CHAPTER 1
INTRODUCTION TO TAXATION
WHAT IS TAXATION?
Taxation may be defined as a state power, a
legislative process, and a mode of government cost
distribution.
1. As a state power
Taxation is an inherent power of the State to
enforce a proportional contribution from its subjects
for public purpose.
2. As a process
Taxation is a process of levying taxes by the
legislature of the State to enforce proportional
contributions from its subjects for public purpose.
3. As a mode of cost distribution
Taxation is a mode by which the State
allocates Its costs or burden to its subjects who are
benefited by its spending.
The Theory of Taxation
Every government provides a vast array of public
services including defense, public order and safety,
health, education, and social protection among
others.
A system of government is indispensable to every
society. Without it, the people will not relish the
benefits of a civilized and orderly society. However, a
government cannot exist without a system of funding.
The government's necessity for funding is the theory
of taxation.
The Basis of Taxation
The government provides benefits to the people in the
form of public services and the people provide the
funds that finance the government. This mutuality of
support between the people and the government is
referred to as the basis of taxation.
This mutuality is illustrated as follows:
Receipt of benefits is conclusively presumed
Every citizen and resident of the State directly or
indirectly benefits from the public services rendered
by the government. These benefits can be in the form
of daily free usage of public infrastructures, access to
public health or educational services, the protection
and security of person and property, or simply the
comfort of living in a civilized and peaceful society
which is maintained by the government.
While most public services are received indirectly,
their realization by every. citizen and resident is
undeniable. In taxation, the receipt of these benefits
by the people is conclusively presumed. Thus,
taxpayers cannot avoid payment of taxes. under the
defense of absence of benefit received. The direct
receipt or actual availment of government services is
not a precondition to taxation.
THEORIES OF COST ALLOCATION
Taxation is a mode of allocating government costs or
burden to the people. In distributing the costs or
burden, the government regards the following general
considerations in the exercise of its taxation power:
1. Benefit received theory - presupposes that the
more benefit one receives from the government, the
more taxes he should pay.
2. Ability to pay theory - presupposes that taxation
should also consider the taxpayer's ability to pay.
Taxpayers should be required to contribute based on
their relative capacity to sacrifice for the support of the
government.
In short, those who have more should be taxed more
even if they benefit less from the government. Those
who have less shall contribute less even if they
receive more of the benefits from the government.
Aspects of the Ability to Pay Theory
1. Vertical equity - proposes that the extent
of one's ability to pay is directly proportional to the
level of his tax base.
For example, A has P200,000 income while B has
P400,000. In taxing income, the government should
tax B more than A because B has greater income;
hence, a greater capacity to contribute.
2. Horizontal equity - requires consideration
of the particular circumstance of the taxpayer.
For example, Businessmen A and B both have
P300,000 income. A incurred P200,000 in business
expenses while B incurred only P50,000 business
expenses. The government should tax B more than A
because he has lesser expenses and thus greater
capacity to contribute taxes.
Vertical equity is a gross concept while horizontal even in the absence of an express grant of power in
equity is a net concept. the Constitution.

The Lifeblood Doctrine The Inherent Powers of the State

Taxes are essential and indispensable to the 1. Taxation power is the power of the State to
continued subsistence of the government. Without enforce proportional contribution from its
taxes, the government would be paralyzed for lack of subjects to sustain itself.
motive power to activate or operate it. (CIR vs. Algue)
2. Police power is the general power of the
Taxes are the lifeblood of the government, and their State to enact laws to protect the well-being
prompt and certain availability are an imperious need. of the people.
Upon taxation depends the government's ability to
serve the people for whose benefit taxes are 3. Eminent domain is the power of the state to
collected. (Vera vs. Fernandez) take private property for public use after
paying just compensation.
Implication of the lifeblood doctrine in taxation:
1. Tax is imposed even in the absence of a
Constitutional grant.
2. Claims for tax exemption are construed against
taxpayers.
3. The government reserves the right to choose the
objects of taxation.
4. The courts are not allowed to interfere with the
collection of taxes.
