TAXATION

TAX-1401.Basic Principles of Taxation

LECTURE NOTES

BASIC PRINCIPLES OF MODERN TAXATION Courts cannot inquire into the wisdom of a taxing act.
A. Define Taxation Courts can only review the legality of the tax based on
1. As a state power: Taxation refers to the inherent the constitutional as well as inherent limitations and
power of a sovereign state acting through its other applicable laws.
legislature to impose a proportionate burden upon
persons, property rights or transaction to raise
revenue to support government expenditure and H. Sources of tax laws:
as a tool for general and economic welfare. 1.
2. As a process: Taxation refers to the act of 2.
imposing a tax by a sovereign state to raise 3.
revenue for government expenses. 4.
5.
B. What are the PURPOSES of taxation?
1. Primary purposes to raise funds for the expenses I. Construction and application of tax laws
of the government: (also called Revenue 1.
Purpose)
2. Secondary purpose: as a tool for general social
and economic welfare (also called 2.
Regulatory/sumptuary/Compensatory purpose)

C. Give the NATURE or CHARACTERISTICS of the J. What are the three inherent powers of the state?
taxing power 1.
1. It is inherent power of a sovereign state – being 2.
inherent in sovereignty, the state has the power to 3.
tax even if not expressly granted by the
constitution. J-1. Give the similarities and distinctions of Taxation,
2. It is legislative in character – taxation in generally Police Power and Power of Eminent Domain.
exercised by the lawmaking body of a state. Three inherent powers of a state:
3. It is subject to inherent and constitutional 1. Power of Taxation – refer to letter A
limitations. 2. Power of Eminent Domain – it refers to the
inherent power of a sovereign state to take private
D. What is SCOPE of the power of taxation? property for public use upon payment of a just
In the absence of inherent and constitutional compensation.
limitations, the power to tax is comprehensive & 3. Police Power – it refers to the inherent power of a
unlimited. As a rule, the state thru the congress can sovereign state to enact laws to promote public
tax any thing at any time and at any amount. health, public safety, public morals and the
1. Subject matter of the tax. common good.
2. Situs of taxation.
3. Purpose of the tax. SIMILARITIES:
4. Amount or rate of tax 1. They are indispensable to government existence.
5. Method of collection / Importance of Taxation 2. They can exist independent of the constitution.
3. They are the means by which the state interferes
E. Where does the power of taxation proceed from? with private rights and properties.
It proceeds from the necessity of the existence of the 4. They are generally exercised by the legislature.
government, and since it exists for the People, it can 5. They contemplate an equivalent compensation or
compel them to pay taxes. benefit.

F. What is the basis of taxation?

The reciprocal obligation of protection and support K. What are the forms of avoiding a tax (tax escape)?
between the state and its citizens. In Return for the 1.
protection provided by the state, the people pay taxes. 2.
Benefit-Protection Theory. 3.
4.
G. Power of judicial REVIEW/ROLE OF COURTS IN 5.
TAX CASES (CTA & SC)

The only thing that stands between a man and what he wants from life is often merely the Will to try it and the FAITH
to believe that it is possible. R. Devos

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DISTINCTIONS: f. Exemption of religious, charitable, educational
entities, non-profit cemeteries and churches
Taxat Eminent Poli from property taxation.
ion Domain ce Power g. Exemption from taxation of non-stock, non-
1. As to Imposed Imposed upon Imposed profit educational institutions and donations for
subject upon private upon educational purposes.
persons, real persons, h. Concurrence by a majority of the members of
property, properties property, Congress for passage of a law granting tax
rights or rights or exemption.
transaction transaction i. The power of the President to veto a revenue
2. As to To raise To acquire For or tariff bill.
purpose revenue for private regulation j. Non-impairment of the jurisdiction of Supreme
government property for and Court in tax cases.
expenses public control 3. Contractual limitations – these are restrictions
use on the taxing power imposed by previously
3. As to Generally Limited to the Limited to existing contracts entered into by the
limitation unlimited fair the cost of government with another party who may be
value of the license fee another state or its own citizens.
expenses and other
of regulation property N. Give the steps/stages involved under taxation
control system.
4. As to act Taxpayers Private Enforcemen 1st : Imposition of taxes
involved pays taxes property is t of laws for 2nd : Collection of taxes
taken for public a. Assessment
public use welfare and b. Actual tax collection
common c. Enforcement of tax laws/criminal prosecution for
good wilful violation of tax laws
5. As to Protection & Person Protection & 3rd: Payment of taxes
benefits other receives a other
receiv benefits from just benefits O. Define TAXES
ed by the the compensation from the Taxes are enforced proportional contributions levied by
people government government the state for the support of the government
6. As to Inferior Superior Superior
relationship
to non– P. What are the essential characteristics, requisites
impairment or elements of a tax?
clause of
the Q. CLASSIFICATION of taxes
constitut 1. What are the kinds of taxes as to subject matter?
ion a. Personal, poll or capitation tax – tax imposed on
persons residing within a specific territory.
L. Enumerate and briefly define the Example: Basic Community Tax
principles/characteristics of a SOUND TAX b. Property tax – tax imposed on property, whether
SYSTEM real or personal.
1. Example: Real estate tax
2. c. Excise tax – tax imposed on the exercise of a right
3. or privilege. Also called “Privilege tax”
4. Example: Income tax, estate tax, donor’s tax, etc.,

