Introduction to Taxation

What is Taxation?
Taxation may be defined as a state power, a legislative process and a
mode of government cost distribution.
What is Taxation?
• As a state power
Taxation is an inherent power of the State to enforce proportional
contribution from its subjects for public purpose.
• As a process
Taxation is a process of laying taxes by the legislature of the State to
enforce proportional contributions from its subjects for public purpose.
• As a mode of cost distribution
Taxation is a mode by which the State allocates its costs or burden to its
subjects who are benefited by its spending.
The Theory of Taxation
A system of government is indispensable to every society. However, a
government cannot exist without a system of funding. The
government’s necessity for funding is the theory of taxation.
The Basis of Taxation

Public services

Government People
Taxes
Receipts of benefits is conclusively presumed
While most public services are received indirectly, their realization by
every citizen and resident is undeniable. In taxation, the receipt of
these benefits by the people is conclusively presumed. Thus, taxpayers
cannot avoid payment of taxes under the defense of absence of benefit
received. The direct receipt or actual availment of government services
is not a precondition to taxation.
Theories of Cost Allocation
• Benefit received theory
It presupposes that the more benefit one receives from the
government, the more taxes he should pay.
• Ability to pay theory
It presupposes that taxation should also consider the taxpayer’s ability
to pay.
The Lifeblood Doctrine
Taxes are essential and indispensable to the continued subsistence of
the government. Without taxes, the government would be paralyzed
for lack of motive power to activate or operate it. (CIR vs Algue)

Taxes are the lifeblood of the Government and their prompt and
certain availability are imperious need. Upon taxation depends the
Government’s ability to serve the people for whose benefit taxes are
collected. (Vera vs. Fernandez)
Inherent Powers of the State
These rights, dubbed as “powers”, are natural, inseparable and
inherent to every government. No government can sustain or
effectively operate without these powers. These powers are naturally
exercisable by the government even in the absence of an express grant
of power in the Constitution.
Inherent Powers of the State
• Taxation power – the power of the State to enforce proportional
contribution from its subjects to sustain itself
• Police power – the general power of the State to enact laws to
protect the well-being of the people
• Eminent domain – the power of the State to take private property for
public use after paying just compensation
Comparison of the Three Powers of the State
Point of Difference Taxation
Exercising Authority Government
Purpose For the support of the
government
Persons affected Community or class of
individuals
Amount of Imposition Unlimited (Tax is based on
government needs)
Importance Most important
Relationship with the Inferior to the “Non-
Constitution Impairment Clause” of the
Constitution
Limitation Constitutional and inherent
limitations
Police Power
Government
To protect the general welfare
of the people
Community or class of
individuals
Limited (Imposition is limited
to cover cost of regulation)
Most superior
Superior to the “Non-
Impairment Clause” of the
Constitution
Public interest and due process
Eminent Domain
Government and private
utilities
For public use
Owner of the property
No amount imposed. (The
government pays just
compensation)
Important
Superior to the “Non-
Impairment Clause” of the
Constitution
Public purpose and just
compensation
Similarities of the Three Powers of the State
1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and
properties.
5. They all exist independently with the Constitution and are exercisable by
the government even without Constitutional grant. However, the
Constitution may impose conditions or limits for their exercise.
6. They all presuppose an equivalent form of compensation received by the
persons affected by the exercise of the power.
7. The exercise of these powers by the local government units may be
limited by the national legislature.
Scope of the Taxation Power
The scope of taxation is widely regarded as comprehensive, plenary,
unlimited and supreme. However, despite the seemingly unlimited
nature of taxation, it is not absolutely unlimited. Taxation has its own
inherent limitations and limitations imposed by the Constitution.
Inherent Limitations
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power
Inherent Limitations
1. Territoriality of taxation
- Tax can be imposed only within the territories of the State.

Exception: In income taxation, resident citizens and domestic

corporations are taxable on income derived within and outside the
Philippines.
Inherent Limitations
2. International comity
- International comity pertains to mutual courtesy or reciprocity
between states. It is a basic principle of international law that all states
are equally sovereign. Each state observes co-equal sovereignty by not
taxing the properties, income or effects of fellow states.
Inherent Limitations
3. Public purpose
- Taxation must be exercised absolutely for public purpose. It cannot be
exercised to further any private interest.
Inherent Limitations
4. Exemption of the government
- The government can exercise the power upon anything including
itself. However, the government normally does not tax itself as this will
not raise additional funds but will only impute additional costs.
Inherent Limitations
5. Non-delegation of the taxing power
- The legislative taxing power is vested exclusively in Congress and is non-
delegable in pursuant to the doctrine of separation of the branches of the
government to ensure a system of checks and balances.