5. In income taxation:
a. Income received in advance is taxable
upon receipt.
b. Deduction for capital expenditures and
prepayments is not allowed as t effectively defers the
collection of income tax.
c. A lower amount of deduction is preferred
when a claimable expense is subject to limit
d. A higher tax base is preferred when the tax
object has multiple tax bases.
Similarities of the three powers of the State:
INHERENT POWERS OF THE STATE 1. They are all necessary attributes of sovereignty.
A government has its basic needs and rights which 2. They are all inherent to the State.
co-exist with its creation. It has rights to sustenance, 3. They are all legislative in nature.
protection, and properties. The government sustains 4. They are all ways in which the State interferes with
itself by the power of taxation, secures itself and the private rights and properties.
well-being of its people by police power, and secures 5. They all exist independently of the Constitution and
its own properties to carry out its public services by are exercisable by the government even without a
the power of eminent domain. Constitutional grant. However, the Constitution may
impose conditions or limits for their exercise.
These rights, dubbed as "powers" are natural, 6. They all presuppose an equivalent form of
inseparable, and inherent to every government. No compensation received by the persons affected by
government can sustain or effectively operate without the exercise of the power.
these powers. Therefore, the exercise of these 7. The exercise of these powers by the local
powers by the government is presumed understood government units may be limited by the national
and acknowledged by the people from the very legislature.
moment they establish their government. These
powers are naturally exercisable by the government

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SCOPE OF THE TAXATION POWER
The scope of taxation is widely regarded as
comprehensive, plenary, unlimited and supreme.
However, despite the seemingly unlimited nature of
taxation, it is not absolutely unlimited. Taxation has its
own inherent limitations and limitations imposed by
the Constitution.
THE LIMITATIONS OF THE TAXATION POWER
A. Inherent limitations
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power
B. Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of
debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable
entities, non-profit cemeteries, churches and mosque
from property taxes
9. Non-appropriation of public funds or
property for the benefit of any church, sect or system
of religion
10. Exemption from taxes of the revenues
and assets of non-profit, non-stock educational
institutions
11. Concurrence of a majority of all members
of Congress for the passage of a law granting tax
exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the
Supreme Court to review cases
15. The requirement that appropriations,
revenue or tariff bills shall originate exclusively in the
House of Representative
16. The delegation of taxing power to local
government units
INHERENT LIMITATIONS OF TAXATION
Territoriality of taxation
Public services are normally provided within
the boundaries of the State. Thus, the government
can only demand tax obligations upon its subjects or
residents within its territorial jurisdiction. There is no
basis in taxing foreign subjects abroad since they do
not derive benefits from our government.
Furthermore, extraterritorial taxation will amount to
encroachment of foreign sovereignty.
Two-fold obligations of taxpayers:
1. Filing of returns and payment of taxes
2. Withholding of taxes on expenses and its
remittance to the government
These obligations can only be demanded and
enforced by the Philippine government upon its
citizens and residents. It cannot enforce these upon
subjects outside its territorial jurisdiction as this would
result in encroachment of foreign sovereignty.
Exception to the territoriality principle
1. In income taxation, resident citizens and domestic
corporations are taxable on income derived both
within and outside the Philippines.
2. In transfer taxation, residents or citizens such as
resident citizens, non-resident citizens and resident
aliens are taxable on transfers of properties located
within or outside the Philippines.
International comity
In the United Nations Convention, countries
of the world agreed to one fundamental concept of co-
equal sovereignty wherein all nations are deemed
equal with one another regardless of race, religion,
culture, economic condition or military power.
No country is powerful than the other. It is by this
principle that each country observes international
comity or mutual courtesy or reciprocity between
them. Hence,
1. Governments do not tax the income and properties
of other governments.
2. Governments give primacy to their treaty
obligations over their own domestic tax laws.
Embassies or consular offices of foreign governments
in the Philippines including international organizations
and their non-Filipino staff are not subject to income
taxes or property taxes. Under the National Internal
Revenue Code (NIRC), the income of foreign
government and foreign government-owned and
controlled corporations are not subject to income tax.
