Chapter 1

Income Taxation – Introduction to Taxation

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I. WHAT IS TAXATION?
A. As a state power
 An inherent power of the State to enforce proportional contributions to its subjects
B. As a process
 A process of levying taxes by the legislature of the State on its subjects
C. As a mode of cost distribution
 A mode by which the State allocates its costs/expenses to its subjects

II. THEORY AND BASIS OF TAXATION

A. Theory of taxation
 The government provides services to the public in order to have a civilized and orderly society; and
to provide these, they need a funding system.
B. Basis of taxation
 Since the government provides services to the public and people benefit from it, these people will
provide the funds to finance the government.

 Every citizen and resident of the State directly/indirectly benefits from government services.

III. THEORIES OF COST ALLOCATION

A. Benefits received theory
 Presumes that the more benefits one receives from the government, the more he should pay
B. Ability to pay theory
 Presumes that taxpayers should be required to contribute based on their capacity to pay
i. Vertical equity – based on gross income, without consideration of expenses
ii. Horizontal equity – based on net income (expenses are deducted)

IV. THE LIFEBLOOD DOCTRINE

 Taxes are the lifeblood of the State as they are the main sources of funds of the government.

Implication of the lifeblood doctrine in taxation:

A. Tax is imposed even in the absence of a Constitutional grant
B. Claims for tax exemption are construed against taxpayers
C. The government reserves the right to choose the objects of taxation
D. The courts are not allowed to interfere with the collection of taxes

V. INHERENT POWERS OF THE STATE

A. Taxation power
 Power of the State to enforce proportional contributions from its subjects
B. Police power
 General power of the State to enact laws to protect the well-being of the people
C. Eminent domain
 Power of the State to take private properties for public use after paying just compensation

VI. SCOPE AND LIMITATIONS OF THE TAXATION POWER

 The scope of taxation is widely regarded as comprehensive, plenary, unlimited and supreme

Inherent Limitations of the Taxation Power

Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 1
Income Taxation – Introduction to Taxation
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1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power

Constitutional Limitations of the Taxation Power

1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque from property
taxes
9. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
11. Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. The requirement that appropriations, revenue, or tariff bills shall originate exclusively in the House of
Representatives
16. The delegation of taxing power to local government units

VII. STAGES OF THE EXERCISE OF TAXATION POWER

1. Levy or imposition (Impact of taxation)
 Involves enactment of a tax law by Congress
 Legislative act in taxation
2. Assessment and collection (Incidence of taxation)
 Involves determination of tax liabilities of taxpayers and the collection thereof
 Administrative act in taxation

VIII. SITUS OF TAXATION

 It is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the tax object.

Situs rules:
A. Business tax situs – subject to tax in the place where the business is conducted
B. Income tax situs on services – subject to tax where services are rendered
C. Income tax situs on sale of goods – gain on sale is subject to tax in the place of sale
D. Property tax situs – properties are taxable in their location
E. Personal tax situs – persons are taxable in the place of residence

IX. OTHER FUNDAMENTAL DOCTRINES IN TAXATION

A. Marshall Doctrine
B. Holme’s Doctrine
C. Prospectivity of tax laws
D. Non-compensation or set-off
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 1
Income Taxation – Introduction to Taxation
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E. Non-assignment of taxes
F. Imprescriptibility in taxation
G. Doctrine of estoppel
H. Judicial non-interference
I. Strict construction of laws

X. DOUBLE TAXATION
 Occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing.

Elements of double taxation

A. Primary – same object
B. Secondary
i. same type of tax
ii. same purpose of tax
iii. same taxing jurisdiction
iv. same tax period

Types of double taxation

A. Direct double taxation
 Occurs when all elements of double taxation exist for both impositions
B. Indirect double taxation
 Occurs when at least one of the secondary elements of double taxation is not common for both
impositions

How to minimize double taxation?

A. Provision of tax exemption
B. Allowing foreign tax credit
C. Allowing reciprocal tax treatment
D. Entering into treaties or bilateral agreements

XI. ESCAPES FROM TAXATION

 Available means for taxpayers to limit or even avoid the impact of taxation

Category A – Those that result to loss of government revenue

A. Tax evasion, or tax dodging
B. Tax avoidance, or tax minimization
C. Tax exemption, or tax holiday

Category B – Those that do not result to loss of government revenue

A. Tax shifting
B. Tax capitalization
C. Tax transformation

XII. TAX AMNESTY VS TAX CONDONATION

 Tax amnesty
 Tax condonation
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 1
Income Taxation – Introduction to Taxation
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Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA