INTRODUCTION

TO TAXATION
LESSON 1
FUNDAMENTAL PRINCIPLES OF TAXATION (2 HOURS)

Taxation
As a power- refers to the inherent power of the state to demand enforced contribution for public
purpose to support the government
1. As a process- the legislative act of laying a tax to raise income for the government to defray its
necessary expenses
2. As a mode of cost allocation- taxation is a means of allocating government burden to the people

Purpose of Taxation
1. Primary- to raise revenue
2. Secondary
I. Regulatory
- To regulate the conduct of business or professions
- To achieve economic and social stability
- To protect local industries

II. Compensatory
- Key instrument of social control - check inflation
- reduces inequities in wealth distributions - tools on international bargains
- strengthens anemic enterprises -promotes science and inventions
- provides incentives
-uses as implement in the exercise of police power to promote general welfare

The Life Blood Doctrine

Taxes are indispensable to the existence of state. Without taxation, the state cannot raise revenue to
support its operations.

Nature or Characteristics of the Power of Taxation

1. For public purpose 4. Exaction payable in money
2. Inherently legislative in nature 5. Territorial
3. Subject to international comity or treaty 6. Not absolute being subject to Constitutional
and Inherent Limitations

How exercised?
-Legislation of laws by Congress and tax ordinances by the Local Sanggunian
-Tax collection by the administrative branch of the government

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Scope of the Power of Taxation (CUPS)
Taxation is Comprehensive, Unlimited, Plenary, and Supreme. It includes the power to destroy.

Discretion of the Taxing Power - extends to:

1. Amount or rate of tax 5. Situs of taxation
2. Kinds of tax to be collected 6. Method of collection
3. Apportionment of tax 7. Purpose for its levy, provided for public purpose
4. The person, property and excises to be taxed, provided within its jurisdiction

Underlying principles behind the power of taxation

1. PRINCIPLE OF NECESSITY- the existence of the government is a necessity and it cannot
continue without means to support itself. This is called the THEORY OF TAXATION
2. BENEFIT RECEIVED THEORY- the government and the people have the reciprocal and mutual
duties of support and protection. This is known as the BASIS OF TAXATION.

Legal Basis of the Power of Taxation

1. Benefit received theory
2. The sovereign power of the state over its people and property
3. The presumption of receipts or enjoyment of benefit and protection by the people
4. To protect new conditions by imposing special duties
5. To uplift social conditions by imposing regulatory taxes or licenses

Objects of Taxation
1. Businesses 5. Acts
2. Interests 6. Persons
3. Transactions 7. Properties
4. Rights 8. Privileges

Phases or Stages of Taxation

1. Levy or imposition Impact of Taxation
Aspects of
taxation
2. Assessment of tax Incidence of Taxation
3. Payment of the tax
- these all comprise the taxation system

Principles of a Sound Tax System (FAT)

1. Fiscal Adequacy- sources of revenue should be sufficient to meet the demand for public
expenditure
2. Administrative Feasibility- tax laws must be capable of convenient, just and effective
administration
3. Theoretical Justice- tax must be imposed with equity and certainty and must consider the
taxpayer’s ability to pay and benefits received.
- Non-observation of the principles does not necessarily render a tax levy unconstitutional, except
for Theoretical Justice.

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Principal Approaches in the distribution of tax burden
A. Benefit Approach- tax payment should be based on the benefits received
B. Ability to Pay Approach- tax payments should be based on relative to the ability of taxpayer’s
ability to pay

Taxation and Economic Efficiency

1. Income Effect- makes people economically efficient (ex: Transformation)
2. Substitution Effect- makes people economically inefficient (ex: Indirect Taxes)

THE INHERENT POWERS OF THE GOVERNMENT

1. POWER OF TAXATION- the power to take property for the support of the government and for
public purpose
2. POLICE POWER- the power to enact laws to promote the general welfare if the people. It is wider
in application because it is the general power to make laws
3. POWER OF EMINENT DOMAIN- the power to take private property for public use upon payment
of just compensation

POINT OF DIFFERENCES OF THE INHERENT POWERS OF THE STATE

Point of Difference Taxation Police Power Eminent Domain
Exercising Authority Government Government Government or private
entities (quasi-public)
Necessity of Delegation is not There must be There must be
Delegation necessary since it is delegation before LGU’s delegation before LGU’s
inherent could exercise it or private party could
exercise it
Purpose Revenue and support of Protection of well-being Property is taken for
the government of the people public use
Persons affected Community or a class of Community or a class of Operates on the owner
individuals individuals of the property
Effects of transfer of Money paid as taxes There is no transfer of There is transfer of right
property rights becomes part of the title, at most there is a to property whether it
public fund restraint on the be of ownership or
injurious use of lesser right
property
Amount of imposition Unlimited Sufficient to cover the No imposition, as the
costs of regulation owner is paid the fair
market value of his
property
Importance Most important of the Most superior
three
Relationship with the Inferior to the Superior to the Superior and may
Constitution “ Non-impairment “ Non-impairment override the
clause of the clause of the “ Non-impairment
Constitution” Constitution” clause of the
Constitution” because
the welfare of the state

