Review Materials

Prepared by:
Junior Philippine Institute of
Accountants UC-Banilad Chapter
F.Y. 2019-2020
General Principles
of Taxation
 What is Taxation?

▪ Taxation is the process or means by

which the sovereign, through its
lawmaking body, raises income to
defray the necessary expenses of the
government

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 Importance of Taxation
▪ It is primary source of the government
revenue that is used to effectively and
permanently perform government
functions.
▪ Without taxation, the other inherent
powers (police power and eminent
domain) would be paralyzed.

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 Purposes of Taxation

1. Primary Purpose
to provide funds or property with which to
promote the general welfare and protection
of its citizens and to enable it to finance its
multifarious activities
2. Secondary Purposes
a. to strengthen anemic enterprises by
giving tax exemptions;
b. to protect local industries against
foreign competition through imposition of
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high customs duties on imported goods;
 c. to reduce inequalities in wealth and
income by imposing progressively higher tax
rates;
d. to prevent inflation by increasing taxes
or ward off depression by decreasing them.

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 Theory and Basis of Taxation

1. Theory
- the existence of the government is a
necessity
- cannot continue without the means to
pay its expenses
- has a right to compel all its citizens and
property within its limits to contribute
(see 51. Am. Jr., 42-43).

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2. Basis
- is found on the reciprocal duties of
protection and support between the
State and its inhabitants.
- Benefits Received Principle, which is a
theory of income tax fairness that says people
should pay taxes based on the benefits they
receive from the government.

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Basic Principles of a Sound Tax System

1. Fiscal Adequacy
- sources of revenue should be sufficient to
meet the demands of public expenditures.
2. Equality or Theoretical Justice
- the tax burden should be proportionate to
the taxpayer’s ability to pay (this is the so-
called Ability-To-Pay Principle).
3. Administrative Feasibility
- the tax laws should be capable of
convenient, just and effective
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administration.
 Nature of Taxation Power

▪ Inherent power of sovereignty;

▪ Essentially a legislative function;
▪ For public purposes;
▪ Territorial in operation;
▪ Tax exemption of government;
▪ The strongest among the inherent powers of
the government; and
▪ Subject to constitutional and inherent
limitations.

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Limitations on the power of taxation

1. Inherent Limitations
- its very purpose 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.

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2. Constitutional Limitations
- to protect the object of taxation against its
abusive implementation.

If a tax law violates the constitution, such law shall

be declared null and void.

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 Inherent Limitations
1. Requirement that levy must be for a public
purpose.
2. Non-delegation of the legislative power to tax.
The rule is “potestas delegata non delegare potest”
– what has been delegated cannot be delegated. Thus, this power
should not be delegated to any person or body. However,
delegation of this power is permitted in the following cases:
- Delegation to the President
- Delegation to local governments
- Delegation to administrative bodies (known as
the “power of subordinate legislation”).

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3. Exemption from taxation of government entities.
4. International comity.
The term comity means recognition or respect accorded
by one jurisdiction within its territory over the law of another.
As a consequence of international comity, no state can
claim jurisdiction over another (par in parem non habet
imperium).
5. Territorial jurisdiction.

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 Constitutional Limitations
1. Due process.
“No person shall be deprived of life, liberty, or
property without due process, nor shall person be denied
the equal protection of the law (Sec. 1, Art. III, NC).”
2. Equal protection of the laws. - (Same with the provision in no. 1)
The constitutional provision on equal protection of laws
means that “no person or class of persons shall be
deprived of the same protection of laws enjoyed by other
persons or other classes in the same place and in like
circumstances.”
3. Rule of uniformity and equity in taxation.

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 The rule of taxation shall be uniform and equal. The
congress shall evolve a progressive system of taxation (Sec.
28 (1), Art. VI, Ibid.).
Uniformity of Taxation – all the taxable persons or
property of the same class shall be taxed at the uniform or same
rate.
4. Non-imprisonment for non-payment of poll tax.
“No person shall be imprisoned for debt or non-
payment of poll tax (Sec. 20, Art. III, id.).”
5. Non-impairment of the obligations of contracts.

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 “No law impairing the obligations of contracts shall be
passed (Sec. 10, Art. III, id.).”
6. Non-infringement of religious freedom.
“No law shall be made respecting the establishment of
religion, or prohibiting the free exercise thereof. The free
exercise of religious profession and worship, without
discrimination or preference, shall be forever allowed. No
religious test shall be required for exercise of civil or political
rights (Sec. 5, Art. III, id. ).”
7. No appropriation for religious purposes.

