Tax1a Basic Principles of Taxation 1

Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA

NATURE, SCOPE, CLASSIFICATION, AND ESSENTIAL CHARACTERISTICS

1. What is taxation?
Taxation is an act, process, or means by which the sovereign (Independent State) through its
law-making body (legislative branch of the government) makes demand for revenue in order
to support its existence and carryout its legitimate objectives,
2. Explain the nature of taxation power
The power of taxation generally refers to the combination of the following natural qualities.
1. Inherent power of Sovereignty
2. Essentially a legislative Function
3. For Public Purposes
4. The strongest of all the inherent powers of the State
5. Subject to International Treaty or Comity
6. Normally Payable in Money
7. Territorial in Scope

Definition:
1. Inherent power of Sovereignty – the power of taxation is co-extensive with sovereignty. It
is existing inseparably with the State. The government could exercise this power
even without any provision in the Constitution mentioning it.
i. Taxation begins its existence from the time a state is born with the
concurrence of its four elements which are people, territory, sovereignty and
government.
2. Essentially a legislative Function – The Law-making body of the government and its
political subdivisions exercise the power of taxation.
3. For Public Purposes – Taxes are public money, and its appropriation to be valid must be for
the common good of the people, such that no individual or particular entity shall
primarily be enriched or benefited from its use.
4. The strongest of all inherent powers of the State - Without money, the government cannot
exist permanently and cannot dispense and exercise any of its powers and / or functions
for its people.
i. In the absence o the limitations provided by the Constitutions, the power of
taxation is unlimited, complete, and supreme. The members of the law-
making body could impose taxes on things and rights at appropriate rates
within boundaries of its inherent restrictions.
5. Subject to Inherent International Treaty or Comity – As a matter of international courtesy,
property of a foreign state may not be taxed by another state based on principle of
sovereign equality among states of international law. One state cannot exercise its
sovereign dominion over another, therefore, a nation cannot impose enforced
contribution to the properties of other nations.
6. Normally payable in Money – Taxes are contributions normally payable in the form of
money.
7. Territorial in Scope – As a rule, tax laws do not operate beyond a country’s
jurisdictional limits unless there exists a privity of relationship between the taxing State
and the object of the tax. Where privity of relationship exists, the state can still exercise
its taxing powers over its citizens outside its territory because the personal jurisdiction of
his government over him still remains.

3. What is the basis of taxation?

Taxation is based on “necessity” and reciprocal duties of protection and support” between
the state and its inhabitants. Taxation is the “lifeblood” or the “bread and butter” of the
government. Therefore, it is necessary that every citizen must pay his taxes. The government
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
cannot exist without means to pay its necessary expenses. The citizen pays taxes to support
the government in order that he may continuously be sustained with security and benefits of
an organized society.

PURPOSE OF TAXATION
4. What are the two main purposes of the exercise of taxation power?
Taxation power is exercised for two main purposes; to raise revenue (fiscal) and to regulate
certain activities or consumption (regulatory)
1. Fiscal purpose – taxes are imposed primarily to raise the necessary revenue to finance
various activities of the government in the promotion of the general welfare and
promotion of the public.
2. Regulatory purpose – taxation power could also be exercised to regulate inflation, achieve
economic and social stability, and to serve as a key instrument for social control.

STAGES (ASPECTS) OF TAXATION

5. What are the three (3) stages of taxation process?
1. Levy or imposition aspect
2. Assessment aspect
3. Collection

Definition:
1. Levy – pertains to the passage of tax laws and tax ordinances to
legislature
2. Assessment – refers to the appraisal and valuation process of the subject
or object of taxation to arrive at total amount of collectible tax.
3. Collection – involves the effective administrative implementation of
obtaining payment of tax from the taxpayer.
6. Which of the aspects of taxation process could not be delegated to other
branches of the government?
The levying or imposition aspect of taxation could not in anyway to be delegated and which
should be exclusively exercised by the law-making body; while the other stages of taxation
may lawfully be delegated to other branches of the government. The collection aspect of
taxation could even be delegated to private entity.

