CHAPTER 1: FUNDAMENTALS PRINCIPLES

Taxation

- is the process or means by which sovereign (independent state), through its law-making body (legislature),
imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to
carry out the legitimate objects of government.
- Act of levying a tax to apportion the cost.
- Inherent in sovereignty.
- Therefore, any constitutional provision regarding the State’s power to tax should not be interpreted as a
“grant of power”, but merely limitation on the state’s power to tax.
- Legislative body may enact laws even in the absence of a constitutional provision because the power to tax
is inherent in the government and not merely a constitutional grant.

Tax – yung mismong burden

- are enforced proportional contributions levied by the law-making body of the State by virtue of its
sovereignty for the support of the government and all public needs.

Tax law

- Special law
- National Internal Revenue Code of 1997 amended by TRAIN Law.
- It prevails over general law.

THREE INHERENT POWERS OF THE STATE

1. Police Power
- It is the power of the state to regulate, property, liberties, rights, privileges.
- Main purpose is the public welfare.
- Exercise by government ONLY.
- Property taken in the exercises of this power is destroyed.

Example: Curfew during pandemic, confiscation of smuggled goods,

2. Power of Eminent Domain

- It is the power of the state to acquire private property for public purposes upon payment of just
compensation. (Fair market value + damages)

Example: LRT station (binili ng government ang mga property na matatamaan ng station)

3. Power of Taxation
- Supreme (pinakamalakas na kapangyarihan ng government out of the three), most absolute, broadest scope,
- Without taxation government will die (Lifeblood theory)
- It is the power of the state to raise revenue to defray necessary expenses of the government.

SIMILARITIES OF THE 3 INHERENT POWER

1. They are indispensable to government existence.

2. They can exist independent of the constitution.
3. They are means by which the state interferes with private rights and properties.
4. They are generally exercised by the legislature.
5. They contemplate an equivalent compensation or benefit.
 Example of Private Authority: Tollgate (Expressway)

Court of Tax Appeal – can nullify the tax if it is unfair, unjust and oppressive.

Non-impairment of Contracts

Unilateral – pwede maimpair

Example: Philippine Economic Zone Authority (PESA) – land with business na walang tax (every 5 years
contract)

Bilateral – hindi pwede maimpair

Example: Contract between government and SM sa pagbebenta ng bigas and may condition na kapalit sa part
ng SM.

PURPOSE OF TAXATION

1. Primary = to raise revenue and provide funds with which to promote general welfare and protection of
citizens to enable to finance multifarious activities.
2. Secondary = for economic growth.
 3. To Reduce Social Inequality

Book:

1. Primary = to raise revenue and provide funds with which to promote general welfare and protection of
citizens to enable to finance multifarious activities.
2. Secondary = Regulatory Purpose, taxation is often employed as a devise for regulation or control by means
a certain effect may be achieved such as:
a. Promotion of General Welfare
b. Reduction of Social Inequality
c. Economic growth

Example of taxes for imposed regulations: Excise taxes for sin products (cigarettes and alcohols), Amusement taxes
for amusement places (clubs, cockpits, racetracks)

“Power to destroy”

GRADUATED TABLE:

THEORIES AND BASIS OF TAXATION

1. Lifeblood or Necessity Theory

- The government can neither exist nor endure without taxation.
- The power of taxation proceeds upon the theory that the existence of government is a necessity.
- “Taxes are the lifeblood of the government and their prompt and certain availability is an imperious
need.”(Lifeblood Doctrine)

