THEORY AND BASIS OF TAXATION

 LIFE BLOOD THEORY - This means that, without taxes, the State can neither
exist nor endure. Taxes should be collected without unnecessary hindrance.
 NECESSITY THEORY - necessary burden to preserve the State’s serve, public
improvements for the enjoyment of the citizenry, and those which come
within the State’s territory and facilities and protection which a
government is supposed to provide.
 SYMBIOTIC - Taxes are what we pay for a civilized society. Without taxes,
the government would be paralyzed for lack of the motive power to
activate and operate it
JURISDICTION OVER SUBJECT AND OBJECTS
It is the place or authority that has the right to impose and collect taxes.
1. Residence of the taxpayer
2. Citizenship of the taxpayer
3. Nature of the tax
4. Subject matter of the tax
5. Source of income

 Poll/Capitation/Community Tax -Residence of taxpayer, regardless of the

source of income or location of property of the taxpayer
 Property Tax
o Real Property - Location of the property (lex reisitae / lex situs),
regardless of whether the owner is a resident or non-resident
o Personal Property - Location of the property
 Excise Tax
o Income Tax
 Place (applied to NRA, NRFC, NRC) - From sources of income
derived within the Philippines
 Nationality (applied to RC, DC) - From sources of income
derived within and without the Philippines
  Residence (applied to RA, RFC) - From sources of income
derived within the Philippines
o Donor’s Tax and Estate Tax
 Place (applied to NRA) - Taxed on properties situated within
the Philippines
 Nationality (applied to RC, NRC) - Taxed upon their properties
wherever situated
 Residence (applied to RA) - Taxed upon their properties
wherever situated.
PRINCIPLES OF A SOUND TAX SYSTEM
 Fiscal adequacy - Revenue raised must be sufficient to meet
government/public expenditures and other public needs.
 Administrative feasibility - The tax system should be capable of being
effectively administered and enforced with the least inconvenience to the
taxpayer.
 Theoretical justice - Must take into consideration the taxpayer’s ability to
pay.
INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION
 Inherent limitations [PITIE]
o Public Purpose
o Inherently Legislative
o Territorial
o International Comity
o Exemption of government entities, agencies and instrumentalities
 Constitutional limitations
o Prohibition against imprisonment for non-payment of poll tax
o Uniformity and equality of taxation
o Grant by Congress of authority to the president to impose tariff rates
o Prohibition against taxation of religious, charitable entities, and
educational entities
o Prohibition against taxation of non-stock, non-profit educational
institutions
 o Majority vote of Congress for grant of tax exemption
o Prohibition on use of tax levied for special purpose
o President’s veto power on appropriation, revenue, tariff bills
o Non-impairment of jurisdiction of the Supreme Court
o Grant of power to the LGUs to create its own sources of revenue
o Origin of Revenue and Tariff Bills
o No appropriation or use of public money for religious purposes
o Due process
o Equal protection
o Religious freedom
o Non-impairment of obligations of contracts
o Freedom of the press
STAGES OF TAXATION
 Levy or imposition (tax legislation) – This refers to the enactment of a law
by Congress authorizing the imposition of tax. It further contemplates the
determination of the subject of taxation, purpose for which the tax shall be
levied, fixing the rate of taxation and the rules of taxation in general.
 Assessment and collection (tax administration) – This is the act of
administration and implementation of the tax law by executive through its
administrative agencies.
 Payment – The act of compliance by the taxpayer, including such options,
schemes or remedies as may be legally available.
 Refund – The recovery of any alleged to have been erroneously or illegaly
assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively, or in any
manner wrongfully collected.
REQUISITES OF A VALID TAX
 It should be for a public purpose.
 It should be uniform.
 The person or property being taxed should be within the jurisdiction of the
taxing authority
  The tax must not impinge on the inherent and constitutional limitations on
the power of taxation.
KINDS OF TAXES
 As to object:
o Personal/poll or capitation tax – A fixed amount imposed upon all
persons, or upon all persons of a certain class, residents within a
specified territory, without regard to their property or occupation.
o Property tax – Tax imposed on property, whether real or personal, in
proportion either to its value, or in accordance with some other
reasonable method of apportionment.
o Privilege/excise tax – A charge upon the performance of an act, the
enjoyment of a privilege, or the engaging in an occupation. An excise
tax is a tax that does not fall as property tax.
 As to burden or incidence:
o Direct taxes are demanded from the very person who, as intended,
should pay the tax which he cannot shift to another.
o Indirect taxes are demanded in the first instance from one person
with the expectation that he can shift the burden to someone else,
not as a tax but as a part of the purchase price.
 As to tax rates:
o Specific – tax of a fixed amount imposed by the head or number, or
by some standard of weight or measurement.
o Ad valorem – tax based on the value of the property with respect to
which the tax is assessed. It requires the intervention of assessors or
appraisers to estimate the value of such property before the amount
due can be determined.
o Mixed – a choice between ad valorem and/or specific depending on
the condition attached.
 As to purposes:
o General/fiscal or revenue – tax imposed solely for the general
purpose of the government.
o Special/regulatory or sumptuary – tax levied for specific purpose, i.e.
to achieve some social or economic ends.
