DON HONORIO VENTURA STATE UNIVERSITY

College of Business Studies

Chapter 1
INTRODUCTION TO TAXATION

LEARNING OUTCOMES :
After this chapter, readers must be able to comprehend and demonstrate the mastery of the following;
1. Concept of taxation and its necessity for every government
2. Lifeblood doctrine and its implication
3. Theories of cost allocation
4. Inherent power of state
5. Scope of the taxation power
6. Limitation of the taxation power
7. Stages of taxation
8. Concept of situs in taxation
9. Fundamental principles surrounding taxation
10. Various escapes from taxation
11. Concept of tax amnesty

WHAT IS TAXATION ?
Taxation may be defined as a State power, legislative process, and a mode of government cost distribution
* As a state power
- is an inherent power of the state to enforce a proportional contribution from its subjects for
public purpose.
* As a process
- is a process of levying taxes by the legislature of the state to enforce proportional contributions from
its subjects for public purpose.
* As a mode of cost distribution
- is a mode by which the state allocates its costs or burden to its subjects who are benefited by its
spending.
THEORY OF TAXATION
- government cannot exist without a system of funding.
- this necessity for funding is the theory of taxation.

THE BASIS OF TAXATION

- the mutuality of support between the people and government is the basis of taxation.
* Government provides benefits to the people in the form of public services.
* People provides funds that finance the government.

Government People

RECEIPT BENEFIT IS CONCLUSIVELY PRESUMED

Every citizen and resident of the State directly or indirectly benefits from the public services rendered by
the government.

THEORIES OF COST ALLOCATION

1) Benefit received theories
- the more benefit one's receives from government, the more taxes he should pay.
2) Ability to pay theories
- those who have more should be taxed even if they benefit less from the government, vice versa.
a) Vertical Equity (Gross Concept)
- proposes that the extent of one's ability to pay is directly proportional to the level of his tax
base.
b) Horizontal Equity (Net Concept)
- requires consideration of the particular circumstance of the taxpayer.
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.

IMPLICATION OF LIFEBLOOD DOCTRINE

1) Tax is imposed even in the absence of a constitutional grant
2) Claims for tax exemption are construed against the taxpayers
3) The government reserves the right to choose the object of taxation
4) The courts are not allowed to interfere with the collection of taxes

IN INCOME TAXATION
Income received in advance is taxable upon receipt
Deduction of capital expenditure and prepayments is not allowed as effectively defers the collection of
income taxes
A lower amount of deductions is preferred when a claimable expense is subject to limit
A higher tax base is preferred when the tax object has multiple tax bases.

INHEREHT POWER OF STATE

1) Taxation power – is the power of the State to enforce proportional contribution from its subjects
to sustain itself
2) Police Power – is the general power of the state to enact laws to protect the well-being of the
people
3) Eminent Domain – power of State to take private property for public use after paying just
compensation

COMPARISON OF THE THREE POWER OF THE STATE

INHERENT LIMITATIONS OF TAXATION
1) TERRITORIALITY OF TAXATION (Situs)
- tax can be imposed only within the territories of the State.
Exception :
1. In income taxation, resident citizens and domestic corporations are taxable on income derived within
and outside the Philippines
2. In transfer taxation, residents or citizens such resident citizens, non-residents citizens and resident
aliens are taxable on transfers of properties located within or outside the Philippines.

2) INTERNATIONAL COMITY
- all states are equally sovereign or consular offices not subject to income.
- pertains to mutual courtesy or reciprocity between states.
- when a state enters treaties with other states, it is bound to honor the agreements as a matter of mutual
courtesy.

3) PUBLIC PURPOSE
- tax is intended for common good. For public purpose. It cannot be exercise to any private interest.
4) EXEMPTION OF THE GOVERNMENT
- government does not tax itself as this will not raise additional funds but will impute additional costs.
- government properties and income from essential public functions are not subject for taxation but
income of government from properties and activities conducted for profit (including income from GOCC)
is subject to tax.

5) NON-DELEGATION OF THE TAXING POWER

- the legislative taxing power is vested exclusively in Congress and is non-delegable.
Exceptions to the rule of non-delegation ;
a. Under the constitution, the LGU’s are allowed to exercise the power to tax to enable them to
exercise their fiscal autonomy.
b. Under the Tariff and Custom Code, the President is empowered to fix the amount of tariffs to be
flexible to trade conditions.
c. Other cases that require expedient and effective administration and implementation of assessment
and collection of taxes

CONSTITUTIONAL LIMITATION OF TAXATION :

1) ASPECT OF DUE PROCESS
- tax laws should neither be harsh nor oppresive.
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. An assessment without legal basis violated the
requirements the due process.
Procedural due process – the government shall observe the taxpayer’s right to notice and hearing.
under NIRC, assessments shall be made within 3 years from the due date of filing of the return or
from the date of actual filing, whichever is later.

