CHAPTER 01: Introduction to Taxation

WHAT IS TAXATION?  requires consideration of the particular

circumstance of the taxpayer
1. As a State Power
 Inherent authority of the State to impose The Lifeblood Doctrine
taxes.
 Taxes are crucial for the government's
 Enforces proportional contributions from
continued operation and functionality.
subjects for public purposes.
 Without taxes, the government would lack
2. As a Process
the resources to function effectively.
 Legislative process of levying taxes.
 Taxes are fundamental to the government's
 Aims to collect proportional contributions
ability to serve its citizens.
from subjects for public purposes.
3. As a Mode of Cost Distribution Implication of the Lifeblood Doctrine in
 Method of allocating government costs Taxation
or burdens.
 Targets those who benefit from 1. Tax is imposed even in the absence of a
government spending. Constitutional grant.
2. Claims for tax exemption are construed
The Theory of Taxation against taxpayers.
3. The government reserves the right to
 the government’s necessary for funding
choose the objects of taxation.
The Basis of Taxation 4. The courts are not allowed to interfere with
the collection of taxes in income taxation:
 mutual support between the people and the
5. In income taxation:
government
a. Income received in advance is taxable
Receipt of benefits is conclusively upon receipt.
presumed b. Deduction for capital expenditures and
prepayments is not allowed as it
Taxpayers cannot avoid payment of tax effectively defers the collection of
under the defense of absence of benefit income tax.
received. The direct receipt or actual availment c. A lower amount of deduction is
of government services is NOT a precondition preferred when a claimable expense
to taxation. subject to limit.
THEORIES OF COST ALLOCATION d. A higher tax base is preferred when the
tax object has multiple tax bases
1. Benefit received theory - the more benefit
one receives from the government, the more INHERENT POWERS OF THE STATE
taxes he should pay "powers" are natural, inseparable, and inherent
2. Ability to pay theory - taxpayers should be to every government
required to contribute based on their relative The Inherent Powers of the State
capacity to sacrifice for the support of the
government 1. Taxation power - the power of the State to
enforce proportional contribution from its
Aspects of the Ability to Pay Theory subjects to sustain itself.
1. Vertical equity (Gross Concept) 2. Police power - the general power of the
 proposes that the extent of one's ability to State to enact laws to protect well-being of the
pay is directly proportional to the level of his people.
tax base 3. Eminent domain - the power of the State to
take private property for use after paying just
compensation.
2. Horizontal equity (Net Concept)
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Comparison of the Three Powers of the B. Constitutional Limitations
State
1. Due process of law
Point of
Difference
Taxation
Police
Power
Eminent
Domain
2. Equal protection of the law
Exercising Government Government Government 3. Uniformity rule in taxation
Authority and private
utilities 4. Progressive system of taxation
Purpose For the
support of the
To protect
welfare of the
For public use 5. Non-imprisonment for non-payment of
government people debt or poll tax
Persons Community Community Owner of the
Affected or class of or class of property 6. Non-impairment of obligation and
Amount of
individuals
Unlimited
individuals
Limited No amount
contract
Imposition (Tax is based (Imposition is imposed (The 7. Free worship rule
on limited to government
government cover cost of pays just 8. Exemption of religious or charitable
Importance
needs.)
Most
regulation.)
Most superior
compensation.)
Important
entities, non-profit cemeteries, churches
important and mosque from property taxes
Relationship Inferior to the Superior to Superior to the
with the “Non- the “Non- “Non- 9. Non-appropriation of public funds or
Constitution impairment
Clause” of
impairment
Clause” of
impairment
Clause” of the
property for the benefit of a church, sect
the the Constitution or system of religion
Constitution Constitution
Limitation Constitutional Public Public purpose 10. Exemption from taxes of the revenues
and inherent
limitations
interest and
due process
and just
compensation
and assets of non-profit, non-stock
educational institutions
11. Concurrence of a majority of all
Similarities of the Three Powers of the State members of Congress for the passage
of law granting tax exemption
 Sovereignty: Essential and inherent
12. Non-diversification of tax collections
powers of the State.
13. Non-delegation of the power of taxation
 Legislative Nature: Involves legislative
14. Non-impairment of the jurisdiction of the
authority.
Supreme Court to review tax cases
 Private Rights: Interfere with private rights
15. The requirement that appropriations,
and properties.
revenue, or tariff bills SHALL originate
 Constitutional Independence: Exist
exclusively in the House of
without Constitutional grants but may face
Representatives
Constitutional limits.
16. The delegation of taxing power to local
 Compensation: Require compensation for
government units
affected individuals.
 Local Limits: National legislature can INHERENT LIMITATION OF TAXATION
restrict local government use of these
powers. 1. Territoriality of Taxation

