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BA 104
MODULE 1

Prepared by:
MARIBEL B.TUANTE
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MODULE 1 – BASIC PRINCIPLES OF TAXATION

Module Title: Basic Principles of Taxation

Course Title: Income Taxation

Course Number: BA 104
Course Description: This introductory Taxation course is primarily concerned with income
taxation. The objective is to develop a working knowledge of the basic principles and rules of
the income tax system as these apply to individuals, partnerships and corporations. It covers an
overview of the national tax system, and the income taxation of employees and unincorporated
businesses and incorporated businesses. It provides the students with the knowledge of the
capital gains tax, final tax on certain passive income, and the year-end tax, including the
minimum corporate income tax, the normal tax, and the improperly accumulated profits tax of
corporations and withholding taxes. Tax forms are provided for specific topics discussed.

Total Learning Time: Week

Pre-requisite: Fundamentals of Accounting, Part II

Overview: This module is about the basic principles about income taxation. Students will learn
about the definition, basis, characteristics and nature of taxation in the Philippines.

Learning Outcomes: At the end of this module, students will be able to:
1. Define Taxation and describe its nature, basis, and objectives.
2. Differentiate the three inherent powers of the State
3. Explain the principles of a sound taxation system.
4. Identify and explain constitutional and inherent limitations.
5. Name and describe the situs of taxation.
6. Define tax, describe its characteristics, and distinguish its classifications.
7. Describe the powers of the Commissioner of Internal Revenue.

Indicative Content:
 Concept and Basis of Taxation
 State Powers
 Principles of a Sound Tax Systems
 Limitations of the Taxation Power
 Situs of Taxation
 Tax, its Elements and Classifications
 Distinction of Tax from Similar Items
 Power of the BIR and Commissioner of Internal Revenue
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Discussion:

Concept and Basis of Taxation

THEORY OF TAXATION
The theory of taxation or taxation proceeds from the theory that the existence of
government is a necessity. The government will not be able to discharge its functions without
the revenues or taxes. This theory of taxation proceeds from this principle that government is
a necessity.
Taxes are the lifeblood of the government. The basis for this power is that reciprocal
obligation or duty between the state and the citizens or its inhabitants.

The obligation of the state is to provide protection, that it would be able to have an orderly
society. The citizens, on the other hand, have the duty to support the state. In that sense, when
the citizens are required to support the state, it means to financially support the state. And that
financial support is through the process of taxation.

Even if one pays more and the other pays less, what the state can guarantee or ensure is
that protection will be provided equally. No obligation on the part of the state that one who
pays more taxes should be given more protection. That is not the essence of that obligation.
What the state would assure is everyone will have a just and orderly society.

Taxation is the process by which the sovereign, through its law making body, races
revenues use to defray expenses of government. It is a means of government in increasing its
revenue under the authority of the law, purposely used to promote welfare and protection of its
citizenry. It is the collection of the share of individual and organizational income by a
government under the authority of the law.
Taxation is the inherent power of the state to impose and demand contribution upon
persons, properties, or rights for the purpose of generating revenues for public purposes. The
power of taxation upon necessity is inherent in every government or sovereignty.

Tax law in the Philippines covers national and local taxes. National taxes refer to
national internal revenue taxes imposed and collected by the national government through the
Bureau of Internal Revenue (BIR) and local taxes refer to those imposed and collected by the
local government.

National Tax Law: 1987 Constitution

The 1987 Philippine Constitution sets limitations on the exercise of the power to tax.
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation. (Article VI, Section 28, paragraph 1)

All money collected on any tax levied for a special purpose shall be treated as a special
fund and paid out for such purpose only. If the purpose for which a special fund was created
has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of
the Government. (Article VI, Section 29, paragraph 3)

The Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restriction as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government (Article VI, Section 28, paragraph 2) The
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President shall have the power to veto any particular item or items in an appropriation, revenue
or tariff bill, but the veto shall not affect the item or items to which he does not object. (Article
VI, Section 27, second paragraph)

The Supreme Court shall have the power to review, revise, reverse, modify or affirm
on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders
of lower courts in all cases involving the legality of any tax, impost, assessment, or toll or any
penalty imposed in relation thereto. (Article VIII, Section 5, paragraph)

