🥕 Principles of Taxation Principles of a Sound Taxation System (FAT)

1. Fiscal Adequacy
➢ sufficiency to meet government
expenditures and other public needs.
Taxation is the inherent power of the state to collect
➢ consonance of the lifeblood theory.
enforced, proportional, monetary contributions levied by the
lawmaking body in order to raise revenues for public
2. Administrative Feasibility
purpose.
➢ capability of being effectively enforced.
➢ tax laws should not obstruct business
Fundamental theories growth and economic development.
in Taxation ➢ it should be that paying for taxes be
Necessity theory the power to tax is an attribute accessible and easy so that people would
of sovereignty emanating from not think twice of paying.
necessity (national defense,
health, education, public 3. Theoretical Justice (equality)
facilities.)
➢ based on the taxpayer’s ability to pay.
Lifeblood theory Without taxes, the govt. would
be paralyzed for lack of the ➢ tax rates imposed should be reasonable.
motive power to activate and
operate it.
Benefits-Protection There is a relationship between Characteristics of Taxes:
Theory / Reciprocal the State and citizens whereby 1. forced charge
Duties in exchange of protection and 2. payable in money
benefits from the State, taxes 3. exclusively imposed by the legislative body
are paid. 4. assessed in accordance w the payor’s ability-to-pay.
5. imposed by the State within its jurisdiction.
The Inherent Powers of the State (PET) 6. imposed for public purpose.
1. Police Power
➢ the power to enact laws for the general
welfare of the people. 🥕 Purpose of Taxation
➢ Wider in application because it is the
general power to make laws.
Fiscal/General/ Tax imposed is solely for the general
2. Power of Eminent Domain Revenue/Primary purpose of the government. No specific
➢ the power to take private property for Purpose pre-determined purpose. (to raise revenue
public use with proper compensation. for government purposes)
Regulatory/Special/ Tax imposed for specific purpose, like
3. Power of Taxation Sumptuary/Secondary achieving some social or economic goals
➢ power to take property for the support of Purpose whether revenue is raised or not. (tariffs)
the government and or public purpose.

Scope if the Power of Taxation

• Supreme
In so far as selection of the subject of taxation.
• Comprehensive
it covers persons, businesses, activities, professions,
rights and privileges.
• Unlimited
in the absence of limitations set by law/constitution,
the power to tax is unlimited and comprehensive.
• Plenary
BIR may avail of certain remedies to ensure
collection of taxes.
• Has the ability to destroy

How are these 3 similar?

