CHAPTER 1

INTRODUCTION TO
TAXATION
LESSON PROPER
What is Taxation?
Taxation may be defined as a State Power,
a legislative process, and a mode of
government cost distribution.
1. As a state power
Taxation is an inherent power of the State to enforce
proportional contributions from its subjects for public
purpose.

2. As a process
Taxation is a process of levying taxes by the legislature of
the State to enforce proportional contributions from its
subject for public purpose.

3. As a mode of cost distribution

Taxation is a mode by which the State allocates its costs or
burden to its subjects who are benefitted by its spending.
The Theory of Taxation
Every government provides a vast array of public
services including defense, public order and
safety, health, education and social protection
among others.

A system of government is indispensable to every

society. Without it, the people will not relish the
benefits of a civilized and orderly society.
However, government cannot exists without a
system of funding. The government’s necessity for
funding is the theory of taxation.
The Basis of Taxation
The government provides benefits to the
people in the form of public services, and
the people provide the funds that finance
the government. This mutuality of support
between the people and the government is
referred to as the basis of taxation.
The mutuality is illustrated as:
Receipt of benefits is conclusively presumed
Every citizen and resident of the State directly or
indirectly benefits from public services rendered by the
Government. These benefits can be in the form of daily
free usage of public infrastructures, access to public
health or education services, the protection and security
of a person and property, or simply the comfort of living
in a civilized an peaceful society which is maintained by
the government.
While most public services are received indirectly, their
realization by every citizen and resident is undeniable. In
taxation, the receipt of these benefits by the people is
conclusively presumed. Thus, taxpayers cannot avoid
payment of tax under the defense of benefit received.
The direct receipt or actual availment of government
services is not a precondition to taxation.
Theories of Cost Allocation

Taxation is a mode of allocating government costs or

burden to the people distributing the costs or burden, the
government regards the following general considerations
in the exercise of its taxation power:

1. Benefit received theory

2. Ability to pay theory
Benefit Received Theory
This theory presupposes that the more
benefit one receives from the government,
the more taxes he should pay.
 Ability to Pay Theory

This theory presupposes that taxation should also consider

the taxpayers ability to pay. Taxpayers should be required to
contribute based on their relative capacity to sacrifice for
the support of the government.

In short, those who have more should be taxed more even if

they benefit less from the government. Those who have
less shall contribute less even if they receive more benefits
from the government.
 Aspects of the Ability to Pay Theory
1. Vertical equity
Proposes that the extent of one’s ability to pay is directly proportional to
the level of his tax base.
Vertical equity is a gross concept while horizontal equity is a
net
For concept.
example, A has P200,000 income while B has P400,000. In taxing
income, the government should tax B more than A because B has
greater income; hence, a greater capacity to contribute.

2. Horizontal equity
Horizontal equity requires consideration of the particular circumstance
of the taxpayer.
For example, both A and B have P300,000 income. A is single without a
child while B is married with four children. In taxing income, the
government should tax A more than B because A has a greater capacity
to contribute since he has no dependents to support. B has less
capacity to contribute considering the support requirements of his
dependents.
The Lifeblood Doctrine
Taxes are essential and indispensable to the continued
subsistence of the government. Without taxes, the
government would be paralyzed for lack of motive power
to activate or operate it.

Taxes are the lifeblood of the government, and their

prompt and certain availability are an imperious need.
Upon taxation depends the government’s ability to serve
the people for whose benefit taxes are collected.
Implication of the lifeblood doctrine in Taxation
1. Tax is imposed even in the absence of Constitutional Grant
2. Claims for tax exemption are construed against taxpayers
3. The government reserves the right to choose the objects of
taxation
4. The courts are not allowed to interfere with the collection of
taxes.
5. In income taxation:
a) Income received in advance is taxable upon receipt
b) Deduction for capital expenditures and prepayments is not
allowed as it effectively defers the collection of income tax.
c) A lower amount of deduction is preferred when a claimable
expense is subject to limit.
d) A higher tax base is preferred when the tax object has
multiple tax base.
Inherent powers of the estate
A government has its basic needs and rights which co-exist
with its creation. It has right to sustenance, protection and
properties. The government sustains itself by the power of
taxation, secures itself and the well-being of its people by
police power, and secures its own properties to carry out its
public services by the power of eminent domain.

