MODULE 1 GENERAL PRINCIPLES

Taxation – is the inherent power of the government by which through its lawmaking body, raises revenue to defray the
necessary expenses of government
Levy or imposition Administration Assessment
Collection
ASPECTS / STAGES

The most basic function of taxation is to fund government expenditures.

REVENUE EXPENDITURES Capital expenditures

Revenue expenditures

Taxes

Lifeblood theory/doctrine of Taxation, government cannot survive (continue) without means

to pay its expenses; and that for these means it has a right to compel its citizens and property within its
limits to contribute
BASIS/THEORY IN TAXATION

Lifeblood Doctrine – Without revenue raised from taxation, the

government will not survive, resulting in detriment to society. Without
taxes, the government would be p`aralyzed for lack of motive power to
activate and operate it

Necessity Theory – The exercise of the power to tax emanates from

necessity, because without taxes, government cannot fulfill its mandate
of promoting the general welfare and well being of the people.

Benefits received principle – Taxpayers receive benefits from taxes

through the protection the State affords to them. For the protection
they get arises their obligation to support the government through
payment of taxes.

Doctrine of symbiotic relationship - Taxation arises because of

reciprocal relation of protection and support between the State and
taxpayers. The State gives protection and for it to continue giving
protection, it must be supported by the taxpayers in the form of taxes.
DOCTRINES of Taxation
Prospective Application of Tax Laws This principle states that “a tax bill must only be
applicable and operative after becoming a law”
EXEMPTION, if the law expressly provides retroactive application which

should not prejudice the taxpayer..

Tax imprescriptibility” states that unless otherwise provided by law itself, taxes in general
are not cancelable.
EXEMPTION, prescriptive period will only be applicable to those taxes
that were returnable

Tax estoppel, which prevents a party from taking factual positions in legal proceedings in
contradiction of disclosures in tax returns.
Under this principle, a litigant shall be unsuccessful in taking a position that is incompatible
with tax returns and disclosures signed by the taxpayer

Double Taxation means an act of the sovereign by taxing twice for the same purpose in the
same year upon the same property or activity of the same person, when it should bet axed
once, for the same purpose and with the same kind of character of tax.

The impact of taxation occurs when the tax* is imposed. It is on the person who pays the
tax* in the first instance.
Tax incidence, on the other hand, takes place at the end of the cycle. It is on the person who
finally bears the tax
 SCOPE of Taxation Power NATURAL Characteristics
of Taxation Power
Unlimited, because the only
Comprehensive, It limitation is the responsibility An Inherent Power Strongest among
of the legislature which
covers the person, his
imposes tax to the constituents
inherent powers
properties and rights.
who pay it. Legislative Function
Operating within its
Territorial
For Public Purposes Jurisdiction
Plenary, because Supreme, with highest
the government authority to select
may avail of valid whatever subject to Restricted by its inherent and Constitutional limitations
remedies to make pay the tax.
sure that tax is
collected
Purpose of Taxation

1. Primary – to raise revenue

2. Secondary
Regulatory
- To regulate the conduct of businesses or professions
- To achieve economic and social stability
- To protect local industries

The Inherent Powers of the State

1. Power of Taxation – the power of the government to impose

and collect taxes for public purpose

2. Police Power – the power to enact laws to promote the general

welfare of the people. It is wider in application because it is the general
power to make laws.

3. Power of Eminent Domain – the power to take private property

for public use upon payment of just compensation
Similarities of the Three Inherent Powers of the State
1. All three powers are necessary attributes of sovereignty, resting upon necessity
2. all are inherent powers of the State
3. All are legislative in nature
4. They are ways in which the State interferes with private rights and property
5. They exist independently with the Constitution although the condition for their exercise may be prescribed or
limited by the Constitution
6. They all presuppose an equivalent compensation received by the persons affected by the exercise of the power,
whether directly, indirectly or remote.
7. The exercise of these powers by the local government units may be limited by national legislature
COMPARATIVE DISTINCTIONS

Point of Taxation Police Power Eminent

Diff erence Domain
Exercising Government Government Government or
Authority priv ate enti ties

Necessity of Delegation is not There mus t be There must be

Delegation necessary since dele gation due dele gation
it is inhere nt before local before local
governments government or
could exercise priv ate party
it may exercise it

Purpose Revenue and Property is taken Property is taken

support of the for public use for public use
government

Persons aff ected Communi ty or Communi ty or Operates on the

class of class of owner of the
indivi duals indivi duals property

Eff ect of Mone y paid as There is no There is trans fer

transfer of taxes becomes trans fer of title, of right to
property rights part of the at most there is property
public fund restraint on the whether it be of
injurious use of ownership or
property lesser right

