CHAPTER 2 (Part 3)

GENERAL PRINCIPLES AND

CONCEPTS OF TAXATION

Ninia C. Pauig-Lumauan, MBA, CPA

2nd Semester SY 2021-2022
Lyceum of Aparri

Income Taxation
 NON IMPAIRMENT OF THE CONTRACTS

• The constitution provides that “No law

impairing the obligation of contracts shall
be passed.”
• The non impairment clause, which provides
that no law impairing the obligations of
valid contracts shall be passed is limited in
application to laws that derogate from prior
acts or contracts by enlarging, abridging or
in any manner changing the intention of
the parties. INCOME TAXATION
 NON IMPAIRMENT OF THE CONTRACTS
• An example of impairment by law is when
a tax exemption based on a contract
entered into by the government is revoked
by a later taxing statute.
• In entering into contracts, the State acts in
the same manner as a private individual or
corporation and may not use its
sovereignty as justification in impairing a
valid contractual obligation which it has
assumed. INCOME TAXATION
 PRESIDENT’S VETO POWER

• The Constitution provides that “Every bill

passed by the congress shall before it becomes
a law be presented to the President. If he
approves the same, he shall sign it; otherwise,
he shall veto it and return the same with his
objections at large in its journal and proceed to
reconsider it.....”
• Veto power refers to the Executive’s power to
refuse to sign into law a bill that has been
passed by a legislature.
INCOME TAXATION
 PRESIDENT’S VETO POWER

• It can be classified into:

a. Item veto power – the power to veto
items in appropriation bills without
affecting any other provisions of such
bills, and
b. Pocket veto power – the disapproval of a
bill by inaction of the President which
results that the bill shall fail to become a
law.
INCOME TAXATION
 PRESIDENT’S VETO POWER

• If the President vetoed the bill, two-thirds

(2/3) of the members of Congress are
required to make such bill a law.
• Under the Constitution, the President does
not have the so-called pocket veto power
because his failure to communicate his
veto of any bill presented to him within
thirty (30) days after the date of receipt
thereof automatically causes the bill to
become a law. INCOME TAXATION
 EXEMPTION FROM PROPERTY TAXATION

• The Constitution provides that “Charitable

institutions, churches, parsonages or
convents appurtenant thereto. Mosques
and non-profit cemeteries and all lands,
buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes shall be
exempt from taxation.”
INCOME TAXATION
EXEMPTION FROM PROPERTY TAXATION
• This exemption is granted to them in
return for the benefits they have afforded
to the public welfare.
• The Supreme Court, however, held that
such tax exemption for the above
provision should be applicable only to real
property taxes and not to transfer taxes.

INCOME TAXATION
EXEMPTION FROM PROPERTY TAXATION

• Hence, if a land owned by a religious

order is sold, it is subject to a final tax of
6% based on the selling price or fair
market value whichever is higher.
• In general special assessments are not
covered by the exemption because by
nature they are not classified as taxes.

INCOME TAXATION
 EXEMPTION FROM PROPERTY TAXATION

• To be exempted from taxation, the real

property must be exclusively used for
religious, educational and charitable
purposes.
• It would appear, therefore, that “idle lands”
or property used by others for other
purposes although owned by religious,
educational and charitable institutions
could be subjected to real estate tax.
INCOME TAXATION
 EXEMPTION FROM PROPERTY TAXATION

• Furthermore, the income of such

organizations derived from profit activities
or sale of properties, regardless of the
disposition, made of such income, is
subject to tax.

INCOME TAXATION
EXEMPTION FROM PROPERTY TAXATION

• For this reason, the issue of ownership is

not relevant, as long as the real property
is used exclusively for religious,
educational and charitable purposes in
which case such property shall be
exempted from real estate tax.

INCOME TAXATION
EXEMPTION FROM PROPERTY TAXATION

• Revenue or income from trade, business

or other activity, the conduct of which is
not related to the exercise or performance
of religious, educational and charitable
purposes or functions shall be subject to
internal revenue taxes when the same is
not actually, directly or exclusively used
for the intended purposes.
INCOME TAXATION
EXEMPTION FROM PROPERTY TAXATION

• The Constitutions also states that “All

revenues and assets of non-stock, non-
profit educational institutions used
actually, directly and exclusively for
educational purposes shall be exempted
from taxes and duties.”

INCOME TAXATION
EXEMPTION FROM PROPERTY TAXATION

• Proprietary educational institutions,

including those cooperatively owned,
may likewise be entitled to such
exemptions subject to the limitations
provided by law including restrictions on
dividends and provisions for re-
investment.

INCOME TAXATION
 PUBLIC MONEY NOT FOR RELIGIOUS PURPOSES

• The Constitution provides that “No public

money or property shall ever be
appropriated, applied, paid or used directly
or indirectly for the use, benefit, or support
of any sect, church, denomination,
sectarian, institution or system of religion,
or for the use, benefit or support of any

INCOME TAXATION
 PUBLIC MONEY NOT FOR RELIGIOUS
PURPOSES
• priest, preacher, minister or other
religious teacher or dignitary as such,
except when such priest, preacher,
minister or dignitary is assigned to the
armed forces or to any penal institution,
or government orphanage or
leprosarium.”

