Saint Louis University

SCHOOL OF ACCOUNTANCY MANAGEMENT COMPUTING

AND INFORMATION STUDIES (SAMCIS)

INCOME TAXATION (INCTAXA)

INTRODUCTORY CONCEPTS
MODULE 1

UNIT I: FUNDAMENTAL PRINCIPLES OF TAXATION

INHERENT POWERS OF THE STATE

1. TAXATION POWER – inherent power of the state by which

the sovereign state imposes financial burden upon persons and
property as a means of raising revenue in order to defray the
necessary expenses of the government.

2. POLICE POWER – the inherent power of the sovereign state

to enact laws to promote public health, public morals, public
safety and the general welfare of the people.

3. EMINENT DOMAIN – power of the State to take private

property for public use upon payment of just compensation.

TAXATION – inherent power of the state by which the sovereign

state imposes financial burden upon persons and property as a means
of raising revenue in order to defray the necessary expenses of the
government.

Characteristics:

A tax is a burden or charge impose by the legislative power

upon persons or property to raise money for public purposes. Its
essential characteristics are the following:

1. It is an enforced contribution.
2. It is exacted pursuant to a legislative authority;
3. It involves the exercise of the taxing power;
4. It is a contribution in money;
5. It is for the purpose of raising revenue;
6. It is to be used for governmental purposes;

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SCOPE OF TAXATION
TAXATION IS:
 Unlimited,
 Far-reaching,
 Plenary
 Comprehensive
 Supreme

STAGES OF TAXATION:

1. Levy – refers to the legislative act of imposing the tax, which is

exercised by Congress. This process involves the enactment of a
tax law by Congress and is called impact of taxation. It is also
referred to as the legislative act in taxation.

Matters of legislative discretion in the exercise of taxation

a. Determining the object of taxation
b. Setting the tax rate or amount to be collected
c. Determining the purpose for the levy which must be
public use
d. Kind of tax to be imposed
e. Apportionment of the tax between the national and local
government
f. Situs of taxation
g. Method of collection

2. Assessment and Collection – refers to the administrative act of

collecting tax, which is exercised by the executive branch of
government, more particularly by the Bureau of Internal
Revenue. The tax law is implemented by the administrative
branch of the government. Implementation involves assessment
or the determination of the tax liabilities of taxpayer and
collection. This stage is referred to as incidence of taxation or
the administrative act of taxation.

BASIS OF TAXATION

1. NECESSITY THEORY – Taxation is a power emanating from

necessity to preserve the State’s sovereignty (Phil. Guaranty
Co., Inc. vs. CIR, 13 SCRA 775). It is the power predicated upon
necessity. It is a necessary burden to preserve the State’s
sovereignty and a means to give the citizenry an 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
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 the citizenry, and those which come within the State’s territory
and facilities and protection which a government is supposed to
provide.

2. LIFEBLOOD DOCTRINE – The power of taxation is

essential because the government can neither exist nor endure
without taxation. “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. Consequently, the state has the right to compel
all of its citizens and property within its limits to contribute.

3. PRINCIPLE OF BENEFITS-RECEIVED OR BENEFITS-

PROTECTION THEORY – Based on reciprocal duties, the
government collects taxes from the subjects of taxation in order
that it may be able to perform its functions and provides
services to them. The government’s right to tax income emanate
from its being a silent partner in the production of income
through means of providing protection, proper business
climate, and peace and order to the taxpayers in the making of
earnings.

The symbiotic relationship and partnership between the taxing

authority and the subject of taxation is enough to justify the
imposition of tax power. (Commissioner vs. Algue, Inc. 158
SCRA 9)

PURPOSES OF TAXATION

1. Revenue Purpose. The primary purpose of taxation is to raise

revenue by collecting funds or property for the support of the
government in promoting the general welfare and protecting its
inhabitants (Phil. Guaranty Co. Inc. vs. Commissioner, 13
SCRA 775).