M. What are the limitations on the power of 2. What are the kinds of taxes as to who bears the
taxation? burden?
1. Inherent limitations – those that restrict the power a. Direct tax – tax imposed upon a person who is
of taxation even though not provided in the directly bound to pay it; tax which the taxpayer
constitution. cannot shift to another.
a. Taxes must be for public purpose. Example: Income tax, estate tax, donor’s tax
b. Exemption of government agencies and b. Indirect tax – tax which forms part of the purchase
instrumentalities from taxation. price; tax which the taxpayer can shift to another.
c. Power to tax cannot be delegated to private Example: Excise tax on certain goods, other
persons or entities. percentage taxes, value added tax
d. Tax laws do not apply to properties of foreign 3. What are the kinds of taxes as to determination of
government. amount?
e. Tax laws should be applied within the territorial a. Specific tax – tax based on weight, number or
jurisdiction of the state. some other standards of weight or
f. Double taxation should be avoided. measurement.
2. Constitutional limitations – those that limit the Example: Excise tax on distilled spirits, wines,
power of taxation as embodied in the constitution. cinematographic films
a. Due process of law in taxation and equal b. Advalorem tax – tax imposed based on the value
protection of the laws. of the taxable item.
b. Rule on uniformity and equity in taxation. Example: Real estate tax
c. No imprisonment for non-payment of poll tax. 4. What are the kinds of taxes as to purpose?
d. Non-impairment of the obligation of contracts. a. General tax – tax imposed for general
e. No appropriation of public money for religious purposes of the government.
purposes. Example: Income tax, value added tax

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b. Specific tax – tax imposed for a special a. Proportional tax – the tax rate of which is fixed
purpose or purposes. or constant.
Example: Protective tariff and customs duties, Example: Corporate Income Tax, value added
Special Educational Fund (SEF) Tax, tax
Special Assessments b. Progressive tax – the tax rate increases as the
5. What are the kinds of taxes as to jurisdiction/scope taxable amount or tax bracket increases.
or authority imposing tax? Example: Individual income tax, estate tax,
a. National tax –tax imposed on a national and donor’s tax
for the national government. c. Regressive tax – the tax rate decreases as the
Example: National Internal Revenue taxes taxable amount or tax bracket increases.
b. Local tax – tax imposed on a local level for the We have no regressive tax in the Philippines.
support of local governments.
6. What are the kinds of taxes as to graduation or
rate?

R. Tax distinguished from OTHER CHARGES and FEES

1. Differentiate tax from toll
TAX TOLL
a. Demand of sovereignty Demand of proprietorship
b. Generally amount is unlimited Amount is limited to the cost and
maintenance of public improvement.
c. For the support of the government For the use of another’s property
d. May be imposed by the State only May be imposed by private individuals or entities

2. Differentiate tax from special assessment

TAX SPECIAL ASSESSMENT
a. Imposed on persons, property rights Levied only on lands
or transactions
b. For the support of the government Contribution to the cost of public improvement
c. Regular exaction Exceptional as to time and place