INCOME TAXATION
 PUBLIC MONEY NOT FOR RELIGIOUS
PURPOSES
• This limitation is fundamentally
supported by the principle that taxes can
be levied for public purposes. Thus, the
Congress has no power to appropriate
funds for private purposes with the
exception specified in the above-cited
Constitutional provision.

INCOME TAXATION
 PUBLIC MONEY NOT FOR RELIGIOUS
PURPOSES
• The doctrine stated above is to further
stress the principle of the separation of
the church and the State.
• In concurrence with the Constitution, the
State shall have no official religion, or
shall not set up a church, whether or not
supported with public funds or prefer one
religion over another.
INCOME TAXATION
PUBLIC MONEY NOT FOR RELIGIOUS PURPOSES

• Likewise, the Church shall not interfere in

purely political matters or affairs
exclusively for the State. Consequently,
the Constitution prohibits any
infringement of religious freedom.

INCOME TAXATION
 CONGRESS GRANTING TAX EXEMPTION

• The Constitution provides that “No law

granting any tax exemption shall be
passed without the concurrence of a
majority of all the members of the
Congress.”

INCOME TAXATION
CONGRESS GRANTING TAX EXEMPTION

• It shall be observed that the above

Constitutional provision requires the
concurrence of a majority not of the
attendees constituting a quorum but of
all the members of the Congress as a
safeguard against the indiscriminate
grant of tax exemptions.

INCOME TAXATION
CONGRESS GRANTING TAX EXEMPTION

• The Constitution also provides that “All

appropriation, revenue or tariff bills, bills
authorizing of the public debt, bills of
local application and private bills shall
originate exclusively in the House of
Representatives, but the Senate may
propose or concur with amendments.”

INCOME TAXATION
 SUPREME COURT’S FINAL JUDGMENT IN ALL TAX CASES

• “ The Supreme Court shall have the

power to review, revise, reverse, modify
or affirm on appeal or certiorari, as the
laws 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.”
INCOME TAXATION
SUPREME COURT’S FINAL JUDGMENT IN ALL
TAX CASES
• The Constitution provides that “no law
shall be passed increasing the appellate
jurisdiction of the Supreme Court without
its advice and concurrence.”
• The Power of Judicial Review in taxation is
limited only to the interpretation and
application of tax laws.

INCOME TAXATION
SUPREME COURT’S FINAL JUDGMENT IN ALL
TAX CASES
• The judicial tribunals have no concern on
the wisdom of taxing act.
• Its power does not include inquiry on the
policy of legislation. Neither can it
legitimately question or refuse to
sanction the provisions of any law
consistent with the Constitution.

INCOME TAXATION
 NO IMPRISONMENT FOR NON-PAYMENT OF POLL TAX

• The Constitution provides that “no

personal shall be imprisoned for debt or
non-payment of a poll tax.”
• The term “poll tax” means a tax imposed
on a person as a resident within a
territory of the taxing authority without
regard to his property, business or
occupation. A good example of poll tax is
the community tax. INCOME TAXATION
 NO IMPRISONMENT FOR NON-PAYMENT OF POLL TAX

• It is to be noted that the prohibition of

imprisonment applies only to the non
payment of poll tax. Consequently,
imprisonment for non payment of other
taxes (not poll tax in nature) or
imposition of fine would not be contrary
to the Constitution.

INCOME TAXATION
 TAXES AS GENERAL FUNDS OF THE GOVERNMENT

• The Constitution states that “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.”
INCOME TAXATION
 TAXES AS GENERAL FUNDS OF THE
GOVERNMENT
• Thus collection of fee with the nature of
taxes intended for the promotion of sugar
industry shall be treated as a special fund.
Such fund shall be used for its intended
purpose and none of its part shall be used
for exclusive benefit of any private
person. Once the purpose is achieved,
the unspent amount shall be transferred
to the general fund of the government.
INCOME TAXATION
 STAGES, ASPECTS OR PROCESSES OF
TAXATION
• Taxation involves three stages namely:
1. Levy
2. Assessment, and
3. Tax payment/collection
LEVY
• Levy or imposition of taxes involves the
passage of tax laws or ordinances
through the legislature.
INCOME TAXATION
ASPECTS OF TAXATION

INCOME TAXATION
 STAGES OF TAXATION

LEVY
• The tax laws to be passed shall
determine the nature of taxes (kind),
those to be taxed (subjects – person,
property or rights), the purpose of tax
(objective), how much is to be collected
(the rate and the base of tax), and how
taxes are to be implemented (the
manner of imposing and collecting tax).
INCOME TAXATION
 STAGES OF TAXATION

• It also involves the granting of tax

exemptions, tax amnesties and tax
remedies that the government and
taxpayers may avail for the proper
implementation of tax measure.
• This gives the legislature the freedom to
choose the objects of taxation provided
that the law-making body does not
violate any inherent and constitutional
limitations. INCOME TAXATION
 STAGES OF TAXATION

