Income Taxation ÷ Prof. Narvaez, CPA ÷ 1st Semester A.Y.

2020 – 2021

INTRODUCTION TO TAXATION

Objectives
After this chapter, readers are expected to gain familiarization and demonstrate mastery of the following:
1. Concept of taxation
2. Fundamental principles surrounding taxation
3. Inherent power of the State
4. Scope of the taxation power
5. Limitations of the taxation power
6. Stages of taxation
7. Concept of situs in taxation
8. Taxes

DEFINITION. Taxation may be defined as a State power, a legislative process, and a mode of government cost distribution.
1. As a state power. Taxation is an inherent power of the state to enforce a proportional contribution from its subjects for public
purpose.
2. As a legislative process. Taxation is a process of levying taxes by the legislative of the state to enforce proportional
contribution from its subjects for public purpose.
3. As a mode of cost distribution. Taxation is a mode by which the State allocates its costs or burden to its subjects who are
benefited by its spending.

Taxation definition examined:

u “Taxation” is the power by which the sovereign raises revenue to defray the expenses of the government. (Source:
Mamalateo, 2014, Reviewer on Taxation, Chapter 1 General Principles, Page 1)
u [A] “Taxation” is the power
u Essential and inherent – because without this power, no sovereign State can exist nor endure. In other
words, it is a necessary attribute of sovereignty. It proceeds upon the theory that the existence of a
government is a necessity. It subsists in a sovereign State, or stated differently for a State to exist it has to
compel all citizens and property. Belonging as a matter of right to every independent government, without
being expressly conferred by the people. The legislature can enact laws to raise revenues even without the
grant of said power in the constitution. It must be noted that Constitutional provisions relating to the power of
taxation do not operate as grants of power to the Government, but instead merely constitute as limitations
upon a power which would otherwise be practically without limit.
u Gem Extracted!
u Taxation being an inherent power
u Constitution limits but DO NOT operate as grants of taxation power
u Tax laws may be enacted EVEN WITHOUT the Constitution (See: Cooley,
Constitutional Limitations, 1927 8th ed., p. 787)

u Unlimited in its range – As an incident of sovereignty, the power to tax has been described as unlimited in
its range, acknowledging in its very nature no limits. Accordingly, it has the broadest scope of all the powers
of government because in the absence of limitations, it is considered as unlimited, plenary, comprehensive
and supreme (This will be further discussed in “Nature and Power of Taxation”). The two limitations on the
power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the
exercise of the of the otherwise plenary and unlimited power. It is the Court’s role to see to it that the
exercise of the power does not transgress these limitations.
u Gem Extracted!
u Taxation is unlimited in its range
u As an incident of SOVEREIGNTY, its very NATURE NO LIMITS
u Responsibility of the LEGISLATURE to secure against its abuse (See:
Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667 (1961)

u Right to compel all citizens and property – As means to pay the government expenses, it has the right to
compel all citizens and property within its limits to contribute. Taxes are enforced charges and contributions.
u Gem Extracted!
u Right to compel all citizens and property
u Basis of its exercise is government necessity - The power to tax is an
inherent power of the sovereign which is exercised through the legislature, to
impose burdens upon subjects and objects within its jurisdictions for the purpose
of raising revenues to carry out the legitimate objects of government.
u Within its jurisdictions - The underlying basis for its exercise falls under the
lifeblood theory and benefits-protection theory. They are enforced within its limits
to contribute in the form of taxes.
u Power to tax exercised through the legislature - Taxes are levied by the
legislative branch of government. ”Levy” refers to the act of imposition by the
legislature which is done through the enactment of a tax law. Levy is an exercise
of the power to tax, which is exclusively legislative in nature and character.

