Chapter 1.

Introduction to Taxation

 TAXATION – state power, legislative process, mode of government cost distribution.

 THEORY OF TAXATION – government’s necessity for funding.

 BASIS OF TAXATION – mutuality of support between the people and the government.

 Receipts of benefits are conclusively presumed.

 THEORIES OF COST ALLOCATION

Benefit received theory – more benefit, more taxes.

Ability to Pay Theory – contribute based on relative capacity to sacrifice.

ASPECTS:

: Vertical Equity – gross concept; extent of ability to pay is proportional to tax base.

: Horizontal Equity – net concept; consideration of circumstances

 THE LIFEBLOOD DOCTRINE – without taxes, government would be paralyzed: Taxes – essential and
indispensable.

IMPLICATION:

: doesn’t need constitutional grant.

: tax exemption – claims: construed against taxpayer

: right to choose object of taxation – government

: courts not allowed to interfere

: Income taxation

taxable upon receipt;

deduction for capital expenditures and prepayment not allowed;

lower amount of deduction is preferred, in case claimable expense subject to limit;

higher tax base is preferred, in case of multiple tax bases.

 INHERENT POWERS OF THE STATE (pg. 4-5)

Taxation Power – enforce proportional contribution

Police Power – enact laws to protect well-being of the people

Eminent Domain – take private property for public use after paying just compensation

 SCOPE OF TAXATION POWER (CPUS) – comprehensive, plenary, unlimited, and supreme.

 THE LIMITATIONS OF THE TAXATION POWER

Inherent Limitations (TIPEN)

 Territoriality of Taxation – demand tax obligations within territorial jurisdiction; extraterritorial taxation
– encroachment of foreign sovereignty.

 International Comity – all nations deemed equal to one another (co-equal sovereignty); non-taxing of
income and properties of other governments

 Public Purpose (only) – intended for the common good

 Exemption of the Government – exemption: income from its properties and activities conducted for
profit (GOCC)

 Non-delegation of the Taxing Power – vested exclusively in congress and is non-delegable. Exemption:
LGU, President – fix amount of tariffs, other cases requiring expedient and effective administration and
implementation.

Constitutional limitations (DEUP-NNFE-NECN-NNTT)

 Due process of law – neither harsh nor oppressive

Aspects:

: Substantive due process – tax must be imposed only for public purpose

: Procedural due process – no arbitrariness, right to notice and hearing.

Assessment – made within 3 years from due date of filing of return or actual filing (whichever is later)

Collection – made within 5 years from date of assessment

 Equal protection of the Law – equal treatment both in terms of rights conferred and obligations
imposed; applies to taxpayers under same circumstances.

 Uniformity rule in taxation – taxation shall be uniform and equitable;

: taxpayers under dissimilar circumstances should not be taxed the same (substantial distinction)

: each class is taxed differently – falling under same class are taxed the same (relative equality)

 Progressive system of taxation – tax rates increase as tax base increases (consistent with taxpayer’s
ability to pay)

 Non-imprisonment for non-payment of debt or poll tax – applies only when the debt is acquired in
good faith (bad faith – estafa)

 Non-impairment of obligation and contract – honored and shouldn’t be cancelled by a unilateral

government action.

 Free worship rule – free exercise of religion but does not extend to income from properties or activities
that are proprietary or commercial in nature

 Exemption of the following lands, buildings, and improvements from property taxes

: Religious, charitable and educational entities

: Non-profit cemeteries, churches and mosques

 Doctrine of use: applies only to properties actually, directly, and exclusively devoted to religious
activities, etc.

 Non-appropriation of public funds or property for the benefit of any church, sect, or system of religion –
government should not favor nor support any particular system of religion

: however, compensation to priests, etc. with military, penal institutions, etc. not considered religious
appropriation. 2 SJDL INCOME TAXATION (Banggawan,2019): REVIEWER

 Exemption from taxes of the revenues and assets non-profit, non-stock educational institutions
(Doctrine of use)

: including grants, endowments, donations, or contributions

: Private educational institutions – minimal 10% income tax

 Concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption
: In withdrawal, only a relative or quorum majority is required

 Non-diversification of tax collections – used only for public use.

 Non-delegation of the power of taxation – as part of lawmaking be vested exclusively in Congress

 Non-impairment of the jurisdiction of the Supreme Court to review tax cases – all tax cases can be
raised to and be finally decided by the Supreme Court of the Philippines

 Appropriations, revenue, or tariff bills shall originate exclusively in the house of representatives

: does not necessarily mean that the House bill must become the final law.

: Senate may propose or concur with amendments

: Held constitutional – senate changed entire house version of tax bill

 Delegation of taxing power to local government units – constitutional recognition of the local autonomy
of LGU

 STAGES OF THE EXERCISE OF TAXATION POWER

Levy or Imposition

: impact of taxation; legislative act

: enactment of a tax law by Congress – House of Representatives and The Senate

: tax bills must originate from House of Representatives.

: However, each may have their own versions proposed which is approved by both bodies.

DISCRETION IN THE EXERCISE: (DSDKNSM)

‘Determine object of taxation

‘Set tax rates/amount collected

‘Determine purpose of levy – public use

‘Kind of tax to be imposed

‘National and local government apportionment

‘Situs of Taxation

‘Method of collection

Assessment and Collection

: incidence of taxation; administrative act of taxation

: tax law is implemented by the administrative branch of the government

: involves assessment/determination of the tax liabilities of taxpayers and collection.

 SITUS OF TAXATION

 Situs – place of taxation; tax jurisdiction.

