CHAPTER 1

FUNDAMENTAL PRINCIPLES

Taxation Defined
Taxation is the process or means by which the sovereign (independent state), through its law making body (the
legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to
carry out the legitimate objects of government.

The Three (3) Inherent Powers of the State

1. Police Power. It is the power of the state for promoting public welfare by restraining and regulating the use of
liberty and property.
2. Power of Taxation. It is the power by which the State raises revenue to defray the necessary expenses of the
government.
3. Power of Eminent Domain. It is the power of the State to acquire private property for public purpose upon
payment of just compensation.

Similarities among the three (3) Inherent Powers of the State

1. They are inherent in the State.

2. They exist independently of the Constitution although the conditions for their exercise may be prescribed by the
Constitution.
3. Ways by which the State interferes with private rights and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received, directly or indirectly, by the persons affected.

DISTINCTIONS AMONG THE THREE (3) INHERENT POWERS

TAXATION POLICE POWER EMINENT DOMAIN
Nature Power to enforce contributions Power to make and implement Power to take private property
to raise gov’t funds. laws for the general welfare. for public use with just
compensation.
Authority Government only Government only May be granted to public
service/utility companies
Purpose For the support of the Promotion of general welfare The taking of private property for
government through regulation public use
Persons affected Community or a class of Community or a class of On an individual as the owner of
individuals. Applies to all individuals. personal property.
persons, property and excises
that may be subject thereto Applies to all persons, property Only particular property is
and excises that may be subject comprehended.
thereto.
Scope Plenary, comprehensive, Broader in application. General Merely a power to take private
supreme power to make and implement property for public use.
law.
Effect Contribution becomes part of No transfer of title. There may There is a transfer of title to
public fund just be a restraint on the property.
injurious use of property.
Benefits received In form of protection and No direct and immediate benefit Market value of property taken.
benefits received from but only such as may arise from
government the maintenance of a healthy
economic standard of society.
Amount of imposition No limit Sufficient to cover cost of the No imposition. The owner is paid
license and the necessary equivalent to the fair value of his
expenses of police surveillance property.
and regulation
PURPOSES OF TAXATION

1. Primary (Revenue or Fiscal Purpose)

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 activities.
Examples: Income and business taxes

2. Secondary (Regulatory Purpose)

Taxation may be employed as a devise for regulation or control to achieve certain conditions such as
promotion of general welfare, reduction of social inequality, economic growth, etc.
Examples:
 Excise taxes for sin products such as cigarettes and alcohols
 Amusement taxes for “amusement places” such as night and day clubs, cockpits and racetracks
 Increasing taxes in periods of prosperity to curb spending power and halt inflation
 Granting tax incentives to promote new/pioneer and encourage growth of local industries

THEORY and BASIS OF TAXATION

1. Theory: LIFEBLOOD THEORY or NECESSITY THEORY

The power of taxation proceeds upon the theory that the existence of government is a necessity. The
power of taxation is essential because the government can neither exist nor endure without taxation. “Taxes are
the lifeblood of the government and their prompt and certain availability is an imperious need” (Lifeblood
Doctrine).

2. Basis: BENEFITS RECEIVED or RECIPROCITY THEORY

The basis is the reciprocal duties of protection and support between the State and its inhabitants. The
State collects taxes from the subjects of taxation in order that it may be able to perform the functions of
government. The citizens, on the other hand, pay taxes in order that they may be secured in the enjoyment of
the benefits of organized society. This theory spawned the Doctrine of Symbiotic Relationship which means,
taxes are what we pay for a civilized society.

MANIFESTATION OF THE LIFEBLOOD THEORY:

a. Rule of “No Estoppel against the Government”.

b. Collection of taxes cannot be enjoined (stopped) by injunction.
c. Taxes could not be the subject of compensation or set-off.
d. Right to select objects (subjects) of taxation.
e. A valid tax may result in the destruction of the taxpayer’s property.

