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General Principles of Taxation

The National Internal Revenue Code

According to Official Gazette (2018), the Republic Act No. 8424, otherwise known as the National Internal
Revenue Code cited as the “Tax Reform Act of 1997” is hereby declared the policy of the State to promote
sustainable economic growth through the rationalization of the Philippine internal revenue tax system, including
tax administration; to provide, as much as possible, an equitable relief to a greater number of taxpayers in order
to improve levels of disposable income and increase economic activity; and to create a robust environment for
business to enable firms to compete better in the regional as well as the global market, at the same time that
the State ensures that government is able to provide for the needs of those under its jurisdiction and care.

Inherent Powers of the State

Every state with sovereignty has inherent powers that are necessary for its subsistence. It exists to raise funds
for the welfare of the State, regulate peace and order, and take public property for public purpose. The following
are the three (3) inherent powers of the State:
• Power to Tax - An act or process of levying a tax. It is also the power of the state to enforce contribution to
support the government to be used for public purpose. As a process, it passes a legislative undertaking
through the enactment of tax laws by the Congress which will be implemented by the Executive Branch of
the government through the Beaureau of Internal Revenue (BIR) to raise revenue from the inhabitants to
pay the necessary expenses of the government (Valencia & Roxas, 2016).
• Police Power - To restrain and legislate for public welfare and morals of a society. It is exercised to prevent
abuses, preserve any resources, and harmonize the community. This power is restricted by the “due
process clause” of the Constitution which provides that no person may be deprived of “life, liberty, or
property, without due process of law” (Valencia & Roxas, 2016).
• Power of Eminent Domain - The inherent ability of the state to take private property for public purpose. It is
exercised by the government by paying the owner of a property a just compensation. “Just compensation”
means paying the owner the full monetary equivalent of the property taken for public use (Valencia & Roxas,
2016).

Similarities of the inherent powers of the State: (Tabag, 2018)

1. They are inherent in the State.
2. They exist independently of the Constitution although the Constitution may prescribe the conditions for their
exercise.
3. Ways by which the State interfere with private rights and property
4. They are legislative in nature and character.
5. They presuppose an equivalent compensation received, directly or indirectly, by the persons affected.

Distinctions among the inherent powers of the state (Tabag, 2018):

Power to Tax Police Power Eminent Domain
Power to take private
Power to enforce contributions Power to make and implement
Nature property for public use
to raise government funds laws for the general welfare
with just compensation
May be granted to public
Authority Government only Government only
service/utility companies
For the support of the Promotion of general welfare The taking of private
Purpose
government through regulation property for public use
Community or a class of
Community or a class of On an individual as the
individuals. It applies to all
Persons individuals. It applies to all owner of the personal
persons, property, and
Affected persons, property, and exercises property. Only particular
exercises that may be subject
that may be subject thereto. property is comprehended.
thereto.

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Power to Tax Police Power Eminent Domain

Type Property is wholesome and is Property is noxious or intended Property is wholesome
of devoted to public use or for a noxious purpose and as and is devoted to public
Property purpose. such taken and destroyed. use or purpose.
No transfer or title. There may
Contribution becomes part of There is a transfer of title
Effect just be a restraint on the
the public fund. to the property.
injurious use of the property.
Rights
Property right Property right and liberty Property right
Affected
Broader in the application. Merely a power to take
Plenary, comprehensive,
Scope General power to make and private property for public
supreme
implement the law. use
No direct and immediate benefit
Inform of protection and
Benefits but only such as may arise from The market value of the
benefits received from the
Received the maintenance of a healthy property taken
government
economic standard of society.
Sufficient to cover the cost of the
Amount No imposition. The owner
license and the necessary
of No limit is paid equivalent to the
expenses of police surveillance
Imposition fair value of his property
and regulation.
Table 1. Distinctions among the Inherent Powers of the State
Source: CPA Reviewer in Taxation, 2018. p.3

Purposes of Taxation

According to Tabag (2018), the primary purpose of taxation is to raise revenue/funds to support the necessary
expenses of the government. Other secondary purposes of taxation are the following:
a. Regulatory Purposes - serve as a regulatory control to attain the visions set by the government.
b. Compensatory Purposes - aim to reduce social inequalities, advancement of economy, and protect local
industries against unfair competition.

