GRADED RECITATION NEXT MEETING (AUGUST 27, 2023)

BUSINESS TAX
TAXATION IN GENERAL
• DEFINITIONS OF TAXATION
Taxation is a term for when a taxing authority, usually a government, levies or imposes a financial
obligation on its citizens or residents. Paying taxes to governments or officials has been a mainstay
of civilization since ancient times.
WHAT DO YOU MEAN BY TAXATION?
Taxation is the practice of collecting taxes (money) from citizens based on their earnings and
property. The money raised from taxation supports the government and allows it to fund police
and courts, have a military, build and maintain roads, along with many other services.

• RELEVANT THEORIES/BASES OF TAXATION

Theory and basis of taxation
1. The power of taxation proceeds upon the theory that the existence of the government is a necessity,
that it cannot continue without means to pay its expenses and that for this means it has a right to
compel all its citizens and property within its limits to contribute.
2. The basis is the reciprocal duties of protection and support between the State and its inhabitants.
The State collects taxes from the subjects of taxation in order that it may be able to perform the
functions of government. The citizens, on the other hand, pay taxes in order that they may be
secured in the enjoyment of the benefits of organized society (benefits received theory).

Lifeblood theory:
1. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious
(expecting obedience) need.
2. Upon taxation depends the government’s ability to serve the people for whose benefit taxes are
collected.

Manifestation of lifeblood theory:

1. Imposition of tax even in the absence of Constitutional grant.
2. Right to select objects of taxation.
3. No injunction to enjoin (or stop) tax collection.

Purposes of taxation:
1. The principal (primary) purpose is to raise revenue for governmental needs. This is also called
revenue or fiscal purpose.
2. The secondary purposes of taxation are:

Compensatory purposes
1. To reduce excessive inequalities of wealth.
2. To maintain high level of employment.
3. To control inflation.

Sumptuary or regulatory purpose

1. To implement the police power of the State to promote the general welfare.

Basic principles of a sound tax system (Canons of taxation): FAT

1. Fiscal adequacy – this means that the sources of revenue should be sufficient to meet the demands
of public expenditures.
2. Administrative feasibility – this means that the laws should be capable of convenient, just and
effective administration.
3. Theoretical justice – this means that the tax burden should be proportionate to the taxpayer’s ability
to pay (ability to pay principle).

• PURPOSES OF TAXATION
The purpose of taxes is to generate revenue for the government so that it can provide public goods
and services. Some examples of public goods and services that are funded by taxes include national
defense, healthcare, education, and infrastructure. In addition to generating revenue, the definition
of tax in economics suggests that it can also be used as a tool to influence behavior. For example,
taxes on cigarettes and alcohol are often used to discourage people from consuming these products.
There are many different types of taxes but some of the most common types are income taxes,
sales taxes, and property taxes.

• CHARACTERISTICS AND REQUISITES OF TAXES

8 ESSENTIAL CHARACTERISTICS OF TAX
A tax (from the Latin taxo) is a compulsory financial charge or some other type of levy imposed
upon a taxpayer (an individual or legal entity) by a governmental organization in order to fund
various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is
punishable by law. en.wikipedia.org/wiki/Tax. The following are the essential characteristics of
tax.

[1] It is an enforced contribution for its imposition is in no way dependent upon the will or assent
of the person taxed. Consent is not an element. This is why some hold the extreme view that
taxation is robbery or theft because it is taking of property without or against the will of the owner.

[2] It is generally payable in the form of money, although the law may provide payment in kind.
For example, backpay certificates are an acceptable form of payment under Sec. 2, R.A. No. 304,
as amended. The reason why tax should generally be paid in money is liquidity. The Government
needs cash for its operation (to pay employees, etc.). Another reason is valuation. Money has a
value certain on its face; whereas, real or personal property still needs appraisal and its market
value may fluctuate.

[3] It is proportionate in character or is laid by some rule of apportionment which is usually

based on ability to pay. Payment of taxes must be based on the “ability-to-pay” principle; thus, the
higher the income of the taxpayer, the bigger the amount of the tax
paid. www.slideshare.net/lanceabalos/taxation-lectures1.

[4] It is levied on persons, property, rights, acts, privileges, or transactions. Congress, through
its plenary legislative power, can choose with almost unlimited discretion the subjects and objects
of taxation. In fact, courts cannot inquire into such discretion unless there is a violation of the
inherent and constitutional limitations of taxation.

