PRINCIPLES OF TAXATION

Accountancy Course

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

introduction to taxation. It deals with the basic principles and rules behind the imposition of the
tax in general. 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 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. Attend virtual classes regularly

2. Take all online quizzes and summative tests.
3. Submit all assignments.
 MODULE 1 – Introduction to Taxation

Introduction

It is said that there are three things you cannot escape from – change, death, and taxes.
The first two are obvious, the last one, however, seems debatable. This course will show you
otherwise. As you progress and learn the basic facets of taxation, the whys and wherefores of
its existence, you will learn how inescapable it truly is and hopefully gain a better understanding
of our present society requires taxes to function. This module will also help you understand the
doctrines that support taxation and its inherent limitations.

Learning Objectives

After completing this module, students should be able to:

1. Define taxation and describe the nature and scope of taxation
2. Differentiate the three inherent powers of the State
3. Discuss the importance and purpose of taxation
4. State the relevant doctrines in taxation
5. Explain the inherent limitations of the power to tax
6. Know the various sources of taxation laws

1.1 Inherent Powers of the State

There are three inherent powers of the state, they are:

1. Police power
2. Eminent Domain and
3. Taxation

They are considered inherent because they belong to the very essence of government and
without them no government can exist. A constitution does not grant these powers. (Bernas,
2011)

1.1.1 Police Power

The power of promoting public welfare by restraining and regulating the use of liberty
and property. It enables it to prohibit all that is hurtful to the comfort, safety, and welfare of
society. (Ermita-Malate Hotel and Motel Operators Association, Inc. vs. Mayor of Manila, 1967).

In essence, police power is the power of the state to regulate our lives for our own good.
It is seen in action whenever the state prohibits, limits or otherwise regulate the liberties and
properties of the populace. A perfect example of this is the community quarantine imposed by
the national government to prevent the spread of COVID-19. The liberty regulated and limited is
the freedom of movement while the purpose is to protect public health.
 The Police Power of the State is based on the law of overruling necessity, which means
that the State has the power to restrain and regulate the use of liberty and property for the
promotion of public welfare. (Suarez, 2011)It is only logical that the State has the power to do
what is necessary in each scenario. Absent such powers, public welfare will suffer.

Police power is justified by the following Latin maxims:

1. Salus populi est suprema lex - the will of the people is the supreme law.
2. Sic utere tuo ut alienum non laedas - use your property so as not to injure the
property rights of others.

Police power is the most pervasive, the least limitable, and the most demanding of the
three powers. It is the most essential, insistent, and the least limitable power, extending as it
does "to all the great public needs." It may be exercised as long as the activity or the property
sought to be regulated has some relevance to the public welfare. (Cruz, 2015)

Since the public power is exercised by the state only when necessary, to protect or
promote public welfare, it is also necessary that police power be inherently “powerful”. If it is
easily hindered, the government may not be able to act fast enough to protect the public. Such
that, if a police officer witnesses a crime being committed within his presence, he can dispense
with the normal due process requirement and arrest the offender immediately. Such is only
necessary to protect the public from a known dangerous individual. However, this does not
mean that, at all times, the exercise of police power is without limits. It only means that it the
least limitable of the three inherent powers of the state.

Illustratively, imagine if there is a deadly virus spreading in the country and the one of
ways that reduces the risk of spread is an implementation of a community quarantine. However,
the quarantine infringes upon the freedom of movement of an individual. If the government is
powerless to stop such individuals from going around and spreading the virus, public health will
be endangered. The government is therefore justified for preventing everyone to travel freely
during the advent of such crisis.

As aforementioned, however, there are limitations and requisites to the exercise of

police power, they are:

As to limitations:
1. Due Process Clause – Provides that no person shall be deprived of life, liberty, or
property without due process of law. Which, in this scenario, required that government to
pass implementing rules and regulations as well as inform the public of what the
community quarantine entails. Such that the public is informed on what is or is not
allowed during the quarantine.
2. Equal Protection Clause – Provides that no person shall be denied the equal protection
of the laws. This means that the quarantine must be applied to all persons of similar
class equally, without exception. Those belonging to a valid and reasonable
classification may be exempted, such the frontliners.