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8. Exemption of religious, charitable or educational
entities, non-profit cemeteries, and churches from
taxation.
9. Exemption of revenues and assets of non-stock,
non-profit educational institutions and donations for
educational purposes from taxation.
10. Concurrence by a majority of all the members of
the Congress for the passage of law granting tax
exemption.

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 “No law granting any tax exemption shall be passed
without the concurrence of a majority of all the
members of the Congress (Sec. 28 (4), Art. VI, id.).”
11. Power of the President to veto any particular item
or items in a revenue or tariff bill.
The President shall have the power to veto any particular
item or items in an appropriation, revenue or tariff bill, but veto
shall not affect the item or items to which he does not
object (Sec. 27 (2), Art. VI).
12. Non-impairment of the jurisdiction of the Supreme
Court in tax cases.

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 “The Supreme Court shall have the power to review,
revise, reverse, modify or affirm on appeal or certiorari as the law
or the Rule of Court may provide, final judgments and orders or
lower courts in all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto
(Sec. 5 (2), Art. VIII, id.).

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 What is Taxes?
▪ The enforced proportional contributions from
persons and property levied by the
lawmaking body of the State by virtue of its
sovereignty for the support of the government and
all public needs.

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 Essential Elements of a Tax

▪ Enforced contribution.
▪ Generally payable in money.
▪ Proportionate in character.
▪ Levied on persons, property, or the exercise of
a right or privilege.
▪ Levied by the state which has jurisdiction over
the subject or object of taxation.
▪ Levied by the lawmaking body of the state.
▪ Levied for public purpose or purposes.

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 The term “public purpose” includes the
following:
a. Construction of roads and bridges;
b. Pensions to retired government
employees and their widows and children;
c. Assistance to victims of calamities; and
d. Social welfare and health care projects.

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 Classifications of Taxes

1. As to subject matter or object

a. Personal, poll or capitation
- These taxes are fixed in amount and imposed
on persons residing with a specific territory regardless of
the amount of their property or their occupation or business.
b. Property
- These taxes are imposed on personal or real
property bases on its proportionate value or in accordance with
other reasonable method of apportionment.
c. Excise (Privilege Tax)

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 - These taxes are imposed upon the
performance of a right or act, the enjoyment of a privilege
or the engagement in on occupation.
2. As to who bears the burden
a. Direct
- These taxes are non-transferable.
- The liability for the payment of tax as well as the
tax falls on the same person.
b. Indirect
- These taxes are transferable.

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 - The liability for the payment of tax falls on one
person but the burden thereof can be shifted or passed to another.
3. As to determination of amount
a. Specific
- These taxes are fixed amounts imposed and
based on some standard of weight or measurement, head
or number, length or volume.
- It requires no assessment other than a
listing or classification of the subjects to be taxed.
b. Ad valorem
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 - These taxes are fixed amounts in
proportion to the value of the property with respect to
which the tax is assessed.
- It requires the intervention of assessors to
estimate the value of such property before the amount due to the
taxpayer be determined.
4. As to purpose
a. General, fiscal or revenue
- Tax that is imposed solely to raise revenue
for government expenditures.
b. Special or regulatory
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 - Tax imposed for a special purpose, i.e. to achieve
some social or economic ends irrespective of whether revenue
is actually raised or not.
5. As to authority imposing the same
a. National
- Tax imposed by the national government.
e. g. Internal Revenue Taxes, Customs Duties
b. Municipal or local
- Tax imposed by municipal corporations.
e.g. Sand and Gravel Tax, Occupation Tax

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6. As to graduation or rate
a. Proportional
- Tax based on fixed percentage of the amount
of the property, receipts, or other basis to be taxed.
b. Progressive
- Tax the rate which increases as the tax base
or bracket increases.
c. Regressive
- Tax the rate which decreases as the tax base
increases.

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 Three Inherent Powers of the
Sovereign State
1. Police Power
- the power to protect citizens and provide
safety and welfare of society.
2. Eminent Domain Power
- the power to take private property (with
just compensation) for public use.
3. Taxation Power
- the power to enforce contributions to
support the government, and other inherent
powers of the state.

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Similarities among Taxation, Eminent
Domain and Police Power

▪ They are inherent powers of the state;

▪ They constitute the three ways by which the state interferes
with the private rights and property;
▪ They are legislative in nature and character;
▪ They presuppose an equivalent compensation;
▪ They all underlie and exist independently of the
constitution ;
▪ They are all necessary attributes of sovereignty; and
▪ The provisions in the constitution are just limitations
on the exercise of these powers.