[5] It is levied by the State which has jurisdiction or control over the subject to be taxed.
[6] It is levied by the law-making body of the State. The power to tax is a legislative power.
However, it is also granted to local governments, subject to such guidelines and limitations as law
may provided. (Section 5 of Article X of the Constitution) In other words, although taxation is an
inherent power of the State, it is exercised through law. Therefore, constitutional tax provisions
are not a grant but a limitation on this power. On the other hand, local government units have no
inherent power to tax but they have the constitutional tax power granted and protected by the 1987
Constitution.

[7] 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. (G.R. No. 77194) The "public purpose or
purposes" of the imposition are implied in the levy of tax. (94 Phil. 1047) A tax levied for a private
purpose constitutes a taking of property without due process of law. Therefore, the courts have the
power to look into whether the tax has a public or private purpose. If the purpose is public, the
courts can look into the wisdom of the legislature no further.

[8] It is also an important characteristic of most taxes that they are commonly required to be paid
at regular periods or intervals. (see 1 Cooley 64)
Tax is an enforced fee that is charged on individuals and organizations by government or its agency
on a product, income, or service. Despite many people complaining of making tax contributions
to government, these contributions are very important for the economy of a country. This is
because these financial contributions are used by government for the implementation of various
socio-economic development projects such as the construction of roads and bridges, schools,
health facilities and provision of social services like national security, provision of salaries for civil
servants including the police, the army, judges, doctors, nurses and teachers. However, to clearly
understand the rationale behind government charging of taxes terms such as taxation, equity in
relation to taxation, direct and indirect tax and sources of income, need to be clearly
understood. www.ukessays.com/essays/economics/explaining-the-primary-purpose-of-taxation-
economics-essay.php.

• NATURE OF THE TAXING POWER

 NATURE OF TAXATION
Taxation is both inherent and legislative in nature. What does this mean?

It is inherent, being one of the three (3) inherent powers of a sovereign; others are power of eminent
domain and police power. The mere existence of the State justifies the collection of taxes because
tax guarantees its existence.

• ASPECTS OF TAXATION

• SOUND TAX SYSTEM

PRINCIPLES OF A SOUND TAX SYSTEM

The principles of a sound tax system are fiscal adequacy, administrative feasibility, and theoretical
justice. Fiscal adequacy means the sources of revenue must be sufficient to meet government
expenditures and other public needs. Administrative feasibility means tax laws and regulations
must be capable of being effectively enforced with the least inconvenience to the taxpayer. And,
theoretical justice means that a sound tax system must be based on the taxpayers’ ability to
pay. www.bworldonline.com.

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.
Ideally, taxes collected should be enough for the operations of the government. Government funds
should not be lower than what is needed. However, it should also not be more than that because,
if so, the public would be overburdened with tax.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by
Adam Smith in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of
the people as little as possible over and above what it brings into the public treasury of the
state.
It simply means that sources of revenues must be adequate to meet government expenditures and
their variations. The dire need for revenue cannot be ignored. Our country is in a quagmire of
financial woe. (G.R. NO. 168056)

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.
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax
system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax
imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired." Thus, even if the imposition of VAT on tollway operations may seem burdensome to
implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution. (G.R. No. 193007
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.
Equality or theoretical justice which means that the tax burden should be proportionate to the
taxpayer’s ability to pay (this is the so-called ability to pay principle). irp-cdn.multiscreensite.com.
The non-observance of the above principles will not necessarily render the tax imposed invalid
except to the extent those specific constitutional limitations are violated. (De Leon)

• TAXES ARE NOT SUBJECT TO COMPENSATION

Taxes cannot be the subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.

• DOCTRINE OF EQUITABLE RECOUPMENT

DOCTRINE OF EQUITABLE RECOUPMENT
The doctrine of equitable recoupment is a principle which allows a taxpayer, whose claim for
refund has been barred due to prescription, to recover said tax by setting off the prescribed refund
against a tax that may be due and collectible from him. Under this doctrine, the taxpayer is allowed
to credit such refund to his existing tax liability. However, the Supreme Court rejected this doctrine
in Collector v. UST (G.R. No. L‐11274, Nov. 28, 1958), since it may work to tempt both parties
to delay and neglect their respective pursuits of legal action within the period set by law.

• CLASSIFICATION OF TAXES
Taxes are most commonly classified as either direct or indirect, an example of the former type
being the income tax and of the latter the sales tax.
Direct taxes
Direct taxes are primarily taxes on natural persons (e.g., individuals), and they are typically based
on the taxpayer’s ability to pay as measured by income, consumption, or net wealth. What follows
is a description of the main types of direct taxes.