BASIC PRINCIPLES OF A SOUND TAXATION SYSTEM

7. What are the three basic principles of a sound taxation system?
The taxation to be effective is guided by three basic principles
1. Fiscal Adequacy
2. Theoretical Justice
3. Administrative Feasibility
Definition
1. Fiscal Adequacy – which requires that the sources of government revenue should be
capable of raising the amount that should be sufficient to meet the demand of
public expenditures regardless of business condition.
2. Theoretical Justice – which requires that the tax burden must be proportionate to
the taxpayer’s ability to pay.
3. Administrative Feasibility – which should enable the system to conveniently
implement a just and an effective tax administration.

LIMITATIONS OF THE POWER OF TAXATION

8. Taxation is the most supreme among the inherent powers of the government.
Could taxation be regarded as an absolute power which the government could
exercise without restriction?
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
No. Although the power of taxation is supreme, plenary and comprehensive, it is till subject to
some inherent and constitutional limitations.
9. What are the inherent limitations on the exercise of power of taxation?
1. It is exercised primarily for public purposes.
2. It is legislative in nature (non-delegation of the legislative power)
3. Its exercise limited to the territorial jurisdiction of the state.
4. It honors and gives due respect to international comity
10. What are the constitutional limitations on the exercise of power of
taxation?
1. Due process of law
2. Equal protection of law
3. Rule of uniformity and equity in taxation
4. Non-impairment of obligations and contracts
5. Non-imprisonment for non-payment of poll tax
6. President’s power to veto tax bills
7. Non appropriation for religious purposes
SIMILARITIES AND DISTINCTION AMONG INHERENT POWERS OF THE GOVERNMENT
11. What are the three inherent powers of the government?
The following powers are inherent to the existence of the government:
1. Taxation power – a power by which an Independent Sate, through its law-making body,
raises and accumulates revenue from its inhabitants to pay the necessary expenses of
the government.
2. Police power – a power of the Sovereign State to legislate for the protection of the
health, welfare and morals of the community.
3. Eminent domain – a power of the Sovereign State to take private property for a public
purpose even without the owner’s consent.

12. What are the three basic similarities of the three inherent powers of the
government?
1. Inherent to the existence of the government
2. Exercised for public purposes
3. Legislative in nature and character
4. Presuppose equivalent compensation
5. All underlie and exist independently on the Constitution, but their exercise can only be
limited by the Constitution.
6. All are necessary attributes of the Sovereign State

13. What are the basic distinctions of the three inherent powers of the government?
1. Police power is broader than taxation and eminent domain because it involves a general
power to make and implement laws.
2. The law on public service or public utility entity may grant eminent domain while police
power and taxation power are to be exercised only by government units.
3. Both taxation and eminent domain are limited by the non-impairment clause in the
Constitution, but not police power.
4. The exercise of police power merely restricts the use of property, while eminent domain
requires the take over of specific property. In taxation, now specific property is being
taken, because this requires payment, generally in money.
5. The exercise of eminent domain requires payment of just compensation to the private
property owner, while in taxation and police power, the government has to receive tax or
fee for its exercise.

SITUS OF TAXATION
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
14. What is situs of taxation?
Situs of taxation refers to the place of taxation, or to the State or political unit which has
jurisdiction to impose tax.

15. The following are the factors which are determinant to the situs of taxation
1. Citizenship of the taxpayer
2. Residency of the taxpayer
3. Nature, kind or classification of tax being imposed
4. Subject or object of taxation
5. Source of income
6. Place of exercise, business or occupation being taxed

Additional Note: The following situs of taxation apply

• Persons- residence of the taxpayer
• Real property or tangible personal property – location of the property
• Intangible personal property – as a rule, situs is the domicile of the owner unless he
has acquired a situs elsewhere
• Income – Taxpayer’s residence or citizenship, or place where the income was
earned.
• Business, occupation and transaction – place where business is being operated,
occupation being practiced and transaction completed
• Gratuitous transfer or property – taxpayer’s residence or citizenship, or location of
the porperty

NATURE, CHARACTERISTICS, KINDS OF TAXES

16. What does the term “taxes” means?

Taxes are obligations created by law. These are civil liabilities of the taxpayer which may
give rise to his criminal liability if he refuses to pay. Taxes are the lifeblood of the government
because these are main sources of government revenues. These are forced contributions from
those who are receiving protections directly or indirectly from the government to support its
multiple functions.

