Chapter 1: Introduction to Taxation

Taxation
1. As a State Power – To enforce proportional contribution for public purpose.
2. As a Process – Process of levying taxes by the legislature of state.
3. As a mode of cost distribution – State allocate its cost to its subjects

PUBLIC SERVICES

GOVERNMENT PEOPLE

TAXES

Theories of Cost Allocation

1. Benefit Received theory – The more benefit received, the more taxes he should pay.
2. Ability to pay theory – Required the contribution on their capacity to sacrifice for the
support of the Government.

Note: Those who have more should be tax more even if they benefit less from the Government. Those who have less
shall contribute less even if they received more benefits from the Government.

Aspects of the Ability to pay theory

1. Vertical equity (Gross concept) – Extent of one’s ability to pay is directly proportional to
the level of his tax base.
2. Horizontal equity (Net concept) – Consideration of the particular circumstance of the tax
payer.

The inherent power of the state

1. Taxation – Enforce proportional contribution from its subject to sustain itself.
2. Police domain – enacts law to protect the well-being of people.
3. Eminent domain – take private property for public use after paying just compensation

Scope of Taxation Power

The scope of Taxation is widely regarded as comprehensive, plenary, unlimited and
supreme.

Limitations of Tax Power

A. Inherent Limitations of Taxation
1. Territoriality of Taxation – The government can only demand tax obligations upon its
subjects or residents within its territorial jurisdiction.
Exception to the territoriality principle
In income taxation, resident citizens and Domestic Corporation are taxable on income derived within and
outside the Philippines

2. International comity – all nations are deemed equal with one another regardless of race
religion culture economic condition or military power

Note: No country is powerful than the other. Hence, governments do not tax the income and properties of other
governments.
 3. Public Purpose – Tax is intended for the common good.
4. Exemption of the government – government properties and income from essential public
functions are not subject to taxation. However, income from properties and activities
conducted for profit including income from government owned and controlled
corporations are subject to tax.
5. Non-delegation of the taxing power – The legislative taxing power is vested exclusively
in congress and is non-delegate pursuant to the doctrine of separation of the branches
of the government ensured a system of checks and balances.

B. Constitutional Limitations
1. Observance of due process of Law – tax laws should neither be harsh nor
oppressive.

Aspects of due process

1. Substantive due process – Tax must be imposed only for public purpose, collected
only under authority of a valid law and only by the taxing power having jurisdiction.
2. Procedural due process – There should no arbitrariness in assessment and
collection of taxes, and the government shall observe the taxpayer’s right to notice
and hearing.
Note: Under the NIRC, assessments shall be made within three years from the due date of filing of the return or from
the date of actual filing, whichever is later.

2. Equal protection of law – No person shall be denied the equal protection of the
law.
3. Uniformity rule in taxation – The rule of taxation shall be uniform and equitable.
4. 4. Progressive system of taxation – tax rates increase as the tax base increases.
5. Non-imprisonment for non-payment of debt or poll tax – no one shall be imprisoned
because of his poverty, and no one is imprisoned for mere inability to pay debt.
6. Non-impairment of obligation and contract – tax exemptions granted under contract
should be honored and should not cancel by a unilateral government action.
7. Free worship rule – the government adopts free exercise of religion and does not subject
its exercise to taxation.
Note: the properties and revenues of religious institutions such as tithes or offerings are not subject to tax.

8. Exemption of religious, charitable or educational entities, non-profit cemeteries,

churches and mosques lands buildings from property taxes – exemption from property
tax applies for properties actually, directly, and exclusively used for charitable,
religious and educational purposes.
Note: the Philippines follows the doctrine of use wherein only properties actually devoted for religious charitable or
educational activities are exempt from real property tax.

9. Non-appropriation of public funds or property for the benefit of church, sect or system of
religion – the government should not favor any particular system of religion by
appropriating public funds or property support thereof.
10. Exemption from taxes of the revenues and assets non-profit, non-stock educational
institutions – This exemption, however, applies only on revenues and assets that are
actually, directly, and exclusively devoted for educational purposes.
 11. Concurrence of a majority of all members of Congress for the passage of a law granting
tax exemption – The constitution requires the vote of the majority of all members of
congress in the grant of tax exemption.

Note: In the approval of exemption law, an absolute majority, or the majority of all congress, not a relative majority
or quorum majority, is required. However, in the withdrawal of tax exemption, only a relative majority is required.

