Income Taxation

Basic Principles of Taxation

INHERENT POWERS OF THE STATE

1. Power of taxation – The power by which the sovereign raises revenue to defray the necessary
expenses of the government. It is the life and strength of the government because no government
can survive without it.

2. Power of Eminent Domain – The power of the State or those to whom the power has been
delegated to take private property for public use upon paying the owners a just compensation to be
ascertained according to law. It is also known as expropriation.

3. Police Power – The power of the State to enact such laws in relation to persons and property as may
promote public health, public morals, public safety and general welfare of the people.

Similarities of the Power of Taxation, Eminent Domain, and Police Power

1. They are inherent in every government.

2. They exist independently of the constitution.
3. They constitute the three ways by which the state interferes with private rights and properties.
4. They are legislative in nature and character.
5. Each presupposes an equivalent compensation.

Distinction Among the Three Inherent Powers of the State

a. As to Authority Which Exercises the Power

Taxation  Government only
Police Power  Government only
Eminent Domain  Government or public service companies and public utilities

b. As to Purpose
Taxation  The property (generally in money) is taken for the support of the
government.
Police Power  The property is taken or destroyed to promote the general welfare
Eminent Domain  The property is taken for public purpose.

c. As to Persons Affected
Taxation  Upon community or class of individuals.
Police Power  Upon community or class of individuals.
Eminent Domain  On an individual as the owner of a particular property..

d. As to Effect
Taxation  The money contributed becomes part of the public fund
Police Power  No transfer of title, at most there is restraint on the injurious use of property
Eminent Domain  There is transfer of the right of property whether it be of ownership or a
lesser right.

e. As to Benefits Received
Taxation  It is assumed that the individual receives the equivalent of the tax in the
form of protection and benefit he receives from the Government as such
Police Power  The person affected receives no direct and immediate benefit but only such
as may arise from the maintenance of a healthy economic standard of
society, often referred to as damnum absque injuria (damage without
injury).
Eminent Domain  The person receives payment (FMV) for the property taken.

f. As to Amount of Imposition
Taxation  Generally no limit
Police Power  The amount should be sufficient to cover the cost of the license and for the
maintenance of regulation.
Eminent Domain  There is no imposition. The owner is paid the FMV of his property.

1 | Page Prof. Rodison E. De Guia

Income Taxation Basic Principles of taxation

g. As to Relation to the Impairment Clause of the Constitution

Taxation  Inferior to Impairment Clause of the Constitution
Police Power  Superior to Impairment Clause of the Constitution
Eminent Domain  Inferior to Impairment Clause of the Constitution

h. As to the Authority Exercising the Power

Taxation  Government
Police Power  Government
Eminent Domain  Government and private persons performing public functions if the power is
granted by law.

Taxation – the act of laying a tax. The process or means by which the sovereign, through its lawmaking
body, raises income to defray the necessary expenses of government. It imposes a levy upon persons,
properties, and property rights for purposes of raising revenue to support the necessary expenses of the
government.

Purposes of Taxation

1. Primary or Principal Purpose – to raise revenue for governmental needs. This is also called revenue
purpose.

2. Secondary Purposes
a. Compensatory Purposes:
i. To reduce excessive inequalities of wealth
ii. To maintain high level of employment
iii. To control inflation

3. Sumptuary or Regulatory purpose – to implement the police power of the State to promote the general
welfare.

Theory of Taxation - the power of taxation proceeds upon the theory that existence of the government is a
necessity, that it cannot continue without means to pay its expenses and that for this means it has a right to
compel all its citizens and property within its limits to contribute.

Basis of Taxation – the basis is the reciprocal duties of protection and support between the State and its
inhabitants. The State collects taxes from the subjects of taxation in order that it may be able to perform the
functions of government. The citizens on the other hand, pay taxes in order that they may be secured in the
enjoyment of the benefits of organized society (benefits-received theory).

Lifeblood Theory
1. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious
(expecting obedience) need.
2. Upon taxation depends the government’s ability to serve the people for whose benefit taxes are
collected.
3. Manifestation of lifeblood theory
a. Imposition of tax even in the absence of Constitutional grant.
b. Right to select objects of taxation
c. No injunction to enjoin or stop tax collection.

Scope of the Power of Taxation – the power of taxation is comprehensive, plenary, unlimited and
supreme. This power is however, subject to inherent and constitutional limitations.

Characteristics or Nature of the Power of Taxation

1. It is inherent in sovereignty; hence, it may be exercises although not expressly granted by the
Constitution.
2. It is legislative in character.
3. It is subject to Constitutional and inherent limitations.