17. What are the characteristics of taxes?

1. A forced contribution
2. Proportionate in character
3. Imposed by the legislative boy
4. Generally payable in money
5. For public purposes
6. Levied on person, property or right
7. Imposed by the sovereign state which has jurisdiction

18. What are classifications of taxes?

1. Local and national, as to authority collecting it
2. Direct or indirect, as to who bears the burden
3. Specific and advalorem, as to determination of the amount
4. Fiscal and regulatory, as to purpose
5. Personal, property, or excise, as to object
6. Proportionate, prorgressive and regressive as to rate
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Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA
TAX INVASION AS DISTINGUISED FROM TAX AVOIDANCE

19. What is the main distinction between tax avoidance and tax invasion?
• Tax avoidance is the legal means to lessen or totally eliminate the tax liability.
Examples are tax shifting, transformation, and other exercise of legal options, which
reduce the tax burden.
• Tax evasion is the illegal means to reduce tax payment.
Example is the willful understatement of the income or the overstatement of
deductions from what is lawfully
authorized or permitted.

DOUBLE TAXATION

20. Define double taxation

Double taxation is an act by the sovereign of taxing twice for the same purpose in the
same year upon the same property or the same person with the same nature or character
of tax.

21. What are the classifications of double taxation?

• Direct duplicate taxation – This is double taxation in its strict sense. It is prohibited
because it consists imposition of the same tax on the same property for the same
purpose by the same State during the same taxable period.
This kind of double taxation violates the constitutional provision of uniformity and
equal protection, as well as the principle that tax must not be excessive,
unreasonable and equitable. Therefore, such taxation should, whenever and
wherever possible, be avoided to prevent injustice or unfairness.
• Indirect duplicate taxation – This is double taxation in its broad sense. It extends to
all cases in which there is a burden of two or more pecuniary impositions. It is
usually allowed as long as there is no violation of equal protection and uniformity
clauses of the Constitution.

TAX ADMINISTRATION

22. What are the main agency implementing the National Internal Revenue
Laws?
The Bureau of Internal Revenue is the administrative agency of the government in charge
with the primary function of administering the National Internal Revenue laws and
regulations. It is responsible for the collection of National Internal Revenue taxes. It is
under the executive supervision and control of the Department of Finance. The Internal
Revenue Commissioner heads it (Sec. 2)