3. Differentiate tax from license fee

TAX LICENSE FEE
a. Imposed to raise revenue For regulation and control
b. Collected under the power Collected under the police power
of government
c. Generally amount is unlimited Limited to the necessary expenses of
regulation and control
d. Imposed on persons, property, Imposed on the exercise of a right or
rights or transaction privilege
e. Non-payment does not make the Non –payment makes the business illegal business illegal

4. Differentiate tax from penalty

TAX PENALTY
a. Imposed to raise revenue Imposed to regulate conduct
b. May be imposed by the May be imposed by the private entity
State only

5. Differentiate tax from custom’s duty

TAX CUSTOM’S DUTY
a. Imposed upon persons, property, Imposed on imported or
rights or transactions exported goods
b. It comprehends more than the It is also a tax
term custom’s duty

6. Differentiate tax from debt

TAX DEBT
a. Based on law Based on Contract
b. Not assignable Assignable
c. Payable in money Payable in kind or in money
d. Not subject to set-off Subject to set-off
e. Non-payment may result to No imprisonment (except when
imprisonment debt arises from crime)
f. Bears interest only if Interest depend upon the
delinquent stipulation of the parties.

7. Differentiate tax from tithe

TAX TITHE
a. Based on law Based on religious obligation
b. Rates vary fixed at 10% of one’s earning

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z

S. Tax Administration deductions and subject to only one or

It is a system involving assessment, collection and single rate.
enforcement of taxes, including the execution of judgment
in all tax cases decided in favor of the BIR by the courts. True or False: In each of the following, write:
A. If only the first statement is correct.
T. Powers and duties of the BIR B. If only the second statement is correct.
1. Assessment and collection of all national internal C. If both statements are correct.
revenue taxes, fees and chargers D. If both statements are incorrect.
2. Enforcement of all forfeitures, penalties and fines
connected therewith 21. a. A person may refuse to pay a tax on the ground
3. Execution of judgement in all cases decided in its that he receives no personal benefit from it.
favor by CTA and ordinary courts b. Any citizen has a legal right to question illegal
4. Give effect to and administer the supervisory and expenditures of public funds.
police power conferred to it by the NIRC or other 22. a. One of the essential characteristics of a tax is it is
laws. unlimited in amount..
b. A tax is generally unlimited because it is based on
U. Official of the BIR the needs of the state.
The BIR shall have a chief to be known as Commissioner of 23. a. A License Fee is a charge imposed under the power
internal revenue and four assistant chiefs to be known as of the taxation.
Deputy Commissioners. b. Special assessment is regular exaction.
24. a. Imposition of taxes is the first step in stages of
I. GENERAL PRINCIPLES / taxation.
EXERCISES b. Collection of taxes is a legislative act.
A. Identification 25. a. A state has the power to tax even if not granted by
_________1. The overall administrative and judicial the Constitution.
machinery in the determination and b. A state cannot exercise police power if not granted
collection of taxes. by the Constitution.
_________2. The laws which enumerate the national 26. a. There can only be a tax if there is a law imposing
taxes and its collection or enforcement. the tax.
_________3. A system where the tax increases as the b. Non delegation rule is absolute.
income of the taxpayer increases. 27. a. A tax is based on law while debt is based on
_________4. Any income derived by the government contract.
whether from tax or other sources. b. A tax is also a custom’s duty.
_________5. Limitations on the power of taxation not 28. a. A person cannot be imprisoned for non-payment of
found in the constitution. a tax.
_________6. Under this specific limitation, properties of b. A tax may be passed violating uniformity of
foreign government are exempted from taxation.
taxation. 29. a. The RDO is known as the alter ego of the BIR
_________7. The theory that justifies the necessity of Commissioner.
taxation. b. The BIR Commissioner is directly under the
_________8. The theory that emphasizes the President’s Office.
relationship between state and its 30. a. Provisions in the Philippine Constitution on
inhabitants. Taxation are grants of power.
_________9. The theory under the canons of taxation b. Due process of law in taxation in the Constitution
which emphasizes on the economic is a grant of power.
aspect of taxation. 31. a. An excise tax is also called privilege tax.
_________10. It also means characteristics of a sound b. A tax which is neither personal or property is an
taxation system. excise tax.
_________11. It means taxes should be based on the 32. a. The power or jurisdiction of court of tax appeals
taxpayer’s ability to pay and benefits over tax cases cannot be impaired.
received. b. Equal protection clause is a direct limitation on the
_________12. It means taxable items of the same class power of taxation.
should be taxed at the same rate. 33. a. Taxation without representation is tyranny.
_________13. Refers to the taxes imposed by the b. In the exercise of taxation, the state can tax
legislature other than duties on imports anything at anytime and at any amount.
and exports. 34. a. Taxation and power of Eminent Domain may be
_________14. It refers to the National Internal Revenue exercised simultaneously.
Code. b. Taxation and Police Power may be exercised
_________15. A taxation system wherein a taxpayer is simultaneously.
not entitled to claim any deduction. 35. a. All of our tax laws are statutory laws.
_________16. A principle which prohibits the delegation b. The non-impairment clause is a statutory law on
of a taxing power which has already been taxation.
delegated. 36. a. Non-payment of tax makes the business illegal.
_________ 17. A form of tax escape by transferring the b. The non-payment of license fee makes the business
burden of taxation to another. illegal.
_________ 18. A form of tax escape through illegal 37. a. Margin fee is a tax.
means. b. Custom’s duty is a tax.
_________ 19. A form of tax escape through permissible 38. a. Territoriality is one of the constitutional limitations
or legal means. on the power of taxation.
_________ 20. A taxation system wherein all income of a b. International comity is an inherent limitation in
taxpayer are added together less related taxation.