Phases/Aspects/Stages/Processes of Taxation
1. Levying or imposition of tax which is a legislative act.
2. Collection of the tax levied which is essentially administrative in character.
2 | Page Prof. Rodison E. De Guia
Income Taxation Basic Principles of taxation
Canon of Taxation or the Basic Principles of a Sound Tax System
1. Fiscal Adequacy – this means that the sources of revenue should be sufficient to meet the demands of
public expenditures.

2. Administrative Feasibility which demands that the tax system must be clear to the taxpayers, rules
reasonably enforceable, is convenient and not burdensome or discouraging to a business activity. This
means that the laws should be capable of convenient, just and effective administration.

3. Consistency or compatibility with economic goals which necessitates that the law should be consistent
with the economic goals of the estate.

4. Equality & Theoretical Justice (Ability to Pay Principle) – It refers to the uniformity of the application of
tax laws and the imposition of taxes based on the relative ability of taxpayers to shoulder the burden
which are primarily made to depend on the level of the taxable basis and the proportionate benefits
they receive from the maintenance of an orderly society..

LIMITATION ON THE POWER OF TAXATION

The power of taxation is constrained by its inherent, constitutional, and contractual limitations.
Inherent limitations are those which restrict the power although they are not embodied in the Constitution
nor expressly provided in the contract. Constitutional limitations are those which are expressly found in
the Constitution. Contractual limitations refer to restrictions on the taxing power imposed by previously
existing contracts entered into by the government with another party who may be another state or its own
citizens.

Inherent Limitations

1. It must be for Public Purpose. This is the purpose affecting the inhabitants of the State as a
community and not merely as individuals.

a. The best test of rightful taxation is that the proceeds of the tax must be used for the support of the
government, for any of the recognized objects of government or to promote the welfare of the
community.
b. A tax levied for private purposes constitutes taking of property without due process of law as it is
beyond the power of the government to impose.

2. It is subject to International Comity. The property of a foreign state or government may not be taxed
by another.

a. International comity means courteous and friendly agreement and interaction between nations.
b. International comity is based on any of the following grounds:
i. Sovereign equality among states under international law by virtue of which one state cannot
exercises its sovereign power over another.
ii. The usage among states that when one enters the territory of another, there is implied
understanding that the former does not intend to degrade its dignity by placing itself under
jurisdiction of the latter.
iii. The rule of international law that a foreign government may not be sued without its consent so
that it is useless to assess tax since anyway it cannot be collected.
a. Our constitution has adopted the generally accepted principles of international law as part of the
law of our country.

3. It must be applied within its Territorial Jurisdiction. The tax laws of a State are enforceable only
within its territorial limits.

b. The tax laws do not operate beyond a country’s territorial limits.

c. Property which is wholly or exclusively within the jurisdiction of another state receives none of the
protection for which a tax is supposed to be a compensation.
d. A person may be taxed where there is between him and taxing state a privity of relationship
justifying the levy.

4. It provides safeguards on Double Taxation. This means taxing a person property or right twice
within the same year by the same taxing authority.

3 | Page Prof. Rodison E. De Guia

Income Taxation Basic Principles of taxation

Double taxation referred to is direct double taxation or direct duplicate taxation. It means:
a. Taxing twice
b. By the same taxing authority
c. Within the same jurisdiction or taxing district.
d. For the same purpose
e. In the same taxable year or period.
f. Same object or subject matter.

5. It allows Exemption to Government Entities. Government agencies performing governmental

functions are exempt from tax unless expressly taxed while those performing proprietary functions are
subject to tax unless expressly exempted.

6. Non-delegation of Power to Tax. The power to tax is purely legislative in character and it cannot be
delegated by the legislature to the executive or judicial departments of the government.

a. The congress cannot delegate the power to other department. The limitation arises from the
doctrine of separation of powers among the three branches of the government.
b. The following are exceptions to the rule against the non-delegation of the taxing power:
i. Delegation to the President to fix within specified limits tariff rates, import or export quotas,
tonnages and wharfage dues and other duties.
ii. Delegation to local governments the power to create its own sources of revenues and to levy
taxes, subject to such limitations as may be provided by law.
iii. Delegation to administrative agencies certain aspects of the taxing process that are not
legislative.

Constitutional Limitations

1. Due Process of Law. No person shall be deprived of life, liberty or property without due process of
law…...

a. Any deprivation of life, liberty, or property is with due process if it is done:

i. Under the authority of law that is valid or of the Constitution itself, and
ii. After compliance with fair and reasonable methods of procedure prescribed by law.

b. Procedural due process in judicial proceedings requires “opportunity to be heard before judgment
is rendered affecting one’s person or property.”

c. Due process in taxation requires:

i. Tax must be for public purpose.
ii. Imposed within the territorial jurisdiction.
iii. No arbitrariness or oppression in assessment and collection.

