CHAPTER 1

GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

After this chapter, readers must be able to comprehend and demonstrate mastery of the following:
1. Concept of taxation and its necessity for every government
2. Lifeblood doctrine and its implication to taxation
3. Theories of government cost allocation
4. Inherent powers of the state
5. Scope of the taxation power
6. Limitations of the taxation power
7. Stages of taxation
8. Concept of situs in taxation
9. Fundamental principles surrounding taxation
10. The type of taxation laws
11. Distinction among tax laws, revenue regulations, and rulings
12. Tax, its elements, and classifications
13. Distinction of tax from similar items
14. Tax system and its types
15. The principles of a sound tax system
16. How tax is administered
17. The powers of the Bureau of Internal Revenue (BIR) and the Commissioner of Internal Revenue
(CIR) and the non-delegated powers of the CIR

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 a proportional contribution 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 subjects 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
benefited 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, a government cannot exist 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
provides the funds that finance the government. This mutuality of support between the people and the
government is referred to as the basis of taxation.
 Receipt of benefits is conclusively presumed. Every citizen and resident of the State directly
or indirectly benefits from the 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
educational services, the protection and security of person and property, or simply the comfort
of living in civilized and peaceful society which is maintained by the government.

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. (CIR vs. Algue)

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  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. (Vera vs. Fernandez)

Implication of the lifeblood doctrine in taxation:

1. Tax is imposed even in the absence of a 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 its 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 bases.

Objectives or Purposes of Taxation

1. Revenue Purposes- It is the primary purpose of taxation by collecting funds or property for the
support of the government in promoting the general welfare and protecting its inhabitants.
2. Regulatory Purposes – is the secondary objective or purpose of imposing tax. It is accomplished
to:
a. Regulate inflation,
b. Achieve economic and social stability, and
c. Serve as key instrument for social control.
3. Compensatory Purpose. A tax may be used to make up for the benefit received. Is a way of giving
back the expected economic and social benefits due to the inhabitants.

THEORIES OF COST ALLOCATION

Taxation is a mode of allocating government cost or burden to the people. In distributing the costs or
burden, the government regards the following general considerations in the exercise of its taxation
power:
1. Benefit received theory
 The benefit received theory presupposes that the more benefit one received from the
government, the more taxes he should pay.

2. Ability to pay theory

 The ability to pay theory presupposes that taxation should also consider the taxpayer’s
ability to pay. Taxpayer should be required to contribute based on their relative capacity
to sacrifice for the support of the government.

NATURE/CHARACTERISTICS OF TAXATION
1. It is inherent in sovereignty & the strongest among the three inherent power of the state; it may be
exercised although it is not expressly granted by the Constitution.
 Inherent Power of the State. 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 acknowledge 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.

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 The inherent powers of the state
1. Taxation power is the power of the State to enforce proportional contribution
from its subject 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 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

Point of difference Taxation Police power Eminent domain
Exercising authority government Government Government and
private utilities
Purpose For the support of the To protect the For public use
government general welfare of
the people
Persons affected Community or class Community or class Owner of the
of individuals of individuals property
Amount of imposition Unlimited (Tax is Limited (imposition No amount imposed.
based on government is limited to cover (The government
needs.) cost of regulation.) pays just
compensation.)
Importance Most important Most superior important
Relationship with the Inferior to the “Non- Superior to the “Non- Superior to the “Non-
Constitutions impairement Clause” impairement Clause” impairement Clause”
of the Constitution of the Constitution of the Constitution
Limitation Constitutional and Public interest and Public purpose and
inherent limitations due process just compensation

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 exist independently of the constitution and are execisable by the government
even without Constitutional grant. However, the Constitution may impose conditions
or limits for their exercise.
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.

2. It is legislative in character; only the legislature can impose taxes (although the power may be
delegated).

3. It is for public purposes; taxes must be used to finance recognized public needs, and for the welfare of
the general public.

4. It is territorial in operation; the power to tax can only be exercised within the territorial jurisdiction of
a taxing authority.

5. Tax exemption of the government; applies only to government entities through which the government
immediately and directly exercises its governmental functions.

6. It is subject to Constitutional and inherent limitations; it is not an absolute power that can be
exercised by the legislature anyway it pleases.

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 Inherent limitations are the natural restrictions to safeguard and ensure that the power of
taxation shall be exercised by the government only for the betterment of the people whose
interest should be served, enhanced and protected.
1. Purpose must be public in nature
o Tax is intended for the common good. Taxation must be exercised absolutely
for public purpose. It cannot be exercise to further any private interest.