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u [B] The Sovereign - The Philippines is a democratic and republican State. Sovereignty resides in the people and all
government authority emanates from them (Sec 1, Art 11, 1987 Constitution).
u One that exercise authority within a limited sphere - Self-governing State, Autonomous, Independent. All
sovereign states, it might be observed, have territory, people and the government. 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 benefits intended to improve the lives of the people and enhance their moral
and material values. The levy of taxes must be for a public purpose.

u Control or power - State having full right and power to govern over itself, without any interference from
outside sources or bodies. It enables it to participate in the international system alongside others of its kind.

u Independent authority and right to govern itself - Each state respect others sovereignty

u [C] Taxation raises revenue

u To raise revenue to promote the general welfare and protection of its citizens - [1] The objectives of
taxation are [1] Revenue, [2] Regulatory, [3] Promotion of Welfare, [4] Reduction of Social Inequality, [5]
Encourage economic growth by granting incentives and exemptions, and [6] Protectionism. Taxation is no
longer envisioned as a measure to raise revenue to support the existence of 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. However, police
power may be exercised jointly with the power of taxation for the purpose of raising revenues (Lutz v.
Araneta, 98 Phil. 148).

u Circumscribed by inherent and constitutional limitations - Justice Holmes once said: “The power to tax
IS NOT the power to destroy while this Court (the Supreme Court) sits.” It is the Court’s role to see to it that
the exercise of the power does not transgress these limitations. The power to tax INVOLVES the power to
destroy is an epigrammatic statement – since the financial needs of a state my outrun any human
calculation, so the power to meet those needs of taxation must not be partial even though taxes
burdensome or confiscatory. Though the power of taxation is SOMETIMES called the power to destroy.
Therefore, it should be exercised with caution to minimize the injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the” hen that lays the golden eggs.”
Taxation does not necessary and unavoidably destroy.

u Main objective of taxation, though taxation is also used for other essential purposes of government

u [D] To defray the expenses of the government

u Way of apportioning cost of government - It is a way of apportioning the cost of government among those
who in some measure are privileged to enjoy its benefits and must bear its burden (51 Am. Jur. 34).
Taxation is described as a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the government (Paseo Realty &
Development Corporation v. Court of Appeals, G.R. No. 119286, October 13, 2004). Taxes are assessed for
the purpose of generating revenue to be used for public needs

THEORY OF TAXATION. The power of taxation proceeds upon the theory that the existence of the government is a necessity, that it
cannot continue without the 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.

BASIS OF TAXATION. The basis is the reciprocal duties of protection and support between the state ad 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, pays taxes in order that they may be secured in the enjoyment of the benefits of organized society (benefits received theory)

LIFEBLOOD THEORY. Taxes are lifeblood of the government, and their prompt and certain availability are an imperious need. Upon
taxation depends the government’s ability to serve the people for whose benefit taxes are collected.

INHERENT POWERS OF THE STATE

1. Taxation is the power of the State to enforce proportional contribution from its subjects to sustain itself.
2. Police power is the general power of the state to enact laws to protect the well-being of the people.
3. Eminent domain is the power of the State to take private property for public use after paying just compensation.

Taxation Police power Eminent Domain

Exercising Government Government Government and private
authority utilities
Purpose For the support of To protect the For public use
the government general welfare of
the people
Persons affected Community or Community or Owner of the property
class of individuals class of individuals
Amount of Unlimited Limited to cover No amount imposed but
imposition the cost of rather the owner is paid just
regulation compensation.
Importance Most important Most superior Important
Relationship to Inferior to the Superior to the Superior to the “non-
Constitution “non-impairment “non-impairment impairment clause”
clause” clause”
Limitation Constitutional and Public interest and Public purpose and just
Inherent limitation due process compensation.

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SCOPE OF TAXATION POWER (1) Comprehensive (2) Plenary (3) Unlimited (4) Supreme

PURPOSE OF TAXATION
1. Primary purpose: To raise revenue for government needs. (revenue purpose)
2. Secondary purpose:
a. Compensatory purpose:
ü To reduce excessive inequalities of wealth
ü To maintain high level of employment
ü To control inflation
b. Sumptuary or regulatory purpose: To implement the police power of the State to promote the general welfare.

