FS2122-INCOMETAX-01A

BSA 1202 Atty. F. R. Soriano

INTRODUCTORY PRINCIPLES OF TAXATION

Define taxation
Taxation is the power by which the sovereign raises revenues to defray the expenses of the
government. Taxation is a merely a way of apportioning the cost of government among those who in
some measure are privileged to enjoy its benefits.

Basic purposes of taxation

1. To secure revenues for the support of the government.
2. To regulate business and occupation.
3. To prevent undue accumulation of wealth.
4. To protect home industries against foreign competition.

Nature of taxation
The power of taxation is inherent in sovereignty as an incident or attribute thereof. It is essentially
a legislative function.

Scope of taxation
In the absence of constitutional restrictions and subject to the will of the legislative bodies with
whom it is entrusted and the discretion of the authorities which exercise it, the power of taxation is
regarded as unlimited, plenary, comprehensive, and supreme, the principal check upon its abuse resting in
the responsibility of the members of the legislature to their constituents.

Coverage of taxation
Taxation covers two separate areas or aspects of government activity, namely:
1. Levying or imposition of the tax – It deals with the provisions of law which determines the person
or property to be taxed, the sum or sums to be raised, the rate thereof, and the time and manner of
levying, receiving and collecting the taxes. This is generally a legislative act. In our jurisdiction,
the taxing power is exercised by Congress.
2. Collection of the tax – It deals with the provisions of law which prescribe the manner of enforcing
the obligation on the part of those taxed to pay the demand thus created. This is essentially
executive or administrative in nature. The government agency charged with this function is the
Bureau of Internal Revenue.

Theory of taxation
Taxation proceeds upon the theory that the existence of the government is a necessity; that it cannot
continue without the means to pay its expenses, and for those means it has the right to compel all citizens
and property within its limits to contribute. (Also known as “Lifeblood doctrine.”)

Basis of taxation
The State demands and receives taxes from the subjects of taxation within its jurisdiction that it
may be enabled to carry its mandate into effect and perform the functions of government, and the citizen
pays from his property the portion demanded in order that he may, by means thereof, be secured in the
enjoyment of benefits of organized society. (Also known as “Benefits-received principle.”)

Basic principles of a sound tax system

1. Fiscal adequacy – The source of revenue, taken as a whole, should be sufficient to meet the
expanding expenditures of the government.

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2. Equality or theoretical justice – The taxes levied should be based on the taxpayer’s ability to pay.
(Also known as “Ability to pay principle.”)
3. Administrative feasibility – Tax laws should be capable of convenient, just and efficient
administration.

Three inherent powers of the State

1. Police power – This is the power of the State to enact legislation that may interfere with personal
liberty or property, in order to promote the general welfare.
2. Power of taxation – This is the power of the State to levy taxes to be used for public purpose.
3. Power of eminent domain – This is the power of the State to take private property for public use
upon payment of just compensation.

Compare taxation with police power and power of eminent domain

1. Similarities
a. They are necessary attributes of sovereignty and are inherent in the state as sovereign.
b. They all underlie but exist independently of the constitution, although they may be regulated
and limited by the constitution.
c. They constitute the three methods by which the State interferes with private rights and
property.
d. They are legislative in nature and character.
e. Each presupposes an equivalent compensation.
(1) In taxation, the compensation is the protection and benefits received from the
government.
(2) In police power, the maintenance of a healthy economic standard of society.
(3) In eminent domain, the just compensation for the property taken.

2. Distinctions
a. In the nature of compensation as shown in 1.e. above.
b. In the use to which the property is devoted:
(1) In taxation, it is the support and consumption of the government.
(2) In police power, for public welfare.
(3) In eminent domain, for public use.
c. Taxation and police power are directed against the whole citizenry; eminent domain is
directed against a particular property.
d. The power of taxation is inferior to the non-impairment clause, while the police power and
power of eminent domain are superior.
e. The main purpose of taxation is revenue generation; for police power, the regulation of
behavior or conduct; and for eminent domain, the taking of private property for public use.
f. The power of taxation and police power are exercised only by the government, while the
power of eminent domain may be granted even to private persons or corporations, such as
public utility companies.