2. Being inherently legislative, taxation may not be delegated

o The legislative taxing power is vested inclusively 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.
Exceptions to the rule of non-delegation
1. Under the constitutions, local government units are allowed
to exercise the power to tax to enable them to exercise their
fiscal autonomy.
2. Under the tariff and customs code, the President is
empowered to fix the amount of tariffs to be flexible to trade
conditions.
3. Other cases that require expedient and effective
administration and implementation of assessment and
collection of taxes.

3. Exemption of government entities, agencies and instrumentalities

o The government normally does not tax itself as this will not raise additional
funds but will only impute additional costs.
o 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.

4. International comity
o Pertains to mutual courtesy or reciprocity between states. It is a basic
principle of international law that all state are equally sovereign. Each state
observes co-equally sovereignty by not taxing the properties, income, or
effects of fellow states.

5. Limitation of territorial jurisdiction

o Tax can be imposed only with in 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.

Exemption 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, resident or citizens such as resident citizens,
non-resident citizen and resident aliens are taxable on transfer of
properties located within or outside the Philippines.

 Constitutional limitations are provisions of the fundamental law of the land that restrict the
supreme, plenary, unlimited and comprehensive exercise by the State of its inherent power to
tax.
1. Due process of law
 No one should be deprived if his life, liberty, or property without due
process of law. Tax laws should neither be harsh nor oppressive.

2. Equal protection of the law

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  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.

3. 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.

4. Progressive system of taxation

 Under the progressive system, tax rates increase as the tax base increases.
The constitution favors progressive tax as it is 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.

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.
 However, this constitutional guarantee applies only when debt is acquired
by the debtor in good faith. Debt acquired in bad faith constitutes estafa,
a criminal offence punishable by imprisonment.

6. 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 be cancelled by a unilateral government action.

7. 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 to tax. This
exemption, however, does not extend to income from proprietary or
commercial in nature.

8. Exemption of religious or charitable entities, non-profit cemeteries, churches

and mosque from property taxes
 The constitutional exemption from property tax applies for properties
actually, directly, and exclusively (i.e. primarily) used for charitable,
religious, and educational purposes. In observing this Constitutional
limitation, the Philippines follows the doctrine of use wherein only
properties actually devoted for religious, charitable, or educational
activities are exempt from real property tax.

9. 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 in support thereof.

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 10. Exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions
 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.

11. 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 congress in the grant of tax
exemption.

12. Non-diversification of tax collections

 Tax collections should be used only for public purpose. It should never
be diversified or use for private purpose.

13. 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.

14. Non-impairment of the jurisdiction of the supreme court to review tax cases
 Notwithstanding the existence of the Court of Tax Appeal, which is a
special court, all cases involving taxes can be raised to and be finally
decided by the Supreme Court of the Philippines.

15. The requirement that appropriations, revenue, or tariff bills shall originate
exclusively in the house of representatives
 Laws that add income to the national treasury and those that allows
spending therein must originate from the House of Representatives while
Senate may 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 held constitutional by the Supreme Court when senate
changed the entire house version of a tax bill.

16. The delegation of taxing power to local government units

 This is a constitutional recognition of the local autonomy of local
governments and an express delegation of the taxing power.

STAGES OF THE EXERCISE OF TAXATION POWER

1. 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, and
2. The senate
Matters of legislative discretion in the exercise of taxation
a. Determining the object of taxation
 Object of taxation refers to the subject to which taxes are imposed.
i. Persons, whether natural or juridical persons
ii. Properties, whether real, personal, tangible or intangible properties
iii. Excise objects such as transaction. Privilege, right, interest.

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 b. Setting the tax rate or amount to be collected
c. Determining the purpose for the levy which must be public use
d. Kind of tax to be imposed
e. Apportionment of the tax between the national and local government
f. Situs of taxation
g. Method of collection

2. 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 IN TAXATION
Literally, situs of taxation means place of taxation. It is the State or political unit which has
jurisdiction to impose a particular tax.
 The determination of the situs of taxation depends on various factors including the:
1. Nature, kind or classification of the tax being imposed
2. Subject matter thereof (i.e. person, property, act or activity ;)
3. Citizenship of the taxpayer
4. Residence of the taxpayer;
5. Source of the income.
6. Place of the excise, privilege, business or occupation being taxed.
Examples of Situs Rules:
1. Business tax situs: Business are subject to tax in the place where the business is
conducted.
2. Income tax situs on services: Service fees are subject to tax where they are
rendered.
3. Income tax situs on sale of goods: The gain on sale is subject to tax in the place of
sale.
4. Property tax situs: Properties are taxable in their location.
5. Personal tax situs: Persons are taxable in their place of residence.