Tax exemptions are limited to those granted by law. However, no law granting any tax
exemption shall be passed without the concurrence of a majority of all the members of the
Congress. (Article VI, Section 28, par. 4). The Constitution expressly grants tax exemption on
certain entities/institutions such as (1) charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, and nonprofit cemeteries and all lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes (Article VI, Section 28, paragraph 3); (2) non-stock non-profit educational institutions
used actually, directly and exclusively for educational purposes. (Article XVI, Section 4(3))

In addition to national taxes, the Constitution provides for local government taxation.
(Article X, Section 5) (Article X, Section 6) Parenthetically, the Local Government Code
provides that all local government units are granted general tax powers, as well as other
revenue-raising powers like the imposition of service fees and charges, in addition to those
specifically granted to each of the local government units. But no such taxes, fees and charges
shall be imposed without a public hearing having been held prior to the enactment of the
ordinance. The levy must not be unjust excessive, oppressive, confiscatory or contrary to a
declared national economic policy (Section 186 and 187) Further, there are common limitations
to the grant of the power to tax to the local government, such that taxes like income tax,
documentary stamp tax, etc. cannot be imposed by the local government.

Laws

The basic source of Philippine tax law is the National Internal Revenue Law, which
codifies all tax provisions, the latest of which is embodied in Republic Act No. 8424 (“The Tax
Reform Act of 1997”). It amended previous national internal revenue codes, which was
approved on December 11, 1997. Local taxation is treated separately in this Guide. There are,
however, special laws that separately provide special tax treatment in certain situations.

Treaties

The Philippines has entered into several tax treaties for the avoidance of double taxation
and prevention of fiscal evasion with respect to income taxes. At present, there are 31
Philippine Tax Treaties in force. Copies are available at the BIR Library and the International
Tax Affairs Division of the BIR, which is under the Deputy Commissioner for Legal and
Inspection Group.

The Philippine Treaty Series, edited and annotated by Haydee Yorac and published by
Law Publishing House, University of the Philippines, is available in seven (7) volumes,
covering the years 1944 to 1978 . The Philippine Treaty Index, by Benjamin Domingo, covers
the years 1978 to 1982. A copy of the Philippine Treaty Index is available in the Department
of Foreign Affairs (DFA) Library. These publications contain treaties entered into by the
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Philippines. Tax privileges and exemptions granted under treaties to which the Philippines is a
signatory are recognized under Philippine tax law. Copies of treaties entered into by the
Philippines with other countries and/or international organizations, from 1983 up to the present,
are available at the DFA Library.

Local Government Tax Law

Local government taxation in the Philippines is based on the constitutional grant of the
power to tax to the local governments.

Local taxes may be imposed, as the Constitution grants, to each local government unit,
the power to create its own sources of revenues and to levy taxes, fees, and charges which shall
accrue to the local governments (Article X, Section 5). With respect to national taxes, local
Government units shall have a just share, as determined by law, in the national taxes which
shall be automatically released to them (Article X, Section 6).

However, certain taxes, such as the following, may not be imposed by local government
units: (Section 133, Local Government Code and Tax Law and Jurisprudence by Vitug &
Acosta, copyright 2000)

(1) Income tax, except when levied on banks and other financial institutions;

(2) Documentary stamp tax;

(3) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as
otherwise provided in the Local Government Code (Code) (except taxes levied on the transfer
of real property ownership under Section 135, and Section 151 of the Code);

(4) Customs duties, registration fees of vessels (except license fees imposed under Section
149, and Section 151 of the Code), wharfage on wharves, tonnage dues and all other kinds of
customs fees, charges and dues except wharfage on wharves constructed and maintained by the
local government unit concerned;

(5) Taxes, fees, charges and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local governments in the guise of charges for wharfage,
tolls for bridges or otherwise, or other taxes in any form whatever upon such goods or
merchandise;

(6) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers
or fishermen;

(7) Taxes on business enterprises certified by the Board of Investments as pioneer or non-
pioneer for a period of six and four years, respectively, from the date of registration;

(8) Excise taxes on articles enumerated under the National Internal Revenue Code and taxes,
fees, or charges on petroleum products, but not a tax on the business of importing,
manufacturing or producing said products (Patron vs. Pililla, 198 SCRA 82);
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(9) Percentage tax or value-added tax on sales, barters or exchanges of goods or services or
similar transactions thereon (but not fixed graduated taxes on gross sales or on volume of
production);