• It cannot be delegated to the executive

and judicial branches of the government
because by nature it is a legislative
function.
• Examples of tax legislative functions are
the following:
a. Prescribing general rules of taxation,
b. Selection of the object or subject to be
taxed,
INCOME TAXATION
 STAGES OF TAXATION
c. Determination of the purposes for which
taxes shall be imposed, and
d. Fixing the amount of the tax and/or tax rates
to be imposed.
• The power of the President to “remit fines and
forfeitures” does not include civil penalties
regarding nonpayment of tax and other
violation of tax laws. Such power embraces
only fines and forfeitures involving criminal
liabilities upon conviction by final judgment.
INCOME TAXATION
 STAGES OF TAXATION

ASSESSMENT
• Assessment involves the act of
administration and implementation of the
tax laws by the executive through its
administrative agencies such as the BIR
and Bureau of Customs.
• Generally taxes are self-assessing. It
means that the taxpayer can compute his
taxes by himself.
INCOME TAXATION
 ASSESSMENT
• Technically, the word “assessment” as
used in taxation, means the appraisal
and valuation of the subject of taxation.
• This process is important in the
determination of tax prescription,
surcharges and interests to arrive at the
specific sum of tax charged on a person
or property in accordance to prevailing
tax laws.
INCOME TAXATION
 PAYMENT OF TAX

• Payment of tax is a process involving the

act of compliance by the taxpayer in
contributing his share to defray the
expenses of the government. It is also
called “tax collection”, the process of
obtaining payment of tax.
• Payment of tax also includes the options,
schemes, or remedies as may be legally
open or available to the taxpayer.
INCOME TAXATION
 STAGES OF TAXATION
• The first two stages of taxation (levy and
assessment) are referred to as the
impact of taxation, and the third phase
(tax payment/collection) is referred to as
the incidence of taxation.
• As a rule, the aspects of taxation that can
be delegated are assessment and
collection of taxes since they are
administrative in nature.
INCOME TAXATION
 STAGES OF TAXATION
• Examples of tax administrative functions
are the following:
a. Valuation of property for taxation
b. Equalization of assessment and
c. Collections of taxes

INCOME TAXATION
 PRINCIPLES OF A SOUND TAX SYSTEM
• The fundamental principles of a sound
taxation system based on Adam’s Smith’s
Canons of Taxation are:
1. Fiscal Adequacy
2. Equality of Theoretical Justice, and
3. Administrative Feasibility

INCOME TAXATION
 FISCAL ADEQUACY

• The principle of fiscal adequacy states

that the sources of revenue of the
government should be sufficient to meet
the demand of public expenditures
regardless of business conditions.
• The revenue of the government should
be capable of expanding or contracting
annually in response to variations in
public expenditures.
INCOME TAXATION
 FISCAL ADEQUACY

• Because of inelastic government revenue,

there may be surplus in budget if revenue
is greater than government expenses and a
budget deficit if government expenses are
more than government revenue.
• An ideal budget to achieve fiscal adequacy
is a balance between revenue and
government expenses. A balanced budget
is achieved when revenue equals
expenditures.
INCOME TAXATION
 FISCAL ADEQUACY

• It is desirable that the government

should adopt effective measures to
collect taxes efficiently and reduce its
expenditures to obtain a balance and
adequate fiscal budget.
• This could be done through proper
collection of taxes and reduction of
government expenditures to meet the
available funds of the government.
INCOME TAXATION
 EQUALITY OR THEORETICAL JUSTICE
• This principle states that the tax burden
must be proportionate to the taxpayer’s
ability to pay.
• It is based on the philosophy that “he
who received more should give more.”
The contribution of each individual to the
government should be fair enough
according to his earnings and wealth.

INCOME TAXATION
 EQUALITY OR THEORETICAL JUSTICE

• Since the Constitution provides that

taxation must be equitable, a tax
measure that violates equality of
theoretical justice would make such tax
measure null and void.

INCOME TAXATION
 ADMINISTRATIVE FEASIBILITY

• Tax laws must be convenient, just,

uniform and effective in their
administration – free from confusion and
uncertainty. Their exercise should be
convenient as to the place, time and
mode of payment, and not burdensome
or discouraging to business. Competent
public officials must enforce them
uniformly.
INCOME TAXATION
 ADMINISTRATIVE FEASIBILITY
• Applications of administrative feasibility
are:
a. Collection of taxes at source
(withholding tax)
b. Assigning of duly authorized banks to
collect taxes
c. Quarterly filing and payment of income
taxes

INCOME TAXATION
 ADMINISTRATIVE FEASIBILITY

• The tax must be clear to the taxpayer, not

unduly burdensome and discouraging to
business, convenient as to time and
manner of payment, and capable of
enforcement by competent public officials.
• The principles of fiscal adequacy and
theoretical justice represent the nature of
the government’s tax policy and the
administrative feasibility represents tax
administration.
INCOME TAXATION