1. All are inherent powers of the state.
2. All are legislative in nature.
3. These are ways in which the State interferes with
private rights and properties.
4. Exist independently with the Constitution although
the conditions for these power to be exercise may
be prescribed or limited by the Constitution.
How a Tax Bill becomes Law? What is Situs?
1. A tax proposal — place of taxation, the country that has the power
2. Originating in the House of Representative (a must) and jurisdiction to levy and collect the tax.
3. There must be a counterpart in the Senate
4. Three-reading rule Subject Situs
Poll tax on persons Residence of he person
i. reading of title, bill number, and author
ii. deliberation in plenary by all members
iii. final approval of all members Real property tax Where the property is
located whether the owner
5. It will then become a law if signed by the president is a resident or not.
or lapses into law after 30 days
6. President may veto (reject) the bill and return it to
the congress.
7. Congress may over-ride the veto by 2/3 vote by
members. Tangible personal State where it is physically
properties located although the owner
8. Law takes effect 15 days after publication in the
resides in another
Official Gazette or in at least two newspapers of jurisdiction (lexi rei sitae)
general circulation. Intangible personal Residence of the owner
property
How is the tax law exercised? Income tax State where the taxpayer
• Legislation of laws by Congress and tax ordinances resides.
by the Local Sangguanian. Business, occupation, etc. Place where the business is
• Tax collection by the administrative branch of. The done.
government.
Constitutional limitations
Stages of the Exercise of Taxation Power 1. Observance of due process
1. Levy or imposition There must be valid law and the measure should not
• Involves the enactment of a tax law by be unjust as to amount to confiscation of property.
Congress. 2. Equal protection of law
• Called impact of taxation All persons subject to legislation shall be treated
2. Assessment of tax alike.
• Similar to audit 3. Uniformity of taxation
3. Collection of tax Rule of taxation must be uniform and equitable.
• Enforcement of tax. 4. Progressive scheme of taxation
Ps!! Assessment and collection is implemented by the Means that tax laws shall place emphasis on direct
administrative branch of the government. taxes rather than indirect taxes, with ability to pay as the
principal criterion.
5. Non-imprisonment of non-payment of poll tax
🥕 Limitations of Taxation Power No person shall be imprisoned for debt or non-
payment of poll tax.
Only punishable by sub-charge.
6. Non-impairment of the obligations of contracts
Inherent Limitations
1. Public purpose
7. Exemption of lands, buildings, improvements,
Tax must always be imposed for public use,
otherwise, it will be declared as invalid.
directly and exclusively used for religious,
charitable or educational purposes.
Synonym to “government purpose”.
2. Exemption of the government agencies
8. Non-stock educational institutions (grants,
Government agencies are exempted unless expressly
endowments, donations or contributions for
stated.
educational purposes) are exemption from taxes
3. Non-delegability of the Taxing Power
of the revenues and assets of non-profit.
Imposition of tax measures cannot be assigned to
anyone other than the legislative.
9. Non-appropriation of public funds or property
However, collection, assessment, valuation of asset
for the benefit of any church, sect, or system of
etc. can be delegated.
religion.
4. International comity of treaty
fund shall be available exclusively for specific
Courteous and friendly agreement and interaction
purpose for which they have been appropriated.
between nation.
5. Situs of taxation or territoriality 10. No money shall be paid out of the treasury
except in pursuance of an appropriation made
Tax laws cannot operate beyond a state’s territorial
by law.
limits.
Property outside one’s jurisdiction does not receive
any protection from the state. 11. Concurrence of a majority of all members of the
Congress for the passage of Law granting tax
exemption.
 12. Non-diversification oof tax collections i. Forward shifting
• follows the normal flow of
13. The president shall have the power to veto any distribution.
item in an appropriation, the veto shall not • common with essential
affect those items not included. commodities and services such as
food or fuel.
14. Non-impairment of the jurisdiction of the • manufacturer to wholesaler
Supreme Court to review tax cases. ii. Backward shifting
congress cannot take away from the Supreme • Common with non-essential
Court the power given to it by the Constitution as the commodities where buyers have
final arbiter of tax cases. considerable market power and
15. Appropriations, revenue, or tariff bills may substitute numerous
originates in the House of Representatives but products.
the Senate may propose or concur with • Reverse of forward shifting.
amendments. iii. Onward shifting
• Mixture of both.
16. Each local government unit shall exercise the
power to create its own sources of revenue and 4. Capitalization
shall have a just share in the national taxes. the seller is willing to lower price of commodity
provided that taxes will be shouldered by the buyer.
5. Transformation
Double taxation the manufacturer absorbs the additional taxes
imposed. By the government without passing, it to the
1. Direct Double Taxation / Direct duplicate /
buyers w the fear of losing its market.
Taxation in Strict Sense
6. Exemption
Elements: immunity, privilege or freedom from payment of
burden to which others are obliged to pay.
i. Same subject matter
exemption is ok if there’s a clear provision.
ii. Same place of jurisdiction
iii. Same taxable period
iv. Same purpose Rules on Construction of Income Tax Laws
v. Same taxing authority 1. Legislative intention must be considered.
vi. Taxes must be of the same kind.
2. Where there is doubt
If one of the elements is missing, then there is Indirect
on a tax statutes – consturcted stictly against the
Double Taxation / Indirect Duplicate / Taxation in Broad
government and liberally in favor of the taxpayers.
Sense.
on a tax exception – constructed strictly against
the taxpayers and liberally in favor of the government.
2. International Double Taxation – taxation caused
by 2 different taxing authorities, one domestic and 3. Where language is plain
one foreign.
if there is no doubt, then the words
employed are to be given their ordinary
meaning.
Escape from Taxation
1. Evasion / Dodging
Taxpayer uses illegal means to evade or lessen the
payment of taxes.
Underreporting income, falsifying documents, hiding
assets or income.
2. Avoidance / Tax Minimization
Reduction of totally escaping payment of tax
through legally permissible means.
Utilizing tax credits, claiming deductions, etc.
3. Shifting
Transfer of tax burden to another.
Imposition of tax is transferred from the
statutory/original taxpayer to another without violating
the law.