Subject: Income Taxation Topic: Introduction to Taxation

Assignment Number 1
Name of the Student: CABINAS, JOSHUA JAMES R.

Question Number 1: What is Taxation?

Taxation is a term for when a taxing authority, usually a government, levies or imposes a
financial obligation on its citizens or residents. Paying taxes to governments or officials has been
a mainstay of civilization since ancient times. The term "taxation" applies to all types of
involuntary levies, from income to capital gains to estate taxes. Though taxation can be a noun or
verb, it is usually referred to as an act; the resulting revenue is usually called "taxes."

Question Number 2: Enumerate the inherent powers of the state, with definition.

1. Power of Taxation – An inherent power of the state exercised through legislature, to

impose burdens upon subjects and objects within its jurisdiction, for the purpose of raising
revenues to carry out the legitimate objects of the government.
Nature: An inherent power of the state exercised through the legislature.
Scope: To impose burdens upon subjects and objects within its jurisdiction.
Purpose: For raising revenue to carry out the legitimate objects of the government
Revenue Objective – To build a just and human society and establishment of a government
under certain ideals and aspi rations.
Sumptuary Objective – An implement of the police power of the state for regulatory purposes.
In this case, it is used in furtherance of any government objective either as an incentive or
deterrence. As an implement, the generation of revenue is merely incidental or in furtherance
thereof. (Lutz v. Araneta, 98 Phil 148).
Compensatory Objective – For social justice purposes or other purposes or other legitimate
objectives of the State, with a view to realize social justice, equitable distribution of wealth,
economic progress and other similar objectives (Southern Cross Cement Corp. v. Cement
Manufacturers Assoc. of the Phils, GR 158540)

2. Police Power – This is the power vested in the Legislature by the Constitution to make,
ordain, and establish all manner of wholesome and reasonable laws, statutes and ordinances,
either with penalties or without, not repugnant to the Constitution, for the good and welfare of
the State and its subjects.
Basis: This power is based on the legal maxim “salus populi est suprema lex” (the voice of the
people is the supreme law). Every citizen of every community, in a civilized society must bear
certain burdens imposed for the good of all.
Note: No right is absolute in the face of the common good.
Nature: Police power is an attribute of sovereignty and founded on the obligation of the State to
provide protection for its citizens and the safety and good order of society.
Scope: Police power is founded on which our social system rests and has for its object the
improvement of social and economic conditions affecting the community. It depends on the
security of the social order, life and health of citizens, comfort and existence in a thickly
populated community, enjoyment of social life, and beneficial use of property.
Requisites:
1. Interest of the public is general, not that of pa particular class
2. Means used are reasonably necessary for the purpose, and not unduly oppressive upon
individuals

3. Power of Eminent Domain – This is the right of the State to acquire private property for
public use upon payment of just compensation and observance of due process.
Basis: It is based on genuine necessity and that necessity must be of public character. It must be
reasonable and practicable such that it would greatly benefit the public with the least
inconvenience and expense to the condemning party ad property owner consistent with such
benefit.
Requisites:
1. There must be taking of public property
2. It must be for public use
3. There must be just compensation
4. Due process of law must be observed in taking of the of property

Question Number 3: Enumerate the inherent limitation of the taxation power.

1. Limitation on public purpose – It is an essential characteristic of the power of taxation that
the tax is imposed is for a public purpose, and not for a private purpose. It should be for a
governmental purpose – for the public welfare or the common good.
2. Limitation on territorial jurisdiction - The power of taxation is limited only within the
boundary or territory of the state. The state cannot exercise its power of taxation outside its
territory. If the subject of taxation is found abroad, then, the state could not anymore tax that..
3. Non-delegation of the legislative power of taxation – As a nature of the power of taxation, it
is legislative in character. That power cannot be delegated to others.
However, this non-delegation admits exceptions:
a. Article VI, Section 28 (2) -involves the delegation to the President to fix tariff rates, import
and export quotas, tonnage and wharfage dues and another duties and imposts.
b. Article X, Section 5 - This is the power of taxation of LGUs to create their own sources of
revenues, levy taxes, fees and charges. The power of taxation of LGUs is not inherent. It may
be granted either by the Constitution or by legislation. In our structure, the grant of the taxing
power to the LGU is by Constitutional grant.
c. Delegation to administrative agencies – in the implementation or tax administration
d. People’s initiative and referendum under RA 6735
4. International comity- the power of taxation is imposed only within the state. The state could
not tax another sovereign, under the principles of international law of which we adhere. This is
on the basis of Article II, Section 2.
5. Exemption of government agencies – government immunity from tax. This is a self-
imposed practical limitation that the government does not tax itself. The government exercising
governmental/sovereign functions is not taxed. But when the government agency exercises
proprietary function, taxation is the rule.