The fiscal policy of the government is based on the rule that

receipts or revenue should be equal to annual government
expenditures. The significant portion of the required receipts is
raised from taxation.

2. Regulatory Purpose. Regulatory, also known as Sumptuary,

is a secondary objective of imposing tax. This objective is
accomplished to
a. Regulate inflation;
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 b. Achieve economic and social stability, and
c. Serve as key instrument for social control.

The amount of taxes may be increased to curb spending power

and minimize inflation in times of prosperity. It may be reduced
to expand business and ward of depression in times of declining
economic condition.

Taxes may be imposed to encourage economic growth by

granting tax exemptions, tax relief and incentives to attract
investments that will create employment.

Taxes may also be used as a tool and weapon in international

relations. It is an instrument to encourage foreign trade by
providing tax incentives or to protect local industries against
foreign competition by imposing additional taxes on imported
products. As a tool to protect trade relation, special duties may
be created to protect new conditions, such as:

a.) Discriminatory duty – this is designed to offset any

foreign discrimination against our local commerce.

b.)Countervailing duty – it may be imposed to offset any

foreign subsidy granted to imported goods to the
prejudice of our local industries.

c.) Marking duty- it is generally imposed as additional duty

tax on imported articles and/or containers with improper
classification.

d.)Dumping duty – it refers to the additional duty taxes

imposed on imported goods with lower prices compared
to their fair market values to protect local industries.

3. Promotion of General Welfare

4. Reduction of Social Inequalities

5. Encourage Economic Growth

6. Protectionism

OBJECTS OF TAXATION

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Objects of taxation may refer to the subject to which taxes are
imposed. Generally, taxes are imposed on the following:

1. Persons, whether natural or juridical persons

a. Natural Persons – refers to individual taxpayers
b. Juridical Persons – includes corporations,
partnerships, and any association

2. Properties, whether real, personal, tangible or intangible

properties
a. Real properties – immovable properties such as land
and buildings.
b. Personal properties – movable properties such as car
and other personal belongings.
c. Tangible properties – that which may be felt or
touched and are necessarily corporeal, either real or
personal properties.
d. Intangible properties – properties that are “rights”
rather than physical objects. Examples are patents,
stocks, bonds, goodwill, trademarks, franchises and
copyrights.

3. Excise objects, such as:

a. Transaction – the act of conducting activities related to
any business or profession. It may involve selling,
servicing, leasing, borrowing, mortgaging or lending.
b. Privilege – a benefit derived through gratuitous transfer
by fact of death or donation.
c. Right – a power, faculty or demand inherent in one
person and incidental to another.
d. Interest – a advantage accruing from anything.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. FISCAL ADEQUACY – means that the sources of revenue

should be sufficient to meet the expanding expenditures of the
government

2. ADMINISTRATIVE FEASIBILITY – means that the tax

must be plain and clear to the taxpayer and should be capable of
effective enforcement by government officials.

3. THEORETICAL JUSTICE – means that the tax must be

plain and clear to the taxpayer and should be capable of
effective enforcement by government officials.

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LIMITATIONS OF THE TAXATION POWER

Although taxation power is supreme, its exercise is not absolute

because it is subject to Inherent and Constitutional Restrictions.

As an inherent power, by its very purpose and nature restrict taxation.

Tax power should be exercised for its very nature, purpose and
jurisdiction.

While taxation is said to be the power to destroy, it is by no means

unlimited. It is equally correct to say that the “power to tax is not
the power to destroy while the Supreme Court sits” because
of the Constitutional restraints placed on a taxing power that violated
fundamental rights. (Roxas et. al. vs. CTA, GR L-25043, April 26,
1968)

A. INHERENT LIMITATIONS

- are the natural restrictions to safeguard and ensure

that the power of taxation shall be exercised by the
government only for the betterment of the people
whose interest should be served, enhanced and
protected. (69 SCRA 460). It includes the following:

1. Public Purpose of Taxes;

- It is the first requisite of lawful taxation that the
purpose for which it is laid shall be a public
purpose. Public purpose in taxation is important
because of all the powers of government, that of
taxation is said to be the strongest as it can be
readily employed against one class of individuals in
favor of another so as to ruin one class and give
unlimited wealth and property to another, if there is
no implied limitation on the uses for which such
taxing power may be exercised.

2. Non-delegability of the Taxing Power

- In the distribution of the powers of government into
three departments, namely: legislative, executive
and judicial, the power of taxation is exclusively
legislative. Consequently, the taxing power as a
general rule may not be delegated.
- Non-delegable legislative powers, that is to say are
those that cannot be delegated to the administrative

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 agencies. It includes the a.) selection of the property
to be taxed; b.) determination of the purposes for
which taxes shall be levied; c.) fixing of the rate of
taxation; and d.) rules of taxation in general.

3. Territoriality or the Situs of Taxation

- Territoriality or the situs of taxation, which means
“place of taxation,” is a limitation on the taxing
power. This is so because the principle is well-
recognized that, however broad the power of
taxation may be as to its character and no matter
how searching it is in its extent, such power is
necessarily limited only to persons, property or
businesses within its jurisdiction; that is to say, to
subjects within its jurisdiction, or over which it can
exercise dominion.

4. Exemption of the Government from Taxes

- It seems that as a matter of public policy, property
of the State and of its municipal subdivisions
devoted to government uses and purposes is
generally deemed to be exempt from taxation
although no express provision in the law is made
therefor. Tax exemption of the government entities
and the political subdivisions of the State seems to
be a well settled principle.

5. International comity
- More often than not, states find it mutually
advantageous for themselves to create self-imposed
restrains on their taxing powers especially with
reference to the properties of foreign governments
within their territorial domain. Reciprocity lies at
the root of this limitation for it cannot be denied
that with reciprocity located at the bottom line,
harmonious and productive relationships among the
various states can be maintained.

B. CONSTITUTIONAL LIMITATIONS
- are the provisions of the fundamental law of the land
that restrict the supreme, plenary, unlimited and
comprehensive power to tax by the State.

As a rule, the Constitution does not create the power

to tax on the State. Instead, it simply defines and

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 regulates the exercise of tax power in order to
safeguard the interest of affected taxpayers.
It must be remembered that a tax law is of no legal
force when it violates the Constitution.

1. No person shall be deprived of life, liberty or property

without due process of law (Art. III, Sec. 1);
- Tax laws should neither be harsh nor oppressive.

Due Process Clause

Aspects of due process:
i. Substantive Due Process – Tax must be imposed
only for public purposes, collected only under
authority of a valid law and only by the taxing
power having jurisdiction. An assessment
without a legal basis violates the requirement of
due process.
ii. Procedural Due Process – There should be no
arbitrariness in assessment and collection of
taxes, and the government shall observe the
taxpayer’s right to notice and hearing. The law
established procedures which must be adhered to
in making assessments and in enforcing
collections. Under the NIRC, assessments shall be
made within three years from the due date of
filing of the return or from the date of actual
filing, whichever is later. Collection shall be
made within five years from the date of
assessment. The failure of the government to
observe these rules violates the requirement of
due process.

2. No person shall be denied the equal protection of the

laws. (Art. III, Sec. 1)

Equal Protection Clause – Taxpayers should be

treated equally both in terms of rights conferred and
obligations imposed. This rule applies where
taxpayers are under the same circumstances and
conditions.

It has been aptly stated that the power of the State

to make reasonable and natural classifications for
the purposes of taxation is unquestioned and such
classifications may relate to the subject of taxation,
the kind of property, the rates to be levied or the

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amounts to be raised, and the methods of

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 assessment, valuation, and collect. Such power to
classify in matters of taxation is said to be broader
than some other exercises of legislative power,
entitled to presumption of validity and will not, as a
rule be interfered with by the judiciary in the
absence of a clear showing unreasonableness,
discrimination or arbitrariness.

However, the classification must be based upon real

and substantial differences between persons,
property or privileges and those not taxed must bear
some reasonable relation to the object or purpose of
legislation or to some permissible governmental
policy or legitimate end of governmental action (see
Tomas P. Matic, Jr., Taxation in the Philippines,
Vol. I, pp. 79-80).

The equal protection clause of the Constitution is

not absolute and it permits reasonable
classification, provided the following requisites are
present:
a. It must rest on substantial distinctions;
b. It must be germane to the purpose of the law;
c. It is not limited to existing conditions only; and
d. It must apply equally to all members of the same
class (Tiu vs. CA, G.R. No. 127410)

3. No law shall be passed abridging the freedom of

speech, of expression, or of the press, or the right of the
people peaceably to assemble and petition the
government for redress of grievances. (Art. III, Sec. 4)
- To epitomize, the Supreme Court held in its decision
on the “Tolentino E-VAT” case, that there is
curtailment of press freedom and freedom of
thought and expression if a tax is levied in order to
suppress this basic right of the people under the
Constitution.

4. No law shall be made respecting an establishment of

religion or prohibiting the free exercise thereof. The
free exercise and enjoyment of religious profession and
worship without discrimination or preference shall
forever be allowed. No religious test shall be required
for the exercise of civil or political rights. (Art. III, Sec.
5)
- In the case of American Bible Society vs. City of

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Manila (101 Phil. 386), the Supreme Court ruled
that a municipal license tax on the sale bibles
and

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 religious articles by a non-stock, non-profit
missionary organization at a little profit constitutes
a curtailment of religious freedom and worship
which is guaranteed by the Constitution. The Court
held that an ordinance of the City of Manila, which
imposed a license fee on those engaged in the
business of general merchandise could not be
applied to the appellant’s sale of bibles and other
religious literature. The Court relied on Murdock vs.
Pennsylvania, ante, in which it was held that as a
license fee fixed in amount and unrelated to the
receipts of the taxpayer, the license fee when applied
to religious sect was actually being imposed as a
condition for the exercise of the sect’s right under
the Constitution. For that reason, it was held that
the license fee “restrains in advance those
constitutional liberties of press and religion, and
inevitable tends to suppress their exercise. Xxx”

5. No person shall be imprisoned for debt or nonpayment

of a poll tax. (Art. III, Sec. 20);
- A poll tax (or personal or capitation tax) is a tax of a
fixed amount on individuals residing within a
specified territory, whether citizens or not, without
regard to their property or the occupation in which
they may be engaged. The residence tax (now, the
community tax certificate) is in the nature of a poll
tax. The prohibition against imprisonment for non-
payment of poll tax is dictated by a sense of
humanity and sympathy for the plight of the poorer
elements of the population who cannot even afford
to pay their cedula or poll tax. (Vicente Sinco,
Philippine Political Law, 11th Ed., p. 682)

6. No law impairing the obligation and contracts shall be

passed. (Art. III, Sec. 10);
- It was held in the case of Casanova vs. Hord (8 Phil.
125) that where a mining concession was granted
under a Royal Decree and where it appears that
under said decree no other taxes except those
mentioned therein shall be imposed on mining and
metallurgical industries, the levy of a tax on said
mining claim plus an ad valorem tax on mineral
output under a subsequent law (Act 1189) constitute
an impairment of contract because of a mining
concession is a contract.

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7. All appropriation, revenue, or tariff bills, bills
authorizing the increase of the public debt, bills of local
application and private bills shall originate exclusively
in the House of Representatives but the Senate may
propose or concur with amendments. (Art. VI, Sec. 24)
- In the “Tolentino E-VAT” case, it has been said that
a bill originating in the House may undergo such
extensive changes in the Senate that the result may
be a rewriting of the whole. At this point, what is
important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that
a revenue statute – and not only the bill which
initiated the legislative process culminating in the
enactment of the law – must substantially be the
same as the House bill would be to deny the Senate’s
power not only to “only concur with amendments”
but also “to propose amendments.” It would be to
violate the co-equality of legislative power of the two
houses of Congress, and in fact make the House
superior to the Senate.

