Introduction to Taxation

Taxation
1. State power – Taxation is an inherent power of the State
2. Legislative process – Taxation is a process of levying taxes
3. Mode of government cost distribution – Taxation is a mode by which the State allocates
its costs or burden to who are benefited by its spending.

Theory of Taxation
- The government’s necessity for funding is the theory of taxation.
- A system of government is indispensable to every society.
- A government cannot exist w/o a system of funding.

Basic Taxation -- mutuality support between the people and the government.
Receipt of benefits is conclusively presumed
- Taxpayers cannot avoid payment of tax under the defense of absence of benefit
received.
- Direct receipt or act of availment of government services is not a precondition to
taxation.
Theories of Cost Allocation
1. Benefit received theory – more benefit one received from the government, more taxes
he should pay.
2. Ability to pay theory – taxpayer’s ability to pay; required to contribute based on their
relative capacity to sacrifice for the support of the government.
(a) Vertical Equity (gross concept) – pay is directly proportional to the level of his tax
base
(b) Horizontal Equity (net concept) – requires consideration of particular
circumstances of taxpayer.

 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.

The Lifeblood Doctrine

 - Without taxes, the government would be paralyzed for lack of motive power to activate
or operate it.
- Upon taxation depends the government’s ability to serve the people.

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 taxed
5. In income taxation:
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditures and prepayments is not allowed
effectively defers the collection of income tax.
c. A lower amount of deduction is preferred when a claimable expense subject
to limit.
d. A higher ta base is preferred when the tax object has multiple tax bases.

Inherent Powers of the State

- Exercise of these powers by the government is presumed understood and acknowledge
by the people from the very moment they establish their government.
- “powers” are natural, inseparable, and inherent
Similarities of the three powers of the State
1. All necessary attributed of sovereignty
2. All inherent to the State
3. All legislative in nature
4. All ways in which the State interferes with private rights properties
5. All exist independently of the Constitution and are exercisable by government even
without a Constitutional grant.
i. Constitution may impose conditions or limits for their exercise.
6. All presupposes an equivalent form compensation
7. Exercise of these powers by the local government units may be limited by the national
legislature.

Scope of Taxation Power

- Widely comprehensive, plenary, unlimited and supreme.
- It is not absolute unlimited; thus, it has its own inherent limitations and limitations
imposed by the Constitution.

Inherent Limitation
 - Can only demand tax obligations upon its subjects or residents
within its territorial jurisdiction.
- Violation will lead in encroachment of foreign sovereignty.
- Two-fold obligation of taxpayers:
i. Filing of returns and payment of taxes
ii. Withholding of taxes on expenses and its remittance to the
Territoriality of government.
Taxation - Exception:
- Resident citizens and domestic corporations are taxable on
income derives both within and outside the Philippines.
(Income Taxation)
- Resident citizens, non-resident citizens and resident aliens
are taxable on transfers of properties located within or
outside the Philippines. (Transfer taxation)

- No country is powerful than the other.

- Principle that each country observes international comity or
mutual courtesy or reciprocity between them.
- Government do not tax the income and properties of other
International governments.
Comity - Give primacy to their treaty obligation over their own
domestic tax laws.
- Embassies or consular offices of foreign governments in the
Philippines including international organizations and non-Filipino
staff are not subject to income taxes.

Public Purpose - Exercised absolutely for public purpose

- Cannot be exercised to further any private interest.
- Government normally does not tax itself as this will not raise
additional funds but will only impute additional costs.
Exemption of
- Properties and income from essential public functions are not
the Government
subject to taxation. (NIRC)
- Government properties and activities conducted for profit =
subject to tax
Non-delegation - Legislative taxing power is vested exclusively in Congress = non
of taxing power delegable.
- What has been delegated cannot be further delegated.
- Exception to the rule:
- Local gov’t units are allowed to exercise the power to tax.
(Constitution)
- President is empowered to fix the amount of tariffs to be
flexible to trade conditions. (Tariff and Customs Code)
- Other cases that require expedient and effective
administration and implementation of assessment and
 collection of taxes.

Constitutional Limitation
- Tax laws should neither be harsh nor oppressive.
Aspects of Due Process
1. Substantive due process – assessment w/o legal basis
violates the requirement of due process.
2. Procedural due process – no arbitrariness in assessment
and collection of taxes, and right to notice and hearing.
Observance of due
process of law
- Assessments shall be made within three (3) years from
due date of filing of return or from the date of actual
filing, whichever is later.
- Collection shall be made within five (5) years from date of
assessment.