(10) Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water except
as provided by the Code;

(11) Taxes on premiums paid for reinsurance or retrocession;

(12) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all
kinds of licenses or permits for the driving thereof, except tricycles;

(13) Taxes, fees, or other charges on Philippine products actually exported except as provided
by the Code (the prohibition applies to any local export tax, fee, or levy on Philippine export
products but not to any local tax, fee, or levy that may be imposed on the business of exporting
said products);

(14) Taxes, fees or charges on duly organized and registered Countryside and Barangay
Business Enterprises (R.A. No. 6810) and on cooperatives (R.A. No. 6938); and

(15) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units (Section 133, LGC)

State Powers
State powers are inherent, it means that as long as the state exists, this power can
never be taken away. The following are the three inherent power of the state:

1. Power of Taxation – An inherent power of the state exercised through legislature, to

impose burdens upon subjects and objects within its jurisdiction, for the purpose of
raising revenues to carry out the legitimate objects of the government.

Nature: An inherent power of the state exercised through the legislature.

Scope: To impose burdens upon subjects and objects within its jurisdiction.

Purpose: For raising revenue to carry out the legitimate objects of the government

Revenue Objective: To build a just and human society and the establishment of a government
under certain ideals and aspirations.

Sumptuary Objective: An implement of the police power of the state for regulatory purposes.
In this case, it is used in furtherance of any government objective either as an incentive or
deterrence. As an implement, the generation of revenue is merely incidental or in furtherance
thereof. (Lutz v. Araneta, 98 Phil 148).
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Compensatory Objective: For social justice purposes or other purposes or other legitimate
objectives of the State, with a view to realize social justice, equitable distribution of wealth,
economic progress and other similar objectives (Southern Cross Cement Corp. v. Cement
Manufacturers Assoc. of the Phils, GR 158540)

2. Police Power – This is the power vested in the Legislature by the Constitution to make,
ordain, and establish all manner of wholesome and reasonable laws, statutes and
ordinances, either with penalties or without, not repugnant to the Constitution, for the
good and welfare of the State and its subjects.Basis: This
power is based on the legal maxim “salus populi est suprema lex” (the voice of the
people is the supreme law). Every citizen of every community, in a civilized societymust
bear certain burdens imposed for the good of all. Note: No right
is absolute in the face of the common good.

Nature: Police power is an attribute of sovereignty and founded on the obligation of the State
to provide protection for its citizens and the safety and good order of society.

Scope: Police power is founded on which our social system rests and has for its object the
improvement of social and economic conditions affecting the community. It depends on the
security of the social order, life and health of citizens, comfort and existence in a thickly
populated community, enjoyment of social life, and beneficial use of property.

Requisites:
1. Interest of the public is general, not that of pa particular class
2. Means used are reasonably necessary for the purpose, and not unduly oppressive
upon individuals

3. Power of Eminent Domain – This is the right of the State to acquire private property
for public use upon payment of just compensation and observance of due process.

Basis: It is based on genuine necessity and that necessity must be of public character. It must
be reasonable and practicable such that it would greatly benefit the public with the least
inconvenience and expense to the condemning party ad property owner consistent with such
benefit.
Requisites:

1. There must be taking of public property

2. It must be for public use
3. There must be just compensation
4. Due process of law must be observed in taking of the of property

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
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taxpayer, and, theoretical justice means that a sound tax system must be based on the taxpayers’
ability to pay.

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 convinced 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). 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).
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Limitations of the Taxation Power

NATURE OF THE POWER OF TAXATION:

1. It is inherent in sovereignty – the power of taxation exists independent of any

legislation. There is no need to enact a law to exercise that power because that power
springs at the moment you have the existence of the state. This is inherent because this is
based on necessity. Taxation is the life-blood of government.
2. It is legislative in character - But in the exercise of that power, that power is assigned
to the law making body. It is not assigned to the judiciary or to the executive branch of the
government. It is assigned to Congress, the law-making body.
3. It is subject to constitutional and inherent limitations – To a certain extent, Congress
will abuse that power. To a certain extent, you have that principle also that the power to tax
involves the power to destroy. Congress may abuse that power given to it by the people
through the electoral process., “to impose”.

