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Principles of Taxation

A. Nature, Scope, Classification, and Essential Characteristics

i.

Nature
1) Inherent power of sovereignty
The power to tax automatically exists at the moment the State exists
and it is granted even without delegation by the Constitution.
2) Lifeblood of the government
The government will not exist if there is no power of taxation because
there will be no source of income to pay the governments expenses.
3) Legislative in character
The lawmaking body of the government and its political subdivisions
exercise the power of taxation.
4) For the public
Taxes are public money and it must be used for the welfare of the
public.
5) Territorial in Operation
Taxes are only enforceable and effective within its territory.
6) Tax exemption of the government
Government entities exercising governmental functions are inherently
exempt from taxation.
7) Strongest among the inherent powers of the government
Income from taxation is very important for the survival and existence of
the State.

Principle of Benefits-Received states that the government and the people within
its limits have reciprocal duties. The government collect taxes so that it will be
able to perform its functions: provide services to its people and promote the
welfare of the public.
Air Canada filed a Petition for Review appealing its previous case in August 26,
2005. Air Canada asked the court years ago for a tax refund because the
company thinks that they erroneously paid taxes of two and one-half percent on

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its Gross Philippine Billings (of 1997 National Internal Revenue Code states).
The case in 2005 concluded that Air Canada was not taxable by that statute.
Surprisingly, Air Canada should be taxed at a graduated rate because it was
found out that Air Canada is doing business as a resident foreign corporation.
Afterwards, Air Canada filed the Petition for Review last January 11, 2016 and
claimed that they are still entitled for a tax refund due to the fact that they are not
doing business here in the Philippines and the income derived are not taxable.
Consequently, the court denied Air Canadas claim. Air Canada company works
through an agent. The agent principally decides for the company in the
Philippines; therefore, it is doing business in the Philippines and a resident
foreign corporation. Aside from that, Philippines tax treaty with Canada tells that
the Canadian company is to be taxed at the limit of the percentage tax on its
gross Philippine billings. If the graduated rate will be used, it will exceed the limit.
The tax paid years ago was based on the percentage tax; thus, the amount of tax
paid was correct in amount. Applying the Principle of Benefits-Received, Air
Canada was also receiving the services of the Philippine government. The
Philippine government provides protection, proper business climate, and peace
and order for the benefit of the public which also includes Air Canada. (G.R.
No. 169507, Air Canada vs. Commission on Internal Revenue, January 11,
2016)
As a taxpayer, one should be aware of the taxation power of the national
government. Taxes are not just a burden, but it is also a way of the government
to serve the public. In order for one to avail the benefits from the government,
one must take part in ensuring that the government will continue to exist. One
must know that the taxes paid shall benefit the public in many ways.

ii.

Scope
1) Unlimited
The power to tax is unlimited in its range.
2) Plenary
The power to tax is complete.
3) Comprehensive
It is with wide extent of application
4) Supreme
It is with the highest degree.

Of all the inherent powers of the government, one can say that the taxation
power of the government is the strongest. The government can neither survive
nor exist without the power to tax. (Antero Sison vs. Ruben Ancheta, G.R. No.

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594131, 25 July 1984, 130 SCRA 654) Taxation works in every object, trade or
occupation, possession. Taxation begets burden and the government can use its
right to seize or confiscate the property if there will be failure to pay. (Churchill, et
al. vs Concepcion, 34 Phil 969)
Taking this scope of taxation into ones mind, one can tell that taxation is very
important for every nation. Chaos will exist if there will be no government to rule
over against its people.

iii.

Classification
1) According to Subject Matter or Object:
Personal, capitation or poll taxes
Fixed amount of taxes imposed on persons of specific class without
regard to their property or business.
Property taxes
Taxes imposed upon a person after assessing his property.
Excise or license taxes
Taxes that are neither poll taxes nor property taxes.
2) According to Burden or Incidence:
Direct taxes
Taxes demanded upon a person primarily burdened to pay them.
Indirect taxes
Taxes primarily paid by a person who can shift the burden upon
someone else.
3) According to Determination of Amount:
Specific Taxes
Taxes imposed per certain unit without the need for classifying the
subject.
Ad valorem taxes
Taxes paid after assessing the value of the subject to be taxed.
4) According to Purpose:

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General or Fiscal
Taxes imposed for the general purposes of the government.
Special, Regulatory or Sumptuary
Taxes imposed for a particular legitimate object of government.
5) According to Scope or Authority Imposing the Tax:
National
Taxes imposed by the national government.
Municipal or Local
Taxes imposed by the local government.
6) According to Graduation:
Progressive
Tax rate increases as the tax base increases.
Regressive
Tax rate decreases as the tax base increases.
Mixed
Tax rates are partly progressive and partly regressive.
Proportionate
Taxes are fixed on a flat tax base.
Tax power should not be viewed as a power to destroy (Holmes Doctrine) Usage
of taxation by the government is for the public; thus, the state shall preserve the
fundamental rights of people. The tax is valid as long as it does not violate any
limitations and it is exercised with caution to minimize injury to proprietary rights
of a taxpayer. (Roxas vs. Court of Tax Appeals, 23 SCRA 276)
Whatever classification of tax is imputed against a taxpayer, one should be
diligent to pay his tax liability. One should not think that tax is a test of money
stewardship, but tax is a source that will give one direct and indirect benefits.

iv.

Essential Characteristics
1) Enforced contribution

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It is not just a voluntary payment or donation exacted pursuant to
legislative authority.
2) Generally payable in money
The payment must be in legal tender.
3) Proportionate in character
The payment of taxes should be based on theoretical justice or the
proportionate ability to pay.
4) Levied on persons and property within the jurisdiction of the state
The taxes are imposed on the subjects and objects of taxation within its
jurisdiction.
5) Levied pursuant to legislative authority
The law-making body of the state has the ability to impose tax.
6) Levied for public purpose
The tax collected shall be used for the welfare of the public.
Taxation is enforced contribution. One cannot object or resist the payment of
taxes because no personal benefit to him can be pointed out as arising from tax.
(Lorenzo vs. Posadas, 64 Phil 353) It is for public purpose levied on any taxable
object. It is used for support of the objectives of the government. (Valentine Tio
vs Video Regulatory Board, June 1987)
The essential characteristics altogether defines perfectly taxation. In the
Philippines, tax is imposed by the state to an individual wherein he has no right
to abscond, especially that tax is said to be equitable. He must pay his tax
liability in the form of money because this fund received by the government will
be used for the welfare of the public.

B. Principles of Sound Tax System

i.

Fiscal Adequacy
There must be a balance between government revenue and government
expenses.

ii.

Theoretical Justice
The tax system must be equitable and fair to each taxpayers ability to pay.

iii.

Administrative Feasibility

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The tax laws must be enforced on taxpayers with the least inconvenience.
This is based on Adam Smiths Canons of Taxation. A tax measure that violates
theoretical justice is null. (Art. VI, Sec. 8, Phil. Constitution) The Supreme Court
made it clear that the use of tax funds are solely for public purpose. This can
mean that taxation cannot be appropriated for private purposes and this can also
mean that there should be no discrimination upon the taxpayers. (Pascual vs.
Secretary of Public Works, 110 Phil. 331)
A sound tax system is very beneficial for a nation once it is felt. The government
in the Philippines major problem is administrative feasibility compared to
theoretical justice and fiscal adequacy. Corrupt practices are still carried out.
Occurrence of tax evasion cases has a very large number.

C. Limitations on the Power of Taxation

i.

Inherent Limitations
1) Purpose must be public in nature
The proceeds of tax must be used for the support of the State or for some
recognized objects of government or directly promote the welfare of the
community.
2) Prohibition against delegation of the taxing power
The power to enact, impose, and levy tax cannot be delegated.
3) Taxation is territorial.
Taxation is imposed only to subjects within the States territorial limits.

ii.

Constitutional Limitations
1) Due process of law
There must be a right to notice and hearing and tax statute must not be
arbitrary.
2) Equal protection of laws
All persons under the taxation law must be treated alike under similar
circumstances and conditions both in the privileges conferred and
liabilities imposed.
3) Rule of uniformity and equity in taxation

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The rule of taxation shall be uniformly applied without discrimination.
The Congress shall evolve a progressive system of taxation.
4) Prohibition against imprisonment for non-payment of poll tax
No person shall be imprisoned for non-payment of a poll tax. It is
punishable only by surcharge.
5) Prohibition against impairment of obligation of contracts

No law impairing the obligation of contracts shall be passed. It is

impaired when a term or condition is changed without the consent of
the other party.

6) Prohibition against infringement of religious freedom

No law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof.
7) Prohibition against appropriation of proceeds of taxation for the use,
benefit or support of any church

No public money shall be used or appropriated for the use, benefit, or

support of any church, denomination, sectarian institution or system of
religion.