- Taxpayers should be treated equally both in terms of

Equal protection of the
rights conferred and obligations imposed.
law
- Rule of taxation must be uniform and equitable.
- Dissimilar circumstances = not be taxed the same
Uniformity rule in - Taxpayers should be classified to commonality in
taxation attributes and substantial distnction.
- Uniformity is relative equality.

- Tax rates increase as the tax base increases.

Progressive system of
- Consistent with the taxpayer’s ability to pay.
taxation
- No one shall be imprisoned because of his poverty, and
mere inability to pay debt.
Non-imprisonment for
- Applies only when debt is acquired in good faith.
non-payment of debt or
- Debt in bad faith = estafa, crime offense
poll tax
punishable by imprisonment.

Non-payment of tax Non-payment of debt Poll tax

- Arises from law and - Arise from private a. Basic community tax
is demand of contracts. - Non-
sovereignty. - Non-payment imprisonment
- Non-payment compromises private applies only to
compromises interest. basic community
public interest. tax.
- Non-payment is
 similar to crime.
Non-impairment of
obligation and contract
Free worship rule
Exemptions of religious,
charitable or educational
entities, non-profit
cemeteries, churches and
mosques, lands, and
buildings, and improvements
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
institution including grants,
endowments, donations, or
contributions for educational
purposes
b. Addt’l community tax
- Non-payment =
act of tax evasion,
punishable by
imprisonment.
- Should not set aside its obligations from contracts by
the exercise of its taxation power.
- Adopts free exercise of religion and does not subject
its exercise to taxation.
- Tithes or offerings are not subject to tax.
- Does not extend to income from properties or
activities of religious institution that are proprietary
or commercial in nature.
- Exemption from property tax applied for properties
actually, directly, and exclusively used for charitable,
religious, and educational purposes.
- Doctrine of Use – only properties actually devoted for
religious, charitable, or educational activities are
exempt from real property tax.
- The constitutional limitation that the
Philippines follows.
- Doctrine of ownership – properties of religious,
charitable, or educational entities whether or not
used in their primary operations are exempt from real
property tax.
- Not applicable in the Philippines.
-
- Intended to highlight the separation of religion and
the State.
- Applies only on revenues and assets that are actually,
directly, and exclusively devoted for educational
purposes.
- National Internal Revenue Code (NIRC) exempts
government educational institutions from income tax
and subjects’ private educational institutions to a
minimal income tax.

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
Appropriations, revenue, or
tariff bills shall originate
exclusively in the House of
Representatives, but the
Senate may propose or
concur with amendments.
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
Stages of the Exercise of Taxation Power
Levy or imposition
- Grant of tax exemption must proceed only upon a
valid basis.
- Approval of an exemption of law, absolute majority
or the majority of all members of Congress, is
required.
- Withdrawal of tax exemption, only a relative majority
is required.
- Never be diversified or be used for private purposes.
- Principle of checks and balances in a republican state
requires that taxation power as part of lawmaking be
vested exclusively in Congress.
- Certain aspects of the taxing process that are non-
legislative in character are delegated.
- The Department of Finance and the Bureau of
Internal Revenue (BIR) functions are merely intended
to interpret or clarify the proper application of the
law.
- They are not allowed to introduce new
legislation.
- All cases involving taxes can be raised to and be finally
decided by the Supreme Court of the Philippines.
- Laws that add income to the national treasury and
allow spending shall originate exclusively from the
House of Representative while the Senate may
propose amendments.
- recognizes the local autonomy of local governments
and expressed the delegation of the taxing power.
Assessment and collection
 - enactment of tax law called Impact of
taxation.
- Referred to as Legislative act in
taxation.
- Tax bills = House of representative
- Cannot originate exclusively
from the Senate.
- referred to as incidence of taxation or
administrative act of taxation.
- Tax law is implemented.
- Implementation involves assessment
or determination of tax liabilities of
taxpayers and collection.

Situs of Taxation
- Situs – place of taxation
- Tax jurisdiction that has the power to levy taxes upon the tax object.

1. Business tax situs – place where the business is conducted.

2. Income tax situs on services – where they are rendered (fees).
3. Income tax situs on sale of goods – tax in the pale of sale (gain on sale).
4. Property tax situs – taxable in their location.
5. Personal tax situs – place of residence.

Other Fundamental Doctrines in Taxation

1. Marshall Doctrine
- “The power to tax involves the power to destroy.”
- Taxation is an instrument of police power.
 Discourage or prohibit undesirable activities or occupation.
- Employed in practice.

2. Holme’s Doctrine
- “Taxation power is not power to destroy while the court sits.”
- Build or encourage beneficia activities or industries by the grant of tax incentives.
- Employed in practice.

3. Prospectivity of tax laws

- Ex post facto law or a law that retroacts (past) is prohibited by the Constitution.
- Tax laws may operate retrospectively if so, intended by Congress under certain
justifiable conditions.