These rights, dubbed as “powers” are natural, inseparable,

and inherent to every government. No government can
sustain or effectively operate without these powers.
Therefore, the exercise of these powers by the government is
presumed understood and acknowledged by the people from
the very moment they establish their government. These
powers are naturally exercisable by the government even in
the absence of an express grant of power in the Constitution.
 The Inherent Powers of the State
Taxation power is the power of the State to enforce
the contribution from its subjects to sustain itself
Police power is the general power of the State to
enact laws to protect the well being of the
people
Eminent Domain is the power of the State to take
private property for public use after paying just
compensation.
Comparison of the three powers of the State
 Similarities of the three powers of the State.
1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with
private rights and properties.
5. They all exists independently of the Constitution and are
exercisable by the government even without
constitutional grant. However, the Constitution may
impose conditions or limits for their existence.
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

The scope of taxation is widely regarded

as comprehensive, plenary unlimited and
supreme

However, despite the seemingly unlimited

nature of taxation, it is not absolutely
unlimited. Taxation has its own inherent
limitations and limitations imposed by the
Constitution.
 The Limitations of the Taxation Power
A. Inherent Limitations

1. Territoriality of Taxation
2. International Comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power.
 B. Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries and churches and
mosque from property taxes.
9. Non-appropriation of public funds or property for the benefit of church, sect or system
of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions
11. Concurrence of a majority of all members of Congress for the passage of law
granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. The requirement that appropriations, revenue, or tariff bills, shall originate exclusively
in the House of Representatives.
16. The delegation of taxing power to local government units.
 Inherent Limitation of Taxation
Territoriality of Taxation
Public services are normally provided within the boundaries of
the State. Thus, tax can be imposed only within the territories
of the State. There is no basis in taxing foreign subjects
abroad since they do not derive benefits from our
government. Furthermore, extraterritorial taxation will amount
to encroachment of foreign sovereignty.

Exception to the territoriality principle

1. In income taxation, resident citizens and domestic corporation

are taxable on income derived within and outside the
Philippines.
2. In transfer taxation, residents or citizens such as resident
citizens, non- resident citizens and resident aliens are taxable
on transfers of properties located within or outside the
Philippines.
 Inherent Limitation of Taxation
International Comity
pertains to mutual courtesy or reciprocity between states. It is
a basic principle of international law that all states are equally
sovereign. Each state observes co-equal sovereignty by not
taxing the properties, income or effects of fellow states.

Consistent with this, embassies or consular offices of foreign

governments in the Philippines including international
organizations and their non-Filipino staff are not subject to
Philippine taxation. Under the National Internal Revenue
Code (NIRC), the income of foreign government and foreign
government-owned and controlled corporations are not
subject to income tax.
When a state enters into treaties with other states, it is bound
to honor the agreements as a matter of mutual courtesy, and
in case its treaty agreements with other states conflict with its
local tax law, its treaty agreements are given primacy.
 Inherent Limitation of Taxation

Public purpose
Tax is intended for the common good.
Taxation must be exercised absolutely for
public purpose. It cannot be exercised to
further any private interest.
 Inherent Limitation of Taxation
Exemption of the government
The taxation power is broad. The government can exercise
the power upon anything including itself. However, the
government normally does not tax itself as this will not raise
additional funds but will only impute additional costs.

Under the NIRC, government properties and income from

essential public functions are not subject to taxation.
However, income of the government from its properties and
activities conducted for profit including income from
government-owned and controlled corporations is subject to
tax.
 Inherent Limitation of Taxation
Non-delegation of the taxing power
The legislative taxing power is vested exclusively in Congress
and is non-delegable pursuant to the doctrine of separation of
the branches of the government to ensure a system of checks
and balances.

