CHAPTER 1

INTRODUCTION TO TAXATION

TAXATION  Gross concept

 State power – inherent power to 2. Horizontal equity – requires
enforce a proportional contribution consideration for the particular
from its subjects for public purpose. circumstance of the taxpayer.
 Net concept
 Process – process of levying taxes by
the legislature of the state to enforce THE LIFEBLOOD DOCTRINE
proportional contributions from its  Without taxes the government would
subjects for public purpose. be paralyzed for lack of motive power
to activate or operate it.
 Mode of government cost distribution
– the state allocates its costs or burden  Taxes are the lifeblood of the
to its subjects who are benefited by its government, and their prompt and
spending. certain availability are an imperious
need.
THE THEORY OF TAXATION
 A government cannot exist without a IMPLICATION OF THE LIFEBLOOD DOCTRINE OF
system of funding. The government’s TAXATION
necessity for funding is the theory of 1. Tax is imposed even if the absence of
taxation. Constitutional grant.
2. Claims for tax exemption are construed
THE BASIS OF TAXATION against taxpayers.
 The government provides benefits to 3. The government reserves the right to
the people in the form of public choose objects of taxation.
services, and the people provide the 4. The courts are not allowed to interfere
funds that finance the government. with the collection of taxes.
5. In income taxation:
 Taxpayers cannot avoid payment of a. Income received in advance is
taxes under the defense of absence of taxable upon receipt.
benefit received. b. Deduction for capital expenditures
and prepayments is not allowed as
 The direct receipt or actual availment of it effectively defers the collection of
government services is not a income tax.
precondition to taxation. c. A lower amount of deduction is
preferred when a claimable
THEORIES OF COST ALLOCATION expense is subject to limit.
1. Benefit received theory – the more d. A higher tax base is preferred when
benefit he receives; the more taxes he the tax objects has multiple tax
should pay. bases.

2. Ability to pay theory – based on their INHERENT POWERS OF THE STATE

capacity to sacrifice for the support of 1. Taxation power – to enforce
the government. proportional contribution from its
subjects to sustain itself.
ASPECTS OF ABILITY TO PAY THEORY
1. Vertical equity – directly proportional 2. Police power – to enact laws to protect
to the level of his tax base. the well-being of the people.

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3. Eminent domain – to take private

property for public use after paying just 1. Governments do not tax the income
compensation. and properties of other
governments.
 These rights, dubbed as “powers” are 2. Governments give primacy to their
natural, inseparable and inherent to treaty obligations over their own
every government. domestic tax laws.

SIMILARITIES OF THE THREE POWERS OF THE 3. Public purpose

STATE
1. Necessary attributes of sovereignty. 4. Exemption of the government – this
2. Inherent to the State. will not raise additional funds but will
3. Legislative in nature. only impute additional costs.
4. Ways in which the State interferes with
private rights and properties.  Income of the government from its
5. Exist independently of the Constitution/ properties and activities conducted for
and are exercisable by the government profit including income from
even without Constitutional grant. government owned and controlled
6. Presuppose an equivalent form of corporations is subject to tax.
compensation received by the persons
affected by the exercise of the power. 5. Non-delegation of the taxing power –
7. The exercise of these powers by the legislative taxing power is vested
local government units may be limited exclusively in Congress.
by the national legislature.
 What has been delegated cannot
SCOPE OF THE TAXATION POWER further be delegated.
 Comprehensive
 Plenary EXCEPTIONS TO THE RULE OF NON-
 Unlimited DELEGATION
 Supreme 1. Under the Constitution, local
government units are allowed to
THE LIMITATIONS OF THE TAXATION POWER exercise the power to tax to enable
A. INHERENT LIMITATIONS them to exercise their fiscal autonomy.
1. Territoriality of taxation – it cannot 2. Under the Tariff and Customs Code, the
enforce upon subjects outside its President is empowered to fix the
territorial jurisdiction. amount of tariffs to be flexible to trade
conditions.
Two-fold obligations of taxpayers 3. Other cases that require expedient and
1. Filing of returns and payments of effective administration and
taxes implementation of assessment and
2. Withholding of taxes on expenses collection of taxes.
and its remittance to the
government. B. CONSTITUTIONAL LIMITATIONS
1. Due process of law
2. International comity – mutual courtesy
or reciprocity between countries (no Aspects of Due Process
country is powerful than the other).

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1. Substantive due process – tax must 5. Non-imprisonment for non-payment of

be imposed only for public purpose, debt or poll tax
collected only under authority of a
valid law and only by the taxing  Applies only when the debt is acquired
power having jurisdiction. by the debtor in good faith.

2. Procedural due process – there  Debt is acquired by the debtor in bad

should be no arbitrariness in faith constitutes a estafa, a criminal
assessment and collection of taxes, offense punishable by imprisonment.
and the government shall observe
the taxpayer’s right to notice and  Applies only to the basis community
hearing. tax.