When a state enters into treaties with other states, it
is bound to honor the agreements as a matter of
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mutual courtesy with the treaty partners even if the
same conflicts with its local tax laws.
Public purpose
Tax is intended for the common good.
Taxation must be exercised absolutely for public
purpose. It cannot be exercised to further any private
interest.
Exemption of the government
The taxation power is broad. The government
can exercise the power upon anything including itself.
However, the government normally does not tax itself
as this will not raise additional funds but will only
impute additional costs.
Under the NIRC, government properties and income
from essential public functions are not subject to
taxation. However, the income of the government
from its properties and activities conducted for profit,
including income from government-owned and
controlled corporations is subject to tax.
Non-delegation of the taxing power
The legislative taxing power is vested
exclusively in Congress and is non-delegable,
pursuant to the doctrine of separation of the branches
of the government to ensure a system of checks and
balances. The power of lawmaking, including
taxation, is delegated by the people to the legislature.
So as not to spoil the purpose of delegation, it is held
that what has been delegated cannot be further
delegated.
Exceptions to the rule of non-delegation
1. Under the Constitution, local government units are
allowed to exercise the power to tax to enable them
to exercise their fiscal autonomy.
2. Under the Tariff and Customs Code, the President
is empowered to fix the amount of tariffs to be flexible
to trade conditions.
3. Other cases that require expedient and effective
administration and implementation of assessment
and collection of taxes.
CONSTITUTIONAL LIMITATIONS OF TAXATION
Observance of due process of law
No one should be deprived of his life, liberty,
or property without 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. An
assessment without a legal basis violates the
requirement of due process.
2. Procedural due process
There should be no arbitrariness in assessment and
collection of taxes, and the government shall observe
the taxpayer’s right to notice and hearing. The law
established procedures which must be adhered to in
making assessments and in enforcing collections.
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.
Collection shall be made within five years from the
date of assessment. The failure of the government to
observe these rules violates the requirement of due
process.
Equal protection of the law
No person shall be denied the equal
protection of the law. Taxpayers should be treated
equally both in terms of rights conferred and
obligations imposed. This rule applies where
taxpayers are under the same circumstances and
conditions. This requirement would mean Congress
cannot exempt sellers of "balot" while subjecting
sellers of "penoy" to tax since they are essentially the
same goods.
Uniformity rule in taxation
The rule of taxation shall be uniform and
equitable. Taxpayers under dissimilar circumstances
should not be taxed the same. Taxpayers should be
classified according to commonality in attributes, and
the tax classification to be adopted should be based
on substantial distinction. Each class is taxed
differently, but taxpayers falling under the same class
are taxed the same. Hence, uniformity is relative
equality.
Progressive system of taxation
Congress shall evolve a progressive system
of taxation. Under the progressive system, tax rates
increase as the tax base increases. The Constitution
favors progressive tax as it is consistent with the
taxpayer's ability to pay. Moreover, the progressive
system aids in an equitable distribution of wealth to
society by taxing the rich more than the poor.
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Non-imprisonment for non-payment of debt or
poll tax
As a policy, no one shall be imprisoned
because of his poverty, and no one shall be
imprisoned for mere inability to pay debt. However,
this Constitutional guarantee applies only when the
debt is acquired by the debtor in good faith. Debt
acquired in bad faith constitutes estafa, a criminal
offense punishable by imprisonment.
Is non-payment of tax equivalent to non-payment
of debt?
Tax arises from law and is a demand of
sovereignty. It is distinguished from debt which arises
from private contracts. Non-payment of tax
compromises public interest while the non-payment
of debt compromises private interest. The non-
payment of tax is similar to a crime. The Constitutional
guarantee on non-imprisonment for non-payment of
debt does not extend to non-payment of tax, except
poll tax.
Poll, personal, community or residency tax
Poll tax has two components:
a. Basic community tax
b. Additional community tax
The constitutional guarantee of non-imprisonment for
non-payment of poll tax applies only to the basic
community tax. Non-payment of the additional
community tax is an act of tax evasion punishable by
imprisonment.
