CHAPTER 1

FUNDAMENTAL PRINCIPLES OF TAXATION

Objectives:
Define the meaning of taxation
Identify and learn the sources of tax laws

Definition of Taxation

Taxation is the process or means by which the sovereign

(independent state), through its law-making body (the legislature),
imposes burdens upon subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the legitimate objects of
government.

Three inherent powers of the state:

1. Police power – it is the power of the State for promoting public

welfare by restraining and regulating the use of liberty and
property.

2. Power of taxation – it is the power by which the State raises

1
 revenue to defray the necessary expenses of the government.

3. Power or eminent domain – it is the power of the State to

acquire private property for public purpose upon payment of
just compensation.

Purpose of taxation

1. Primary: Revenue or fiscal purpose

2. Secondary: Regulatory purpose (or sumptuary / compensatory)

Theory and Basis of taxation

1. Theory: Lifeblood or necessity theory

- The power of taxation proceeds upon the theory that the existence
of government is necessity (necessity theory). It is necessary
burden to preserve the State’s sovereignty and a means to give
the citizenry an army to resist aggression, a nave to defend its
shores from invasion, a corps of civil servants to serve, public
improvements for the enjoyment of the citizenry.

- 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”. (Lifeblood doctrine).

2. Basis of taxation: Benefits received or reciprocity theory

- The basis is the reciprocal duties of protection and support

between the state and its inhabitants.

2
Manifestation of the lifeblood theory:

a. Rule of “No estoppel against the Government”.

b. Collection of taxes cannot be enjoined (stopped) by injunction.

c. Taxes could not be the subject of compensation or set-off.

d. Right to select objects (subjects) of taxation.

e. A valid tax may result in the destruction of the taxpayer’s property.

Scope of the power of taxation

a. Comprehensive – as it covers persons, businesses, activities,

professions, rights and privileges.

b. Unlimited – in the absence of limitations prescribed by law or the

constitution, the power to tax is unlimited and comprehensive.

c. Plenary – as it is complete; BIR may avail of certain remedies to

ensure collection of taxes.

d. Supreme – in so far as the selection of the subject of taxation.

Essential elements of a tax

a. It is an enforced contribution.

b. It is generally payable in money.

c. It is proportionate in character.

d. It is levied on persons, property, or the exercise of aright or privilege.

e. It is levied by the law-making body of the state.

f. It is levied for public purpose.

3
Aspects of taxation:

1. Levying or imposition of the tax is a legislative act or function.

2. Assessment or determination of the correct amount of applicable tax.

3. Collection of the tax levied which is essentially administrative in

character.

Nature/Characteristics of the State’s power to tax

1. It is inherent in sovereignty.

2. It is legislative in character.

3. Exemption of government entities, agencies and instrumentalities.

4. International comity (polite and friendly agreements) among nations.

5. Limitation of territorial jurisdiction.

6. Strongest among the inherent powers of the State.

Classification of taxes

1. As to scope

a. National – imposed by the National Government (e.g. income tax,

estate tax, donor’s tax, VAT other percentage taxes, documentary
stamp tax)

b. Local – imposed by local government units such as municipal

corporations (e.g. real estate tax and professional tax receipts)

2. As to subject matter or object

a. Personal, poll or capitation – tax of a fixed amount imposed upon

4
 individual, whether citizens or not, residing within a specified
territory without regard to their property or the occupation in which
he may be engaged (e.g. community tax)

b. Property – tax imposed on property, whether real or personal, in

proportion either to its value, or in accordance with some other
reasonable method of apportionment (e.g. real estate tax)

c. Excise – any tax which does not fall within the classification of a
poll tax or property tax. Excise tax may also refer to the tax levied
or imposed on sin products and non-essential goods such as
cigars and liquors.

3. As to who bears the burden

a. Direct – tax which is demanded from the person who also

shoulders the burden of tax or tax which the taxpayer cannot shift
to another.

b. Indirect – tax which is demanded from one person in the

expectation and intention that he shall indemnify himself at the
expense of another.

4. As to determination of amount

a. Specific – tax of fixed amount imposed by the head or number, or

by some standard of weight or measurement (e.g. excise tax on
cigars and liquors)

b. Ad valorem – tax of fixed proportion of the value of property with

respect to which the tax is assessed (e.g. vat, income tax, donor’s
tax and estate tax)

5. As to purpose

a. Primary, Fiscal, or Revenue purpose – tax imposed solely for the

5
 general purpose of the government to raise revenue for
government purposes (e.g. income tax, donor’s tax and estate tax)

b. Secondary, Regulatory, Specific or Sumptuary purpose – tax

imposed for a specific purpose to achieve some social or
economic ends irrespective of whether revenue is actually raised
or not (e.g. tariff and certain duties on imports)

6. As to graduation or rate

a. Proportional – tax based on a fixed percentage of amount of the

property, receipts, or other basis to be taxed (e.g. VAT)

b. Progressive or graduated – tax the rate of which increases as the

tax base or bracket increases (e.g. income tax on individual
taxpayer’s)

c. Regressive – tax the rate of which decreases as the tax base or

bracket increases.

7. As to taxing authority

a. National – taxes imposed under the National Internal revenue

Code (commonly known as the Tax Code) collected by the
national government through the Bureau of Internal Revenue
(BIR) and other national government agencies.

b. Local – taxes imposed by local government units.