As to requisites for a valid exercise of police power:

 1. Lawful subject - The subject of the measure is within the scope of the police power, i.e.,
that the activity or property sought to be regulated affects the public welfare. The interest
of the public, generally, as compared to a particular class requires interference by the
State; and
2. Lawful means - The means employed are reasonably necessary for the accomplishment
of the purpose, and not unduly oppressive upon individuals. Both the end and the means
must be legitimate.

1.1.2 Eminent Domain

The power to forcibly take private property for public purpose upon payment of just
compensation. (Suarez, 2011)

The basis of this power is the necessity of property for public use. A State may forcibly
take private property for public use. This most recently illustrated by the road widening project
currently in development throughout the country. Said project consist of the taking of private
property, the land near every major highway, and using it to expand said highways.

Eminent domain may not be exercised without just compensation. The State cannot
simply take the private property, compensation must be given. What is just shall be determined
by the courts. It is the full and fair equivalent of the property taken; the fair market value of the
property.

1.1.3 Taxation

The power by which the sovereign, through its law-making body, raises revenue to
defray the necessary expenses of government. It is a way of apportioning the costs of
government amount those who in some measure are privileged to enjoy its benefits and must
bear its burdens.

Taxes are the enforced proportional contributions from persons and property, levied by
the State by virtue of its sovereignty, for the support of government and for all public needs.

Scope: Taxation coves persons, property, or occupation to be taxed within the taxing
jurisdiction. It is inherent in the power to tax that a State be free to select the subjects of
taxation. (Lutz vs. Araneta , 1955)

Reason: Taxes are what we pay for civilized society. Without it, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard-earned income, every person who is able must
contribute his share in the running of the government. In return, the government is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of people
and enhance their moral and material values (CIR v. Ague, Inc., 1988)

The most common form of tax that you are probably familiar with is the Income Tax. It is
tax paid by an individual or corporation on their earnings. However, it is not the most
inescapable form of tax, as those individuals earning the minimum wage are exempt from its
imposition. Value-Added Tax (VAT) is the most inescapable form of tax, as it added directly to
the price of goods that everyone purchases.

1.1.4 Inherent Powers Distinguished

Police Power Eminent Domain Taxation

As to purpose Public necessity and Necessity of the Public necessity;
the right of the State public for the use lifeblood theory
and of the public to of private property
self-preservation
and self-protection
As to nature of the Property is noxious Property is wholesome and is devoted
property involved or intended for a to public use or purpose
noxious purpose
and as such taken
and destroyed
As to compensation Compensation is the Compensation is Compensation is
intangible, altruistic
the full and fair the protection
feeling that the
equivalent of the and public
individual has
property taken improvements
contributed to the instituted by the
public good. government for
the taxes paid
As to the scope Regulates both Affects only property rights
liberty and property
As to exercising Exercised only by May be delegated Exercised only by
authority the Government to private entities the Government
(Meralco is able to
buy land for their
electric posts as it
is use for public
utility, despite
being a private
entity)

Activity
 Watch the video “Inherent Powers of the Government”. Available from
https://www.youtube.com/watch?v=6mo26VXjmO4
 Discuss on the Forum what you think each of these powers are.
1.2 Nature and Purpose of Taxation

1.2.1 Nature

Inherent in sovereignty – The power to tax is an attribute of sovereignty. It is a power

emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist an aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of
the citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide

Essentially a legislative function – The power to tax is peculiarly and exclusively

legislative and cannot be exercised by the executive or judicial branch of the government.
Hence, only Congress, our national legislative body, can impose taxes. The levy of a tax,
however, may also be made by a local legislative body subject to such limitations as may be
provided by law. It includes the authority to:

1. Determine the nature, purpose, extent, coverage, apportionment, situs, and method
of collection of the tax;
2. Grant tax exemptions or condonations; and
3. Specify or provide for the administrative as well as judicial remedies that either the
government or the taxpayers may avail themselves in the proper implementation of
the tax measure.