Manifestation of Lifeblood Theory

a. Rule of No Estoppel against the Government In the performance of its governmental functions, the state
cannot be estopped by the neglect of its agents/officers.
b. Collection of taxes cannot be enjoined (stopped) by injunction.
c. Taxes could not be the subject of compensation or set off since claims for taxes is not a debt or contract.
The no set-off rule also states that taxes are not subject to set-off or legal compensation because the
government and the taxpayer are not mutual creditor and debtor of each other. An exception to the rule is
 where both the claims of the government and the taxpayer against each other have already become due,
demandable and fully liquidated (liquidated debts are those where the exact amounts have already been
determined)
d. Right to select objects (subjects) of taxation. Power of tax is essentially legislature in nature. (the subject or
object to be taxed, the purpose of the tax, the amount or rate, kind of tax)
e. A valid tax may result in the destruction of the taxpayer’s property. The power of tax includes the “power
to destroy”, where the tax is valid tax. Likewise, the exercise of power to tax is “not destructive of
taxpayer’s property” where it is an invalid tax, which violates the inherent or constitutional limitation s. An
imposition of lawful regulatory taxes is viewed as the power to destroy in the sense that a lawful tax cannot
be defeated just because its exercise would be destructive or would bring out insolvency to a taxpayer.

2. Benefits Protection Theory (Symbiotic Relationship)

- Give and Take
- Reciprocal duties of protection and support between state and its inhabitants.
- This theory spawned the Doctrine of Symbiotic Relationship which means, taxes are what we pay for a
civilized society.

SCOPE OF TAXATION

a. Comprehensive – covers persons, businesses, activities, professions, rights and privileges

b. Unlimited – Amount of imposition is no limit. In the absence of limitations prescribed by law or the
constitution, the power to tax is unlimited and comprehensive.
c. Plenary – Absolute, complete and unqualified. As it is complete; the BIR may avail of certain remedies to
ensure collection of taxes.
d. Supreme – in so far as the selection of the subject of taxation.

BASIC PRINCIPLES OF SOUND TAX SYSTEM

1. Fiscal Adequacy – source of revenue must be adequate/sufficient to meet government expenditures and
sustain the level of public services.
2. Theoretical Justice or Equity – ability to pay and tax burden should be proportionate to the taxpayer’s
ability to pay.
3. Administrative Feasibility – ease of doing business, collection of taxes without delay and hindrances.

ESSENTIAL ELEMENTS OF TAX

a. Enforced Contribution – tax payment is not voluntary or donation.

b. Generally payable in money – it is pecuniary burden payable in money which must be in legal tender.
c. Proportionate in character – payment of tax should be based on ability to pay (ex: graduated table)
d. Exacted pursuant to legislative authority
e. For raising revenue for public purpose and needs

ASPECT OF TAXATION

1. Levying – Congress, legislative in nature, process of determination of imposition of tax (kung sino/ano i-
impose ng tax)
2. Assessment – BIR, determination of correct amount of tax due/ audit. (Administrative and Executive)
3. Collection – BIR, Administrative and Executive
CONSTITUTIONAL LIMITATIONS

I. No person shall be deprived of life, liberty or property without

 Due Process of law
 Equal Protection of Law

Rule of Uniformity and equity in taxation

A. Uniformity
B. Equality

II. No person shall be imprisoned for debt or non-payment of poll tax.

Poll tax – tax of fixed amount imposed on residents within a specific territory regardless of
citizenship, business or profession.
III. Prohibition against infringement of religious freedom.
IV. Prohibition against taxation of religious, charitable and educational entities – all lands, building and
improvements actually, directly and exclusively used for religious, charitable or educational purposes
shall be exempt from taxation.This is an exemption from real property tax only. The test of exemption
refers to actual use, not ownership.
V. No law impairing the obligation of contracts shall be passed.
VI. Prohibition against taxation of non stock, non profit educational institutions – as long as it is actually,
directly and exclusively for educational purposes shall be exempt from taxes and duties.
VII. No law granting any tax exemption shall be passed without the concurrence of a majority of all
Members of Congress.
VIII. Veto of appropriation, revenue, tariff bills by the President.
IX. Non-impairment of the supreme court jurisdiction. Congress cannot take away from the Supreme Court
the power give to it by the Constitution as the final arbiter of taxes.
X. Revenue bills shall originate exclusively from the House of Representatives. But the Senate may
propose or concur amendments, it can propose its own version even with respect to bills which are
required by the Constitution to originate in the House nor does the Constitution prohibit the filing in
the State of a substitute bill in anticipation of its receipts of the bill from the House, so long as action
by the Senate as a body is withheld pending receipt of the House bill.

