Course Code and Title : BACR 5 - Income Taxation

Lesson Number : 1
Topic : Fundamental Principles of Taxation
Instructor : Prof. Rosario A. Calamba, CPA, MBM, PhD
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LEARNING OBJECTIVES

At the end of this lesson, the student should be able to:

1. Identify and differentiate the three inherent powers of the state;

2. Explain the definition of taxation and its necessity for every government;

3. Discuss the different fundamental theories and doctrines in taxation;

4. Define the scope of taxation and classify the sources of its limitations;

5. Explain the stages on the exercise of the power of taxation;

6. Identify the situs of taxable events;

7. Explain the characteristics of double taxation;

8. Identify the different methods of escaping from taxation and explain the effects

on government revenue collections; and

9. Differentiate tax amnesty from tax condonation.

PRE-ASSESSMENT

Identify the words which are described by the following statements by filling out the boxes on the left.
This is the power of the State enforce proportional contribution from its subjects to sustain itself.
Taxes are the main form of government .
This is the place of taxation.
This is the process of transferring the tax burden to other taxpayers.

LESSON PRESENTATION

INHERENT POWERS OF THE STATE

A government has its basic needs and rights which co-exist with its creation. It has rights to
sustenance, protection and properties. The government sustains itself by the power of
taxation, secures itself and the well-being of its people by police power and secures its own
properties to carry out its public services by the power of eminent domain.

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 acknowledged by the people from the very moment they establish their
government.

Taxation
This is the power of the State to enforce proportional contribution from its subjects to
sustain itself.

Police Power
This is the inherent power of a sovereign state to legislate for the protection of the
health, general welfare, safety and morals of the public. It involves the power to
regulate both liberty and property for the promotion of the public good.

The police power of the State may be exercised through taxation because taxes may
be levied for the promotion of the welfare of the public.

Eminent Domain
This is the power of the State to take private property for public use after paying just
compensation. This is synonymous to expropriation.

S imilarities of the Inherent Powers

The three inherent powers of the State are similar in the following senses.

1. They are all necessary attributes of the sovereignty.

2. They are all inherent to the State.
3. They all presuppose an equivalent form of compensation received by the
persons affected by the exercise of the power.

C omparison of the Inherent Powers

Point of
Taxation Police Power Eminent Domain
Difference
Exercising Government and
Government Government
Authority private utilities
For the support of the To protect the general
Purpose For public use
government welfare of the people
Persons Community or class of Community or class of
Owner of the property
Affected individuals individuals
Amount of Limited to cover cost of
Unlimited No amount imposed
Imposition regulation
Importance Most Important Most Superior Important
All persons, property,
All persons, property, Only upon specific
Scope rights, privileges and
rights and privileges property
liberties
No transfer, but only
Transfer of
Taxes collected become restraint on the Transfer is effected in
Property
part of public funds exercise of property favor of the State
Rights
rights
 No special or direct A direct benefit results
No direct benefit but a
Benefits benefit but the general in the form of just
healthy economic
Received benefit of general compensation to the
standard of society
welfare property owner

TAXATION DEFINED:
Taxation is the i nherent power of the state1, e xercised through the legislature2, to i
mpose b urdens3 upon s ubjects and objects4 within its jurisdiction5 for the
purpose of raising revenues6 to c arry out the functions7 of government.

NATURE / CHARACTERISTICS OF TAXATION:

1. Inherent Power of the State
Taxation is one of the three inherent powers of the state, with police power and
eminent domain. Inherence means that even with the absence of an express grant
of the Constitution, the State can still exercise the power to levy and collect taxes.

2. Exercised through the Legislature

Only the legislative branch of the government can levy taxes, meaning, tax laws
can only originate, specifically, from the House of Representatives. The Senate,
however, may propose tax laws to the House of Representatives.
The executive branch is tasked in the enforcement of said tax laws through the
assessment and collection of taxes, whilst, the judiciary branch is concerned with
any tax-related cases that may emanate from the administration of taxes.