Nature and Characteristics of Taxation

The nature of taxation power includes the following (Valencia & Roxas, 2016):
1. Inherent power of the sovereignty - The government can impose it even without a specific provision in the
Constitution authorizing it.
2. Essentially a legislative function - The power to enact laws and ordinances, and to impose and collect taxes
are given to the Congress.
3. For public purposes - Taxation flows forth from the legitimate purpose to support the government and use
it to serve the public.
4. Territorial in operation - Tax laws are enforceable only within territorial jurisdictions.
5. Tax exemption of the government - It runs with the concept that the government should not tax itself unless
it is expressly stated or it performs proprietary functions.
6. The strongest among the inherent powers of the government - Taxation is considered the “lifeblood” of the
government; without funds, the government can neither survive nor perform its powers and functions.
7. Subject to Constitutional and inherent limitations - As an inherent power, it’s very purposes and nature
restrict taxation. Tax power should be exercised for its very nature, purpose and jurisdiction. A violation of
these inherent limitations is tantamount to taking a property without due process of law (Course Hero, 2018).

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The essential characteristics of taxation are the following (De Leon & De Leon, 2016):
1. Enforced contribution
2. Payable in the form of money
3. Laid by some rule of apportionment
4. Levied on persons, property, acts, privileges, or transactions
5. Levied by the State which has jurisdiction or control over the subject to be taxed
6. Levied by the law-making body of the State
7. Levied for a public purpose

Taxes Defined
According to De Leon and De Leon (2004), taxes are the enforced proportional contributions, generally payable
in money, levied by the law-making body of the State by its sovereignty upon the persons or property within the
jurisdiction for the support of the government and all public needs.

Smith (2014) identified the following canons which are still considered when evaluating a particular tax structure:
1. Equality - Each taxpayer is entitled to just or equitable treatment by paying taxes proportionate to his/her
income level.
2. Convenience - Administrative feasibility is assessed in formulating tax policy.
3. Certainty - The taxpayer can quickly identify the mode of payment, sanctions, and place of payment.
4. Economy - A good tax system must alleviate the problems of the government and promote economic
progress.

Theories of Taxation
1. Necessity Theory or Principle of Necessity - Tax laws are created to support the necessity of any state. The
burden for expenses to maintain the sovereignty, services of the government, and administrative expenses
must be borne by its own people.
2. Benefits-Protection Theory - In exchange for the benefits received, taxes are paid by the citizen to sustain
the activities and for the improvement of the government.
3. Lifeblood Theory - Taxes are the lifeblood of the government; without it, the government can neither operate
nor survive.

Aspects of Taxation
The following are the three (3) stages or aspects of taxation (Valencia & Roxas, 2016):
1. Levying or Imposition – It is the passage of tax laws or ordinances by the Congress;
2. Assessment and Collection – It is the act of execution and implementation of tax laws through its agencies
(e.g., BIR).
3. Tax Payment – It is the act of compliance on the part of taxpayers.
Principles of Sound Tax System
The following are the three (3) principles of the sound tax system anchored on the canons of taxation:
1. Fiscal Adequacy - It states that collection from taxes must be sufficient to meet the expenditures of the
government. The concept of economy is applicable in this principle.
2. Equality or Theoretical Justice - It denotes that tax should be based on the ability of the taxpayer.
3. Administrative Feasibility - It tackles certainty and convenience of administration.

Limitations on the Power of Taxation

Taxation is constrained by the following limitations (Tabag, 2018):
• Inherent Limitations – distinct and positive limitations in its very nature and exist whether declared or not in
the written constitution.
1. Public purpose
2. Situs of taxation or place of taxation
3. International comity
4. Non-delegability of the taxing power
5. Exemption of the government

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• Constitutional Limitations – provisions prescribed in the Constitution on the taxing power of the government.
1. Observance of due process of law
2. Equal protection of the law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of poll tax
6. Non-impairment of the obligations of contracts
7. Free-worship clause
8. Exemption of charitable institutions, churches, parsonages, convents, lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable, or educational purposes
9. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
including grants, endowments, donations, or contributions for educational purposes
10. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion,
etc.
11. No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.
12. The concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption
13. Non-diversification of tax collections
14. The President shall have the power to veto any particular item(s) in an appropriation, revenue, or tariff,
but the veto shall not affect the item(s) to which no objection has been made.
15. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
16. Appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives, but
the Senate may process or concur with amendments.
17. Each local government unit shall exercise the power to create its sources of revenue and shall have a
just share in the national taxes.

