FUNDAMENTAL PRINCIPLES OF TAXATION
📌 Taxation is the process or means by which the sovereign through its law-making body imposes
burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out
the legitimate objects of government.
Three Inherent Powers of the State
1. Police Power
Power to make and implement laws for the general welfare
2. Taxation
Power to enforce contributions to raise government funds
3. Eminent Domain
Powe to take private property for public use with just compensation
Purposes of Taxation
Primary: Revenue or Fiscal Purpose
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To provide funds or property with which to promote the general welfare and the protection of its
citizens and to enable it finance it s multifarious activities.
Secondary: Regulatory Purpose
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Devise for regulation or control by means of which certain effects or conditions envisioned may
be achieved such as:
1. Promotion of general welfare
2. Reduction of social inequality
3. Economic Growth
Theory and Basis of Taxation
1. Theory: Lifeblood Theory and Necessity Theory
Necessity Theory
the existence of government is a necessity
Taxation is a power predicated upon necessity. It is a necessary burden to preserve the State’s sovereignty
and a means to give the citizenry and army to resist aggression, a navy to defend its shores from invasion,
a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which
come within the State’s territory and facilities and protection which a government is supposed to provide.
Lifeblood Theory
Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need
The government cannot continue to perform its basic functions of serving and protecting its people
without means to pay its expenses.
2. Basis: Benefits Received or Reciprocity Theory
Taxes are what we pay for a civilized society
The State collects taxes from the subjects of taxation in order that it may be able to performs the functions
of government. The citizens, on the other hand, pay taxes in order that they may be secured in the
enjoyment of the benefits of organized society.
-Doctrine of Symbiotic Relationship
Manifestation of the Lifeblood Theory
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Rule of “No Estoppel against the Government”
Collection of taxes cannot be enjoined (stopped) by injunction
Taxes could not be the subject of compensation of set-off
Right to select objects (subjects) of taxation
A valid tax may result in the destruction of the taxpayer’s property
Scope of Power to Tax
The power of taxation is the most absolute and broadest of all powers of the government.
1. Comprehensive
as it covers persons, businesses, activities, professions, rights and privileges
2. Unlimited
in the absence of limitations prescribed by 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 restrictions.
3. Plenary
As its is complete; the BIR may avail of certain remedies to ensure collection of taxes
4. Supreme
in so far as the selection of the subject of taxation
Essential Elements of Tax
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It is an enforced contribution
It is generally payable in money.
It is proportionate in character
It is levied on persons, property, or the exercise of a right or privilege
It is levied by the law-making body of the State.
It is levied for public purpose
Aspects of Taxation
1. Levying (legislative) - imposition of tax
2. Assessment (executive) - determination of the correct amount of applicable tax
3. Collection (administrative) - the national agency charged with the function of collecting internal
revenue taxes is the Bureau of Internal Revenue
Nature of the State’s Power to Tax
1. It is inherent in sovereignty
2. It is legislative in character
Exceptions to non-delegation rule
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Delegation as provided for the 1987 Constitution (e.g Delegation to the President)
Delegation to local government units
Delegation to Administrative Agencies
It is subject to Constitutional and inherent limitations
3. Exemption of government entities, agencies and instrumentalities.
Rules on determining whether government entities and agencies are subject to tax:
1. Agencies performing governmental functions are tax exempt unless expressly taxed.
2. Agencies performing proprietary functions are subject to tax unless expressly exempted.
3. Government owned and controlled corporations (GOCCs) performing proprietary functions
are subject to tax, however, the following were granted tax exemptions:
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Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation (PHIC)
Local Water Districts (RA 10026)
Home Development Mutual Fund (HDMF or Pag-ibig)
4. International Comity
Property of a foreign State may not be taxed by another State due to:
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Sovereign equality of States
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When one State enter the territory of another State, there is an implied understanding that the
former does not intend to denigrate its dignity by placing itself under the jurisdiction of the other
State.
Immunity from suit of a State
5. Limitation on Territorial jurisdiction
6. Strongest among the inherent powers of the State
Classification of Taxes
As to scope
1. National
imposed by the National Government
(e.g. income tax, estate tax, donor’s tax, VAT other percentage taxes, documentary stamp tax)
1. Local
imposed by the local government units such as municipal corporations
(e.g. real estate tax and professional tax receipts)
The local government unit’s power to tax is based on a constitutional grant that paved the way for the
enactment of the Local Government Code of the Philippines.
