Chapter 1 - introduction to taxation ● Horizontal equity - requires consideration

of the particular circumstance of the

Taxation taxpayer
- a state power, a legislative process, and a
mode of government cost distribution.
- An inherent power of the state , through its INHERENT POWERS OF THE STATE
law making body, to enforce proportional These rights, dubbed as "powers" are natural,
contributions from its subjects in order to inseparable, and inherent to every government. No
defray its necessary expenses government can sustain or effectively operate without
these powers. Therefore, the exercise of these powers
1. As a state power - an inherent power of the by the government is presumed understood and
states to enforce a proportional contribution acknowledged by the people from the very moment
from its subjects for public purpose. they establish their government. These powers are
2. As a process - levying taxes by the naturally exercisable by the government even in the
legislature of the state to enforce absence of an express grant of power in the
proportional contributions from its subjects Constitution.
for public purpose
3. As a mode of cost distribution - a mode by
which the state allocates its costs or burden
to its subjects who are benefited by its Comparison of the three powers of the state
spending
1. As to exercising authority
The theory of taxation - government cannot exist ● Taxation - government
without a system of funding ● Police power - government
The basis of taxation - the government provides ● Eminent domain - government
benefits to the people in the form of public services, and private utilities
and the people provide the funds that finance the 2. As to purpose
government. ● Taxation - for the support of the
Receipt of benefits is conclusively presumed - most government
public services are received indirectly. Taxpayers ● Police power - to protect the
cannot avoid payment of taxes under the defense of general welfare of the people
absence of benefit received. The direct receipt of ● Eminent domain - for public use
actual availment of government services is not a 3. Persons affected
precondition to taxation ● Taxation - community or class of
individuals
Theories of cost allocation ● Police power - community or class
● Benefit received theory - the more benefit of individuals
one receives from the government, the more ● Eminent domain - owner of the
taxes he should pay. property
● Ability to pay - consider the taxpayer’s 4. Amount of imposition
ability to pay (based on their relative ● Taxation - unlimited (tax is based
capacity to sacrifice) on government needs)
● Police power - limited (imposition
is limited to cover cost of
Aspects of the ability regulation)
● Vertical equity - the extent of one’s ability ● Eminent domain - no amount
to pay is directly proportional to the level of imposed (the government pays just
his tax base compensation)
5. Importance
 ● Taxation - most important 4. Exemption of the government
● Police power - most superior 5. Non-delegation of the taxing power
● Eminent domain - important
6. Relationship with the constitution B. Constitutional Limitations
● Taxation - inferior to the 1. Due process of law
“non-impairment cause” of the 2. Equal protection of the law
constitution 3. Uniformity rule in taxation
● Police power - superior to the 4. Progressive system of taxation
“non-impairment cause” of the 5. Non-imprisonment for non-payment of debt or poll
constitution tax
● Eminent domain - superior to the 6. Non-impairment of obligation and contract
“non-impairment cause” of the 7. Free worship rule
constitution 8. Exemption of religious or charitable entities,
7. Limitation non-profit cemeteries, churches and mosque from
● Taxation - constitutional and property taxes
inherent limitations 9. Non-appropriation of public funds or property for
● Police power - public and inherent the benefit of any church, sect or system of religion
limitations 10. Exemption from taxes of the revenues and assets
● Eminent domain - public purpose of non-profit, non-stock educational institutions
and just compensation 11. Concurrence of a majority of all members of
Congress for the passage of a law granting tax
exemption
Similarities of the three powers of the State 12. Non-diversification of tax collections
1. They are all necessary attributes of sovereignty. 13. Non-delegation of the power of taxation
2. They are all inherent to the State. 14. Non-impairment of the jurisdiction of the
3. They are all legislative in nature Supreme Court to review tax
4. They are all ways in which the State interferes with 15. The requirement that appropriations, revenue, or
private rights and properties. tariff bills shall originate exclusively in the House of
5. They all exist independently of the Constitution Representatives
and are exercisable by the government even without a 16. The delegation of taxing power to local
Constitutional grant. However, the Constitution may government units
impose conditions or limits for their exercise.
6. They all presuppose an equivalent form of
compensation received by the persons affected by the
exercise of the power.
7. The exercise of these powers by the local
government units may be limited by the national
legislature.

