BASIC PRINCIPLES OF TAXATION

Prepared by: Mr. Johann Reginald B. Piquero, LPT, MACDDS

 Learning Objectives
At the end of the chapter, the student shall be able
to:
1. Define taxation;
2. Describe the nature and scope of taxation;
3. Discuss the importance and purpose of taxation;
4. Differentiate the three inherent powers of the
State;
5. Describe the stages of taxation;
6. Explain the principles of a sound taxation system;
7. Explain the inherent limitations of taxation;
Cont.
8. Identify and explain the constitutional limitations
of taxation;
9. Describe the various sources of taxation laws;
10. Name and describe the situs of taxation and its
application;
11. Define tax and describe its essential
characteristics;
12. Identify the classification of taxes;
13. Distinguish tax from other charges or fees; and
14. Describe the various concepts on escape from
taxation.
 NATURE AND CONCEPT
Taxation if defined in various ways as follows:

a. Taxation is an inherent power of the State to

enforce proportional contribution upon persons,
properties, or rights in order to generate revenues
to defray the expenses of the government.
b. Taxation is a legislative act of the State to exact
contributions on individuals, properties, or
transactions to raise money for public expenditures.
c. Taxation is an exercise of the sovereign power to
raise revenue on persons, properties, and
transactions to defray the expenses of the
government.
 OBJECTS OF TAXATION

1. Persons
2. Properties
3. Transactions, earnings, or rights
 THE NEED FOR TAXATION

Taxation exists for a very simple

reason – no state or government can
survive without it.
 BASES OF INCOME TAXATION

1. Benefit-received theory
2. Ability to pay theory
Therefore, taxation exists on the following
premises:
a. There is a need for a government to exist.
b. Any government that exists cannot continue to
survive without any revenue to defray its
expenses.
c. The government must force its constituents within
its territorial jurisdiction to pay taxes to raise
revenue.
 TAX LAWS IN THE PHILIPPINES

1. The National Internal Revenue Code of the

Philippines (Republic Act No. 8424, as
amended)
2. Tariff
and Customs Code of 1979 (Presidential
Decree No. 1464, as amended)
3. LocalGovernment Code of 1991 (Republic Act
No. 7160)
4. National taxes imposed by special laws
National Internal Revenue Code (NIRC)
of 1997 (RA NO. 8424, amended)
 An internal revenue law is intended to collect
taxes in order to raise revenue for public purposes.
When the law covers the whole country, the revenue
law is said to be a national internal revenue law.
The NIRC regulates the following taxes:
1. Income taxes
2. Estate and donor’s taxes
3. Documentary stamp tax
4. Excise tax
5. Value-added tax (VAT)
6. Percentages taxes
Cont.

These taxes are under the

administration of the Bureau of Internal
Revenue (BIR). The latest law that amended
the NIRC is the Tax Reform for Acceleration
and Inclusion (TRAIN) under Republic Act No.
10963 approved on December 19, 2017 and
took effect on January 1, 2018.
 The Tariff and Customs Code of 1979
(Presidential Decree No. 1464, as amended)

The Tariff and Customs Code of 1979 is

intended to collect the following:
1. Import goods or duties
2. Export goods or duties
 The Local Government Code of 1991
(Republic Act No. 7160, as amended)
The Local Government Code of 1991, enacted
through Republic Act No. 7160, was a mandate from the
1987 Philippine Constitution. Subject to the limitations
and guidelines provided by Congress, each local
government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and
charges.
1. Professional tax
2. Real property tax
3. Community tax
4. Business taxes and other fees and charges
NATIONAL TAXES IMPOSED BY SPECIAL LAWS

1. Traveltax. This is regulated by Presidential

Decree No. 1183, as amended.
2. Specialeducation fund taxes. This is governed by
RA No. 5447.
3. Motor vehicle fee. RA No. 4136, otherwise known
as the Land Transportation and Traffic Code,
regulates the collection of fees on motor vehicles.
4. Taxeson narcotic drugs. This governed by RA No.
953, otherwise known as the Narcotic Drugs Law.
NATURE OF TAXATION
 INHERENT POWER