3. Impose Burdens
The imposition of taxes to individuals, objects or privileges normally would
cause a financial burden to the taxpayer.

4. Subjects and Objects

Different subjects may be considered in the levying of taxes. Common are those
taxes on individuals, properties and privileges. Taxation serves as a mode by
which the state allocate its costs to its subjects who are benefited by its spending.

5. Within its Jurisdiction

The state can only tax a subject that is within its territoriality. This is true since it is
one of the inherent limitations of taxation. Taxing outside its jurisdiction would
 constitute impossibility of collection and immorality of taxing subjects which do
not receive benefit from the government’s services.

6. Purpose of Raising Revenues

Taxes are the main source of funds which the state needs to conduct its public
services. Though the government also receives inflows from other sources, taxes
generate the most to fund said services.

7. Carry Out the Functions

The government is the one responsible for the various public services like
education and health. In the conduct of said services, the government needs
taxation to defray the costs associated to said services.

Purposes of Taxation
The exercise of the power of taxation may be classified as to its purpose.
R evenue or Fiscal
The primary purpose of taxation on the part of the government is to provide funds or
property with which to promote the general welfare and the protection of its citizens
and to enable it to finance its multifarious activities.

N on-Revenue or Regulatory
Taxation may also be employed for purposes of regulation or control, e.g., imposition
of tariffs on imported goods to protect local industries, the adoption of progressively
higher tax rates to reduce inequalities in wealth and income and the increase or
decrease of taxes to prevent inflation or ward off depression.

FUNDAMENTAL THEORIES AND DOCTRINES

Theory of Taxation
A system of government is indispensable to every society. Without it, the people will not relish
the benefits of a civilized and orderly society. The power of taxation proceeds upon the theory
that the government has the necessity for funding; that it cannot continue without means to pay
its expenses; and that for these means, it has a right to compel all its citizens and properties
within its limits to contribute.

Basis of Taxation
The basis of taxation is found in the reciprocal duties of protection and support between the
State and its inhabitants. In return for his contribution, the taxpayer receives benefits and
protection from the government. In short, both the government and the people receive
mutuality of benefits.
 Benefit Received Theory
This theory bases the power of the State to demand and receive taxes on the reciprocal
duties of support and protection. The citizen supports the State by paying the portion
from his property that is demanded in order that he may, by means thereof, be secured
in the enjoyment of the benefits of an organized society. Thus, the taxpayer cannot
question the validity of the tax law on the ground that payment of such tax will render
him impoverished, or lessen his financial or social standing, because the obligation to
pay taxes is involuntary and compulsory, in exchange for the protection and benefits
one receives from the government.

In return for his contribution, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his property. One is
compensation or consideration for the other; protection for support and support for
protection.

However, it does not mean that only those who are able to and do pay taxes can enjoy
the privileges and protection given to a citizen by the government.

In fact, from the contribution received, the government renders no special or

commensurate benefit to any particular property or person. The only benefit to which
the taxpayer is entitled is that derived from the enjoyment of the privilege of living in
an organized society established and safeguarded by the devotion of taxes to public
purpose. The government promises nothing to the person taxed beyond what may be
anticipated from an administration of the laws for the general good.

R eceipt of benefits 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 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 a civilized and peaceful society which
is maintained by the government.
While most public services are received indirectly, their realization by every citizen and
resident is undeniable. In taxation, the receipt of these benefits by the people is conclusively
presumed, thus, taxpayers cannot avoid payment of taxes under the defense of absence of
benefit received. The direct receipt or actual availment of government services is not a
precondition to taxation.
Ability to Pay Theory:
The ability to pay theory presupposes that taxation should also consider the taxpayer’s
ability to pay. Taxpayers should be required to contribute based on their relative capacity
to sacrifice for the support of the government. In short, those who have more should be
taxed more even if they benefit less from the government. Those who have less shall
contribute less even if they received more of the benefits from the government.

