BASIC

PRINCIPLES
OF
TAXATION

 TAXATION is defined in many ways.

Commonly heard definitions include:
It is the process by which the sovereign, through its law
making body, races revenues use to defray expenses of
government.
It is a means of government in increasing its revenue
under the authority of the law, purposely used to promote
welfare and protection of its citizenry.
It is the collection of the share of individual and
organizational income by a government under the
authority of the law.

Taxation is the inherent power of the state

to impose and demand contribution upon
persons, properties, or rights for the
purpose of generating revenues for public
purposes.
The power of taxation upon necessity and
is inherent in every government or
sovereignty.

Taxes are the enforced proportional

contribution, generally payable in money,
levied by the law-making body of the
State by virtue of its sovereignty upon the
persons or property within its jurisdiction for
the support of the government and all
public needs.

Principles and Theories of Taxation

The Benefit Principle. This principle holds the individuals
should be taxed in proportion to the benefits they receive
from the governments and that taxes should be paid by
those people who receive the direct benefit of the
government programs and projects out of the taxes paid.
The Ability-to-Pay Principle. This principle holds that
taxes should relate with the peoples income or the ability
to pay, that is, people with greater income or wealth and
can afford to pay more taxes should be taxed at a higher
rate than people with less wealth. Ex. Individual income
tax.
The Equal-Distribution Principle. This principle that
income, wealth, and transaction should be taxed at a fixed
percentage; that is, people who earn more and buy more
should pay more taxes, but will not pay a higher rate of
taxes.

Structures of a Tax System

A tax is proportional. Meaning the government takes an amount
of money from a person which is indirect proportion to his income.
Ex. Ben salary is 10,000pesos and the government is deducting
10% of his salary for tax. After a year his income increases to
15,000pesos and the governments now deducts 12% of his salary
for tax. The said tax is proportional.
A tax is regressive. Meaning that the governments takes a larger
percentage of a persons income per tax, while he is receiving a
lower income. Ex. Bens salary 10,000pesos and government is
asking him to pay 15% of his salary for tax which is contrary to
our given example in number 1.
A tax is progressive. Meaning that the government takes a lager
percentage of his salary for tax due to his high salary. Ex. Ben
has a monthly income of 30,000pesos and the governments
deducted 20% of his salary for tax. The tax amount is
proportionately equal to someones status in the society. A rich
man should pay more than a poor man.

Significance of Taxation
Primary purpose: generates funds or revenues use to defray
expenses incurred by the government in promoting the
general welfare of its citizenry.
Other purposes:
to equitably contribute to the wealth of the nation
to protect new industries
to protect local producers

Characteristics of Tax
It is enforced contribution. Its payment is not voluntary
nature, and the imposition is not dependent upon the will
of the person taxed.
It is generally payable in cash. This means that payment
by checks, promissory notes, or in kind is not accepted.
It is proportionate in character. Payment of taxes should
be base on the ability to pay principle; the higher income
of the tax payer the bigger amount of the tax paid.
It is levied (to impose; collect) on person or property.
There are taxes that are imposed or levied on acts, rights
or privileges. Ex. Documentary tax.

Characteristics of Tax
It is levied by the state which has jurisdiction over the
person or property. As a general rule, only persons,
properties, acts, right or transaction with in the jurisdiction
of the taxing state are subject for taxation.
It is levied by the law making body of the state. This
means that a prior law must be enacted first by the
congress before assessment and collection may be
implemented of the 1987 constitution.
It is levied for public purposes. Taxes or imposed to
support the government for implementation of projects
and programs.

Basic Principles of a Sound Tax System

Fiscal adequacy. Means that the sources of revenue taken as a whole

should be sufficient to meet the expanding expenditures of the
government regardless of business, export taxes, trade balances, and
problems of economic adjustment. Revenues should be capable
expanding or contracting annually in response to variations of public
expenditures.

Equality or Theoretical Justice. Means the taxes levied must be base

upon the ability of the citizen to pay.

Administrative Feasibility. This principle connotes that in a successful

tax system, such tax should be clear and plain to taxpayers, capable of
enforcement by an adequate and well-trained staff of public office,
convenient as to the time and manner payment, and not unduly
burdensome upon on discouraging to business activity.

Consistency or Compatibility with Economic Goals. This refer to the

tax laws that should be consistent with economic goals or programs of
the government. This are the basic services intended for the masses.

Classification of Taxes
1. As to subject matter

Personal, Poll or Capitation Tax (ex. Residence Tax)

Property Tax. (ex. Real State Tax)
Excise Tax (ex. RVAT)

2. As to who bears the burden

Direct Tax (ex. Income Tax)

Indirect Tax (ex. Buying of goods and services (RVAT) )

3. As to determination of account

Specific Tax (ex. Taxes on wines)

Ad Valorem Tax (ex. Tax according to value such as Real
Estate Tax.