NATURE OF TAXATION
1. It is inherent in sovereignty; hence, it may be exercised although not expressly granted by the Constitution.
2. It is legislative in character.
*Matters within the competence of the Legislature to determine:
ü the subject matter or object to be taxed.
ü the purpose of the tax so long as it is a public purpose
ü the amount or rate of tax
ü manner or means of collecting taxes
3. It is subject to constitutional and inherent limitations.

Nature of taxation examined:

1. It is an attribute of sovereignty
a. The power of taxation is an ESSENTIAL AND INHERENT attribute of sovereignty, belonging as a MATTER OF
RIGHT TO EVERY INDEPENDENT GOVERNMENT, WITHOUT BEING EXPRESSLY CONFERRED BY THE
PEOPLE (Pepsi-Cola Bottling Company of the Phil. V. Mun. of Tanauan, Leyte, 69 SCRA 460)

Note: Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that
the existence of a government is a necessity. The power to tax is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent State. No sovereign State can continue to exist without the
means to pay its expenses, and for those means, it has the right to compel all citizens and property within its limits to
contribute; hence, the emergence of the power to tax.

2. Legislative in character
a. Legislative function
The power of taxation is essentially a legislative function. The power to tax includes the authority to: [1] determine the
(a) nature (kind); (b) object (purpose); (c) extent (amount or rate); (d) coverage (subjects and objects); (e)
apportionment of the tax (general or limited application); (f) situs (place) of the imposition; and (g) method of
collection; [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 measures (Petron v. Pililla, 198 SCRA 82).
b. Generally not delegated to executive or judicial department
i. The central legislative body CANNOT DELEGATE EITHER TO THE EXECUTIVE OR JUDICIAL
DEPARTMENT OF THE GOVERNMENT without infringing upon the THEORY OF SEPARATION OF
POWERS (Pepsi-Cola Bottling Company of the Phil. V. Mun. of Tanauan, Leyte, supra).
ii. With exceptional cases –
1. those exercised by local legislative bodies provided by the Constitution (Sec. 5, Art. X, 1987
Constitution) - To local governments in respect of matters of local concern to be exercised by the
local legislative bodies thereof;
2. all others when allowed by the Constitution (Sec. 23(2) and 28 (2), Art. VI, 1987 Constitution) -
Thus, 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 dues or imposts within the framework of the national development
program of the Government; and
3. relates merely to administrative implementation (Cervantes v. Auditor General, 91 Phil 359) implied
from the policy and purpose of the Act (Maceda v. Macaraig, 197 SCRA 771).

Gold mined! 🏆
a. The power to tax is purely legislative
b. Taxes are to be used for public purpose
c. Clearly, taxes are NOT levied by the executive branch of government

Quasi-legislative power
u (b) Delegation of legislative powers to the President is permitted in Sections 23(2) and 28 [2], of Art. VI, of the Constitution

By virtue of a valid delegation of legislative power, it may also be exercised by the President and administrative boards, as well
as the lawmaking bodies of all municipal levels, including the barangay (Camarines Norte Electric Cooperative v. Torres, G.R.
No. 127249, February 27, 1998). Such delegation confers upon the President quasi-legislative power which may be defined as
the authority delegated by the lawmaking body to the administrative body to adopt rules and regulations intended to carry out
the provisions of the law and implement legislative policy.

u To be valid, an administrative issuance, such as an executive order, must comply with all the following requisites
(Hon. Exec. Secretary v. Southwing Heavy Industries, et. al., G.R. No. 164171, February 20, 2006):
u Its promulgation must be authorized by the legislature;
u It must be promulgated in accordance with the prescribed procedure;
u It must be within the scope of the authority given by the legislature; and
u It must be reasonable
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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 dues or imposts within the framework of the national development program of the
Government (Sec. 28 [2]. Art. VI, 1987 Constitution)

3. Subject to constitutional and inherent limitations

a. No matter how broad and encompassing the power of taxation, it is still subject to inherent and constitutional
limitations
i. The power to tax is said to be the strongest of all the powers of the 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 (See discussion on Inherent and constitutional limitations
below).
ii. Taxes are assessed for the purposes of generating revenue to be used for public needs. Taxation itself is
the power by which the State raises revenue to defray the expenses of the government. A jurist said that tax
is that we pay for civilization.