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

1. Prospectivity of tax laws
 Taxes are generally prospective in operation. An ex post facto law or a law that retroacts is
prohibited by the Constitution. Exceptionally, income tax laws may operate retrospectively if
so intended by Congress under certain justifiable conditions. For example, congress can levy
tax on income earned during periods of foreign occupation even after the war.

2. Imprescriptibility of taxes
 States that unless otherwise provided by the tax itself, taxes in general are not cancelable.
 Under the NIRC, tax prescribes if not collected within 5 years from the date of its assessment.
In the absence of an assessment, tax prescribes if not collected by judicial action within 3
years from the date the return is required to be field. However, taxes due from taxpayers who
did not file a return or those who field fraudulent returns do not prescribe.

3. 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 be taxed once, for the same
purpose and with the same kind of character of tax.

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4. Exemption from taxation
 denotes a grant of immunity, expressed or implied, to a particular person, corporation, or to
person or corporation of a particular class, from a tax upon property or an excise which
person and corporation generally within the same taxing district are obliged to pay.

5. Equitable recoupment
 states that a tax claim for refund, which is prevented by prescription, may be allowed to be
used as payment for unsettled tax liabilities if both taxes arise from the same transaction in
which overpayment is made and underpayment is due. It is not applicable to cases where the
taxes involved are totally unrelated.

6. Set- off taxes

 states that taxes are not subject to set off or legal compensation because the government and
the taxpayer are not mutual creditor and debtor of each other.
Exceptions:
1. 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
2. Cases of obvious overpayment of taxes
3. Local taxes

7. Taxpayer suit
 effected through court proceeding and could only be allowed if the act involves a direct and
illegal disbursement of public funds derived from taxation.

8. Compromises
 this doctrine provides that compromises are generally allowed and enforceable when the
subject matter thereof is not prohibited from being compromised and the person entering such
compromise is duly authorized to do so.

9. Escape from taxation

 the means available to the taxpayer to limit or even 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. In income taxation,
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 may be done by selecting 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. Tax exemptions may be granted by the Constitutions, law, or contract.
All forms of tax exemptions can be revoked by Congress except those
granted by the Constitution and those granted under contracts.

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

1. Shifting - This is the process of transferring tax burden to other taxpayer.
a. Forward shifting - this is the shifting of tax which follows
the normal flow of distribution (i.e.from manufacturer to
wholesaler, retailers to consumers). forward shifting is
common with essential commodities and services such as
food and fuel.
b. Backward shifting - this is the reverse of forward shifting.
Backward shifting is common with non-essential

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 commodities where buyers have considerable market power
and commodities with numerous substitutes products.
c. Onward shifting - this refers to any tax shifting in the
distribution channel 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.
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.

Taxation Law

 Refers to any law that arises from the exercise of the taxation power of the State.

Types of taxation laws

1. Tax laws – These are laws that provide for the assessment and collection of taxes.
Examples:
a. TRAIN
b. The National Internal Revenue Code (NIRC)
c. The Tariff and Customs Code
d. The Local Tax Code
e. The Real Property Tax Code

2. Tax exemption laws – These are laws that grant immunity from taxation.
Examples:
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1986 (E.O 226)
c. Barangay Micro- Business Enterprises (BMBE) Law
d. Cooperative Development Act
Sources of Taxation Laws
1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax treaties and conventions with foreign countries
8. Revenue Regulations
Types of Administrative Issuances
1. Revenue regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue bulletins
6. BIR rulings

TAXES DEFINED
 Taxes are the enforced proportional contributions from persons and property levied by the law-
making body of the State by virtue of its sovereignty for the support of the government and all public
needs.

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 Essential elements or Characteristics of taxes
1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is imposed for the purpose of raising revenue.
5. It is levied on persons, property, or the exercise of a right or privilege.
6. It is commonly required to be paid at regular intervals.
7. It is levied by the State which has jurisdiction over the subject or object of taxation.
8. It is levied by the law-making body of the State.
9. It is levied for public purpose or purposes.

