deprived of life, liberty or property without due process of law.
Equal protection clause: taxpayers shall be treated alike under similar circumstances and conditions, both in privileges
and liabilities imposed.
Uniformity clause: taxable articles or property of the same class shall be taxed at the same rate. No direct double
taxation.
Direct double taxation
"Direct double taxation occurs when the same public authority imposes two or more taxes on the same property
for the same purpose during the same taxing period.

Limitations implied from constitution:

E.g. public purpose and non-delegation of legislative power.
E.g. territoriality international comity, exemption of government entities.
Classification of taxes:
AS TO SUBJECT MATTER OR OBJECT
personal , poll or capitation: fixed amount imposed on individuals residing within specified territory . E.g. community tax
property , real or personal, E.g. real estate tax
excise: tax imposed upon performance of an act, the enjoyment of privilege engagement in an occupation, E.g. income
tax , taxes on business
Classification of taxes:
AS TO WHO BEARS THE BURDEN
 direct tax demanded from the person who is intended to pay it
 indirect tax demanded from one person in the expectation and intention that he shall indemnity himself at the
expense of another. E.g. value added tax
Classification of taxes:
As to determination of amount
 - specific tax of a fixed amount imposed by the head or number , or by some standard of weight or
measurement, E.g. excise taxes on cigarettes, distilled spirits and others.
- ad valorem tax of fixed proportion of the amount (e.g. income tax ) value of the property (e.g. real estate
tax, excise tax on cars & non essential goods)
(in tax code , excise taxes refer to taxes applicable to specified articles manufactured in the country for
domestic sale or imported goods )

As to purpose
- General, Fiscal, or revenue- tax for the general purposes of government
E.g. income tax, taxes on business
- Special or regulatory tax for a special purpose
E.g. tariffs on imported goods.
As to authority imposing the tax
- National
- Local or Municipal
As to gradation or rate
- Proportional tax based on a fixed percentage of the amount of the property, income or other basis to be
taxed. E.g. real estate taxes, value added tax
- Progressive or graduated-tax the rate of which increases as the tax base increases. E.g. income tax, donor's
tax
INCOME TAX
Definitions:
 “Income tax is referred to as tax on all yearly profits arising from property , professions ,trades or offices , or as a
tax on a person's income emoluments, profits and the like.”
 “Income tax is generally regarded as an excise tax. It is not levied upon persons , property, funds or profits but
upon the right of a person to receive income or profits.”
 Sites of taxation : place of taxation
Factors
 Nature of the tax and the subject matter thereof , a person, property, act, or activity
 Possible protection and benefit that may accrue both to the state and to taxpayer
 Domicile or residence
 Citizenship
 Source of income
 Doctrine : State's taxing power does not extend beyond its territorial limits.
 Sites of taxation : place of taxation
BASIS
 the recipient of the income is a citizen or resident of the country
 the income is derived from sources within the country
"The income tax is founded on the protection afforded by the state to the recipient of the income in his person,
in his right to receive the income and in his enjoyment of it when received."
 Is the present income tax system JUST?