Lifeblood Doctrine:
Taxes are the lifeblood of the government and should be collected without necessary
hindrance. They are what we pay for a civilized society. Without taxes, the government
would be paralyzed for lack of motive power to activate and operate it. The
government, for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral and
material values. Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need. Put simply, taxes are needed by the government to
carry out its functions.

Other Fundamental Doctrines

M arshall Doctrine
“The power to tax is the power to destroy.” Taxation power can be used as an
instrument of police power. It can be used to discourage or prohibit undesirable
activities or occupation.

H olme’s Doctrine
“Taxation power is not the power to destroy while the court sits.” Taxation power may
be used to build or encourage beneficial activities or industries by the grant of tax
incentives.

P rospectivity of Tax Laws

Tax laws are generally prospective in operation. However, tax laws may operate
retrospectively if so intended by Congress under certain justifiable conditions.

N on-Compensation or Set-Off
Taxes are not subject to automatic set-off or compensation. The taxpayer cannot delay payment
of tax to wait for the resolution of a lawsuit involving the pending claim against the
government. Tax is not a debt; hence, it is not subject to set-off.

Exceptions:
a. 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
b. Cases of obvious overpayment of taxes
c. Local taxes
N on-Assignment of Taxes
Tax obligations cannot be transferred to another entity by contract. Contracts executed by
the taxpayer to such effect shall not hinder the government to collect taxes.
I mprescriptibility in Taxation
The government’s right to collect taxes does not prescribe unless the law itself provides.

In the Philippines, tax prescribes if not collected within 5 years from the date of its
a ssessment. In the absence of an assessment, tax prescribes if not collected within 3
years f rom the date the return is required to be filed. However, taxes due from
taxpayers who did not file a return or those who filed a fraudulent returns do not
prescribe.

D octrine of Estoppel
The error of any government employee does not bind the government. It is held that
the neglect or omission of government officials entrusted with the collection of taxes
should not be allowed to bring harm or detriment to the interest of the people.

J udicial Non-Interference
Generally, courts are not allowed to issue injunction against the government’s pursuit
to collect tax as this would unnecessarily defer tax collection.

SCOPE OF TAXATION
The power of taxation is the most absolute of all powers of the government. It has
the broadest scope of all the powers of government because in the absence of
limitations, it is considered as comprehensive, unlimited, plenary and supreme.

However, the power of taxation should be exercised with caution to minimize injury to
the proprietary rights of the taxpayer. It must be exercised fairly, equally, and
uniformly, lest the tax collector kill “the hen that lays the golden egg”.
LIMITATIONS OF TAXATION
Despite the un-seemingly unlimited nature of taxation, it is not absolutely unlimited. Taxation
has its own inherent limitations and limitations imposed by the Constitution.

Inherent Limitations
T erritoriality
Public services are normally provided within the boundaries of the State, thus, tax can
be imposed only within its territories. It cannot tax outside because foreigners do not
derive benefits from our government. The Philippines would not tax objects from
foreign States as this would amount to encroachment of foreign sovereignty.
I nternational Comity
This pertains to mutual courtesy or reciprocity between states. When a state enters into
treaties with other states, it is bound to honor the agreements as a matter of mutual
courtesy and in case such treaties are in conflict with local laws, the treaties are given
primacy.

P ublic Purpose
Proceeds from the collection of tax is intended for the common good, thus, tax must be
exercised absolutely for public purpose and cannot be exercised to further any private
interest.

E xemption of the Government

Taxation, being broad, the government can exercise the power to tax including
upon itself. However, taxing itself would not raise additional funds rather will
only impute additional costs.

N on-Delegation of the Taxing Power

The legislative taxing power is vested exclusively in Congress and is non-delegable
pursuant to the doctrine of separation of the branches of the government.

Constitutional Limitations
As the power of taxation is inherent to every state, there is no need for an express stipulation of
law for the State to exercise it. In fact, the Constitution only tackles the power of taxation by
imposing limitations on its exercise.