Non-impairment of obligation and contract
The State should set an example of good
faith among its constituents. It should not set aside its
obligations from contracts by the exercise of its
taxation power. Tax exemptions granted under
contract should be honored and should not be
cancelled by a unilateral government action.
Free worship rule
The Philippine government adopts free
exercise of religion and does not subject its exercise
to taxation. Consequently, the properties and
revenues of religious institutions such as tithes or
offerings are not subject to tax. This exemption,
however, does not extend to income from properties
or activities of religious institutions that are proprietary
or commercial in nature.
Exemption of religious, charitable or educational
entities, non-profit cemeteries, churches and
mosques, lands, buildings, and improvements
from property taxes
The Constitutional exemption from property
tax applies for properties actually, directly, and
exclusively (i.e. primarily) used for charitable,
religious, and educational purposes.
In observing this Constitutional limitation, the
Philippines follows the doctrine of use wherein only
properties actually devoted for religious, charitable, or
educational activities are exempt from real property
tax.
Under the doctrine of ownership, the properties of
religious, charitable, or educational entities whether
or not used in their primary operations are exempt
from real property tax. This, however, is not applied
in the Philippines.
Non-appropriation of public funds or property for
the benefit of any church, sect, or system of
religion
This constitutional limitation is intended to
highlight the separation of religion and the State. To
support freedom of religion, the government should
not favor any particular system of religion by
appropriating public funds or property in support
thereof. It should be noted, however, that
compensation to priests, imams, or religious ministers
working with the military, penal institutions,
orphanages, or leprosarium is not considered
religious appropriation.
Exemption from taxes of the revenues and assets
of non-profit, non-stock educational institutions
including grants, endowments, donations, or
contributions for educational purposes
The Constitution recognizes the necessity of
education in state building by granting tax exemption
on revenues and assets of non-profit educational
institutions. This exemption, however, applies only on
revenues and assets that are actually, directly, and
exclusively devoted for educational purposes.
Consistent with this constitutional recognition of
education as a necessity, the NIRC also exempts
government educational institutions from income tax
and subjects private educational institutions to a
minimal income tax.
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Concurrence of a majority of all members of
Congress for the passage of a law granting tax
exemption
Tax exemption law counters against the
lifeblood doctrine as it deprives the government of
revenues. Hence, the grant of tax exemption must
proceed only upon a valid basis. As a safety net, the
Constitution requires the vote of the majority of all
members of Congress in the grant of tax exemption.
In the approval of an exemption law, an absolute
majority or the majority of all members of Congress,
not a relative majority or quorum majority, is required.
However, in the withdrawal of tax exemption, only a
relative majority is required.
Non-diversification of tax collections
Tax collections should be used only for public
purpose. It should never be diversified or used for
private purpose.
Non-delegation of the power of taxation
The principle of checks and balances in a
republican state requires that taxation power as part
of lawmaking be vested exclusively in Congress.
However, delegation may be made on matters
involving the expedient and effective administration
and implementation of assessment and collection of
taxes Also, certain aspects of the taxing process that
are non-legislative in character are delegated.
Hence, implementing administrative agencies such
as the Department of Finance and the Bureau of
Internal Revenue (BIR) issues revenue regulations,
rulings, orders, or circulars to interpret and clarify the
application of the law. But even so, their functions are
merely intended to interpret or clarify the proper
application of the law. They are not allowed to
introduce new legislations within their quasi-
legislative authority.
Non-impairment of the jurisdiction of the
Supreme Court to review tax cases
Notwithstanding the existence of the Court of
Tax Appeals, which is a special court, all cases
involving taxes can be raised to and be finally decided
by the Supreme Court of the Philippines.
Appropriations, revenue, or tariff bills shall
originate exclusively in the House of
Representatives, but the Senate may propose or
concur with amendments.
Laws that add income to the national treasury and
those that allows spending therein must originate
from the House of Representatives while Senate may
concur with amendments. The origination of a bill by
Congress does not necessarily mean that the House
bill must become the final law. It was held
constitutional by the Supreme Court when Senate
changed the entire house version of a tax bill.
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
This is a constitutional recognition of the local
autonomy of local governments and an express
delegation of the taxing power.