8. The rule of taxation shall be uniform and equitable.

The Congress shall evolve a progressive system of
taxation (Art. VI, Sec. 28[1]);
- Uniformity in taxation means that all taxable
articles or kinds of property of the same class shall
be taxed at the same rate. It does not mean that
lands, chattels, securities, income, occupations,
franchises, privileges, necessities and luxuries shall
be assessed at the same rate. Different articles may
be taxed at different amounts provided that the rate
is uniform on the same class everywhere with all
people at all times.
- A tax is uniform when it operates with the same
force and effect in every place where the subject of it
is found (Churchill et. al. v. Concepcion, 34 Phil
969)
- Progressivity of taxation is also mandated in the
Constitution, Our income tax system is one good
example of such progressivity because it is built on
the principle of the taxpayer’s ability to pay.
Taxation is progressive when its rate goes up
depending on the resources of the person affected
(Reyes, et. al. vs. Almanzor, et. al.)

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 9. Charitable institutions, churches, and parsonages or
convents appurtenant thereto, mosques, 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 (Art. VI, Sec. 28[3]);
- In the case of Lladoc vs. CIR (L-19201, June 16,
1965), wherein petitioner assailed the donor’s and
donee’s gift taxes on the cash donation for the
church building, the Supreme Court ruled that the
above- mentioned constitutional provision which
grants tax exemption applies only to property or
realty taxes assessed on such properties used
directly, actually and exclusively for religious,
charitable and educational purposes.

10. 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. Upon the dissolution or
cessation of the corporate existence of such
institutions, their assets shall be disposed of in the
manner provided by law. Proprietary educational
institutions, including those cooperatively-owned, may
likewise be entitled to such exemptions subject to the
limitations provided by law including restrictions on
dividends and provisions for reinvestment (Art. XIV,
Sec. 4[3]);
- Under Sec. 27(B) of the Tax Code of 1997,
proprietary educational institutions shall pay a tax
of ten percent (10%) of their taxable income, except
those covered by Subsection (D) of said section.
Non-stock and non-profit educational institutions
and government education institutions are exempt
from income tax under Sec. 30 (H) and (I),
respectively, of the 1997 Tax Code. Notwithstanding
the provisions for income tax exemption under said
Sec. 30 of the Tax Code, the law provides that
income of whatever kind and character of said
organizations from any of their properties, real or
personal, or from any of their activities conducted
for profit, regardless of the disposition made of such
income, shall be subject to tax imposed under the
Tax Code.

11. Each local government unit shall have the power to

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create its own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and
limitations

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 as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees and charges
shall accrue exclusively to the local governments. (Art.
X, Sec. 5);

12. Local government units shall have a just share, as

determined by law, in the national taxes which shall be
automatically released to them (Art. X, Sec. 6);

13. No law granting any tax exemption shall be passed

without the concurrence of a majority of all the
members of Congress. (Art. VI, Sec. 28[4]); and
- It is a settle rule that refunds partake of the nature
of exemptions (Aguilar vs. Commissioner, CA-GR
No. SP-16432, Mar. 30, 1990). Condonation of taxes
already paid or yet unpaid are also in the nature of
tax exemptions (Surigao Consolidated Mining Co.
vs. CIR, L-14878, Dec. 26, 1963)

14. No public money or property shall be appropriated,

applied, paid or employed, directly or indirectly for the
use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of
religion or of any priest, preacher, minister, or other
religious teacher or dignitary as such except when such
priest, preacher, minister or dignitary is assigned to the
armed forces or to any penal institution, or
government orphanage or leprosarium. (Art. VI, Sec.
29[1]).

15. The Supreme Court shall have the power to review,

revise, reverse, modify or affirm on appeal or
certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in
all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation
thereto. (Art. VIII, Sec. 5[2b]).

SITUS OF TAXATION

Situs is the place of taxation. It is the tax jurisdiction that has

the power to levy taxes upon the tax object. Situs rules serve as frames
of reference in gauging whether the tax object is within or outside the
tax jurisdiction of the taxing authority.