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Distinction of Taxation, Police Power,
and Eminent Domain
Eminent
Taxation Police Power
Domain
1. As to Power to enforce Power to make Power to take
concept contribution to and implement private property
raise laws for general for public use
government welfare. with just
funds. compensation.
2. As to scope Plenary, Broader in Merely a power
Comprehensive, application, to take private
and Supreme general power to property for
make and public use.
implement laws.

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 Eminent
Taxation Police Power
Domain
3. As to Exercised only Exercised only May be granted
authority by government by government to public service
or its political or its political or public utility
subdivisions. subdivisions. companies.

4. As to Money is taken Property is Private property

purpose to support the taken or is taken for
government. destroyed to public use.
promote general
welfare.

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 Eminent
Taxation Police Power
Domain
5. As to The power to Can be expressly Can be expressly
necessity of make tax laws delegated to the delegated to the
delegation cannot be local local
delegated. government government
units by the law units by the law
making body. making body.

6. As to Operates on Operates on Operates on

person community or a community or a particular
affected class of class of private property
individual. individual. of an individual.

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 Eminent
Taxation Police Power
Domain
7. As to Continuous Healthy Market value of
benefits protection and economic the property
organized standard of expropriated.
society. society.

8. As to Generally, no Cost of No imposition.

amount of limit. regulation,
imposition license and
other necessary
expenses.

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 Eminent
Taxation Police Power
Domain
9. As to Inseparable for Protection, Common
importance the existence of safety and necessities and
a nation- it welfare of interests of the
supports police society. community
power and transcend
eminent individual rights
domain. in property.

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 Eminent
Taxation Police Power
Domain
10. As to Subject to Relatively free Superior to and
relationship constitutional from may over ride
to and inherent constitutional constitutional
constitution limitations. limitations. impairment
provision
Inferior to non- Superior to non- because the
impairment impairment welfare of the
clause. clause. state is superior
to any private
contract.

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 Eminent
Taxation Police Power
Domain
11. As to Constraints by Limited by the Bounded by
limitation constitutional demand for public purpose
and inherent public interest and just
limitations. and due process. compensation.

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 Other Charges/Fees
1. Penalty
- is any sanction imposed, as a punishment
for violations of laws or acts deemed injurious.
2. Revenue
- refers to all funds or income derived
whether from tax or from other sources.
3. Debt
- is an obligation to pay or render service
from a definite future period based on contract.

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4. Toll
- is a compensation for the use of somebody
else’s property determined by the cost of the
improvement.
5. License Fee
- is a contribution enforced by the government
primarily to restrain and regulate business or
occupation.
6. Custom Duties
- are imposition or imported goods brought
into the country to protect local industry.
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7. Subsidy
- is a monetary aid directly given or
granted by the government to an individual or
private commercial enterprises deemed beneficial
to the public.
8. Tariff
- is a schedule or lists of rates, duties of taxes
imposed on imported goods.

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9. Margin Fee
- is a tax on foreign exchange designed to
curb excessive demands upon our international
reserves.
10. Special Assessment
- is an amount collected by the government for
the purpose of reimbursing itself for certain
extended benefits regarding construction of
public works.

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 Certain Doctrine in Taxation
1. Double Taxation
- an act of the sovereign by taxing twice for
the same purpose in the same year upon the
same property or activity of the same person,
when it should be taxed once, for the same purpose
and with the same kind of character of tax.

To avoid injustice and unfairness, doubts as to

whether double taxation has been imposed should be
resolved in favor of the taxpayer.

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▪ Indirect Duplicate Taxation
- this is double taxation in its broad sense.
- it extends to all cases in which there is burden
of two or more pecuniary impositions.
▪ Direct Duplicate Taxation
- this is double taxation in its strict sense.
- it is prohibited because it compress imposition
of the same tax on the same property for the same
purpose by the same state during the same taxing
period.

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How to counter act indirect double taxation?
1. Tax exemptions;
2. Reciprocity clause/tax treaty;
3. Tax credit; and
4. Allowance for deductions such as vanishing
deduction in estate tax.
There is no double taxation in the following cases:
1. By taxing corporate income and
stockholder’s dividends from the same
corporation.