Limitations on the power of taxation

1. Inherent limitations – These are restrictions that are essential and inseparable attributes of the
power to tax.
2. Constitutional limitations – These are provisions in the Constitution that affect taxation, directly or
indirectly.

Inherent limitations
1. The tax levied must be for a public purpose.
2. The power to tax, being inherently legislative, cannot be delegated.
3. The power to tax is limited to the territorial jurisdiction of the taxing authority.
4. Government entities are exempt from taxation.
5. There shall be an observance of international comity in the exercise of the power to tax.
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Constitutional limitations
1. Provisions directly affecting taxation
a. “No person shall be imprisoned for . . . x x x. . . non-payment of poll tax.” (Art. III, Sec.
20)
b. “The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive
system of taxation.” (Art. VI, Sec. 28)
c. “Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,
non-profit cemeteries and all lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes shall be exempt from
taxation.” (Art. VI, Sec. 28, par. 3)
d. “All revenues and assets of non-stock, non-profit educational institutions actually, directly
and exclusively used for educational purposes shall be exempt from taxes and duties. Upon
dissolution or cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law.
Proprietary educational institutions, including those cooperatively owned may
likewise be entitled to such exemptions, subject to the limitations provided by law, including
restrictions on dividends and provisions for reinvestments.
Subject to the conditions prescribed by law, all grants, endowments, donations or
contributions used actually, directly, and exclusively for educational purposes shall be
exempt from tax.” (Art. XIV, Sec. 4, pars. 3 and 4)
e. “No law granting any tax exemption shall be passed without the concurrence of a majority of
all the members of Congress. “ (Art. VI, Sec. 28 par. 4
f. “The President shall have the power to veto any particular item or items in an appropriation,
revenue or tariff bill, but the veto shall not affect the item or items to which he does not
object.” (Art. VI, Sec. 27, par. 2)
g. “The Supreme Court shall have the power to review, revise, reverse, modify or affirm on
appeal or certiorari as the law or the Rules of Court may provide final judgments and orders
of lower courts in all cases involving the legality of any tax, impost, assessment, or toll, or
any penalty imposed in relation thereto.” (Art. VIII, Sec. 5, par. 2)
h. “Each local government unit shall have the power to create its own sources of revenue and
to levy taxes, fees and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local governments.” (Art. X, Sec. 5)
i. “No public money or property shall ever be appropriated, applied, paid or used directly or
indirectly for the use, benefit, or support of any sect, church, denomination, sectarian
institution, or system of religion, or for the use, benefit or support of any priest, preacher,
minister, or other religious teacher or dignitary as such, except when such priest, preacher,
minister, or dignitary is assigned to the armed forces, or to any penal institution, or
government orphanage or leprosarium.” (Art. VI, Sec. 29, par. 2)

2. Provisions indirectly affecting taxation

a. “No person shall be deprived of life, liberty or property, without due process of law . . . x x
x . . .” ) Art. III, Sec. 1)
b. “No person shall . . . x x x . . . be denied the equal protection of the laws.’ (Art. III, Sec. 1)
c. “No law shall be made respecting an establishment of religion or prohibiting the free
exercise thereof. The free exercise and enjoyment of religious freedom and worship,
without discrimination or preference shall forever be allowed. No religious test shall be
required for the exercise of civil or political rights.” (Art. III, Sec. 5)
d. “No law shall be passed impairing the obligations of contracts.” (Art. III, Sec. 10)

Tax, concept

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Tax is an enforced contribution of money or property assessed in accordance with some reasonable
rule of apportionment by authority of a sovereign state, on persons or property within its jurisdiction, for
the purpose of defraying the public expenses

Elements or characteristics of a tax

1. It is a forced burden, charge, imposition or contribution.
2. It is exacted pursuant to legislative authority in the exercise of the taxing power.
3. It is a pecuniary burden, although the law may provide for payment in kind.
4. It is proportionate in character.
5. It is collected for a public purpose.

Classification of taxes
1. As to who bears the burden
a. Direct tax – A tax where the person supposed to pay the tax really pays it without
transferring the burden to someone else.
b. Indirect tax – A tax which is imposed upon goods before reaching the customer who
ultimately pays for it, not as a tax, but as part of the purchase price. It is a tax where the
burden thereof can be shifted to another person.