SCOPE OF THE TAXATION POWER  Taxes are imposed within the State’s
territorial boundaries.
 comprehensive  The government can tax only its residents
 plenary – full or complete in all aspects or subjects.
 not absolute unlimited  No basis for taxing foreign subjects abroad.
 supreme  Extraterritorial taxation would infringe on
foreign sovereignty.
THE LIMITATIONS OF THE TAXATION
POWER
A. Inherent limitations
1. Territoriality of taxation Exception to the territoriality principle
2. International comity
3. Public purpose a. In income taxation, resident citizens and
4. Exemption of the government domestic corporations are taxable on
5. Non-delegation of the taxing power income derived both within and outside the
Philippines.
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b. In transfer taxation, residents or citizens b. Tariff Flexibility
such as resident citizens, non- resident o The President can adjust tariff amounts
citizens and resident aliens are taxable on under the Tariff and Customs Code to
transfers of properties located within or respond to trade conditions.
outside the Philippines. c. Expedient Tax Administration
o Certain cases require efficient and
2. International comity
effective administration and collection of
 Governments do not tax the income and taxes.
properties of other governments.
CONSTITUTIONAL LIMITATIONS OF
 Governments give primacy to their treaty
TAXATION
obligations over their own domestic tax
laws. 1. Observance of due process of law
NOTE: When a state enters into treaties with Aspects of Due Process
other states, it is bound to honor the
agreements as a matter of mutual courtesy with a. Substantive Due Process
the treaty partners even if the same conflicts  Taxes must be for public purposes.
with its local tax laws.  Must be authorized by valid law and
within jurisdiction.
3. Public purpose  Assessments without legal basis violate
due process.
NOTE: It cannot be exercised to further any
b. Procedural Due Process
private interest.
 Assessments and collections must be
Exemption of the government non-arbitrary.
 Taxpayers have the right to notice and
 Self-Taxation hearing.
o The government generally does not tax  Procedures for assessment and
itself as it does not generate additional collection must be followed:
funds and could increase costs. o Assessments: Within three years
 Tax Exemptions from the due date or actual filing,
o Government properties and income from whichever is later.
essential public functions are exempt o Collections: Within five years from
from taxation under the NIRC. the date of assessment.
 Taxable Government Income  Failure to follow these rules violates due
 Income from government properties and process.
activities conducted for profit, including
government-owned and controlled 2. Equal protection of the law (balot and
corporations, is subject to tax. penoy)

4. Non-delegation of the taxing power  Taxpayers should be treated equally both in

terms of rights conferred and obligations
 The legislative taxing power is vested imposed
exclusively in Congress and is non  This rule applies where taxpayers are under
delegable. the same circumstances and conditions.
3. Uniformity rule in taxation
 Each class is taxed differently, but
Exceptions to the rule of non-delegation taxpayers falling under the same class are
taxed the same. Hence, uniformity is
a. Local Government Taxation relative equality.
o Local government units have the
constitutional power to tax to ensure 4. Progressive system of taxation
fiscal autonomy.