STAGES OF THE EXERCISE OF TAXATION
POWER
1. Levy or imposition
2. Assessment and collection
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:
1. The House of Representatives, and
2. The Senate
As mandated by the Constitution, tax bills must
originate from the House of Representatives. Each
may, however, have their own versions of a proposed
law which is approved by both bodies, but tax bills
cannot originate exclusively from the Senate.
Matters of legislative discretion in the exercise of
taxation
1. Determining the object of taxation
2. Setting the tax rate or amount to be
collected
3. Determining the purpose for the levy which
must be public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the
national and local government
6. Situs of taxation
7. Method of collection
Assessment and Collection
The tax law is implemented by the administrative
branch of the government. Implementation involves
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assessment or the determination of the tax liabilities
of taxpayers and collection. This stage is referred to
as incidence of taxation or the administrative act of
taxation.
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. Situs rules serve as frames of reference in
gauging whether the tax object is within or outside the
tax jurisdiction of the taxing authority.
Examples of Situs Rules:
1. Business tax situs: Businesses are
subject to tax in the place where the business is
conducted.
Illustration: A taxpayer is involved in car dealership
abroad and restaurant operation in the Philippines.
The restaurant business will be subject to business
tax in the Philippines since the business is conducted
herein, but the car dealing business is exempt
because the business is conducted abroad.
2. Income tax situs on services: Service
fees are subject to tax where they are rendered.
Illustration: A foreign corporation leases a residential
space to a non-resident Filipino citizen abroad.
The rent income will be exempt from Philippine
taxation as the leasing service is rendered abroad.
3. Income tax situs on sale of goods: The
gain on sale is subject to tax in the place of sale.
Illustration: While in China, a non-resident OFW
citizen agreed with a Chinese friend to sell his
diamond necklace to the latter. They stipulated that
the delivery of the item and the payment will be made
a week later in the Philippines. The sale was
consummated as agreed.
The contract of sale is consensual and is perfected by
the meeting of the minds of the contracting parties.
The perfection of the contract of sale is in China. The
situs of taxation is China. The gain on the sale of the
necklace will be taxable abroad and exempt in the
Philippines.
4. Property tax situs: Properties are taxable
in their location.
Illustration: An overseas Filipino worker has a
residential lot in the Philippines.
He will still pay real property tax despite his absence
in the Philippines because his property is located
herein.
5. Personal tax situs: Persons are taxable in
their place of residence.
Illustration: Ahmed Lofti is a Sudanese studying
medicine in the Philippines.
Ahmed will pay personal tax in the Philippines even if
he is an alien because residing in the Philippines.
OTHER FUNDAMENTAL DOCTRINES IN
TAXATION
1. Marshall Doctrine - "The power to tax involves the
power to destroy." Taxation power can be used as an
instrument of Police power. It can be used to
discourage or prohibit undesirable activities or
occupation. As such, taxation power carries with it the
power to destroy.
However, the taxation power does not include the
power to destroy if it is used solely for the purpose of
raising revenue. (Roxas vs. CTA)
2. Holme's Doctrine - "Taxation power is not the
power to destroy while the court sits." Taxation power
may be used to build or encourage beneficial
activities or industries by the grant of tax incentives.
While the Marshall Doctrine and the Holme's Doctrine
appear to contradict each other, both are actually
employed in practice. A good manifestation of the
Marshall Doctrine is the imposition of excessive tax
on cigarettes while applications of the Holme's
Doctrine include the creation of Ecozones with tax
holidays and provision of incentives, such as the
Omnibus Investment Code (E.O. 226) and the
Barangay Micro-Business Enterprise (BMBE) Law.
3. Prospectivity of tax laws - Tax laws are generally
prospective in operation. An ex post facto law or a law
that retroacts is prohibited by the Constitution.
Exceptionally, income tax laws may operate
retrospectively if so intended by Congress under
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certain justifiable conditions. For example, Congress
can levy tax on income earned during periods of
foreign occupation even after the war.
