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Income Taxation ( BA 2)
School o f Business Management
2nd Semester, AY 2023-2024

HANDOUT 1
GENERAL PRINCIPLES OF TAXATION POWER OF TAXATION

Handout Overview and Outcome: This module introduces the fundamentals

principles of income taxation and theories that underlie our system of taxation in the
Philippines.

Discussion:

The Three (3) Inherent Powers of the State

1. Police Power. It is the power of the state promoting public welfare by restraining
and regulating the use of liberty and property. It may be exercised only by the
government. The property taken in the exercise of this power is destroyed
because it is noxious or intended for noxious purposes.

2. Power of taxation. It is the power by which the State raises revenue to defray
the necessary expenses of the government.

3. Power of Eminent Domain. It is the power of the state to acquire private

property for the public purpose upon payment o just compensation.

Similarities among the three (3) inherent powers

1. They are inherent in the state.

2. They exist independently of the constitution although the conditions for
their exercise may be prescribed by the constitution.
3. Ways by which the State interferes with private rights and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received, directly or indirectly, by
the persons affected.

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What is Taxation?

It is the inherent power by which the sovereign through its law-making body raises revenue to
defray the necessary expenses of the government.

Scope of the Power of Taxation

The power of taxation is the most absolute of all the powers of the government:

a. Comprehensive - covers all (persons, businesses, professions, right and privileges)

b. Unlimited - In the absence of limitations provided by the law or the constitution, the
power to tax is unlimited and comprehensive. Its force is so searching to the extent that
the courts scarcely venture to declare that it is subject to any restrictions.

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 c. Plenary - it is complete; BIR may avail of certain remedies to ensure collection of taxes.
d. Supreme - in so far as the selection of the subject of taxation

Essential Elements of Taxation

A. It is am enforced contribution
B. It is generally payable in money
C. It is proportionate in character
D. It is levied on person, property or rights
E. It is levied by the law-making body of the state
F. It is levied for public purpose.

NATURE/CHARACTERISTICS of the State's Power to Tax

1. It is inherent in sovereignty. The state, having sovereignty can enforce contribution (tax)
even in the absence of a constitutional provision because the state has the supreme power to
command and enforce obedience to its will from the people within its jurisdiction.

2. It is legislative in character. The power to tax levying or imposition) is peculiarly and

exclusively legislative in nature. It cannot be exercised by the executive or judicial branches of
the government.

Purposes of Taxation

1. PRIMARY: Revenue or Fiscal Purpose

-to provide funds or property with which to promote general welfare and protection of its
citizens.

2. SECONDARY: Regulatory Purpose

- Employed as a device for regulation or control
Effects:
o Promotion of General Welfare
o Reduction of Social Inequality
o Economic Growth
What is Tax.

Enforce proportional contribution from the person and property levied by the law-making body
of the State by virtue of its sovereignty in support of government and for public needs.

Exceptions to Non-Delegation Rule

a. Delegations as provided for in the 1987 Constitution such as "Delegation to the President"
under Section 28 Article VI stating that the Congress may authorize, by law the President to fix,
within specified limits and subject to such limitations and restrictions as it mav impose:
• 'Tarift rates Import and export quotas Tonnage and wharfage dues
• Other duties or imposts within the framework of the national development program of the
government

b. Delegation to local government units as provided under Section 5, Article X of the Constitution.
The power of local government units to impose taxes and fees is always subject to the limitations
which Congress may provide, the former having no inherent power to tax.

c. Delegation to administrative agencies. Certain aspects of the taxing process that are not

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 really legislative in nature are vested in administrative agencies such as:

• Power to value property Power to assess and collect taxes

• Power to perform details of computation, appraisement or adjustment

d. It is subject to Constitutional and inherent limitations

CONSTITUTIONA

Exemptions of government entities, agencies and instrumentalities.

Immunity is necessary in order that governmental functions will not be impeded.

Otherwise, the government will be taxing itself to raise money for itself. The following rules shall
apply in determining whether or not government entities or agencies are subject to tax:

a. Agencies performing governmental function are tax exempt unless expressly taxed
b. Agencies performing proprietary functions are subject to tax unless expressly exempted
c. GOCCs performing proprietary functions are subject to tax, however the following are
granted tax exemptions:
o Government Service Insurance System (GSIS)
o Social Security System (SSS) Philippine Health Insurance Corporation (PHIC)
o Philippine Charity Sweepstakes Office (PCSO) Local Water Districts (RA 10026)
o

INTERNATIONAL COMITY (Polite arrangements among nations). There principles limit the authority of
the government to effectively impose taxes on a sovereign state and its instrumentalities. as well
as on its property held and activities undertaken in that capacity. International laws dictate peace
and harmony among states. hence, no state shall assert superiority over the other by imposing
taxes.

Limitation of territorial jurisdiction

Strongest among the inherent powers of the state

CLASSIFICATION OF TAXES

1. As to scope:

 National- imposed by the national government

 Local - imposed by the local government

2. As to subject matter or object:

a. Personal, poll, or capitation - tax of a fixed amount imposed upon individuals residing
within a specified territory.
b. Property - tax imposed on property in proportion to its value
c. Excise - tax on certain rights and privileges (sin products or imported goods)
d. Custom Duties – duties charged upon the commodities on their being imported into or
exported from a country. E.g Tariffs

3. As to who bears the burden:

• Direct - taxpaver cannot shift to another
• Indirect - indemnify himself at the expense of another

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 4. As to determination of fixed amount:
 Specific- tax of fixed amount by number, standard of weight, or measurement
 Ad valorem - tax of fixed proportion of the value of the property