The power of lawmaking, including taxation, is delegated by

the people to the legislature. So, as not to spoil the purpose of
delegation, it is held that what had been delegated cannot be
further delegated.
 Exceptions to the rule of non-delegation

1. Under the Constitution, local government units are allowed to

exercise power to tax to enable them to exercise their fiscal
autonomy.
2. Under the Tariff and Customs Code, the President is
empowered to fix amount of tariffs to be flexible to trade
conditions.
3. Other cases that require expedient and effective
administration implementation of assessment and collection
of taxes.
 Constitutional Limitations of Taxation
Observance of due process of law
No one shall be deprived of life, liberty or property without due
process of law. Tax laws should neither be harsh nor
oppressive.
Aspects of due process
1. Substantive due process
Tax must be imposed only for public purpose, 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.
1. Procedural due process
There should be no arbitrariness in assessment and collection
of taxes, and government shall observe the taxpayer’s right to
notice and hearing. The law established procedures which
must be adhered to in making assessments and enforcing
collections.
 Constitutional Limitations of Taxation
Equal protection of the law
No person shall be denied the equal protection of the law.
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. This requirement would mean
Congress cannot exempt sellers of “ballot” while subjecting
sellers of penoy to tax since they are essentially the same
goods.
 Constitutional Limitations of Taxation
Uniformity rule in taxation
The rule of taxation shall be uniform and equitable. Taxpayers
under dissimilar circumstances should not be taxed the same.
Taxpayers should be classified according to commonality in
attributes, and the tax classification to be adopted should be
based on substantial distinction. Each class is taxed
differently, but taxpayers falling under the same class are
taxed the same. Hence, uniformity is relative equality.
 Constitutional Limitations of Taxation
Progressive system of taxation
Congress shall evolve a progressive system of taxation.
Under the progressive system, tax rates increase as the tax
base increases. The Constitution favors progressive tax as it
consistent with the taxpayer’s ability to pay. Moreover, the
progressive system aids in an equitable distribution of wealth
to society by taxing the rich more than the poor.
Constitutional Limitations of Taxation
Non-imprisonment for non-payment of debt or
poll tax
As a policy, no one shall be imprisoned because of his
poverty, and no one shall be imprisoned for mere inability to
pay debt.
However, this Constitutional guarantee applies only when
the debt is acquired by the debtor in good faith. Debt acquired
in bad faith constitutes estafa, a criminal offense punishable
by imprisonment.
Is non-payment of tax equivalent to non-payment
of debt?
Tax arises from law and is a demand of
sovereignty. It is distinguished from debt which
arises from private contracts. Nonpayment of tax
compromises public interest while the non-
payment of debt compromises private interest.
The non-payment of tax is similar to a crime.
The Constitutional guarantee on non-
imprisonment for non-payment of debt does not
extend to non-payment of tax, except poll tax.
 Poll tax (two components)
1. Basic community tax
2. Additional community tax

The constitutional guarantee of non-

imprisonment for non-payment of poll tax
applies only to the basic community tax. Non-
payment of the additional community tax is an
act of tax evasion punishable by imprisonment.
Constitutional Limitations of Taxation
Non-impairment of obligation and contract.
The state should set an example of good faith among its
constituents. It should not set aside its obligations from
contracts by the exercise of its taxation power. Tax
exemptions granted under contract should be honored and
should not cancelled by a unilateral government action.
Constitutional Limitations of Taxation
Free worship rule
The Philippine government adopts free exercise of religion
and does not subject its exercise to taxation. Consequently,
the properties and revenues of religious institutions such as
tithes or offerings are not subject to tax. This exemption
however does not extent to income from properties or
activities of religious institutions that are proprietary or
commercial in nature.
Exemption of religious, charitable or educational entities, non-
profit cemeteries, churches and mosques, lands, buildings
and improvements from property taxes.
Constitutional Limitations of Taxation
Free worship rule
The Philippine government adopts free exercise of religion
and does not subject its exercise to taxation. Consequently,
the properties and revenues of religious institutions such as
tithes or offerings are not subject to tax. This exemption
however does not extent to income from properties or
activities of religious institutions that are proprietary or
commercial in nature.
Exemption of religious, charitable or educational entities, non-
profit cemeteries, churches and mosques, lands, buildings
and improvements from property taxes.
The Constitutional exemption from property tax applies for
properties actually, directly and exclusively used for
charitable, religious and educational purposes.
Constitutional Limitations of Taxation
Non-appropriation of public funds or property for
the benefit of any church, sect or system of
religion.
This constitutional limitation is intended to highlight the
separation of religion and the State. To support freedom of
religion, the government should not favor any particular
system of religion by appropriating public funds or property
support thereof.
It should be noted however that compensation to priests,
imams, or religious ministers working with the military, penal
institutions, orphanages or leprosarium is not considered
religious appropriation.
Constitutional Limitations of Taxation
Exemption from taxes of the revenues and
assets of non-profit, non-stock educational
institutions including grants, endowments,
donations or contributions for educational
purposes.
The constitution recognizes the necessity of education in
state building by granting tax exemption on revenues and
assets of non-profit educational institutions. This exemption,
however applies only on revenues and assets, that are
actually, directly and exclusively devoted for educational
purposes.
Consistent with this constitutional recognition of education as
a necessity, the NIRC also exempts government educational
institutions from income tax and subjects private educational
institution to a minimal 10% income tax.
Constitutional Limitations of Taxation
Concurrence of a majority of all members of
Congress for the passage of a law granting tax
exemption
Tax exemption law counters against the lifeblood doctrine as it
deprives the government of revenues. Hence, the grant of tax
exemption must proceed only upon a valid basis. As a safety
net, the Constitution requires the vote of the majority of all
members of the Congress in the grant of tax exemption.