The power of taxation is

Compulsory
Comprehensive
Involuntary

ASPECTS/PHASES OF THE POWER OF TAXATION

(STAGES OF TAXATION)

1. Levying stage – This is legislative in character. This is the role of Congress –

determining and enacting a tax law. It is Congress which determines the rate and the kind of
tax and the facility or mode of collecting the tax. Once you have a complete
law, it is the executive branch which implements that tax law.
2. Assessment/Collection – This is what we call tax administration. It is not legislative. It is
executive. The implementation and administration of your tax laws are done or implemented
by the executive branch of the government (BIR, Bureau of Customs).
3. Payment of the Tax – involves the act of compliance by the tax payer in contributing his
share to pay the expenses of government.

The power to tax is purely legislative in character. It is up to Congress which will

determine the subjects or objects to be taxed, purpose, the amount of the rate and the manner
and means of its collection. Courts cannot question the motive of Congress or the law-making
body, on the levy that is introduced by Congress or the law-making body.

LIMITATIONS ON THE POWER OF TAXATION

Classifications:
a. Inherent limitations
b. Constitutional limitations

a. INHERENT LIMITATIONS – these are limitations or restrictions that spring from

its very own power. While the power of taxation is inherent in sovereignty, there are also
limitations or safeguards which spring from its own inherent power.
1. Limitation on public purpose – It is an essential characteristic of the power of taxation
that the tax is imposed is for a public purpose, and not for a private purpose. It should be
for a governmental purpose – for the public welfare or the common good.
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2. Limitation on territorial jurisdiction - The power of taxation is limited only within the
boundary or territory of the state. The state cannot exercise its power of taxation outside its
territory. If the subject of taxation is found abroad, then, the state could not anymore tax
that.
By way of exception to territorial jurisdiction, the state may exercise personal
jurisdiction. Even if the subject of taxation is outside the territory, the state can still impose
its power of taxation by invoking personal jurisdiction. Before the exemption of the non-
resident citizens, like the OFWs, we used to tax the income of non-resident citizens or the
OFWs because we invoked then personal jurisdiction.
3. Non-delegation of the legislative power of taxation – As a nature of the power of
taxation, it is legislative in character. That power cannot be delegated to others.
When the State grants taxing power to another agency, then that is a violation of the
inherent limitation. However, this non-delegation admits exceptions:
a. Article VI, Section 28 (2) -involves the delegation to the President to fix tariff
rates, import and export quotas, tonnage and wharfage dues and another duties and
imposts.
b. Article X, Section 5 - This is the power of taxation of LGUs to create their own
sources of revenues, levy taxes, fees and charges. The power of taxation of LGUs is not
inherent. It may be granted either by the Constitution or by legislation. In our structure,
the grant of the taxing power to the LGU is by Constitutional grant.
c. Delegation to administrative agencies – in the implementation or tax
administration
d. People’s initiative and referendum under RA 6735
4. International comity - the power of taxation is imposed only within the state. The
state could not tax another sovereign, under the principles of international law of which we
adhere. This is on the basis of Article II, Section 2.
5. Exemption of government agencies – government immunity from tax. This is a self-
imposed practical limitation that the government does not tax itself. The government
exercising governmental/sovereign functions is not taxed. But when the government
agency exercises proprietary function, taxation is the rule.

b. CONSTITUTIONAL LIMITATIONS
1. Requirement of Due Process (Article III, Section 1)
- When the state exercises the power of taxation, the taking of the property should be
subject to due process. There must be a basis for the taking.
- If the state exercises its power outside of its territory or when it tax another sovereign,
it is also a violation of due process.
2. Equal Protection of the Laws (Article III, Section 1)
3. Uniformity and Equity in Taxation (Article VI, Section 21)
- There is no more distinction between equality and uniformity in taxation
- Equitability or Equity in Taxation – based on one’s ability to pay
- Valid and reasonable classification
a. The classification must be based on substantial distinctions which make
real differences.
b. It must be germane to the purpose of the law or the legislation.
c. It must apply not only to present conditions but also to future conditions
substantially identical to those present.
d. It must apply equally to all those who belong to the same class wherever
they may be found within the jurisdiction of the taxing authority.
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Situs of Taxation
SITUS of Taxation
This means the place of taxation.

