FAR

EASTERN UNIVERSITY
TAXATION
1. Fundamental Principles J. Cayetano

Taxation
the power of the state to demand proportionate contribution from persons and property in order to promote
public welfare to defray the expenses of the government.

Subject of Tax
1. Person – tax on persons who are residents of a particular territory
2. Property – tax on properties, real or personal
3. Privilege – tax imposed upon the performance of an act, enjoyment of a privilege or engagement in an
occupation.

Three Major Characteristics of Taxation

1. Inherent power
2. Legislative in nature
3. Subject to inherent and constitutional limitations

Purposes of Taxation
1. Primary (fiscal purpose) – to raise revenue and funds to defray the necessary expenses of the government.
2. Secondary (sumptuary/compensatory purpose) – to regulate, to promote general welfare, to reduce social
inequality, and to promote economic growth.

Subject of Tax
4. Person – tax on persons who are residents of a particular territory
5. Property – tax on properties, real or personal
6. Privilege – tax imposed upon the performance of an act, enjoyment of a privilege or engagement in an
occupation.

Inherent Powers of the State

Are powers naturally exercisable by the government even in the absence of an express grant of power in the
Constitution. There are three (3) Inherent Powers, namely:

1. Police Power – is the power of the State to enact laws to protect well-being of the people.
2. Eminent Domain – is the power of the State to acquire private property for public purpose upon payment
of just compensation.
3. Taxation – is the power of the state to enforce collection to defray the necessary expenses of the
government.

Differences of
Police Power Eminent Domain Taxation
Inherent Power
Government and
1. Exercising Authority Government only Government only
private utility company
Regulates both liberty
2. Scope Regulates property Regulates property
and property
To protect and
3. Purpose promote general To use by the public To support government
welfare
Community or class of Owner of private Community or class of
4. Persons affected
individual property individual
Compensation is the
intangible, altruistic Compensation is the Compensation is the
5. Benefit received feeling that the fair value of the protection and public
individual contributed property taken improvement
to the public
Sufficient to cover the
6. Amount of imposition None No limit
cost of license
7. Relationship with the Superior to the “Non- Superior to the “Non- Inferior to the “Non-
Constitution impairment Clause” impairment Clause” impairment Clause”

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Similarities of Inherent Powers
1. They are all necessary attributes of sovereignty
2. They are all inherent to the State
3. They are all legislative in nature
4. They are all ways in which the State interferes with private rights and properties
5. They all presuppose an equivalent form of compensation received by the person affected by the exercise
of the power whether directly, or indirectly.

Stages or Process of Taxation

1. Levy or Imposition – This process involves the passage of tax laws or ordinances through the legislature.
2. Assessment – This process involves the act of administration and implementation of tax laws by the
executive through its administrative agencies such as the Bureau of Internal Revenue.
3. Payment – This process involves the act of compliance by the taxpayer in contribution his share to pay the
expenses of the government.

Basic Principle of Sound Tax System

1. Fiscal Adequacy – the sources of government revenue must be sufficient to meet government expenditures
and other public needs.
2. Administrative Feasibility – tax law must be capable of convenient, just and effective administrative – free
from confusion and uncertainty.
3. Theoretical Justice – A good tax system must be based on the taxpayer’s ability to pay. This suggests that
taxation must be progressive conformably with the constitutional mandate that congress shall be evolve a
progressive system of taxation

Theories and Basis of Taxation

1. Lifeblood Theory – The power of taxation is essential because the government can neither exist nor endure
without taxation. The government cannot continue to perform its basic functions of serving and protecting
its people without means to pay its expenses.

2. Benefit-Protection Theory – Taxes are what we pay for a civilized society. The government and people
have a reciprocal and mutual duties of support and protection to one another.

3. Ability to Pay Theory – This theory presupposes that those who have more should be taxed more even if
they benefit less from the government. Those who have less shall contribute less even if they receive more
of the benefit from the government.

Inherent Limitation
1. Territoriality of Taxation – Government can only demand tax obligations upon its subject or resident within
the territorial jurisdiction. There is no basis in taxing foreign subjects abroad since they do not derive benefits
from our government.

