MODULE 1
INTRODUCTION TO TAXATION
INTRODUCTION
This chapter discusses the fundamental principles of taxation.
After this chapter, readers must be able to comprehend and
demonstrate mastery of the following:
1. Concept of taxation and its necessity for every government
2. Lifeblood doctrine and its implication to taxation
3. Theories of government cost allocation
4. Inherent power of the State
5. Scope of the taxation power
6. Limitations of the taxation power
7. Stages of taxation
8. Concept of situs in taxation
9. Fundamental principles surrounding taxation
10. Various escapes from taxation
11. Concept of tax amnesty and condonation
INTENDED LEARNING OUTCOMES
ILO 1 – Demonstrate an extensive knowledge on the
background, nature, scope, and characteristics of taxation
ILO 2 – Understand the principles of taxation, its theory,
scope, and limitations of taxation
ILO 3 – Understand the escapes from taxation, amnesty and
condonation
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 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
2. Ability to pay theory
Benefit received theory
The benefit received theory presupposes that the
more benefit one receives from the government, the more
taxes he should pay.
Ability to pay theory
The 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
Vertical equity
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.
 The Inherent Powers of the State
Horizontal equity Taxation power is the power of the State to enforce
Horizontal equity requires consideration of the particular proportional contribution from its subjects to sustain itself.
circumstance of the taxpayer. Police power is the general power of the State to enact laws
to protect the so well-being of the people.
For example, Businessmen A and B both have P300,000 Eminent domain is the power of the State to take private
income. A incurred P200,000 in business expenses while B property for public use after paying just compensation.
incurred only P50,000 business expenses. The government
should tax B more than A because he has lesser expenses and Comparison of the three powers of the State
thus greater capacity to contribute taxes. Point of Police Eminent
Taxation
Difference Power Domain
Vertical equity is a gross concept while horizontal equity is a Government
Exercising Governmen
net concept. Government and private
authority t
entities
The Lifeblood Doctrine For the To protect
Taxes are essential and indispensable to the support of the general
continued subsistence of the government. Without taxes, the Purpose For public use
the welfare of
government would be paralyzed for lack of motive power to government the people
activate or operate it. (CIR vs. Algue) Community Community
Persons Owner of the
or class of or class of
Taxes are the lifeblood of the government, and their affected property
individuals individuals
prompt and certain availability are an imperious need. Upon No amount
taxation depends on the government's ability to serve the Limited
Unlimited imposed.
people for whose benefit taxes are collected. (Vera vs. (Imposition
(Tax is based (The
Fernandez) Amount of is limited to
on government
imposition cover cost
government pays just
Implication of the lifeblood doctrine in taxation: of
needs) compensation
Tax is imposed even in the absence of a Constitutional grant. regulation)
)
Claims for tax exemption are construed against taxpayers. Most Most
The government reserves the right to choose the objects of Importance Important
important superior
taxation. Superior to
The courts are not allowed to interfere with the collection of Inferior to
the “Non- Superior to
taxes. Relationshi the “Non-
impairment the “Non-
In income taxation: p with the impairment
Clause” of impairment
Income received in advance is taxable upon receipt. Constitutio Clause” of
the Clause” of the
Deduction for capital expenditures and prepayments is not n the
Constitutio Constitution
allowed as it effectively defers the collection of income tax. Constitution
n
A lower amount of deduction is preferred when a claimable Constitution Public Public
expense is subject to limit. al and interest purpose and
A higher tax base is preferred when the tax object has Limitation
inherent and due just
multiple tax bases limitations process compensation