FACTORS THAT DETERMINE SITUS:

1. nature, kind or classification of the tax
2. subject natter of the tax
3. citizenship of the taxpayer
4. residence of the taxpayer
5. sources
6. place of business/occupation being taxed

DOUBLE TAXATION can be defined as “taxing twice” by the same taxing authority within
the same taxing jurisdiction or the same taxing district for the same purpose, of the same year
or taxing period and of the same property.

Double Taxation, NOT Prohibited

Now, whether it is a (1) direct duplicate or direct double taxation, or (2) indirect duplicate
or indirect double taxation, double taxation has been called as not to be prohibited. Double
taxation is not unconstitutional.

When you have a law that was enacted resulting to a double tax, you could not invoke
double taxation because it is not unconsitutitional. The manner of attacking that law should not
be based on the argument on double taxation but it should be attacked on the basis of
constitutional or inherent limitations.

If real property is subject to a percentage tax under the NIRC and subject to a real property
tax under the LGC, there is no double taxation because there are 2 taxing authorities – one
imposed by the State and the other imposed by the LGU.

You may have gross receipts of the business establishment subject to income tax and VAT
under the NIRC and business tax under local taxation. There is no double taxation (income tax
and VAT) because they are for 2 different purposes – one is for income and the other is for
excise. Income tax and VAT are imposed by the state and the business tax is imposed by the
LGU. So, there is not double taxation because they are imposed by different taxing authorities.

In a deed of sale, that sale is subject to capital gains tax and doc stamp tax, both under the
NIRC. There is no double taxation because because the 6% capital gains tax is for income and
the doc stamps tax is an excise tax for the privilege of entering into a transaction.

Tax, its Elements and Classifications

PURPOSE
The purpose of taxation is to raise revenue. This is the principal purpose of tax.

It also has secondary or incidental purposes (non-revenue purposes:

a. As an implement of police power – when a tax is imposed, it can
be used to regulate (e.g. motor vehicle registration fees – while they are calledfees,
they are in the nature of taxes)
b. To protect local industries
c. To reduce inequalies of wealth
d. As an implement of eminent domain

Q: Can the power of taxation be used hand-in-hand with the power of eminent domain?
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Eminent domain is an inherent power of the government to take away private property
subject to payment of just compensation.

This has been illustrated in granting benefits to senior citizens.

Kinds of taxes:
a. As to the subject matter:
1. Personal tax – Poll tax. Tax on the person, like the poll tax or the cedula or
community tax certificate. It is a tax imposed on the person, including natural as
well as juridical persons, who establish residency in a particular locality and made
to pay this personal tax.
2. Property tax – Tax imposed on the property
3. Excise tax – Tax imposed for the exercise of a privilege - of transferring
property, entering into a business, of exercising an occupation.
b. As to who bears the burden: (common question in the bar)
1. Direct – is one where the statutory taxpayer is the person who is required by
law to pay the tax. The statutory taxpayer shoulders the burden as well as the
liability of the tax. Example: income tax, estate tax, donor’s tax
2. Indirect – is one where the law provides that this is the statutory taxpayer but
this statutory taxpayer is allowed to pass on or to shift, not the liability, but the
burden of the tax to another person.
Example:
i. business taxes like VAT – The VAT is passed on to the buyer of that item or
merchandise.
ii. percentage tax – another form of business tax;
iii. excise tax
c. As to the determination of amount:
1. Specific – based on a certain or a manner of measurement; on the basis of
weight. This type of tax is peculiar to those products which are produced or
manufactured like gasoline, alcohol products, cigars and cigarettes.
2. Ad valorem – amount is determined on the value; means “based on the value
of the article”.
d. As to purpose:
1. General – also known as fiscal or revenue. The purpose is principally to raise
revenue.
2. Special – also known as regulatory. While the purpose is to raise revenue, it
carries an incidental or special or regulatory purpose like for regulatory power or as
basis for just compensation.
e. As to scope or authority imposing the tax:
1. National – taxes legislated by Congress which are found under the tax code
(NIRC) as well as the Tariff and Customs Code
2. Municipal or Local – taxes authorized to local government units and found
under the Local Government Code; either by the province, city or municipality
f. As to graduation or rate:
1. Proportional
2. Progressive
3. Regressive
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PROGRESSIVE SYSTEM OF TAXATION

This is different from a progressive tax rate. In the case of progressive or graduated tax
rate, this is where the rate increases as the tax base increases. In the case of income, the more
income you have, the higher will be the tax rate.
Progressive System of Taxation means that the state has more direct taxes than indirect
taxes.