ASPECTS OF TAXATION
1. Levy- refers to the enactment of a law by Congress, imposing a tax.
2. Assessment and Collection- act of administration and implementation of the tax law by the executive department through
the administrative agencies.
3. Payment- act of compliance by the taxpayer including such options, schemes or remedies as may be legally available to
him.

Aspects of taxation examined:

1. Levy
a. Vested with the Congress of the Philippines
b. All revenue or tariff bills shall originate from House of Representatives, but the Senate may propose or
concur with amendments (Sec. 24, Art. VI, 1987 Constitution)
c. Tax policy - The power to levy taxes, which involves tax policy, is essentially legislative in character, although the
power may be delegated to executive agencies with respect to administrative matters, provided that adequate
guidelines or safeguards prescribed are followed in the administration of tax laws.

2. Assessment and Collection

a. “Administrative regulation” or “subordinate legislation” - The delegated power to the executive department has
been described as such (Sec. 244 NIRC; Calalang v. Williams, 70 Phil. 726)
b. Tax administration
c. Exercised by the executive department of government, particularly the BIR with respect to internal revenue
taxes
3. Payment - Payment include schemes available to taxpayers.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal adequacy. Source of revenue should be sufficient to meet the demands of public expenditures.
2. Equality or theoretical Justice. Tax burden should be proportionate to the taxpayer’s ability to pay (ability to pay principle).
3. Administrative feasibility. The laws should be capable of convenient, just and effective administration.

INHERENT LIMITATIONS
1. Territoriality of Taxation. Tax can be imposed only within the territories of the State
2. International comity. The property of a foreign or government may not be taxed by another.
3. Public purpose. Taxation must be exercised absolutely for public purpose.
4. Exemption of the government. Government agencies performing government functions are exempt from tax unless
expressly taxed while those performing propriety functions are subject to tax unless expressly exempted.
5. Non-delegation of the taxing power. The legislative taxing power is vested exclusively in Congress and is non-delegable
pursuant to the doctrine of separation of the branches of the government.
6. Double taxation. Taxing a person, property or right twice within the same year by the same taxing authority.

CONSTITUTIONAL LIMITATIONS
1. Due process of law (Art. III, Sec. 1)
2. Equal protection of the laws (Art. III, Sec. 1)
3. Rules of Uniformity and Equity in Taxation (Art. VI, Sec. 20)
4. Non-imprisonment for non-payment of poll tax (Art III, Sec. 20)
5. Non-impairment of the obligation of Contracts (Art. III, Sec. 10)
6. Non-infringement of religious freedom (Art. III, Sec. 5)
7. No appropriation for religious purposes (Art. VI, Sec. 29)
8. Non-impairment of the jurisdiction of Supreme Court in Tax Cases (Art. VIII, Sec. 5)
9. Exemption from taxation of charitable institutions, churches and personages 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 (Art VI, Sec. 28)
10. Exemption of revenues and Assets of Non-stock, Non-profit Educational Institutions and Donations for Educational Purposes
from taxes and Duties (Art. XIV, Sec. 4)
11. Exemption from Tax of All grants, Endowments, Donations or contributions used actually, directly, and exclusively for
Educational Purposes. (Art. XIV, Sec. 4)

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SITUS OF TAXATION
1. Business tax situs. Businesses are subject to tax in the place where the business is conducted.
2. Sale on service. Service fees are subject to tax where they are rendered.
3. Sale of goods. The gain on sale is subject to tax in the place of sale.
4. Property Tax Situs. Properties are taxable in their location.
5. Personal tax situs. Persons are taxable in their place of residence.