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 is superior to private
contracts
Limitation Constitutionally and Public interest and the Public purpose and just
inherently requirement of due compensation
Restricted process

Similarities of the Three Powers

1. All three are necessary attributes of sovereignty, resting upon necessity
2. All are inherent powers of the state
3. All are legislative in nature
4. There are ways in which the Senate interferes with private rights and property
5. They exist independently with the Constitution although the condition for the exercise may be
prescribed or limited by the Constitution
6. They all presupposes an equivalent compensation received by the persons affected by the exercise
of the power, whether directly, indirectly or remote.
7. The exercise of these powers by the LGU’s may be limited by the national legislature.
* Police Power can be used to raise money for the government. (Ex: License Fee)

LIMITATIONS OF THE TAXATION POWER

A. INHERENT LIMITATION (TIPENd)
a) Territoriality of Taxation c) Tax is for public purpose
d) Tax exemption of the government
b) Subject to international comity or treaty e) Non-delegation of the power of taxation

* Letters c & e, are also Constitutional Limitations

B. CONSTITUTIONAL LIMITATION
a) Observance of due process of law
b) Equal protection of the law
c) Uniformity in taxation
d) Progressive scheme of taxation
e) Non-imprisonment for non-payment of debt or poll tax
f) Free worship wall
g) Non-appropriation of obligations and contracts
h) Non-appropriation of public funds or property for the benefit of any church, sect or system of
religion
i) Exemption of religious, charitable, or educational institutions, non-profit cemeteries, churches
and mosque from property taxes
j) Exemption from taxes of the revenues and assets of non-stock, non-profit educational
institutions including graft, endowments, donations or contributions for educational
institutions
k) Concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption
l) Non-diversification of tax collections
m) Non-delegation of the power of taxation
Exceptions:

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 i. Power to tax was delegated to the President under the Flexibility Clause of the Tariff and
Customs Code
ii. Power to tax was delegated to the local government units under the Local Government
Code
iii. Matters involving the expedient and effective administration and implementation of
assessment and collection of taxes or certain aspects of taxing process that are not
legislative in character
n) Non-impairment of the jurisdiction of the Supreme Court to review tax cases
o) Appropriations, revenue, or tariff bills shall originate exclusively in the House of
Representatives but the Senate may propose or incur amendments
PASSING REPEAL AND AMENDMENT
TAX LAW Relative Majority Relative Majority
TAX EXEMPTION LAW Absolute Majority Relative Majority

p) Each local government unit shall exercise the power to create its own sources of revenue and
shall have a just share in the national taxes

SITUS OF TAXATION -The place of taxation

Factors that determine the situs of taxation

1. Nature, kind or classification of tax
2. Sources of income
3. Subject matter of the tax
4. Place of exercise, business, or occupation being taxed
5. Citizenship of the taxpayer
6. Place where income producing activity was held or done
7. Residence of the taxpayer

Application
1. Persons- residence of the taxpayer
2. Community development tax- residence or domicile of the taxpayer
3. Business taxes- where the business was conducted or place where the transaction took place
4. Privilege or occupation tax- where the privilege is exercised
5. Real property tax- where the property is located
6. Personal property tax-
i. Tangible- where they are physically located
ii. Intangible- domicile of the owner unless the property has acquired a situs elsewhere
7. Income- place where the income is earned or residence or citizenship of the taxpayer
8. Transfer taxes- residence or citizenship of the taxpayer or location of the property
9. Franchise taxes- state that grants the franchise
10. Corporate taxes- depend on the law of incorporation

DOUBLE TAXATION
Taxing the object or subject within the territorial jurisdiction twice, for the same period, involving
the same kind of tax by the same tax authority

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Kinds:
1. Direct Double taxation- the objectionable and prohibited kind because it violates the
constitutional provision on uniformity and equality
2. Indirect Double taxation- no constitutional violation. Ex: Taxing the same property by two
different taxing authority

INTERNATIONAL DOUBLE TAXATION- a double taxation caused by two different taxing

authorities, one domestic and one foreign

Remedies for International Double Taxation

1. Provision of taxation 3. Allowance for tax credit
2. Allowance for principle of reciprocity 4. Enter into treaties with and agreement
with foreign corporation

Forms of Escape from Taxation

A. Those that will not result in loss of revenue to the government
i. Shifting- the process of transferring the tax burden from the statutory taxpayer to
another without violating the law
ii. Capitalization- the selling is willing to lower the price of the commodity provided the
taxes will be shouldered by the buyer
iii. Transformation- the manufacturer or producer upon whom the tax has been imposed,
fearing the loss of his market if he should add the tax to the price, pays the tax and
endeavors to recoup himself by improving his process of production, thereby turning out
his units at a lower cost.