 Under the NIRC, assessments shall be  Non-payment of the additional

made within three years from the due community tax is an act of tax evasion
date of filing of the return or from the punishable by imprisonment.
date of actual filing, whichever is later.
6. Non-impairment of obligation and
 Collection shall be made within five contract – it should no set aside its
years from the date of assessment. obligations from contracts by the
exercise of its taxation power.
2. Equal protection of the law – taxpayers
should be treated equally both in terms 7. Free worship rule – does not extend to
of rights conferred and obligations income from properties or activities of
imposed (same circumstances). religious institutions that are
proprietary or commercial in nature.
 Congress cannot exempt sellers of
“balot” while subjecting sellers of 8. Exemption of religious or charitable
“penoy” to tax since they are essentially entities, non-profit cemeteries,
the same goods. churches and mosques, lands,
buildings and improvements from
3. Uniformity rule in taxation – the rule of property taxes – actually, directly and
taxation shall be uniform and equitable. exclusively used for charitable,
religious, and educational purposes.
 Taxpayers under dissimilar
circumstances should not be taxed the  Doctrine of use – properties actually
same. devoted for religious, charitable, or
educational activities are exempt from
 Uniformity is relative equality. real property tax.

4. Progressive system of taxation – tax  Doctrine of ownership – properties of

rates increase as the tax base increases. religious, charitable, or educational
entities whether or not used un their
 Aids in an equitable distribution of primary operations are exempt from
wealth t society by taxing the rich more real property tax (not applied in PH).
than the poor.

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9. Non-appropriation of public funds or 13. Non-delegation of the power of

property for the benefit of any church, taxation – requires that taxation power
sect or system of religion – intended to as part of lawmaking be vested
highlight the separation of religion and exclusively in Congress.
the State.
14. Non-impairment of the jurisdiction of
 Compensation to priests, imams, or the Supreme Court to review tax cases
religious ministers working with the – notwithstanding the existence of the
military, penal institutions, orphanages Court of Tax Appeals, which is a special
or leprosarium is not considered court, all cases involving taxes can be
religious appropriation. raise to and be finally decided by the
Supreme Court of the Philippines.
10. Exemption from taxes of the revenues
and assets of non-profit, non-stock 15. The requirement that appropriations,
educational institutions including revenue, or tariff bills shall originate
grants, endowments, donations, or exclusively in the House of
contributions for educational purposes Representatives, but the Senate may
– applies only on revenues and assets propose or concur with amendments
that are actually, directly and
exclusively devoted for educational 16. The delegation of taxing power to local
purposes. government units shall exercise the
power to create its own sources of
 Exempts government educational revenue and shall have a just share in
institutions from income tax and the national taxes – this is a
subjects’ private educational constitutional recognition of the local
institutions to a minimal 10% income autonomy of local government and an
tax. express delegation of the taxing power.

11. Concurrence of a majority of all STAGES OF HE EXERCISE OF TAXATION POWER

members of Congress for the passage 1. Levy or imposition – enactment of a tax
of a law granting tax exemption – law by Congress and is called impact of
requires the vote of the majority of all taxation or legislative act in taxation.
members of Congress.
Congress is composed of two bodies:
 In the approval of an exemption law, an 1. The House of Representatives
absolute majority or the majority of all 2. The Senate
members of Congress is required.
 Tax bills cannot originate exclusively
 In the withdrawal of tax exemption, from the Senate.
only a relative majority or quorum
majority is required. 2. Assessment and collection – referred to
as incidence of taxation or the
12. Non-diversification of tax collections – administrative act of taxation.
it should never be diversified for private
purposes. SITUS OF TAXATION – the place of the taxation.
 Situs rules serve as frames of reference
in gauging whether the tax object is

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within or outside the tax jurisdiction of 5. Non-assignment of taxes – tax