REGRESSIVE SYSTEM OF TAXATION

The regressive rate is different from the regressive system of taxation.
Regressive System of Taxation means that there are more indirect taxes than direct
taxes. Example: VAT – regardless of your economic status as a taxpayer, the purchase of an
item or commodity, regardless of who the buyer is, they are made to pay the same tax. Whether
you are rich or poor and you buy the same item, you pay the same tax.

Forms of Escape
1. SHIFTING is the transfer of the tax burden by the person on whom it is imposed by
law to another person.
Shifting is peculiar only to certain forms of taxes and this is peculiar only in indirect
taxes. There is no shifting in the case of direct taxes.

Ex: VAT, Percentage Tax, Business Tax

Forms of Shifting:
1. Forward Shifting - is a form of transfer of the tax from the factors of production
through the factors of distribution until the burden finally rests to the consumer
2. Backward Shifting - s the transfer of the burden of the tax from the point of
consumption to the factors of distribution to the factors of production.
3. Onward Shifting - is a series of shifts. So The series of shifts will be either two
or more forward shifting or two or more backward shifting or a combination of
forward or backward shifting, an you have what you call an onward shifting. This
occurs when the tax is shifted two or more times either forward or backward.

2. TAX CAPITALIZATION is a form of backward shifting whereby real taxes on

property sold are capitalized at the time of purchase and deducted in lump sum from the
selling price.

Example: Sale of real properties where you have savings – acquiring the property at a
lesser price. From that savings you have, the savings will be capitalized to pay your future tax
obligations when you would now own that property. The future taxes on the property sold are
capitalized at the time of purchase and deducted lump sum from the selling price.

3. TRANSFORMATION is effected through the process of production. The producer

on whom the tax is imposed, fearing the loss of his market if he adds the tax to the price,
takes the tax and recovers his additional expense by improving his method of production
thereby turning out units at lesser costs. This is peculiar only in the production process –
when you are a manufacturer or producer.
When one improves his means, methods or manner of production, this would turn out
more units at a lesser cost. The tax is transformed into a gain through the medium of
production.
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4. TAX EVASION is the use of illegal means to defeat or lessen the payment of a tax.
It is also known as “TAX DODGING” and it is also punishable by law.

Example: Underpricing in your Deed of Sale is tax evasion.

5. TAX AVOIDANCE is the use of legally permissible method to reduce tax payment
or what we call “TAX MINIMIZATION”.

6. TAX EXEMPTIONS – This is a grant of immunity to particular persons or

corporations or to persons of a particular class from a tax which persons are generally within
the same state or taxing district who are obliged to pay for the tax. It is an immunityor the
non-payment of a tax.

The power to tax carries with it the power to grant tax exemptions. The principles of the
power of taxation are the same principles to be applied in the grant of tax exemptions –
legislative in character, public purpose, subject to territorial restriction, constitutional
limitations, due process, equality, uniformity.

The more important basis for granting tax exemption is public interest. The consequence
of such exemption is that the state will incure monetary loss. By reason of public interest, the
state is willing to incur a monetary loss provided that public interest will be served by the grant
of the exemption. The public interest must be sufficient to offset the monetary loss entailed in
the grant of the exemption.

Grounds for the grant of tax exemption

1. Exemptions may be granted on the basis of contracts.
2. The exemption may be contained in the charter or in the law creating the
corporation or entity to which the exemption is granted.
3. The exemption may be based on some ground of public policy. For purposes of
encouraging and promoting industries, we grant tax benefits or tax exemptions for a
certain period of time so that they would encourage and develop their industries.
4. Tax exemption may be created on the basis of tax treaties or agreements between
two states on the basis of reciprocity.