2. Equal Protection of the Laws: “No person shall be deprived of life, liberty or property without due
process of law nor shall any person be denied the equal protection of law.” All persons subject to
legislation shall be treated alike under circumstances and conditions both in the privileges conferred
and liabilities imposed. The Constitution does not require things which are different in fact to be treated
in law as though they were the same.

3. Rule of Reciprocity and Equity in Taxation: The rule of taxation shall be uniform and equitable.
4. No Person shall be imprisoned for Non-payment of Poll Tax.
5. No law impairing the Obligations of Contracts shall be passed.
6. Non-Infringement of Religious Freedom
7. No appropriation for Religious Purposes
8. Charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques,
nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.
9. No law granting tax exemption may be passed without the concurrence by a majority of all
members of the legislature.

Situs (sites) of Taxation means the place of taxation. The state has the jurisdiction to impose a particular
tax upon persons, property or transactions. The legislative department determines the situs of taxation. It is
subject to the rule of uniformity and other inherent and constitutional limitations.
4 | Page Prof. Rodison E. De Guia
Income Taxation Basic Principles of taxation

Multipilicty of Situs – income onintangible personal properties may be subject to taxation in several taxing
jurisdiction. Remedies against multiplicity of situs are: provision of exemption, allowance or reduction or tax
credit for foreign taxes, and/or treaties with other states.

Situs of Taxation
Subject Situs
Poll tax on persons Residence of the person
Real property tax State where the property is located whether the owner is a
resident or non-resident.
Tax on tangible personal State where it is physically located although the owner resides in
property another jurisdiction.
Tax on intangible personal Domicile of the owner (mobilia sequntur personam)
property
Income tax State where the taxpayer is a resident or citizen.
Business, occupation and Place where the business is done, or the occupation is engaged
transaction tax in, or the transaction took place.
Gratuitous transfer of property State where the transfer is/was a citizen or resident, or where
the property is located.

Incidence of taxation – The point on which a tax was originally imposed.

- Who is the subject of taxation?

Impact of taxation – The point on which a tax burden finally rests or settles down.
- Who shall be liable to pay taxes or who will shoulder the burden?

Forms of Escape from Taxation

1. Shifting – refers to the transfer of the tax burden by the person on whom it is imposed by law to
another who bears it. Shifting may be forward, backward, or onward shifting.

2. Capitalization – a form of backward shifting whereby future taxes on property sold are capitalized at
the time of purchase and deducted in lump sum from the selling price. In this case, the taxes are
shifted backward from the buyer to the seller.

3. Transformation – this escape from taxation is effected through the process of production. The
producer on whom the tax is imposed, fearing the loss of his market if he adds the tax to the price,
pays the tax and recovers his additional expenses by improving his method of production thereby
turning out units of lesser cost. Here, the tax is transformed into a gain through the medium of
production.

4. Evasion - a form of escape from taxation which is accomplished by breaking the letter of the law. It is
tantamount to, fiscally speaking, the absence of taxation. This is illegal and punishable by law. Tax
evasion is also known as tax dodging. The tax evader breaks the law.

5. Avoidance – refers to the legal means to lessen or avoid tax by taking advantage of the loopholes of
law. It is legal and permissible by law. Tax avoidance is known as tax minimization. The tax avoider
circumvents the law.

6. Equitable Recoupment – A principle which means a tax erroneously paid may be set off from a
present tax liability even if the right to refund has already prescribed.

7. Exemption from taxation is a grant of immunity, express or implied, to particular persons,

corporations, or to persons or corporations of a particular class, from a tax upon property, or an excise
tax which persons and corporations generally within the same taxing district, are obliged to pay.

The following are generally exempted from the payment of income taxes:
A. Those persons exempted under international agreement. Ex. Heads of the State, consuls,
ambassador, and other diplomatic officials.
B. Those person(s) exempted under the Constitution. Ex: Churches, cemeteries, land used
exclusively for religious, charitable or educational purposes.
C. Those persons granted exemption by law. Ex: charitable institutions, labor union, non-profit
association, and private foundation.
D. Those person(s) exempted under special laws.
E. Those person(s) exempted by virtue of a contract entered into with the government
5 | Page Prof. Rodison E. De Guia
Income Taxation Basic Principles of taxation
F. Those person(s) exempted under an ordinance.

Classification of Exemptions
A. Express or affirmative – these are express provisions in the Constitution, statutes, treaties,
ordinances, franchise or contracts.
B. Implied or exemption by omission – This occurs when a tax is levied on certain classes of persons,
properties or transactions without mentioning other classes. Those not mentioned are deemed
exempted by omission.

