PRINCIPLES OF TAXATION

Accountancy Course

Welcome to this introductory course of Principles of Taxation. This course is the

introduction to taxation and income tax. It deals with the underlying principles behind the
imposition of the tax in general and income tax. It emphasizes the social and moral
responsibility of the people to pay the taxes in support of the government in order that the same
government will be able to discharge its appropriate function and render services their favor.
The emphasis is on the application of the theory and principles in solving income tax problems.
It tests the students’ conceptual knowledge and proficiency in the practical application of the law
as they relate to accounting practice and use the same knowledge to enhance human
development and social transformation.

COURSE OBJECTIVES

At the end of the course, you should be able to

1. Understand the general principles of taxation and the constitutional and statutory
provisions on taxation including pertinent regulations from government agencies.
2. Understand the different powers and duties of the Bureau of Internal Revenue and the
authorities statutorily given to the Commissioner of Internal Revenue.
3. Understand the jurisdiction and basic procedures of the Court of
Tax appeal.
4. Understand the tax remedies available to the Government and taxpayers as applicable.

STUDY SCHEDULE

The study schedule below will guide you on your pacing as you go through each part of
the course or lesson and in doing the course requirement.

Date/Period Topic(s) Activity

Week 1 Course overview 1. Read the course guide.
Week 1 MODULE 1 1. Participate in discussion forum.
2. Submit Assignment #1
3. Take online quiz #1
Week 2 MODULE 2 1. Participate in discussion forum.
2. Submit Assignment #2.
3. Take online quiz #2
Week 3 MODULE 3 1. Participate in discussion forum.
2. Submit Assignment #3
3. Take Midterm Examination
Week 4 MODULE 4 1. Participate in discussion forum
2. Take online quiz #3
 3. Take Final Examination

COURSE REQUIREMENTS

To passed the course, you are required to do the following

1. Take all online quizzes and summative tests.

2. Submit all assignments.
 MODULE 2 – Taxation

Introduction

The power to tax is unlimited, plenary, comprehensive and supreme, in the absence of
constitutional restrictions, the principal check on its abuse resting in the responsibility of
members of Congress to their constituents. Such reliance on Congress risks an unbridled abuse
of the power, which could lead to unfair and self-serving tax laws. Constitutional limitations are
therefore essential to help Congress in exercising the power. In the exercise of the power, there
are stages or aspects, elements classification and kinds. To gain a better perspective on
taxation, you must first understand these broad categories.

Learning Objectives

After completing this module, students should be able to:

1. Explain the constitutional limitations of the power to tax
2. Describe the stages of taxation
3. Differentiate the elements of tax
4. Identify the different classification of taxes
5. State the major sources of government’s income thru taxation
6. Describe the broadclassification of taxes
7. Differentiate taxes from other charges imposed by the government

2.1 Constitutional Limitations

The following discussions lists out the limitations on the power of taxation expressly
provided within our Constitution. It is classified between those which directly affect taxation and
those with only an indirect effect, as the power is essentially an exercise of law making which
the Constitution also defines certain limits.

1.1.1 Provisions Directly Affecting Taxation

1. Prohibition against imprisonment for nonpayment of poll tax[Art. III, Sec. 20] - No person
shall be imprisoned for debt or nonpayment of a poll tax. Poll tax is most known as
“cedula.”
2. Uniformity and equality of taxation[Art. VI, Sec. 28(1)] - The rule of taxation shall be
uniform and equitable. Congress shall evolve a progressive system of taxation.

