MODULE 1
BASIC PRINCIPLES
FATIMA T. PERALTA, CPA, MMBM
LEARNING OBJECTIVES
At the end of module, students are expected to be able to:
1. Understand the concept and purpose of taxation
2. Know the elements of a tax
3. Identify the limitation on the state power to tax
FATIMA T. PERALTA, CPA, MMBM
What is taxation?
FATIMA T. PERALTA, CPA, MMBM
What is taxation?
- It is the process or means by which the sovereign through its
law-making body, imposes burdens upon subjects and objects
within its jurisdiction for the purpose of raising revenues to carry
out the legitimate objects of government
FATIMA T. PERALTA, CPA, MMBM
THREE INHERENT POWERS OF THE STATE
1. Police power - the inherent power of a government to exercise reasonable
control over persons and property within its jurisdiction in the interest of
the general security, health, safety, morals, and welfare except where legally
prohibited
2. Power of Taxation – is the means by which the government or the taxing
authority imposes or levies a tax on its citizen and business entities.
3. Power of eminent domain - also called “condemnation” – is the power of
local, state or federal government agencies to take private property for
“public use” so long as the government pays “just compensation.
FATIMA T. PERALTA, CPA, MMBM
DISTINCTIONS AMONG THE THREE
INHERENT POWERS
FATIMA T. PERALTA, CPA, MMBM
DISTINCTIONS AMONG THE THREE
INHERENT POWERS
FATIMA T. PERALTA, CPA, MMBM
PURPOSES OF TAXATION
1. Revenue or fiscal purpose
2. Regulatory purpose
a. Promotion of general welfare
b. Reduction of social inequality
c. Economic growth
FATIMA T. PERALTA, CPA, MMBM
THEORY OR BASIS OF TAXATION
1. Lifeblood theory and/or necessity theory
2. Benefit received or reciprocity theory
FATIMA T. PERALTA, CPA, MMBM
SCOPE OF THE POWER OF TAXATION
1. Comprehensive
2. Unlimited
3. Plenary
4. Supreme
FATIMA T. PERALTA, CPA, MMBM
ESSENTIAL ELEMENTS OF A TAX
1. It is an enforced contribution
2. It is generally payable in money
3. It is proportionate in character
4. It is levied on persons, property, or the exercise of a right or
privilege
5. It is levied by law-making body of the state
6. It is levied for public purpose
FATIMA T. PERALTA, CPA, MMBM
CLASSIFICATION OF TAXES
1. As to scope
a. National
b. Local
2. As to subject
a. Personal, poll or capitation
b. Property
c. Excises
FATIMA T. PERALTA, CPA, MMBM
CLASSIFICATION OF TAXES
3. As to who bears the burden
a. Direct
b. Indirect
4. As to the determination of the amount
a. Specific
b. Ad valorem
FATIMA T. PERALTA, CPA, MMBM
CLASSIFICATION OF TAXES
5. As to purpose
a. Primary
b. Secondary
6. As to graduation or rate
a. Proportional
b. Progressive
c. Regressive
FATIMA T. PERALTA, CPA, MMBM
CLASSIFICATION OF TAXES
7. As to taxing authority
a. National
b. Local
FATIMA T. PERALTA, CPA, MMBM
ELEMENTS OF SOUND TAX SYSTEM
1. Fiscal Adequacy
2. Theoretical Justice or Equity
3. Administrative Feasibility
FATIMA T. PERALTA, CPA, MMBM
LIMITATION ON THE STATE’S POWER TO TAX
1. Inherent Limitation
a. Purpose must be public in nature
b. Prohibition against delegation of the taxing power
c. Territorial Limitation
2. Constitutional Limitations
a. Due process of law
b. Equal protection of laws
c. Rule of uniformity and equity in taxation
FATIMA T. PERALTA, CPA, MMBM
LIMITATION ON THE STATE’S POWER TO TAX
2. Constitutional Limitation (cont.)
d. Prohibition against imprisonment for non-payment of “poll tax”
e. Prohibition against impairment of obligation
f. Prohibition against infringement of religious freedom
g. Prohibition against appropriate of proceeds of taxation for use, benefit, or
support of any church
h. Prohibition against taxation of religious, charitable and educational
entities
i. Prohibition against taxation of non-stock, non-profit educational institution
FATIMA T. PERALTA, CPA, MMBM
FACTORS TO CONSIDER IN
SITUS OF TAXATION
1. Subject matter
2. Nature of Tax
3. Citizenship
4. Residence of the taxpayer
5. Source of Income
6. Place of excise, business or occupation being taxed
FATIMA T. PERALTA, CPA, MMBM
TAX AS DISTINGUISHED FROM OTHER TERMS
OR IMPOSTS
FATIMA T. PERALTA, CPA, MMBM
TAX AS DISTINGUISHED FROM OTHER TERMS
OR IMPOSTS
FATIMA T. PERALTA, CPA, MMBM
TAX AS DISTINGUISHED FROM OTHER TERMS
OR IMPOSTS
FATIMA T. PERALTA, CPA, MMBM
TAX AS DISTINGUISHED FROM OTHER TERMS
OR IMPOSTS
FATIMA T. PERALTA, CPA, MMBM
DOUBLE TAXATION
1. Direct duplicate taxations
-Taxing twice
by the same taxing authority, jurisdiction, or taxing district
for the same purpose
in the same year or taxing period
same subject or object
same kind/character of the tax
2. Indirect double taxation
FATIMA T. PERALTA, CPA, MMBM
MEANS OF AVOIDING OR MINIMIZING THE
BURDEN OF TAXATION
1. Shifting – the transfer of the burden of tax by the original payer or the one
on whom the tax was assessed or imposed to someone else
2. Transformation – an escape from taxation where the producer or
manufacturer pays the tax and endeavor to recoup himself by improving
his process of production thereby turning out his units of products at a
lower cost
3. Evasion – the use by the taxpayer of illegal or fraudulent means to defeat
or lessen the payment of a tax
FATIMA T. PERALTA, CPA, MMBM
MEANS OF AVOIDING OR MINIMIZING THE
BURDEN OF TAXATION
4. Tax Avoidance or tax minimization – is the exploitation by the taxpayer of legally
permissible alternative tax rates or methods of assessing taxable property or
income in order to avoid or reduce the tax liability
5. Exemption – the grant of immunity to a particular persons or corporations or to
persons or corporation of a particular class from a tax which persons or
corporations generally within the same State or or taxing district are obliged to pay
6. Capitalization – the reduction in the selling price of income producing property by
an amount equal to the capitalized value of future taxes that may be paid by the
purchases FATIMA T. PERALTA, CPA, MMBM