Individual income taxes are commonly levied on total personal net income of the taxpayer (which
may be an individual, a couple, or a family) in excess of some stipulated minimum. They are also
commonly adjusted to take into account the circumstances influencing the ability to pay, such as
family status, number and age of children, and financial burdens resulting from illness. The taxes
are often levied at graduated rates, meaning that the rates rise as income rises. Personal exemptions
for the taxpayer and family can create a range of income that is subject to a tax rate of zero.

Taxes on net worth are levied on the total net worth of a person—that is, the value of his assets
minus his liabilities. As with the income tax, the personal circumstances of the taxpayer can be
taken into consideration.
Personal or direct taxes on consumption (also known as expenditure taxes or spending taxes) are
essentially levied on all income that is not channeled into savings. In contrast to indirect taxes on
spending, such as the sales tax, a direct consumption tax can be adjusted to an individual’s ability
to pay by allowing for marital status, age, number of dependents, and so on. Although long
attractive to theorists, this form of tax has been used in only two countries, India and Sri Lanka;
both instances were brief and unsuccessful. Near the end of the 20th century, the “flat tax”—which
achieves economic effects similar to those of the direct consumption tax by exempting most
income from capital—came to be viewed favourably by tax experts. No country has adopted a tax
with the base of the flat tax, although many have income taxes with only one rate.

Taxes at death take two forms: the inheritance tax, where the taxable object is the bequest received
by the person inheriting, and the estate tax, where the object is the total estate left by the deceased.
Inheritance taxes sometimes take into account the personal circumstances of the taxpayer, such as
the taxpayer’s relationship to the donor and his net worth before receiving the bequest. Estate
taxes, however, are generally graduated according to the size of the estate, and in some countries
they provide tax-exempt transfers to the spouse and make an allowance for the number of heirs
involved. In order to prevent the death duties from being circumvented through an exchange of
property prior to death, tax systems may include a tax on gifts above a certain threshold made
between living persons (see gift tax). Taxes on transfers do not ordinarily yield much revenue, if
only because large tax payments can be easily avoided through estate planning.

Indirect taxes
Indirect taxes are levied on the production or consumption of goods and services or on transactions,
including imports and exports. Examples include general and selective sales taxes, value-added
taxes (VAT), taxes on any aspect of manufacturing or production, taxes on legal transactions, and
customs or import duties.

General sales taxes are levies that are applied to a substantial portion of consumer expenditures.
The same tax rate can be applied to all taxed items, or different items (such as food or clothing)
can be subject to different rates. Single-stage taxes can be collected at the retail level, as the U.S.
states do, or they can be collected at a pre-retail (i.e., manufacturing or wholesale) level, as occurs
in some developing countries. Multistage taxes are applied at each stage in the production-
distribution process. The VAT, which increased in popularity during the second half of the 20th
century, is commonly collected by allowing the taxpayer to deduct a credit for tax paid on
purchases from liability on sales. The VAT has largely replaced the turnover tax—a tax on each
stage of the production and distribution chain, with no relief for tax paid at previous stages.
The cumulative effect of the turnover tax, commonly known as tax cascading, distorts economic
decisions.

Although they are generally applied to a wide range of products, sales taxes sometimes exempt
necessities to reduce the tax burden of low-income households. By comparison, excises are levied
only on particular commodities or services. While some countries impose excises and customs
duties on almost everything—from necessities such as bread, meat, and salt, to nonessentials such
as cigarettes, wine, liquor, coffee, and tea, to luxuries such as jewels and furs—taxes on a limited
group of products—alcoholic beverages, tobacco products, and motor fuel—yield the bulk of
excise revenues for most countries. In earlier centuries, taxes on consumer durables were applied
to luxury commodities such as pianos, saddle horses, carriages, and billiard tables. Today a
main luxury tax object is the automobile, largely because registration
requirements facilitate administration of the tax. Some countries tax gambling, and state-run
lotteries have effects similar to excises, with the government’s “take” being, in effect, a tax on
gambling. Some countries impose taxes on raw materials, intermediate goods (e.g., mineral oil,
alcohol), and machinery.