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 Tax rates increase as the tax base subjects private educational institutions to a
increases. minimal income tax.
5. Non-imprisonment for non-payment of 11. Concurrence of a majority of all
debt or poll tax members of Congress for the passage of a
law granting tax exemption
 debt acquired in good faith
 debt acquired in bad faith constitutes -  Tax Exemption and Revenue
estafa o Tax exemptions counter the "lifeblood"
doctrine by reducing government
Is non-payment of tax equivalent to non-
revenue.
payment of debt?
o Tax exemptions must be granted on a
 non-payment of tax compromises public valid basis.
interest  Constitutional Requirement
o basic community tax: ok o Granting tax exemptions requires a
o additional community tax: tax majority vote of ALL Congress
evasion punishable by imprisonment members.
 non-payment of debt compromises private  Approval vs. Withdrawal of Tax
interest Exemption
o Approval: Requires an absolute
7. Free worship rule majority (majority of all members of
EXPN: Income from properties or activities of Congress).
religious institutions that are proprietary or o Withdrawal: Requires only a relative
commercial in nature are taxable. majority (simple majority or quorum
majority).
8. Exemption of religious, charitable or
educational entities, non-profit cemeteries, 12. Non-diversification of tax collections (for
churches and mosques, lands, buildings, public use ONLY)
and improvements from property taxes
STAGES OF THE EXERCISE OF TAXATION
 Constitutional Exemption POWER
o Property tax exemption applies to
1. Levy or imposition
properties used PRIMARILY for
charitable, religious, or educational 2. Assessment and collection
purposes.
Matters of Legislative Discretion in the
 Doctrine of Use
Exercise of Taxation
o In the Philippines, only properties
actually used for these purposes are 1. Determining the object of taxation
exempt from real property tax.
 Doctrine of Ownership 2. Setting the tax rate or amount to be
o Exempts properties of religious, collected
charitable, or educational entities 3. Determining the purpose for the levy which
regardless of use. must be public use
o This doctrine is not applied in the
Philippines. 4. Kind of tax to be imposed

10. Exemption from taxes of the revenues 5. Apportionment of the tax between the
and assets of non-profit, non-stock national and local government
educational institutions including grants, 6. Situs of taxation
endowments, donations, or contributions
for educational purposes 7. Method of collection

 The NIRC also exempts government Assessment and Collection (incidence of

educational institutions from income tax and taxation or the administrative act of taxation)

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 The tax law is implemented by the EXPNS:
administrative branch of the government.
a. Where the taxpayer's claim has already
SITUS OF TAXATION (place of taxation) become due and demandable such as when
the government already recognized the
Examples of Situs Rules
same and an appropriation for refund was
1. Business tax situs: Businesses are subject made
to tax in the place where the business is b. Cases of obvious overpayment of taxes
conducted. c. Local taxes