The power of taxation is considered

inherent because it is inseparable from the
State. Taxation starts to exist concurrently
with the existence of a person, government,
territory, and sovereignty.
The government can exercise the power
of taxation even if the Constitution does not
expressly provide it.
 LEGISLATIVE FUNCTION
Under the 1987 Philippine Constitution,
there are two instances wherein the taxing
power has been delegated, namely:
1. The power to tax as delegated to the local
government units (1987 Phil. Const., Art. X,
Sec. 5)
2. The power given to the President on the
imposition of tariff rates, import and
export quotas, and other charges (1987
Phil. Const., Art. VI, Sec. 28 (2)
Cont.

The following concerns, however, should be

determined by the legislative body:
1. The purpose of tax
2. The subject or object to be taxed
3. The amount or rate of tax to be imposed
4. The manner and means of collection
 PUBLIC PURPOSE

The primary objective of taxation is to raise

revenue to support the government in exercising its
functions.
The term “public purpose” embraces the
concept that the disbursement from taxes is for the
common good of all individuals regardless of age,
sex, financial standing in the community, or religion.
No individual or group of individuals alone shall be
enriched by public funds.
Cont.

Taxation satisfies the requirement of

public purpose when the tax collected is used
for the following:
1. Support the expenses of the government
2. Defray recognized projects of the
government
3. Promote the welfare of the community
 OPERATING WITHIN TERRITORIAL JURISDICTION

The territorial jurisdiction of the

Philippines will include all territories over
which the Philippines has sovereignty.
Accordingly, Philippine territorial jurisdiction
will include all areas and waters outlined in
the Treaty of Paris of 1898, the Treaty of
Washington of 1900, and the areas and
waters outlined in the United Nations
Convention on the Law of the Sea of
December 10, 1982.
 STRONGEST AMONG THE INHERENT
POWER OF THE STATE

The power of taxation is the strongest

among the three inherent powers of the
State. No state can exist without taxation.
Without taxation, the two other
inherent powers, namely, the power of
eminent domain and police power, can
neither survive nor be effectively exercised
by the government.
 SUBJECT TO LIMITATIONS

1. Inherent limitations. Inherent limitation are

restrictions on the power that exists from the very
nature of the power of taxation itself.
2. Constitutional limitations. Constitutional
limitations are restrictions in the exercise of the
power of taxation expressly provided in the 1987
Philippine Constitution.
The power of taxation, therefore, is not
absolute because it is restricted by inherent and
constitutional limitations.
 CHARACTERISTICS OF INCOME TAXATION IN
THE PHILIPPINES
1. National tax – tax is said to be national tax when it covers
the whole country and not only a particular province, city or
municipality or, or barangay.
2. General purpose – tax is said to be a general-purpose tax
when it is levied without any specific or predetermined
purpose.
3. Direct tax – tax is said to be a direct tax when it is payable
by the person to whom it is levied upon or imposed by law.
4. Excise tax – excise tax, with reference to tax
characteristics, is the tax imposed on the right or privilege
of a person to earn income.
5. Progressive tax – the rate of income tax under the
progressive tax system increases as the tax base increases.
 PURPOSE OF TAXATION

Principle
Purpose
Secondary Purpose
3 INHERENET POWERS OF THE STATE
 Power of Taxation

The State has the inherent power to enforce

proportional contributions upon individuals,
properties, and transactions to raise revenues to
support the existence of a government.
The power of taxation is the strongest
among the three inherent powers of the State.
Taxation is considered as the lifeblood of the
government.
 Police Power
The State has the inherent power to promote the
general welfare of its inhabitants through proper
regulations of rights or properties.
Among others, the following measures illustrate
the exercise of police power.
1. Issuing laws on gambling, prohibited drugs, and
prostitution
2. Regulating the exercise of profession
3. Protecting the environment and natural resources
4. Putting convicted criminals and law abusers in prisons
5. Enforcing traffic rules and regulations
 Power of Eminent Domain

