CHAPTER 1
BASIC PRINCIPLES OF TAXATION
CONCEPT OF TAXATION
It is an inherent power by which the sovereign through its law- making body
raises income to defray the necessary expenses of government by
apportioning the cost among those who, in some measures are privileged to
enjoy its benefits and, therefore, must bear its burdens.
Taxation is the act of levying a tax to apportion the cost of government
among those who, in some measure, are privileged to enjoy the benefits and
must therefore bear its burden.
Basis of taxation is found on the reciprocal duties of protection and support
between the State and its inhabitant.
The State collects taxes from the subjects of taxation in order that it may be
able to perform the function of the government.
This theory spawned the Doctrine of Symbiotic Relationship which means,
taxes are what we pay for a civilized society.
THE LIFEBLOOD DOCTRINE AND ITS IMPLICATION TO TAXATION
Tax is the lifeblood of the government; without the taxes the government
will not survive.
“Without taxes, the government would be paralyzed for lack of motive power
to activate and operate it. Hence, despite the natural reluctance to surrender
part of one’s earned income to the taxing authorities, every person who is
able must contribute his share in the running of the government.” (CIR v.
Algue, G.R. No. L-28896, February 17, 1988).
THEORIES OF GOVERNMENT COST ALLOCATION
Benefit received theory – The benefit received theory presupposes that the
more benefit one receives from the government, the more taxes he should
pay.
Ability to pay theory – The ability to pay theory presupposes that taxation
should also consider the taxpayer’s ability to pay. Taxpayers should be
required to contribute based on their relative capacity to sacrifice for the
support of the government.
IMPLICATION OF THE LIFEBLOOD DOCTRINE IN TAXATION
1. Tax is imposed even in the absence of a Constitutional grant.
2. Claims for tax exemption are construed against the taxpayer.
3. The government reserves the right to choose the objects of taxation.
4. The courts are not allowed to interfere with the collection of taxes.
5. In income taxation:
a. Income derived in advance is taxable upon receipt.
b. Deduction for capital expenditures and prepayments is not allowed as
it effectively defers the collection of income tax.
c. A lower amount of deduction is preferred when claimable expense is
subject to limit.
d. A higher base is preferred when the tax object has multiple tax bases.
TAXATION AS AN INHERENT POWER OF THE STATE
INHERENT POWERS OF THE STATE
1. Taxation Power – is the power of the State to enforce proportional
contribution from its subject to sustain itself.
2. Police Power – is the general power of the State to enact laws to
protect the well-being of the people.
3. Eminent Domain – is the power of the State to take private property
for public use after paying just compensation.
SCOPE AND LIMITATIONS OF THE POWER TO IMPOSE TAXES
The scope of taxation is widely regarded as comprehensive, plenary,
unlimited, and supreme. Despite of these, taxation has its own inherent
limitations and limitations imposed by the Constitutions.
INHERENT LIMITATIONS OF TAXATION
1. Territoriality of taxation – the taxing power of a State is limited to
persons and property within and subject to its jurisdiction.
2. International comity – refers to the respect accorded by nations to each
other because they are sovereign equals. Thus, the property or income
of a foreign state may not be subject of taxation by another state.
3. Public purpose – the proceeds of tax must be used for the support of
the State; or for some recognized objective of the government or to
directly promote the welfare of the community.
Tests in determining public purpose
1. Duty test – whether the thing to be furthered by the appropriation of
public revenue is the duty of the State as a government to provide.
2. Promotion of general welfare test – whether the proceeds of the tax
will directly promote the welfare of the community in equal measure.
4. Exemption of the government – the government, its agencies and
instrumentalities is exempt from tax.
5. Non-delegation of the taxing power – only the legislature has the full
discretion as to the persons, property, occupation or business to be
taxed provided these are all within the State’s territorial jurisdiction. It
can also fully determine the amount or rate of tax, the kind of tax to be
imposed and method of collection. (1 Cooley 176-184)
Exceptions:
a. Delegation to Local Government Units
b. Delegation to the President
c. Delegation to administrative agencies
CONSTITUTIONAL LIMITATIONS OF TAXATION
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contracts
7. Free worship rule
8. Exemption of religious or charitable entities, nonprofit cemeteries,
churches and mosque from property taxes
9. Non-appropriation of public funds or property for the benefit of any
church, sect, or system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-
stock educational institutions
11. Concurrence of a majority of all members of Congress for the
passage of a law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax
cases
15. The requirement that appropriations, revenue, or tariff bill shall
originate exclusively in the House of Representative
16. The delegation of taxing power to local government units
STAGES OF TAXATION
The exercise of taxation involves two stages, namely:
1. Levy or imposition– this process involves the enactment of a tax law
by Congress and is called impact of taxation. It is also referred to as
the legislative act in taxation.