Subject to constitutional and inherent limitations – The power to tax is said to be the
strongest of all the powers of government. It 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. However, the power of taxation is
subject to constitutional and inherent limitations. These limitations are those provided in the
fundamental law or implied therefrom, while the rest spring from the nature of the taxing power
itself although they may or may not be provided in the Constitution.

1.2.2 Characteristics

1. It is an enforced contribution for its imposition is in no way dependent upon the will or
assent of the person taxed. It is not contractual, either express or implied, but
positive acts of government.
2. It is generally payable in the form of money, although the law may provide payment
in kind
3. It is proportionate in character or is laid by some rule of apportionment which is
usually based on ability to pay. ―The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation.
4. It is levied on persons, property, rights, acts, privileges, or transactions.
 5. It is levied by the State which has jurisdiction or control over the subject to be taxed.
6. It is personal to the taxpayer.
7. It is levied by the law-making body of the State. The power to tax is a legislative
power but is also granted to local governments, subject to such guidelines and
limitations as law may be provided by law. ―Each local government unit shall have
the power to create its own sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
8. It is levied for public purpose. Revenues derived from taxes cannot be used for
purely private purposes or for the exclusive benefit of private persons. A tax levied
for a private purpose constitutes a taking of property without due process of law; and
9. It is also an important characteristic of most taxes that they are commonly required to
be paid at regular periods or intervals every year.

1.2.3 Purpose

1. Revenue-raising. Primary purpose of taxation is to provide funds or property with

which to promote the general welfare and protection of its citizens.

Fees may be properly regarded as taxes even though they also serve as an
instrument of regulation. If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a tax.

2. Non-revenue/special or regulatory. Taxation is often employed as a device for

regulation by means of which certain effects or conditions envisioned by
governments may be achieved. Taxes may be levied with a regulatory purpose to
provide means for the rehabilitation and stabilization of a threatened industry which
is affected with public interest as to be within the police power of the state. These
regulatory purposes are also known as Sumptuary. Thus, taxation can:
a. Strengthen anemic enterprises or provide incentive to greater production
through grant of tax exemptions or the creation of conditions conducive to
their growth.
b. Protect local industries against foreign competition by imposing additional
taxes on imported goods, or encourage foreign trade by providing tax
incentives on imported goods.
c. Be a bargaining tool by setting tariff rates first at a relatively high level before
trade negotiations are entered into with another country.
d. Halt inflation in periods of prosperity to curb spending power; ward off
depression in periods of slump to expand business.
e. Reduce inequalities in wealth and incomes, as for instance, the estate,
donor's and income taxes, their payers being the recipients of unearned
wealth or mostly in the higher income brackets. Progressive system of
taxation prevents the undue concentration of wealth in the hands of a few
individuals. Progressivity is keystoned on the principle that those who are
able to pay shoulder the bigger portion of the tax burden.
 f. Taxes may be levied to promote science and invention (see RA. No. 5448) or
to finance educational activities (see RA. No. 5447) or to improve the
efficiency of local police forces in the maintenance of peace and order
through grant of subsidy (see RA.No. 6141).
g. Be an implement of the police power to promote the general welfare.
h. Protect local industries from foreign competition. Taxation is no longer
envisioned as a measure merely to raise revenue to support the existence of
the government; taxes may be levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of a threatened industry which is
affected with public interest as to be within the police power of the state.

Activity
 Discuss on the forum what you think is the most important characteristic of taxation
 Answer the short quiz.

1.3 Relevant Doctrines

1.3.1 Theory and Basis of Taxation

1. Lifeblood Theory.Taxes are the lifeblood of the government and their prompt and
certain availability is an imperious need. (CIR v. Pineda , 1967)

Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. It is said that taxes are what we pay for civilized society.
Without taxes, the government would be paralyzed for lack of the motive power to
activate and operate it. (CIR v. Ague, Inc., 1988)

2. Necessity theory. The power of taxation proceeds upon theory that the existence of
government is a necessity; that is cannot continue without means to pay its
expenses; and that for those means it has the right to compel all citizens and
property within its limits to contribute.