Interpretations of exemption grant – Exemption Grants are strictly construed against the person, entity or
properly claiming exemption. One claiming must justify such claim by clear and positive grant. Tax Laws
or statutes are construed strictly against the government and liberally in favor of the taxpayer while tax
exemptions are construed strictly against the taxpayer and liberally in favor of the government.

Exemption statutes are liberally construed when:

 The law expressly provides for liberal constructions.
 If the exemptions favor religious, charitable, or educational institutions; and
 If the exemption will favor the government.

The principle of “strictissimi juris” applies with peculiar force to a claim of exemption from taxation. Under
this principle, taxation is the rule and exemption the exception, because the exemption must be expressed
in clear terms. The rule of exemption from taxation is never presumed.

True or False
1. Police Power and power of taxation may be exercised only by the government while the power of
eminent domain may be exercised by some private entities.
2. A tax is a voluntary donation to the government.
3. In power of eminent domain, the person affected by the exercise of the power receives just
compensation.
4. Power of eminent domain and power of taxation affect only property rights while police power affects
both liberty and property.
5. Taxation may be used to implement the police power of the state.
6. In power of taxation and police power, the person affected by the exercise of the powers receives
nothing.
7. No person shall be imprisoned for non-payment of tax.
8. In every case of doubt, tax exemptions are construed strictly against the taxpayer and liberally in favor
of the government.
9. In every case of doubt, tax laws are construed strictly against the taxpayer and liberally in favor of the
government.
10. There can only be a tax if there is a law imposing the tax.
11. Provisions in the Philippine Constitution on taxation are grants of power and not limitations on the
taxing power.
12. Territoriality is an inherent limitation on the power to tax.
13. Due process of law provision in the Philippine Constitution is a grant of power.
14. Power of taxation is superior to the impairment clause of the constitution.
15. The Rule of taxation shall be uniform and equitable.
16. The point on which a tax burden finally rests or settles down is the incidence of taxation.
17. The power of taxation cannot be exercised without a previous constitutional authority.
18. All revenue bills must originate from the Senate.
19. The Congress may delegate to the President the power to fix tariff rates.
20. Taxes are paid only by those who are directly benefiting from the government.
21. As a general rule, a tax exemption is an act of liberality which can be revoked by the government.
6 | Page Prof. Rodison E. De Guia
Income Taxation Basic Principles of taxation
22. Tax evasion in one year can be offset by paying excessive taxes in the following year.
23. The power to grant tax exemption is essentially a legislative prerogative.
24. The power to tax may include the power to destroy.
25. The income of a non-stock and non-profit educational institution is exempt from income tax.

Identification
1. The power to demand from the members of society their proportionate share or contribution in the
maintenance of the government.
2. The power to regulate liberty and property for the promotion to the general welfare.
3. The power to acquire private property, upon payment of just compensation for some intended public
purpose.
4. The state has the right to compel contributions as the existence of the government is a necessity.
5. The reciprocal duties of support and protection between the people and the government.
6. Tax imposed should be proportionate to the taxpayer’s ability to pay.
7. The tax laws must be capable of convenient, just and effective administration.
8. The sources of revenue as a whole should be sufficient to meet the demands of public expenditures.
9. It is the privilege of not being imposed a financial burden to which others are subject.
10. This body has the sole power to grant tax exemption.
11. Property of one country, located in another may not be taxed by the latter.
12. It is a scheme wherein a taxpayer makes use of the loopholes of the law to his own advantage.
13. Tax laws are enforceable only within their limits or boundaries.
14. Limitations which are specifically provided in the Constitution.
15. Fundamental law of the land.
16. The term that is synonymous to tax evasion.
17. An escape from taxation where the tax burden is transferred by the one on whom the tax is imposed
or assessed to another.
18. It is construed to be in favor of the taxpayer and against the government.
19. It means that it will benefit the majority of the taxpayers and majority does not always means 100%.
20. The levying or imposition of tax and the collection of the tax are processes which constitute the
taxation system.

List of Possible Answers

A. Basis of taxation N. Transformation
B. Theory of taxation O. Taxes
C. Power of eminent domain P. Territorial jurisdiction
D. Police Power Q. Public Purpose
E. Power of taxation R. Legislative
F. Aspects of taxation S. Interpretation of Tax Laws
G. Fiscal Adequacy T. Tax minimization
H. Administrative Feasibility U. Canons of Taxation
I. Theoretical Justice V. Incidence of taxation
J. Tax evasion W. Equitable Recoupment
K. International Comity X. Tax Dodging
L. Tax exemption Y. Executive
M. Capitalization Z. Shifting

7 | Page Prof. Rodison E. De Guia