 Uniformity – All taxable articles or properties of the same class shall be taxed
at the same rate. [City of Baguio v. de Leon, G.R. No. L-24756 (1968)].
o Uniformity of operation throughout tax unit -The rule requires the
uniform application and operation, without discrimination, of the tax in
every place where the subject of it is found. This means, for example,
that a tax for a national purpose must be uniform and equal
throughout the country and a tax for a province, city, municipality, or
 barangay must be uniform and equal throughout the province, city,
municipality or barangay.
o Equality in burden – Uniformity implies equality in burden, not equality
in amount or equality in its strict and literal meaning. The reason is
simple enough. If legislation imposes a single tax upon all persons,
properties, or transactions, an inequality would obviously result
considering that not all persons, properties, and transactions are
identical or similarly situated. Neither does uniformity demand that
taxes shall be proportional to the relative value or amount of the
subject thereof. Taxes may be progressive

 Equity - ―Equitable means fair, just, reasonable and proportionate to the

taxpayer‘s ability to pay. Taxation may be uniform but inequitable where the
amount of the tax imposed is excessive or unreasonable.The constitutional
requirement of equity in taxation also implies an approach which employees a
reasonable classification of the entities or individuals who are to be affected
by a tax. Where the ―tax differentiation is not based on material or
substantial differences, the guarantee of equal protection of the laws and the
uniformity rule will likewise be infringed.

3. Grant by Congress of authority to the President to impose tariff rates[Art. VI, Sec. 28(2)]
- The Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the Government.

4. Prohibition against taxation of religious, charitable entities, and educational entities [Art.
VI, Sec. 28(3)] - Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.

 The tax exemption under this constitutional provision covers property taxes
only and not other taxes [Lladoc v. Commissioner, G.R. No. L19201 (1965)].
 In general, special assessments are not covered by the exemption because
by nature they are not classified as taxes. [Apostolic Prefect v. City Treasurer
of Baguio, G.R. No. L-47252 (1941)]
 To be entitled to the exemption, the petitioner must prove that: (1) It is a
charitable institution (2) Its real properties are actually, directly and
exclusively used for charitable purposes.

5. Prohibition against taxation of non-stock, nonprofit educational institutions[Art. XIV, Sec.

4] - (3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes
and duties. Proprietary educational institutions, including those cooperatively owned,
may likewise be entitled to such exemptions subject to the limitations provided by law,
including restrictions on dividends and provisions for reinvestment. (4) Subject to
 conditions prescribed by law, all grants, endowments, donations, or contributions used
actually, directly, and exclusively for educational purposes shall be exempt from tax.
 The exemption covers income, property, and donor‘s taxes, custom duties,
and other taxes imposed by either or both the national government or political
subdivisions on all revenues, assets, property or donations, used actually,
directly and exclusively for educational purposes. (In the case of religious and
charitable entities and non-profit cemeteries, the exemption is limited to
property tax.)
 The exemption does not cover revenues derived from, or assets used in,
unrelated activities or enterprise
 Lands, buildings, and improvements actually, directly and exclusively used for
educational purposes are exempt from property tax [Art. VI,Sec. 28(3)]

6. Majority vote of Congress for grant of tax exemption [Art. VI, Sec. 28] - No law granting
any tax exemption shall be passed without the concurrence of a majority of all the
Members of the Congress.
 Basis: The inherent power of the state to impose taxes carries with it the
power to grant tax exemptions.
 Exemptions may be created by: (1) The Constitution, or (2) Statutes, subject
to constitutional limitations
 Vote required for the grant of exemption: Absolute majority of the members of
Congress (at least ½ + 1 of ALL the members voting SEPARATELY)
 Local government units may, through ordinances duly approved, grant tax
exemptions, incentives or reliefs under such terms andconditions as they may
deem necessary. [Sec. 192, Local Government Code]
 The President of the Philippines may, when public interest so requires,
condone or reduce the real property tax and interest for any year in any
province or city or a municipality within the Metropolitan Manila Area. [Sec.
277, LGC]

7. Prohibition on use of tax levied for special purpose[Art. VI, Sec. 29(3)] - All money
collected on any tax levied for a special purpose shall be treated as a special fund and
paid out for such purpose only. If the purpose for which a special fund was created has
been fulfilled or abandoned, the balance, if any, shall be transferred to the general
funds of the Government.