SCOPE OF THE POWER OF TAXATION

a. Comprehensive – as it covers persons, businesses, activities, professions, rights and privileges.

b. Unlimited – in the absence of limitations prescribed by law or the constitution, the power to tax is unlimited and
comprehensive. Its force is so searching to the extent that the courts scarcely venture to declare that it is subject
to any restrictions.
c. Plenary – as it is complete; BIR may avail of certain remedies to ensure collection of taxes.
d. Supreme – in so far as the selection of the subject of taxation.

ESSENTIAL ELEMENTS OF A TAX

a. It is an enforced contribution.
b. It is generally payable in money.
c. It is proportionate in character.
d. It is levied on persons, property or the exercise of a right or privilege.
e. It is levied by the law-making body of the state.
 f. It is levied for public purpose.

ASPECTS OF TAXATION (Stages/Phases/Process of Taxation)

1. Levying. Imposition of the tax which is a legislative act.

2. Assessment. Determination of the correct amount of applicable tax. Administrative function.
3. Collection. Essentially and administrative function.

NATURE OF THE STATE’S POWER TO TAX

1. It is inherent in sovereignty.
2. It is legislative in character.
3. Exemption of government entities, agencies and instrumentalities from taxation.
4. International comity
5. Limitation of territorial jurisdiction
6. Strongest among the inherent powers of the state

CLASSIFICATION OF TAXES

1. As to scope and taxing authority

a. National – imposed by the National Government (e.g. income tax, estate tax, donor’s tax, VAT and other
percentage taxes, documentary stamp tax).
b. Local – imposed by local government units such as municipal corporations (e.g. real estate tax and
professional tax receipts).
2. As to subject matter or object
a. Personal, poll or capitation – tax of a fixed amount imposed upon individuals, whether citizens or not,
residing within a specified territory without regard to their property or the occupation in which he may
be engaged (e.g. community tax)
b. Property - tax imposed on property, whether real or personal, in proportion either to its value, or in
accordance with some other reasonable method of apportionment (e.g. real estate tax)
c. Excise – any tax which does not fall within the classification of a poll tax or property tax. This is a tax on
the exercise of certain rights and privileges (e.g. income tax, estate tax, donor’s tax)
3. As to who bears the burden
a. Direct – tax which is demanded from the person who also shoulders the burden of tax or tax which the
taxpayer cannot shift to another (e.g. income tax, estate tax, donor’s tax).
b. Indirect – tax which is demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another (e.g. VAT, percentage tax, excise tax on exciseable articles).
4. As to determination of amount
a. Specific – tax of fixed amount imposed by the head or number, or by some standard of weight or
measurement (e.g. excise tax on cigars and liquors)
b. Ad valorem – tax of fixed proportion of the value of the property with respect to which the tax is
assessed (e.g. VAT, income tax, donor’s tax and estate tax)
5. As to purpose
a. Primary, Fiscal, or Revenue Purpose
b. Secondary, Regulatory, Special or Sumptuary Purpose
6. As to graduation or rate
a. Proportional – tax based on a fixed percentage of amount of the property, receipts, or other basis to be
taxed (e.g. VAT, Ad valorem tax on distilled spirits)
b. Progressive or graduated – tax the rate of which increases as the tax base or bracket increases (e.g.
income tax on individual taxpayers)
c. Regressive – tax the rate of which decreases as the tax base or bracket increases
ELEMENTS OF SOUND TAX SYSTEM

a. Fiscal Adequacy
The fundamental purpose of taxation is to raise the revenue necessary to fund public services.
Consequently, it is necessary that the sources of revenues must be adequate to meet government expenditures
and sustain the level of public services demanded by citizens and policymakers.
b. Theoretical Justice or Equity
Taxpayer’s ability to pay must be taken into consideration. The tax burden should be proportionate to
the taxpayer’s ability to pay.
c. Administrative Feasibility
Tax laws must be capable of effective and efficient enforcement.

LIMITATIONS ON THE STATE’S POWER TO TAX

1. Inherent Limitations
 These are restrictions arising from the very nature of the power to tax.
 Those which exist despite the absence of an express constitutional provision.

a. Purpose must be public in nature

 Proceeds of the tax must be used:
 For the support of the government; or
 For some of the recognized objects of government; or
 To promote the welfare of the community.
b. Prohibition against delegation of the taxing power
 What cannot be delegated is the legislative power to tax i.e. enactment/imposition/levying
 Administrative implementation can be delegated (assessment, collection, valuation of property for
tax purposes)
c. Territorial limitation
 Tax laws cannot operate beyond a state’s territorial limits.