the taxing authority. obligations cannot be transferred to
another entity by contract.
Examples:
1. Business tax situs – where the business 6. Imprescriptibility in taxation –
is conducted. prescription is the lapsing of a right due
2. Income tax situs on services – where to the passage of time.
they are rendered.  Tax prescribes if not collected
3. Income tax situs on sale of goods – within 5 years from the date of its
place of sale. assessment.
4. Property tax situs – location.  In the absence of assessment, tax
5. Personal tax situs – place of residence. prescribes if not collected by
judicial action within 3 years from
OTHER FUNDAMENTAL DOCTRINES IN the date the return is required to be
TAXATION filed.
1. Marshall Doctrine – “the power to tax  Taxes due from taxpayers who did
involves the power to destroy”. not file a return or those who filed
 Does not include the power to fraudulent returns do not prescribe.
destroy if it is used solely for the
purpose of raising revenue. 7. Doctrine of estoppel – any
 Imposition of excessive tax on misrepresentation made by one party
cigarettes. toward another who relied therein in
good faith will be held true and binding
2. Holme’s Doctrine – “taxation power is against that person who made the
not the power to destroy while the misrepresentation.
court sits”.  The error of any government
 Include the creation of Ecozones employee does not bind the
with tax holidays and provision of government.
incentives.
8. Judicial Non-interference – courts are
3. Prospectivity of tax laws – tax laws are not allowed to issue injunction against
generally prospective in operation. the government’s pursuit to collect tax
 an ex post facto law or a law that as this would unnecessarily defer tax
retroacts is prohibited by the collection (Lifeblood Doctrine).
Constitution.
9. Strict Construction of Tax Laws –
4. Non-compensation or set-off – tax is “taxation is the rule; exemption is the
not a debt; hence, it is not subject to exemption”
set-off.  There is no room for interpretation,
 Exceptions: there is only room for application.
a. Taxpayer’s claim has already  When taxation laws are vague, the
become due and demandable. doctrine of strict legal construction
b. Cases of obvious overpayment is observed.
of taxes.
c. Local taxes  Vague tax laws – construed against
the government and in favor of the
taxpayers.

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o It means no tax law.

o Obligation arising from law is b. Allowing foreign tax credit – tax
not presumed. payments in the foreign tax law is
deductible against the tax due of the
 Vague exemption laws – construed domestic tax law.
against the taxpayer and in favor of
the government. c. Allowing reciprocal tax treatment –
o It means no exemption law. provisions in tax laws imposing a
o Construed strictly against the reduced tax rates or even exemption if
taxpayer in accordance with the the country of the foreign taxpayer also
lifeblood doctrine. give the same treatment to Filipino
non-residents therein.
 Tax exemption cannot arise from vague
inference. d. Entering into treaties or bilateral
agreements – countries may stipulate
DOUBLE TAXATION – occurs when the same for a lower tax rates for their residents
taxpayer is taxed twice by the same tax if they engage in transactions that are
jurisdiction for the same thing. taxable by both of them.

ELEMENTS OF DOUBLE TAXATION ESCAPES FROM TAXATION – available to the

1. Primary elements: taxpayer to limit or even avoid the impact of
a. same object taxation.
2. Secondary elements:
a. Same type of tax Categories of Escapes from Taxation
b. Same purpose of tax A. Those that result to loss of government
c. Same taxing jurisdiction revenue
d. Same tax period 1. Tax evasion – also known as tax
dodging, refers to any act or trick that
TYPES OF DOUBLE TAXATION tends to illegally reduce or avoid the
1. Direct double taxation – all element of payment of tax.
double taxation exists for both
impositions. 2. Tax avoidance – also known as tax
 Discouraged because it is minimization, refers to any act or trick
oppressive and burdensome to that reduces or totally escapes taxes by
taxpayers. any legally permissible means.

2. Indirect double taxation – at least one 3. Tax exemption – also known as tax
of the secondary elements of double holiday, refers to the immunity,
taxation is not common for both privilege or freedom from being subject
impositions. to a tax which others are subject to.
 Prevalent in practice.  All forms of tax exemptions can be
revoked by Congress except those
How can double taxation be minimized? granted by the Constitution and
a. Provision of tax exemption – only one those granted under contracts.
tax law is allowed to apply to the tax
object while other tax law exempts the B. Those that do not result to loss of
same tax object. government revenue

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1. Shifting – transferring tax burden to  Conditional upon the taxpayer paying

other taxpayers. the government of a portion of the tax.
 Common with business taxes where
taxes imposed on business revenue TAX CONDONATION – forgiveness of the tax
can be shifted or passed-on to obligation of a certain taxpayer under certain
customers. justifiable grounds.
 Also referred to as tax remission.
a. Forward – normal flow of  Construed against the taxpayer and in
distribution (manufacturer to favor of the government.
customers).  Covers civil liabilities of the taxpayer.
 common with essential  Applies prospectively to any unpaid
commodities and services such balance of the tax; hence, the porting
as foods and fuel. already paid by the taxpayer will not be
refunded.
b. Backward – reverse of forward  Requires no payment.
shifting.
 Common with non-essential
commodities where buyers
have considerable market
power and commodities with
numerous substitute products.

c. Onward – any tax shifting in the

distribution channel that exhibits
forward or backward shifting.

2. Capitalization – adjustment of the value

of an asset cause by changes in tax
rates.
 This is a form of backward shifting
of tax.

3. Transformation – elimination of wastes

or losses by the taxpayer to form
savings to compensate for the tax
imposition or increase in taxes.

TAX AMNESTY – general pardon granted by the

government for erring taxpayer 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.
 Absolute forgiveness or waiver by the
government on its right to collect and is
retrospective in application.
 Covers both civil and criminal liabilities.