Double Taxation
Double Taxation is taxing the same property, person, or activity when it should be taxed once for the same kind
and the same purpose of the tax. According to De Vera (2018), there are two (2) kinds of double taxation: Direct
Duplicate Taxation and Obnoxious or Indirect Duplicate Taxation.

• Direct Duplicate Taxation is double taxation in the disagreeable or illegal sense (De Vera, 2018).
o The person, property, or activity is taxed twice when it should be taxed only once.
o Both taxes are levied for the same purpose.
o Imposed by the same taxing authority
o Within the same territoriality
o Same taxing period
o Same kind or character of the tax
• Obnoxious or Indirect Duplicate Taxation is not legally objectionable. It extends to all cases in which there
is a burden of two (2) or more pecuniary impositions but imposed by different taxing authorities.

Types of Tax Escapes

1. Evasion or Dodging - It is the illegal way of avoiding or minimizing tax liability.
2. Avoidance - It is the legal way to avoid or minimize tax liability.
3. Shifting – It is the process of transferring the burden from one (1) taxpayer to another without any violations
of the law.
4. Capitalization – It is the lowering the price of the product provided the taxes will be shouldered by the buyer
(Tabag, 2018).
5. Transformation - The manufacturer pays the tax him/herself and will not add tax to the price of the product,
fearing the loss of his/her market. It is done by increasing or improving the quantities of units produced
causing a reduced price per unit of a product.
6. Exemption – This is an immunity, privilege, or freedom of a certain person to pay a certain tax.

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Situs/Place of Taxation
Taxing persons, property, or businesses is bounded only within the jurisdiction or territory of the taxing
authorities. The following are the factors that determine the Situs of Taxation (De Vera, 2018):
1. Kinds and classification of the tax
2. Situs of the thing or property taxed
3. Citizenship of the taxpayer
4. Residence of the taxpayer
5. Source of income tax
6. Situs of the excise, privilege, business, or occupation being taxed

KIND OF TAX SITUS

Personal or Community Tax Residence or domicile of the taxpayer
Real Property Tax Location of property (Lex rei sitae)
Personal Property Tax Tangible: where it is physically located or permanently kept (Lex rei sitae)
Intangible: subject to Sec.104 of the NIRC and the principle of mobilia
sequuntur personam.
Business Tax Place of business
Excise or Privilege Tax Where the act is performed or where occupation is pursued
Sales Tax Where the sale is consummated
Income Tax Consider (1) citizenship, (2) residence, and (3) source of income (Sec. 42,
1997 NIRC)
Transfer Tax Residence or citizenship of the taxpayer or location of the property
Franchise Tax State which granted the franchise
Corporate Tax Law on Corporation
Table 2. Application of Situs of Taxation
Source: Quicknotes Taxation, 2013. p. 13

Legislation of Tax Laws

The Philippine tax law came from the following sources:
1. 1987 Philippine Constitution sets a limitation on the exercise of the power to tax.
2. Laws. The basic sources of Philippine tax law are the following:
• National Internal Revenue/ Republic Act No. 8424 (The Tax Reform Act of 1997)
• Republic Act No. 10963 -Tax Reform for Acceleration and Inclusion (TRAIN) Law
3. Treaties. The Philippines has entered into several tax treaties for the avoidance of double taxation and
prevention of fiscal evasion concerning income taxes. At present, there are 31 Philippine tax treaties in force
(Bureau of Internal Revenue, 2018).
4. Administrative Materials. Administrative issuances may be relied upon in interpreting the provisions of the
Tax Code, which are signed by the Secretary of Finance, the Commissioner of Internal Revenue, or his/her
duly authorized representative, come in the form of Revenue Regulations, Revenue Memorandum Orders,
Revenue Memorandum Rulings, Revenue Memorandum Circulars, Revenue Memorandum Rulings, and
BIR Rulings (Bureau of Internal Revenue, 2018).
• Revenue Regulations (RRs) - Issuances signed by the Secretary of Finance, upon the recommendation
of the Commissioner of Internal Revenue, that specify, prescribe, or define rules and regulations for the
effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related
statute (Bureau of Internal Revenue, 2018).
• Revenue Memorandum Orders (RMOs) - Issuances that provide directives or instructions, prescribe
guidelines, and outline processes, operations, activities, workflows, methods, and procedures
necessary in the implementation of established policies, goals, objectives, plans, and programs of the
Bureau in all areas of operations, except auditing (Bureau of Internal Revenue, 2018).
• Revenue Memorandum Rulings (RMRs) are rulings, opinions, and interpretations of the Commissioner
of Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a
specific set of facts, with or without established precedents, and which the Commissioner may issue

