General Principles

of Taxation
Tax 421 – Transfer and
BusinessTaxation
What is taxation?

Taxation is the process or means by which

the sovereign, through its lawmaking
body, raises income to defray the
necessary expenses of the government.
Purpose of taxation

Primary purpose
• To provide funds or property with which
to promote the general welfare of its
citizens and to enable it to finance its
multifarious activities.
Purpose of taxation

Secondary purposes
• To strengthen anemic enterprises by
giving tax exemptions.
• To protect local industries against
foreign competition through imposition of
high customs duties on imported
goods.
Purpose of taxation

Secondary purposes
• To reduce inequalities in wealth and
income by imposing progressively
higher taxes.
• To prevent inflation by increasing taxes
or ward off depression by decreasing
taxes.
Theory and basis of taxation

• Theory
– The existence of the government is a
necessity.
– The government cannot continue without a
means to pay its expenses.
– The government has the rights to compel its
citizens and property within its limits to
contribute.
Theory and basis of taxation

• Basis
– Taxation is based on the reciprocal duties of
protection and support between the
government and its people.
– Government receives taxes from the people
which is used to perform functions of
government and other benefits.
– Benefit-received theory.
Basic principles of sound tax
system

• Fiscal adequacy
• Equality or theoretical justice
• Administrative feasibility
Fiscal adequacy

• The source of government revenue should

be efficient to demand the needs of public
expenditure.
• Creating new taxes ornew tax machinery
or by merely changing the rates applicable
to existing taxes.
Equality or theoretical justice

• The tax burden should be proportionate to

the taxpayer’s ability to pay.
• Ability-to-pay principle
Administrative feasibility

• The tax laws should be capable of

convenient, just and effective administration.
• Each tax should be:
– Clear and plain to the taxpayer.
– Capable of uniform enforcement
– Convenient as to time, place and manner of
payment.
– Not unduly burdensome upon or discouraging to
business activity
Nature of taxation

• It is inherent in sovereignty.
• Legislative in character.
• Subject to constitutional and inherent
limitations.
Limitations of taxation

• Inherent limitations – restrictions on the

power exists from the very nature of the
power of taxation itself.

• Constitutional limitations – restrictions

in the exercise of the power of taxation as
expressly provided in the Philippine
Constitution.
Constitutional limitations

• Due process.
• Equal protection of the laws.
• Rule of uniformity and equity in taxation.
• Non-imprisonment for non-payment of poll
tax.
• Non-impairment of the obligations and
contracts.
• Non-infringement of religious freedom.
Constitutional limitations

• No appropriation for religious purposes.

• Exemption of religious, charitable or
educational entities, non-profit cemeteries,
and churches from taxation.
• Exemption of revenues and assets of non-
stock, non-profit educational institutions
and donations for educational purposes
from taxation.
Constitutional limitations

• Concurrence by a majority of all members

of the Congress for the passage of a law
granting any tax exemption.
• Power of the President to veto any
particular item or items in a revenue or
tariff bill.
• Non-impairment of the jurisdiction of the
Supreme Court in tax cases.
Inherent limitations

• Requirement that levy must be for a public

purpose.
• Non-delegation of the legislative power to
tax, except:
– Delegation to the President
– Delegation to local governments
– Delegation to administrative bodies
Inherent limitations

• Exemption from taxation of government

entities.
• International comity
• Territorial jurisdiction
Aspects of taxation

• Levy – deals with the provisions of law

which determines:
– The person or property to be taxed
– The sum or sums to be raised
– The rate of the tax
– The time and manner of levying, receiving
and collection the tax.
Aspects of taxation

• Collections – constituted of the provisions

of law which prescribe the manner of
enforcing the obligation on the part of
those taxes to pay the demand thus
created.
Classification of Taxes

As to subject matter or object:

•Personal, capitation or poll – imposed
on persons residing within a specified
territory without regard to their property
or occupation.
Ex. Community tax
•Property – tax on property whether real
or personal
Ex. Real estate tax
Classification of Taxes

•Excise (privilege) – imposed upon the

performance of an act, enjoyment of
privilege or engaging in an occupation
Ex. Income tax, donor’s tax, estate tax
Classification of Taxes
Classification of Taxes

• The RPT rate for the cities and municipalities in

Metro Manila is two percent (2%) while for provinces
it is one percent (1%).

• LGUs may levy and collect an annual tax of one

percent (1%) on the assessed value of the real
property which shall be in addition to the basic real
property tax. The collection shall be accrued to the
Special Education Fund (SEF). Moreover, at the rate
not exceeding five percent (5%) of the assessed
value of the property may be imposed annually as an
additional ad valorem tax on idle lands.
Classification of Taxes
Classification of Taxes

As to who bears the burden:

•Direct – demanded from persons who
shoulder also the burden of the tax.
Ex. Income tax, donor’s tax, estate tax
•Indirect – demanded from person who
shall indemnify himself at the expense of
another.
Ex. VAT, other percentage taxes
Classification of Taxes
Classification of Taxes
Classification of Taxes

