01 - General Principles of Taxation (Revised 2023)

TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
ACCOUNTANCY DEPARTMENT
TAXATION 2023 REVISED
GENERAL PRINCIPLES OF TAXATION
Inherent Powers of the State Non-Impairment Inferior Superior Superior

1. Police Power – power of the government to regulate property and liberty to promote Clause of the
and protect public welfare. This power involves the enactment of laws for the general Constitution
welfare.
2. Eminent Domain – power of the government to take private property for public welfare. Similarities among the Inherent Powers of the State
3. Power of Taxation –power of the government to raise revenue to defray the necessary 1. Inherent in the State
expenses of the government. 2. Exist independently from the Constitution but conditions for the exercise may be
prescribed by the Constitution.
Inherent Powers of the State Distinguished 3. Ways of the State to interfere with private rights and properties.
Distinction Taxation Police Power Eminent Domain 4. Legislative in nature and character
5. Presuppose equivalent compensation received by the persons affected.
Purpose Raise revenue for the Destroy property or Take property to
government deprive liberty to promote public
Purposes of Taxation
protect public welfare
1. Primary purpose or Fiscal/Revenue purpose – to raise revenue to defray the necessary
welfare
expenses of the government.
Benefit General benefits No tangible benefit Just compensation is 2. Secondary purposes
from the projects is given to those given to owners of a. Regulatory purpose – taxation is employed as a device for regulation or control by
and activities of the persons this power is property taken means of which certain conditions envisioned by the government may be achieved.
government exercised b. Compensatory purposes - to reduce social inequality, increase economic growth,
Authority Only the government Only the Can be delegated to and protect local industries against unfair competition.
can government can public service
exercise exercise companies or public Nature and Characteristics of Taxation
utilities 1. Legislative in nature – only the legislative department can impose taxes.
Amount of No limit (based on Limited to cost of No imposition *There can be no taxes if there is no law imposing taxes
Imposition the gov’t needs) regulation 2. Inherent in sovereignty – maybe exercised although not expressly granted by the
Constitution.
Rights Property right Property right and Property right
*The constitution only provides for the limitation of taxation, not grant of powers.
Affected liberty
3. Superior among other inherent powers of the state
As to Most Most superior Important 4. Subject to inherent and constitutional limitations – not an absolute power.
Importance important 5. Subject to international treaties and comity
6. For public purpose
Sources: Philippine Tax Code (RA 8424 NIRC, as amended by RA 10963 TRAIN Law and RA 11534 CREATE Law; Income Taxation, Banggawan; CPA Reviewer in Taxation, Tabag; CPA Reviewer in
Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer; CRC-ACE Reviewer; RESA Reviewer
7. Generally payable in money 3. Non-delegation of the legislative power to tax (with exceptions)
8. Assume territoriality in scope 4. Territoriality (study situs of taxation)
5. International Comity
Scope of Taxation
Taxation is Unlimited, Comprehensive, Plenary and Supreme but subject to inherent and Constitutional Limitations
constitutional limitations. 1. Due Process of Law
2. Equal Protection of the Laws
Theories in Taxation 3. Non-impairment of obligation of contracts*
1. Lifeblood Theory – taxes are essential and indispensable to the continued subsistence 4. Non-imprisonment for non-payment of debt and poll tax
of the government. Without taxes, the government would be paralyzed for lack of 5. Rule of Taxation should be uniform and equitable
motive power to activate or operate it. The following are the manifestation of this 6. Promotion of Progressive tax system
theory:
7. Veto Power of the President
a. Tax is imposed even in the absent of constitutional grant 8. Absolute Majority vote of all members of the congress to enact a law granting tax