D ue Process of Law
No one should be deprived of his life, liberty or property without due process of law. Tax
laws should neither be harsh nor oppressive.

Aspects of Due Process:

Substantive Due Process – Tax must be imposed only for public purpose, collected only
under authority of v alid law and only by the taxing power having jurisdiction. An
assessment without legal basis violates the requirement of due process.
Procedural Due Process – There should be n o arbitrariness in assessment and collection
of taxes and the government shall observe the taxpayer’s right to notice and hearing.

E qual Protection of the Law

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. This rule applies
where taxpayers are under the s ame circumstances and conditions.

A common example of this would be the Congress cannot exempt sellers of “balot”
while subjecting sellers of “penoy” to tax since they are essentially the same goods.

Uniformity Rule
Taxpayers under dissimilar circumstances should not be taxed the same. Taxpayers
should be classified according to commonality in attributes. Each class is taxed
differently but taxpayers falling under the same class are taxed the same.

P rogressive System
In a progressive system, t ax rates increase as the tax base increases. This is consistent
with the ability to pay theory. Moreover, the progressive system aids in an equitable
distribution of wealth to society by taxing the rich more than the poor.

N on-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. It should be noted, however, that only the
non-payment of Basic
P oll Tax (cedula) is within the scope of this limitation. Non-payment of other taxes may
result to imprisonment.

N on-Impairment of Obligation and Contract

The state 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.

F ree Worship Rule

The Philippine government adopts free exercise of religion and does not subject its
exercise of taxation. The properties and revenues (not commercial in nature) of
religious institutions are not subject to tax.

E xemption of religious, charitable or educational entities, nonprofit cemeteries,

churches and m osques, lands, building, and improvements from property taxes
The constitutional exemption from property tax applies for properties actually,
directly and e xclusively used for charitable, religious and educational purposes.

N on-appropriation of public funds or property for the benefit of any church, sect, or
system o f religion
This constitutional limitation is intended to highlight the separation of the church 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.

E xemption from taxes of the revenues and assets of non-profit, non-stock,

educational i nstitutions
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 assets and revenues actually, directly and
exclusively devoted for educational purposes.
C oncurrence of a majority of all members of Congress for the passage of a law granting
tax e xemption
The Constitution requires the vote of majority of all members of Congress in the grant
of tax exemptions. A q uorum majority, however, is only required for the withdrawal
of tax exemption.

N on-diversification of tax collections

Tax collections should be used only for public purposes. It should never be diversified
or used in private purpose.

N on-delegation of Taxing Power

The impact of taxation cannot be delegated. The incidence, however, may be delegated
on matters involving expedient and effective administration.

N on-impairment of the jurisdiction of the Supreme Court to review tax cases

All cases involving taxes can be raised to and be finally decided by the Supreme Court of
the Philippines.

A ppropriations, revenue and tariff bills shall originate exclusively from the
House of Representatives
Tax Laws should emanate from the House of Representatives, however, the
Senate may propose tax laws and may concur amendment.

E ach LGU shall exercise the power to create its own sources of revenue and shall
have a just s hare in the national taxes
This is a constitutional recognition of the local autonomy of LGUs and an express
delegation of taxing power.

STAGES OF EXERCISE OF TAXATION POWER

Levy or Imposition
This process involves the enactment of a tax law by Congress. It is also referred
to as the l egislative act in taxation.

Assessment and Collection

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

SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes
upon the tax object. Situs rules serves as frames of reference in gauging whether the tax
object is within or outside the tax jurisdiction of the taxing authority.

Tax Imposed Situs Rule

Business Tax It is subject to tax in the place where the business is conducted
Income Tax on Services Service fees are subject to tax where they are rendered
Income Tax on Sale of Goods The gain on sale is subject to tax on the place of sale
Property Tax Properties are taxable in their location
Personal Tax Persons are taxable in their place of residence
Income Tax on Interests It is subject to tax on the debtor’s place of residence.