Classification of Taxes
4.

As to purpose

5.

General Tax (ex. Almost All Taxes)

Special Tax

As to scope

6.

National Tax (ex. National Revenue Taxes)

Local Tax

As to graduation rate

Proportional
Progressive or graduated

Regressive

Classification of Taxes
1. As to subject matter

Personal, Poll or Capitation Tax (ex. Residence Tax)

Tax of fixed amount imposed on individuals residing
within a specified territory without regard to their property
or the occupation in which they may be engaged.
Example: community tax

Property Tax. (ex. Real State Tax)

Tax imposed on property, whether real or personal, in
proportion either to its value or in accordance with some
other reasonable method of apportionment.
Example: real estate tax

Excise Tax (ex. RVAT)

Tax imposed upon the performance of an act, the
enjoyment of privilege, or the engaging in an occupation.
Example: income tax, value added tax, percentage tax

Classification of Taxes
2. As to who bears the burden

Direct Tax (ex. Income Tax)

Tax which is demanded from the person who is intended
to pay.
Example: community tax, income tax

Indirect Tax (ex. Buying of goods and services (RVAT) )

Tax which is demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of
another; or tax which the tax payer can shift to another.
Example: value-added tax

Classification of Taxes
3. As to determination of account

Specific Tax (ex. Taxes on wines)

Tax of a fixed amount imposed by the head or number,
or by some standard of weight of measurement; it
requires no assessment other than a listing or
classification of the objects to be taxed.
Example: Excise tax on distilled spirits, cigars and
cigarettes.

Ad Valorem Tax (ex. Tax according to value such as Real

Estate Tax.
Tax of fixed proportion of the amount or value of the
property with respect to which tax is assessed.
Example: income tax, real estate tax, customs duties,
excise tax on automobiles and non essential goods.

Classification of Taxes
3.

As to determination of account

When classifying taxes according to subject matter or object, excise

tax or privilege tax is employed to refer to as other than personal tax
and property tax.
Excise Tax are taxes applicable to certain specified articles
manufactured or ;produced in the Philippines for domestic sale or
consumption or any other disposition and to things imported into the
Philippines.
These taxes maybe specific or ad valorem.

Classification of Taxes
4.

As to purpose

General, Fiscal, or Revenue Tax (ex. Almost All Taxes)

Tax imposed for the general purpose of the government to
raise revenue for governmental needs.
Example: income taxes, business taxes.

Special Tax
Tax imposed for special purpose of the government to achieve
some social or economic ends irrespective of whether revenue is
actually raised or not.
Example: protective tariffs on imported goods.

Classification of Taxes
5.

As to authority imposing the tax

National
Tax imposed by the national government.
Example: National Internal Revenue Tax - income taxes,
customs duties, national taxes imposed by special lwas .

Municipal or Local
Tax imposed by municipal corporations or local governments.
Example: real estate tax, tax on occupations

Classification of Taxes
6.

As to graduation rate

Proportional
Tax based on fixed percentage of the amount of the
property, income tax or other basis as to be taxed.
Example: real estate taxes, value added tax, percentage
taxes

Progressive or graduated
Tax the rate at which increases as the tax base increases.
Example: income tax, estate tax, donors tax

Regressive
Tax the rate at which decreases as the tax base increases.

Income Tax
Tax on all yearly profits arising from
property, profession, trades or offices, or
as a tax on a persons income,
emoluments, and profits.
It is generally regarded as an excise tax.
It is not levied upon persons, property,
funds or profits but upon the right of a
person to receive income or profits.

Power to Impose Income Tax

Taxes are imposed based on
constitutional provisions expressly
authorizing the imposition of specified
kind of taxes other than income taxes.

Functions of Income Tax

1)To provide large amounts of revenues.
2)To offset regressive sales and consumption
taxes and together with estate tax.
3)To mitigate the evils arising from the
inequalities in the distribution of income and
wealth which are considered deterrents to social
progress, by a progressive scheme of taxation.

Functions of Income Tax

Income Tax is regarded as the
best measure of persons ability
to pay.

Distinction of Tax
Tax distinguished from Toll
- A tax is demand of sovereignty, while toll is demand
for proprietorship.
- A tax is paid for the use of the governments property,
while a toll is paid for the use of anothers property.
- A tax may be imposed by the government only, while a
toll is enforced by the government or a private
individual or entity.

Tax distinguished from Penalty

- A tax is intended to raise revenue, while penalty is
designed to regulate conduct.
- A tax may be imposed by the government only while a
penalty may be imposed by the government or a
private individual.