4. Non-compensation or set-off - Taxes are not
subject to automatic set-off or compensation. The
taxpayer cannot delay payment of tax to wait for the
resolution of a lawsuit involving his pending claim
against the government. Tax is not a debt; hence, it is
not subject to set-off. This rule is important to allow
the government sufficient period to evaluate the
validity of the claim. (See Philex Mining Corporation
vs. CI R, G.R. 125704)
Exceptions:
a. Where the taxpayer's claim has already become
due and demandable such as when the government
already recognized the same and an appropriation for
refund was made
b. Cases of obvious overpayment of taxes
c. Local taxes
5. Non-assignment of taxes - Tax obligations
cannot be assigned or transferred to another entity b
y contract. Contracts executed by the taxpayer to
such effect shall not prejudice the right of the
government to collect.
6. Imprescriptibility in taxation - Prescription is the
lapsing of a right clue to the passage of time. When
one sleep on his right over an unreasonable period of
time, he is presumed to be waiving his right. The
government's right to collect taxes does not prescribe
unless the law itself provides for such prescription.
Under the NIRC, tax prescribes if not collected within
5 years from the date of its assessment. In the
absence of an assessment, tax prescribes if not
collected by judicial action within 3 years from the
date the return is required to be filed. However, taxes
due from taxpayers who did not file a return or those
who filed fraudulent returns do not prescribe.
7. Doctrine of estoppel - Under the doctrine of
estoppel, any misrepresentation made by one party
toward another who relied therein in good faith will be
held true and binding against that person who made
the misrepresentation.
The government is not subject to estoppel. The error
of any government employee does not bind the
government. It is held that the neglect or omission of
government officials entrusted with the collection of
taxes should not be allowed to bring harm or
detriment to the interest of the people. Also,
erroneous applications of the law by public officers do
not block the subsequent correct application of the
same.
8. Judicial Non-interference - Generally, courts are
not allowed to issue injunction against the
government's pursuit to collect tax as this would
unnecessarily defer tax collection. This rule is
anchored on the Lifeblood Doctrine.
9. Strict Construction of Tax Laws - When the law
clearly provides for taxation, taxation is the general
rule unless there is a clear exemption. Hence the
maxim, "Taxation is the rule, exemption is the
exception."
When the language of the law is clear and categorical,
there is no room for interpretation. There is only room
for application. However, when taxation laws are
vague, the doctrine of strict legal construction is
observed.
Vague tax laws
Vague tax laws are construed against the
government and in favor of the taxpayers. A vague
tax law means no tax law. Obligation arising from law
is not presumed. The Constitutional requirement of
due process requires laws to be sufficiently clear and
expressed in their provisions.
Vague exemption laws
Vague tax exemption laws are construed
against the taxpayer and in favor of the government.
A vague tax exemption law means no exemption law.
The claim for exemption is construed strictly against
the taxpayer in accordance with the lifeblood doctrine.
The right of taxation is inherent to the State. It is a
prerogative essential to the perpetuity of the
government. He who claims exemption from the
common burden must justify his claim by the clearest
grant of organic or statute law. (Iloilo, et al. vs. Smart
Communications, Inc., G.R. No. 167260, February
27, 2009)
When exemption is claimed, it must be shown
indubitably to exist. At the outset, every presumption
is against it. A well-founded doubt is fatal to the claim;
it is only when the terms of the concession are too
8
explicit to admit fairly of any other construction that
the proposition can be supported. (Ibid)
Tax exemption cannot arise from vague inference.
Tax exemption must be clear and unequivocal. A
taxpayer claiming a tax exemption must point to a
specific provision of law conferring on the taxpayer, in
clear and plain terms, exemption from a common
burden. Any doubt whether a tax exemption exists is
resolved against the taxpayer. (see Digital
Telecommunications, Inc. vs. City Government of
Batangas, et al)
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 elements:
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.
Examples:
a. An income tax of 10% on monthly sales and a 2%
income tax on the annual sales (total of monthly
sales)
b. A 5% tax on bank reserve deficiency and another
1% penalty per day as a consequence of such
reserve deficiency
2. Indirect double taxation
This occurs when at least one of the
secondary elements of double taxation is not
common for both impositions.