Amount of Unlimited Suffi cient to No imposition,

Imposition cover the costs the owner is
of regulation paid the fair
market value of
his prope rty

Importance Most important Most superior

of the three
Relationship Inferior to the Superior to the Superior and
with the “Non- “Non- may override
Constitution Impairme nt Impairme nt the “Non-
Clause ” of the Clause ” of the Impairment
Constitution Constitution Clause” becaus e
the welfare of
the state is
supe rior to
priv ate contracts

Limitation Constitutionally Public inte rest Public purpose

and inhere ntly and the and just
restricted requirement of compens ation
due process
CONSTITUTIONAL Limitations that are expressly found in the Constitution

Due process of law

Equal protection of the laws
Rule of uniformity and equity in taxation
Capitation tax
No imprisonment of non-payment of poll tax Community tax

Non-impairment of the obligation of contracts

Non-infringement of religious freedom
No appropriation for religious purpose
Exemption of religious, charitable and educational entities, non-profit cemeteries and churches from taxation
Exemption of non-stock, non-profit educational institutions from taxation
Concurrence by majority of all members of Congress for the passage of a law granting tax exemption
Authority of the President to veto the particular items in a revenue or tariff bill
Non-impairment of the jurisdiction of the Supreme Court in taxes
BASIC PRINCIPLES OF SOUND TAX SYSTEM

Fiscal adequacy
 The sources of revenue should be sufficient to meet the demands of public expenditure

Equity or theoretical justice

 The tax burden should be proportionate to the taxpayer’s ability to pay

Administrative feasibility
Tax laws should be capable of convenient , just, and effective administration
LEGISLATION OF TAX LAWS, Rules
· Revenue bill must originate from the House of Representative
· Senate can amend or concur the House Bill

· Differences of two version of bills are resolved in a joint

conference committee (Bicam)

· Tax bill to be signed by the President to become a law

· Veto power of the President is overcome by 2/3 votes of

all members of Congress

CHARACTERISTICS OF TAX LAWS

· A special law

· Civil in nature

· Prospective in application
LAWS Governing Internal Revenue Taxes :
The Constitution, is the fundamental law of the land in the Philippines.
National Internal Revenue Code (RA 8424), The basic source of Philippine tax law which codifies all
tax provisions

Special Laws – Omnibus Investment Code/ Philippine Economic Zone Authority Act, Bases Conversion and Development Act
Treaties, The Philippines has entered into several tax treaties for the avoidance of double taxation
and prevention of fiscal
evasion with respect to income taxes.

ADMINISTRATIVE MATERIALS:
Revenue Regulations – (RRs) are issuances signed by the Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, that specify, prescribe or define
rules and regulations for the effective enforcement of the provisions of the National Internal
Revenue Code (NIRC) and related statutes.

Revenue Memorandum Circulars – (RMCs) are issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules, regulations and precedents issued by the
BIR and other agencies/offices.

Revenue Memorandum Orders – (RMOs) are issuances that provide directives or instructions; prescribe
guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary in
the implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of
operations, except auditing.
General Tax Rules:

On Imposition
• The doubt should be resolved liberally in favor of the
taxpayer, and strictly against the taxing authority, since tax
laws impose special burden upon the taxpayer.

On Tax Exemption
• Tax exemptions are to be construed strictly against the
taxpayer .
• The burden of proof as to exemptions/deductions must be
on the taxpayer, meaning, he is taxable, unless he could
prove otherwise.

On Conflict in Taxation between Civil Law and Tax Law

• The tax law, being a special law shall prevail.

On Conflict between the Tax Law and GAAP, what should prevail?
• The tax law, with respect to preparation of tax return shall prevail.

On Criminal Liability
· if the taxpayer refused to pay his tax, he could be prosecuted for criminal liability,
(except those involving poll tax).
DIRECT VS INDIRECT TAXES

DIRECT TAX
A tax is said to be direct tax when impact and Incidence of a tax are on one and same
person, i.e., when a person on whom tax is levied is the same who finally bears the!
burden of tax.
For Instance, income tax is a direct tax because impact and incidence falls on the same
person.

INDIRECT TAX
If impact of tax falls on one persons and incidence is on the another, the tax is called
indirect.
For example, Value Added tax on saleable articles is usually an indirect tax because it can
be shifted on to the consumers.

SYSTEM OF TAXATION
· Progressive – give emphasis on direct taxes (more direct taxes are collected
in the system)

· Regressive – more indirect taxes than direct taxes are collected in the
system.
Situs of taxation
Literally means place of taxation.

