BUKIDNON STATE UNIVERSITY

Alubijid Satellite Campus

LECTURE NOTE: PRINCIPLES OF TAXATION

Taxation defined.

Taxation is the act of laying a tax, i.e., the process or means by which the sovereign, through its
lawmaking body, raises, revenue to defray the necessary expenses of government.

1. Theory and basis of taxation:

a. Theory – the existence of the government is a necessity, that it cannot continue without
means to pay its expenses and that it has a right to compel all its citizens and property
within its limits to continue.

b. Basis – the reciprocal duties of protection and support between the State and its inhabitants
The state collects taxes from the subjects of taxation in order that it may be able to perform
the functions of the 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 (Benefits-received Principle).

2. Lifeblood theory:

a. Taxes are the lifeblood of the Government and their prompt and certain availability is an
imperious (expecting obedience) need.

b. Upon taxation depends the government’s ability to serve the people for whose benefit taxes
are collected.

c. Manifestation of lifeblood theory:

1. Imposition of tax even in the absence of the Constitutional grant.
2. Right to select subjects or objects of taxation.
3. No injunction to enjoin (or stop) tax collection.

3. Purpose of taxation:
a. Principal (primary) purpose. To raise revenue for governmental needs (revenue or fiscal
purpose)
b. The secondary purposes of taxation are:
 1. Compensatory purpose
a. To reduce excessive inequalities of wealth.
b. To maintain high level of employment.
c. to control inflation.
2. Sumptuary or regulatory purposes
To supplement the police power of the state to promote the general welfare.
4. Basic Principles of a sound tax system (Canons of taxation): FEA
a. Fiscal Adequacy – the sources of revenue should be sufficient to meet the demands of public
expenditures.
b. Equality/Theoretical Justice – the tax burden should be proportionate to the taxpayer’s ability
to pay (ability to pay principle)
c. Equality/Theoretical Feasibility – tax laws should be capable of convenient, just and effective
administration.

5. Characteristics or nature of the State’s power to tax:

a. Inherent in Sovereignty - it may be exercised although not expressly granted by the

Constitution.
b. Legislative in Character – only the legislature can impose taxes.
c. Subject to constitutional and inherent limitations – it is not an absolute power that can be
exercised by the legislature anyway it pleases.

6. Scope of the power of taxation:

The power of taxation is unlimited, comprehensive, plenary and supreme. However, subject to inherent
and constitutional limitations.

7. Aspects of Taxation
a. LEVYING or imposition of tax which is a legislative act.
b. COLLECTION of the tax levied which is essentially administrative in character.

How taxation came to life:

a. Co-exists with the creation of government.
1. It is an inherent power by which the sovereign state raises revenues for the use and support
of the government.
2. Taxation is the lifeblood of the government without it the nation will die.
 3. Taxation is the government and government is taxation. Neither one can exist without the
other. The success of one is the success of the other.

b. How is power exercised?

1. Legislative in function (enactment of tax laws)
2. Collection of the tax which is administrative in character.

Power of taxation-incidents:
a. Without such power, the government will not survive.
b. Exercised in a very democratic way
c. Taxpayers elect their representatives to the lawmaking body of the government.
d. Congress enacts tax laws.
e. Basically a legislative function.
f. The delegated power is something formidable.
g. Could be abused; principal check is their conscience of responsibility to their constituents.
h. Subject to inherent and constitutional limitations.

LIMITATIONS ON POWER OF TAXATION

1. Distinction between inherent and constitutional limitations:

a. Inherent Limitations – caused by the very nature of the power itself`; not found in the
constitution.
b. Constitutional Limitations – expressly found in the Constitution or implied from its provisions.

