INTRODUCTION TO TAXATION

Hector de Leon, American jurisprudence, defines taxation as "the process or means by

which the sovereign, through its law-making body, raises income to defray the necessary
expenses of the government." He goes further to state that "it is merely a way of
apportioning the cost of the government among those who in some measure are
privileged to enjoy its benefits and therefore, must bear its burdens. As a power,
taxation refers to the inherent power of the State to demand enforced contributions for
public purpose or purposes."

Nature of Taxation
1. Inherent in sovereignty
The power is inherent as an incident necessary to the existence of every
government. Being vital, it does not require a Constitution or law to create it per
se but only to limit the power and scope.
2. Legislative
This refers to the legislative branch of our government. Collectively known as the
Congress, it makes laws to limit the power of taxation. The taxes created by law-
makers (i.e. Congressmen and Senators) are generally national taxes. National
taxes apply to all citizens of the country. This only means that there is a uniform
implementation throughout the country but not necessarily the same rate for
everyone.
3. Subject to constitutional and inherent limitations
Chief Justice Marshall of the United States Supreme Court once said that "the
power to tax involves the power to destroy". To avoid abuse, the Constitution as
the supreme law of the land provides for limitations expressly or impliedly. Some
inherent limitations include that the tax must be imposed for public purpose,
limited to only those within the State's territory, and exemption of the
government's entities performing governmental functions from taxation as it is
ridiculous for the government to tax itself in order to pay itself.

In addition, the State also cannot tax the property of foreign sovereigns. This is
the principle of international comity where State A respects the sovereignty of
another State and will not reduce it by placing the latter under the former's
jurisdiction.
Purpose of Taxation
1. Earn Revenue
➢ money collected by the government is used to provide for various public
services to promote the welfare of the people
2. Non-revenue Objectives
➢ taxation may be used to regulate the behavior of people towards a
particular purpose that the government seeks to achieve. Some examples
include the following:
■ increase in taxes on foreign products to make local products more
competitive
■ increase in taxes on alcoholic drinks and cigarettes to discourage
vices
■ decrease in taxes for particular businesses to encourage start-ups
and investments which will create more jobs

Essential Characteristics of Tax

1. Enforced contribution - required, not voluntary
2. Generally payable in money - paid in Philippine Peso
3. Proportionate - amount paid is dependent on a person's capacity to pay
4. Placed on persons or property - excise taxes are charge on the person
5. Taxed by the State which has authority and power over the person or property -
the person or property must be within the territorial boundaries of the State so
that the State can enforce its power to tax on them
6. Taxed by the law-making body of the State - Congress for national taxes,
Provincial Board for provincial taxes, Municipal Board for municipal taxes, etc.
7. For public purpose - used for public services

Basic Principles of a Sound Tax System

1. Fiscal Adequacy
➢ the total revenue of the government must be sufficient to answer for the
costs of public expenditure
2. Equality or Theoretical Justice
➢ reinforces the ability to pay principle which holds that "similarly situated
taxpayers should pay equal taxes, those who have more should pay
more"
 3. Administrative Feasibility
➢ the tax law must be capable of effective enforcement. A law no matter
how beautifully crafted, will not further the purpose of the government if
it cannot be implemented properly.

Classifications and Distinctions of Taxes

1. Subject Matter
1. Personal, Poll or Capitation
■ fixes amount charged against persons of a specified territory
whether or not a citizen
■ e.g. Community Tax
2. Property
■ tax imposed on real or personal property in proportion to the value
or other reasonable method of distribution
3. Excise
■ all other taxes not falling under the above 2 classifications
■ charged on the "performance of an act, enjoyment of a privilege, or
engaging in an occupation, profession or business"
2. Personal Responsible
1. Direct
■ the person responsible for the tax must pay it
■ e.g. income tax
2. Indirect
■ the person responsible for the tax is expected to shift/pass the
burden to another person
■ e.g. Value Added Tax
3. Determination of Amount
1. Specific
■ tax based on a fixed amount of number or other standard of
measurement like weight
■ based on quantity rather than their value
2. Ad Valorem
■ literally means "according to value"
■ items which are taxed according to this scheme require first a
valuation to estimate their fair market value before a certain
percentage is imposed on the item
4. Purpose
1. General, Fiscal, Revenue
■ to raise revenue to cover government expenses
2. Special or Regulatory
■ to achieve a particular purpose the government considers important
whether or not sufficient revenue is collected
5. Scope of Authority for Imposing Tax
1. National
■ tax imposed by the national authority (those from the Tax Code or
special laws which Congress passed)
2. Local
■ taxes imposed by the local government
6. Rate
1. Proportional
■ fixed percentage regardless of the amount of the property
■ also called flat or uniform tax
2. Progressive or graduated
■ tax percentage would be constant for the amount bracket assigned
to it but would increase to the next rate as the current bracket is
exceeded

3. Regressive
■ tax percentage would be constant for the amount bracket assigned
to it but would decrease to the next rate as the current bracket is
exceeded
■ no regressive taxes in the Philippines
7. Tax System
1. Progressive System
 ■ tax laws emphasize more direct taxes rather than indirect taxes
using the ability to pay principle
2. Regressive System
■ tax laws are geared towards more indirect taxes rather than direct
taxes

A progressive tax is NOT synonymous to the progressive system of taxation or vice

versa.

Forms of Escape from Taxation

While paying taxes is an enforced contribution and not simply depending on the will of
the taxpayer, there are instances when the taxpayer could escape from the obligation.
With the exception of tax evasion, all others enumerated below are legal means of tax
escape.
1. Shifting
○ the original payor or one whom the tax was assessed transfers the burden
of the tax to someone else (indirect tax)
2. Capitalization
○ the total amount of future taxes expected to be paid for the object is
deducted from the purchase price of the object
○ occurs if the property is income generating and the buyer considers the
reasonability of the purchase
3. Transformation
○ the seller maintains his selling price and margin of profit not by shifting
the tax to his customers but by improving his method of production
○ it is as if no tax has been added to the price when in fact it has already
been factored in
4. Avoidance
○ the use of tax-saving devices or means sanctioned by law to avoid or
reduce tax liability
5. Exemption
○ the government grants immunity to particular persons, corporations, or a
particular class of persons or nature or business
6. Evasion
○ the use of illegal or fraudulent means to escape or lessen the payment of
tax
○ it is a crime punishable by a fine and imprisonment