INHERENT POWERS OF THE STATE
A government has its basic needs and rights which co-exist
with its creation. It has rights to sustenance, protection, and
properties. The government sustains itself by the power of
taxation, secures itself and the well-being of its people by
police power, and secures its own properties to carry out its
public services by the power of eminent domain.
These rights, dubbed as "powers" are natural, inseparable,
and inherent to every government. No government can
sustain or effectively operate without these powers.
Therefore, the exercise of these powers by the government is
presumed understood and acknowledged by the people from
the very moment they establish their government. These
powers are naturally exercisable by the government even in
the absence of an express grant of power in the Constitution.
Similarities of the three powers of the State
They are all necessary attributes of sovereignty.
They are all inherent to the state.
They are all legislative in nature.
They are all ways in which the State interferes with private
rights and properties.
They all exist independently of the Constitution and are
exercisable by the government even without a constitutional
grant. However, the Constitution may impose conditions or
limits for their exercise.
They all presuppose an equivalent form of compensation
received by the persons affected by the exercise of the
power.
The exercise of this powers by the local government units
may be limited by the national legislature.
SCOPE OF THE TAXATION POWER
The power of taxation is the most absolute of all the powers
of the government.
Comprehensive – covers all (persons, businesses, professions,
right and privileges)
Unlimited – In the absence of limitations provided by the 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.
Plenary – it is complete; BIR may avail of certain remedies to
ensure collection of taxes.
Supreme – in so far as the selection of the subject of taxation
THE LIMITATIONS OF THE TAXATION POWER
Inherent limitations
Territoriality of taxation
International comity
Public purpose
Exemption of the government
Non-delegation of the taxing power
Constitutional Limitations
Due process of law
Equal protection of the law
Uniformity rule in taxation
Progressive system of taxation
Non-imprisonment for non-payment of debt or poll tax
Non-impairment of obligation and contract
Free worship rule
Exemption of religious or charitable entities, non-profit
cemeteries, churches and mosque from property taxes
Non-appropriation of public funds or property for the benefit
of any church, sect or system of religion
Exemption from taxes of the revenues and assets of non-
profit, non-stock educational institutions
Concurrence of a majority of all members of Congress for the
passage of a law granting tax exemption
Non-diversification of tax collections
Non-delegation of the power of taxation
Non-impairment of the jurisdiction of the Supreme Court to
review tax cases
The requirement that appropriations, revenue, or tariff bills
shall originate exclusively in the House of Representatives
The delegation of taxing power to local government units
ESSENTIAL ELEMENTS OF TAX
It is an enforced contribution.
It is generally payable in money.
It is proportionate in character.
It is levied on persons, property or rights.
It is levied by the law-making body of the state.
It is levied for public purpose.
ASPECTS OF TAXATION
Levying or imposition of tax
Assessment and collection of tax
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, and
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
Determining the object of taxation
Setting the tax rate or amount to be collected
Determining the purpose for the levy which must be public
use
Kind of tax to be imposed
Apportionment of the tax between the national and local
government
Situs of taxation
Method of collection
Assessment and Collection
The tax law is implemented by the administrative branch of
the government. Implementation involves 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:
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.
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.
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.
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.
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 he is residing in the Philippines.
OTHER FUNDAMENTAL DOCTRINES IN TAXATION
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).
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.
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 certain justifiable conditions.
For example, Congress can levy tax on income earned during
periods of foreign occupation even after the war.
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. CIR, G.R. 125704)
Exceptions:
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
Cases of obvious overpayment of taxes
Local taxes
Non-assignment of taxes
Tax obligations cannot be assigned or transferred to another
entity by contract. Contracts executed by the taxpayer to
such effect shall not prejudice the right of the government to
collect.
Imprescriptibility in taxation
Prescription is the lapsing of a right due 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.
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.
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.
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 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:
Same type of tax
Same purpose of tax
Same taxing jurisdiction
Same tax period
Types of Double Taxation
Direct double taxation
This occurs when all the element of double taxation exists for
both impositions.
Examples:
An income tax of 10% on monthly sales and a 2% income tax
on the annual sales (total of monthly sales)
A 5% tax on bank reserve deficiency and another 1% penalty
per day as a consequence of such reserve deficiency
Indirect double taxation
This occurs when at least one of the secondary elements of
double taxation is not common for both impositions.
Examples:
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.
The national government collects income tax from a taxpayer
on his income while the local government collects community
tax upon the same income.
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:
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
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
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
Entering into treaties or bilateral agreements - countries may
stipulate for a lower tax rates 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
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:
This can be achieved by gross understatement of income,
non-declaration of income, overstatement of expenses or tax
credit.
Misrepresenting the nature or amount of transaction to take
advantage of lower taxes.
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:
Selection and execution of transaction that would expose
taxpayer to lower taxes.
Maximizing tax options, tax carry-overs or tax credits
Careful tax planning
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
Shifting - This is the process of transferring tax burden to
other taxpayers.
Forms of shifting
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.
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
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.
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.
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.
MODULE EXERCISES
True or False
There should be direct receipt of benefit before one could be
compelled to pay taxes.
Eminent domain involves confiscation of prohibited
commodities to protect the well-being of the people.
Horizontal equity requires consideration of the circumstance
of the taxpayer.
Taxes are the lifeblood of the government.
Taxation is a mode of apportionment of government costs to
the people.
The exercise of taxation power requires Constitutional grant.
Taxation is inherent in sovereignty.
Police power is the most superior power of the government.
Its exercise needs to be sanctioned by the Constitution.
All inherent powers presuppose an equivalent form of
compensation.
The reciprocal duty of support between the government and
the people underscores the basis of taxation.
The scope of taxation is regarded as comprehensive, plenary,
unlimited, and supreme.
The Constitutional exemption of religious, charitable, and
non-profit cemeteries, churches, and mosques refers to
income tax and real property tax.
Taxpayers under the same circumstance should be taxed
differently.
Taxation is subject to inherent and Constitutional limitations,
International comity connotes courtesy between nations.
Collection of taxes in the absence of a law is violative of the
Constitutional requirement for due process.
No one shall be imprisoned for non-payment of tax.
The lifeblood doctrine requires the government to override
its obligations and contracts when necessary.
2/3 of all members of Congress is required to pass a tax
exemption law.
The government should tax itself.

Reference:

Banggawan, R. B. (2021), Income Taxation Laws Principles

and Applications

Bureau of Internal Revenue,

https://www.bir.gov.ph/index.php/tax-information/income-
tax.html