8. President‘s veto power on appropriation, revenue, tariff bills [Art. VI, Sec. 27(2)] - The
President shall have the power to veto any particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the item or times to which he does not
object. For most statutes, the President may only either approve or veto the entire bill
passed by Congress, without the power to veto any specific provision of the bill. But for
tax bills, the President may veto a specific provision or “item”.

9. Non-impairment of jurisdiction of the Supreme Court [Art. VIII, Sec. 5(2(b)] - The
Supreme Court shall have the following powers: (2) Review, revise, modify or affirm on
appeal or certiorari, as the laws or the Rules of Court may provide, final judgments and
 orders of lower courts in (b) all cases involving the legality of any tax, impost,
assessment or toll or any penalty imposed in relation thereto.

10. Grant of power to the local government units to create its own sources of revenue [Art.
X, Sec. 5] - LGUs have power to create its own sources of revenue and to levy taxes,
fees and charges, subject to such guidelines and limitations as the Congress may
provide which must be consistent with the basic policy of local autonomy.

11. Flexible tariff clause[Art. VI, Sec. 28(2)] - Delegation of tariff powers to the President
under the flexible tariff clause.

12. No appropriation or use of public money for religious purposes [Art. VI, Sec. 29] - (1) No
money shall be paid out of the Treasury except in pursuance of an appropriation made
by law. (2) No public money or property shall be appropriated, applied, paid, or
employed, directly or indirectly, for the use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of religion, or of any priest, preacher,
minister, other religious teacher, or dignitary as such, except when such priest,
preacher, minister, or dignitary is assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium.

1.1.2 Provisions Indirectly Affecting Taxation

1. Due process – [Art. III, Sec. 1] - No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the equal protection of the
laws.
 Due Process in Taxation requirements:
i. Public purpose
ii. Imposed within taxing authority‘s territorial jurisdiction
iii. Assessment or collection isnot arbitrary or oppressive

 Instances of violations of the due process clause:

i. If the tax amounts to confiscation of property
ii. If the subject of confiscation is outside the jurisdiction of the taxing
authority
iii. If the tax is imposed for a purpose other than a public purpose
iv. If the law which is applied retroactively imposes just and oppressive
taxes.
v. If the law violates the inherent limitations on taxation.

2. Equal protection[Art. III, Sec. 1] - No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the equal protection of the
laws.
 All persons subject to legislation shall be treated alike under similar
circumstances and conditions both in the privileges conferred and liabilities
imposed.
 The doctrine does not require that persons or properties different in fact be
treated in laws as though they were the same. Indeed, to treat them the same or
alike may offend the Constitution. What the Constitution prohibits is class
 legislation which discriminates against some and favors others. As long as there
are rational or reasonable grounds for so doing, Congress may, therefore, group
the persons or properties to be taxed and it is sufficient ―if all of the same class
are subject to the same rate and the tax is administered impartially upon them.

3. Religious freedom [Art. III, Sec. 5] - No law shall be made respecting an establishment of
religion, or prohibiting the free exercise thereof. (Non-establishment clause). The free
exercise and enjoyment of religious profession and worship, without discrimination or
preference, shall forever be allowed. (Free exercise clause).
 The imposition of license fees on the distribution and sale of bibles and other
religious literature by a non-stock, non-profit missionary organization not for
purposes of profit amounts to a condition or permit for the exercise of their right,
thus violating the constitutional guarantee of the free exercise and enjoyment of
religious profession and worship which carries with it the right to disseminate
religious beliefs and information. [American Bible Society v. City of Manila, G.R.
No. L-9637 (1957)]

4. Non-impairment of obligations of contracts [Art. III, Sec. 10] - No law impairing the
obligation of contracts shall be passed.
 The Contract Clause has never been thought as a limitation on the exercise of
the State's power of taxation save only where a tax exemption has been granted
for a valid consideration. [Tolentino v. Secretary of Finance]s