Other situs rules may be followed depending on the kind of tax being imposed.

Nash E. Mulan, a Chinese national, resides in Sampaloc, Manila. He has the following
endeavors:
 He has a car dealership business in Macau and a restaurant operation in Quezon City.
 He renders consultancy services in the main office of a domestic company.
 He casually sells jewelry stored in Pasay City. During his trip to Palawan, he agreed to
Kim Bong-Un to sell a piece of necklace. They stipulated that it will be delivered in
Pyongyang a week later.
 Mr. Mulan owns a hectare parcel of land in Chonburi, Thailand.

The Philippine government can only impose business taxes upon Mr. Mulan relating to his restaurant
operation since it is within the territory of the country. Income tax on his consultancy services may
also be collected since it is rendered within the Philippines considering it is a domestic company.
Regarding the sale of necklace to Kim Bong-Un, the Philippine government can tax the gain from said
sale since the sale was perfected in Palawan. The stipulation of delivery in North Korea is not
considered in this case. No local government unit in the Philippines can impose a real property tax on
the parcel of land owned by Nash since it is found in Thailand. Mr. Mulan, being a resident of the
country, shall be subject to personal tax, notwithstanding his Chinese nationality.
DOUBLE TAXATION
Double Taxation can be either direct or indirect. For a double taxation to be considered
direct, a ll of the following characteristics should concur:

a. Taxing the same object twice;

b. By the same taxing authority;
c. Within the same jurisdiction;
d. For the same purpose;
e. In the same period.

An example of a direct double taxation is as follows:

The state taxes the income of self-employed individuals at 10% of its monthly gross receipts. In
addition, it also imposes a 2% annual income tax on the annual gross receipts.

In this case, self-employed individuals are burdened by paying the monthly and annual
income tax based on their gross receipts (the annual totaling all monthly gross receipts). It
was imposed by the same taxing authority within the same jurisdiction, with the same
purpose of taxing the income for the same period.

The absence of one or more of the given circumstances does not constitute direct
double taxation, thus, classifying it as an indirect double taxation.

Constitutionality of Double Taxation:

The Philippine Constitution does not prohibit double taxation. However, while it is
not forbidden, it is something not favored. Such taxation should, whenever possible,
be avoided and prevented. In addition , where there is direct double taxation, there
may be a violation of the constitutional precepts of equal protection and uniformity in
taxation.

ESCAPES FROM TAXATION

Escapes from taxation are the means available to the taxpayer to limit or completely avoid
the impact of taxation.

With Loss of Government Revenue

The following are the escapes from taxation that would result to loss of government
revenue.
T ax Evasion
Also known as tax dodging, it refers to any act or trick that tends to illegally reduce or avoid
the payment of tax.
T ax Avoidance
Also known as tax minimization, refers to any act or trick that reduces or totally escapes
taxes by any l egally permissible means.

To further illustrate the difference between tax evasion and tax avoidance, refer to the
table below.

BASIS TAX AVOIDANCE TAX EVASION

What is it? Hedging of tax Concealment of tax

Immoral in nature, which Illegal and objectionable, both in
Attributes involves bending the law script and moral.
without breaking it.
Taking unfair advantage of the Deliberate manipulations in
Concept
shortcomings in the tax laws. accounts resulting in fraud.
Use of Justified means Use of such means that are
Legal implication
forbidden by law
Before the occurrence of tax After tax liability arises.
Happened when
liability.
Type of act Legal Criminal
Consequences Deferment of tax liability Penalty or imprisonment
To reduce tax liability by To reduce tax liability by
Objective
applying the script of law. exercising unfair means.

T ax Exemption
Also known as tax holiday, refers to immunity, privilege or freedom from being subject to a
tax which, others are subject to.

Without Loss of Government Revenue

Escaping from taxation, however, may not result into loss of government revenue.
Common examples of which are as follows.

S hifting
This is the process of transferring the tax burden to other taxpayers.