INHERENT LIMITATIONS

1. Territorial Limits – within and without the country (all income basta resident ka)
2. Public Purpose
3. Exemption of government, political subdivisions or agencies performing PURELY governmental
functions
4. Non-delegation Doctrine – Taxing power of the legislature may not be delegated except
 The president can fix tariff rates, imports and export quotas, tonnage and wharfage dues and other
duties and imports.
 The local government shall have the power to create its own sources of revenues and to levy taxes,
fees, and charges subject to such guideline and limitations.
5. International Comity – treaty. As a rule, Philippine Government cannot tax foreign ambassadors nor
impose real property taxes upon foreign embassies.
6. Double Taxation – There is no constitutional prohibition against double taxation though it is no favored.
Direct double taxation becomes legally objectionable for being oppressive and inequitable. It violates the
concept of equal protection, uniformity and equitableness of taxation in the Constitution.
 (Dapat lahat present para maging double taxation)

a. Same subject is taxed twice

b. Same taxing authority
c. Within same jurisdiction
d. During the same taxing period
e. Covering the same kind or character of tax

CLASSIFICATION OF TAXES

According to SCOPE or exercising authority

a. National Tax – imposed by National Government (ex: income tax, estate tax, donor’s tax, VAT,
documentary stamp tax)
b. Municipal or Local Tax – imposed by Local Government (ex: real estate tax, professional tax receipts) It
is based on constitutional grant that paved the way for the enactment of Local Government Code hence it is
not inherent.

According to who bears the burden of the tax

a. Direct tax – tax which is demanded from the person who also shoulders the burden of tax or tax which the
taxpayer cannot shift to another. Kung sino lang ang nag earn ng income siya mismo magbabayd tax Ex:
Income tax
b. Indirect tax – tax which is demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another. Pwedeng ma transfer or ma shift ang tax. Ex: VAT, percentage
tax, excise tax)

Shifting - 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 maybe
shifted.

Output Vat – nagbenta

Input Vat – bumili

Output Vat – Input Vat = VAT (Value Added Tax)

Example Problem:

Kitkat Manufacturer (output) binenta kay PureGold (input), si puregold (output) binenta kay consumer (input).

According to the rate applied

a. Proportional – tax based on fixed percentage Ex: VAT (12%), Capital Gains (6%)
b. Progressive – the rate of which increases as the tax base or bracket increases. Habang tumataas income,
tumataas tax. Ex: Graduated table
c. Regressive – mas tumataas income, bumababa tax

CONSTRUCTION OF TAX LAWS

 1. Tax laws are prospective generally, but can have retrospective application.
2. Rule in case of doubt in Tax Law
a. In case of doubt, statues imposing a tax are construed most strongly against the government and
liberally in favor of the citizen because burdens are not to be imposed beyond what the statues
expressly and clearly declares.
b. Tax Exemptions are to be construed strictly against the taxpayer – the one who claims exemption
must be able to justify his claims.
3. Revenue laws are not political in nature.
4. Legislative intention must be considered.
5. Tax Laws are special laws and prevail over general laws. Special laws are created separately from the
constitution.

MEANING OF AVOIDING OR ESCAPE FROM TAX

1. Shifting – 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 maybe shifted.
Ex: VAT
2. Capitalization – Not selling a property to increase its value. It 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. Ex: paghohold ng lupa, alahas
3. Tax Exemption – Freedom from financial charges or burden to which others are subjected.. It is the grant
of immunity to a particular person or corporations. Ex: PWD, Senior citizens (VAT-exempt)
4. Tax Avoidance – Called as tax minimization. Legal way to minimize tax. It 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. Ex: Sa business, paghohold ng items na mag iincur ng income.

Example case: Pedro income from leasing leasing his property reaches the maximum rate of tax under the law. He
donated one-half of his said property to a non-stock, non-profit educational institution whose income and assets are
actually, directly, and exclusively use for educational purposes, and therefore qualified for tax exemption. The
donation is likewise exempt from the donor’s tax.

5. Tax Evasion – Also knows as tax dodging. Illegal way of minimizing tax dues usually involves fraud to
lessen or defeat tax Ex: Hindi pag declare ng income.