As to subject matter or object
1. Personal, poll, or capitation
tax of a fixed amount imposed upon individual, whether citizens or not, residing within a specified
territory without regard to their property or the occupation in which he may be engaged
(e.g. community tax)
1. Property
tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with
some other reasonable method of apportionment
(e.g. real estate tax)
1. Excise
any tax which does not fall within the classification of poll tax or a property tax
tax on the exercise of certain rights and privileges
(e.g. income tax, estate tax, donor’s tax)
As to who bears the burden
1. Direct
tax which is demanded from the person who also shoulders the burden of tax or tax which the taxpayer
cannot shift to another.
(e.g. income tax, estate tax, donor’s tax)
1. Indirect
tax which is demanded from one person in the expectation and intention that he shall indemnify himself at
the expense of another.
(e.g. VAT, percentage tax, excise tax)
As to determination of amount
1. Specific
tax of fixed amount imposed by the head or number, or by some standard of weight or measurement
(e.g. excise tax)
1. Ad valorem
tax on fixed proportion of the value of the property with respect to which tax is assessed
(e.g. VAT, income tax, donor’s tax, estate tax)
As to purpose
1. Primary: Fiscal or Revenue Purpose
tax imposed solely for the general purpose of the government i.e., to raise revenue for government
purposes
1. Secondary: Regulatory, Special or Sumptuary Purpose
tax imposed for a specific purpose i.e., to achieve some social or economic ends irrespective of whether
revenue is actually raised or not
As to graduation or rate
1. Proportional
tax based on percentages of amount of the property, receipts, or other basis to be taxed
1. Progressive or graduated
the rate increases as the tax base or bracket increases
1. Regressive
the rate decreases as the tax base or bracket increases
As to taxing authority
1. National
taxes imposed under the National Internal Revenue Code collected by the national government through
Bureau of Internal Revenue (BIR) and other national government agencies.
Other national taxes:
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Customs duties
Taxes on narcotic drugs
Special education fund taxes
Energy taxes on aircraft, motorized watercraft, and electric power consumption
Sugar adjustment taxes
Travel tax
Private motor vehicle tax
1. Local
taxes imposed by local government units
Elements of Sound Tax System
Fiscal Adequacy
It is necessary that the sources of revenues must be adequate to meet government expenditures and sustain
the level of public services demanded by citizens and policymakers.
Theoretical Justice or Equity
The tax burden should be proportionate to the taxpayer’s ability to pay
Administrative Feasibility
tax laws must be capable of effective and efficient enforcement
Limitations on the State’s Power to Tax
Inherent Limitations
are restrictions arising from the very nature of the power to tax itself.
1. Purpose must be public in nature
2. Prohibition against delegation of taxing power
3. Territorial Limitation
Constitutional Limitations
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Due process of law
Equal protection of laws
Rule of uniformity and equity in taxation
Prohibition against imprisonment for non-payment of “poll tax”
Poll tax is a tax of fixed amount imposed on residents within a specific territory regardless of citizenship,
business or profession.
1. Prohibition against impairment of obligation of contracts
2. Prohibition against infringement of religious freedom
3. Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of any
church
4. Prohibition against taxation of religious,, charitable and educational entities
5. Prohibition against taxation of non-stock, non-profit educational institutions
OTHERS
1. Grant of tax exemption
2. Veto of appropriation, revenue, tariff bills by the President
3. Delegated authority of president to impose tariff rates, import and export quotas, tonnage and
wharfage dues as delegated by Congress through a law within the framework of national
development program
4. Non-impairment of the Supreme Court jurisdiction
5. Revenue bills shall originate exclusively from the House of Representatives
6. Infringement of press freedom
7. Revocation of tax exemptions
Situs of Taxation
place of taxation
Factors to consider in determining the situs of taxation
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subject matter
nature of the tax
citizenship
residence of the taxpayer
source of income
place of excise, business or occupation being taxed
Tax distinguished from other terms or imposts
1. Toll is a sum of money for the use of something, generally applied to the consideration, which is
paid of the use of a road, bridge, or the like of a public nature
2. Penalty is a sanction imposed as a punishment for violation of law or acts deemed injurious
3. Special Assessment is an enforced proportional contribution from owners of lands for special
benefits resulting from public improvements
CHARACTERISTICS OF SPECIAL ASSESSMENT
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Levied only on land
Not a personal liability of the person assessed
Based wholly on benefits
Exceptional both as to time and place
1. Revenue refers to all the funds or income derived by the government whether from tax or any
other source
2. Subsidy is a pecuniary aid directly granted the government to an individual or private
commercial enterprise deemed beneficial to the public.