Classification of Taxes

A. As to purpose
1. Fiscal or revenue tax - a tax imposed for general purpose
2. Regulatory - a tax imposed to regulate business, conduct, acts or transactions
3. Sumptuary – a tax levied to achieve some social or economical objectives

B. As to subject matter
1. Personal, poll or capitation – a tax on persons who are residents of a particular territory
2. Property tax – a tax on properties, real or personal
3. Excise or privilege tax – a tax imposed upon the performance of an act, enjoyment of a
privilege or engagement in an occupation

C. As to incidence
1. Direct tax – when both the impact and incidence of taxation rest upon the same taxpayer, the
tax is said to be direct. The tax is collect from the person who is intended to pay the same.
The statutory taxpayer is the economic taxpayer.
2. Indirect tax – when the tax is paid by any person other than the one who is intended to pay the
same, the tax is said to be indirect. This occurs in the case of business taxes where the
statutory taxpayer is not the economic taxpayer.
The statutory taxpayer is the person named by law to pay the tax. An economic taxpayer is
the one who actually pays the tax.
D. As to amount
1. Specific tax– a tax of a fixed amount imposed on a per unit basis such as per kilo, liter or
meter, etc.
2. Ad valorem – a tax of a fixed proportion imposed upon the value of the tax object.

E. As to rate
1. Proportional tax – This is a flat rate tax. The use of proportional tax emphasizes equality as it
subjects all taxpayers with the same rate without regard to their ability to pay.
2. Progressive or graduate tax – This is a tax which imposes increasing rates as the tax base
increase. The use of progressive tax rates results in equitable taxation because it gets more tax
to those who are more capable. It aids in lessening the gap between the rich and the poor.
3. Regressive tax – This tax impose decreasing tax rates as the tax base increase. This is the total
reverse of progressive tax. Regressive tax is regarded as anti-poor. It directly violates the
Constitutional guarantee of progressive taxation.
4. Mixed tax- This tax manifest tax rates which is a combination of any of the above types of
tax.

F. As to imposing authority
1. National tax- tax imposed by the national government
a. Income tax- tax on annual income, gains or profits
b. Estate tax- tax on gratuitous transfer of properties by a decedent upon death
c. Donor’s tax- tax on gratuitous transfer of properties by a living donor
d. Value Added tax- consumption tax collection by VAT business taxpayers

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 e. Other percentage tax- consumption tax collected by non-VAT business taxpayers
f. Excise tax- tax on sin products and non- essential commodities such as alcohol,
cigarettes and metallic minerals. This should be differentiated with the privilege tax
which is also called excise tax.
g. Documentary stamp tax- a tax on documents, instruments, loan agreements and papers
evidencing the acceptance, assignment, sale or transfer of an obligation, right or
property incident thereto.

2. Local tax- tax imposed by the municipal or local government

a. Examples:
b. Real property tax
c. Professional tax
d. Business taxes, fees and charges
e. Community tax
f. Tax on banks and other financial institutions

DISTINCTION OF TAXES WITH SIMILAR ITEMS

Tax vs. Revenue
 Tax refers to the amount imposed by the government for public purpose. Revenue refers to all
income collections of the government which includes taxes, tariff, licenses, toll, penalties and
others. The amount imposed is tax but the amount collected is revenue.

Tax vs. License fee

 Tax has a broader subject than license. Tax emanates from taxation power and is imposed
upon any object such as persons, properties, or privileges to raise revenue.
 License fee emanates from police power and is imposed to regulate the exercise of a privilege
such as the commencement of a business or a profession.
 Taxes are imposed after the commencement of a business or profession whereas license fee is
imposed before engagement in those activities. In other words, tax is a post-activity
imposition whereas license is a pre-activity imposition.

Tax vs. Toll

 Tax is a levy of government; hence, it is a demand of sovereignty. Toll is a charge for the use
of other’s property; hence, it is a demand of ownership.
 The amount of tax depends upon the needs of the government, but the amount of toll is
dependent upon the value of the property leased.
 Both the government and private entities impose toll, but private entities cannot impose taxes.

Tax vs. Debt

 Tax arises from law while debt arises from private contracts. Non-payment of tax leads to
imprisonment, but non-payment of debt does not lead to imprisonment. Debt can be subject to
set-off but tax is not. Debt can be paid in kind (dacion en pago) but tax is generally payable in
money
 Tax draws interest only when the taxpayer is delinquent. Debt draws interest when it is so
stipulated but the contracting parties or when the debtor incurs a legal delay.