As to determination of amount:
• Specific – fixed amount by the head, number
or some standard of weight or
measurement.
Ex. Excise tax on distilled spirits, wines,
liquors.
• Ad valorem – fixed proportion of the value of
property with respect to which tax is
assessed.
Ex. Real estate tax
Classification of Taxes

NEW TAX RATES based on Republic Act No. 10351 Remarks

CULARS 2018
2013 2014 2015 2016 2017 onwards
A. DISTILLED SPIRITS, AD VALOREM & SPECIFIC TAX

1) AD VALOREM TAX RATE -

Based on the Net Retail Price
(NRP) per proof (excluding the 15% 15% 20% 20% 20% 20%
excise and value-added taxes);
and

Effective
1/1/2016, the
specific tax rate
2) SPECIFIC TAX - Per proof liter Php20 Php20 Php20 Php20.80 Php21.63 shall be
increased by 4%
every year
thereafte
Classification of Taxes

As to purpose:
•General, fiscal or revenue – imposed to
raise revenue for the general purposes of
the government.
Ex. Income tax, VAT
•Special or regulatory – imposed for
special purposes.
Ex. Customs duties, sugar adjustment
taxes
Classification of Taxes

As to imposing authority:
•National – imposed by national
government
Ex. Internal revenue taxes, customs
duties
•Municipal or local – imposed by local
government units.
Ex. Sand and gravel tax, occupation
tax
Classification of Taxes

As to graduation or rate:
• Proportional – based on fixed percentage of
property, receipts or other basis to be taxed.
Ex. VAT
• Progressive – rate increases as the tax base
increases.
Ex. Income tax, estate tax, donor’s tax
• Regressive – the rate decreases as the tax
base increases.
Taxation, Police Power and Eminent
Domain
Police Power – is the power of the
government to regulate behaviors and
enforce order within its territory, often
framed in terms of public welfare, security,
health, and safety. The exercise of police
power can be in the form of making laws,
compelling obedience to those laws
through physical means with the aim of
removing liberty, legal sanctions, or other
forms of coercion and inducements.
Taxation, Police Power and Eminent
Domain
Power of Eminent Domain - Eminent
domain is the right or power of a sovereign
state to appropriate private property to
particular uses to promote public welfare.
It is an indispensable attribute of
sovereignty; a power grounded in the
primary duty of government to serve the
common need and advance the general
welfare.
Taxation, Police Power and Eminent
Domain
Similarities:
•They are inherent in the State.
•They exist independently of the
Constitution.
•They constitute three methods by which
the State interferes with private rights
and property.
•They are legislative in character.
•Each presupposes an equivalent
compensation.
Taxation, PoliceofPower
Classification Taxesand Eminent
Domain
Distinctions – taxation (T), police power
(P) and eminent domain (E)

As to authority
•P and T – exercised only by the
government
•E – granted also to public service
companies or public utilities
Taxation, PoliceofPower
Classification Taxesand Eminent
Domain
Distinctions – taxation (T), police power
(P) and eminent domain (E)

As to purpose – property is taken

•T – to support the government
•E – for public use
•P – or destroyed to promote public
welfare
Taxation, PoliceofPower
Classification Taxesand Eminent
Domain
As to persons affected

P and T – group or class of individuals

E – individuals as the owner of a particular
property
Taxation, PoliceofPower
Classification Taxesand Eminent
Domain
As to effect

T – becomes part of public funds

E – there is transfer of right or ownership
P – no transfer of title; at most, there is
restraint on injurious use of property
Taxation, PoliceofPower
Classification Taxesand Eminent
Domain
Amount of imposition

T – no limits on the amount tax

P – amount is limited to cover cost of
license and expenses of police
surveillance and regulation
E – no imposition; property owner is paid
its market value
Taxation, PoliceofPower
Classification Taxesand Eminent
Domain
As to relationship to the non-
impairment clause of the constitution

P – superior to the non-impairment clause

E – inferior
T – inferior
Tax (Tx) vs Toll (To)
Classification of Taxes

To – demand of proprietorship
Tx – demand of sovereignty
To – paid for the use of another’s property
Tx – paid for the support of government
Tax (Tx) vsPolice
Taxation, Toll (To)
Classification Power
of and Eminent
Taxes
Domain
To – amount is based on cost of
construction or maintenance of public
improvement
Tx – based on necessities of the state
To – imposed by government, private
individuals or entities
Tx – imposed only by the government
Tax (T) vs License
Classification (L)
of Taxes

L – imposed for regulation

T – levied for revenue
L – involves exercise of police power
T – involves exercise of taxing power
Tax (T) vs License (L)

L – amount is limited to expenses of

regulation
T – no limit on the amount to be imposed
L – failure to pay makes the act or
business illegal
T – failure to pay does not make the
business illegal
Tax (T) vs Police
Taxation, Debt of
Classification (D)
Power and Eminent
Taxes
Domain
D – based on contract
T – based on law
D – assignable
T – cannot generally be assigned
Tax (T) vs Police
Taxation, Debt of
Classification (D)
Power and Eminent
Taxes
Domain
D – maybe paid in kind
T – generally payable in money
D – imprisonment is not a sanction for
non-payment
T – imprisonment is a sanction (except poll
tax)
Tax (T) vs Police
Taxation, Debt of
Classification (D)
Power and Eminent
Taxes
Domain
D – based on contract
T – based on law
D – assignable
T – cannot generally be assigned
System ofPolice
Taxation, Taxation
Classification Power
of and Eminent
Taxes
Domain