The power to tax, an inherent prerogative, has to be availed of to assure the

performance of vital state functions. It is the source of the bulk of public funds. (Sison
v. Ancheta, , 1984)

The obligation to pay taxes rests upon the necessity of money for the support of the
state. For this reason, no one is allowed to object to or resist the payment of taxes
solely because no personal benefit to him can be pointed out.( Lorenzo v. Posadas,
1937)

3. Benefits-protection Theory (Symbiotic Relationship). This principle serves as the

basis of taxation and is founded on the reciprocal duties of protection and support
between the State and its inhabitants.

Despite the natural reluctance to surrender part of one's hard earned income to the
taxing authorities, every person who is able to must contribute his share in the
 running of the government. The government for its part is expected to respond in the
form of tangible and intangible benefits intended to improve the lives of the people
and enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.(CIR v. Ague, Inc., 1988)

4. Jurisdiction over subject and objects. The limited powers of sovereignty are
confined to objects within the respective spheres of governmental control. These
objects are the proper subjects or objects of taxation and none else.

1.3.2 Principles of A Sound Tax System

1. Fiscal adequacy. The sources of tax revenue should coincide with, and approximate
the needs of, government expenditures. The revenue should be elastic or capable of
expanding or contracting annually in response to variations in public expenditures.
2. Administrative feasibility. Tax laws should be capable of convenient, just and
effective administration. Each tax should be capable of uniform enforcement by
government officials, convenient as to the time, place, and manner of payment, and
not unduly burdensome upon, or discouraging to business activity.
3. Theoretical justice or equality. The tax burden should be in proportion to the
taxpayer‘s ability to pay. This is the so-called ability to pay principle. Taxation should
be uniform as well as equitable

Activity
 Discuss on the forum what you think is the most accurate theory on taxation.
 Answer the short quiz.

1.4 Inherent Limitations on Power of Taxation

1.4.1 Public Purpose

The proceeds of the tax must be used:

1. For the support of the State; or

2. For some recognized objects of the government or directly to promote the welfare of
the community.

The State cannot the tax the public for the advantage of select private individuals. It is
inherent in the power to tax it be exercised within the limits of public purposes. A contrary rule
would make the legislative body mere thieves whose sole purpose is to enrich themselves.

What is the test to determine whether the taxation is for public purpose or not?

In Pascual vs. Sec. of Public Works, the Supreme Court provided the following: It is
whether the statute is designed to promote the public interest, as opposed to the furtherance of
the advantage of individuals, although each advantage to individuals might incidentally serve
the public.
 This means that, a taxation law passed solely for the benefit of individual members of
the Congress, is invalid even though said members serve the public.

Other tests:

1. Duty test - Whether the thing to be furthered by the appropriation of public revenue is
something which is the duty of the State as a government to provide. For example, it is
not the duty of the State to help a corporation recover from a bankruptcy by paying its
loans.
2. Promotion of General Welfare Test - Whether the proceeds of the tax will directly
promote the welfare of the community in equal measure. For example, proceeds used to
improve the public school system benefits the public equally as better educated and
informed populate make better decisions.
3. Character of the Direct Object of the Expenditure - It is the essential character of the
direct object of the expenditure which must determine its validity as justifying a tax and
not the magnitude of the interests to be affected nor the degree to which the general
advantage of the community, and thus the public welfare, may be ultimately benefited by
their promotion. Incidental advantage to the public or to the State, which results from the
promotion of private enterprises or business, does not justify their aid with public money.
For example, using tax proceeds to enable corporations to pay the salaries and wages
of its employees may incidentally benefit the public, but its direct object or purpose will
still be to help private entities, as such, the purpose is invalid.