  As to scope or authority to impose:
o National tax – Tax levied by the National Government.
o Local or municipal – Tax levied by a local government.
 As to graduation:
o Progressive – A tax rate which increases as the tax base or bracket
increases.
o Regressive – The tax rate decreases as the tax base or bracket
increases.
o Proportionate – A tax of a fixed percentage of amounts of the base.
DOCTRINES IN TAXATION
 Prospectivity of tax laws - Tax laws must only be imposed prospectively.
 Imprescriptibility of taxes - Taxes are imprescriptible by reason that it is the
lifeblood of the government.
 Situs of taxation –
 Double taxation - There is no constitutional prohibition against double
taxation in the Philippines. It is something not favored, but is permissible,
provided some other constitutional requirement is not thereby violated,
such as the requirement that taxes must be uniform
o Direct (strict sense)- Double taxation in the objectionable or
prohibited sense since it violates the equal protection clause of the
Constitution.
o Indirect (broad sense)- It is a permissible double taxation. It is
indirect when some elements of direct double taxation are absent
o Modes of eliminating double taxation –
 Tax credit – an amount subtracted from taxpayer’s tax liability
in order to arrive at the net tax due.
 Tax deduction – an amount subtracted from the gross amount
on which a tax is calculated.
 Tax exemption – a grant of immunity to particular persons or
entities from the obligation to pay taxes.
 Imposition of a rate lower than the normal domestic rate
 Tax treaty - The purpose is to reconcile the national fiscal
legislation of the contracting parties in order to help the
 taxpayer avoid simultaneous taxation in two different
jurisdictions (international double taxation). This is to
encourage the free flow of goods and services and the
movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and
dynamic economies.
 Escape from taxation
o Shifting of tax burden Shifting is the transfer of the burden of tax by
the original payer or the one on whom the tax was assessed or
imposed to another or someone else without violating the law.
 Forward shifting – When the burden of tax is transferred from
a factor of production through the factors of distribution until
it finally settles on the ultimate purchaser or consumer.
 Backward shifting – When the burden is transferred from the
consumer through the factors of distribution to the factors of
production.
 Onward shifting – When the tax is shifted two or more times
either forward or backward.
o Distinguish: tax avoidance and tax evasion
 Tax avoidance is a scheme where the taxpayer uses legally
permissible alternative method of assessing taxable property
or income, in order to avoid or reduce tax liability.
 Tax evasion is a scheme where the taxpayer uses illegal or
fraudulent means to defeat or lessen payment of a tax.
 Exemption from taxation - It is the grant of immunity, express or implied, to
particular persons or corporations, from a tax upon property or an excise
tax which persons or corporations generally within the same taxing districts
are obliged to pay.
o Nature of tax exemption
 Personal in nature and covers only taxes for which the grantee
is directly liable.
 Strictly construed against the taxpayer.
 Implies a waiver on the part of the government of its right to
collect what otherwise would be due.
  Exemptions are not presumed. But the strict interpretation
does not apply in the case of exemptions running to the
benefit of the government itself or its agencies. The burden is
upon the claimant to establish right to exemption beyond
reasonable doubt.
o Kinds of tax exemption
 Constitutional – Immunities from taxation which originate
from the Constitution
 Statutory – Those which emanate from legislation
 Contractual – Agreed to by the taxing authority in contracts
lawfully entered into by them under enabling laws.
 Implied – When particular persons, properties or excises are
deemed exempt as they fall outside the scope of the taxing
provision.
 Treaty
 Licensing ordinance
 Equitable recoupment - It is a principle which allows a taxpayer, whose
claim for refund has been barred due to prescription, to recover said tax by
setting off the prescribed refund against a tax that may be due and
collectible from him. Under this doctrine, the taxpayer is allowed to credit
such refund to his existing tax liability.
 Prohibition on compensation and set-off - Compensation or set-off shall
take place when two persons, in their own right, are creditors and debtors
of each other. No set-off is admissible against the demands for taxes levied
for general or local governmental purposes. Taxes cannot be subject to
compensation because the government and the taxpayer are not creditors
and debtors of each other. Where both the claims of the government and
the taxpayer against each other have already become due, demandable,
and fully liquidated, compensation takes place by operation of law and
both obligations are extinguished to their concurrent amounts. In the case
of the taxpayer’s claim against the government, the government must have
appropriated the amount thereto.
 Compromise - Compromise is a contract whereby the parties, by reciprocal
concessions, avoid litigation or put an end to one already commenced. It
implies the mutual agreement by the parties in regard to the thing or
 subject matter which is to be compromised. Compromises are generally
allowed and enforceable when the subject matter thereof is not prohibited
from being compromised and the person entering such compromise is duly
authorized to do so.
 Tax amnesty - Tax amnesty, being a general pardon or intentional
overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or tax law. It partakes
of an absolute waiver by the government of its right to collect what is due it
and to give tax evaders who wish to relent a chance to start with a clean
slate.