5. As to purpose:
• Primary, Fiscal, or Revenue Purpose
• Secondary, Regulatory, Special, or Sumptuary Purpose

6. As to graduation or rate:
• Proportional - tax based on fixed percentages o amount
• Progressive - tax the rate of which increases as the tax base or bracket increases
• Regressive - tax the rate of which decreases as the tax base or bracket increases

7. As to taxing authority:
 National - imposed under National Internal Revenue Code, collected by Bureau of
Internal Revenue
 Local - imposed by LGU's

ELEMENTS OF SOUND TAX SYSTEM

a. Fiscal Adequacy - sources must be adequate
b. Theoretical Justice or Equity - tax should be proportionate
c. Administrative Feasibility - law must be capable of effective and efficient enforcement

LIMITATIONS ON THE STATE'S POWER TO TAX

1. Inherent Limitations
2. Constitutional Limitations
o Due process of law
o Equal protection of laws
o Rule of uniformity and equity in taxation

A progressive svstem of taxation means that tax laws shall place emphasis on direct taxes
rather than indirect taxes with the ability to pay as the principal criterion.

Regressive tax rates refer to tax rates which decreases as the tax base or bracket decreases.
Regressive tax rates should be differentiated from a regressive tax system of taxation which exists when
there are more indirect taxes imposed than direct taxes.

o Prohibition against imprisonment for non-payment of poll tax

o Prohibition against impairment o obligation and contracts
o Prohibition against infringement of religious freedom
o Prohibition against appropriation of proceeds of taxation for the use, benefit or support
of any church
o Prohibition against taxation of religious, charitable and educational entities
o Prohibition against taxation of non-stock, non-profit educational institutions others
o
WHAT ARE THE RULES GOVERNING CONTRACTUAL LIMITATIONS?
A. When the exemption is bilaterally agreed upon between the government and the taxpayer
- it cannot be withdrawn without violating the non-impairment clause.

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 B. When it is unilaterally granted by law, and the same is withdrawn by virtue of another law.
C. When the exemption is granted under a franchise - it may be withdrawn at any time.

SITUS OF TAXATION
Literally, the situs of taxation means "place of taxation". It is the state or political unit which
has jurisdiction to impose a particular tax. The state where the subject to be taxed has a situs may
rightfully levy and collect the tax. The situs is necessarily in the state which has jurisdiction or which
exercises dominion over the subject in question.

FACTORS IN DETERMINING THE SITUS OF TAXATION

a. Subject matter (person, property, or activity)
b. Nature of tax
c. Citizenship
d. Residence of the taxpayer
e. Source of Income
f. Place of excise, business or occupation being taxed.

DOUBLE TAXATION

In its strict sense, double taxation referred to is direct duplicate taxation. In its broad sense,
double taxation is referred to as indirect double taxation. It extends to all cases in which there is a
burden of two or more impositions.

DIRECT DOUBLE TAXATION means taxing twice:

1. By the same taxing authority, jurisdiction or taxing district

2. For the same purpose 3. In the same year or taxing period
4. Same subject or object
5. Same kind or character of the tax

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MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION

A. SHIFTING - the transfer of the burden of tax by the original payer to someone else.

B. TRANSFORMATION - the producer pays the tax and endeavor to recoup himself by
improving his process of production

C. EVASION - the use of illegal means to defeat or lessen tax

D. TAX AVOIDANCE - the exploitation of legally permissible alternative tax rates of

assessing taxable income to reduce tax liah1itv

E. EXEMPTION - the grant of immunity to particular persons of a particular class

GROUNDS FOR GRANTING TAX EXEMPTION

o May be based on contract
o May be based on some public policy
o May be on grounds of reciprocity or to lessen the rigors of international or multiple taxation
Nature of power to grant tax exemption

o National government. The power to grant tax exemptions is an attribute of sovereignty for
the power to prescribe who or what persons or property shall be tax implies the power to
prescribe who or what persons or property shall not be taxed.
o Local governments. Municipal corporations are clothed with no inherent power to tax or
to grants exemptions. But the moment the power to impose a particular tax is granted, they
also have the power to grant exemption therefrom unless forbidden by some provision of
the Constitution or law.

KINDS OF EXEMPTION

As to basis:

 Constitutional- Immunities from taxation which originate from the Constitution

 Statutory- Immunities from taxation which emanates from legislation

As to form:

• Express - Exemptions expressly granted by statute.

• Implied - When particular persons, property or rights are deemed exempt as they fall
outside the scope of the taxing provision itself.

As to extent

 Total. Connotes absolute immunity.

 Partial. One where a collection of a part of the tax is dispensed Amnesty It is the general
or intentional overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of revenue or tax law.

AMNESTY - It partakes of an absolute forgiveness or waiver of the government of its right to collect.
It is a way to give tax evaders, who wish to relent or willing to reform a chance to do so.
Amnesty involves immunity from all criminal, civil and administrative liabilities from non-
payment of taxes.

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 G. CAPITALIZATION - the reduction in the selling price of income producing property by an
amount equal to the capitalized value

H. AVOIDANCE - the tax saving device within the means sanctioned by the law.

SOURCES OF TAX LAWS

1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances/ City or municipal tax codes
6. Tax treaties and international agreements
7. Special Laws
8. Decision of the Supreme Court and the Court of Tax Appeals
9. Revenue rules and regulations and administrative ruling and opinion.

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Assignment #1

1. Question: IS DOCTRINE OF EQUITABLE RECOUPMENT FOLLOWED IN THE

PHILIPPINES? Explain your answer. 5 pts

2. Question: MAY A TAX BE SUBJECT TO COMPENSATION OR SET-OFF? Explain your answer. 5

pts

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