SCOPE OF THE TAXATION POWER INHERENT LIMITATION OF TAXATION

The scope of taxation is widely regarded as Territoriality of taxation
comprehensive, plenary, unlimited and supreme. Public services are normally provided within the
boundaries of the State. Thus, the government can
THE LIMITATIONS OF THE TAXATION only demand tax obligations upon its subjects or
POWER residents within its territorial jurisdiction. There is no
A. Inherent limitations basis in taxing foreign subjects abroad since they do
1. Territoriality of taxation not derive benefits from our government.
2. International comity Furthermore, extraterritorial taxation will amount to
3. Public purpose encroachment of foreign sovereignty.
 courtesy with the treaty partners even if the same
Two-fold obligations of taxpayers: conflicts with its local tax laws.
1. Filing of returns and payment of taxes
2. Withholding of taxes on expenses and its Public purpose
remittance to the government. Tax is intended for the common good. Taxation must
be exercised absolutely for public purposes. It cannot
These obligations can only be demanded and be exercised to further any private interest.
enforced by the Philippine government upon its
citizens and residents. It cannot enforce these upon Exemption of the government
subjects outside its territorial jurisdiction as this The taxation power is broad. The government can
would result in encroachment of foreign sovereignty. exercise power upon anything including itself.
However, the government normally does not tax itself
Exception to the territoriality principle as this will not raise additional funds but will only
1. In income taxation, resident citizens and domestic impute additional costs.
corporations are taxable on income derived both
within and outside the Philippines. Under the NIRC, government properties and income
2. In transfer taxation, residents or citizens such as from essential public functions are not subject to
resident citizens, nonresident citizens and resident taxation. However, the income of the government
aliens are taxable on transfers of properties located from its properties and activities conducted for profit,
within or outside the Philippines. including income from government-owned and
controlled corporations is subject to tax.
International comity
In the United Nations Convention, countries of the
world agreed to one fundamental concept of co-equal Non-delegation of the taxing power
sovereignty wherein all nations are deemed equal The legislative taxing power is vested exclusively in
with one another regardless of race, religion, culture, Congress and is non-delegable, pursuant to the
economic condition or military power. doctrine of separation of the branches of the
No country is more powerful than the other. It is by government to ensure a system of checks and
this principle that each country observes international balances.
comity or mutual courtesy or reciprocity between The power of lawmaking, including taxation, is
them. delegated by the people to the legislature. So as not to
Hence, spoil the purpose of delegation, it is held that what
1. Governments do not tax the income and properties has been delegated cannot be further delegated.
of other governments.
2. Governments give primacy to their treaty Exceptions to the rule of non-delegation
obligations over their own domestic tax laws, 1. Under the Constitution, local government units are
allowed to exercise the power to tax to enable them to
Embassies or consular offices of foreign governments exercise their fiscal autonomy.
in the Philippines including international 2. Under the Tariff and Customs Code, the President
organizations and their non-Filipino staff are not is empowered to fix the amount of tariffs to be
subject to income taxes or property taxes, Under the flexible to trade conditions.
National Internal Revenue Code (NIRG), the income 3. Other cases that require expedient and effective
of foreign government and foreign administration and implementation of assessment and
government-owned and controlled corporations are collection of taxes.
not subject to income tax. CONSTITUTIONAL LIMITATIONS OF
TAXATION
Observance of due process of law
When a state enters into treaties with other states, it is
bound to honor the agreements as a matter of mutual
No one should be deprived of his life, liberty, or Congress shall evolve a progressive system of
property without due process of law. Tax laws should taxation. Under the progressive system, tax rates
neither be harsh nor oppressive. increase as the tax base increases. The Constitution
favors progressive tax as it is consistent with the
Aspects of Due Process taxpayer's ability to pay. Moreover, the progressive
1. Substantive due process system aids in an equitable distribution of wealth to
Tax must be imposed only for public purpose, society by taxing the rich more than the poor.
collected only under authority of a valid law and only
by the taxing power having jurisdiction. An
assessment without a legal basis violates the Non-imprisonment for non-payment of debt or
requirement of due process. poll tax
As a policy, no one shall be imprisoned because of
2. Procedural due process his poverty, and no one shall be imprisoned for mere
There should be no arbitrariness in assessment and inability to pay debt.
collection of taxes, and the government shall observe However, this Constitutional guarantee applies only
the taxpayer's right to notice and hearing. when the debt is acquired by the debtor in good faith.
The law established procedures which must be Debt acquired in bad faith constitutes estafa, a
adhered to in making assessments and in enforcing criminal offense punishable by imprisonment.
collections. Is non-payment of tax equivalent to non-payment
of debt?
Under the NIRC, assessments shall be made within Tax arises from law and is a demand of sovereignty.
three years from the due date of filing of the return or It is distinguished from debt which arises from
from the date of actual filing, whichever is later. private contracts. Non-payment of tax compromises
Collection shall be made within five years from the public interest while the non-payment of debt
date of assessment. The failure of the government to compromises private interest. The nonpayment of tax
observe these rules violates the requirement of due is similar to a crime. The Constitutional guarantee on
process. non-imprisonment for non-payment of debt does not
extend to non-payment of tax, except poll tax.
Equal protection of the law
No person shall be denied the equal protection of the Poll, personal, community or residency tax
law. Taxpayers should be treated equally both in Poll tax has two components:
terms of rights conferred and obligations imposed. a. Basic community tax
This rule applies where taxpayers are under the same b. Additional community tax
circumstances and conditions. This requirement
would mean Congress cannot exempt sellers of The constitutional guarantee of non-imprisonment for
"balot" while subjecting sellers of "penoy" to tax non-payment of poll tax applies only to the basic
since they are essentially the same goods. community tax. Non-payment of the additional
community tax is an act of tax evasion punishable by
Uniformity rule in taxation imprisonment.
The rule of taxation shall be uniform and equitable.
Taxpayers under dissimilar circumstances should not Non-impairment of obligation and contract
be taxed the same. Taxpayers should be classified The State should set an example of good faith among
according to commonality in attributes, and the tax its constituents. It should not set aside its obligations
classification to be adopted should be based on from contracts by the exercise of its taxation power.
substantial distinction. Each class is taxed differently, Tax. exemptions granted under contract should be
but taxpayers falling under the same class are taxed honored and should not be canceled by a unilateral
the same. Hence, uniformity is relative equality. government action.