Situs Rules:

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 1. Business tax – Businesses are subject to tax in the place
where the business is conducted.

2. Income tax on services – Service fees are subject to tax in

the place where the services have been rendered.

3. Income tax on sale of goods – The gain on sale is subject to

tax in the place of sale.

4. Property tax – Properties are taxable in the place where they

are located.

5. Personal tax – Persons are taxable in their place of residence.

FUNDAMENTAL PRINCIPLES/DOCTRINES

1. Marshall Doctrine – “The power to tax involves the power

to destroy.” Taxation power can be used as an instrument of
police power. It can used to discourage or prohibit undesirable
activities or occupation. As such, taxation power carries with it
the power to destroy.

2. Holme’s Doctrine - “Taxation power is not the power to

destroy while the court sits.” Taxation power may be used to
build or encourage beneficial activities or industries by the
grant of tax incentives.

3. Prospectivity of tax laws – Tax laws are generally

prospective in operation. An ex post facto law or a law that
retroacts is prohibited by the Constitution. Exceptionally,
income tax laws may operate retrospectively if so intended by
Congress under certain justifiable conditions.

4. Non-compensation or set-off of taxes – Taxes are not

subject to automatic set-off or compensation. The taxpayer
cannot delay payment of tax to wait for the resolution of a
lawsuit involving his pending claim against the government.
Tax is not a debt; hence, it is not subject to set-off. This rule is
important to allow the government sufficient period to evaluate
the validity of the claim. (See Philex Mining Corporation vs.
CIR, G.R. 125704)

5. Non-assignment of taxes – Tax obligations cannot be

assigned or transferred to another entity by contract. Contracts

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 executed by the taxpayer to such effect shall not prejudice the
right of the government to collect.

6. Imprescriptibility in Taxation – Prescription is the lapsing

of a right due to the passage of time. When one sleeps on his
right over an unreasonable period of time, he is presumed to be
waiving his right. The government’s right to collect taxes does
not prescribe unless the law itself provides for such
prescription.

7. Doctrine of Estoppel – Any misrepresentation made by one

party toward another who relied therein in good faith will be
held true and binding against that person who made such
representation. The government however is not subject to
estoppel. Which means that the erroneous interpretation of a
government employee of a particular provision of tax law does
not bind the government. It has been held that the neglect or
omission of government officials entrusted with the collection
of taxes should not be allowed to bring harm or detriment to the
interest of the people. Erroneous applications of the law by the
public officers do not block the subsequent correct application
of the same.

8. Judicial Non-Interference – Generally, courts are not

allowed to issue injunction against the government’s pursuit to
collect taxes as this would unnecessarily defer tax collection.

9. Strict Construction of Tax Laws – When the law clearly

provides for taxation, taxation is the general rule unless there is
a clear exemption. Hence the maxim, “Taxation is the rule,
exemption is the exception.” When the language of the law is
clear and categorical, there is no room for interpretation. There
is only room for application. However, when taxation laws are
vague, the doctrine of strict legal construction is observed.

Vague tax laws are construed against the government and in

favor of the taxpayers. A vague tax law means no tax law.
Obligations arising from law are not presumed. The
Constitutional requirement of due process requires laws to be
sufficiently clear and expressed in their provisions.

Vague tax exemption laws are construed against the taxpayer

and in favor of the government. A vague tax exemption law
means no exemption law. The claim for exemption is construed
strictly against the taxpayer in accordance with the lifeblood
doctrine. (Rex Banggawan, Income Taxation 2019 Edition)

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10. Double Taxation – It is the act of the sovereign by taxing
twice for the same purpose in the same year upon the same
property or activity of the same person, when it should be taxed
once, for the same purpose and with the same kind of character
of tax.