b. Income received in advance is taxable upon receipt exemption.
c. Lower amount of deduction is preferred
9. Exemption from Real Property Tax of religions/ religious organizations.
d. Higher tax base is preferred
10. Exemption from taxation of nonprofit non-stock educational institution.
e. No estoppel against the government
f. Taxes are not subject to set-off *The non-impairment clause is contained in Section 10, Article III of the Constitution, which
g. Government’s right to select objects of taxation provides that no law impairing the obligation of contracts shall be passed. The non-
2. Ability to pay Theory – taxpayers should contribute based on their relative capacity to impairment clause is limited in application to laws that derogate from prior acts or contracts
sacrifice for the support of the government. Those who have more should be taxed by enlarging, abridging or in any manner changing the intention of the parties. There is
more even if they benefit less from the government. impairment if a subsequent law changes the terms of a contract between the parties, imposes
3. Benefit Received Theory – all taxpayers are assumed to benefit from the operations of new conditions, dispenses with those agreed upon or withdraws remedies for the
the government, it might not be directly but it is the government’s means to protect enforcement of the rights of the parties. (SC Jurisprudence)
public welfare. The more benefit one receives from the government,
the more he should pay. This is the basis of taxation. Essential Characteristics of Taxes
4. Necessity Theory – taxation proceeds upon the theory that the existence of the 1. Enforced contribution
government is a necessity and it cannot perform its mandates without means to pay 2. Generally payable in money
for its expenses. 3. Proportionate in character
4. Levied on persons, property or exercise of right or privilege by the lawmaking body of
Inherent Limitations the state which has jurisdiction over the object of taxation
1. Levied for public purpose 5. Levied for public purpose
2. Exemption of the government from taxation (with exceptions)
Classification of Taxes d. Value Added Tax- consumption tax collected by VAT business taxpayers.
A. As to subject matter e. Other Percentage Tax- consumption tax collected by non-VAT business
1. Personal, Poll or Capitation – imposed on persons residing within a specified taxpayers.
territory without regard to their property or occupation. (ex. Community tax) f. Excise Tax- tax on sin products and non-essential commodities.
2. Property – tax on property whether real or personal. (ex. Real property tax) g. Documentary Stamp Tax- a tax on documents, instruments loan agreements
3. Excise (privilege) – imposed upon the performance of an act, enjoyment of and papers evidencing the acceptance, assignment,
privilege, or engaging in an occupation. (ex. Income Tax, Estate Tax, Donor’s Tax) sale or transfer of an obligation, right or property incident thereto.
B. As to who bears the burden 2. Local – imposed by the local government units under the delegated power through
1. Direct – demanded from persons who shoulder also the burden of taxation of the passage of local ordinances by the Sanggunian and collected by designated
tax. (ex. Income Tax, Community Tax) Treasurers. (Real Property; Professional Tax; Community Tax)
2. Indirect – demanded from person who shall indemnify himself at the expense of F. As to graduation of rate
another. (ex. VAT and other percentage taxes) 1. Proportional – based on fixed percentage of property, receipts or other basis to be
C. As to determination of amount taxed. (VAT, OPT, Estate, Donor’s, etc.)
1. Specific – fixed amount by the head, number or some standard of weight or 2. Progressive – rate increases as the tax base increases. (Income Tax for individual
measurement. taxpayers)
2. Ad Valorem – fixed proportion of the value of property with respect to which tax 3. Regressive – the tax rate decreases as the tax base increases (Not currently
is assessed. adopted in the Philippines)
D. As to purpose Aspects or Stages of Taxation