2) EQUAL PROTECTION OF LAW

- No person shall be denied the annual protection of law. Should be treated equally both in terms of rights
conferred and obligations imposed.
- This rule applies where taxpayers are under the same / similar circumstances and conditions.
3) UNIFORMITY RULE OF TAXATION
- The rule should be uniform and equitable.
- Each class tax differently, but under the same class are taxed the same.
(Example Corporations, withholding tax of professional)
- Uniformity is relative equality.

4) PROGRESSIVE SYSTEM OF TAXATION

Tax rate increase as the base increases.

- is consistent with taxpayer's ability to pay.

- aids in an equitable distribution of wealth to society by taxing the rich more than the poor.

5) 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.
- Unless, it was acquired in bad debt, it constitutes estafa as criminal offense punishable by law.
- Non-payment of debt comprises private interest while non-payment of tax comprises public interest.
Hence, non-payment of tax is a crime.
- The constitutional guarantee on non-imprisonment for non-payment of debt does not extend to non-
payment of tax, except poll tax.

6) NON IMPAIRMENT OF OBLIGATION AND CONTRACT

The State should set an example of good faith. It should not set aside its obligations from contracts by he
exercise of taxation power. (Example : Tax holidays)

7) FREE WORSHIP RULE

- Exercise of religion – exempted to income tax such as offerings.
- transactions that are proprietary and commercial in nature are taxable.

8) EXEMPTION OF RELIGIOUS, CHARITABLE OR EDUCATIONAL ENTITIES, NON-

PROFIT CEMETERIES, CHURCHES AND MOSQUES, LAND AND IMPROVEMENTS FROM
PROPERTY TAX.
- Not exempted if not used in the primary reason of being exempted.
- Exemption applies for properties actually, directly and exclusively used for charitable, religious and
educational purposes.
Doctrine of Use - applied in the Philippines
- only properties devoted for religious, charitable and educational activities are exempt from real
property tax.
Doctrine of Ownership - not applied in the Philippines
- properties of religious, charitable and educational activities whether or not used in the primary
operations are exempt from real property tax.

9) NON-APPROPRIATION OF PUBLIC FUNDS FOR THE BENEFIT OF ANY CHURCH,

SECT OR SYSTEM OF RELIGION
- to support freedom of religion, government should not favor any particular system of religion by
appropriating public funds or property support thereof.
- however, compensation of priests, imams or religious ministers working with the military, penal
institutions, orphanages or leprosarium is not considered religious appropriation.

10) EXEMPTION FROM TAXES OF THE REVENUES, AND THE ASSETS OF NON-PROFIT,
NON-STOCK EDUCATIONAL INSTITUTIONS INCLUDING GRANTS, ENDOWMENTS,
DONATIONS, OR CONTRIBUTION FOR EDUCATIONAL PURPOSES
- The exemptions apply only for revenues and assets devoted purely educational purposes.
- government educational institutions are exempted from income tax while private educational institutions
to a minimal 10% income tax.

11) CONCURRENCE OF A MAJORITY OF ALL MEMBERS OF CONGRESS FOR THE

PASSAGE OF A LAW GRANTING EXEMPTION.
- The constitution requires the vote of the majority of all member of the congress in the grant of tax
exemption.

12) NON-DIVERSIFICATION OF TAX COLLECTIONS

- tax collections should be used only for public purpose and should never be diversified or used for
private purpose.

13) NON-DELEGATION OF TAXING POWER

- the principle of check and balances requires that taxation power as part of lawmaking be vested
exclusively in congress.
However, delegation may be made on matters involving expedient and effective administration and
implementation of assessment and collection of taxes.

14) NON-IMPAIRMENT OF THE JURISDICTION OF THE SUPREME COURT TO REVIEW

TAX CASES –ALL CASE INVOLVING TAXES CAN BE RAISED AND BE FINALLY
DECIDED BY THE SUPREME COURT OF THE PHILIPPINES.
- notwithstanding to the existence of the Court of Appeals, all cases involving taxes can be raised to and
finally decided by the Supreme Court.

15) APPROPRICATIONS, REVENUE, TARIFF SHALL ORIGINATE EXCLUSIVELY IN THE

HOUSE OF REPRESENTATIVE, BUT THE SENATE MAY PROPOSE OR CONCUR WITH
AMENDMENTS.
- laws that add income to the national treasury and those allows spending therein must originate from House of
Representatives while the Senate may concur with amendments.

16) EACH LOCAL GOVERNMENT UNIT SHALL EXERCISE THE POWER TO CREATE ITS
OWN SOURCES OF REVENUE AND SHALL HAVE A JUST SHARE IN THE NATIONAL TAXES

STAGES OF THE EXERCISE OF TAXATION POWER

1. Levy of Imposition
This is the process of enactment of a tax law by congress and is called impact of taxation or
legislative act of taxation.