ESCAPE FROM TAXATION

1. Tax evasion (tax dodging) – act that tends to illegally reduce or avoid the payment of tax.
2. Tax avoidance (tax minimization) – act that reduces or totally escapes taxes by any legally or permissible means.
3. Tax exemption (tax holiday) – immunity, privilege or freedom from being subject to tax which others are subject to.

TAX AMNESTY. General pardon granted by the government for erring taxpayers to give them a chance to reform and enable them to
have a fresh start to be part of a society with a clean slate.

TAX CONDONATION. Forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds (tax remission).

TAX is an enforced contribution levied by the lawmaking body of the State to raise revenue for public purpose.

ESSENTIAL CHARACTERISTICS
1. It is an enforced contribution.
2. It is levied pursuant to legislative authority.
3. It is proportionate in character.
4. It is payable in money.
5. It is levied on persons and property within the jurisdiction of the State.
6. It is levied and collected for the purpose of raising revenue to be used for public purpose.
7. It is commonly required to be paid at regular intervals (not all taxes).

CLASSIFICATION OF TAXES
1. As to scope
a. National - tax imposed by the National Government (e.g. income tax, estate tax, donor’s tax, VAT, OPT, excise tax,
documentary stamp tax)
b. Local – tax imposed by the Municipal or Local Government (e.g. real property tax, professional tax, business tax, etc.)
2. As to incidence
a. Direct – tax which is demanded from the person who also shoulders the burden of tax or tax which the taxpayer cannot
shift to another.
b. Indirect – tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the
expense of another or tax which can be shifted to another person.
3. As to amount
a. Specific tax – a tax of a fixed amount imposed on a per unit basis such as per kilo, liter or meter, etc.
b. Ad valorem – a tax of a specified proportion imposed upon the value of the tax object
4. As to purpose
a. General/Fiscal/revenue tax – a tax imposed for general purpose
b. Special/Regulatory – a tax imposed for specific purpose
5. As to subject matter
a. Personal, poll or capitation – a tax on persons who are residents of a particular territory
b. Property tax – a tax on properties, real or personal
c. Excise or privilege tax – a tax imposed upon the performance of an enjoyment of a privilege or engagement in an
occupation
6. As to rate
a. Proportional – tax based on a fixed percentage of amount of the property, receipts, or other basis to be taxed
b. Progressive – tax rate of which increases as the tax base or bracket increases
c. Regressive – tax rate of which decreases as the tax base or bracket increases

DISTINCTION OF TAXES WITH SIMILAR ITEMS

A. Tax v. Debt
Tax Debt
Basis Based on law Based on contract or judgment
Effect of Taxpayer may be No imprisonment for failure to pay a
non- imprisoned for his failure to debt
payment pay the tax (except poll tax)
Mode of Generally payable in money May be payable in money, property
payment or services
Assignability Not assigned Can be assigned
Interest Does not draw interest Draws interest if stipulated or
unless delinquent. delayed.
Authority Imposed by public authority Can be imposed by private
individuals
Prescription Prescriptive periods for tax Civil Code governs the prescriptive
are determined under the period of debts
NIRC

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B. Tax v. Toll
Tax Toll
Definition Enforced proportional A sum of money for the use of
contributions from persons something, a consideration which is
and property. paid for the use of a property which
is of a public nature.
Basis A demand of sovereignty. A demand of proprietorship.
Amount No limit as to the tax Amount of toll depends upon the
cost of construction or maintenance
of the public improvement used.
Authority May be imposed only by the May be imposed by the government
government. or private individuals or entities.

C. Tax v. License fee

Tax License fee
Purpose For revenue raising For regulatory purposes
Basis Imposed under the power of Imposed under the police power of
taxation the State.
Amount No limit as to the amount of Amount of license fee that can be
tax collected is limited to the cost of the
license and the expenses of police
surveillance

SOURCES:

[1] Mamalateo, 2014, Reviewer on Taxation, Chapter 1 General Principles

[2] Cooley, Constitutional Limitations, 1927 8th ed., p. 787
[3] Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667 (19961)
[4] Lutz v. Araneta, 98 Phil. 148
[5] Paseo Realty & Development Corporation v. Court of Appeals, G.R. No. 119286, October 13, 2004
[6] Pepsi-Cola Bottling Company of the Phil. V. Mun. of Tanauan, Leyte, 69 SCRA 460
[7] Petron v. Pililla, 198 SCRA 82
[8] Sec. 5, Art. X, Sec. 23(2) and 28 (2), Art. VI, 1987 Constitution
[9] Cervantes v. Auditor General, 91 Phil 359
[10] Maceda v. Macaraig, 197 SCRA 771
[11] Hon. Exec. Secretary v. Southwing Heavy Industries, et. al., G.R. No. 164171, February 20, 2006
[12] Sec. 5, Art. X, 1987 Constitution
[13] Mamalateo, 2014, Reviewer on Taxation, Chapter 1 General Principles, Page 5
[14] Sec. 24, Art. VI, 1987 Constitution
[15] Sec. 244 NIRC
[16] Calalang v. Williams, 70 Phil. 726

QUESTION

1. In taxation, what is Levy?

2. May Congress, under the 1987 Constitution, abolish the power to tax of local governments?

3. Which of the following is not an example of an excise tax?

A. Income tax
B. Real property tax
C. Transfer tax
D. Value-added tax

4. The following statements are correct, except

A. The power of taxation is shared by the legislative and executive departments of government.
B. An inherent limitation of taxation may be disregarded by the application of a constitutional limitation.
C. The property of an educational institution by a religious order is exempt from property tax, but its income is subject to income tax.
D. The prohibition of delegation by the State of the power of taxation will still allow the BIR to modify the rules on time of filing of returns and payment
of taxes.

5. The following are the different schemes of shifting tax liabilities from the taxpayer to another or escaping without violating any provisions of tax laws,
EXCEPT
A. The manufacturer transfers the value-added tax to the distributor, then in turn to the wholesaler, in turn to the retailer and finally to the customer.
B. The manufacturer transfers the tax to the consumer by adding the tax to the selling of the goods sold.
C. The purchaser asks for a discount or refuses to buy at a regular price unless it is reduced by the amount equal to the tax he/she will pay.
D. The seller changes the terms of the sale like FOB shipping point in the Philippines to FOB destination abroad, so that the title passes abroad
instead in the Philippines

6. Financial income is the result of the application of generally accepted accounting principles (GAAP). Taxable income is computed by applying the income
tax provisions. In case of conflict between GAAP and tax laws:
A. The conflict shall be resolved by competent courts.
B. Both tax laws and GAAP shall be enforced.
C. Tax laws shall prevail over GAAP.
D. GAAP shall prevail over tax laws.

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7. Statement 1: Taxes may be imposed to provide disincentives to certain activities within the State.
Statement 2: The provisions of taxation in the Philippines Constitution are grants of power and not limitation on taxing powers.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are correct.
D. Neither statement is correct.

8. Statement 1: One of the characteristics of internal revenue laws is that they are generally prospective in application.
Statement 2: The internal revenue laws are penal and criminal in nature.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are correct.
D. Neither statement is correct.

9. The three inherent powers of the State – power of taxation, police power and power of eminent domain – are similar as expressed in the following
statements, EXCEPT
A. The three inherent powers are legislative in character.
B. The three inherent powers affect all persons or the public.
C. The three inherent powers interfere with private rights and property.
D. The three inherent powers are necessary attributes of sovereignty.