Distinction of Tax
Tax distinguished from Debt
- A tax is base on law, while a debt is based on
contract.
- A tax may not be assignable, while a debt is
assignable.
- A tax is generally payable in cash, while debt is
payable in cash or in kind.
- A person may be imprisoned for a non-payment of
taxes, but any person may not be imprisoned for nonpayment of debt.

Distinction of Tax
Tax distinguished from other Terms
- Revenue. This refers funds or income derived by the
government whether from tax or any other source in
another sense.
- Internal Revenue. It refers to taxes imposed by the
legislature other than duties on imports and exports.
- Customs Duties. These are taxes imposed on goods
exported into a country.

Entities Exempted from Taxation

Religious Institutions
Charitable Institutions
Non-Profit, Non-Stock Educational Institutions
Non-profit Cemeteries
Government Institutions
Foreign Diplomats

Situs of Taxation
Situs is a latin term which means situation,
location, or place. In short, its literal meaning
refers to a place taxation. In real property, the
rules is tax is imposed to a place or state where
the property is located and subject to be tax has a
jurisdiction over the said property.

Situs of Taxation
1)

a)
b)
c)
d)
e)

Factors
The taxation jurisdiction or situs will depend upon various
factors:
the nature of the tax and the subject matter thereof, which
may be a person, property, act, or activity.
The possible protection and benefit that may accrue both to
the government and to the tax payer.
Domicile or residence
citizenship
source of income

The accepted doctrine is that taxing power of a State does not

extend beyond its territorial limits but within such limits it may
tax persons, property, income or business.

Situs of Taxation
2)

Basis

The jurisdiction to impose and collect Income Tax is based on

the following:
a) the recipient of the income is a citizen or resident of the
Philippines.
b) the income is derived from sources within the Philippines.
The income tax is founded on the protection afforded by the State
to the recipient of the income in his person, in his right to
receive the income, and in his enjoyment of it when received.
These are the rights and privileges which attached to
domicile or citizenship. .

Income Derived within the State Taxabale

It is also an accepted doctrine that the State can tax all
income derived from sources within the State, regardless of
whether the recipient is a citizen or not, a resident or no, or
a domestic of foreign corporation.
SOURCE
is not a place but the property, activity, or service that
produced the income. In the case of income derived from
LABOR,
it is the place where the labor is performed; in the case of
income derived from the

Income Derived within the State Taxabale

It is also an accepted doctrine that the State can tax all
income derived from sources within the State, regardless of
whether the recipient is a citizen or not, a resident or no, or
a domestic of foreign corporation.
USE OF CAPITAL,
it is the place where the capital is employed; in the case of
profits
FROM THE SALE OF EXCHANGE OF CAPITAL ASSETS
it is the place where the transactions occurs.

Double Taxation
Direct Duplicate
Elements:
Taxing twice
By the same taxing
authority
Within the same taxing
jurisdiction
For the same purpose
In the same taxable
period
Involving the same
purpose

Indirect duplicate
Indirect duplicate
taxation, on the other
hand, occurs when taxes
on the property are not
imposed by the same
taxing authority. The local
and national governments
imposed taxes on the
same property during one
taxable period. This kind
of imposition is legal.

Forms of Escape from Taxation

6 forms of escape from taxation
1. Shifting. It is one way of passing the burden
of tax from one person to another. Ex. Taxes
paid by the manufacturer may be shifted to the
consumer by adding the amount of the tax paid
to price of the product.
Kinds of Shifting

Forward shifting occurs when the burden of the tax is

transferred from a factor of the production to the factor of
distribution.
Backward shifting occurs when the burden of tax is
transferred from the consumer to the producer or
manufacturer.
Onward shifting occurs when tax is shifted to two or more
times either forward or backward.

Forms of Escape from Taxation

2.

Capitalization. This refers to the reduction in the price

of the tax object to the capitalized value of future taxes
which the purchaser expects to be called upon to pay.
Ex: A reduction made by the seller on the price of the
real estate, in anticipation of the future tax to be
shouldered by the future buyer.

3.

Transformationn occurs when the manufacturer or

producer upon whom the tax has been imposed pays
the tax and endeavor to recoup (make up for) himself
by improving his process of production

4.

Tax Evasion is the practice by the taxpayer through

illegal or fraudulent means to defeat or lessen the
amount for tax. This is also know as tax dodging.

Forms of Escape from Taxation

5.

Tax Avoidance is the exploitation by the taxpayer of

legally permissible methods in order to avoid or reduce
tax liability. This is also known as tax minimization.

6.

Tax Exemption is the grant of immunity or freedom from

a financial charge or obligation or burden to which others
are subjected.
Grounds for tax exemption:
Contract, wherein the government is the contracting
party.
Public policy
Reciprocity