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from time to time for providing taxpayers guidance on the tax consequences in specific situations. BIR
Rulings, therefore, cannot contradict duly issued RMRs; otherwise, the Rulings are null and void ab
initio (Bureau of Internal Revenue, 2018).
• Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable portions
and amplifications of laws, rules, regulations, and precedents issued by the BIR and other agencies/
offices (Bureau of Internal Revenue, 2018).
• BIR Rulings are the official position of the Bureau to queries raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax laws (Bureau of Internal Revenue, 2018).
5. Case Law are decisions from the Supreme Court that form part of the law.
6. Local Government Tax Law is a grant of power given by the constitution to the local government to create
its sources of revenues, to levy taxes, fees, etc. for the use of the residents.
7. Periodicals. Periodical on Philippine tax law are the following (Bureau of Internal Revenue, 2018):
• Philippine Revenue Service. - published by the BIR from 1969-1980 (copies available in the BIR Library)
• Philippine Revenue Journal. - published by BIR from 1969 to 2000 (copies available in the BIR Library)
• Tax Monthly - published by the National Tax Research Center (NTRC) (copies available in the BIR
Library and the NTRC)

Ethical Tax Compliance and Administration

Ethics in Tax Compliance
Professional ethics is composed of ideologies of conducts which governs individual or group of professionals.
It aids the particular person in responding to a certain conflict in the workplace in a morally correct and upright
manner. Compliance is greatly affected by behaviors. Tax compliance should recognize this facet to incorporate
ethics with tax compliance and tax administration effectively.

Tax Administration
Tax administration is a structure or set of procedure that governs the collection of taxes in the country, backed
up by the country’s tax laws and policies.

Tax Schemes
The following are three (3) tax schemes or systems (Valencia & Roxas, 2016):
1. Global Income Tax System – It employs the grouping of similar incomes from all sources and subjecting
them to a single tax rate or progressive graduated rates.
2. Gross Income Tax System - Under this tax system, the taxpayer’s income tax is fixed or computed based
on the gross income. The allowable deductions are disregarded in computing for income tax.
3. Schedular Tax System – It is computed based on either the concept of global income tax system or gross
income tax system.

Governing Bodies involved in Taxation

The Department of Finance (DOF) has the main responsibility of managing the financial strength and fiscal
policies of the government. It supervises and controls other agencies such as (Valencia & Roxas, 2016):
1. Bureau of Internal Revenue (BIR) - The agency which is tasked to assess and collect all taxes and
necessary fees imposed by regulations, policies, and tax laws.
2. Bureau of Customs (BOC) and the Tariff Commission (TC) - These agencies are in charge to take effect all
the policies set by the Tariff and Customs Code (TCC).
3. Land Transportation Office (LTO) - The office that is tasked to collect registration fees and motor vehicle
tax.
4. Duly Authorized Collectors - These are persons or banks authorized by BIR, BC, TC, and LTC to collect
taxes.
5. Local Offices - Provincial, City, Municipal, and Barangay Treasurer, etc.

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References:
Bureau of Internal Revenue. (2018). Guide to Philippines Tax Law Research. Retrieved from Bureau of Internal
Revenue: https://www.bir.gov.ph
Course Hero. (2018). 6 Subject to Constitutional and Inherent Limitations. Retrieved from Course Hero:
https://www.coursehero.com/file/p453v44/6-Subject-to-Constitutional-and-Inherent-Limitations-As-an-
inherent-power-its/
De Leon, H. S., & De Leon, H. M. (2016). The Law on Income Taxation. Quezon City: REX Printing Company,
Inc.
De Vera, J. L. (2018). Quicknotes in Taxation. Manila: GIC Enterprises & Co.,Inc.
Department of Finance. (2018, August 31). Tax 101. Retrieved from Department of FInance:
http://www.dof.gov.ph
Hoffman, W. H., & Smith, J. E. (2014). Individual Income Taxes. Mason: Cengage Learning.
Official Gazette. (2018). Republic Act No. 8424. Retrieved from
http://www.officialgazette.gov.ph/1997/12/11/republic-act-no-8424/
Tabag, E. D. (2018). CPA Reviewer on Taxation. Manila: Professional Review and Training Center.
Valencia, E. G., & Roxas, G. F. (2016). Income Taxation. Baguio City: Valencia Educational Supply.

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