Equity is not a ground for tax exemption

When your neighbor is exempted, you cannot claim exemption on the ground that “I
should be exempted because my neighbor is also exempted.” You cannot invoke equity. There
must be a basis for the grant of exemption. There must be a law. There must be due process.

Tax exemptions are strictly construed against the taxpayer. The law must be clear that
you are covered in that exemption. A taxpayer invoking the exemption must show or prove or
has the burden that it will be exempted or that he is covered by the exemption. Taxation is the
rule and exemption is the exception.
7. TAX AMNESTY - operates as a condonation of your tax liability. It is also construed
strictly against the taxpayer.

When you avail of a tax amnesty, the government cannot run after you for other deficiency
tax. Once you avail of the tax amnesty for a certain tax periond, then, you are released from
any liability or deficiency. The state has granted you condonation. Tax amnesty partakes of
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an absolute forgiveness or waiver on the part of the government to collect what otherwise
would be due it. And in a sense, prejudicial thereto, particularly to give tax evaders who wish
to relent and are willing to reform a chance to do so, thereby become part of the new society
with a clean slate. This is a full immunity, “for the use and support of the government”.

Distinction of Tax from Similar Items

Tax is also distinguished from other terms:

PENALTY does not operate as a tax. It is a sanction imposed for a violation, whether you will
be made to pay a fine or subject yourself to imprisonment for such violation. But when you are
made to pay a tax, that enforced contribution does not operate as a penalty.

DEBT:
1. A debt arises from a contract, express or implied, while a tax is created by law.
2. As to effect of non-payment, no person can be imprisoned for non-payment of a
debt. In case of non-payment of a tax, you will be made to pay a fine or
imprisonment or both, in addition to the payment of the basic tax plus other
surcharges such as interest. 3. As to set-off or compensation (bar question), taxes
are not subject to set-off or compensation. Taxes are not debts. Taxes arise from
compulsory obligation imposed upon citizens or inhabitants of the state.

If a taxpayer owes something to the government by way of taxes, and the government has
a debt which it has to pay to the taxpayer, set-off or compensation.

A LICENSE FEE operates for purposes of police power, for regulation, while tax operates to
raise revenue. This is the basic distinction between a tax and a license fee.
a. Taxes arise from the exercise of taxing power while license fees arise from police
power.
b. Taxes are for revenue while license fees are for regulation.
c. License fees cannot exceed the reasonable cost for regulation while taxes are not
so limited
d. License fees can be imposed only on legal businesses and activities while taxes
can be imposed on legal and illegal businesses.
e. Failure to pay license fees makes the business illegal while failure to pay a tax
does not necessarily make the act or business illegal.

3 Kinds of License Fees:

1. License Tax – this is purely a tax. The purpose is to raise revenue
2. License Fee to regulate a useful occupation – police power. The purpose is to regulate.
3. License Fee to regulate a non-useful occupation – police power. The purpose is to regulate.

License Fee to regulate a useful occupation - The amount of fees that is to be imposed for
purposes of regulation should be reasonable amount to cover the cost of inspection,
surveillance or regulation.
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License Fee to regulate a non-useful occupation – It could go over and above the
requirement of reasonableness because the purpose of a license fee to regulate a non-useful
occupation is to discourage people from going into a non-useful occupation.

TOLL is not a tax. It is paid when you use or pass through a private property.
Toll – consideration for the use of a property
Tax – enforced contribution, the purpose of which is to raise revenue

SPECIAL ASSESSMENT/SPECIAL LEVY is different from a tax. An example is the

special levy found in your Local Government Code. It is purpose to recover that cost of
improvement or infrastructure introduced by the LGU. Such that, only real property owners
who were benefited by that improvement are subject to tax. When the government has already
recovered the cost, the collection stops. Collection is limited, unlike in tax, where it will
continue unless Congress will repeal.
This special levy is imposed on the land. If you have an area not accessible to commercial
activity because there are no roads or bridges, the local government will build roads or bridges
to have an access to that remote area. It is exceptional both as to time and locality.
For as long as the tax is not repealed, then the tax is assessed and collected against you
forever, but not in the case of a special assessment. A special assessment is not a tax.

Q: Who are the subjects of these burdens or charges?