2. Assessment and collection– This process involves the act of
administration and implementation of tax laws by the executive through
its administrative agencies such as the Bureau of Internal Revenue or
Bureau of Customs. This stage is referred to as incidence of taxation
or the administrative act of taxation
SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to
levy taxes upon the tax object. Examples of Situs Rule are:
1. Business tax situs
2. Income tax situs on services
3. Income tax situs on sale of goods
4. Property tax situs
5. Personal tax situs
OTHER FUNDAMENTAL DOCTRINES IN TAXATION
1. Marshall Doctrine - The power to tax involves the power to destroy.
Taxation power can be used as an instrument of police power. It can be
used to discourage or prohibit undesirable activities or occupation.
2. Holme’s Doctrine - The power to tax should not be the power to destroy.
The power to destroy is merely a consequence of taxation.
3. Prospectivity of tax laws - Tax laws are prospective in character and
application.
Exceptions:
• The retroactive application is necessarily implied from the
provisions of the law
• It involves income tax
• The retroactive application is clearly the intent of the Congress
4. Non- compensation or set-off - A claim for taxes is not such a debt,
demand, contract or judgment as allowed to be set-off; neither are they a
proper subject of recoupment since they do not arise out of the contract
or transaction.
5. Non-assignment of taxes - The power of taxation, being purely
legislative, Congress cannot delegate such power. This limitation arises
from the doctrine of separation of powers among the three branches of
government.
6. Imprescriptibility in taxation - Taxes will not prescribe against the
government because of the principle that taxes are a lifeblood of the
government and their prompt and certain availability is an imperious
need.
7. Doctrine of estoppel - The State cannot be stopped by the neglect of its
agents and officers. Erroneous application and enforcement of law by
public officers do not block the subsequent correct application of statutes.
8. Judicial Non-interference - The courts cannot inquire into the wisdom
of a taxing act or the advisability of expediency of tax. The impracticability
and absurd consequences of a tax law should be addressed to the
legislature and administrative authorities and not the courts.
9. Strict Construction of Tax Laws - Tax exemption must be strictly
construed against the taxpayer and liberally in favor of the government.
ESCAPES FROM TAXATION
Escapes from taxation are the means available to the taxpayer to limit or
even avoid the impact of taxation.
Categories of Escapes from Taxation
1. Those that result to loss of government revenue
2. Those that do not result to loss of government revenue
THOSE THAT RESULT TO LOSS OF GOVERNMENT REVENUE
1. Tax evasion is using illegal means to avoid paying taxes. Usually, tax
evasion involves hiding or misrepresenting income. This might be
underreporting income, inflating deductions without proof, hiding or not
reporting cash transactions, or hiding money in offshore accounts, e.g. not
reporting an income source.
2. Tax avoidance the legitimate minimizing of taxes and maximize after-tax
income, using methods included in the tax code, e.g. taking legitimate tax
deductions to minimize business expenses and lower your business tax
bill.
3. Tax exemption is the reduction or removal of a liability to make a
compulsory payment that would otherwise be imposed by a ruling power
upon persons, property, income, or transactions. Tax-exempt status may
provide complete relief from taxes, reduced rates, or tax on only a portion
of items. Examples include exemption of charitable organizations from
property taxes and income taxes, veterans, and certain cross-border or
multi-jurisdictional scenarios.
THOSE THAT DO NOT RESULT TO LOSS OF GOVERNMENT
REVENUE
1. Shifting- process of transferring tax burden to other taxpayers.
Forms of Shifting
• Forward shifting
• Backward shifting
• Onward shifting
2. Capitalization- pertains to the adjustment of the value of an asset
caused by changes in tax rates.
3. Transformation- pertains to the elimination of wastes or losses by the
taxpayer to form savings to compensate for the tax imposition or increase
in taxes.
TAX AMNESTY AND TAX CONDONATION
Amnesty is a general pardon granted by the government for erring taxpayers
to give them a chance to reform and enable them to have a fresh start to be
part of a society with a clean slate.
Tax condonation is the forgiveness of the tax obligation of a certain
taxpayer under certain justifiable grounds. This is also referred to as tax
remission.
TAX AMNESTY TAX CONDONATION
Covers both civil and criminal Cover only civil liabilities of the
liabilities taxpayer
Operates retrospectively by Applied prospectively to any unpaid
forgiving past violations balance of the tax
Conditional upon the taxpayer Requires no payment
paying the government a portion of
the tax
Double taxation
Double Taxation occurs when the same taxpayers is taxed twice by the same
tax jurisdiction for
the same thing.
Elements of Double taxation:
Primary element: Same object
Secondary elements:
• Same type of tax
• Same purpose of tax
• Same taxing jurisdiction
• Same tax period
Types of double taxation:
• Direct double taxation – this occurs when all the element of double
taxation exists for both impositions.
• Indirect double taxation – this occurs when at least one of the
secondary elements of double taxation is not common for both
impositions.