2. As to subject matter or object

a. Personal, capitation or poll tax – Tax of a fixed amount upon all persons, or upon all persons
of a certain class, within the jurisdiction of the taxing power, without regard to the amount of
their property or occupation or business, in which they may be engaged.
b. Property tax – Tax assessed on all property, or on all property of a certain class, within the
jurisdiction of the taxing power, in proportion to its value, or in accordance with some other
reasonable method of apportionment.
c. Excise tax – A charge imposed upon the performance of an act, the enjoyment of a privilege,
or the pursuit of a trade or occupation. The term “excise tax” is synonymous with “privilege
tax.’ If a tax is not classified as a capitation or property tax, it is properly classified as
excise tax.

3. As to determination of amount
a. Specific tax – Tax which imposes a specific sum by the head or number, or by some standard
weight or measurement, and which requires no assessment beyond a listing and classification
of the subjects to be taxed.
b. Ad valorem tax – Tax of a fixed proportion of the value of the property with respect to which
the tax is assessed, and requires the intervention of assessors or appraisers to estimate the
value of such property before the amount due from each taxpayer can be determined.

4. As to graduation or rate
a. Proportional tax – Tax which is determined by applying a fixed percentage on the value of
the property, the amount of the receipts or other tax base.
b. Progressive tax – Tax the rate of which increases as the amount to be taxed increases.
c. Regressive tax – Tax the rate of which decreases as the amount subject to taxation increases.
There are no regressive taxes in the Philippines.

5. As to purpose
a. General, fiscal or revenue tax – Tax levied for the ordinary purposes of the government the
proceeds of which are placed in a general fund.
b. Special tax – Tax that is levied for a special or specific purpose the proceeds of which are
placed in a special fund.

6. As to authority imposing the tax

a. National tax – Tax imposed by the national government.
b. Municipal or local – Tax imposed by local government units such as provinces, cities,
municipalities and barangays.
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Toll, concept
Toll is a sum of money for the use of something, generally applied to the consideration which is
paid for the use of a road, bridge or the like, of a public nature. It is the compensation paid for the use of
the property of another or of improvements by him on the property.

Tax distinguished from toll

1. A tax is a demand of sovereignty, while a toll is a demand of proprietorship.
2. A tax is collected by the government, while a toll may be collected by the government or private
individuals or entities.
3. A tax is levied in order to defray the expenses of the government, while a toll is the imposed to
recover the cost of property and any improvements plus a reasonable return of investment.

Special assessment, concept

Special assessment is a local imposition upon property for the payment of the cost of public
improvements within its immediate vicinity and levied with reference to the property assessed.

Tax distinguished from special assessment

1. Tax may be levied not only on land, but also upon persons, property, business, occupation or
income, while special assessment is levied only on land
2. Tax is a liability of the person upon whom it is imposed, while special assessment (in most
jurisdictions) cannot be made a personal liability of the person assessed.
3. Tax is based primarily on necessity, and incidentally on benefits, while special assessment is based
wholly on benefits.
4. Tax is a regular periodic imposition and affects generally a broader scope as to area, while special
assessment is exceptional both as to time and as to place.
5. The purpose of a tax is to provide the Government with revenues needed for the financing of state
affairs, while the purpose of special assessment is to finance the improvement of particular
properties, with the benefits of the improvements accruing or inuring to the owners of such
properties who, after all, pay the assessment.

License fee, concept

License fee is an amount paid to a government agency for the privilege of conducting an act,
operating a business or exercising a profession, the non-payment of which will render the act illegal. The
main purpose for the payment of license fee is to restrain or regulate business or occupation.

Tax distinguished from license fee

1. Taxes are levied pursuant to the taxing power, while license fees are imposed by virtue of the police
power.
2. Taxes are exacted principally for the purpose of raising revenues, while license fees are imposed for
the purpose of restraining or regulating business or occupation.
3. Taxes may be imposed in any amount, while license fees are limited to the cost of inspection or
regulation, except when they are exacted to regulate non-useful businesses or occupations, where
the amount may be large without necessarily being a tax.
4. Taxes are imposed on persons, property, business, occupation, or the exercise of any privilege,
whether legal or illegal, while license fees may be imposed only on legitimate businesses and
occupations.
5. The non-payment of tax does not render the business or occupation illegal, while failure to pay
license fee renders the occupation or business illegal.