Tax vs. Special assessment

 Tax is an amount imposed upon persons, properties, or privileges. Special assessment is
levied by the government on lands adjacent to a public improvement. It is imposed on land
only and is intended to compensate the government for a part of the cost of the improvement.
 The basis of special assessment is the benefit in terms of the appreciation in land value caused
by the public improvement. On the other hand, tax is levied without expectation of a direct
proximate benefit.
 Unlike taxes, special assessment attaches to the land. It will not become a personal obligation
of the land owner. Therefore, the non-payment of special assessment will not result to
imprisonment of the owner (unlike in non-payment of taxes)

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 Tax vs. Tariff
 Tax is broader than tariff. Tax is an amount imposed upon persons, privilege, transactions, or
properties. Tariff is the amount imposed on imported or exported commodities.

Tax vs. Penalty

 Tax is an amount imposed for the support of the government. Penalty is an amount imposed
to discourage an act. Penalty may be imposed by both the government and private individuals.
It may arise both from law or contract whereas tax arises from law.

TAX COLLECTION SYSTEMS

1. Withholding system- Under this collection system, the payor of the income withholds or
deducts the tax on the income before releasing the same to the payee and rents the same to the
government. The following are the withholding taxes collected under this system:
a. Withholding tax on compensation- a tax withheld by the employer from payments of
compensation income to employees
b. Expanded withholding tax- a withholding tax prescribed on certain income payments
and creditable against the income the due of the payee for the taxable quarter or year
in which the particular income was earned.
c. Final withholding tax- a kind of withholding tax which is prescribed on certain
income payments and is not creditable against any income tax due of the payee for
the taxable year.
d. Withholding tax on government payments – the tax withheld by the national
government agencies and instrumentalities including government-owned and
controlled corporations on their payment taxpayers, suppliers, or payees.

2. Voluntary compliance system- Under this collection system, the taxpayer himself
determines his income, reports the same through income tax returns and pays the tax to the
government. This system is also referred to as the”self-assessment method.” A portion of the
tax due payable herein may have been withheld under the withholding system, such as:
a. Withholding tax on the compensation earners
b. Expanded withholding tax by taxpayer engaged in business or exercise of
profession
c. The taxes withheld are treated as tax credit (deduction) against the tax due of the
taxpayer in the income tax return. The taxpayer shall pay any balance still due after
such credit or claim refund for excess tax withheld.

3. Assessment or enforcement system- Under this collection system, the government identifies
non-compliant taxpayers, assess their tax dues and penalties, and enforces collections by
coercive means such as summary proceeding or juridical proceeding when necessary.

PRINCIPLES OF A SOUND TAX SYSTEM

 According to Adam Smith, governments should adhere to certain principles or canons evolve a sound
tax system:
1. Fiscal adequacy
 requires that the sources of government funds must be sufficient to cover government
costs. The government must not incur a deficit. A subject deficit paralyzes the
government’s ability to deliver the essential public services to the people. Hence,
taxes should increase in response in government spending
2. Theoretical justice
 suggests that taxation should consider the taxpayer’s ability to pay. It also suggests
that the exercise of taxation should not be oppressive, unjust, or confiscatory.

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 3. Administrative feasibility
 suggest that tax laws should be capable of efficient and effective administration to
encourage compliance. Government should make it easy for the taxpayer to comply
by avoiding administrative bottlenecks and reducing compliance costs.

The following are applications of the principle of administrative feasibility:

1. E- filing and e-payment of taxes
2. Substituted filing system for employees
3. Final withholding tax on non-resident aliens or corporations
4. Accreditation of authorizes agent banks in the filing and payment of taxes

TAX ADMINISTRATION
 refers to the management of the tax system. Tax administration of the national tax system in the
Philippines is entrusted to the Bureau of Internal Revenue which is under the supervision and
administration of the Department of Finance.

Chief Officials of the Bureau of Internal Revenue

1. Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
a. Operations group
b. Legal Enforcement Group
c. Information System Group
d. Resources Management Group

POWERS OF THE BUREAU OF INTERNAL REVENUE

1. Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties and fines, and judgements in all cases decided in its favor by
the courts
3. Giving effect to, and administering the supervisory and police powers conferred to it by the NIRC and
other laws
4. Assignment of Internal revenue officers and other employees to other duties
5. Provision and distribution of forms, receipts and clearances
6. Issuance of receipts and clearances
7. Submission of annual report, pertinent information to Congress and reports to the congressional
Oversight Committee in matters of taxation