Matters of legislative discretion in the exercise of taxation

1. Determining the object taxation
2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which must be public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the national and local gorv
6. situs of Taxation
7. Method of collection

2. Assessment and Collection

This stage is referred to as incidence of taxation or administrative act of taxation.
The law is implemented by the administrative branch of the government.
Implementation involves assessment or the determination of the tax liabilities of taxpayers and
collection.

SITUS OF TAXATION
Situs is the place of taxation.
1. Business Tax Situs – Business are subject to tax in the place where the business is conducted.
2. Income Tax situs on services – Services fee are subject to tax where they are rendered. (Ex.
Foreign corporation leases a residential space to a non-resident abroad)
3. Income tax situs on sale of goods – the gain on sale is subject to tax in the place of sale
BUSINESS TAX SITUS
Business are subject to tax in the place where the business is conducted.

INCOME TAX SITUS ON SERVICES

Income Tax situs on services – service fee is subject to tax where they are rendered. (Ex. Foreign
corporation leases a residential space to a non-resident abroad)

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 will be made a week later in the
Philippines. The sale was consummated as agreed.
The contract of sale is concensual and is perfected by the meeting of minds of the contracting parties.

PROPERTY TAX SITUS

Properties are taxable in their location.
JG Summit Holdings Inc have a property on Philippines and outside of the country.
He needs to pay real property tax in the Philippines and as well in other country if required.
Persons are taxable in the place of their residence.

PERSONAL TAX SITUS

Persons are taxable in the place of their residence.

OTHER FUNDAMENTALS DOCTRINE IN TAXATION

1) Marshall Doctrine
- The power to tax involve the power to destroy.
- It can be used to discourage undesirable activities or occupation.

2) Holme’s Doctrine
- May be used to build or encourage beneficial activities or industries by the grant of tax incentives.
Example : Holme’s Doctrine – Tax holidays in ecozones

3) Prospectivity of Tax Laws

- Tax laws are generally prospective in operation as ex post facto law or law that retroacts is prohibited in
the constitution.
Example : congress can levy tax on income earned during periods of foreign occupation even after the
war.

4) Non-compensation or set off

- taxes are not subject to compensation or automatic set-off because taxes are not debts.
- taxpayers cannot delay payment of tax to wait for the resolution of a lawsuit involving his pending claim
against the government.
Exceptions :
a. Where the taxpayer's claim has already become due and demandable such as when the government
already recognized the same and appropriation for refund was made.
b. Cases of obvious overpayment of taxes
c. Local taxes

5) Non-assignment of taxes
- tax obligations cannot be assigned or transferred to another entity by contract.

6) Imprescriptibility in taxation
- Prescription - is the lapsing of right due to the passage of time.
- the government's right to collect taxes does not prescribe unless the law itself provides for such
prescription.
1) With Assessment - tax prescribes if not collected within 5 years from the date of assessment.
2) Without assessment - tax prescribes if not collected by judicial action within 3 years from the date of
return is required to be filed.
- tax due from taxpayers which do not file a return or those who filed fraudulent returns do not prescribe.

7) Doctrine of estoppel
- any misrepresentation made by one party toward another who relied in good faith will be held true and
binding against the person who made the misrepresentation.
- The government is not subject to estoppel.
1) the error of any government employee does not bind the government.
2) the erroneous application of the law of public officers do not block the subsequent correct application
of the same.

8) Judicial Interference
- courts are not allowed to issue injunction against the government pursuits to collect tax as this would
unnecessarily defer tax collection.

9) Strict Construction of Tax laws

- When the law clearly provides for taxation, taxation is the general rule unless there is a clear exemption.
Taxation is the rule, exemption is the exception.
Vague Tax Laws - are construed against the government and in favor of the taxpayers.
Vague Exemption Laws - are construed against the taxpayer and in favor of the government.

DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the
same thing.

Elements :
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 of the element of double taxation exists for both impositions.
Example : Income tax 10% on monthly sales and 2% income tax on annual sales.

2. Indirect Double Taxation

- this occurs when at least one of the secondary elements of double taxation is not common for both
impositions.
Example : National government and local government levies business tax on the sales or gross receipts
of the business.

HOW CAN DOUBLE TAXATION MINIMIZED?

The impact of double taxation can be minimized by any 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 home country and a foreign country
d. Entering into treaties or bilateral agreements

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
1. Tax Evasion – also known as tax dodging, refers to any act or trick that tends to illegally reduce or avoid the
payment of tax.
- this can be perpetrated by undue understatement of income, overstatement of expenses or non-declaration of
income.
2. Tax avoidance also known as tax minimization
- refers to any act or trick that reduces or totally escapes taxes by any legally permissible means.
- this can be done by selection tax options allowed by the law which minimizes tax liability or by
careful tax planning to reduce tax exposure.