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 2. A tax imposed by the state and the local
government upon the same occupation, calling or
activity.
3. Real estate tax and income tax collected
on the same real property leased for earning
purposes.
4. Taxes are imposed on the taxpayer’s final
product and the storage of raw materials used
in the production of the final product.

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2. Escape from Taxation
The ways by which a taxpayer could escape tax
burdens may be through tax evasion and tax
avoidance.
▪ Tax Evasion
- under this method, the taxpayer uses
unlawful means to evade or lessen the payment of
tax.
- this form is tax dodging is prohibited and
therefore subject to civil and/ or criminal
penalties.
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▪ Tax Avoidance
- this is the reducing of totally escaping payment
of taxes through legal permissible means.

Forms of Tax Avoidance

1. Tax Option
- taxpayers may choose to pay lower tax rate
in some transactions as permitted by tax laws.
2. Shifting

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 - is the transfer of tax burden to another;
the imposition of tax is transferred from the
statutory taxpayer to another without violating
the law.
3. Transformation
- the producer absorbs the payment of tax
to reduce prices and to maintain market share, then he
recovers his additional tax expenses by improving
the process of production.
4. Exemption from Taxation

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 - denotes a grant of immunity, expressed or
implied, to a particular person, corporation, or to
persons or corporations of a particular class, from a tax
upon property of an excise which persons and
corporation generally within the same taxing district
are obliged to pay.
- tax exemptions are generally granted in the
basis of (a) reciprocity, (b) public policy, and (c)
contracts.

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3. Equitable Recoupment
- this doctrine of law states that a tax claim for
refund, which is prevented by prescription, my be
allowed to be used as payment for unsettle tax
liabilities if both taxes arises from the same
transaction in which overpayment is made and
underpayment is due.
4. Set-off Taxes
- this doctrine states that taxes are not
subject to set-off or legal compensation because

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the government and the taxpayer are not mutual
creditor and debtor of each other.

Exemption to this rule:

1. Where both the claims of the government and the
taxpayer against each other have already become
due, demandable and fully liquidated;
2. Where there is an actual compromise between
the taxpayer and the tax officer.

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5. Taxpayer Suit
- is effected through court proceedings and
could only be allowed if the act involves a direct and
illegal disbursement of public funds derived
from taxation.

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 Situs of Taxation
▪ This refers to the place of taxation, or the state
or political unit which has jurisdiction to
impose tax over its inhabitants.

General Rule: The state has the power to impose tax

only within its territorial jurisdiction.

The following factors are determinants to the Situs of

Taxation:
1. Nature, kind of classification of the tax
being imposed;
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 2. Subject matter of the tax (person, property,
rights or activity);
3. Source of the income being taxed;
4. Place of excise, privilege, business or
occupation being taxed;
5. Citizenship of the taxpayer;
6. Residence of the taxpayer.

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Interpretation and Application of Tax
Law
The following rules are generally followed for the
interpretations and applications of tax laws:

1. Tax statute must be enforced as written.

2. Imposition of tax burden is not
presumed.
3. Doubts should be resolved liberally in favor
of the taxpayer.
4. Tax exemptions are strictly construed
against the taxpayer.

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 5. Tax laws are applied prospectively.
6. Tax laws prevail over civil laws.

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 Sources of Tax Laws
Taxation is derived from:
1. Constitution
- this refers to that body of rules and maxims in
accordance with which the power of sovereignty are
habitually exercised.
2. Statutory enactments
- refers to the tax laws passed by the congress.
3. Administrative rulings and regulations
- Administrative rulings are the less general
interpretation of tax laws which are issued from time
to time by the Commissioner of Internal Revenue.
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 Sources of Tax Laws
They are commonly known as “BIR Rulings.”
- Regulations are intended to clarify or explain
the law and carry into effect its general provisions by
providing the details of administration and procedure.
It is issued by the Secretary of Finance, upon the
recommendation of the Commissioner of Internal
Revenue, are known as “Revenue Regulations.”
4. Judicial decisions
- this refers to decisions of the Court Tax
Appeals and the Supreme Court applying or
interpreting tax laws.
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 End of Topic
Please see complementary test bank for
practice problems and theories.

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 Dear, you.
Always be in pursuit for
the one you have not yet
become. Keep going!
Love,
Your UCB-JPIA family

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Reference:
▪ General Principles and Concepts of Taxation. (n.d.). Retrieved
October 30, 2020, from
http://docshare01.docshare.tips/files/18218/182183198.pdf
▪ Ampongan, O. E. (2018). Income Taxation (with practice set) 15th
ed. Iriga City.
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