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39. a. Taxes may be used for sectarian purposes also if b. All exist independently of the Constitution
allowed by an ordinance. c. All contemplate and equivalent benefit
b. The President can refuse to implement a tax law if d. All are superior to the non-impairment clause of
it appears to be unconstitutional. the Constitution

40. a. There can be double taxation in the Philippines. 55. Below are characteristics of a sound taxation system,
b. Inherent limitations prevail over constitutional ones. EXCEPT:
41. a. A progressive system of taxation means a tax a. Administrative feasibility and compliance
structure where the tax base decreases as the tax rate b. Fiscal Adequacy
increases. c. Theoretical Justice or equality
b. Tax exemption is a grant of immunity to a particular d. Uniformity of taxation
taxpayer from tax where others are obliged to pay.
42. a. Tax avoidance is a form of tax escape that is 56. It refers to a fraudulent act of minimizing taxes.
illegal. a. Tax avoidance c. Tax minimization
b. Tax evasion is not punishable. b. Tax evasion d. Multiple taxation
43. a. Taxation includes the power to destroy always.
b. Taxation can modify an existing contract. 57. One of the following is NOT an inherent limitation:
44. a. A tax may be subjected to set-off or compensation. a. Taxes must be for public purposes
b. A tax ordinarily includes interest. b. Equality in Taxation
45. a. A tax bill normally embraces more than one c. Territoriality rule
subject. d. Rule on double taxation
b. Tax bills may come from either Senate or Lower
House if certified by the President. 58. All of the following are exceptions to the territoriality
doctrine which is not?
C. Multiple Choice: In each of the following, choose a. In case of taxation of resident or citizens of the
the best answer. Philippines.
46. All are characteristics of the power of taxation, b. If provided under a treaty obligation.
EXCEPT: c. In case of International Comity.
a. It is an inherent power. d. In case of International organizations.
b. It is a legislative in character.
c. It is civil in character. 59. Taxation is equitable in all of the following, EXCEPT:
d. It is subject to inherent and constitutional a. Its burden falls on those better to pay.
limitations. b. It is based on ability to pay.
47. Our tax laws are: c. It is based on benefits received.
a. Political in nature c. Penal in nature. d. It is based on uniformity rule.
b. Civil in nature d. Social in nature.
60. The only tax where non-payment of which will not
48. Also known as tax administration result to imprisonment:
a. Collection of taxes c. Payment of taxes a. Excise tax c. Personal tax
b. Levying of taxes. d. Incidence of taxation b. Donor’s tax d. Property tax
49. Taxation is an inherent power because:
61. All are privilage tax under the Tax Codeexcept:
a. It is the life blood of the government.
a. Income tax
b. Protection and benefit theory.
b. Donor’s tax
c. It co-exists with the existence of the state.
c. Excise tax on certain goods
d. It is exercised for the general welfare of the
d. Estate tax
people.
50. All are essential characteristics of a tax, EXCEPT: 62. One of the following can be BOTH a progressive tax
a. It is an enforced contribution. and a proportional tax:
b. It is generally unlimited in amount. a. Donor’s tax
c. It is generally payable in money. b. Basic Income tax on individuals
d. It is a proportionate burden. c. Both a and b
d. Estate tax
51. A tax is invalid in the following cases, EXCEPT:
a. Theory of taxation and its purpose are disregarded. 63. A tax which is BOTH under taxation and Police Power:
b. Basis of taxation is not recognized. a. Compensatory Tax c. National Tax
c. Inherent and constitutional limitations are not b. Regulatory Tax d. General Tax
observed.
d. It results to double taxation. 64. A demand of Proprietorship:
a. Tax c. Toll
52. All are secondary purposes of taxation, EXCEPT: b. Special Assessment d. License Fee
a. Sumptuary purpose c. Compensatory purpose
b. Regulatory purpose d. Revenue purpose 65. Levied only on lands:
a. Tax c. Toll
53. In the absence of inherent and constitutional b. Special Assessment d. License Fee
limitation, the power of tax is:
a. Comprehensive, unlimited and plenary 66. A proportional tax:
b. Unlimited and plenary a. Individual income tax c. Donor’s tax
c. Broad and penal b. Corporate income tax d. Estate tax
d. Unlimited and political