2. Inherent limitations (NEPTI)

a. Non-delegation of the power to tax – the power to tax is purely legislative, and it cannot be
delegated by the legislature to the executive or judicial department of the government.

b. Exemption from taxation of government entities – government agencies performing essential

governmental functions are exempt from tax unless expressly taxed, while those
performing proprietary functions are subject to tax unless expressly exempted.
c. Public purposes – this is the purpose affecting the inhabitants of the State as a community
and not merely as individuals.
d. Territorial jurisdiction – tax laws of the state are enforceable only within its territorial limits.
e. International Comity – the property of the foreign State or government may not be taxed by
another.
Non-delegation of the power to tax:
The limitation arises from the doctrine of separation of powers among the three branches of the
government.
The following are some exceptions to the rule against the delegation of the taxing power:
1. Delegation to the president to fix, within specifies limits, tariff rates, import or export quotas,
tonnage and wharfage dues and other duties or imports.
2. Delegation to local governments the power to create its own sources of revenues and to levy taxes,
subject to such limitations as may be provided by law.
3. Delegation to administrative agencies (power of subordinate legislation) certain aspects of the
taxing process that are not legislative, such as the power:
a. to fix value of property for purpose of taxation pursuant to fixed rules.
b. to access and collect taxes.
c. to perform any of the innumerable details of computation, appraisement, and adjustments,
and the delegation of such duties.

Exemptions from taxation of government agencies and instrumentalities:

a. Government cannot tax itself
b. Government agencies operated for profit shall be taxed in the same manner as private business
enterprises.
c. Tax exemption of agencies performing essential governmental function.

Public purpose:
1. The proceeds of the tax must be used:
a. For the support of the government, or
b. For any of the recognized objects of government, or
c. To promote the welfare of the community.
2. A tax levied for private (not public) purpose constitutes taking of property without due process of law
as it is beyond the power of the government to impose.
3. Instances of public purpose:
a. Financing educational activities and programs (e.g., free college education)
b. Promotion of science (DOST)
c. Construction of maintenance of roads, bridges and piers.
d. Aid to victims of public calamity
 e. Relief for the poor and unemployed and to provide for unemployment benefits (e.g., 4Ps)
f. Payment of pensions and bonuses for services rendered by public officers and employees.
g. The construction of experimental stations to seek increases of efficiency in sugar production
and the improvement of living and working conditions in sugar mills or plantation.
Territorial jurisdiction
1. The tax laws do not operate beyond a country’s territorial limits.
2. Property which is wholly or exclusively within the jurisdiction of another State receives none of the
protection for which a tax is supposed to be compensated.

Situs of taxation
A person may be taxed where there is between him and the taxing State a privity of relationship
justifying the levy.
Situs of taxation:
1. Meaning – place of taxation
2. Basic rules on situs – situs is the State which has jurisdiction or which exercise dominion over the
subject in question.

Subject of taxation & Situs

1. Poll tax on persons – Residence of the person
2. Real property tax – Location of property
3. Tax on tangible personal property – Location of property
4. Tax on intangible personal property – Domicile of the owner
5. Income tax – where the taxpayer is a citizen or resident or the place where the income is derived.
6. Business, occupation and transaction tax – Place where the business is done, or the occupation is
engaged in, or the transaction took place.
7. Gratuitous transfer of property – State where the transferor is/was a citizen or resident, or where the
property is located.
a. Multiplicity of situs – income or intangible personal properties may be subject to taxation in
several taxing jurisdictions.
b. Remedies against multiplicity of situs
1. Provision of exemptions.
2. Allowance of deduction or tax credit for foreign taxes.
3. Treaties with other States.
International comity:
1. Courteous and friendly agreement and interaction between nations
2. Based on any of the following grounds:
a. Sovereign equality among States under international law by virtue of which one State cannot
exercise its sovereign power over another.
b. The usage among States when one enters the territory of another, there is an implied
understanding that the former does not intend to degrade its dignity by placing itself
under jurisdiction of the latter.
c. The rule of international law that a foreign government may not be sued without its consent
so that it is useless to assess tax since anyway it cannot be collected.
3. Our Constitution has adopted the generally accepted principle of international law as part of the law
of our country.