Exceptions:
a. LGUs are allowed to exercise the power to tax to enable them to exercise
their fiscal autonomy.
b. The President is empowered to fix the amount of tariffs to be flexible to
trade conditions.
c. Other cases that requires expedient and effective administration and
implementation of assessment and collection of taxes.
Constitutional Limitations
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 contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit 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
Constitutional Limitations
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 bills shall
originate exclusively in the House of Representatives
16. The delegation of taxing power to local government units
Constitutional Limitations
2. Equal protection of the law
- No person shall be denied the equal protection of the law. Taxpayers
should be treated equally both in terms of rights conferred and
obligations imposed.
Constitutional Limitations
3. Uniformity rule in taxation
- The rule on taxation shall be uniform and equitable. Taxpayers under
dissimilar circumstances should not be taxed the same. Each class is
taxed differently but taxpayers falling under the same class are taxed
the same. Hence, uniformity is relative equality.
Constitutional Limitations
4. Progressive system of taxation
- Under the progressive system, tax rates increase as the tax base
increase. The Constitution favors progressive tax as it is consistent with
the taxpayer’s ability to pay.
Constitutional Limitations
5. Non-imprisonment for non-payment of debt or poll tax
- As a policy, no one shall be imprisoned by virtue of his poverty and no one
shall be imprisoned for mere inability to pay debt. However, this
Constitutional guarantee applies only when the debt is acquired by the
debtor in good faith. Debt acquired in bad faith constitutes estafa, a criminal
offense punishable by imprisonment.

Is non payment of tax equivalent to non-payment of debt?

“The Constitutional guarantee on non-imprisonment for non-payment of
debt does not extend to non-payment of tax, except poll tax (basic
community tax). Thus, non-payment of any other tax other than the basic
community tax is an act of tax evasion punishable by imprisonment.”
Constitutional Limitations
6. Non-impairment of obligation and contract
- The State should not set aside its obligations from contracts by the
exercise of its taxation power. Tax exemptions granted under contract
should be honored and should not be cancelled by a unilateral
government action.
Constitutional Limitations
7. Free worship rule
- The Philippine government adopts free exercise of religion and do not
subject its exercise to taxation. Consequently, the properties and
revenues of religious institutions such as tithes or offerings are not
subject to tax. This exemption, however, does not extend to income
from properties or activities of religious institutions that are
proprietary or commercial in nature.
Constitutional Limitations
8. Exemption of religious or charitable entities, non-profit
cemeteries, churches and mosque from property taxes
- The Constitutional exemption from property tax applies for properties
actually, directly and exclusively used for charitable, religious and
educational purpose.
Constitutional Limitations
9. Non-appropriation of public funds or property for the benefit of
any church, sect or system of religion
- To support freedom of religion, the government should not favor any
particular system of religion by appropriating public funds or property
in support thereof.
Constitutional Limitations
10. Exemption from taxes of the revenues and assets of non-profit,
non-stock educational institutions
- The Constitution recognizes the necessity of education in state
building by granting tax exemption on revenues and assets of non-
profit educational institutions. This exemption, however, applies only
on revenues and assets that are actually, directly and exclusively
devoted for educational purposes.
Constitutional Limitations
11. Concurrence of a majority of all members of Congress for the
passage of a law granting tax exemption
- In the approval of exemption law, an absolute majority or the majority
of all members of the Congress, and not relative majority or quorum
majority is required. However, in the withdrawal of tax exemption, only
a relative majority is required.
Constitutional Limitations
12. Non-diversification of tax collections
- Tax collections should be used only for public purpose. It should never
be diversified or used for private purpose.
Constitutional Limitations
13. Non-delegation of the power of taxation
- The principle of checks and balances in a republican state require that
taxation power as part of lawmaking to be vested exclusively in
Congress. However, delegation may be made on matters involving the
expedient and effective administration and implementations of
assessment and collection of taxes. Also, certain aspects of the taxing
process that are non-legislative in character are delegated.
Constitutional Limitations
14. Non-impairment of the jurisdiction of the Supreme Court to
review tax cases
- Notwithstanding the existence of the Court of Tax Appeals, which is a
special court, all cases involving taxes can be raised to and be finally
decided by the Supreme Court of the Philippines.
Constitutional Limitations
15. The requirement that appropriations, revenue or tariff bills shall
originate exclusively in the House of Representatives
- Laws that add income to the national treasury and those that allows
spending therein must originate from the House of Representatives
while Senate may concur with amendments.
Constitutional Limitations
16. The delegation of taxing power to local government units
- Each local government unit shall exercise the power to create its own
sources of revenue and shall have a just share in the national taxes.
Stages of the Exercise of Taxation Power
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 – The tax law is implemented by the
administrative branch of the government. Implementation involves
assessment or the determination of the tax liabilities of taxpayers
and collection. 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.
Other Fundamental Doctrines in Taxation
1. Marshall doctrine – “The power to tax involves the power to
destroy.”
2. Holme’s doctrine – “Taxation power is not the power to destroy
while the court sits.”
3. Prospectivity of tax laws – An ex post facto law or a law that
retroacts is prohibited by the Constitution.
4. Non-compensation or set-off – Taxes are not subject to automatic
set-off or compensation.
5. Non-assignment of taxes – Tax obligations cannot be assigned or
transferred to another entity by contract.
Other Fundamental Doctrines in Taxation
6. Imprescriptibility in taxation – As a rule, taxes do not prescribe unless
the law itself provides for prescription.
7. Doctrine of estoppel – Under the doctrine of estoppel, any
misrepresentation made by one party toward another who relied therein
in good faith will be held true and binding against that person who made
the misrepresentation. However, the government is not subject to
estoppel. The error of any government employee does not bind the
government.
8. Judicial non-interference – Generally, courts are not allowed to issue
injunction against the government’s pursuit to collect tax as this would
unnecessarily defer tax collection.
9. Strict construction of tax laws – “Taxation is the rule, exemption is the
exception.”
Vague Tax Laws vs. Vague Exemption Laws
• Vague tax laws are construed against the government and in favor of
the taxpayers. A vague tax law means no tax law. Obligation arising
from law is not presumed.
• Vague tax exemption laws are construed against the taxpayer and in
favor of the government. A vague tax exemption law means no
exemption law.
Double Taxation
Double taxation occurs when the same taxpayer is taxed twice by the
same tax jurisdiction for the same thing.