Progressive system of taxation Free worship rule

The Philippine government adopts free exercise of The Constitution recognizes the necessity of
religion and does not subject its exercise to taxation. education in state building by granting
Consequently, the properties and revenues of tax exemption on revenues and assets of non-profit
religious institutions such as tithes or offerings are educational institutions. This exemption, however,
not subject to tax. This exemption, however, does not applies only on revenues and assets that are actually,
extend to income from properties or activities of directly, and exclusively devoted for educational
religious institutions that are proprietary or purposes.
commercial in nature.
Consistent with this constitutional recognition of
Exemption of religious, charitable or educational education as a necessity, the NIRC also exempts
entities, non-profit cemeteries, churches and government educational institutions from income tax
mosques, lands, buildings, and improvements and subjects private educational institutions to a
from property taxes. minimal income tax.
The Constitutional exemption from property tax
applies for properties actually, Concurrence of a majority of all members of
directly, and exclusively (i.e, primarily) used for Congress for the passage of a law granting tax
charitable, religious, and educational purposes exemption
Tax exemption law counters against the lifeblood
doctrine as it deprives the government of revenues.
In observing this Constitutional limitation, the Hence, the grant of tax exemption must proceed only
Philippines follows the doctrine of use wherein only upon a valid basis. As a safety net, the Constitution
properties actually devoted for religious, charitable, requires the vote of the majority of all members of
or educational activities are exempt from real Congress in the grant of tax exemption.
property tax.
In the approval of an exemption law, an absolute
Under the doctrine of ownership, the properties of majority or the majority of all members of Congress,
religious, charitable, or educational entities whether not a relative majority or quorum majority, is
or not used in their primary operations are exempt required.
from real property tax. This, however, is not applied However, in the withdrawal of tax exemption, only a
in the Philippines relative majority is required.