The State has the inherent power to take the

private properties of individuals or entities with just
compensation for public purpose.
The property can be taken by the State even at
the refusal of the owner as long as there is just and
fair compensation. Although considered legislative in
nature, the power of eminent domain can be
delegated to the Executive Branch of the
government.
 Similarities of the 3 Inherent
Powers

1. Based on existence
2. Based on their relationship with the
Constitution
3. Basedon their relationship with the subject
of the power
4. Basedon their relationship with the
branches of the government
STAGES OF TAXATION
 Levying or Imposition Stage

1. Those who will be taxed

2. The amount to be collected
3. The rate to be used
4. The manner of collection
5. The granting of tax exemptions

In the Philippines, the Congress, which is

composed of the House of Representatives and the
Senate, is vested with the legislative function of the
government.
 Assessment and Collection Stage

Assessment refers to the act of appraising or

valuing the subject of taxation and determining the
amount of tax due and payable including surcharges
and interest.
Collection is the process of obtaining payment
of tax that is due and payable.
The assessment and collection stage of
taxation is an administrative function in character and
is usually implemented by the Executive Branch
through its various administrative agencies such as BIR
or Bureau of Customs (BOC).
 Payment Stage of Taxation

This particular phase of taxation is

incidental to the whole process because it
involves the taxpayer’s compliance to the
requirements and employment of available
remedies.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
 Fiscal Adequacy

Under this principle, the

revenues of the government should be
sufficient to cover or meet the
expenses of the government.
Government spending is based on
estimated revenue collection and
proper collection of taxes.
 Theoretical Justice

Taxes imposed are proportionate

to the taxpayer’s ability to pay. The
tax burden is measured in terms of
the ability, income, wealth, or
benefits of the taxpayer.
 Administrative Feasibility

1. Administeringquarterly filing and payment

of income taxes
2. Collecting of withholding taxes from
employees
3. Authorizing banks to perform the collection
 Limitations of the Power of Taxation

 Inherent limitations are those limitations

intrinsic or natural to the existence of the power
of taxation. These are limitations that exist
because the power of taxation exists.
 Constitutional limitations are those limitations
that are specifically provided in the various
provisions of the 1987 Philippine Constitution.
 INHERENT LIMITATIONS

1. Levied for public purpose

2. Non-delegation of power to tax
3. Exemptions of government entities from taxation
4. Taxation laws are within the territorial jurisdiction of
the State
 Privity of relationship
5. Taxation laws are subject to international comity
6. Prohibition of double taxation
 Indirect double taxation
 Direct double taxation
 CONSTITUTIONAL LIMITATIONS

1. Due process
2. Equal protection of the law
3. No imprisonment for non-payment of poll tax
4. Uniform and equitable taxation rules
5. Non-appropriation of money for religious or private
purposes
6. Exemption of charitable institutions, churches,
educational entities, convents, or non-profit cemeteries
from property taxation
7. Concurrence of the majority of all the members of the
Congress to pass laws granting tax exemption
 Grounds for Tax Exemption
a. Contract. Corporations that are granted an
exemption status from certain kinds of taxes
usually indicate the nature and forms of the
exemption in their corporate charter.
b. Public policy. Tax exemption, as a measure of
public policy, promotes or encourages a particular
industry for investors to favorably consider a
particular industry.
c. Treaty. Tax exemption is a way of fostering
international relations with foreign states.
 Attributes of Tax Exemption

1. It is considered personal
2. By operation of law, it is a privilege
3. It is not discriminatory
 Classification of Tax Exemption

As to object. Tax Exemption may be

categorized as personal or impersonal.
a. Personal tax exemptions are granted to favor
certain classifications of individual taxpayers.
b. Impersonal tax exemptions are granted to
favor certain classes of transactions, rights,
or properties.
Cont.

As to coverage. The extent of tax exemption

may be total or partial.
a. Total or full exemption is an exemption
from all kinds of taxes imposed either local
or national, or income or business.
b. Partial
exemption is an exemption granted
from a particular kind of tax but is subject
to other taxes.
Cont.