Debt, concept
Debt refers to the liability to pay a sum of money or to do something.

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Tax distinguished from debt
1. A tax is created by law, while a debt generally arises from contract.
2. A tax cannot be assigned, while a debt may be assigned by one person to another.
3. A tax (except poll tax), if not paid, may result in imprisonment, while non-payment of debt does
not result in imprisonment.
4. A tax does not bear interest before it is due, while a debt may bear interest before it is due if
stipulated upon by the parties.

Tax evasion and tax avoidance

Tax evasion is the use of unlawful means to lessen or defeat taxes. It connotes fraud through the
use of pretenses and forbidden devices to lessen or defeat taxes. (Also known as “tax dodging.”)
Tax avoidance is the use of lawful means to minimize taxes. It is a tax saving device within the
means sanctioned by law. (Also referred to as “tax minimization.”)

Double taxation
Double taxation or duplicate taxation is used in two different senses. Direct double taxation or
direct duplicate taxation , i.e., double taxation in its strict sense, means taxing twice, for the same
purpose, by the same taxing authority, in the same jurisdiction, in the same year, some of the property in
the territory where the tax is laid, without taxing all of it a second time. This type of double taxation is
objectionable or prohibited.
Double taxation in its broad sense, referred to as indirect double taxation or indirect duplicate
taxation, is other than direct double taxation. It takes place when there are two or more impositions on
the same property. It is double taxation which, though not prohibited, should be avoided whenever
possible in order to prevent injustice or unfairness. Otherwise, the aggrieved party may seek relief under
the uniformity and equal protection clauses of the Constitution.

Situs of taxation
Situs means the place of an event or incident, or the location of the property. (People vs.
Lawrence, 69 OG 9200). Thus, situs of taxation is the place of taxation. Generally, the state that has
jurisdiction of the transaction (i.e., the event or incident), property, or the person has the power to
rightfully impose and collect the tax. It is the legislature that determines the situs of taxation. The
following are the situs of taxation:
1. Business, occupation or transaction – The place where the business is conducted or the occupation
is practiced, or where the transaction transpired.
2. Real and tangible personal property – The location of the property.
3. Intangible personal property – Domicile of the owner, except when the property has acquired a
situs elsewhere, in which case, it may be taxed in the jurisdiction of the situs.
4. Income – The place where the income is earned, or the citizenship or domicile of the recipient of
the income.
5. For transfer taxes (donor’s tax and estate tax) – The domicile or residence of the transferor, or the
location of the property.

Factors that determine situs of taxation

1. Nature or kind of tax.
2. Protection and benefit afforded to the persons or property sought to be taxed. (Manila Electric Co.
vs. Yatco, 69 Phil 89)
3. The subject matter to be taxed.
4. The residence or domicile of the person to be taxed.
5. The citizenship of the taxpayer.

Tax amnesty*
Tax amnesty is defined as a measure that condones the liabilities incurred by a taxpayer due to his
incorrect or non-payment of taxes on condition that the tax filer complies with certain requirements.
(Angel Q. Yoingco, “Experience with Tax Amnesty Legislation,” 1998). Amnesty schemes vary
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depending upon the type of tax that is eligible for condonation, the taxable period covered, and the degree
of offense (for example, those with pending cases in court are ineligible for amnesty if specifically
indicated in the law or regulation.)

Justifications for tax amnesty*

1. For immediate collection to finance operations, projects and outstanding obligations of the
government.
2. To broaden the tax base as a result of the expected voluntary disclosure.
3. To reduce the backlog in paperwork, thus, minimizing the cost of tax administration.

*Q and A on Tax Amnesty, No. 2004-02, Congressional Planning and Budget Dept., House of
Representatives.

Effects of tax amnesty

Generally, a person granted tax amnesty shall be immune from civil, criminal and administrative
penalties arising from the failure to pay the tax during the period covered by the amnesty. For this
purpose, the requirements mentioned in the tax amnesty law must be complied with such the submission
of documentary requirements (like the Statement of Assets and Liabilities) and the payment of a
minimum amount.

Nature or construction of tax laws.

1. Tax laws are prospective, generally.
2. Tax laws are strictly construed against the government. However, tax exemptions are to be
construed strictly against the taxpayer and in favor of the government.
3. Revenue laws are not political in nature.

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