Non appropriation of public funds or property for Non-diversification of tax collections

the benefit of any church sect, or system of Tax collections should be used only for public
religion
purposes. It should never be diversified or used for
This constitutional limitation is intended to highlight
private purposes.
the separation of religion and the State. To support
freedom of religion, the government should not favor
any particular system of religion by appropriating Non-delegation of the power of taxation
public funds or property in support thereof.
It should be noted, however, that compensation to The principle of checks and balances in a republican
priests, imams, or religious ministers working with state requires that taxation power as part of
the military, penal institutions, orphanages, or lawmaking be vested exclusively in Congress.
leprosarium is not considered religious appropriation.
However, delegation may be made on matters
involving the expedient and effective administration
Exemption from taxes of the revenues and assets
of non-profit, non-stock and implementation of assessment and collection of
educational institutions including grants, taxes.
endowments, donations, or contributions for
educational purposes
Also, certain aspects of the taxing process that are 1, Levy or imposition
non-legislative in character are delegated. 2. Assessment and collection
Hence, implementing administrative agencies such as Levy or imposition
the Department of Finance and the Bureau of Internal
This process involves the enactment of a tax law by
Revenue (BIR) issues revenue regulations, rulings,
Congress and is called the impact of taxation. It is
orders, or circulars to interpret and clarify the
also referred to as the legislative act in taxation.
application of the law. But even so, their functions
are merely intended to interpret or clarify the proper
application of the law. They are not allowed to
introduce new legislations within their Congress is composed of two bodies:
quasi-legislative authority. 1. The House of Representatives, and
Non-impairment of the jurisdiction of the 2. The Senate
Supreme Court to review tax cases
Notwithstanding the existence of the Court of Tax
As mandated by the Constitution, tax bills must
Appeals, which is a special court, all cases involving
originate from the House of Representatives. Each
taxes can be raised to and be finally decided by the
may, however, have their own versions of a proposed
Supreme Court of the Philippines.
law which is approved by both bodies, but tax bills
cannot originate exclusively from the Senate.
Appropriations, revenue, or tariff bills shall
originate exclusively in the House of
Matters of legislative discretion in the exercise of
Representatives, but the Senate may propose or
taxation
concur with amendments
1.Determining the object of taxation
Laws that add income to the national treasury and
those that allow spending therein must originate from 2 Setting the tax rate or amount to be collected
the House of Representatives while Senate may 3.Determining the purpose for the levy which must
concur with amendments. The origination of a bill by be public use
Congress does not necessarily mean that the House 4.Kind of tax to be imposed
bill must become the final law. It was held
5. Apportionment of the tax between the national and
constitutional by the Supreme Court when the Senate
local government
changed the entire house version of a tax bill.
6.Situs of taxation
7. Method of collection
Each local government unit shall exercise the
power to create its own sources of revenue and
shall have a just share in the national taxes
This is a constitutional recognition of the local Assessment and Collection
autonomy of local governments and an express The tax law is implemented by the administrative
delegation of the taxing power. branch of the government.
Implementation involves assessment or the
STAGES OF THE EXERCISE OF TAXATION determination of the tax liabilities of taxpayers and
POWER
collection. This stage is referred to as incidence of While the Marshall Doctrine and the Holme's
taxation or the administrative act of taxation. Doctrine appear to contradict each other, both are
actually employed in practice. A good manifestation
of the Marshall Doctrine is the imposition of
SITUS OF TAXATION
excessive tax on cigarettes while applications of the
Situs is the place of taxation. It is the tax jurisdiction
Holme's Doctrine include the creation of Ecozones
that has the power to levy taxes upon the tax object.
with tax holidays and provision of incentives, such as
Situs rules serve as frames of reference in gauging
the Omnibus Investment Code (E.O. 226) and the
whether the tax object is within or outside the tax
Barangay Micro-Business Enterprise (BMBE) Law.
jurisdiction of the taxing authority.
Examples of Situs Rules:
3. Prospectivity of tax laws -
1. Business tax situs: Businesses are subject to tax in
Tax laws are generally prospective in operation. An
the place where the business is conducted.
ex post facto law or a law that retroacts is prohibited
2. Income tax situs on services: Service fees are
by the Constitution.
subject to tax where they are rendered.