As to manner of creation. The exemption

granted may be expressly or impliedly
provided in the law:
a. Express tax exemption is an exemption
specifically provided by the Constitution,
Tax Code, Revenue Regulations, statutes, or
ordinances.
b. Implied tax exemption is a manner of
providing exemption by the process of
omission from the coverage of taxation.
8. Non-impairment of the Supreme Court
jurisdiction of tax cases
9. Philippine President to veto any item in a
tax bill approved by the Congress
 Veto power
 Item veto
 Pocket veto
10. Tax collection as a general fund of the
government
 SOURCES OF TAXATION LAWS
 The Philippine Constitution
 Statues and Presidential Decrees
 Revenue Regulation by the Department of Finance
• Revenue Regulations (RRs)
• Revenue Memorandum Orders (RMOs)
• Revenue Memorandum Rulings (RMRs)
• Revenue Memorandum Circulars (RMCs)
• Revenue Bulletins (RBs)
• BIR Rulings
Cont.

 Judicial Decisions
 Local Government Ordinances
 INTERPRETATION OF TAX LAWS

1. Tax laws have prospective application

2. Tax laws are resolved in favor of the
taxpayer in case of doubts
3. Tax laws should clearly indicate tax burden
4. Provisions on tax exemption should be clear
 SITUS OF TAXATION

Situs (site) or place of taxation refers to the

territorial jurisdiction of the State to impose the
power of taxation, that is, to charge and collect
taxes on persons, properties, or transactions.
1. Residence or domicile of the person
2. Citizenship of a person or taxpayer
3. Location or source of properties, rights, or income
 Subject or Object of Taxation Situs or Place of Taxation
1. Person Residence of the taxpayer
2. Real property Location of the property
3. Personal tangible property Location of the property
4. Personal intangible property Residence of the owner
5. Income Residence of the taxpayer
Location where the income was
earned
Citizenship of the taxpayer
6. Gratuitous transfer of property Residence of the taxpayer
Location of the property
Citizenship of the taxpayer
7. Business Location of the business
8. Occupation Location where occupation was
conducted
Cont.

Some subjects of taxation have several situs.

For instance, an income has the situs of the
following:

1. Residence of a taxpayer
2. Place or location where the income was
earned
3. Citizenship of a taxpayer
 MEANS OF ESCAPE FROM TAXATION

A taxpayer sometimes tries to minimize

the amount of tax or totally escapes the
burden of tax liabilities.
The concept of minimizing or totally
escaping the tax burden is referred to as the
doctrine of escape from taxation.
 CLASSIFICATIONS OF ESCAPE FROM TAXATION

1. Escapes that result in loses of government

revenue
a. Tax avoidance
b. Tax evasion
c. Tax exemption
2. Escapes that do not result in losses of
government revenue
d. Tax shifting
e. Tax transformation
f. Tax capitalization
 TAXES

Taxes are proportionally enforced

contributions on persons, properties,
rights, and transactions levied by the
legislative body for the support of the
government.
ESSENTIAL CHARACTERISTICS OF TAXES
1. Enforced contribution
2. Levied by the legislative body
3. Proportionate in character
4. Payable in money
 Distraint
 Levy
5. Levied for public purpose
6. Collected for government revenue
7. Collectible by the State within its jurisdiction
 CANONS OF TAXATION

1. Tax is proportional to one’s ability to pay.

2. Tax is certain and not arbitrary.
3. Tax is generally convenient to pay.
4. Tax is economical to collect.
CLASSIFICATION OF TAXES
According to Subject Matter or Object

1. Personal,poll, or capitation – tax is imposed on

an individual in accordance with his/her
residence. Example: Community tax
2. Property tax – it is a tax imposed on a property
that is either personal or real based on its value
or some other reasonable method of
apportionment. Example: Real Estate tax
3. Excisetax – tax is imposed on the performance of
an act or exercise of a profession. Example: VAT,
professional tax, income tax, and estate tax.
 According to Purpose