In the approval of an exemption law, an absolute majority or

the majority of all members of the Congress, not a relative
majority or quorum majority is required. However in the
withdrawal of tax exemption, only a relative majority is
required.
Constitutional Limitations of Taxation
Non-diversification of tax collections
Tax collections should be used only for public purpose. It
should never be diversified or used for private purpose.
Constitutional Limitations of Taxation
Non-delegation of the power of taxation
The principle of checks and balances in a republican state
requires that taxation power as part of lawmaking be vested
exclusively in Congress.
However, delegation may be made on matters involving the
expedient and effective administration and implementation of
assessment and collection of taxes. Also, certain aspects of
the taxing process that are non-legislative in character are
delegated.
Hence, implementing administrative agencies such as the
Department of Finance and Bureau of Internal Revenue (BIR)
issues revenue regulations, rulings, orders or circulars to
interpret and clarify the application of 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 quasi-legislative authority.
Constitutional Limitations of Taxation
Non-impairment of the jurisdiction of the
Supreme Court to review tax cases
Notwithstanding the existence of the Court of Tax Appeals,
which is a special court, all cases involving taxes can be
raised to and be finally decided by the Supreme Court of the
Philippines.
Constitutional Limitations of Taxation
Appropriations, revenue, or tariff bills shall
originate exclusively in House of
Representatives, but the Senate may propose or
concur with amendments.
Laws that add income to the national treasury and those that
allows spending therein must originate from the House of
Representatives while Senate concur with amendments. The
origination of a bill by Congress does not necessarily mean
that the House Bill must become the final law. It was
constitutional by the Supreme Court when Senate changed
the entire house version of a tax bill.
Each local government unit shall exercise the power to create
its sources of revenue and shall have a just share in the
national taxes.
This is a constitutional recognition of the local autonomy of
local governments an express delegation of the taxing power.
 Stages of the exercise of Taxation Power.

1. Levy or imposition
2. Assessment and Collection
Levy or imposition

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.
 Congress is composed of two bodies:
1. The House of Representatives.
2. The Senate

As mandated by the Constitution, a tax bill must

originate from the House of Representatives.
Each may, however have their own versions of a
proposed law, which is approved by both bodies,
but tax bills cannot originate exclusively from the
Senate.
 Matters of legislative discretion in the exercise of taxation

1. Determining the object of taxation

2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which must
be for public purpose
4. Kind of tax to be imposed
5. Apportionment of the tax between the national
and local government
6. Situs of taxation
7. Method of Collection
Assessment and Collection

The tax law is implemented by the administrative

branch of the government. Implementation
involves assessment or the determination of the
tax liabilities of taxpayers and collection. This
stage is referred to as incidence of taxation or
the administrative act of taxation.
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.
Examples of Situs Rules:
1. Business tax situs: Businesses are subject to
tax in the place where the business is
conducted.
Illustration
A taxpayer is involved in car dealership abroad
and restaurant operation in the Philippines.
The restaurant business will be subject to
business tax in the Philippines since the
business is conducted herein, but the car
dealing business is exempt because the
business is conducted abroad.
Examples of Situs Rules:
2. Income tax situs on services: Service fees are
subject to tax where they are rendered
Illustration
A foreign corporation leases a residential
space to a non-resident Filipino citizen abroad.

