BASICS OF TAXATION
Definition of taxation
Taxation is a process or means by which a sovereign, through its law-
making body, imposes burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenue to carry out the legitimate
objects of government.
It is an inherent power of the government.
In your curriculum, do you have subject constitution?
Let’s review the inherent powers of the government as usually discussed in
that subject.
1) Police power – so this pertains to the power of the government to
enforce restriction and regulation on the use of liberty and property to
ensure and promote public health, safety and welfare. This power is
not just for law enforcement but for the government as a whole.
Through this power, it allows the government to enact laws and
regulations that promote common good, even if those laws restrict
individual freedoms or property rights.
Examples:
a) Building code – ensures minimum standard for construction to
ensure safety and structural integrity of buildings
b) Regulating gambling – the government can restrict or ban certain
forms of gambling to maintain public order and prevent potential
harm to individuals and communities. Recently, there is a clamor to
ban online gambling as legislatures are pointing out the social cost.
Some have filed their bill related on this but as of now no progress
yet as 20th congress will only resume session today.
2) Power of taxation – this pertains to the power of the government to
raise revenue to fund the programs and projects of the government.
This subject dwells on this topic and later part of our discussion will be
the purpose of taxation.
3) Power of eminent domain – this is the power of the state wherein it can
acquire properties to use for public purpose upon payment of just
compensation
Example: Government acquiring properties to build roads and bridges.
Sometimes, the power of eminent domain is transferred to private
entities if it serves a public purpose. Like for example if they acquire
land in order to build expressways.
Those are the three inherent power of the state. Any question or
clarification?
If none, let’s start digesting the power of taxation.
Let’s go back to the definition of taxation…
It is a process or means – meaning it involves a set of activities
There are three aspects of taxation
1. Levying – refers to the act of imposing a tax by the government
through enactment of laws. Hence, this is carried out by the law-
making body
2. Assessment – this involves the computation of taxes due in accordance
with laws and rules and regulations
3. Collection – as the term implies, this is the collection of taxes due.
Performed by Executive branch, Bureau of Internal Revenue (BIR),
Bureau of Customs (BOC) being the most known collecting agencies.
Through its law-making body – as mentioned earlier, levying is carried out by
the legislative branch.
Can anyone enumerate those bodies that are part of the legislative branch?
1. Senate
2. House of representative
3. Provincial council
4. City or municipal council
5. Barangay council
Note though that for national level, only the House of Representatives has
the exclusive power to initiate bills for raising revenue. While Senate can
propose or concur with amendments to such bills, they cannot originate
them as outlined in the Philippine Constitution, to be specific this is covered
by Article VI Section 24.
For what reason? Can anyone guess?
Okay, so the Constitutional authority is rooted in the principle that
representatives directly elected by the people should have the initial
responsibility over taxation matters. The purpose is to ensure that the
branch of legislature with the most direct accountability to the people has
the primary say on how revenue is raised through taxes.
Going back to the definition, the law-making body imposes burdens upon
subjects and objects, meaning individuals, corporations and properties
among others can be burdened of tax.
There are different types or classifications of tax. They can be classified
according to
1. Subject matter or object
2. Who bears the burden
3. Determination of amount
4. Imposing authority
5. Graduation or rate
Subject matter or object
1. Personal, capitation or poll tax – example: community tax (cedula)
Capitation (Merriam Webster) – a direct uniform tax imposed on each
head or person
2. Property tax – example: real property tax, estate tax
3. Excise or license tax - example: income tax
Who bears the burden
1. Direct – example: income tax, estate tax
2. Indirect – example: VAT, percentage tax
Determination of amount
1. Specific tax (applied on a per unit, regardless of value) – sin tax on
cigarettes (per pack)
2. Ad valorem tax (ad valorem is a latin phrase which means according to
value) – example: real estate tax, VAT is also considered ad valorem
tax
Trivia: Tax on distilled spirits is composed of specific and ad valorem tax.
Specific tax is tax per liter (currently a little less than P70 per liter) while
ad valorem is the 22% tax on net retail price.
Imposing authority
1. National – example: Internal revenue taxes (i.e., income tax, VAT)
2. Municipal or local – example: local business tax
Graduation or Rate
1. Proportional – example: VAT, percentage tax
2. Progressive – example: income tax of individuals
3. Regressive
Within its jurisdiction…
Situs of taxation refers to the place where a tax is imposed or levied. It
determines the jurisdiction that has the power to tax a particular transaction
or activity.
Why do we need to understand situs of taxation? Basically we need to
understand situs of taxation to avoid double taxation – that is taxes are
levied twice on the same object or source of income, by the same or different
taxing authority. This will be discussed thoroughly later in this subject.
To raise revenue to carry out the legitimate objects of the government…
Actually there are two classification of purpose of taxation
The primary purpose is Revenue or Fiscal purpose
To provide funds or property with which to promote general welfare and the
protection of its citizens and to enable it to finance its activities.
Secondary purpose is Regulatory, Sumptuary or Compensatory
1. To promote General Welfare
What is the difference of promoting general welfare here with the
general welfare mentioned earlier in the primary purpose of taxation?
Here, there are restrictions made in order to promote general welfare
for example the passage of sin tax law imposing sin tax on cigarettes.
2. Reduction of Social Inequality – social inequality per se cannot be
eliminated, but it can be reduced. So one way to reduce social
inequality is imposing taxes, for example estate tax. Most estate tax
are paid only by the rich and through proper payment of estate taxes,
their wealth is shared to the Government to fund its activities. Another
example, individuals who have high earnings, they are taxed gradually
(15% to 35%) compared to those minimum wage earners that are
exempted in paying taxes.
3. Economic Growth – there are certain areas or industry in which taxes
are lowered down in order to attract investors. For example, in PEZA
zones, they have different tax scheme or they were incentives in order
to attract investments in the country.
Definition of taxation
Taxation is a process or means by which a sovereign, through its law-
making body, imposes burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenue to carry out the legitimate
objects of government.
Questions and/or clarifications?
Fundamental doctrines of taxation
1. The lifeblood doctrine
2. Benefits received theory – the higher the benefits received from the
government, the higher the tax that you are to pay
3. Ability to pay theory – the more you are able to pay, the higher the tax
that you pay
Benefits received theory and ability to pay are called cost allocation
theory
4. Marshall doctrine – the power to tax involves the power to destroy. So
for example, tax on cigarette, considering the impact of cigarette that
is why the sin tax was imposed
5. Holmes doctrine – taxation power is not the power to destroy while the
court is in sit (check further)
6. Prospectivity of tax laws – effectivity of tax laws, when will it take
effect. Prospectivity, meaning impact of tax laws is moving forward,
especially if the tax law passed is detrimental to tax payers.
7. Non-compensation or set-off – so this is the general rule
8. Non-assignment of taxes – obligation to pay tax cannot be passed. If
you’re the one obliged to pay the tax, you cannot pass the obligation
to another
9. Imprescriptibility in taxation
Prescription is the lapsing of a right due to passage of time
In taxation, the obligation to pay tax does not prescribe
10. Doctrine of estoppel