The general rule is that the taxing power cannot go beyond the territorial limits of the taxing authority.

Basically, the state where the subject to be taxed has a situs may rightfully levy and collect the tax.

Determinant factors of situs of taxation

– Protection extended
– nature of tax
– lex rei sitae - location of property
– mobilia sequuntor personam – the place where the owner is found
– citizenship of taxpayer
Philippine Internal Revenue Taxes, Situs Taxation:

NATURE OF TAX TAXPAYER LOCATION / SOURCE OF TAXABLE AMOUNT

BUSINESS TAX W/I PHILIPPINES

SALES/RECEIPTS W/I OUTSIDE PHILIPPINES W/O
SALES/RECEIPTS
:
Resident of the Phil. Subject to Phil Tax Exempt (zero rate)
INCOME TAX:
INCOME W/I INCOME W/O
Resident Citizen Subject to Phil Tax Subject to Phil Tax
Other Individual Subject to Phil Tax Exempt
Domestic Corporation Subject to Phil Tax Subject to Phil Tax
Other Corporations Subject to Phil Tax Exempt

TRANSFER TAXES:
TRANSFERS W/I TRANSFERS W/O
Non-Resident Alien Subject to Phil Tax Exempt
OTHER Taxpayers Subject to Phil Tax Subject to Phil Tax
TAX ESCAPE, is the scheme of reducing or getting free from tax.
TWO WAYS OF TAX ESCAPES:
TAX AVOIDANCE, refers to the use of legal methods to minimize the amount of tax.
This is generally accomplished by claiming as many deductions and credits as are allowable.

TAX EVASION, is using illegal means to avoid paying taxes.

TAX AVOIDANCE or TAX MINIMIZATION (Tax Planning)

o Shifting, Example The 12% VAT may at option of the seller i. legally pass on to the buyer or ii. absorb as its expense
o Exemption Example, if qualified to be registered with the BOI, enjoy Tax Holiday for several years
o Transformation Example, transform the commercial units into residential units will exempt the rental from income tax if P15,000 or less/month
o Reciprocity agreement Example, A tax treaty or double tax agreement may be entered into by two or more countries to
resolve issues involving double taxation of passive and active income of each of their
respective citizens.

TAX EVASION or TAX DODGING

• Non filing and non payment of tax, Fraudulent violation = 50% surcharge surcharge, 10 years prescription
• Understatement of taxable amount if the understatement is more than 30% of what was declared, = fraudulent violation
• Overstatement of deductible expenses if the overstatement is more than 30% of the allowable amount, = fraudulent violation

Remedies to lessen the impact of indirect double taxation:

a . deductions
b . tax credits
c . Exemption ( thru treaty and tax residency certificate.)
d . reciprocity clause ( preferential tax rate thru double taxation agreement)
ESSENTIAL CHARACTERISTICS OF TAX
It is levied for public purposes
Taxation and tax involves a charge or burden imposed to provide income for public purposes

It is an enforced contribution
 Tax is not a voluntary payment or donation
 Its imposition is no way dependent upon the will or assent of the persons ta x

It is generally payable in money

It is an exaction to be discharged alone in money which must be in legal tender

It is proportionate in character
 It is ordinarily based on the ability to pay

It is levied on persons, property, rights

• Tax may be imposed on acts or transactions or contracts

It is levied by the state which has jurisdiction over the person, property, rights
 The persons or property must be subject to the jurisdiction of the taxing state
CLASSIFICATION OF TAXES
As to Purpose:
–Revenue or fiscal
–Regulatory or sumptuary

As to object:
– Personal
– Property
- Excise or rights

As to determination of Amount
– Ad valorem (taxable amount is in Peso)
– Specific (taxable item is in other measurement other than peso)

As to who is carrying the burden of taxation

– Direct
– Indirect
Taxes as to rate
–Proportionate - Under this classification, the individuals are required to pay tax in proportion
to their income, i.e., the rate of tax remains same as the base changes.

–Progressive - Under this classification, the rate of tax increases as the tax base increase.
Using the progressive tax rate, taxes are seen as reducing inequalities in
income distribution

Taxes as to collecting government unit

National taxes:
– Income tax Local taxes:
– Business tax; – Community tax
• Excise tax on production/importation – Privilege/occupational tax
• VAT – Real property tax
• Other Percentage Tax – Local business taxes
– Transfer taxes:
• Donor’s tax
• Estate tax
– documentary stamp tax
– Custom duties
– Energy tax
– Travel tax
– Motor vehicle tax