Elements of sound tax system

1. Fiscal adequacy

2. Theoretical justice or equity

3. Administrative feasibility
6
Limitations on the state’s power to tax

1. Inherent limitations

a. Purpose must be public in nature

b. Prohibition against delegation of the taxing power

c. Territorial limitation

2. Constitutional limitations

a. Due process of law

b. Equal protection of laws

c. Rule of uniformity and equity in taxation

d. Prohibition against imprisonment for non-payment of “poll tax”

e. Prohibition against impairment of obligation of contracts

f. Prohibition against infringement of religious freedom

g. Prohibition against appropriation of proceeds of taxation for the

use, benefit, or support of any church

h. Prohibition against taxation of religious, charitable and educational

entities

i. Prohibition against taxation of non-stock, non-profit educational

institutions

j. OTHERS

i. Grant of tax exemption

ii. Veto of appropriation, revenue, tariff bills by the President

iii. Delegated authority of President to impose tariff rates

iv. Non-impairment of the Supreme Court (SC) jurisdiction

7
 v. Revenue bills shall originate exclusively from the House of
Representatives

Situs of taxation

Literally, situs of taxation means “place of taxation. It is the state

or political unit which has jurisdiction to impose a particular tax. The
state where the subject to be taxed has a situs may rightfully levy and
collect the tax. The situs is necessarily in the state which has jurisdiction
or which exercises dominion over the subject in question.

Factors to consider in determining the situs of taxation

- Subject matter (person, property, or activity)

- Nature of the tax

- Citizenship

- Residence of the taxpayer

- Source of income

- Place of excise, business or occupation being taxed

Tax distinguished from other terms or imposts

1. TAX versus TOLL

Toll is a sum of money for the use of something, generally applied to

the consideration, which is paid of the use of a road, bridge or the like
8
 of a public nature

2. TAX versus PENALTY

Penalty is a sanction imposed as a punishment for violation of law or

acts deem injurious.

3. TAX versus SPECIAL ASSESSMENT

Special assessment is an enforced proportional contribution from

owners of lands for special benefits resulting from public
improvements.

4. TAX versus REVENUE

Revenue refers to all the funds or income derived by the government,

whether from tax or any other source.

5. TAX versus SUBSIDY

Subsidy is a pecuniary aid directly granted the government to an

individual or private commercial enterprise deemed beneficial to the
public.

6. TAX versus PERMIT or LICENSE FEE

Permit or license is a charge imposed under the police power to

purposes of regulation.

7. TAX versus CUSTOMS DUTIES

Customs duties are taxes imposed on goods exported from or

imported into a country.

Double taxation

In its strict sense, double taxation referred to is direct duplicate

9
taxation. In its broad sense, double taxation is referred to as indirect
double taxation. It extends to all cases in which there is a burden of two
or more impositions. Double taxation means taxing twice by the same
taxing authority, jurisdiction or taxing district; for the same purpose; in
the same year or taxing period; same subject or object; same
kind/character of the tax.

Means of avoiding or minimizing the burden of taxation

1. Shifting – is the transfer of the burden of a tax by the original payer or

the one on whom the tax assessed or imposed to someone else.

2. Transformation – an escape from taxation where the producer or

manufacturer pays the tax and endeavor to recoup himself by
improving his process of production thereby turning out his units of
products at a lower cost.

3. Evasion – is the use by the taxpayer of illegal or fraudulent means to

defeat or lessen the payment of a tax. It is also known as “tax
dodging”.

4. Tax avoidance – is the exploitation by the taxpayer of legally

10
 permissible alternative tax rates or methods of assessing taxable
property or income in order to avoid or reduce tax liability. It is politely
called “tax minimization” and is not punishable by law.

5. Exemption – it is the grant of immunity to particular persons or

corporations or to persons or corporations of a particular class from a
tax which persons and corporations generally within the same state
or taxing district are obliged to pay.

6. Capitalization – the reduction in the selling price of income producing

property by an equal to the capitalized value of future taxes that may
be paid by the purchaser

7. Avoidance – is the tax saving device within the means sanctioned by

law. This method should be used by the taxpayer in good faith and at
arm’s length.

Kinds of exemptions

1. As to basis

a. Constitutional – immunities from taxation which originate from the

constitution.

b. Statutory – immunities from taxation which emanates from

legislation.

2. As to form

a. Express – exemptions expressly granted by statute.

b. Implied – when particular persons, property, or rights are deemed.

3. As to extent

a. Total – connotes absolute immunity.

11
 b. Partial – one where a collection of a part of the tax is dispensed
with.

Source of tax laws

1. Constitution

2. National Internal Revenue Code

3. Tariff and Customs Code

4. Local Government Code

5. Local tax ordinances / City or municipal tax codes

6. Tax treaties and international agreements

7. Special laws

8. Decisions of the Supreme Court and the Court of Tax Appeals

9. Revenue rules and regulations and administrative rulings and

opinions

For further discussion please refer to the link provided: Fundamentals of taxation
https://www.youtube.com/watch?v=wZ8A81tI3XQ
For further discussion please refer to the link provided: Inherent Limitations on the State's Power
to Tax
https://www.youtube.com/watch?v=3BWl72Lu_YI&list=PL6BP0F-nFtQYvIlWG1fkvnNhdzEgWGc-
B&index=5
For further discussion please refer to the link provided: Characteristics of Tax and the Nature
of the State's Power to Tax
https://www.youtube.com/watch?v=Kzj1YKYV7yo&list=PL6BP0F-nFtQYvIlWG1fkvnNhdzEgWGc-
B&index=4

Reference Book:

Income Taxation
(with special topics and properly filled BIR
forms)
By: Enrico D. Tabag, 2020 Edition

12