1. Primary – to raise revenue for the general purposes to defray the necessary 1. Levying or Imposition (Impact of Taxation) - this process involves the enactment of a tax
expenses of the government (Revenue Purpose) law by Congress. It is also referred to as the legislative act in taxation
2. Secondary – imposed for special purpose to implement the police power of the 2. Assessment and Collection (Incidence of Taxation) – the tax laws are implemented by
State by means of devising and controlling taxes which will achieve certain goals the administrative branch of the government. It is also referred to as the administrative
of the government (Regulatory Purpose), and to increase economic growth, act in taxation.
reduce social inequality, and control inflation through protecting local industries
against unfair competitions (Compensatory Purposes) Scope or Matters within the Competence of the Legislative
E. As to imposing authority 1. Object to be taxed
1. National – imposed by the national government under Inherent Power through 2. Purpose of the tax
enactment of tax laws by the Congress and collected by BIR or BOC 3. Amount or Rate of the tax
a. Income Tax – tax on annual income, gains or profits) 4. Kind of tax
b. Estate Tax – tax on gratuitous transfer of properties by a deceased person. 5. Apportionment of the tax
6. Situs of taxation
c. Donor’s Tax – tax on gratuitous transfer of properties by a living donor.
7. Manner of collection
Principles of a Sound Tax System Exceptions to the Non-Delegation of Taxing Power