Question Number 4: Enumerate the constitution limitation of the taxation power.

1. Requirement of Due Process (Article III, Section 1)
-When the state exercises the power of taxation, the taking of the property should be subject to
due process. There must be a basis for the taking.
- If the state exercises its power outside of its territory or when it tax another sovereign, it is also
a violation of due process.
2. Equal Protection of the Laws (Article III, Section 1)
3. Uniformity and Equity in Taxation (Article VI, Section 21)
- There is no more distinction between equality and uniformity in taxation
- Equitability or Equity in Taxation – based on one’s ability to pay
- Valid and reasonable classification
4. Rule on Progressive Taxation (Article VI, Section 21)
While it is found in the Constitution, this is not a mandatory requirement to be imposed upon
Congress. This is just a directive to Congress. When the State imposes more indirect taxes than
direct taxes, you could not compel Congress that it should devolve a progressive system of
taxation.
5. Prohibition against impairment of obligation and contracts (Article III, Section 10)
Taxing power cannot alter or revoke existing rights and obligations under valid contracts. When
a taxpayer enjoys a contractual tax exemption, then, it is protected by the non-impairment clause.
If there is a later law which taxes that activity and that person has been granted contractual tax
exemption, then, that person affected can invoke the non-impairment clause. He could not be
subject to that new tax law.
But when one enjoys an exemption or a lesser tax rate by virtue of a franchise, then, the non-
impairment clause cannot be invoked. A franchise, under Article XII, Section 11 of the
Constitution, is subject to amendment, alteration or repeal by Congress when public interest
requires.
6. Prohibition against imprisonment for non-payment of poll tax (Article III, Section 20)
7. Non-impairment of the jurisdiction of the Supreme Court to review final decisions on
tax matters. (Article VIII, Section 5(2))
Congress cannot make a law that the decision of the BIR is appeable to the CTA and the decision
of the CTA is final and executory and cannot be appealed, even by certiorari. That is not valid.
8. The free exercise of religious profession and worship is superior to the power of taxation
(Article III, Section 5)
9. No public money or property shall be appropriated for the use of religious purposes,
exempt in payment for services rendered as mentioned therein (Article VI, Section 29 (2))
10. Exemption from real property taxation on properties which are used for religious,
charitable institutions and educational purposes. (Article VI, Section 28 (3))
11. Exemption on the non-stock, non-profit educational institutions (Article XIV, Section 3-
4)
12. Ratification requirement on tax exemptions (Article VI, Section 28 (4)
13. Tax measures, revenue and tariff bills shall originate in the House of Representatives.
14. Tax money collected for a special purpose shall be treated as a special fund
Question Number 5: What is double taxation? And how can double taxation be minimized?
DOUBLE TAXATION can be defined as “taxing twice” by the same taxing authority within the
same taxing jurisdiction or the same taxing district for the same purpose, of the same year or
taxing period and of the same property.
Double Taxation, NOT Prohibited
Now, whether it is a (1) direct duplicate or direct double taxation, or (2) indirect duplicate or
indirect double taxation, double taxation has been called as not to be prohibited. Double taxation
is not unconstitutional.
When you have a law that was enacted resulting to a double tax, you could not invoke double
taxation because it is not unconsitutitional. The manner of attacking that law should not be
based on the argument on double taxation but it should be attacked on the basis of constitutional
or inherent limitations.
If real property is subject to a percentage tax under the NIRC and subject to a real property tax
under the LGC, there is no double taxation because there are 2 taxing authorities – one imposed
by the State and the other imposed by the LGU.
You may have gross receipts of the business establishment subject to income tax and VAT under
the NIRC and business tax under local taxation. There is no double taxation (income tax and
VAT) because they are for 2 different purposes – one is for income and the other is for excise.
Income tax and VAT are imposed by the state and the business tax is imposed by the LGU. So,
there is not double taxation because they are imposed by different taxing authorities.
In a deed of sale, that sale is subject to capital gains tax and doc stamp tax, both under the NIRC.
There is no double taxation because because the 6% capital gains tax is for income and the doc
stamps tax is an excise tax for the privilege of entering into a transaction.