2. International Comity – This principle states that each country observes mutual courtesy or reciprocity
between them. Government do not tax income and properties of other governments. Additionally,
embassies or consular offices of foreign government in the Philippines including international organizations
and their non-Filipino staff are not subject to income taxes or property taxes.

3. Public Purposes – Taxes are intended for the common good. Taxation must be exercised absolutely for
public purpose only. It cannot be used for private interest.

4. Exemption of the Government – The government does not tax itself as this will not raise additional funds
but will only impute additional cost. Agencies and Government Owned and Controlled Corporations
(GOCCs) performing proprietary functions are subject to tax.

5. Non-delegation of the Taxing Power – Taxing power is vested exclusively in Congress and is non-
delegable pursuant to the doctrine of separation of the branches of the government to ensure a system of
check and balances.

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 Exception to the rule of non-delegation:
a. The congress may authorize the President to fix, within specified limits, subject and restriction to impose:
§ Tariff rate
§ Import and export quotas
§ Tonnage and wharfage dues
§ Other duties or imposts within the framework of the national development program of the
government

b. The power of the local government unit (LGU) to impose taxes and fees is always subject to the
limitations which Congress may prove, the LGU have no inherent power to tax.

c. Delegation to administrative agencies certain aspects of the taxing process that are not really legislative
in nature such as:
§ Power to value property
§ Power to assess and collect taxes
§ Power to perform details of computation, appraisement or adjustment; among others.

Constitutional Limitation
1. Due Process of Law – No one should be deprived of his life, or property without due process of law. The
law established procedures which must be adhered in making assessments and in enforcing collections.
Failure of the government to observe there rules violates the requirement of due process.

2. Equal Protection of the Law – Taxpayers under similar circumstances and conditions should be treated
equally both in terms of rights conferred and obligations imposed.

3. Uniformity in Taxation – Requires the uniform application and operation, without discrimination, of the tax
in every place where the subject of tax is found.

4. Progressive System of Taxation – Tax rates increase as the tax base increase. This is consistent with the
taxpayer’s ability to pay and reduces social inequality.

5. Non-imprisonment for Non-payment of Poll Tax – No one shall be imprisoned for mere inability to pay
debt. Non-payment of poll tax is only punishable by a surcharge.

6. Free Worship Rule – Properties and revenues of religion institutions such as offerings are not subject to tax.
This exemption does not extend to income from properties or activities of religious institutions that are
proprietary or commercial in nature.

7. Exemption of Religion, Charitable or Education Entities, Non-profit Cemeteries, Churches and

Mosque from Property Taxes – Constitutional exemptions from property tax applies for properties actually
directly, and exclusively used for chartable, religious and educational.

8. Non Appropriation of Public Funds for the Benefit of any Church or System of Religion – To support
freedom of religion, the government should not favor any particular system of religion by appropriating public
funds or property in support thereof.

9. Concurrence of a Majority of ALL Members of Congress to Pass Law Granting Exemption

10. Tax Bills shall Originate Exclusively in the House of Representatives, but Senate may Propose
Amendments

11. Non-Diversification of Tax Collection – Tax should never be diversified or used for private purpose.

12. Non-Delegation of the Power of Taxation

13. Non-Impairment of the Supreme Court Jurisdiction – Congress cannot take away from the Supreme
Court the power given to it by the Constitution as the final arbiter of tax cases.

14. Each Local Government Unit Shall Exercise the Power to Create its Own Sources of Revenue – this is
a constitutional recognition of the local autonomy of local governments and an express delegation of the
taxing power.

15. Exemption from Taxes of the Revenues and Assets of Non-Profit, Non-Stock Educational Institutions
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Double Taxation
1. Direct Double Taxation – this is prohibited because it violates provision on uniformity and equality. All of
the following should be present for it to be considered as direct double taxation (elements):
a. Taxing twice d. Same jurisdiction
b. Same subject e. Same year
c. Same taxing authority f. Same purpose

2. Indirect Double Taxation – is not legally questionable. It expands to all cases in which there is a burden
of two or more pecuniary imposition but imposed by different taxing authority.

Nothing in our law expressly prohibits double taxation.