The Supreme Court held that there is no Constitutional

prohibition against double taxation in the Philippines.
(Villanueva vs. Iloilo, 26 SCRA 578); therefore, it is not a valid
defense against the validity of a tax measure, (Pepsi Cola vs.
Tanauan, 69 SCRA 460)

Indirect Duplicate Taxation. This is double taxation in its

broad sense. It extends to all cases in which there is a burden of
two or more pecuniary impositions. It is usually allowed as long
as there is no violation of the equal protection and uniformity
clauses of the Constitution.

Indirect double taxation may be counteracted through the

application of:
1. Tax exemptions;
2. Reciprocity clause/tax treaty;
3. Tax credit; and
4. Allowance for deductions such as vanishing deduction in
Estate Tax.

Direct Duplicate Taxation. This is double taxation in its

strict sense. It is prohibited because it comprises imposition of
the same tax on the same property for the same purpose by the
same state during the same taxing period.

This kind of double taxation violates the constitutional

provision of uniformity and equal protection, as well as the
principle that tax must not be excessive, unreasonable and
inequitable. Therefore, such taxation should, whenever and
wherever possible, be avoided to prevent injustice or
unfairness. (De Villata vs. Stanley, 32 Phil. 541; San Miguel
Brewery, Inc. vs. City of Cebu, L-20312, February 26, 1972;
City of Baguio vs. De Leon, 25 SCRA 938)

11. Escape from Taxation – A tax evader breaks the law (tax
evasion), the tax avoider sidesteps it (tax avoidance)” (Schultz &
Harris, American Public Finance)

Forms of Escape from Taxation

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1. Tax evasion (unlawful means); and

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 2. Tax avoidance (lawful means);

Several forms to tax avoidance, which could be legally used by

the taxpayer, to minimize his income tax liability are:
a. Tax option;
b. Shifting;
c. Capitation;
d. Transformation;
e. Exemption;
f. Tax Amnesty; and
g. Tax Condonation.

Tax Evasion – Under this method, the taxpayer uses illegal or

unlawful means to defeat, evade or lessen the payment of tax. It
presupposes malice, fraud, bad faith or willful intent on the part
of the taxpayer (Rep vs. Gonzales, 13 SCRA 633) to
substantially under declare income (Perez vs. CTA, L-10507)

Examples: Non-inclusion of sales, deliberate fabrication of

expenses, and forming an artificial person to evade taxation or
to deliberately reduce taxable income; or malicious failure to
report income to defeat tax liability.

These forms of “tax dodging” are prohibited and therefore

subject to civil and/or criminal penalties (Gutbin and Beck, Tax
Evasion, p. 21)

Tax Avoidance – This is also called Tax Minimization. It is

reducing or totally escaping payment of taxes through legally
permissible means.

Examples of tax avoidance are:

1. Selling shares of stock through a stock exchange in order to
avail of the lower tax rates.
2. Estate planning within the means sanctioned by the Tax
Code has been held to be one of permissible tax
minimization. (Sec. 34, NIRC; Delpher Trades Corporation
vs. IAC, 157 SCRA 349)

12. Equitable Recoupment – This doctrine of law states that a

tax claim for refund, which is prevented by prescription, may be
allowed to be used as payment for unsettled tax liabilities if
both taxes arise from the same transaction in which
overpayment is made and underpayment is due. This doctrine is
not applicable to case where the taxes are involved are totally
unrelated.

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13. Taxpayer Suit – It is effected through court proceedings and
could only be allowed if the act involves a direct and illegal
disbursement of public funds derived from taxation. (Pascual
vs. Secretary of Public Works, 110 Phil. 331; 11 Am. Jur. 761)

Therefore, the following legal questions would be improper to be

classified as taxpayer suit:

1. Where the disbursement does not involve funds raised

by taxation (Gonzales vs. Marcos, 65 SCRA 624); and
2. To stop the Commission on Election from holding an
exercise of suffrage or question its inaction to call a
special election. (Dumlao vs. Commission on Elections,
95 SCRA 392; Lozada and Igot vs. Commission on
Election, L-59068, 27 January 1983)