C apitalization
This pertains to the adjustment of the value of an asset caused by changes in tax rates.

T ransformation
This pertains to the elimination of wastes and losses by the taxpayer to form savings to
compensate for the tax imposition or increase in taxes.
 Tax Amnesty vs. Tax Condonation
Tax amnesty is a general pardon given by the government to erring taxpayers. It
generally operates retrospectively by forgiving past violations. It is conditional upon
the taxpayer paying a portion of the tax. On the other hand, tax condonation or tax
remission prospectively applies to forgiving any unpaid balance of tax. The portion
already paid is not refunded and no further payment is necessary.

GENERALIZATION:
This module discusses the general principles in Taxation that comprises its
definition, the inherent power of the State, the purposes of taxation, its theory and
basis. It includes essential elements of tax, the different theory of taxation, situs of
taxation, its nature and characteristics as well as its limitations.

APPLICATION:

1. Illustrate the three (3) inherent powers of the State by way of an

example.
a. Taxation power
b. Police power
c. Power of Eminent Domain

2. Situational:
The Congress, after much public hearing and consultations with
various sectors of society, came to the conclusion that it will be good for
the country to have only one system of taxation by centralizing the
imposition and collection of all taxes in the national government.
Accordingly, it is thinking of passing a law that would abolish the
taxing power of all local government units. Would such law be valid
under the present Constitution?

3. Explain the difference between Tax Avoidance and Tax Evasion by

citing an illustration.
 4. What is Double Taxation?
- Does it exist in the Philippine Tax System?
- In your answer provide a proof of its existence.

ACTIVITY/EVALUATION

TRUE OR FALSE
Determine whether the following statements are true or false. Write your answers on the
space provided for.
IDENTIFICATION
1. Though the Senate is part of the Philippine Congress, tax bills
Identify the terminologies best described by the following statements.
cannot originate from it.
1. The enforced proportional contributions from persons and property
2. The primary purpose of taxation is to raise revenues of the
levied by the lawmaking body of the State
government in order to defray its expenses on its performance of
2. The power of the State to take private property for public use after
public goods.
paying just compensation
3. The basis of taxation is the government’s necessity for funding.
3. This refers to any act or trick that tends to illegally reduce or
4. Tax laws are generally retrospective in application, meaning,
avoid the payment of tax
application of which starts when the statute is enacted.
4. This pertains to the elimination of wastes and losses by the taxpayer to
5. The Marshall Doctrine states that the power to tax is not the power to
Form savings to compensate for the tax imposition or increase in taxes
destroy while the court sits.
6. The administrative act of taxation is primarily the duty of the
Bureau of Internal Revenue.
7. The police power of the State may be exercised through taxation
because taxes may be levied for the promotion of the welfare of the
public
8. A person cannot be imprisoned for non-payment of tax.
MULTIPLE CHOICE
Choose the best answer from the choices provided.
1. A tax must be imposed for public purposes. Which of the following is not
a public purpose?
a. Procurement of army weapons
b. Construction of rehabilitation centers for drug addicts
c. Construction of a satellite for a telco company
d. Expenses on the President’s state visits to other countries

2. Persons or things belonging to the same class shall be taxed at the same rate
a. Simplicity in taxation
b. Equality in taxation
c. Reciprocity in taxation
d. Uniformity in taxation

3. For double taxation to be considered direct, it should meet the following

criteria, except
a. Taxing the same object twice
b. Same period
c. Same amount of tax
d. Same jurisdiction

4. This is an inherent limitation on the power of taxation

a. Rule on uniformity and equity in taxation
b. Due process of law and equal protection of tine laws
c. Non-impairment of the jurisdiction of the Supreme Court in tax cases
d. Exemption of the government

5. Taxation as distinguished from police power and power of eminent domain

a. Property is taken to promote the general welfare
b. May be exercised only by the government
c. Operates upon the whole citizenry
d. There is generally no limit as to the amount that may be imposed

REINFORCEMENT:

Case Study THE SWEET TAX

1.1
To provide means for the rehabilitation and stabilization of the sugar industry so as
to prepare it for the eventuality of the loss of the quota allocated to the Philippines
resulting from the lifting of U.S. sanctions against African countries, Congress
passes a law increasing the existing tax on the manufacture of sugar on a graduated
basis. All collections made under the law are to accrue to a special fund to be spent
only for the purposes enumerated herein, among which are to place the sugar
industry a living wage and to improve their working conditions.