Constitutional limitations
A. Due process of law. “No person shall be deprived of life, liberty or property without due process of
law nor shall any person be denied the equal protection of law”.
1. Any deprivation of life, liberty, or property is with due process if it is done:
a. Under the authority of law that is valid or of the Constitution itself; and
b. After compliance with fair and reasonable methods of procedure prescribed by law.

2. Due process in taxation requires:

a. tax must be for public purpose.
b. imposed within the territorial jurisdiction.
c. no arbitrariness or oppression in assessment and collection.

3. All person subject to legislation shall be treated alike under circumstances and conditions both in
the privileges conferred and liabilities imposed.
4. The constitution does not require things which are different in fact to be treated in law as though
they were the same. Thus, there is no denial of equal protection if coconut planters are given
tax exemption while copra dealers are taxable.
5. There is denial of equal protection in the following cases:
a. Where an ordinance imposes a property tax on motor vehicles using the streets of Manila,
such being payable only by owners of vehicle residing outside Manila while the residents
who also use the streets are not made to share the corresponding burden.
b. Where a tax provisions is enforced against manufacturers of filled milk only, but not against
 persons similarly situated such as manufacturers of condensed skimmed milk.

B. Power of the President to veto any particular items in a revenue or tariff bill
As a general rule, under the Constitution, the President may not veto a bill in part and approve it in part.
The exception is with respect to revenue or tariff bill.

C. Non-impairment of the obligation of contracts. “No law impairing the obligations of contracts shall
be passed”.
The obligation of contract is impaired when its terms or conditions are changed by law or by a party
without the consent of the other, thereby weakening the position of the latter.

D. Non-imprisonment for non-payment of poll tax. “No person shall be imprisoned for debt or non-
payment of poll taxes”.
1. An imposition of a fine (but not subsidiary imprisonment), or even imprisonment for any other
violation than non-payment would not be unconstitutional.
2. Only non-payment of poll tax (or community tax) is covered by the limitation. Non-payment of
other (additional) taxes can validly be subjected by law to imprisonment.

E. The congress may authorize the president to fix tariff rates, import and export quotas, tonnage and
wharfage dues and other duties or imposts.

F. rule of uniformity and equity in taxation.

“The rule of taxation shall be uniform and equitable”.
1. Articles or properties of the same class shall be taxed at the same rate.
2. A tax is considered uniform when it operates with the same force and affect in every place where
the subject may be found.
3. the concept of equity in taxation requires that apportionment of the tax burden be, more or less,
just in the light of the taxpayer’s ability to shoulder the tax burden and, if warranted, on the
basis of the benefits he receives from the government.
4. The Congress shall evolve a “progressive system of taxation” – tax shall place emphasis on direct
rather than indirect taxation, with ability to pay as the principal criterion. A system that places
emphasis on indirect taxes is said to be a regressive tax system.
5. Equal protection – like treatment of persons in like circumstances, uniformity and equity refer to
the proper relative treatment for tax purposes of persons in unlike circumstances.
6. Double Taxation, in its general sense, means taxing a person, property or right twice during the
same taxable period. In its general sense, it does not violate the equal protection and uniformity
clauses of the constitution.
a. Direct double taxation or direct duplicate taxation (which violates the equal protection and
 uniformity clauses of the constitution) means:
1. Taxing twice.
2. By the same taxing authority.
3. Within the same jurisdiction or taxing district.
4. For the same purpose.
5. In the same year (or taxing period)
6. Some of the property in the territory.

b. There is no direct double taxation (indirect duplicate taxation) in the following cases:
1. A tax on a mortgage of the property when the mortgaged property is also taxed at its
full value as real estate.
2. A tax upon the same property imposed by two differing States.

G. No appropriate for religious purpose. “No public money or property shall be appropriated, applied,
paid, or employed, directly or indirectly. For the use, benefit, or support of any sec, church,
denomination, sectarian institution, or system of religion, or of any priest, preacher, minister,
other religious teacher, or dignitary.