Progressive system – place stress on

direct taxes (rather than on indirect) or
on the taxpayer’s ability to pay

Regressive system – introduces more

indirect taxes rather than direct taxes
Double taxation
Taxation, Policeof
Classification Power and Eminent
Taxes
Domain
Not unconstitutional but being discouraged.
Direct duplicate taxation – taxing twice, the same
• taxing authority
• jurisdiction
• purpose
• period
• some property in the territory

indirect duplicate taxation – (indirect double) double

taxation other than direct duplicates; it extends to all
cases in which there is burden of two or more
pecuniary impositions.
Tax avoidance
Taxation, Policevs
Classification tax
Power
of evasion
Taxesand Eminent
Domain
Evasion (tax dodging) – illegal or
fraudulent means to defeat or lessen
payment of tax.

Avoidance (tax minimization) – legal

or permissible means to reduce tax
liability
Other forms
Taxation, of of
Police
Classification escape
Power fromEminent
and
Taxes taxation
Domain
Shifting – transfer of burden of tax by the
original payor or the one on whom the tax
was assesses or imposed to another or
someone else. It is possible only when
there is an exchange of commodities.
Other forms
Taxation, of of
Police
Classification escape
Power fromEminent
and
Taxes taxation
Domain
Capitalization – reduction in the price of
the taxed object equal to the capitalized
value of future taxes which the purchaser
expects to be called upon to pay. This
occurs the tax falls on an income-
producing property.
Other forms
Taxation, of of
Police
Classification escape
Power fromEminent
and
Taxes taxation
Domain

Transformation – the manufacturer or

produces upon whom the tax has been
imposed, fearing the loss of his market if
he should add the tax to the price, pays
the tax and endeavors to recoup himself
by improving his process of production
thereby turning out his units of
production at a lower cost.
Tax Situs Policeof
Taxation,
Classification Power and Eminent
Taxes
Domain

•Business, occupation or transaction –

place where the business is conducted;
place where the occupation is
practiced; or the place where the
transaction took place.

•Real and tangible personal property –

location of property
Tax Situs Policeof
Taxation,
Classification Power and Eminent
Taxes
Domain

•Income – place where the same is

earned, or citizenship or domicile of the
owner.

•Gratuitous transfer of property –

residence or citizenship of the taxpayer
or location or property.
Interpretation
Taxation, Policeof
Classification tax
Power
of laws
Taxes and Eminent
Domain
General Rule: liberally in favor of the
taxpayer and strictly against the
government.

Exception: in cases of tax exemptions

and deductions.
Sources ofPolice
Taxation, tax laws
Classification Power
of and Eminent
Taxes
Domain
•The Constitution – the provisions of the
Constitution dealing on taxation merely
regulate the exercise of the power of
taxation. They are not actually grants of
the power, because taxation can be
exercised by the government; the power
of taxation is not a mere constitutional
grant.
Sources ofPolice
Taxation, tax laws
Classification Power
of and Eminent
Taxes
Domain

•Statutory enactments – this refers to the

tax laws passed by the Congress.
Sources ofPolice
Taxation, tax laws
Classification Power
of and Eminent
Taxes
Domain
•Administrative rulings and regulations –
administrative rulings are less general
interpretation of tax laws which are
issued from time to time by the
Commissioner of Internal Revenue. They
are usually rendered on request of
taxpayers to clarity certain provisions of a
tax law. They are commonly known as
“BIR Rulings”.
Sources ofPolice
Taxation, tax laws
Classification Power
of and Eminent
Taxes
Domain
•Judicial decisions – this refers to
decisions of the Court of Tax Appeals
and the Supreme Court applying or
interpreting tax laws. They constitute
major part of the jurisprudence on
taxation and form part of the legal
system of the Philippines. Decisions of
the Court of Tax Appeals, however, are
still appealable to the Supreme Court.
Other Doctrines
Taxation, Policeof
Classification inTaxes
Taxation
Power and Eminent
Domain

Taxpayer’s Suit – this suit can only be

allowed if the act involves a direct and
illegal disbursement of public funds
derived from taxation.
Other doctrines
Taxation, Policeof
Classification inTaxes
taxation
Power and Eminent
Domain
Equitable Recoupment – this states
that a claim for refund which is
prevented by prescription may be
allowed to be used as payment for
unsettled tax liabilities if both taxes arise
from the same transaction in which
overpayment is made and
underpayment is due.
Other doctrines
Taxation, Policeof
Classification inTaxes
taxation
Power and Eminent
Domain

Tax Amnesty – this is an immunity from

all criminal and civil obligations arising
from non-payment of taxes. It is general
pardon given to all taxpayers; it applies
only to past periods, hereto, of
retroactive application.