3. Permit or License Fee is a charge imposed under the police power for purposes of regulation
4. Customs duties are taxes imposed on goods exported from or imported into a country.
5. Tariff may be used in one of three senses:
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A books of rates drawn usually in alphabetical order containing the names of several kinds of
merchandise with the corresponding duties to be paid for the same
The duties payable on goods imported or exported; or
The system or principle of imposing duties on the importation or exportation of goods
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.
Direct double taxation means taxing twice
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by the same taxing authority, jurisdiction or taxing district
for the same purpose
in the same year or taxing period
same subject or object
same kind/character of the tax
Direct double taxation becomes legally objectionable for being oppressive and inequitable
Means of Avoiding or Minimizing the Burden of Taxation
1. Shifting
is the transfer of the burden of a tax by the original payer or the one whom the tax was assessed or
imposed to someone else.
Taxes that may be shifted: VAT; percentage taxes; excise taxes; ad valorem taxes
2. Transformation
an escape from taxation where the producer or manufacturer pays the tax and endeavor to recoup himself
by improving his process of production thereby turning out his units of products at a lower cost
3. Tax Evasion (tax dodging)
is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax.
ELEMENTS OF TAX EVASION
Tax evasion connotes the integration of three factors:
1. The end to be achieved
2. An accompanying state of mind which is described as being “evil”, in “bad faith”, “willful”, or
“deliberate and not accidental
3. A course of action or failure of action which is unlawful
4. Tax Avoidance (tax minimization)
is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing
taxable property or income in order to avoid or reduce tax liability
5. Exemption
is the grant of immunity to particular persons or corporations or to persons or corporations of a particular
class from a tax which persons and corporations generally within the same State or taxing district are
obliged to pay.
GROUND FOR GRANTING TAX EXEMPTIONS
1. May be based on contract.
2. May be based on some ground of public policy
3. May be based on grounds of reciprocity or to lessen the rigors of international double or multiple
taxation
Kinds of Tax Exemption
As to basis
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Constitutional - immunities from taxation which originate from the constitution
Statutory - immunities from taxation which emanates from legislation
As to form
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Express - exemptions expressly granted by statute
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Implied - when particular persons, property, or rights are deemed exempt as they fall outside the
scope of the taxing provision itself.
As to extent
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Total - connotes absolute immunity
Partial - one where a collection of a part of the tax is dispensed with
Amnesty - is the general or intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law.
6. Capitalization
is the reduction in the selling price of income producing property by an amount equal to the capitalized
value of future taxes that may be paid by the purchaser.
Sources of Tax Laws
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Philippine Constitution
Tax treaties and international agreements
The National Internal Revenue Code (NIRC) or Tax Code
Tariff and Customs Code
Local Government Code
Local tax ordinances
Other special laws
Decisions of the Supreme Court and the Court of Tax Appeals
Revenue rules and regulations and administrative rulings and opinions
Effectivity of revenue rules and regulations
Except when the law otherwise expressly provides, the aforesaid revenue tax issuances shall not begin to
be operative until after due notice thereof may be fairly assumed.
Purpose of rules and regulations
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To properly enforce and execute the laws
To clarify and explain the law
To clarify into effect the law’s general provisions by providing details of administration and
procedure
Requisites for validity of rules and regulation
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They must not be contrary to law and the Constitution
They must be published in the Official Gazette or a newspaper of general circulation
Construction and Interpretation of Tax Laws or Tax Legislation
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Public purpose is always presumed
If the law is clear, apply the law in accordance to its plain and simple tenor
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A statute will not be construed as imposing a tax unless it does so clearly, expressly and
unambiguously
In case of doubt, it is construed most strongly against the Government, and liberally in the favor
of the taxpayer
Provisions of a taxing act are not to be extended by implication
Tax laws operate prospectively unless the purpose of the legislature to give retrospective effect is
expressly declared or may be implied from the language used
Tax laws are special laws and prevail over a general law
Application of tax laws
📌 General rule: Tax laws are prospective in operation because the nature and amount of the tax could
not be foreseen and understood by the taxpayer at the time the transactions which the law seeks to tax was
completed.
Exceptions
While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared
or is clearly the legislative intent. But a tax law should not be given retroactive application when it would
be harsh and oppressive which violate the taxpayer’s constitutional rights regarding equity and due
process.
Section 246. Non-Retroactivity of Rulings
Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance
with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not
be given retroactive application if the revocation, modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
a) Where the taxpayer deliberately misstates or omits material facts from his return or any document
required of him by the Bureau of Internal Revenue;
b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from
the facts on which the ruling is based; or
c) Where the taxpayer acted in bad faith.