 Situs rules – frames of reference whether tax object is within or without the jurisdiction.

: Business Tax Situs – where the business is conducted.

: Income tax situs on services – where service is rendered

: Income tax situs on sale of goods – in the place of sale

: Property tax situs – in its location

: Personal tax situs – in their place of residence

 OTHER FUNDAMENTAL DOCTRINES IN TAXATION

 Marshall Doctrine – “The power to tax involves the power to destroy”: an instrument of police power.

: used to discourage or prohibit undesirable activities or occupation. (e.g. SINTAX)

: solely for the purpose of raising revenues – does not include the power to destroy

 Holme’s Doctrine – “Taxation power is not the power to destroy while the court sits.”

: used to build or encourage beneficial activities – grant of tax incentives. (e.g. Tax Holidays)

 Prospectivity of tax laws

: ex post facto law/law that retroacts – prohibited by constitution, unless intended by Congress under
certain justifiable conditions. (e.g. under foreign occupation even after the war)

 Non-compensation or set-off – cannot delay payment of tax; not a debt.

Exceptions

: Taxpayer’s claim become due and demandable – recognized by government; a refund was made
: overpayment of taxes

: Local taxes

 Non-assignment of taxes

: Contracts executed shall not prejudice the right of government to collect

 Imprescriptibility in taxation – government’s right to collect does not prescribe unless the law itself
provides for such prescription.

: Prescription – lapsing of a right due to the passage of time

Under NIRC, tax prescribed if not collected within:

 5 years from the date of assessment

 3 years from the date of return required to be filed, in absence of an assessment

 Doctrine of estoppel – “still the taxpayer’s fault”

: error of any government employee does not bind the government since it is not subject to estoppel. 3
SJDL INCOME TAXATION (Banggawan,2019): REVIEWER

 Judicial Non- Interference

: generally, courts cannot issue injunction against the government’s pursuit to collect tax

: anchored on the lifeblood doctrine

 Strict Construction of Tax Laws – “taxation is the rule; exemption is the exception”

: when language of law is clear and categorical – no room for interpretation, only for application

: Vague tax laws – means no tax law; construed against the government and in favor of the taxpayers –
obligation arising from law is not presumed (due process)

: Vague exemption laws – means no exemption law; claim for exemption is construed strictly against the
taxpayer in accordance with the lifeblood doctrine

‘Exemption must be clear and unequivocal. Any doubt is resolved against the taxpayer.
 DOUBLE TAXATION – occurs when same taxpayer is taxed twice by same tax jurisdiction for the
same thing.

 Elements of double taxation (O-TPJP)

: Primary elements – same object

: Secondary elements – same type, purpose, taxing jurisdiction and/or tax period.

 Types of Double Taxation

: Direct double taxation – all the element of double taxation exists for both impositions; discouraged
since it is oppressive and burdensome.

‘counter the rule of equal protection and uniformity in the constitution’

: Indirect double taxation – at least one of the secondary elements of double taxation is not common for
both impositions; prevalent in practice.

 Impact of double taxation minimized:

: Provision of tax exemption – only one tax law is allowed to apply to the tax object

: Allowing foreign tax credit – payment made in foreign tax law is deductible against the tax due of the
domestic tax law

: Allowing reciprocal tax treatment – reduced tax rates or exemption on foreign taxpayer if the country
of the same give same treatment to Filipino non-resident therein

: Entering into treaties or bilateral agreements – lower tax rates for their residents engage in transaction
that are taxable by both of them

 ESCAPE FROM TAXATION – means available to the taxpayer to limit or even avoid the impact of
taxation.

 Categories of Escape from Taxation

A. Those that result to loss of government revenue (Ev, Av, Ex)

: Tax Evasion (tax dodging) – any act or trick that tend to illegally reduce or avoid payment of tax (e.g.
understatement of income, overstating of expenses)

: Tax Avoidance (tax minimization) – any act or trick that reduces or totally escapes taxes by any legally
permissible means. (e.g. selection/execution of transaction that would effect to lower taxes)
: Tax exemption (tax holiday) – immunity, privilege or freedom from being subject to tax granted by
constitution, law, or contract.

‘Can be revoked by Congress except those granted by constitution and under contracts’

B. Those that do not result to loss of government revenues (ShiCapTra)

: Shifting – process of transferring tax burden to other taxpayers

Forms of Shifting

‘Forward Shifting’ follows the normal flow of distribution; common with essential commodities and
services such as food and fuel (e.g. manufacturers to wholesalers, wholesalers to retailers)

‘Backward shifting’ reverse of forward shifting; common to non-essential commodities; buyers have
market power with numerous alternatives

‘Onward shifting’ any tax shifting in the distribution channel exhibits either of the former forms.

: Capitalization – adjustment of the value of an asset caused by changes in tax rates.

‘Value of mining property decreases when output is subject to higher tax – form of backward shifting

: Transformation – elimination of wastes or losses by taxpayer to form savings to compensate for the tax
imposition or increase in taxes. (e.g. improvement of goods)

 TAX AMNESTY VS. TAX CONDONATION – both construed against taxpayers and in favor of the
government

 Tax Amnesty

: general pardon – granted by government for erring taxpayers

: chance to reform and enable fresh start – clean slate

: retrospective in application

: covers both civil and criminal liabilities

: conditional upon the taxpayer paying a portion

 Tax Condonation (tax remission)

: forgiveness under certain justifiable grounds

: covers only civil liabilities

: applies prospectively to any unpaid balance – portion paid will not be refunded
: requires no payment