10. The following statements are correct, EXCEPT

A. The provisions of taxation in the Philippine Constitution are grants of power and not limitations on taxing powers.
B. Taxes may be imposed to provide disincentives to certain activities within the State.
C. Although the Constitution does not expressly provide it, the State can have the power of taxation.
D. The State can tax anything at any time in exercising the power of taxation.

11. Which of the following statements distinguishes police power from the power of eminent domain?
A. Property of individual or entity is taken from the government for public purpose.
B. The owner of the property received just compensation.
C. May be granted or exercised by public utility company.
D. Superior to the impairment clause of the Constitution.

12. The following statements are correct, EXCEPT

A. The provisions of taxation in the Philippine Constitution are powers granted to the taxing authorities and not limitations in the exercise of taxation.
B. The State can tax anything at any time within its jurisdiction in the exercise of taxation.
C. Taxes are generally imposed to raise revenue or to provide certain disincentives to certain activities within the State’s juridical limit.
D. The State can exercise the power of taxation even if the Constitution does not expressly provide such power.

13. Which of the following describes the characteristics of tax?

A. It is limited in amount.
B. It is generally assignable.
C. It is generally based on contract.
D. It is generally payable in money.
14. Which statement refers to police power as distinguished from taxation?
A. The amount imposed has no limit.
B. It involves the taking of property, either real or personal, by the government.
C. The amount imposed depends on whether the activity is useful or not.
D. It can only be imposed on specific property or properties.

15. The following are the characteristics of the State’s power to tax, EXCEPT
A. It is based on the ability to pay.
B. It is inherent in a sovereignty.
C. It is legislative in character.
D. It is subject to constitutional and inherent limitations.

16. When tax is classified according to graduation or rate, value-added tax will fall under the classification of
A. Graduated
B. Proportional
C. Regressive
D. Progressive

17. Which of the following statements distinguishes tax from license fee?
A. A regulatory measure
B. Limited to cover cost of regulation
C. Imposed in the exercise of police power
D. Non-payment does not necessarily render the business illegal

18. The following are the sources of taxation laws or ordinances, EXCEPT
A. Judicial decisions
B. Contracts or agreements
C. Philippine Constitution
D. Statues or Presidential decrees

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19. Which stage of taxation refers to the making of taxation laws?

A. Levying stage
B. Assessment stage
C. Collection stage
D. Payment stage

20. (Prior to TRAIN Law) The National Internal Revenue Code of 1997, as amended, is a codification of internal revenue laws under the enactment of
A. R.A. 6110
B. R.A. 9504
C. R.A. 8424
D. R.A. 7641

21. Which of the following is not an element or a basic principle of a sound tax system?
A. The tax imposed must be regressive in character.
B. The tax should be imposed based on the taxpayer’s ability to pay.
C. The tax must be capable of simple, convenient, and just application.
D. The source of income should be sufficient to meet the expenditures of government regardless of the prevailing business conditions.

22. Which of the following is not a purpose of taxation?

A. To reduce inequality of wealth
B. To expropriate private property for the promotion of general welfare
C. As protective tariff on imported goods to protect local producers against foreign competitors
D. To encourage the growth of home industries through the proper use of tax exemptions and tax incentives

23. Statement 1: Tax differs from debt because tax is based on enacted laws while debt is based on contract.
Statement 2: Tax differs from customs duties because tax is imposed on person, properties, or rights while customs duties are imposed only on
persons and rights.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both Statements are correct.
D. Neither Statement is correct.

24. What is the concept of minimizing payments of taxes where the producer absorbs the amount of tax and then recovers the taxes paid by improving the
process of production?
A. Tax capitalization
B. Tax transformation
C. Tax shifting
D. Tax avoidance

25. Statement 1: The President has the power to veto any appropriation, revenue, or tariff bill.
Statement 2: The pocket veto of the President disapproves or affects only the items or items to which
he/she objects.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are correct.
D. Neither statement is correct.