Measures to Avoid Double Corporate Taxation

1. Legislation
Legislation must be enacted to remove elements of double taxation, which is inefficient and
discourages investment. If investors are able to receive their dividends tax-free, they will be
inclined to invest more rather than retain profit, especially for mature companies that do not need
much capital.
2. Pass-through taxation
It involves structuring the business as a sole proprietorship, a partnership, or an LLC adopt pass-
through taxation features. There are no dividends in such structures, as profits are shared
between the owner(s)/partners. However, the strategy is only applicable to small organizations.

3. Absence of dividend payments

Avoiding payment of dividends and retaining profits in the business to generate growth. The
strategy works for start-ups and organizations in the growth phase of the business life cycle. It is
critical to growing product scope and market share. Shareholders of mature companies with
stable cash flows and very little cash appetite expect dividend compensation.
4. Personal income tax status
Shareholders can add themselves as employees in smaller companies or as executive directors in
larger companies and get paid a salary; however, they would still be taxed on their salary through
a personal tax rate, and it would not qualify as double taxation.
Managing International Double Taxation
The best way to manage the challenge of international double taxation is to come up with tax
treaties between countries and legal jurisdictions. The treaties involve collaboration between
jurisdictions and the exchange of information. They are established to reduce or eliminate illegal
taxation practices, promote trade efficiency between nations, prevent tax evasion, and ensure tax
certainty.
Double Taxation Agreements (DTA)
A double taxation agreement (DTA) refers to an agreement signed between two countries to
prevent or minimize territorial double taxation of the same income by the two countries. DTAs
are put in place to ensure they alleviate double taxation, which undoubtedly discourages
international trade. Given the global village the world has become, double taxation is
counterproductive and discourages investment flows.
DTAs encourage cross border trade and investment between countries. When trade between two
countries is growing, and both countries anticipate further growth, they usually facilitate the
signing of a DTA to eliminate double taxation and improve trade between them. The DTA
establishes rules and regulations of how income earned through cross border transactions is
treated and to ensure that the income is not compromised through double taxation.
A DTA can require that tax is charged in the investor’s home country and is exempt in the
country where the income is generated. Alternatively, an investor may be levied tax where the
income arises, and the investor will receive a foreign tax credit in the home country.

Double Taxation Relief

1. Exemption method
Under the exemption method, a taxpayer is exempt from tax in their resident country or
jurisdiction regardless of where the income is generated. However, taxpayers are liable to pay tax
in the host country where income is generated. The exemption method encourages cross border
investments by investors in their resident countries and removes barriers to free trade, thereby
increasing trade and the globalization of business.
Countries that solely use the exemption method are termed tax havens, as they do not tax –or
apply low tax rates to – foreign earned income by resident corporations and individuals. Most
tax havens attract wealthy individuals, multinational corporations, and financial institutions that
seek to minimize tax liabilities.
However, there’s been some criticisms of tax havens in that they protect financial transactions of
criminals and shady businesses and facilitate money laundering. Examples of tax havens include
The Cayman Islands, Bermuda, The Bahamas, and Cyprus, among others.
2. Foreign tax credit (FTC)
The foreign tax credit method taxes the income of residents regardless of where it arises. The
FTC method requires the home country to allow a credit against domestic tax liability where a
resident pays tax in a country where the revenue arises.
The tax paid in one country is used to offset the tax liability in another country. This method
helps businesses to operate normally within existing tax regulations. FTC can also be termed the
Capital Export Neutral System.
Source
https://www.investopedia.com/terms/t/taxation.asp
https://www.lexanimo.com/2016/09/16/fundamental-powers-of-the-state/
https://sites.google.com/site/lawpinoy/tax1
https://corporatefinanceinstitute.com/resources/knowledge/finance/double-taxation/