Remedy to Double Taxation:

a. Provision of tax exemption c. Allowing reciprocal tax treatment
b. Allowing foreign tax credit d Entering into treaties or bilateral agreements

Forms of Escapes from Taxation

1. Shifting – This is the process of transferring tax burden to other taxpayer.

2. Capitalization – This pertains to the adjustment of the value of an asset caused by changes in tax rates.

3. Transformation – This pertains to the elimination of wastes or losses by the taxpayer to form savings to
compensate for the tax imposition increase in taxes.

4. Tax Evasion – Also known as tax dodging, refers to any act or trick tends to illegally reduce or avoid the
payment of tax.

5. Tax Avoidance – Also known as tax minimization, refers to any act or trick that reduces or total escapes
taxes by any legally permissible means.

Elements of a Valid Tax System

1. Tax must be levied by the taxing power having jurisdiction over the object of taxation
2. Tax must not violate constitutional and inherent limitation
3. Tax must be uniform and equitable
4. Tax must be for public purpose
5. Tax must be proportional in character
6. Tax is generally payable in money

Ambiguity of Tax Law and Tax Exemption

1. Ambiguity pertains to the Tax Law or Tax Statute:

a. Strictly against the government
b. Liberally in favor of the taxpayer

2. Ambiguity pertains to the Tax Exemption or Allowable Deduction

a. Strictly against the taxpayer
b. Liberally in favor of the government

Classification of Taxes

1. As to purpose
a. Fiscal or revenue tax – tax imposed for general purpose
b. Regulatory – tax imposed to regulate business, conduct, act or transactions
c. Sumptuary – tax levied to achieve some social or economic objective

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2. As to imposing authority
a. National – imposed by the National Government
- Income tax - Other percentage tax
- Estate tax - Excise tax
- Donor’s tax - Documentary stamp tax
- Value added tax
b. Local – imposed by local government units such as municipality or local government
- Real property tax
- Professional tax
- Business taxes, fees, and charges

3. As to subject matter
a. Personal tax – tax on persons who are residents of a particular territory
b. Property tax – tax on properties, real or personal
c. Excise tax – tax imposed upon the performance of an act, enjoyment of a privilege or engagement in an
occupation

4. As to who bears the burden (incidence of taxation)

a. Direct – both the incidence (liability for the payment of the tax) as well as the impact or burden of tax
falls on the same person. The burden of tax cannot shift to another.
b. Indirect – incidence or the liability for the payment of the tax falls on one person but the burden thereof
can be shifted or passed on to another person (e.g., VAT).

5. As to determination of amount:
a. Specific – tax of fixed amount imposed by the head or number, or by some stranded of weight or
measurement (e.g., excise tax on cigars and liquors)
b. Ad valorem – tax proportion of the value of the property with respect to which the tax is assessed (e.g.,
donor’s tax and estate tax)

6. As to graduation or rate:
a. Proportional – this is a flat or fixed rate tax
b. Progressive – the rate is increasing as the tax base increase
c. Regressive – the rate is decreasing as the tax base increase

Distinction and Similarities of Tax with Other Payables

1. Tax vs. Revenue – Tax refers to the amount imposed by the government for public purpose. Revenue
refers to all income collections of the government which includes taxes, licenses, toll, penalties and others.

2. Tax vs. License Fee – Tax has a broader subject than license. Tax emanates from taxation power and is
imposed upon any object such as person, properties, or privileges to raise revenue.

License fee emanates from police power and is imposed to regulate the exercise of a privilege such as the
commencement of a business or a profession.

3. Tax vs. Toll – Tax is a levy of government; hence, it is a demand of sovereignty. Toll is a charge for the use
of other’s property; hence, it is a demand of ownership. The amount of tax depends upon the needs of the
government, but the amount of toll is dependent upon the value of the property leased.

4. Tax vs. Debt – Tax arises from law while debt arises from private contracts. Non-payment of tax leads to
imprisonment, but non-payment of debt does not lead to imprisonment.

5. Tax vs. Special Assessment – Special assessment is levied by the government on lands adjacent to a
public improvement. It is imposed on land only and is intended to compensate the government for a part of
the cost of the improvement.

6. Tax vs. Tariff – Tariff is the amount imposed on imported or exported commodities.

7. Tax vs. Penalty – Tax Penalty is an amount imposed to discourage an act. Penalty may be imposed by
both government and private individuals. It may arise both from law or contract whereas tax arises from law.
/END/

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