14. Compromises – This doctrine provides that compromises are

generally allowed and enforceable when the subject matter
thereof is not prohibited from being compromised and the
person entering such compromise is duly authorized to do so.
(Edwin G. Valencia, Income Taxation, 7th Edition)

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CLASSIFICATION OF TAXES:

1. As to Purpose:

a. Revenue or Fiscal. These taxes are imposed solely for the

purpose of raising revenue for the government

b. Regulatory, Special or Sumptuary. These taxes are

imposed for the purpose of achieving some social or
economic goals having no relation to the raising of revenue
(e.g. Customs duties, protective tariff on imports to control
foreign trade and excise tax).

c. Compensatory. Taxes may be imposed for the equitable

distribution of wealth and income in the society.

2. As to Object or Subject Matter:

a. Personal, Poll, or Capitation. These taxes are fixed in

amount and imposed on persons residing within a
specified territory regardless of the amount of their
property or their occupation or business. (e.g. Community
tax);

b. Property. These taxes are imposed on personal or real

property based on its proportionate value or in accordance
with some other reasonable method of apportionment.
(e.g.
Real Estate Tax); and

c. Excise. These taxes are imposed upon the performance of a

right or act, the enjoyment of a privilege or the
engagement in an occupation (e.g. Professional tax,
Income tax, Estate tax, Donor’s tax and Value Added Tax)

3. As to Determination of Amount:

a. Ad Valorem. These taxes are fixed amounts in proportion

to the value of the property with respect to which the tax is
assessed. It requires the intervention of Assessors to
estimate the value of such property before the amount due
for each taxpayer can be determined (e.g. Real Estate Tax,
Custom Duties and Excise Tax on fermented liquors,
cigars, cigarettes, gasoline and automobiles).

b. Specific. These taxes are fixed amounts imposed and based

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on some standard of weight or measurement, head or
number, length or volume. It requires independent

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 assessment other than a listing or classification of the
subject to be taxed like excise taxes on distilled spirits,
wines, fireworks, and cinematographic films. (7 SCRA 887

4. As to Who Bears the Burden:

a. Direct. These taxes are non-transferable. They are

demanded from persons who are bound by law to pay the
tax. The liability for the payment of tax as well as the
burden of the tax falls on the same person (e.g.
Community tax, Income tax, Transfer tax, Traveler’s tax
and Corporate Income Tax)

b. Indirect – These taxes are transferable. The liability for the

payment of tax falls on one person but the burden thereof
can be shifted or passed to another.

5. As to Scope or Authority Collecting the Tax:

a. National. Those taxes collected by the National

Government. Examples of national taxes are:

1. Estate and Donor’s taxes

2. Income tax;
3. Value – Added Tax;
4. Excise Tax;
5. Customs Duties; and
6. Documentary Stamp Taxes.

b. Local or Municipal. Those taxes collected by the Municipal

governments. Examples of local and municipal taxes:

1. Community tax;
2. Municipal licenses taxes;
3. Professional tax;
4. Real Estate tax.

6. As to Rate or Graduation:

1. Proportional or Flat Rate. The rate of the tax is based

on the fixed percentage of the amount of the property,
receipt or other basis to be taxed (e.g. Real estate tax
and VAT).

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 2. Progressive or Graduated Rate. The rate of the tax
increases as the tax base or bracket increases (e.g.
Income taxes, Estate taxes and Donor’s taxes)

3. Regressive Rate. The rate of tax decreases as the tax

base or bracket increases. There is no regressive tax in
the Philippines.

4. Digressive Rate. A fixe rate is imposed on a certain

amount but diminishes gradually on sums below it. In
digressive rate, the tax rate is arbitrary because the
increase in tax rate is not proportionate to the increase
of tax base.

5. Mixed Tax. It is a tax system that uses a combination of

the different tax rates. (Edwin G. Valencia, Income
Taxation, 7th Edition)

Prepared by:

ATTY. EDWIN U. MARQUEZ, CPA

Faculty
Business Laws and Taxation Department

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