Some excises and customs duties are specific—i.e., they are levied on the basis of number, weight,
length, volume, or other specific characteristics of the good or service being taxed. Other excises,
like sales taxes, are ad valorem—levied on the value of the goods as measured by the price. Taxes
on legal transactions are levied on the issue of shares, on the sale (or transfer) of houses and land,
and on stock exchange transactions. For administrative reasons, they frequently take the form of
stamp duties; that is, the legal or commercial document is stamped to denote payment of the tax.
Many tax analysts regard stamp taxes as nuisance taxes; they are most often found in less-
developed countries and frequently bog down the transactions to which they are applied.

Proportional, progressive, and regressive taxes

Taxes can be distinguished by the effect they have on the distribution of income and wealth.
A proportional tax is one that imposes the same relative burden on all taxpayers—i.e., where
tax liability and income grow in equal proportion. A progressive tax is characterized by a more
than proportional rise in the tax liability relative to the increase in income, and a regressive tax is
characterized by a less than proportional rise in the relative burden. Thus, progressive taxes are
seen as reducing inequalities in income distribution, whereas regressive taxes can have the effect
of increasing these inequalities.

The taxes that are generally considered progressive include individual income taxes and estate
taxes. Income taxes that are nominally progressive, however, may become less so in the upper-
income categories—especially if a taxpayer is allowed to reduce his tax base by
declaring deductions or by excluding certain income components from his taxable income.
Proportional tax rates that are applied to lower-income categories will also be more progressive if
personal exemptions are declared.

Income measured over the course of a given year does not necessarily provide the best measure of
taxpaying ability. For example, transitory increases in income may be saved, and during temporary
declines in income a taxpayer may choose to finance consumption by reducing savings. Thus, if
taxation is compared with “permanent income,” it will be less regressive (or more progressive)
than if it is compared with annual income.

Sales taxes and excises (except those on luxuries) tend to be regressive, because the share of
personal income consumed or spent on a specific good declines as the level of personal income
rises. Poll taxes (also known as head taxes), levied as a fixed amount per capita, obviously are
regressive.
• OTHER SOURCES OF REVENUE/FUNDS AND IMPOSITION
What are the other sources of revenue in the Philippines?

The Philippine government generates revenues mainly through personal and income tax collection,
but a small portion of non-tax revenue is also collected through fees and licenses, privatization
proceeds and income from other government operations and state-owned enterprises.

• TAXATION DISTINGUISHED FROM POLICE POWER AND POWER OF EMINENT

DOMAIN
DIFFERENCES: TAXATION, POLICE POWER, EMINENT DOMAIN

The following are the differences among taxation, police power and eminent domain.

As to who exercises the power, the first and the second are exercise by the government or its
political subdivisions. The third is exercise by the government or public service companies and
public utilities.
As to purpose, the first is exercise to raise revenue. The second is to promote of general welfare.
The third is to facilitate the taking of private property for public purpose.

As to those affected, the first and the second upon all persons or a class of persons. The third is
upon the owner or owners of property taken.

As to monetary limitations, the first and the third have no such limitation. The second is limited to
the reasonable cost of regulation, issuance of license or surveillance.

As to benefits, the first gives no direct benefit but allows a civilized society. The second also has
no direct benefit but the welfare of the people is protected. The third gives direct benefit to the
owner in the form of just compensation.

As to impairment of the obligation of contracts, the second and the third are supreme over the non-
impairment clause. The first cannot impair the obligation of contracts if, for example, the grant of
exemption is supported b sufficient consideration.

• JUDICIAL REVIEW
Judicial review, power of the courts of a country to examine the actions of the legislative,
executive, and administrative arms of the government and to determine whether such actions are
consistent with the constitution. Actions judged inconsistent are declared unconstitutional and,
therefore, null and void. The institution of judicial review in this sense depends upon the existence
of a written constitution.

• TAXPAYER'S SUIT

In a taxpayer's suit, one is allowed to sue where there is an assertion that public funds are illegally
disbursed or deflected to an illegal purpose, or that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law. On the other hand, in a citizen's suit, the person
complaining must allege that he has been or is about to be denied some right or privilege to which
he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of
the statute or act complained of (GR No. 183591, October 14, 2008).A taxpayer's suit requires that the act
being complained of directly involves the illegal disbursement of public funds derived from
taxation. To be sure, standing as a citizen has been upheld by the Court in case where a petitioner is
able to craft an issue of transcendental importance or when paramount public interest
is involved. A citizen's suit is a rule whereby any Filipino citizen in representation
of others, including minors or generations yet unborn may file an action to enforce rights or
obligations under environmental laws. Citizen suits are filed under RA 8749. (A.M. No. 09-6-8-
SC, Sec. 5).