4. Non-compensation or set-off
- Not subject to automatic set-off or compensation.
- Cannot delay payment of tax to wait for the resolution of a lawsuit.
 - “Tax is not a debt; hence, it is not subject to set-off.”
- Exceptions:
 Taxpayer’s claim has already become due and demandable such as when
the gov’t already recognized the same and an appropriation for refund
was made.
 Cases of obvious overpayment of taxes
 Local taxes

5. Non-assignment of taxes
- Tax obligation cannot be assigned or transferred to another entity by contract.
- Contracts shall not prejudice the right of the government to collect.

6. Imprescriptibly in taxation
- Prescription – lapsing of a right due to the passage of time.
- Government’s right to collect taxes does not prescribe unless the law itself
provides for such prescription.
- Tax prescribes if not collected within 5 years from date of its assessment.
 If not collected by judicial action within 3 years from date of retur is
required to be filed.
 Taxes due from taxpayers who did not file a return or those who filed
fraudulent returns do not prescribe.

7. 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.
- Gov’t is not subject to estoppel.
 Error of any gov’t employee does not bind the gov’t.
 Erroneous application of the law by public officers do not block the
subsequent correct application of the same.

8. Judicial Non-interference
- Courts are not allowed to issue injunction (restrain) against the government’s
pursuit to collect tax.

9. Strict Construction of Tax Laws

- Taxation is the general rule unless there is a clear exemption.
 Maxim: “Taxation is the rule, exemption is the exception.”
- When taxation laws are vague, the doctrine of strict legal construction is
observed.
  Vague tax laws – construed against the government and in favor of the
taxpayers.
o Means no tax law.
o Constitutional requirement of due process requires laws to be
sufficiently clear and expressed in their provisions.
 Vague exemption laws – construed against the taxpayer and in favor of
the gov’t.
o Means no exemption law
o When exemption is claimed, it must be shown indubitably
(impossible to doubt) to exist.
o Tax exemption must be clear and unequivocal (leaving no
doubt).

Double Taxation
- Same taxpayer is taxed twice by the same tax jurisdiction for the same things.
- Nothing in our law expressly prohibits double taxation.
- 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 – all the element of double taxation exists for both
impositions.
 Discourage as it is oppressive and burdensome to taxpayers
 It counters the rule of equal protection and uniformity in the
constitution.
2. Indirect double taxation – at least one of the secondary elements of double taxation
is not common for both impositions.
 Prevalent in practice

Impact of double taxation can be minimized by any one or a combination of the

following:
a. Provision of tax exemption – only one tax allowed to apply to the tax object
while other tax law exempts the same tax object.
 b. Allowing foreign tax credit – tax payments made in the foreign tax law are
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 country of the foreign taxpayer also gives
the same treatment to Filipino non-resident.
d. Entering into treaties or bilateral agreements – countries may stipulate for a
lower tax rate for their residents if they engage in transaction that are taxable
by both of them.

Escapes from Taxation

- Limit or even avoid impact of taxation.
A. Those that result to loss of gov’t revenue
1. Tax evasion – illegally reduce or avoid the payment of tax.
2. Tax avoidance (tax minimization) – reduces or totally escapes taxes by any legally
permissible means.
3. Tax exemption (tax holiday) – immunity, privilege or freedom from being subject to
tax.
 Granted by the Constitution, law, or contract.
 Can be revoked by the 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 – transferring tax burden to other taxpayers.
a. Forward shifting – shifting of tax which follows the normal flow of
distribution.
o Common with essential commodities and services.
b. Backward shifting – reverse of forward shifting; coon with non-essential
commodities
o Higher taxes = decrease in value of property or output
c. Onward shifting – distribution channel exhibits forward shifting or backward
shifting.
 Shifting is common with business taxes – taxes imposed on business revenue can
be shifted or passed-on to customers.

2. Capitalization – adjustment of the value of an asset caused by changes in tax rates.

3. Transformation – elimination of wastes or losses by the taxpayer to form savings to
compensate or the tax imposition or increase in taxes.

Tax Amnesty Tax Condonation (Tax Remission)

- General pardon for erring taxpayers to - Forgiveness of the tax obligation
reform and enable them to have a under certain justifiable grounds.
fresh start to be part of a society with - Covers only civil liabilities.
a clean slate. - Applies prospectively to any unpaid
- Absolute forgiveness on its right to balance of the tax; portion paid will
collect and is retrospective in not be refunded.
application. - Requires no payment.
- Covers both civil and criminal
liabilities.
- Operates retrospectively.
- Conditional upon the taxpayer paring
the gov’t portion of tax.