Name: Date:

Section: Score:

Chapter TOPIC 1 Fundamental Principles of Taxation

PART 1

1. Taxation is the process or means by which the sovereign (independent State), through its law-making body (the
legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues
to carry out the legitimate objects of government. In simple terms, it is the act of levying a tax to apportion the
cost of government among those who, in some measure, are privileged to enjoy its benefits and must therefore
bear its burdens. It is a power inherent in every sovereign State being essential to the existence of every
government. Hence, even if not mentioned in the constitution, the State can still exercise the power. Therefore,
any constitutional provision regarding the State's power to tax should not be interpreted as a "grant of power",
but merely a limitation on the State's power to tax. Taxes, on the other hand, are the enforced proportional
contributions or charges from persons and property levied by the law-making body of the State by virtue of its
sovereignty for the support of the government and all public needs.
2.
3. The Three (3) Inherent Powers of the State
I.
II.
III.
4. Distinctions among the three (3) inherent powers of the State.
Feature TAXATION POLICE POWER EMINENT DOMAIN
1. Nature

2. Authority

3. Purpose

4. Persons
Affected
5. Scope

6. Amount of
Imposition

5. Two (2) Purposes of Taxation

I. PRIMARY:______________________________________
II. SECONDARY: _____________________________________________
6. ________________________________________________It is a necessary burden to preserve the State's
sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public improvements 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.
7. ________________________________________________The basis is the reciprocal duties of protection and
support between the State and its inhabitants.
8. Scope of the Power to Tax
C_________________
U_________________
P_________________
S_________________
9. Six (6) Essential Elements of Tax
I. It is an ___________ contribution.
II. It is _______________ payable in money.
III. It is _____________________ in character.
 IV. It is levied on persons, property, or the exercise of a ____________________.
V. It is levied by the _________________ body of the State.
VI. It is levied for ____________ purpose,
10. Aspects of Taxation

L___________________ A_________________________ C_______________________

11. Power to Tax includes “power to _________________”

Name: Date:
Section: Score:
Chapter TOPIC 1 Fundamental Principles of Taxation
PART 2