B. Those that will result to loss of revenue to the government

i. TAX EVASION- tax dodging, illegal act of reducing or avoiding the payment of tax
ii. TAX AVOIDANCE- tax minimization, legal acts of reducing or avoiding escape from
taxes
iii. TAX EXEMPTION- tax holiday, immunity, privilege or freedom from being subject to a
tax others are subject to.
- All forms of tax exemptions can be revoked by Congress except those granted by
the Constitution and those granted under contracts.

KINDS OF EXEMPTION
1. Express- granted by the Constitution, statute, treaties, ordinance, contracts, or
franchise
a) Constitutional b) Statutory c) Contractual
2. Implied- exempted by accident or intentional omission
3. Total- exemption from all taxes (OFW’s)
4. Partial- exemption from certain taxes, partially or totally

GROUNDS FOR EXEMPTION

1. It may be based on a contract
2. It may be based on grounds of public policy- ex. Granting of exemptions to rural
banks, and sweepstakes or lotto winnings

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 3. It may be based on some grounds to foster charitable and other benevolent
institutions
4. It may be created under a treaty on grounds of reciprocity
5. It may be created to lessen the rigors of international double or multiple taxation

Distinctions between tax evasion and tax avoidance

TAX EVASION
It is a scheme used outside of those lawful
means and when availed of, it usually
subjects the taxpayer to penalties
It is accomplished by breaking the law
It connects fraud, deceit, and malice
TAX AVOIDANCE
It is a tax saving device within the means
sanctioned by the law
Accomplished by legal procedures and do not
violate the law
No fraud is involved

Tax Exemption
 Is not automatic
 Is non-transferable
 Is revocable by the government (except when granted under a valid contract or by
the Constitution)
 Rule shall be uniform
 Does not contravene the Lifeblood Doctrine
 Is always disfavored
 Is allowed only under a clear and unequivocal provision of the law
 On real property tax, it will be based on the DOCTRINE OF USE and NOT OF
OWNERSHIP, except for real properties owned by the government which is
absolutely exempt from taxation
 On real property tax, cannot be granted by local governments but can condone real
property tax liabilities in special cases
 On local taxes can be granted by local governments cannot condone existing
liabilities on local taxes

FUNDAMENTAL DOCTRINES IN TAXATION

1. MARSHALL DOCTRINE: “The power to tax involves the power to destroy”
2. HOLME'S DOCTRINE: Taxation power is not the power to destroy while the court sits.
3. PROSPECTIVITY OF TAX LAWS: An ex post facto law is prohibited by the Constitution
4. NON-COMPENSATION OR SET-OFF
XPN: 1. When the taxpayer claim has already become due and demandable
2. Cases of obvious overpayment of taxes
3. Local taxes
5. NON-ASSIGNMENT OF TAXES
6. IMPRESCRIPTIBILITY IN TAXATION
7. DOCTRINE OF ESTOPPEL
8. JUDICIAL NON-INTERFERENCE
9. STRICT CONSTRUCTION OF TAX LAWS
a. VAGUE TAX LAWS- construed against the government and in favor of the
taxpayer

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 b. VAGUE EXEMPTION LAWS- construed against the taxpayer and in favor of the
government.

DISTINCTION BETWEEN TAX AMNESTY AND CONDONATION

TAX AMNESTY- general pardon granted by the government. for erring taxpayer to give them chance to
reform and enable them to be part of society with a clean slate. Absolute forgiveness,
retrospective in application (Civil and Criminal liabilities, conditional upon the taxpayer paying the
government)

TAX CONDONATION- forgiveness of the tax obligation of a certain taxpayer under certain justifiable
cause. (Also Known as Tax Remission, civil liabilities only, operates prospectively, forgives unpaid
obligation and no refund, it requires no payment)

TAX EXEMPTION TAX AMNESTY

There is no liability at all Connotes condonation from payment of
existing liabilities
The grantee need not to pay anything The grantee pays a portion
Can be availed of by any qualified taxpayer Not always available

TEACHER’S INSIGHT

Studying the principles of taxation is very important in our succeeding

discussions. All relevant rules here has a direct or indirect application to the
fundamentals of income and other types of taxation. Students sometimes
forgot the very core principles of taxation when they go to higher concepts and
as they apply theoretical principles as applied in here, they neglect to
reconsider the principles of taxation.

On the note of receipt of benefits is conclusively presumed, we are all

beneficiaries of government services regardless of where we came from. You
cannot say to the government, “ Hey You! Government! Hindi ako
magbabayad ng tax kasi samin, lubak lubak ang daan, hindi maayos ang street lights, etc.” The
government has priority projects every year. Wait for your turn. But still when you go the city/
well-improved places, you enjoy the government services at its finest. Naglakad ka sa gabi at di ka
narape, Wow! Government services yan bebe. Salamat sa presensiya ng ating mga makikisig at
matatapang na mga alagad ng batas. Naglalakad ka sa kalsada, may on-going construction, at hindi ka
nahulog sa manhole. Oh Yeah! Government service yan kapatid. All the improvements and services
that we enjoy today were the product of government initiatives through the exercise of the power of
taxation.

As future tax practitioners, you will always go back to the general principles of taxation.

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