23. What are the powers of the Commissioner of Internal Revenue

1. To interpret tax laws and to decide on tax cases.
2. To obtain information, to summon and take testimony to effect tax collection
3. To make assessment and prescribe additional requirements for tax administration and
enforcement
• Examination of returns and determination of tax due.
• Failure to submit required returns, statements, reports and other documents
• Authority to conduct inventory-taking, surveillance and prescribe presumptive
gross sales and receipts
• Authority to terminate taxable period.
• Authority to prescribe real property values.
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• Authority of the Commissioner to inquire deposit accounts
• Authority to accredit and register tax agents.
• Authority of the Commissioner to prescribe additional procedural or
documentary requirements.
Check-up Quiz
NATURE, SCOPE, CLASSIFICATION, AND
ESSENTIAL CHARACTERISTICS
1. Which of the following statements is
not correct?
a. The power of tax is inherent to
the existence of the
government which could be
exercised even without its
provision in the Constitution.
b. Taxation is the strongest among
the inherent powers of the state
and considered as an absolute
power.
c. Constitutional provisions
regarding taxation may limit the
exercise of the power of
taxation.
d. Taxes appropriated for National
Defense may be regarded as for
public purpose.
2. Taxes are public money which should
be used for public purposes. Which o
the following is not regarded as for
public purposes?
a. Appropriation for public
education
b. Appropriation for
Comprehensive Agrarian
Reform Program of the
government
c. Appropriation for the Church
d. Appropriation for governmental
projects
3. Which of the following could not
exercise the levying function of
taxation?
a. City council
b. Provincial board
c. Provincial governor
d. Congress
4. Statement: Taxation power could
readily be exercised by the State upon
its existence. True or False
5. Statement: Any provision in the
Constitution regarding taxation merely
constitutes limitations upon the
supremacy of taxation power.
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Rubenil B. Ibuyan, CPA, MBA
6. Which of the following statement is
not correct?
a. In the absence of any
Constitutional provisions, the
power of taxation is unlimited
except for the restrictions of its
inherent limitations.
b. The power of taxation is plenary
(full, complete), comprehensive,
and most supreme among the
inherent powers of the State.
c. The exercise of taxation is also
restricted by the sense of
responsibility of the members of
the law-making body.
d. The power of taxation is
separably existing from the
State, and such could be
exercised by the President even
without provision in the
constitution.
PURPOSE OF TAXATION
7. Which of the following is generally
serving the regulatory function of
taxation?
a. real estate tax
b. income tax
c. custom duties
d. estate tax
8. Which of the following could not be
considered as a purpose of taxation?
a. To raise revenue to support the
government
b. To distribute wealth of the
nation
c. To check inflation
d. To impose monetary burden to
the people
9. Which of the following business taxes
serve more the regulatory functions of
taxation?
a. Value Added Tax
b. Percentage Tax
c. Excise Tax
d. All of the above
STAGES (ASPECTS) OF TAXATION
10.Fixing the rate to be imposed is best
described as a (an)
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a. Tax administration aspect
b. Tax legislative function
c. Aspect of taxation which could
be delegated
d. Function that could be
exercised b the executive
branch
11.Which of the following is considered as
tax administrative function?
a. Collection of taxes
b. Fixing of tax rates
c. Prescribing the date and place
of payment of tax
d. Determination of the subject or
object of taxation
12.The determination of the tax base in
accordance with the pertinent law is a
(an)
a. Imposition aspect of taxation
b. Assessment aspect of taxation
c. Collection aspect of taxation
d. Payment of taxes
13.Which of the following could exercise
the levying aspect of taxation?
a. Barangay council
b. City Mayor
c. Judiciary
d. The President of the Philippines
BASIC PRINCIPLES OF A SOUND
TAXATION SYSTEM
14.Which tax principle dictates that the
government must maintain an ideal
budgetary system?
a. Fiscal adequacy
b. Theoretical justice
c. Administrative feasibility
d. All of the above
15.Which tax principle is described in the
statement: The more income earned
by the taxpayer, the more tax he has
to pay.
a. Fiscal adequacy
b. Theoretical justice
c. Administrative feasibility
d. All of the above
16.Which of the following is not in
harmony with the basic tax principles?
a. Clear and concise
b. Vague and burdensome
c. Convenient to the taxpayer
d. Convenient to the government
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Rubenil B. Ibuyan, CPA, MBA
LIMITATIONS OF THE POWER OF
TAXATION
17.Which constitutional limitation is being
complied with the serving of
assessment notice to delinquent
taxpayer?
a. Due process of law
b. Equal protection of law
c. Rule of uniformity
d. Non-impairment clause
18.What constitutional provision is
described when tax bill is required to