12. Non-diversification of tax collections – tax collections should be used only for public
purpose. It should never be used for private purpose.
13. Non delegation of the power of taxation – Taxation power as part of Law-making is
vested exclusively in Congress.
14. Non-impairment of the jurisdiction of the Supreme Court to review cases – all cases
involving taxes can be raised to and be finally decided by the Supreme Court of the
Philippines.

Stages of the exercise of Taxation Power

1. Levy or Imposition – This process involves the enactment of a tax law by Congress and
is called impact of taxation. It is also referred to as the legislative act in taxation.

Congress is composed of two bodies:

 The house of representatives – tax bills must be originate from them
 The Senate

2. Assessment and collection – This stage is referred to as incidence of taxation or the

administration act of taxation.

15. The requirement that appropriations, revenues, or tariff bills shall originate exclusively in
the House of Representative
16. The delegation of taxing power to local government units

SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes
upon the tax object.

Examples of Situs Rules:

1. Business tax situs – Businesses are subject to tax in the place where the business is
conducted.
2. Income tax situs on services – Service fees are subject to tax where they are rendered.
3. Income tax situs on sale of goods – the gain on sale is subject to tax in the place of sale.
4. Property tax situs – Properties are taxable in their location.
5. Personal tax situs – Persons are taxable in their place of residence.

FUNDAMENTAL DOCTRINES IN TAXATION

1. Marshall Doctrine – taxation power carries with it the power to destroy.
2. Holme’s Doctrine – taxation power may be used to build or encourage beneficial
activities or industries by the grant of tax incentives.
3. Prospectivity of tax laws – An ex post facto law or a law that retroacts is prohibited by
the constitution.
4. Non-compensation or set-off – Taxes are not subject to automatic set-off or
compensation. Tax is not a debt.
5. Non-assignment of taxes – tax obligations cannot be assigned or transferred to another
entity by contract.
 6. Imprescriptibility in taxation – Prescription is lapsing of a right due to the passage of
time.
7. Doctrine of estoppel – The government is not subject to estoppel.
8. Judicial Non-interference – courts are not allowed to issue injunction in the government’s
pursuit to collect tax.
9. Strict construction of tax laws – Taxation is the rule, exemption is the exemption.

Vague tax laws – are construed against the government and in favor of the tax payers. A vague
tax law means no tax.

Vague exemption tax – construed against the tax payer and in favor of the government. A vague
exemption tax law means no exemption law.

DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax
jurisdiction for the same thing.

Elements of double taxation –

1. Primary element : Same object
2. Secondary element :
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period

Types of Double Taxation

1. Direct double taxation – This occurs when all the element of double taxation exists for
both impositions.
2. Indirect double taxation – This occurs when at least one of the secondary elements of
double taxation is not common for both impositions.

How can double taxation be minimized?

a. Provision of tax exemption – only one tax is allowed to apply to the tax object while the
other tax law exempts the same tax object.
b. Allowing foreign tax credit – both tax laws of the domestic country and foreign country
tax the tax object but the tax payments made in the foreign tax law is deductible against
the tax due of the domestic tax law.
c. Allowing reciprocal tax treatment – provision in tax laws imposing a reduced tax rates or
even exemption if the countries of the foreign tax payers also give the same treatment to
Filipino non-residents therein.
d. Entering into treaties or bilateral agreements – countries may stipulate for a lower tax
rates for their residents if they engage in transactions that is taxable by both of them.
ESCAPES FROM TAXATION
Escapes from taxation are the means available to the taxpayer to limit or even avoid the
impact of taxation.

Categories of Escapes from Taxation

A. Those that result to loss of government revenue
1. Tax evasion – also known as tax dodging, refers to any trick that tends to illegally
reduce or avoid the payment of tax.
 2. Tax avoidance - also known as tax minimization, refers to any trick that reduces or
totally escapes taxes by any legally permissible means.
3. Tax exemption – also known as tax holiday, refers to the immunity, privilege or
freedom from being subject to a tax which others are subject to. Tax exemptions may
be granted by the Constitution, law, or contract.
B. Those that do not result to loss of government revenue
1. Shifting – This is the process of transferrin tax burden to other taxpayers.
Forms of shifting
a. Forward shifting – follows the normal flow of distribution.
b. Backward shifting - reverse of forward shifting
c. Onward shifting – exhibits forward shifting or backward shifting

2. Capitalization – This pertains to the adjustment of the value of an asset caused by

changes in tax rates
3. Transformation – This pertains the elimination of wastes or losses by the tax payer
to form savings to compensate for the tax imposition or increase in taxes.