54. All are similarities of taxation, police power, and power 67. Imposed to regulate conduct as a sanction:
of eminent domain, EXCEPT: a. Tax c. Penalty
a. All are necessary attributes of the Constitution b. Toll d. License fee

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80. Which of the following is not a scheme of shifting the
68. All are excise taxes as to subject matter except: incidence of taxation?
a. Real estate tax a. The manufacturer transfer the tax to the consumer
b. Income tax by adding the tax to the selling price of the goods
c. Excise tax on wine sold;
d. Excise tax on cinematographic films b. The tax forms part of the purchase price;
69. One of the following is NOT a source of our tax laws: c. Changing the terms of the sale like FOB shipping
a. Administrative rulings and opinions point in the Philippines to FOB destination abroad,
b. Judicial decisions so that the title passes abroad instead of in the
c. 1987 Constitution Philippines.
d. Expert Opinion on Taxation d. The manufacturer transfer the sales tax to the
70. The government may not do all except one: distributor, then in turn to the wholesaler, in turn
a. Tax itself to the retailer and finally to the consumer.
b. Delegate its power to tax to private agencies
c. Impose tax arbitrarily 81. In case of conflict between the tax code and generally
d. Disregard uniformity in taxation accepted accounting principles (GAAP):
a. Both tax codes and GAAP shall be enforced;
71. A form of tax escape through which one is given tax b. GAAP shall prevail over tax code;
immunity wherein others are subjected to tax: c. Tax code shall prevail over GAAP;
a. Shifting c. Tax exemption d. The issue shall be resolved by the courts.
b. Tax immunity d. Tax avoidance
82. Which of the following statements is not correct?
72. A form of tax escape by a manufacturer or producer a. Taxes may be imposed to raise revenues or to
who improves his proceeds of production thereby regulate certain activities within the state;
minimizing his unit production cost: b. The state can have the power of taxation even if
a. Tax avoidance c. Transformation the Constitution does not expressly give it the
b. Capitalization d. Shifting power to tax;
c. For the exercise of the power of taxation, the state
73. A waiver by the government’s right to collect tax: can tax anything at any time;
a. Tax exemption c. Tax avoidance d. The provisions of taxation in the Philippines
b. Tax amnesty d. Tax evasion Constitution are grants of power and not
limitations on taxing powers.
74. A tax imposed based on the number:
a. Income Tax c. Advalorem Tax 83. Tax as distinguished from license fee:
b. Specific Tax d. Custom’s Duties a. Non-payment does not necessary render the
business illegal;
75. The theory which most justifies the necessity of b. A regulatory measure;
taxation: c. Imposed in the exercise of police power;
a. Protection and benefits theory d. Limited to cover cost of regulation.
b. Revenue purposes theory
c. Lifeblood theory 84. Value-added tax is an example of:
d. Ability to pay theory a. Graduated tax;
b. Progressive tax;
76. One of the characteristics of internal revenue laws is c. Regressive tax;
that they are: d. Proportional tax.
a. Criminal in nature
b. Penal in nature 85.Which statement refers to police power as distinguished
c. Political in nature from taxation?
d. Generally prospective in application a. It can only be imposed on specific property or
properties;
77. Which of the following is not example of excise tax: b. The amount imposed depends on whether the
a. Transfer tax c. Real property tax activity is useful or not;
b. Sales tax d. Income tax c. It involves the taking of property by the
government;
78. The following are similarities of the inherent power of d. The amount imposed has no limit.
taxation, eminent domain, and police power, except
one: 86. 1st Statement – Tax exemptions are strictly construed
a. Are necessary attributes of sovereignty against the government.
b. Interfere with private rights and property 2nd Statement – When the tax law is not clear and
c. Superior to the non-impairment clause there is doubt whether he is taxable or not, the doubt
d. Are legislative in character. shall be settled against the government.
a. Only the first statement is correct.
79. The power of taxation is inherent in sovereignty being b. Only the second statement is correct.
essential to the existence of every government. Hence, c. Both statements are correct.
even if not mentioned in the Constitution the state can d. Both statements are incorrect.
sill exercise the power. It is essentially a legislative
function. Even in the absence of any constitutional 87. 1st Statement – The income from bank deposit of a
provision, taxation power fails to Congress as part of Tax-exempt Catholic Church is taxable.
the general power of law-making. 2nd Statement – Donations for educational purposes
a. False; False c. True; True are tax exempt under the NIRC.
b. False; True d. True; False a. True; False c. True; True
b. False; True d. False; False