The rent income will be exempt from

Philippine taxation as the leasing service is
rendered abroad.
Examples of Situs Rules:
3. Income tax situs on sale of goods: The gain on sale is
subject to tax in the place of sale
Illustration
While in China, a non-resident OFW citizen agreed
with a Chinese friend to sell his diamond necklace to
the latter. They stipulated that the delivery of the item
and the payment will be made a week later in the
Philippines. The sale was consummated as agreed.
The contract of sale is consensual and is perfected by
the meeting of the mind of the contracting parties. The
perfection of the contract of sale is in China. The situs
of taxation is China. The gain on sale of the necklace
will be taxable abroad and exempt in the Philippines.
Examples of Situs Rules:
4. Property tax situs:Properties are taxable in their
location
Illustration
An overseas Filipino worker has a residential lot in the
Philippines.

He will still pay real property tax despite his absence

in the Philippines because his property is located
therein.
Examples of Situs Rules:
5. Personal tax situs:Persons are taxable in their place of
residence.
Illustration
Ahmed Lofti is a Sudanese studying medicine in the
Philippines.

Ahmed will pay personal tax in the Philippines even if

he is an alien because he is residing in the
Philippines.
Other Fundamental Doctrines in Taxation
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 be used to
discourage or prohibit undesirable activities or
occupation. As such, taxation power carries with it the
power to destroy.
However, the taxation power does not include the
power to destroy if it is used solely for the purpose of
raising revenue.
Other Fundamental Doctrines in Taxation
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.
While the Marshall Doctrine and the Holme’s Doctrine
appear to contradict each other, both are actually
employed in practice. A good manifestation of the
Marshall Doctrine is the imposition of excessive tax on
cigarettes while applications of the Holme’s Doctrine
include the creation of Ecozones with tax holidays and
provision of incentives, such as the Omnibus
Investment Code and the Barangay Micro-Business
Enterprise Law.
Other Fundamental Doctrines in Taxation
4. Non-compensation or set off
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.
Exceptions:
a. Where the taxpayer’s claim has already become due and
demandable such as when the government already
recognized the same and an appropriation for refund was
made.
b. Cases of obvious overpayment of taxes
c. Local taxes
Other Fundamental Doctrines in Taxation
5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to
another entity by contract. Contracts executed by the
taxpayer to such effect shall not prejudice the right of the
government to collect.
Other Fundamental Doctrines in Taxation
6. Imprescriptibility in Taxation
Prescription is the lapsing of a right due to the passage of
time. When one sleep 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.

Under the NIRC, tax prescribes if not collected within 5

years from the date of its assessment. In the absence of
assessment, tax prescribes if not collected by the judicial
action within 3 years from the date the return is required to
be filed. However, taxes due from taxpayers who did not
file a return or those who filed fraudulent returns do not
prescribe.
Other Fundamental Doctrines in Taxation
7. Doctrine of estoppel
Under the doctrine of estoppels, 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 the misrepresentation.