1.4.2 Inherently Legislative

As a General Rule, the power to tax is exclusively vested in the legislative body and it
may not be re-delegated.
In the Philippines, our legislative body consists of the Congress, which in turn consists of
the House of Representatives and the Senate. The Congress has the power to determine the:

1. Nature (Kind),
2. Object (Purpose),
3. Extent (Rate),
4. Coverage (Subjects), and
5. Situs (Place) of taxation

As an Exception, the Power to Tax is granted by the Constitution to the following:

1. Local Governments – This exception is in line with the general principle that the
power to create municipal corporations for purposes of local self-government carries
with it, by necessary implication, the power to confer the power to tax on such local
governments.
Art. X, Sec. 5 of the Constitution: Each local government unit shall have the
power to create its own sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress may provide, consistent
 with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
These are your Property and Business Taxes paid to each municipality or city
each year.

2. The President – Has the power to enter into Executive Agreements (subject to
Senate concurrence) which grant tax exemptions. Most commonly applies to
foreigners residing in the Philippines who are granted tax exemption if their country
also grants tax exemption to Filipinos residing therein.
Art. VI, Sec. 28(2) of the Constitution: 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.

3. Administrative Agencies - Limited to the administrative implementation that calls for

some degree of discretionary powers under sufficient standards expressed by law or
implied from the policy and purposes of the Act. The powers which cannot be
delegated include the determination of the subjects to be taxed, the purpose of the
tax, the amount or rate of the tax, the manner, means, and agencies of collection,
and the prescribing of the necessary rules with respect thereto.

1.4.3 Territorial

A state may not tax property lying outside its borders or lay an excise or privilege tax
upon the exercise or enjoyment of a right or privilege derived from the laws of another state and
therein exercises and enjoyed.

Reasons:
1. Tax laws (and this is true of all laws) do not operate beyond a country‘s territorial
limits.
2. Property which is wholly and exclusively within the jurisdiction of another state
receives none of the protection for which a tax is supposed to be compensation.

It does not mean, however, that a person outside of state is no longer subject to its
taxing powers. The fundamental basis of the right to tax is the capacity of the government to
provide benefits and protection to the object of the tax. A person may be taxed where there is
between him and the taxing state, a privity of the relationship justifying the levy. Thus, the
citizen‘s income may be taxed even if he resides abroad as the personal (as distinguished from
territorial) jurisdiction of his government over him remains. In this case, the basis of the power to
tax is not dependent on the source neither of the income nor upon the location of the property
nor upon the residence of the taxpayer but upon his relation as a citizen to the state. As such
citizen, he is entitled, wherever he may be, inside or outside of his country, to the protection of
his government.

1.4.4 International Comity

 Comity – respect accorded by nations to each other because they are sovereign equals.
Thus, the property or income of a foreign state or government may not be the subject of taxation
by another state.

Reasons:
1. In par in parem non habet imperium. As between equals there is no sovereign
(Doctrine of Sovereign Equality among states under international law). One state
cannot exercise its sovereign powers over another.)
2. In international law, a foreign government may not be sued without its consent →
useless to impose a tax which could not be collected.
3. Usage among states that when a foreign sovereign enters the territorial jurisdiction of
another, there is an implied understanding that the former does not intend to
degrade its dignity by placing itself under the jurisdiction of the other.

1.4.5 Exemption of Government Entities, Agencies, and Instrumentalities

If the taxing authority is the National Government: General Rule: Agencies and
instrumentalities of the government are exempt from tax.

Unless otherwise provided by law, the exemption applies only to government entities
through which the government immediately and directly exercises its sovereign powers. With
respect to government-owned or controlled corporations performing proprietary (not
governmental) functions, they are generally subject to tax in the absence of tax exemption
provisions in their charters or the law creating them.

Reasons for the exemption:

1. To levy a tax upon public property would render necessary new taxes on other public
property for the payment of the tax so laid and thus, the government would be taxing
itself to raise money to pay over for itself.
2. This immunity also rests upon fundamental principles of government, being necessary in
order that the functions of government shall not be unduly impeded.
3. The practical effect of an exemption running to the benefit of the government is merely to
reduce the amount of money that has to be handled by the government in the course of
its operations: For these reasons, provisions granting exemptions to government
agencies may be construed liberally in favor of non-tax liability of such agencies.

However, there is no constitutional prohibition against the government taxing itself.

Activity
 Discuss on the forum what you think is the most of which limitation is easily exploitable.
 Answer the short quiz.