Sweet, a sugar planter, files a suit questioning the constitutionality of the law
alleging that the tax is not for a public purpose as the same is being levied
exclusively for the aid and support of the sugar industry.

Is the contention of Sweet tenable?

Case Study WHO IS TO BLAME?

1.2
Many consider that it was untimely that the internal revenue office of Wakanda
issued a memorandum circular during the pandemic reminding guidelines on the
registration of online businesses for tax filing. As enacted under Wakanda’s
revenue code, online businesses are liable to income tax on the gains from their
sales.

One of Wakanda’s officials, Senator Jack A. Moon, questioned the internal revenue
office on its issuance indicating that it was not moral for it to run after online
businesses and impose taxes on their income, more so that they are normally
conducting such endeavors for mere subsistence.
Is the senator’s contention tenable?

Case Study IS IT EXEMPT?

1.3
A congregation owns a parcel of land. Most of it is directly used for its religious and
educational endeavors. A small commercial space was built beside the school it operates to
rent out to businesses which would cater the needs of its students. The proceeds from
rentals are being used for charitable purposes.

Should the rental income and property be subjected to tax?

SITUS RULES APPLICATION:
Dina B. Nalican, Spanish by citizenship, obtained the income from the following
during the year.
 Having posted in Shoppy, a customer browsing the online shopping
application in General Santos City asked if she could inspect the car
personally. It was after the inspection in Zamboanga City that the
customer agreed to buy the car. It is to be delivered to and paid by the
customer in Davao City.
 Dina has a hardware store located in Mactan, Cebu. She decided to close
the main branch in Leyte five years ago.
 She also lends thru the 5-6 system of lending in her residence in Quiapo. A
debtor residing in Quezon City owes her P60,000, inclusive of interests.
They are to meet in Sampaloc for the payment of said debt.
 Dina owns a condo unit in Laoag City. A student from Cagayan rents said
property and pays to Dina’s son (residing in Vigan City) the rent when
they meet up in Batac City.

Determine the situs of:

1. Tax on the gain on sale of her car
2. Tax on her hardware store
3. Tax on interest income earned
4. Tax on rental income earned
5. Personal Tax

LIMITATIONS
Identify the source of the limitation on the power of taxation. Write C if it is constitutional, I
if it is inherent, B if it is both constitutional and inherent and N if it is not a limitation.
1. Taxes collected must be used for public purposes
2. Taxes can only be imposed within the territory of the State
3. Taxes cannot be assigned
4. Tax treaties entered into with other contracting States must be honored
5. Imprisonment for non-payment of income tax
6. Non-delegation of the taxing power
7. Exemption from taxes of the revenues and assets of religious,
charitable or educational entities, nonprofit cemeteries, churches
and mosques
8. No arbitrariness in assessment and collection of taxes
REFERENCES:
 Income Taxation with Special Topics and Properly Filled BIR
Forms, 2020 Edition - Enrico D. Tabag, CPA, MBA & Earl Jimson
R. Garcia, CPA, MBA

 Reviewer in Taxation Updated TRAIN-Book 1 2018 Edition-

Asser S. Tamayo, CPA, MBA

 Income Taxation-Laws, Principles and Applications- Rex B.

Banggawan, CPA, MBA

 National Internal Revenue Code of 1997

 Bureau of Internal Revenue Regulations

 Bureau of Internal Revenue Memorandum Circulars

 Supreme Court Decisions on Tax Cases