1. Fiscal Adequacy – revenue must be sufficient to meet government spending (not to 1. Local government units are allowed to exercise the power to tax for fiscal autonomy
incur deficit). 2. President is empowered to fix amount of tariffs to be flexible to trade conditions.
2. Equality or Theoretical Justice – progressive or based on taxpayer’s ability to pay 3. Other cases for effective administration of assessment and collection of taxes.
3. Administrative Feasibility – capable of convenient, just and effective administration.
Sources of Tax Laws
Situs of Taxation 1. The Constitution – provides for limitations of the power to tax and not grants of power
It is the place of taxation. The taxing power is limited to objects within the tax jurisdiction. to tax. Power to tax is inherent in sovereignty.
1. Business, Occupation or Transaction – place where the business, occupation or 2. Tax Treaties – conventions and agreements with foreign countries
transaction took placed or conducted. 3. The Tax Code – RA 8424 or the National Internal Revenue Code as amended by RA
2. Income – place where the same is earned, or citizenship or domicile of the owner. 10963 or the TRAIN Law and RA 11534 or the CREATE Law
3. Gratuitous transfer of properties – residence or citizenship of the taxpayer or location 4. Statutory Enactments and Presidential Decrees – laws passed by the legislative
of property department and the president respectively.
4. Real Property – location of the property. 5. Judicial Decisions – refers to decisions of the Court of Tax Appeals and Supreme Court
5. Tangible personal property – location of the property. applying or interpreting tax laws.
6. Intangible personal property – place where the intangible is used or exercised or 6. BIR Rulings and Revenue Regulations – issuances of the Department of Finance that
domicile of the owner. clarify certain provisions of the tax law.
7. Persons – Residence of the taxpayer
Factors to consider in determining the situs are the (a) object of taxation, (b) nature of the tax Interpretation of Tax Laws
and, (c) citizenship, and (d) residence of the taxpayer. General Rule: Liberally in favor of the taxpayer and strictly against the government.
Exception: In cases of Tax exemption and deduction, it is against the taxpayer for it reduces
Exceptions to the Tax Exemptions of the Government the revenue collection of the government.
General Rule: government agencies performing governmental functions are tax exempt
unless expressly taxed. Nature of Tax Laws
Exception: agencies performing proprietary functions are subject to tax unless exempted. ✓ Tax laws are civil and not penal in nature.
Exception to the exception (non-taxable proprietary agencies): ✓ Generally, tax laws are prospective in operation except when expressly declared in a
1. GSIS statute or clearly the legislative intent and without harsh and oppressive provisions.
2. SSS
3. PHIC Escape from Taxation
4. Local Water Districts 1. Tax Evasion (Tax Dodging) – is the illegal way of escape from taxation. It includes efforts
to reduce tax liability by using illegal schemes or means not in accordance with the rules
of Tax laws.
2. Tax Avoidance (Tax Minimization) – is the legal or permissible means to reduce tax 4. Equitable Recoupment – this states that a claim for refund which is prevented by
liability. These are ways that the laws allow to be used or exercise by the taxpayers as prescription maybe allowed to be used as payment for unsettled tax liabilities if both
incentives or alternative choices. taxes arise from the same transaction in which overpayment is made and
3. Shifting (Forward, Backward, Onward) – transfer of burden of tax by the original payor underpayment is due.
or the one on whom the tax was assessed or imposed to another or someone else. 5. Tax Amnesty – it is a general pardon or the intention overlooking by the State of its
4. Capitalization – reduction in the price of the taxed object equal to the capitalized value authority to impose penalties on persons otherwise guilty of violation of tax law. It is
of future taxes which the purchaser expects to be called upon to pay. This occurs when an absolute forgiveness and retrospective in application. This can be availed by upon
the tax falls on an income-producing property. paying a portion of the tax obligation.
5. Transformation – the manufacturer or producer upon whom the tax has been imposed, 6. Tax Condonation – it is a tax remission prospectively applied and requires no payment.
fearing the loss of his market if he should add the tax to the price, pays the tax and In case payment was made, portion of tax obligation paid will not be refunded.
endeavors to recoup himself by improving his process of production thereby turning
out his units of production at a lower cost. Tax Distinguished from Other Charges and Fees
6. Exemption – immunity to which others are obliged to pay. 1. Tax vs Toll
a. Express or affirmative – these are express provisions in the Constitution, statues, - demand of sovereignty - demand of ownership
treaties, ordinances, franchises of contracts. - support to government - compensation for use
b. Implied or exempt by omission – this occurs when a tax is levied on certain - imposed only by government - imposed by gov’t or private entities
classes of persons, properties, or transactions without mentioning other classes. - based on needs - determined by cost of property
2. Tax vs Debt
Classifications of Tax System
- based on law - based on contract
1. Global – generally treats in common all categories of taxable income of the individual. - non-payment constitute crime - non-payment do not necessarily
All types of income are treated as if they are the same. except non-payment of poll tax constitute a crime
2. Schedular – system which itemized the different income and provides from varied - incurs interest only if delinquent - assignable
percentages of taxes, to be applied thereto. - non-assignable - subject to set-off
- not subject to set-off - payable in kind or in money
Other Concepts in Taxation - payable in money
1. Double Taxation – occurs when the same object is taxed twice by the same tax
jurisdiction, for the same purpose, for the same tax period. It is not unconstitutional 3. Tax vs License Fee
but being discouraged. - levied in the power to tax - from the exercise of police power
- to generate revenue - to regulate
2. Set-off or compensation – is not allowed for tax purposes. Tax liability are not based on
- unlimited as to imposition - limited to the cost of regulation
contracts between the taxpayer and the government, but based on statutory
- imposed on person, property, - imposed on the exercise of rights
requirements.
privileges or rights - non-payment renders the business
3. Taxpayer’s Suit – a suit that can only be pursued if a direct or illegal disbursement of - non-payment do not render the illegal
public fund from taxation is done. business illegal
4. Tax vs Customs Duties

- imposed on person, property, - imposed on the importation and
privileges or rights exportation of goods
- covers customs duties - a form of tax
5. Tax vs Special Assessment
- levied on person, property, - levied on land
privileges or rights - not a personal liability
- could be a personal liability - non-payment is not a crime
- non-payment constitute crime - based on benefits received
- based on necessity, regardless of - exceptional in application
the benefit of the taxpayer
- a general application to all
6. Tax vs Penalties
- to generate revenue - to regulate conduct through
- imposed only by government punishment and suppression
- arises from law - imposed by gov’t or private entities
- payable in money - arises from law or contracts
- payable in kind or in money

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01 - General Principles of Taxation (Revised 2023)

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TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY

GENERAL PRINCIPLES OF TAXATION

Inherent Powers of the State Non-Impairment Inferior Superior Superior

D. As to purpose Aspects or Stages of Taxation

Principles of a Sound Tax System Exceptions to the Non-Delegation of Taxing Power

4. Tax vs Customs Duties

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