The government is not subject to estoppels. The error of

any government employee does not bind the government.
It is held that the neglect or omission of government official
entrusted with the collection of taxes should not be allowed
to bring harm or detriment to the interest of the people.
Also, erroneous application of the law by public officers do
not block subsequent correct application of the same.
Other Fundamental Doctrines in Taxation
8. Judicial Non-interference
Generally, courts are not allowed to issue injunction against
the government pursuit to collect tax as this would
unnecessarily defer tax collection. This rule is anchored on
the lifeblood theory.
Other Fundamental Doctrines in Taxation
9. Strict Construction of Tax Laws
When the law clearly provides for 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 on strict legal construction is observed.
Vague tax laws
Vague tax laws are construed against the government and in
favor of the taxpayers. A vague tax law means no tax law.
Obligation arising from law not presumed. The
Constitutional requirement of due process requires laws to
be sufficiently clear and expressed in their provisions.
Vague exemption laws
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.
The right taxation is inherent to the State. It is prerogative
essential to the perpetuity of the government. He who
claims exemption from the common burden must justify his
claim by the clearest grant of organic statute or law.
When exemption is claimed, it must be shown indubitably
to exist. At the outset, every presumption is against it. A
well-founded doubt is fatal to the claim: it is only when the
terms of the concession are too explicit to admit fairly of
any other construction that the proposition can be
supported.
Double Taxation
Double taxation occurs when the same
taxpayer taxed twice by the same tax
jurisdiction for the same thing.
Elements of double taxation
1. Primary element: Same object
2. Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
Types of Double Taxation
1. Direct double taxation
This occurs when all the element of double
taxation exists for both impositions
Examples:
a. Income tax of 10% on monthly sales and a
2% income tax on the annual sales (total of
monthly sales)
b. A 5% tax on bank reserve deficiency and
another 1% penalty per day as a consequence
of such reserve deficiency
Types of Double Taxation
2. Indirect double taxation
This occurs when at least one of the secondary elements of
double taxation is not common for both impositions.
Examples:
The national government levies business tax on the sales
or gross receipts of business while local government levies
business tax upon the same sales or receipts.
The national government collects income tax from a
taxpayer on his income while the local government collects
community tax upon the same income.
The Philippine government taxes foreign incomes of
domestic corporations and resident citizens while a foreign
government also taxes the same income.
Types of Double Taxation
2. Indirect double taxation
This occurs when at least one of the secondary elements of
double taxation is not common for both impositions.
Examples:
The national government levies business tax on the sales
or gross receipts of business while local government levies
business tax upon the same sales or receipts.
The national government collects income tax from a
taxpayer on his income while the local government collects
community tax upon the same income.
The Philippine government taxes foreign incomes of
domestic corporations and resident citizens while a foreign
government also taxes the same income.
How can double taxation be minimized?
The impact of double taxation can be minimized by
any one or a combination of the following:
a. Provision of tax exemption
b. Allowing foreign tax credit (deduction for taxes paid
abroad)
c. Allowing reciprocal tax treatment between the home
country and a foreign country
d. Entering into treaties or bilateral agreements
Escapes from taxation
Escapes from taxation are the means
available to the taxpayer to limit or avoid the
impact of taxation
Categories of Escapes from Taxation
a. Those that result to loss of government revenue
Tax Evasion (Tax dodging) – any act or trick that tends to illegally
reduce or avoid the payment of tax.

Tax Avoidance (Tax Minimization) – any act or trick that reduces or

totally escapes taxes by any legally permissible means.

Tax Exemption (Tax Holiday) – immunity or privilege or freedom

from being subject to tax which others are subject to. It may be
granted by the constitution, law, or contract.
Example: PEZA-registered entities
Categories of Escapes from Taxation
b. Those that do not result to loss of government revenue
Shifting- This is the process of transferring tax burden to other
taxpayers.
Forms of shifting
1. Forward shifting- this is the shifting which follows the normal
distribution (i.e. from manufacturers to, wholesalers, retailers to
consumers.)
2. Backward shifting- this is the reverse of forward shifting.
Backward shifting is common with non-essential commodities
where buyers have considerable market power and commodities
with numerous substitute products.
3. Onward shifting- This refers to any tax shifting in the distribution
channel that exhibits forward shifting or backward shifting.

Shifting is common with business taxes where taxes imposed on

business revenue can be shifted or passed-on to customers.
Categories of Escapes from Taxation
2. Capitalization- This pertains to the adjustment of the value of an
asset caused by changes in tax rates.

For instance, the value of a mining property will correspondingly

decrease when mining output is subjected to higher taxes. This is
a form of backward shifting of tax.

3. Transformation- this pertains to the elimination of wastes or losses

by the taxpayer to form savings to compensate for the tax
imposition or increase in taxes.
Tax amnesty
Amnesty is a general pardon granted by the
government for erring taxpayers to give them
a chance to reform and enable them to have a
fresh start to be part of a society with clean
state. It is an absolute forgiveness or waiver
by the government on its right to collect and is
retrospective in application.