12. Classification of Taxes

I. AS TO SCOPE
i. National - imposed by the National Government (e.g. income tax, estate tax, donor's tax, VAT
other percentage taxes, documentary stamp tax)
ii. Local imposed by local government units such as municipal corporations (e.g. real estate tax and
professional tax receipts). The local government unit's power to tax is based on a constitutional
grant that paved the way for the enactment of the Local Government Code of the Philippines.
Hence, the local government's power to tax is not inherent.
II. AS TO SUBJECT MATTER OR OBJECT
i. a. Personal, poll or capitation - tax of a fixed amount imposed upon individual, whether citizens
or not, residing within a specified territory without regard to their property or the occupation in
which he may be engaged (e.g. community tax)
ii. Property - tax imposed on property, whether real or personal, in proportion either to its value, or
in accordance with some other reasonable method of apportionment (e.g. real estate tax)
iii. Excise - any tax which does not fall within the classification of a poll tax or a property tax. This is
a tax on the exercise of certain rights and privileges (e.g. income tax, estate tax, donor's tax).
Excise tax may also refer to the tax levied or imposed on sin products and non-essential goods
such as cigars and liquors. Excise taxes of this nature are taxes applicable to certain specified
articles or products manufactured in the Philippines for domestic sale or consumption or any
other disposition and to specified things or goods imported into the Philippines. It may be specific
or ad valorem
III. AS TO WHO BEARS THE BURDEN
i. Direct - tax which is demanded from the person who also shoulders the burden of tax or tax
which the taxpayer cannot shift to another. Both the incidence (liability for the payment of the
tax) as well as the impact or burden of the tax falls on the same person (e.g. income tax, estate
tax, donor's tax).
ii. Indirect - tax which is demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another. These are taxes wherein the incidence of or the
liability for the payment of the tax falls on one person but the burden thereof can be shifted or
passed on to another person (e.g. VAT, percentage tax, excise tax on excisable articles). In the
case of Maceda v. Macaraig (197 SCRA 771), an indirect tax is defined as one paid by a person
who is not directly liable therefor, and who may therefore shift or pass on the tax to another
person or entity, which ultimately assumes the tax burden
IV. AS TO DETERMINATION OF AMOUNT:
i. Specific - tax of fixed amount imposed by the head or number, or by some standard of weight or
measurement (e.g. excise tax on cigars and liquors)
ii. Ad valorem - tax of fixed proportion of the value of the property with respect to which the tax is
assessed (e.g. vat, income tax, donor's tax and estate tax)
V. AS TO PURPOSE:
 i. Primary, Fiscal, or Revenue Purpose- tax imposed solely for the general purpose of the
government, i.e., to raise revenue for government purposes (e.g. income tax, donor's tax and
estate tax).
ii. Secondary, Regulatory, Special or Sumptuary Purpose - tax imposed for a specific purpose, i.e., to
achieve some social or economic ends irrespective of whether revenue is actually raised or not
(e.g. tariff and certain duties on imports).
VI. AS TO GRADUATION OR RATE:
i. Proportional - tax based on a fixed percentages of amount of tie property, receipts, or other basis
to be taxed [e.g. VAT, Table 1-5 above (Ad-valorem tax on distilled spirits)]
ii. Progressive or graduated - tax the rate of which increases as the tax base or bracket increases
(e.g. income tax on individual taxpayers)
iii. Regressive - tax the rate of which decreases as the tax base or bracket increases
VII. AS TO TAXING AUTHORITY
i. National - taxes imposed under the National Internal Revenue Code (commonly known as the Tax
Code) collected by the national government through the Bureau of Internal Revenue (BIR) and
other national government agencies. Other national taxes other than those collected by the BIR
as provided for under special laws include but not limited to: Customs duties Taxes on narcotic
drugs в Special education fund taxes Energy taxes on aircraft, motorized watercraft, and electro
power consumption в Sugar adjustment taxes Travel tax Private motor vehicle tax
ii. Local - taxes imposed by local government units
13. Elements of Sound Tax System
i. a. Fiscal Adequacy The fundamental purpose of taxation is to raise the revenue necessary to fund
public services. Consequently, it is necessary that the sources of revenues must be adequate to
meet government expenditures and sustain the level of public services demanded by citizens and
policymakers.
ii. Theoretical Justice or Equity ("ability to pay principle") Taxpayer's ability to pay must be taken
into consideration. The tax burden should be proportionate to the taxpayer's ability to pay.
iii. Administrative Feasibility Tax laws must be capable of effective and efficient enforcement. A good
tax system requires informed stakeholders who understand how taxes are assessed, collected
and complied with. It should be clear who and what is being taxed, and how tax burdens affect
them. Therefore, the tax system should be as simple as possible, and should minimize gratuitous
complexity. Complicated tax rules make the tax system difficult for citizens to understand.
Complexity also makes it harder for governments to monitor and enforce tax collections, and
makes it easier for lawmakers to enact (and conceal) targeted tax breaks benefitting particular
groups.
14. Factor to Consider in Determining the Situs of Taxation.
i. Subject matter (person, property, or activity)
ii. Nature of the tax
iii. Citizenship
iv. Residence of the taxpayer
v. Source of income
vi. Place of excise, business or occupation being taxed
15. Double Taxation
In its strict sense, double taxation referred to is direct duplicate taxation. In its broad sense, double
taxation is referred to as indirect double taxation. It extends to all cases in which there is a burden of
two or more impositions.

Direct double taxation means taxing twice

1. By the same taxing authority, jurisdiction or taxing district
2. For the same purpose
3. In the same year or taxing period
4. Same subject or object
5. Same kind/character of the tax
16. Means of Avoiding or Minimizing the burden of Taxation
 I. Shifting is the transfer of the burden of a tax by the original payer or the one on whom the tax was
assessed or imposed to someone else Transferred is not the payment of the tax but the burden of the
tax. Only indirect taxes may be shifted; direct taxes cannot be shifted.
II. Transformation An escape from taxation where the producer or manufacturer pays the tax and endeavor
to recoup himself by improving his process of production thereby turning out his units of products at a
lower cost
III. Tax Evasion Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of a tax. It is also known as tax dodging. It is connotes fraud through the use of pretenses or
forbidden devices to lessen or defeat taxes, Example: . Deliberate failure to report a taxable income or
property deliberate reduction
IV. Tax Avoidance Tax avoidance is the exploitation by the taxpayer of legally permissible alternative tax rates
or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is a tax
saving device within the means sanctioned by law. It is politely called "tax minimization" and is not
punishable by law. This method should be used by the taxpayer in good faith and at arm's length.
V. EXEMPTION It is the grant of immunity to particular persons or corporations or lo persons or corporations
of a particular class from a tax which persons and corporations generally within the same State or taxing
district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden
to which others are subjected (Greenfield v. Meer - 77 Phil 394). Exemption is allowed only if there is a
clear provision therefor. It is not necessarily discriminatory as long as there is a reasonable foundation or
rational basis. In the construction of tax statutes, exemptions are not favored and are construed against
the taxpayer,
VI. Capitalization Capitalization is the reduction in the selling price of income producing property by an
amount equal to the capitalized value of future taxes that may be paid by the purchaser.