H. Exemption of religious, charitable or educational entities, nonprofit cemeteries, and churches from
property taxation”.
“Charitable institutions, churches, and personages or convents appurtenant thereto, mosque, non-
profit cemeteries, and all lands, buildings and improvements, actually, directly and exclusively used for
religious, charitable, or educational purposes shall be exempt from taxation”.
1. The tax exemption covers property taxes only and not other taxes.
2. Conveyance (transfer) of exempt property would be subject to transfer taxes.
3. The test of the exemption of the property is the use and not ownership.

I. Exemption from income taxes, real estate taxes and customs duties of non-stock. Non-profit
educational institutions.
‘’All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties.

J. Non-impairment of the jurisdiction of Supreme Court in tax cases.

K. Concurrence by a majority of all members of the congress for the passage of a law granting tax
exemptions.
 1. What is exemption from taxation?
a. Tax holiday
b. Privilege of immunity from a tax burden of which others are subjected to.
c. The power of taxation carries with it the power not to tax or the power to exempt.
d. The general rule, however, is taxation and exemption is the exception.
e. Strictly construed against the taxpayer claiming the exemption and in favor of the State.
f. The exemption must be based on reasonable grounds.
g. It requires a majority vote of congress on tax exemption grant.
h. It is personal and cannot be assigned or transferred by the person to whom it is given without
the consent of the State given in clear and unmistakable terms.

2. Kinds of tax exemption:

a. Expressly or affirmative – clearly provide for in the constitution, statutes, or tax treaty with
other countries. Examples are:
1. Exemption from real property tax on real properties used for religious and charitable
purposes by religious and charitable institutions per the Constitution.
2. Exemption from income taxation of non-profit organizations and exemption from gift tax of
certain donations per the NIRC.
3.Reciprocity agreements with other nations intended to minimize tax burdens of their
respective subjects.
4. Grounds for statutory or expresses exemptions:
a. Contract franchise - grant with exemption from tax entered into between the State
and the grantee.
b. Public policy – those enjoyed by religious and charitable institutions and non-profit
organizations.
c. Reciprocity

b. Exemption by omission or implied exemption. Occurs when a tax is imposed on certain class
of taxpayers without mentioning the other class. Those not mentioned are therefore
exemptions by omission, either intentional or accidental.

4. Tax exemption (E) vs. tax amnesty (A)

E – an immunity from civil liability only; it is immunity or privilege, a freedom from a charge or burden
of which others are subjected to; It is prospective in application.
A – an immunity from all criminal and civil obligations arising from non-payment of taxes; it is a
 general pardon given to all taxpayers; it applies only to past tax periods, hence of retroactive
application.

Inherent power of the State: PET

a. Police power (P) – power of the state to enact laws in relation to persons and property so as
to promote public health, public moral, public safety and general welfare of the people.
b. Power of eminent domain (E) – power of the State or those to whom the power has been
delegated to take private property for public use upon paying the owner or just
compensation.
c. Power of taxation (T) – power of the State by which the sovereign raises revenue to defray
the necessary expenses of the government.

Similarities among the three inherent powers of the State:

a. They are inherent in the State.
b. They exist independently of the constitution.
c. They constitutes the three methods by which the States interferes with private rights and property.
d. They are legislative in nature and character.
e. Each presupposes an equivalent compensation.

Distinctions among the three inherent powers of the State:

a. Authority which exercises the power:
1. P/T – government only
2. E - government, public service companies and public utilities
b. Purpose:
1. P - promote general welfare
2. E – public purpose
3. T – support of government
c. Persons affected:
1. P/T – community or class of individuals
2. E - individual, as owner of a particular property
d. Effect
1. P – no transfer of title, three is restraint on the injurious use of property
 2. E – there is transfer of the right to property, either ownership or a lesser right
3. T – taxes become part of public funds
e. Benefits received:
1. P – no direct and immediate benefit, only such as may arise from the maintenance of a
healthy economic standard of society.
2. E – market value of the property taken from the property owner
3. T – equivalent of tax in the form of protection and benefits

f. Amount of imposition:
1. P – limited to the cost of the license and the necessary expenses of police surveillance and
regulation.
2. E – no imposition, the owner is paid the fair market value of his property
3. T – no limit

g. Relationship to the non-impairment clause of obligations clause of the Constitution:

1. P – superior to the clause
2. E/T – inferior to the clause

TAX AND OTHER CHARGES

1. Tax is an enforced proportionate contribution levied by the State by virtue of its sovereignty for the
support of the government and all public needs.