8) Prohibition against taxation of religious, charitable, and educational

entities
Charitable institutions, churches, parsonages or convents appurtenant
hereto, mosques, and non-profit cemeteries and all lands, buildings,
and improvements actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation.
9) Prohibition
institutions

against

taxation

of

non-stock,

non-profit,

educational

All revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the dissolution
or cessation of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law. Proprietary
educational institutions, including those cooperatively owned, may

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likewise be entitled to such exemptions, subject to the limitations
provided by law, including restrictions on dividends and provisions for
reinvestment.
Though taxation is subject to several limitations, Taxation if done correctly is
problem-free. Following the sound tax system and inflicting no harm on public is
relative to non-violation of taxations limitations. Tax law is nothing if it violates the
constitution. For example, violation on due process of law is wrong. This due
process of law requires that the law should be reasonable and substantive and it
requires opportunity to hear both sides in a court before final judgment. (Aragon
vs. Jorge, 85 Phil. 426) Local government units do not have the inherent capacity
or power to tax subjects; only the national government has such right. (National
Power Corporation vs. Albay, 186 SCRA 198)
As a responsible citizen of the Philippines, citizens should understand clearly the
taxes imposed upon them. They must be aware of their basic rights and the
legality of every tax liability they have.

D. Tax Evasion and Tax Avoidance

i.

Tax Evasion
It is an unlawful way of eluding tax that can cause civil and criminal
liabilities. This lessens the payment of tax as it presupposes malice, fraud,
bad faith or willful intent on the part of the taxpayer.

ii.

Tax Avoidance
It is a lawful way of saving and minimizing tax. It is valid if used by the
taxpayer in good faith and the law permits this tax escape.

Evasion of tax is illegal. This form of tax dodging is prohibited and subject to civil
and or or criminal penalties. (Gutbin and Beck, Tax Evasion, p.21) This is also a
form of fraud. (Perez vs CTA, Gonzales, 13 SCRA 633) On the other hand, tax
avoidance is permissible by law. One requisite of this minimization of tax is that it
must be done in good faith. (Heng Tong Textiles Co. Inc. vs. Commissioner,
August 26, 1968) It should not constitute any tax fraud. (Delpher Trades Corp. vs
IAC, 157 SCRA 349)
Tax avoidance is mostly used by high-earning companies and individuals. The
government must make sure that the avoidance made is not just a way of
minimizing tax in a bad faith. Tax evasion cases are usually heard in Philippine
news. This is an indication that the government should be stricter in
implementing taxation rules to avoid tax evasion.

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E. Situs of Taxation

i.

Income from Sources within Philippines

1) Interest
2) Dividends
3) Service
4) Rentals and Royalties
5) Technical advice, assistance or services in connection with technical
management or administration of any scientific, industrial or commercial
undertaking, venue, project or scheme
6) The use or right to use motion picture films, films or videotapes, and tapes
for use in radio broadcasting
7) Sale of real property
8) Sale of personal property

ii.

Income from Sources without Philippines

1) Interest not derived from Philippines
2) Dividends not derived from Philippines
3) Compensation for labor or personal services performed not within
Philippines
4) Rentals and Royalties from property not within Philippines
5) Gains, profits, and income from sale of real or personal property not
located within Philippines.

iii.

Income from Sources partly within and partly without Philippines

This income are from sources that are derived partly from Philippines
and derived partly not from the Philippines.

Not only are the resident citizens bound by the sovereignty of the state subject to
taxation. For example, non-resident foreign corporations are taxed on
compensation derived from the sources within the Philippines though the service
performance was done abroad. (Philam Insurance vs. CTA and CIR, CA-G.R.
No. 31283, 25 April 1995)

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Situs is very important and fundamental in determining tax liability. If one person
is to become a businessman or he is to earn income or gains, he should be
aware that he might bear tax liability for each source of his income.

F. Double Taxation
Taxing for the same tax period the same thing or activity twice, when it
should be taxed but once, for the same purpose and with the same kind of
character of tax.
a. Direct Duplicate Taxation
It is when levies are made by the same taxing authority.
b. Indirect Duplicate taxation
It the double taxation when it is not a direct duplicate taxation.
Double taxation can be oppressive to the taxpayer. It can be seen an indirect
way of violation of theoretical justice. Still, Double taxation is not forbidden by law
and cannot be a reason of defense against taxation. (Pepsi-Cola vs. Tanauan,
69 SCRA 460)
Double taxation may sound negatively to a taxpayer, but one must take note that
the usage of taxes is for the public. Usually, foreign companies are subject to
double taxation; therefore, treaties should be encouraged to let the foreign
companies lessen tax liability.