Examples:
a. The national government levies business tax on the
sales or gross receipts of business while the local
government levies business tax upon the same sales
or receipts.
b. The national government collects income tax from
a taxpayer on his income while the local government
collects community tax upon the same income.
c. The Philippine government taxes foreign income of
domestic corporations and resident citizens while a
foreign government also taxes the same income
(international double taxation).
Nothing in our law expressly prohibits double
taxation. In fact, indirect double taxation is prevalent
in practice. However, direct double taxation is
discouraged because it is oppressive and
burdensome to taxpayers. It is also believed to
counter the rule of equal protection and uniformity in
the Constitution.
How can double taxation be minimized?
The impact of double taxation can be
minimized by any one or a combination of the
following:
a. Provision of tax exemption – only one tax
law 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 a foreign country
tax the tax object, but the tax payments made
in the foreign tax law are deductible against
the tax due of the domestic tax law
c. Allowing reciprocal tax treatment –
provisions in tax laws imposing a reduced tax
rates or even exemption if the country of the
foreign taxpayer also gives the same
treatment to Filipino non-residents therein
d. Entering into treaties or bilateral
agreements – countries may stipulate for a
lower tax rate for their residents if they
engage in transactions that are 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 act or trick that tends to illegally reduce
or avoid the payment of tax.
Examples:
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a. This can be achieved by gross understatement of
income, non-declaration of income, overstatement of
expenses or tax credit.
b. Misrepresenting the nature or amount of
transaction to take advantage of lower taxes.
2. Tax avoidance, also known as tax
minimization, refers to any act or trick that reduces or
totally escapes taxes by any legally permissible
means.
Examples:
a. Selection and execution of transaction that would
expose taxpayer to lower taxes.
b. Maximizing tax options, tax carry-overs or tax
credits
c. Careful tax planning
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.
All forms of tax exemptions can be revoked by
Congress except those granted by the Constitution
and those granted under contracts.
B. Those that do not result to loss of government
revenue
1. Shifting - This is the process of
transferring tax burden to other taxpayers.
Forms of shifting:
a. Forward shifting -This is the shifting of tax
which follows the normal flow of distribution
(i.e. from manufacturer to wholesalers,
retailers to consumers). Forward shifting is
common with essential commodities and
services such as food and fuel.
b. Backward shifting - This is the reverse of
forward shifting. Backward shifting is
common with non-essential commodities
where buyers have considerable market
power and commodities with numerous
substitute products.
c. Onward shifting - This refers to any tax
shifting in the distribution channel that
exhibits forward shifting or backward shifting.
Shifting is common with business taxes where taxes
imposed on business revenue can be shifted or
passed-on to customers.
2. Capitalization - This pertains to the
adjustment of the value of an asset caused by
changes in tax rates.
For instance, the value of a mining property will
correspondingly decrease when mining output is
subjected to higher taxes. This is a form of backward
shifting of tax.
3. Transformation - This pertains to the
elimination of wastes or losses by the taxpayer to
form savings to compensate for the tax imposition or
increase in taxes.
Tax Amnesty
Amnesty is a general pardon granted by the
government for erring taxpayers to give them a
chance to reform and enable them to have a fresh
start to be part of a society with a clean slate. It is an
absolute forgiveness or waiver by the government on
its right to collect and is retrospective in application.
Tax Condonation
Tax condonation is forgiveness of the tax obligation
of a certain taxpayer under certain justifiable grounds.
This is also referred to as tax remission. Because they
deprive the government of revenues, tax exemption,
tax refund, tax amnesty, and tax condonation are
construed against the taxpayer and in favor of the
government.
Tax Amnesty vs. Tax Condonation
Amnesty covers both civil and criminal liabilities, but
condonation covers only civil liabilities of the
taxpayer.
Amnesty operates retrospectively by forgiving past
violations. Condonation applies prospectively to any
unpaid balance of the tax; hence, the portion already'
paid by the taxpayer will not be refunded.
Amnesty is also conditional upon the taxpayer paying
the government a portion of the tax whereas
condonation requires no payment.
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