2. Essential elements of tax:

a. It is an enforced contribution.
b. It is generally payable by money
c. It is proportionate in character.
d. It is levied on persons, property, or the exercise of a right or privilege.
e. It is levied on the state which has jurisdiction over the subject or object of taxation.
f. It is levied by the lawmaking body of the state.

3. Classification of taxes:
a. As to scope:
1. National – imposed by the National Government (e.g., income tax, estate tax, donor’s tax, value-
 added tax, other percentages taxes, documentary stamp tax).
2. Local or Municipal – imposed by municipal corporations (e.g., real estate tax, community tax).

b. As to who bears the burden:

1. Direct- demanded from the person who also shoulders the burden of the tax; tax which the
taxpayer cannot shift to another (e.g., income tax, estate tax, donor’s tax).
2. Indirect – tax which is demanded from one person in the expectation and intention that he shall
indemnify himself at the expenses of another; tax which the taxpayer can shift to another (e.g.,
VAT, OPT)
c. As to determination of amount:
1. Specific - tax of fixed amount imposed by the head and number, or by some standard of weight or
measurement. It requires no assessment other than a listing or classification of the subjects to
be taxed (e.g., excise tax in cigar, cigarettes and liquors).
2. Ad valorem – tax of fixed proportion of the value of the property with respect to which the tax is
assessed. It requires the intervention of assessors or appraisers to determine the amount to be
taxed.
d. As to purpose:
a. General/fiscal/revenue – tax imposed solely for the general purposes of the government, i.e., to
raise revenue for government expenditures (e.g., income tax, donor’s tax and estate tax).
b. Special/Regulatory – tax imposed for a particular of specific purpose, i.e., to achieve some social or
economic ends irrespective of whether revenue is actually raised or not (e.g., tariff and certain
duties on imports).
e. As to object or subject matter
a. Personal/poll/capitation – tax of a fixed amount imposed on individuals whether citizens or not,
residing within the specified territory without regarding to their property or the occupation in
which he may be engaged (e.g., community tax).
b. 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).
c. Excise – any tax which does not fall within the classification of a poll tax or a property tax. This is a
tax on the exercise of certain rights and privileges (e.g., income tax, estate tax, donor’s tax, VAT,
other percentage taxes).
Note: This is different from the excise tax which is a business tax imposed on items such as
cigars, cigarettes, wines, liquors, automobiles, mineral products, etc.

f. As to rates or graduation:
a. Proportional – tax on a fixed percentage of amount of the property, receipts, or other basis to be
taxed (e.g., VAT, other percentage taxes).
 b. Progressive – tax the rate of which increases as the tax base or bracket increases (e.g., income tax,
estate tax and donor’s tax).
c. Regressive – tax the rate of which decreases as the tax base or backet increases.
Regressive system of taxation
a. A regressive tax must not be confused with regressive system of taxation. In society where
the majority of the people have low income, it exists when there are more indirect taxes
imposed than direct taxes.
b. The low-income sector of the population as a whole buys more consumption goods on which
indirect taxes are collected. The burden of indirect taxes rests more on them than on
the more affluent groups.