Exceptionally, income tax laws may operate

3. Income tax situs on sale of goods: The gain on
retrospectively if so intended by Congress under
sale is subject to tax in th place of sale.
certain justifiable conditions. For example, Congress
can levy tax on income earned during periods of
4. Property tax situs: Properties are taxable in their foreign occupation even after the war.
location.
5. Personal tax situs: Persons are taxable in their 4. Non-compensation or set-off
place of residence.
Taxes are not subject to automatic set-off or
compensation. The taxpayer cannot delay payment of
OTHER FUNDAMENTAL DOCTRINES IN tax to wait for the resolution of a lawsuit involving
TAXATION his pending claim against the government. Tax is not
1. Marshall Doctrine - “the power to tax involves the a debt; hence, it is not subject to set-off. This rule is
power to destroy.” taxation power can be used as an important to allow the government sufficient period
instrument of police power. It can be used to to evaluate the validity of the claim. Exceptions:
discourage or prohibit undesirable activities or a. Where the taxpayer's claim has already become
occupation. As such, taxation power carries with it due and demandable such as when the government
the power to destroy. already recognized the same and an appropriation for
However, the taxation power does not include the refund was made
power to destroy if it is used solely for the purpose of b.Cases of obvious overpayment of taxes
raising revenue. (Roxas vs. CTA) c. Local taxes
2. Holme's Doctrine - "Taxation power is not the
power to destroy while the court sits. Taxation power
5.Non-assignment of taxes
may be used to build or encourage beneficial
Tax obligations cannot be assigned or transferred to
activities or industries by the grant of tax incentives.
another entity by contract. Contracts executed by the
taxpayer to such effect shall not prejudice the right of 9. Strict Construction of Tax Laws
the government to collect. When the law clearly provides for taxation, taxation
6. Imprescriptibility in taxation is the general rule unless there is a clear exemption.
Prescription is the lapsing of a right due to the Hence the maxim, "Taxation is the rule, exemption is
passage of time. When one sleep on his right over an the exception."
unreasonable period of time, he is presumed to be When the language of the law is clear and
waiving his right. The government's right to collect categorical, there is no room for interpretation. There
taxes does not prescribe unless the law itself provides is only room for application. However, when taxation
for such a prescription. laws are vague, the doctrine of strict legal
construction is observed.

Under the NIRC, tax prescribes if not collected Vague tax laws
within 5 years from the date of its assessment. In the Vague tax laws are construed against the government
absence of an assessment, tax prescribes if not and in favor of the taxpayers. A vague tax law means
collected by judicial action within 3 years from the no tax law. Obligation arising from law is not
date the return is required to be filed. However, taxes presumed. The Constitutional requirement of due
due from taxpayers who did not file a return or those process requires laws to be sufficiently clear and
who filed fraudulent returns do not prescribe. expressed in their provisions.
Vague exemption laws
7. Doctrine of estoppel Vague tax exemption laws are construed against the
Under the doctrine of estoppel, any misrepresentation taxpayer and in favor of the government, A vague tax
made by one party toward another who relied therein exemption law means no exemption law. The claim
in good faith will be held true and binding against for exemption is construed strictly against the
that person who made the misrepresentation. taxpayer in accordance with The

The government is not subject to estoppel. The error with the lifeblood doctrine.
of any government employee does not bind the The right of taxation is inherent to the State. It is a
government. It is held that the neglect or omission of prerogative essential to the perpetuity of the
government officials entrusted with the collection of government. He who claims exemption from the
taxes should not be allowed to bring harm or common burden must justify his claim by the clearest
detriment to the interest of the people. Also, grant of organic or statute law.
erroneous applications of the law by public officers
do not block the subsequent correct application of the
When exemption is claimed, it must be shown
same.
indubitably to exist. At the outset, every presumption
is against it. A well-founded doubt is fatal to the
8. Judicial Non-interference claim; it is only when the terms of the concession are
Generally, courts are not allowed to issue injunction too explicit to admit fairly of any other construction
against the government's pursuit to collect tax as this that the proposition can be supported. (Ibid)
would unnecessarily defer tax collection. This rule is
anchored on the Lifeblood Doctrine. Tax exemption cannot arise from vague inference.
Tax exemption must be clear and unequivocal. A
taxpayer claiming a tax exemption must point to a
specific provision of law conferring on the taxpayer, discouraged because it is oppressive and burdensome
in clear and plain terms, exemption from a common to taxpayers. It is also believed to counter the rule of
burden. Any doubt whether a tax exemption exists is equal protection and uniformity in the Constitution.
resolved against the taxpayer. (see Digital
Telecommunications, Inc. VS. City Government of
How can double taxation be minimized?
Batangas, et al)
The impact of double taxation can be minimized by
any one or a combination of • the following:

a. Provision of tax exemption - only one tax

DOUBLE TAXATION law is allowed to apply to the tax object
Double taxation occurs when the same taxpayer is while the other tax law exempts the same tax
taxed twice by the same tax jurisdiction for the same object
thing. b. Allowing foreign tax credit - both tax laws
of the domestic country and a foreign
country tax the tax object, but the tax
Elements of double taxation
payments made in the foreign tax law are
1. Primary element: Same object
deductible against the tax due of the
2. Secondary elements: domestic tax law
a. Same type of tax c. Allowing reciprocal tax treatment -
b. Same purpose of tax provisions in tax laws imposing a reduced
tax rates or even exemption if the country of
Same taxing jurisdiction
the foreign taxpayer also gives the same
d. Same tax period
treatment to Filipino non-residents therein
Types of Double Taxation d. Entering into treaties or bilateral agreements
1. Direct double taxation - countries may stipulate for a lower tax
This occurs when all the element of double taxation rates for their residents if they engage in
exists for both impositions. transactions that are taxable by both of them

2. Indirect double taxation

This occurs when at least one of the secondary
elements of double taxation is not common for both ESCAPES FROM TAXATION
impositions. Escapes from taxation are the means available to the
taxpayer to limit or even the impact of taxation
C. The Philippine government taxes foreign income
of domestic corporations and resident citizens while a Categories of Escapes from Taxation
foreign government also taxes the same income
A. Those that result to loss of government revenue
(international double taxation).
1. Tax evasion, also known as tax dodging, refers to
any act or trick that tends to illegally reduce or avoid
Nothing in our law expressly prohibits double the payment of tax.
taxation. In fact, indirect double taxation is prevalent
in practice. However, direct double taxation is
2. Tax avoidance, also known as tax minimization, subjected to higher taxes. This is a form of backward
refers to any act or trick that reduces or totally shifting of tax.
escapes taxes by any legally permissible means. 3.Transformation - This pertains to the elimination
3. Tax exemption, also known as tax holiday, refers to of wastes or losses by the taxpayer to form savings to
the immunity, privilege or freedom from being compensate for the tax imposition or increase in
subject to a tax which others are subject to. Tax taxes.
exemptions may be granted by the Constitution, law,
or contract. Tax Amnesty - Amnesty is a general pardon granted
All forms of tax exemptions can be revoked by by the government for erring taxpayers to give them a
chance to reform and enable them to have a fresh
Congress except those granted by the Constitution
start to be part of a society with a clean slate. It is an
and those granted under contracts. absolute forgiveness or waiver by the government on
its right to collect and is retrospective in application.
B. Those that do not result to loss of government
Tax Condonation
revenue
Tax condonation is forgiveness of the tax obligation
1. Shifting - this is the process of transferring of a certain taxpayer under certain justifiable
tax burden to other taxpayers. grounds. This is also referred to as tax remission.
Because they deprive the government of revenues,
tax exemption, tax refund, tax amnesty, and tax
Forms of shifting condonation are construed against the taxpayer and in
a. Forward shifting -This is the shifting of tax which favor of the government.
follows the normal flow of distribution (i.e. from
Tax Amnesty vs. Tax Condonation
manufacturer to wholesalers, retailers to consumers).
Amnesty covers both civil and criminal liabilities, but
Forward shifting is common with essential condonation covers only civil liabilities of the
commodities and services such as food and fuel. taxpayer.
b. Backward shifting - This is the reverse of forward
Amnesty operates retrospectively by forgiving past
shifting. Backward shifting is common with
violations. Condonation paid by the taxpayer will not
non-essential commodities where buyers have
be refunded.
considerable market power and commodities with applies prospectively to any unpaid balance of the
numerous substitute products. tax; hence, the portion already
C. Onward shifting - This refers to any tax shifting
Amnesty is also conditional upon the taxpayer paying
in the distribution channel that exhibit forward
the government a portion of the tax whereas
shifting or backward shifting. condonation requires no payment.

Shifting is common with business taxes where taxes

imposed on business revenue can be shifted or
passed-on to customers.
2. Capitalization - This pertains to the adjustment of
the value of an asset cause by the changes in tax rates
For instance, the values of a mining property will
correspondingly decrease when mining output is