POWERS OF THE COMMISSIONER OF INTERNAL REVENUE

1. To interpret the provisions of the NIRC, subject to review by the secretary of finance
2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals, such
as:
a. Disputed assessments
b. Refunds of internal revenue taxes, fees, or other charges
c. Penalties imposed
d. Other NIRC and special law matters administered by the BIR
3. To obtain information and to summon, examine and take testimony of persons to effect tax collection
4. To make assessment and prescribe additional requirement for tax administration and enforcement
5. To examine tax returns and determine tax due thereon
6. To conduct inventory taking or surveillance
7. To prescribe presumptive gross sales and receipts for a taxpayer when:
a. The taxpayer failed to issue receipts; or
b. The CIR believes that the books or other records of the taxpayer do not correctly reflect the
declaration in the return.
8. To terminate tax period when the taxpayer is:
a. Retiring from business
b. Intending to leave the Philippines

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 c. Intending to remove, hide, or conceal his property
d. Intending to perform any act tending to obstruct the proceeding for the collection of the tax or
render the same ineffective
9. To prescribe real property values
10. To compromise tax liability of taxpayers
11. To inquire into bank deposits, only under the following instances:
a. determination of the gross estate of a decedent
b. To substantiate the taxpayer’s claim of financial incapacity to pay tax in an application for tax
compromise
12. To accredit and register tax agents.
13. To refund or credit internal revenue taxes
14. To abate or cancel tax liabilities in certain cases
15. To prescribe additional procedures or documentary requirements
16. To delegate his powers to any subordinate officer with a rank equivalent to a division chief of an
office

Non-delegated power of the CIR

The following powers of the Commissioner shall not be delegated:

1. The power to recommend the promulgation of rules and regulations to the Secretary of Finance.
2. The power to issue rulings of first impression or to reverse, revoke or modify any existing rulings of
the Bureau
3. The power to compromise or abate any tax liability
Exceptionally, the Regional Evaluation Boards may compromise tax liabilities under the following:
a. assessments are issued by the regional offices involving basic deficiency tax of 500,000 or
less, and
b. minor criminal violations discovered by regional and district officials

Composition of the Regional Evaluation Board

a. Regional Director as chairman
b. Assistant Regional Director
c. Heads of the Legal, Assessment and Collection Division
d. Revenue District Officer having jurisdiction over the taxpayer

4. The power to assign and reassign internal revenue officers to establishments where articles subject to
excise tax are produces or kept.

References:
Income taxation, 2019 Ed. By Win Lu Ballada
Income taxation, 2014 Ed. by Valencia
Income taxation 2013 Ed, by Ampongan
Income taxation 2013 Ed, by Nick Aduana
Income taxation 20190 Ed, by Rex B. Banggawan,
Income taxation 2019 Ed, by Enrico Tabag, CPA

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 Activity No.1- General Principles in Taxation
Exercise Drill No. 1
In the space provided for, indicate whether the statement relates to a Constitutional limitation (C) or inherent
limitation (I). if it is not a limitation to the taxing power, indicate (N).
1. Non-assignment of taxes
2. Territoriality of taxation
3. Taxes must be for public use
4. Exemption of the property of religious institutions from income tax
5. Exemption of the revenues and asset of non-profit, non-stock
educational institutions
6. Non-delegation of the taxing power
7. Non-appropriation for religious purpose
8. The requirements of absolute majority in the passage of a tax
exemption law.
9. Non-imprisonment for non-payment of tax or debt
10. Taxpayers under the same circumstance should be treated equal both
in terms of privileges and obligations
11. Exemption from property taxes of religious, educational and charitable
entities.
12 Government income and properties are not objects of taxation
13 Each local government shall have the power to create its own sources
of revenue
14 Imprescriptibility in taxation
15. Non-impairment of obligation and contracts.
16. Guarantee of proportional system of taxation
17. International courtesy
18. Non-impairment of the jurisdiction of the Supreme Court to review tax
cases.
19. The government is not subject to estoppel.
20. Imprisonment for non-payment of poll tax.

Exercise Drill No. 2

Identify the type of tax that is described by the following:
1. A consumption tax collected by non-VAT business
2. Tax on gratuitous transfer of property by living donor
3. Tax that decreases in rates as the amount or value of the tax object
increases
4. Tax collected upon persons who are not the statutory taxpayers
5. Tax that is imposed based on the value of the tax object
6. Tax for general purpose
7. Tax imposed by the National Government
8. A tax on sin products or non-essential commodities
9. Imposed on the gratuitous transfer of property upon death
10. Tax on residents of a country
11. Tax that remains of flat rate regardless of the value of the tax object
12. Tax which is collected on a per unit basis
13. Tax is collected upon the statutory taxpayer
14. Tax imposed to regulate business or professions
15. Tax upon performance of an act or enjoyment of a privileged

Exercise Drill No.3

Identify which item is described by the following:
1. It refers to all income collections of the government.
2. It is an imposition for the support of the government.
3.It is imposed upon land adjacent to public improvements

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 4. It is imposed on imported and exported commodities.
5. It is a charge imposed prior to the commencement of business or
exercise of a profession.
6. It is a post activity rather than a pre-activity imposition.
7. It is subject to compensation or set-off.
8. It is a charge for the use of others property.
9. It is an imposition intended to discourage an act.
10. It arises from contacts rather than from law.