Elements of double taxation:

a. Primary element: Same object
b. Secondary elements:
Same type of tax
Same purpose of tax
Same taxing jurisdiction
Same tax period
Types of Double Taxation
1. Direct double taxation
2. Indirect double taxation
Direct Double Taxation
This occurs when all the element of double taxation exists for both
impositions.

Examples:
a. An income tax of 10% on monthly sales and a 2% income tax on the
annual sales (total of monthly sales)
b. A 5% tax on bank reserve deficiency and another 1% penalty per
day as a consequence of such reserve deficiency
Indirect Double Taxation
This occurs when at least one of the secondary elements of double taxation
is not common for both impositions.

Examples:
a. The national government levies business tax on the sales or gross
receipts of business while the local government levies business tax upon
the same sales or receipts.
b. The national government collects income tax from a taxpayer on his
income while the local government collects community tax upon the
same income.
c. The Philippine government taxes foreign incomes of domestic
corporations and resident citizen while a foreign government also taxes
the same income (international double taxation).
Double Taxation – It is illegal?
Nothing in our law expressly prohibits double taxation. However, direct
double taxation is discouraged because it is oppressive and
burdensome to taxpayers.
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
Categories of Escapes from Taxation
1. Those that result to loss of government revenue
Tax evasion – Also known as tax dodging, refers to any act or trick that tends
to illegally reduce or avoid the payment of tax.
Tax avoidance – Also known as tax minimization, refers to any act or trick
that reduces or totally escapes by any legally permissible means.
Tax exemption – Also known as tax holiday, refers to the immunity, privilege
or freedom from being subject to a tax which others are subject to.

All forms of tax exemptions can be revoked by Congress except those granted
by the Constitution and those granted under contracts.
Categories of Escapes from Taxation
2. Those that do not result to loss of government revenue
Shifting – the process of transferring tax burden to other taxpayers
Capitalization – occurs when the value of assets adjusts to
accommodate increase in taxes
Transformation – occurs when wastes or losses are eliminated by the
taxpayer to form savings to compensate for the tax imposition or
increase in taxes
Tax Amnesty
Tax amnesty is a general pardon granted by the government for erring
taxpayers to give them chance to reform and to enable them a fresh
start to be part of a society with a clean slate.
Tax Condonation
Tax condonation is forgiveness of the tax obligation of a certain
taxpayer under certifiable grounds. This is also referred to as tax
remission.
Tax Amnesty vs. Tax Condonation
• Amnesty covers both civil and criminal liabilities but condonation
covers only civil liabilities of the taxpayer.
• Amnesty operates retrospectively by forgiving past violations.
Condonation applies prospectively to any unpaid balance of the tax.
• Amnesty is also conditional upon the taxpayer paying the government
a portion of the tax whereas condonation requires no payment.