2. Constitutional Limitations
a. Due process of law
b. Equal protection of laws
c. Rule of uniformity and equity in taxation
d. Prohibition against imprisonment for non-payment of poll tax
e. Prohibition against impairment of obligation of contracts
f. Prohibition against infringement of religious freedom
g. Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of any church
h. Prohibition against taxation of religious, charitable and educational entities
i. OTHERS
i. Grant of tax exemption
ii. Veto of appropriation, revenue, tariff bills by the President
iii. Delegated authority of President to impose tariff rates, import and export quotes, tonnage and
wharfage dues as delegated by Congress
iv. Non-impairment of the Supreme Court jurisdiction
v. Revenue Bills shall originate exclusively from the House of Representatives
vi. Infringement of press freedom
vii. Revocation of Tax Exemptions

SITUS OF TAXATION
 Means “place” of taxation
 The State where the subject to be taxed has a situs may rightfully levy and collect the tax.
Factors to Consider in Determining the Situs of Taxation:
a. Subject matter (person, property, or activity)
b. Nature of the tax
c. Citizenship
d. Residence of the taxpayer
e. Source of income
f. Place of excise, business or occupation being taxed

TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS

1. TAX versus TOLL
2. TAX versus PENALTY
3. TAX versus SPECIAL ASSESSMENT
4. TAX versus REVENUE
5. TAX versus SUBSIDY
6. TAX versus PERMIT or LICENSE FEE
7. TAX versus DEBT
8. TAX versus CUSTOMS DUTIES
9. TAX versus TARIFF

DOUBLE TAXATION
In it strict sense, double taxation referred to is direct duplicate taxation. In its broad sense, double taxation is
referred to as indirect double taxation. It extends to all cases in which there is a burden of two or more impositions.
Direct double taxation means taxing twice:
1. By the same taxing authority, jurisdiction or taxing district
2. For the same purpose
3. In the same year or taxing period
4. Same subject or object
5. Same kind/character of the tax

MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION

1. Shifting
 Transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to
someone else.
 Only indirect taxes may be shifted; direct taxes cannot be shifted.
2. Transformation
 An escape from taxation where the producer or manufacturer pays the tax and endeavor to recoup himself
by improving his process of production thereby turning out his units of products at a lower cost
3. Evasion
 Use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax
 Also known as tax dodging
4. Tax Avoidance
 Exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable
property or income in order to avoid or reduce tax liability.
 Also known as tax minimization
5. Exemption
 Grant of immunity to particular persons or corporations or to persons or corporations of a particular class
from a tax which persons and corporations generally within the same state or taxing district are obliged to
pay
6. Capitalization
 Reduction in the selling price of income producing property by an amount equal to the capitalized value of
future taxes that may be paid by the purchaser
Elements of Tax Evasion
a. Payment of less than that known by the taxpayer to be legally due, or non-payment of tax when it is shown that
a tax is due;
b. An accompanying state of mind which is described as being evil, in bad faith, willful, or deliberate and not
accidental; and
c. A course of action or failure of action which is unlawful.

SOURCES OF TAX LAWS

1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code
5. Local tax ordinances/ City or Municipal Tax Codes
6. Tax treaties and international agreements
7. Special Laws
8. Court of Tax Appeals and Supreme Court decisions
9. Revenue rules and regulations and administrative rulings and opinions

Nature of Internal Revenue Laws

Internal revenue laws are not political in nature. Tax laws are civil and not penal in nature, although there are
penalties provided for their violation.

Construction of Tax Laws

 Public purpose is always presumed.
 If the law is clear, apply the law in accordance to its plain and simple tenor.
 A statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously.
 In case of doubt, it is construed most strongly against the Government, and liberally in favor of the taxpayer.
 Provisions of a taxing act are not to be extended by implication.
 Tax laws operate prospectively unless the purpose of the legislature to give retrospective effect is expressly
declared or may be implied from the language used.
 Tax laws are special laws and prevail over a general law.