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88. 1st Statement – Tax imposed outside the situs of b. False, False d. True, False
Taxation is voidable.
2nd Statement – International Comity is an exception to 95. 1st Statement To be exempt from taxation under the
the territoriality doctrine. Constitution land & buildings must be exclusively and
a. True; False c. True; True actually used for religious, educational or charitable
b. False; True d. False; False purpose, even if not directly.
2nd Statement Exemptions of non-profit schools are
89. Imposed based on the control & superiority of one only limited to revenue and assets derived from strictly
country over another: school operations.
a. TITHE a. True, True c. False, True
b. TAX b. False, False d. True, False
c. TRIBUTE
d. TOLL 96. 1st Statement A taxpayer’s tax exempt status justifies
the non-keeping of books of accounts & other
90. Imposed based on religious obligation: accounting records.
a. TITHE c. TRIBUTE 2nd Statement Fiscal tax and regulatory tax are the
b. TAX d. TOLL same.
a. True, True c. False, True
91. Taxes are: b. False, False d. True, False
a. Retroactive
b. Prospective 97. 1st Statement Our Civil Code prevails over the Tax
c. Generally proportional Code.
d. Personal to the taxpayer 2nd Statement Tax regulations promulgated by the
Secretary of Finance need not be published in a
92. 1st Statement Government owned and controlled newspaper of general circulation.
corporation are exempt from tax. a. True, True c. False, True
2nd Statement Tax liabilities of a corporation will not b. False, False d. True, False
extend to the stockholders as a rule.
a. True, True c. False, True 98. Our tax laws are both:
b. False, False d. True, False a. Progressive and prospective
b. Civil and prospective
93. All are objectives of taxation except: c. Penal and regulatory
a. Revenue purpose d. Personal and regulatory
b. Regulation
c. Increase of social inequity 99. All are indirect constitutional limitations except:
d. Encourage economic growth a. Non imprisonment for non-payment of poll tax
b. Due process clause
94. 1st Statement Courts can review or inquire into the c. Equal protection clause
wisdom or advisability of a tax law under the Power of d. Religions freedom
Judicial Review in Taxation
2nd Statement Our constitution does not contain any 100. All are sources of Public Revenues except:
provision granting tax exemption to the provision a. Grants and Foreign aids
granting tax exemption to the government. b. Administrative revenues
a. True, True c. False, True c. Commercial revenues
d. Taxes and tithes

“Whatever the mind of man can conceive and believe, it can achieve”
(Napolen Hill’s Law of Success)

- All things whatsoever you pray and ask for, believe that you have received them, and
you shall receive them” . (Mark 11:24, Holy Bible)

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