1. Generalor revenue – tax is imposed to raise

revenue in order to defray the expenses of
the government. Example: Income tax and
VAT
2. Special or regulatory – tax is imposed for
special intended purposes such as achieving
economic and social growth. Example:
custom duty
 According to Who Bears the Burden

1. Direct– tax is imposed on persons who are bound

by a taxation law to pay. Examples: Income tax,
community tax, and estate tax.
2. Indirect– tax is imposed on certain individuals
but is shifted to another person by way of
indemnifying himself/herself at the expense of
the other. Example: VAT
According to Determination of Amount

1. Ad valorem – it refers to the tax with fixed

proportion in relation to the value of a property as
determined by an independent appraiser.
Examples: Real estate tax and excise tax on
cigarettes
2. Specific – is based on certain units of
measurement such as head or number, weight,
length, or volume. Examples: Tax on fermented
liquor, distilled spirits, and wines.
 According to Scope or Authority
Imposing the Tax
1. National– tax is imposed by the national
government and is being administered by
government agencies such as the BIR and the BOC.
Examples: internal revenue taxes and custom
duties
2. Localor municipal – tax is imposed by various
LGUs such as provinces, cities, or municipalities.
Examples: real estate tax and municipal licenses.
 According to Graduation or Rate

1. Proportional – tax is imposed on fixed percentage

or rate on property, income , or other bases
depending on a particular bracket or classification
where the subject belongs. Examples: Real property
tax, VAT, and percentage tax
2. Progressiveor graduated – tax is imposed wherein
the rate increases as the tax base increases.
Examples: income tax, estate tax, and donor’s tax
3. Regressive – tax is imposed wherein the rate
decreases as the tax base increases. At present,
there is no regressive tax in the Philippines.
TAX DISTINGUISHED FROM OTHER CHARGES
 Tax Distinguished from License Fee

Tax License Fee

a. Imposed for the purpose of raising a. Imposed for the purpose of regulation
revenue for the state
b. Based on the power of taxation b. Based on police power
c. The authority to levy tax is vested in
c. The authority to impose is through
the legislative body (Congress) the delegated power given to the local
government
d. Non-payment of tax does not make d. Non-payment makes the business or
the business/occupation illegal occupational illegal
e. The amount is usually material e. The amount usually covers
administrative costs in the
implementation
 Tax Distinguished from Toll

Tax Toll
a. Tax is imposed to raise a. Toll is imposed to cover the
revenue to cover the expenses of cost of a private property or
the government improvement
b. Tax is a demand of the state b. Toll is a demand of ownership

c. Tax is imposed by the c. Toll is imposed by private

government entities

 Toll represents the amount charged by the

owner for the use of his/her property or
improvements by others.
 Tax Distinguished from Penalty

Tax Penalty
a. It is imposed for the primary a. It is imposed to serve as a
objective of raising revenue punishment to regulate conduct

b. Only the government imposes b. Private entities/individuals

the payment of taxes may impose penalty

c. Tax arises from law c. Penalty arises from law or

contract
 Tax is Distinguished from Special Assessment

Tax Special Assessment

a. The national or local
government imposes tax
b. Tax is levied on a person,
property, or exercise of
privilege
c. Tax is imposed to cover the
expenses of the government
a. Only the local government
imposes special assessment
b. Levied on land only or its
improvements
c. Imposed to cover the cost of
land or improvement
Tax Distinguished from Custom Duties

Tax Custom Duties

a. Tax is imposed on
persons, properties, or
rights
b. Tax is broader in scope;
tax includes custom duties
a. Custom duties are
imposed on imported goods
b. Limited in meaning; not
all custom duties are taxes
 Tax Distinguished from Debt
Tax
a. It is based on enacted laws
b. Tax is non-assignable
c. Non-payment of tax (except
poll tax) can cause imprisonment
for debt
d. It is generally payable in money
e. Except for delinquent payment,
tax is non-interest bearing and
does not include interest
Debt
a. It is based on contract
b. Debt is transferable
c. No possibility of imprisonment
for non-payment
d. Payable in money or property
e. Usually payment of debts
END 