True or False
1. Eminent domain involves confiscation of prohibited commodities to protect the well-being of the
people.
2. Horizontal equity requires consideration of the circumstance of the taxpayer.
3. Taxes are the lifeblood of the government.
4. Taxation is a mode of apportionment of government costs to the people.
5. There should be direct receipt of benefit before one could be compelled to pay taxes.
6. The exercise of taxation power requires Constitutional grant.
7. Taxation is inherent in sovereignty.
8. Police power is the most superior power of the government. Its exercise needs to be sanctioned by the
Constitution.
9. All inherent powers presuppose are equivalent form of compensation.
10. The reciprocal duty of support between the government and the people underscores the basis of
taxation.
11. The Constitutional exemption of religious, charitable and non-profit cemeteries, churches and
mosques refers to income tax and real property tax.
12. Taxpayers under the same circumstance should be taxed differently.
13. Taxation is subject to inherent and Constitutional limitations.
14. International comity connotes courtesy between nations
15. Collection of taxes in the absence of a law is violative of the constitutional requirement for the due
process.
16. The scope of taxation is regarded as comprehensive, plenary, unlimited and supreme.
17. No one shall be imprisoned for non-payment of tax.
18. The lifeblood doctrine requires the government to override its obligations and contracts when
necessary.
19. 2/3 of all members of congress required to pass a tax exemption law.
20. The government should tax itself.

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 Self-Assessment Test
Multiple Choices

1. 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

2. The agreement among nations to lessen tax burden of their respective subjects is called
a. Reciprocity
b. International comity
c. Territoriality
d. Tax minimization

3. An educational institution operated by a religious organization was being required by a local

government to pay real property tax. Is the assessment valid?
a. Yes, with respect to all properties held by such educational institution
b. Yes, with respect to properties not actually devoted to educational purposes.
c. No, with respect to any properties held by such educational institution.
d. No, with respect to properties not actually devoted to educational purposes.

4. Which is not a Constitutional limitation?

a. No tax law shall be passed without the concurrence of a majority of all members of Congress.
b. Non-appropriation for religious purposes
c. No law impairing government obligations on contracts shall be passed.
d. Non- impairment of religious freedom

5. 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.

6. The following are inherent limitations to the power of taxation except one. Choose the exception.
a. Territoriality of taxation
b. Legislative in character
c. For public purposes
d. Non-appropriation for religious purpose

7. That all taxable articles or properties of the same class shall be taxed at the same rate underscores
a. Equality in taxation
b. Equity of taxation
c. Uniformity of taxation
d. None of these

8. The following are the limitations of taxation:

a. Territoriality of taxation
b. Exemption of the government
c. Taxation is for public purpose
d. Non-impairment of contracts
e. Non-delegation of the power to tax

9. Which of these are classified as both constitutional and inherent limitations?

a. A and B
b. B and C
c. C and E
d. D and E

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10. The provisions in the constitution regarding taxation are
a. Grants of the power to tax
b. Limitation of the power to tax
c. Grants and limitations to the power to tax
d. Limitations against double taxation

11. The Constitutional exemption of non-stock, non-profit educational institutions refers to

a. Real property tax
b. Income tax
c. Property tax and income tax
d. Business tax

12. Which is principally limited by the requirement of due process?

a. Eminent domain
b. Police power
c. Taxation
d. All of these

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. Statement 1 and 2
d. Neither statement 1 and 2

14. Which of the State affects the least number of people?

a. Police power
b. Eminent domain
c. Taxation
d. Taxation and police power

15. Select the correct statement.

a. The benefit received theory explains that the government is obliged to serve the people since
it is benefiting from the tax collection from its subjects.
b. The lifeblood theory underscores that taxation is the most superior power of the State.
c. The police power of the State is superior to the non-impairment clause of the Constitution.
d. The power of the taxation is superior to the non-impairment clause of the Constitution.