2. Income tax situs on services: Service fees 5. Non-assignment of taxes

are subject to tax where they are rendered.
6. Imprescriptibility in taxation
3. Income tax situs on sale of goods: The
 Prescription means the loss of a right due
gain on sale is subject to tax in the place of sale
to the passage of time, implying a waiver if
4. Property tax situs: Properties are taxable in one delays too long.
their location.  Government's Right to Collect Taxes
o The right to collect taxes does not expire
5. Personal tax situs: Persons are taxable in unless specified by law.
their place of residence.  Tax Prescription Under NIRC
OTHER FUNDAMENTAL DOCTRINES IN o With Assessment: Taxes must be
TAXATION collected within 5 years from the date of
assessment.
1. Marshall Doctrine o Without Assessment: Taxes must be
"The power to tax involves the power to collected within 3 years from the date
destroy." the return should have been filed,
through judicial action.
2. Holme's Doctrine o Exceptions: Taxes from unfiled or
fraudulent returns do not expire (do not
"Taxation power is not the power to destroy
prescribe).
while the court sits."
7. Doctrine of estoppel
 Taxation power may be used to build or
encourage beneficial activities or industries o Misrepresentations made by one party,
by the grant of tax incentives. relied upon in good faith by another, are
3. Prospectivity of tax laws binding on the party who made the
misrepresentation.
 Prohibition of Retroactive Laws  Government and Estoppel
o Ex post facto laws (retroactive laws) are o The government is not subject to
prohibited by the Constitution. estoppel; errors by government
 Exception for Income Taxes employees do not bind the government.
o Income tax laws may operate o Mistakes or omissions by tax officials do
retrospectively if explicitly allowed by not harm the public’s interest.
Congress under certain conditions. o Erroneous applications of the law by
public officers do not prevent correct
4. Non-compensation or set-off
future applications of the law.
 Taxes cannot be automatically reduced or o
canceled by offsetting them against any
claims you have against the government. 8. Judicial Non-interference in Tax
 You must pay your taxes on time, even if Collection
you have a lawsuit or claim pending against Generally, courts are not allowed to
the government. You can’t wait to pay your issue injunction against the government's
taxes until your claim is resolved. pursuit to collect tax as this would
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unnecessarily defer tax collection. This rule is ESCAPES FROM TAXATION
anchored on the Lifeblood Doctrine.
A. Those that result to loss of government
9. Strict Construction of Tax Laws revenue
“Taxation is the rule, exemption is the 1. Tax evasion (tax dodging)
exception."
2. Tax avoidance (tax minimization)
 When the language of the law is clear and
3. Tax exemption (tax holiday)
categorical, there is no room for
interpretation. NOTE: All forms of tax exemptions can be
a. Vague tax laws - interpreted against revoked by Congress except those granted by
the government and favor taxpayers the Constitution and those granted under
b. Vague exemption laws - interpreted contracts.
against the taxpayer and favor the
government B. Those that do not result to loss of
government revenue
DOUBLE TAXATION
1. Shifting (business taxes)
Double taxation occurs when the same
taxpayer is taxed twice by the same tax a. Forward Shifting
jurisdiction for the same thing.  shifting the tax burden down the
distribution chain from the producer to
Elements of Double Taxation the consumer
o Common With:
1. Primary element: Same object
 essential commodities and services
2. Secondary elements: (e.g., food, fuel)
b. Backward Shifting
a. Same type of tax
 shifting the tax burden up the
b. Same purpose of tax
distribution chain from the consumer
c. Same taxing jurisdiction
back to the producer
d. Same tax period
o Common With:
Types of Double Taxation  non-essential commodities where
buyers have market power and
1. Direct double taxation products with many substitutes
 This occurs when all the element of double c. Onward Shifting
taxation exists for both impositions.  general term for any tax shifting within
the distribution channel, encompassing
2. Indirect double taxation (National Gov’n both forward and backward shifting
and LGU) o Process:
 This occurs when at least one of the  includes both shifting down to
secondary elements of double taxation is consumers (forward shifting) and
not common for both impositions. shifting up to producers (backward
shifting)
How can double taxation be minimized?
2. Capitalization – the adjustment of the value
a. Provision of tax exemption of an asset caused by changes in tax rates
b. Allowing foreign tax credit
c. Allowing reciprocal tax treatment - 3. Transformation – the elimination of wastes
reduced tax rates or even exemption if the or losses by the taxpayer to form savings to
country of the foreign taxpayer also gives the compensate for the tax imposition or increase in
same treatment to Filipino non-residents therein taxes.
d. Entering into treaties or bilateral agreements TAX AMNESTY VS. TAX CONDONATION

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 Tax Amnesty
o Definition: General pardon allowing
erring taxpayers a fresh start with
forgiveness of tax liabilities.
o Scope: Covers both civil and criminal
liabilities.
o Application: Retrospective; forgives
past violations.
o Payment Requirement: Typically
requires payment of a portion of the tax.
 Tax Condonation
o Definition: Forgiveness of tax
obligations under specific conditions,
also known as tax remission.
o Scope: Covers only civil liabilities.
o Application: Prospective; applies to
unpaid balances but does not refund
amounts already paid.
o Payment Requirement: No payment
required.
NOTE: Tax amnesty and tax condonation are
construed against taxpayers and in favor of the
government as they deprive the government of
revenue.