G. Legislation of Tax Laws

1. Levy
This is the act of imposition by the legislature such as by its enactment of
the law. It refers to the tax policy of the sovereign state. It also involves
granting of tax exemptions, amnesties, and remedies that the government
or taxpayer may avail.
2. Assessment
This is the act of administration and implementation of the tax laws by the
executive through its administrative agencies such as Bureau of Internal
Revenue or Bureau of Customs. It is the appraisal or valuation of the
subject of taxation.
3. Tax payment or collection

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This is the act of compliance by the taxpayer in contributing his share to
the public funds that will be used by the government to pay its
expenditures. In short, this is obtaining payment of tax.
Tax laws are generally civil in nature and they are not political and penal in
nature. (Republic vs. Oasan Vda.De Fernandez et al, 99 Phil 935) It is valid and
legal that income tax returns shall be filed and paid by the inhabitants even if
foreign invaders occupy our country.
Taxation is a form of law. As a law-abiding citizen, one must be knowledgeable
on how the legislation of law works.

H. Impact of Taxes in Nation Building

Taxes are the source of the public funds. This public money shall be used by the
government to pay the expenses it makes. All the projects, actions, and
occurrences made by the government is for the welfare of its people.
Government is expected to respond in form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material
values. To sum it up, tax is what we pay for civilized society.
One basis of taxation is principle of benefits-received. It states that the
government and the people within its limits have reciprocal duties. The
government collect taxes so that it will be able to perform its functions: provide
services to its people and promote the welfare of the public. (Commissioner vs.
Algue, Inc. 158 SCRA 9)
As a resident citizen of the Philippines, one must abide by the laws, especially in
the statutes regarding taxation. In order for one to avail the benefits from the
government, he must take part in ensuring that the government will continue to
exist. One should know that the taxes I pay shall benefit me in many ways.

I. Ethical Tax Compliance and Administration

As taxpayers, it is expected that the persons or subjects should pay taxes. In
complying with the tax rules, taxpayers should have honesty and integrity within
the proper assessment of their tax. Ethical tax compliance must be an important
issue as citizens. On the other hand, ethical tax administration must be given
emphasis in every country or state. The principles of sound tax system should be
the guide of every sovereign state in administering tax.
In administration of tax laws, government should be fair. Tax burdens shall
neither be imposed nor presumed beyond what statutes expressly and clearly
state because tax statute should be construed strictly against the government.

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(CIR vs. CA, Central Vegetable Mfg. Co. Inc., and CTA, G.R. No. 122161, 23
February 1999)
Even there are present controversies in tax administration here in the
Philippines, one must still comply with tax rules. We must follow our moral
principles and contribute to the service of our nation.

J. Organizations
i.

ii.

iii.

Bureau of Internal Revenue

It is the government agency primarily in charge to assess and
collect all taxes and charges imposed by the National Internal
Revenue Code, other tax laws and regulations.

It enforces all forfeitures, penalties, and fines connected with

collecting taxes.

It executes judgments in all cases decided in its favor by the Court

of Tax Appeals and the ordinary courts.

It administers, supervises, and effects police powers authorized by

the NIRC and other laws and when necessary.

This is under Department of Finance.

Bureau of Customs

Along with Tariff Commission, Both are tasked to enforce the Tariff
and Customs Code.

It collects taxes on imports embodied in the National Internal

Revenue Code.

It prevents and suppresses smuggling and other frauds upon the

customs.

This is under Department of Finance.

Local Government Tax Collecting Units

iv.

Persons, agencies, or dully accredited banks authorized by the

Bureau of Internal Revenue, Bureau of Customs, Tariff Commission,
and Land Transportation Office to collect taxes.

Board of Investments

It is the lead investments promotion agency of the Philippines.

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v.

It is at the forefront of the governments efforts to attract direct

investments into the country to contribute to economic growth and
jobs creation, to help uplift the general economic welfare of the
Filipinos.

It is also attached to Department of Trade and Industry.

PEZA

It is a government agency in the Philippines attached to the

Department of Trade and Industry.

It is built to help promote investments in the export-oriented

manufacturing industry into the country by assisting investors in
registering and facilitating their business operations.

It is also providing tax incentives to businesses.

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