26. The major factors that determines the situs of taxation are the following, EXCEPT
A. Citizenship of the taxpayer
B. Location of income
C. Amount or level of income
D. Residence of the taxpayer

27. The following are the basic guidelines in interpreting tax laws and ordinances, EXCEPT
A. Tax laws have prospective application.
B. In case of doubts, tax laws are resolved in favor of the taxpayer.
C. In the absence of clear intention, tax laws have retroactive effect.
D. The burden of tax and exemption should be clearly indicated.

28. These are detailed administrative interpretations issued by the Secretary of Finance, upon recommendation of the BIR Commissioner, of the tax laws
enacted by the legislative body?
A. BIR Memorandum Circulars
B. BIR Revenue Regulations
C. BIR Revenue Rulings
D. BIR Revenue Decisions

29. The following are the elements of double taxation in its strict sense, EXCEPT
A. Taxation for the same purpose
B. Taxation by the same governing authority
C. Taxation within the same taxable year
D. Taxation with the same tax rate

30. The concept that all the subjects of taxation under the same class are treated alike is called
A. Equity in taxation
B. Uniformity in taxation
C. Privity of relationship
D. Principle of reciprocity

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Income Taxation ÷ Prof. Narvaez, CPA ÷ 1st Semester A.Y. 2020 – 2021

31. The following are the characteristics or nature of tax exemptions, EXCEPT
A. It is transferable
B. It is considered personal
C. It is created by the operation of law
D. It is not discriminatory

32. Statement 1: The power of taxation is inherent in a sovereignty being essential to the existence of every government. Hence, even if not
mentioned in the Constitution, the State can still exercise this power
Statement 2: Taxation is essentially a legislative function. Even in the absence of any constitutional provision, taxation power falls to Congress as
part of its general law-making power.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are correct.
D. Neither statement is correct.

33. Tax of a fixed proportion of the value of the property with respect to which the tax is assessed and that requires the intervention of assessors or appraisers
to estimate the value of such property before the amount due from each taxpayer can be determined is called
A. Capitation
B. Specific
C. Ad valorem
D. Regulatory or special

34. Banks are authorized by the government to collect taxes. This practice highlights the principle of
A. Administrative feasibility
B. Fiscal adequacy
C. Privity of relationship
D. Theoretical justice

35. The following statements are some of the differences between taxation and police power, EXCEPT
A. In taxation, the revenue collected is intended to support the government but not in police power.
B. The money collected in taxation becomes a public fund but not in police power.
C. There is no limitation as to the imposition of amount in taxation but not in police power.
D. In taxation, the power is exercised by the government but not in police power.

36. It refers to the place, or the state, or political unit which has jurisdiction to impose tax on its inhabitants.
A. Theory of taxation
B. Phases of taxation
C. Basis of taxation
D. Situs of taxation

37. Value-added tax is classified as

A. Progressive tax
B. Proportional tax
C. Graduated tax
D. Regressive tax

38. When both the liability for the payment of tax as well as the burden of tax falls on the same person, the tax is classified as
A. Personal tax
B. Property tax
C. Direct tax
D. Indirect tax

39. The following taxes, fees, and charges are considered as national internal revenue taxes and administered by the Bureau of Internal Revenue, EXCEPT
A. Real property tax
B. Value-added tax
C. Estate tax
D. Income tax

40. The following elements should be present in double taxation, EXCEPT

A. Both taxes are imposed for the same purpose.
B. Both taxes are imposed for the same year.
C. Both taxes are imposed upon the same person.
D. Both taxes are imposed by the same taxing authority.

41. The basic principle of a sound tax system promoting the concept “Taxes must be based on taxpayer’s ability to pay” is called
A. Ability to pay theory
B. Equality in taxation
C. Equity in taxation
D. Theoretical justice

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