3. Tax Exemption – also known as tax holiday.

- refers to the immunity privilege or freedom from being subject to a tax which others are subject to.

B. Those that do not result to loss of government revenue

1. Shifting
1. Forward shifting – shifting which follows the normal flow distribution (from
manufacturer to wholesaler. Retailer to consumer).
2. Backward shifting – this is the reverse of forward shifting. Buyers have considerable
market power and commodities with numerous substitutes.
3. Onward Shifting – tax shifting that exhibits forward shifting or backward shifting.
2. Capitalization
- this pertains to the adjustment of the value of an asset caused by changes in tax rates.
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 – granted by government for erring taxpayers to give them a chance to perform and
enable them to have a fresh start. Its an absolute forgiveness or waiver by the government on its right to
collect and is retrospective.

TAX CONDONATION
- is the forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. Also
referred to as tax remission.
- Tax amnesty (civil and criminal) while Tax condonation covers civil liability.

EXERCISES
True or False

1. Eminent domain involves confiscation of prohibited commodities to protect the well-being of the
people
2. There should be direct receipt of benefit before one could be compelled to pay taxes.
3. The reciprocal duty of support between the government and the people underscores the basis of
taxation
4. International comity connotes courtesy between nations.
5. The government should tax itself.

Multiple Choice
1. The power to enforce proportional contribution from the people for the support of the government is
a. Taxation
b. Police power
c. Eminent domain
d. Exploitation
2. This theory underscores that taxes are indispensable to the existence of the state.
a. Doctrine of equitable recoupment
b. The Lifeblood Doctrine
c. The benefit received theory
d. The Holmes Doctrine
3. Which does not properly describe the scope of taxation?
a. Comprehensive
b. Supreme
c. Discretionary
d. Unlimited
4. Which limitation of taxation is the concept of "situs of taxation" based?
a. Territoriality
b. Public purpose
c. International comity
d. Exemption of the government
5. Which statement is incorrect?
a. Every person must contribute his share in government costs.
b. The existence of a government is expected to improve the lives of the people.
c. The government provides protection and other benefits while the people provide support.
d. Only those who are able to pay tax can enjoy the privileges and protection of the government
6. This refers to the privilege or immunity from a tax burden which others are subject to:
a. Exclusion
b. Deduction
c. Tax holiday
d. Reciprocity
7. The Constitutional exemption of religious or charitable institutions refers only to
a. Real property tax
b. Income tax
c. Property tax and income tax
d. Business tax
8. Which of the following is not an inherent limitation of the power to tax?
a. Tax should be levied for public purpose.
b. Taxation is limited to its territorial jurisdiction.
c. Tax laws shall be uniform and equitable.
d. Exemption of government agencies and instrumentalities
9. The provisions in the Constitution regarding taxation are
a. Grants of the power to tax
b. Limitations to the power to tax
c. Grants and limitations to the power to tax
d. Limitations against double taxation
10. When a legislative body taxes persons and property, rights and privileges under the same taxable
category at the same rate, this is referred to as compliance with the constitutional limitation of:
a. Equity
b. Uniformity
c. Due process
 d. Equal protection clause
11. Licensing of business or profession is an exercise of
a. Police power
b. Taxation
c. Eminent domain
d. All of these
12. Which of the following is not a constitutional limitation of the power to tax?
a. Non-impairment of obligation or contracts
b. Due process and equal protection of the law
c. Non-appropriation for religious purposes
d. Non-delegation of the taxing power
13. Statement 1: Congress can exercise the power of taxation even without Constitutional delegation of
the power to tax.
Statement 2: Only the legislature can exercise the power of taxation, eminent domain, and police
power.

Which statement is correct?

a. Statement 1
b. Statement 2
c. Statements 1 and 2
d. Neither statement 1 nor 2
14. In exercising taxation, the government need not consider
a. Inherent limitations
b. Just compensation
c. Due process of law
d. Constitutional limitations
15. Ram is the only practicing lung transplant specialist in Baguio City. The City Government of Baguio
passed a local ordinance subjecting the practice of lung transplant to 2% tax based on receipts. Ram
objected claiming that other transplant specialists in other regions of the country are not subjected to
tax.

Is Ram's contention valid?

a. Yes, because the rule of taxation should be uniform and equitably enforced.
b. Yes, because Ram is the only one subject. Other practitioners who would later practice would
not be covered by the ordinance.
c. No, because the ordinance would cover all transplant specialist who would practice in Baguio
City. The uniformity rule would not be violated.
d. No, because subjecting the new industry to taxation would hamper economic growth.
REFERENCES:

Income taxation (Laws, Principles and Application) by Rex B. Bangawan, CPA, MBA.