16. Which of the following is not exercised by the government?

a. Taxation
b. Police power
c. Eminent domain
d. Exploitation

17. Select the incorrect statement.

a. Since there is compensation, eminent domain raises money for the government.
b. Once a government is established, taxation is exercisable.
c. The most important of the power is taxation.
d. Police power is more superior than the non-impairment clause of the Constitution.

18. The following statements reflects the differences among the inherent powers except:
a. The property taken under eminent domain and taxation are preserved but that of police power
is destroyed.
b. Eminent domain and police power do not require Constitutional grant, but taxation, being a
formidable power, requires constitutional grant.
c. Only eminent domain can be exercised by private entities.

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 d. Taxation, police power, and eminent domain are ways in which the government interferes
with private right and property.

19. Statement 1: The taxation power can be used to destroy if the law is valid.
Statement 2: A tax law which destroys things, business or enterprises for the purpose of raising
revenue is an invalid tax law.
Which is incorrect?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement

20. Select the correct statement.

a. The provisions on taxation in the Philippine Constitution are grants of the power to tax.
b. The power to tax includes the power to destroy.
c. When taxation is used as a tool for general and economic welfare, this is called fiscal purpose.
d. The sumptuary purpose taxation is to raise funds for the government.

21. Which of the following power is inherent or co-existent with the creation of the government?
a. Police power
b. Eminent domain
c. Taxation
d. All of these

22. When tax is collected upon someone who is effectively reimbursed by another, the tax is regarded as
a. direct c. personal
b. indirect d. illegal

23. All are ad valorem taxes, except one. Select the exception.
a. Poll tax c. Real property tax
b. Estate tax d. Capital gains tax on real property capital asset

24. Taxation power can be used to destroy

a. as a revenue measure c. as an implement of police power
b. even if the tax is invalid d. when the State is in dire need of fund

25. Which is not a characteristic of tax?

a. It is an enforced contribution
b. It is generally payable in money
c. It is subject to assignment
d. It is levied by the law-making body of the State having jurisdiction

26. Which of the following is a local tax?

a. Value added tax c. Documentary stamp Tax
b. Real property tax d. Constitution

27. Which is not a source of tax law?

a. CHED regulations c. Judicial decisions
b. BIR rulings d. Constitution

28. Tax as to purpose is classified as

a. Fiscal or regulatory c. National or local tax
b. Direct or indirect tax d. Specific or ad valorem tax

29. Tax as to incidence is classified as

a. Fiscal or regulatory c. National or local tax
b. Direct or indirect tax d. Specific or ad valorem tax

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30. Which is not a nature of tax?
a. Enforced proportional contribution
b. Enforced within the territorial jurisdiction of the taxing authority
c. Levied by the lawmaking body
d. Generally payable in kind

31. The Commissioner of Internal Revenue is not authorized to

a. Interpret the provisions of the National Internal Revenue Code
b. promulgate Revenue Regulations
c. terminate an accounting period
d. prescribe presumption gross receipts

32. Which is not a power of the Commissioner of Internal Revenue?

a. To change tax periods of taxpayers
b. To refund internal revenue taxes
c. To prescribe assessed value of real properties
d. to inquire into bank deposits only under certain cases

33. The principles of a sound tax system exclude

a. Economic efficiency c. Theoretical justice
b. Fiscal adequacy d. Administrative feasibility

34. Which of the following best describes the effect of tax condonation?
a. It only covers the unpaid balance of tax liability
b. It is conditional on the taxpayer paying some portion of the unpaid tax
c. It generally applies to all taxpayers
d. All of these

35. Which is not an application of a principle of a sound tax system?

a. Taxes should adjust based on government needs
b. Taxation should be progressive
c. Taxation should encourage convenient compliance
d. None of these

36. By which principle of a sound tax system is the elasticity in tax rates is justified?
a. Theoretical justice c. Administrative feasibility
b. Fiscal adequacy d. All of these

37. Violation of this principle will make a tax law invalid

a. Fiscal adequacy c. Administrative feasibility
b. Theoretical justice d. Economic consistency

38. Which of the following is not an application of the lifeblood doctrine?

a. The government has the right to select the object of taxation
b. Taxation is the rule, exemption is the exemption
c. Claim for exemption is strictly construed against the taxpayer
d. None of these

39. Which of the following is the BIR not empowered to do?

a. Assess national taxes
b. Collect income, business and transfer taxes
c. Assess and collect local taxes
d. Enforce forfeitures, penalties and fines

40. Which principle demands that tax should be just, reasonable, and fair?
a. Theoretical justice c. Administrative feasibility
b. Fiscal adequacy d. Economic consistency

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