“upon persons, property or property rights”

This brings us to the principle that the scope of the power of taxation is unlimited or
comprehensive. It almost covers all subjects.

We have this principle that the power to tax involves the power to destroy. If you would
be imposing too many burdens on the inhabitants of the state, then, this will destroy the state
as well as the inhabitants.
But this principle was rebutted by another principle – the power to tax does not involve
the power to destroy while this court sits. This tells us that while the power of taxation is
unlimited or comprehensive, it is subject to the limitations or restrictions of that power.

Power of the BIR and Commissioner of Internal Revenue

Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal Revenue shall
be under the supervision and control of the Department of Finance and its powers and duties
shall comprehend the assessment and collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and fines connected therewith,
including the execution of judgments in all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts. The Bureau shall give effect to and administer the supervisory
and police powers conferred to it by this Code or other laws.

SEC. 3. Chief Officials of the Bureau of Internal Revenue. - The Bureau of Internal Revenue
shall have a chief to be known as Commissioner of Internal Revenue, hereinafter referred to as
the Commissioner, and four (4) assistant chiefs to be known as Deputy Commissioners.
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SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and
Take Testimony of Persons. - In ascertaining the correctness of any return, or in making a
return when none has been made, or in determining the liability of any person for any internal
revenue tax, or in collecting any such liability, or in evaluating tax compliance, the
Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or material to
such inquiry;

(B) To obtain on a regular basis from any person other than the person whose internal revenue
tax liability is subject to audit or investigation, or from any office or officer of the national and
local governments, government agencies and instrumentalities, including the Bangko Sentral
ng Pilipinas and government-owned or -controlled corporations, any information such as, but
not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers,
and the names, addresses, and financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of multinational companies, joint
accounts, associations, joint ventures of consortia and registered partnerships, and their
members; Provided, That the Cooperative Development Authority shall submit to the Bureau
a tax incentive report, which shall include information on the income tax, value added tax, and
other tax incentives availed of by cooperatives registered and enjoying incentives under
Republic Act No. 6938, as amended: Provided, further, That the information submitted by the
Cooperative Development Authority to the Bureau shall be submitted to the Department of
Finance and shall be included in the database created under Republic Act No. 10708, otherwise
known as “The Tax Incentives Management and Transparency Act (TIMTA).”

(C) To summon the person liable for tax or required to file a return, or any officer or employee
of such person, or any person having possession, custody, or care of the books of accounts and
other accounting records containing entries relating to the business of the person liable for tax,
or any other person, to appear before the Commissioner or his duly authorized representative
at a time and place specified in the summons and to produce such books, papers, records, or
other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant or material
to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time of any
revenue district or region and inquire after and concerning all persons therein who may be
liable to pay any internal revenue tax, and all persons owning or having the care, management
or possession of any object with respect to which a tax is imposed.
The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall be
construed as granting the Commissioner the authority to inquire into bank deposits other than
as provided for in Section 6(F) of this Code.
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SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. -
(A) Examination of Return and Determination of Tax Due. After a return has been filed as
required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the correct
amount of tax, notwithstanding any law requiring the prior authorization of any government
agency or instrumentality: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from the
Commissioner or from his duly authorized representative.

Any return, statement of declaration filed in any office authorized to receive the same shall not
be withdrawn: Provided, That within three (3) years from the date of such filing, the same may
be modified, changed, or amended: Provided, further, That no notice for audit or investigation
of such return, statement or declaration has in the meantime been actually served upon the
taxpayer.

References:
Win Ballada, and Susan Ballada (2019). Income Taxation (17th Edition). Philippines:
Domdane Publishers & Made Easy Books

Enrico D. Tabag, and Earl Jimsonarcia. (2018). Income Taxation with Special Topics in
Taxation. Philippines: Book Shop

Online References:

https://www.bir.gov.ph/index.php/legal-matters/guide-to-philippines-tax-law-research.html
https://www.lexanimo.com/2016/09/16/fundamental-powers-of-the-state/
https://www.projectjurisprudence.com/2019/12/principles-of-sound-tax-system.html
https://sites.google.com/site/lawpinoy/tax1
https://www.bir.gov.ph/index.php/tax-
code.html#:~:text=Power%20of%20the%20Commissioner%20to,by%20the%20Secretary%2
0of%20Finance.