Sources of tax laws:

a. Constitution
b. Statutes or laws
c. Judicial decisions
d. Provincial, city, municipal and barangay ordinances
e. Treaties and international agreements
f. Revenue regulations
g. Administrative rulings and opinions

Basic tax laws of the Philippines

a. National internal revenue code
b. Customs Modernization and Tariff Act (CMTA)
c. The local tax code
d. The real property tax code

Tax avoidance vs. tax evasion

a. Tax avoidance (tax minimization) is the use by the taxpayer of legally permissible methods in order
to reduce tax liability.
b. Tax evasion (tax dodging) is the use by the taxpayer of illegal means to defeat or lessen the
payment of tax.

Relationship among impact, shifting and incidence of taxation:

The impact of taxation corresponds to the imposition of the tax; shifting refers to the transfer of the tax;
and, incidence consists of the payment of the tax.
Shifting is the transfer of the burden of a tax by the original payor or the one to whom the tax was
assessed or imposed to another or someone else.

Kinds of Shifting
1. Forward shifting – takes place when the burden of the tax is transferred from a factor of production
through the factors of distribution until it finally settles to the ultimate purchaser or consumer.
2. Backward shifting – effected when the burden of the tax is transferred from the customer or
purchaser through the factors of distribution to the factor of production.
3. Onward shifting – occurs when tax is shifted two or more times either forward or backward.

Distinction of tax from other charges

a. Penalty vs Tax
PENALTY TAX
Designed to regulate conduct Aimed at raising revenue
Imposed by government or private entities Imposed by government only

b. Debt vs. Tax

DEBT TAX
Based on contract Based on law
Assignable Generally not assignable
May be paid in kind Generally payable in money
May be subject to set-off or compensation Generally not subject to set-off or compensation
No imprisonment for non-payment Imprisonment for non-payment, except poll tax
Governed by ordinary prescriptive period Governed by special prescriptive period
Draws interest when stipulated or when there is Does not draw interest except when delinquent
default

c. Special Assessment vs. Tax

Special assessment is an enforced proportional contribution from owners of lands foe special
benefits resulting from public improvements.
SPECIAL ASSESSMENT (SPECIAL LEVY) TAX
Levied on land only Levied on persons, property or the exercise of
privilege
Not a personal liability of the person assessed Personal liability of the person taxed
Based wholly on the special benefits to the
property assessed
Exception both as to time and place
3. Other charges/related terms:
a. A subsidy is pecuniary aid directly granted by the government to an individual or private
commercial enterprise deemed beneficial to the public.
b. Revenue refers to all the funds or income derived by the government, whether from tax or from
any other sources.
c. Internal Revenue refers to taxes imposed by the legislature other than duties on imports and
exports.
d. Customs Duties (or simply duties) are taxes imposed on goods exported to or imported from a
country. Customs duties are really taxes but the latter is broader.
e. Tariff may be used in one the following three senses:
1. A block of rates drawn usually in alphabetical order containing the names of the several kinds
of merchandise with the corresponding duties to be paid for the same.
Based on the necessities of the government without any special benefit directly occurring to the
taxpayer.
Has general application.

d. License fee vs. Tax

License fee or permit is a charge imposed under the police power of the State for the purpose of
regulations.

LICENSE FEE TAX

Imposed for regulation Imposed for revenue
Involves an exercise of police power Involves exercise of taxing power
Amount is limited to the necessary of regulations Amount is generally not limited
Imposed on the right to exercise a privilege Imposed on persons, property and the right to
exercise a privilege
Legal compensation or reward of an officer for Enforced contribution assessed by sovereign
specific services authority to defray public expenses
Failure to pay makes the act or business illegal Failure to pay does not necessarily make the
business illegal

e. Toll vs, tax

Toll is a sum of money collected for the use of something, generally applied to the consideration
which is paid for the use of road, bridge or the like, of a public nature.

TOLL TAX
Demand for proprietorship Demand of sovereignty
Paid for another person’s property Paid for the support of the government
Amount is based on the cost of construction or Amount is based on the necessities of the State
maintenance of the public improvements use
May be imposed by the government or by private Imposed by government only
entities
1. The duties payable on goods imported or exported
2. The system or principles of imposing duties on the importation of goods.