be presented for the approval of the
executive branch of the government?
a. Legislative in nature
b. Non-impairment clause
c. Due process of law
d. President’s power to veto
19.Which of the following pertains to the
provision in the fundamental law of
the land restricting the exercise of
power of taxation?
a. International comity
b. Territorial jurisdiction
c. Inherent limitation
d. Constitutional limitation
20.Which of the following pertains to the
Constitutional provision requiring that
tax apportionment must be more or
less just in light with the taxpayer’s
ability to shoulder the taxpayer in
accordance to his wealth, property
and income, or proportionate to the
benefits received from the
government?
a. Due process of law
b. Equal protection of law
c. Equity in taxation
d. Rule of uniformity in taxation
21.Which of the following pertains to the
Constitutional guaranty which
provides that all taxable articles and
properties of the same class, should
be taxed at the same rate?
a. Equity in taxation
b. Rule of uniformity in taxation
c. Equal protection of law
d. Due process of law
22.Which Constitutional provision
requires that all persons subject to
legislation should be treated alike
under similar circumstances and
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conditions both in privileges conferred
and liabilities imposed?
a. Equity in taxation
b. Equal protection of law
c. Due process of law
d. For public purposes
23.Which limitation on the power of
taxation inherently implied that the
State’s primary concern is for the
common good of the people?
a. Equity in taxation
b. Equal protection of law
c. Due process of law
d. For public purposes
24.Which of the following restrictions on
the power of taxation recognizes that
the country’s tax laws shall not be
applied to the property of foreign
government?
a. Taxation is inherently a
legislative function
b. Exercise of taxation is subject to
international comity
c. Due process of law
d. Equal protection of law
25.Which restriction on the power of
taxation limits its imposition on
properties which are within physical
boundaries of the State imposing it?
a. Inherently legislative
b. Territorial jurisdiction
c. International comity
d. Equal protection of law
26.Which of the following limitations on
the power of taxation restricts the
delegation of taxation power to those
ministerial and advisory in nature,
such as valuation and assessment of
object of taxation
a. Inherently legislative
b. Due process of law
c. International comity
d. Non-impairment clause
27. Which restriction is described in the
non-taxability of the property within
the foreign country’s embassy which is
located within the territorial
jurisdiction of the taxing State?
a. Inherently legislative
b. Territorial jurisdiction
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Rubenil B. Ibuyan, CPA, MBA
c. International comity
d. Non-impairment clause
SIMILARITIES AND DISTINCTION AMONG
INHERENT POWERS OF THE
GOVERNMENT
28.Which of the following is a
characteristic of taxation which
distinguishes it from police power and
eminent domain?
a. For public purposes
b. Legislative in nature
c. Generally payable in money
d. Inferior to non-impairment
clause in the Constitution
29.Which of the following generally does
not raise money to the government?
a. Taxation power
b. Police power
c. Eminent Domain
d. None of the above
30.Which statement refers to police
power as distinguished from taxation?
a. The benefit derived by the
payer is the protection provided
by the state
b. It is inherent to the existence of
the State
c. It involves only restriction on
the usage of property
d. Specific property is being taken
over by the government
31.The following are similarities of
taxation, police power and eminent
domain, except
a. All are inherent to the existence
of the State
b. All have a corresponding form
of compensation
c. All are superior to the non-
impairment clause
d. All are limited for public
purposes
SITUS OF TAXATION
32.Which of the following income is
taxable in the Philippines?
a. Salary received for working
abroad by non-resident citizen
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b. Interest income earned by a
non-resident alien the
Philippines
c. Business income earned in the
USA by an American corporation
d. Cash dividend received by a
non-resident citizen from a
foreign corporation
33.Which of the following is subject to
Philippine estate tax?
a. Personal property of a non-
resident citizen decendent
located outside the Philippine at
date of death
b. Real property of a non-resident
alien decedent located outside
the Philippines at date of dearth
c. All of the above
d. None of the above
34.Where is the place of payment of real
property tax for a building located in
Baguio, owned by an individual whose
residence is in Manila, and those
working place is in Quezon City?
a. Treasurer’s office of Baguio
b. Treasurer’s office of Manila
c. Treasurer’s office of Quezon
City
d. Treasurer’s office of any of the
three mentioned cities
35.Value Added Tax is a national business
tax. Where should this tax be paid for
the sales of a business entity doing
business in Baguio, whose owner is a
resident of Makati?
a. City treasurer of Baguio
b. Revenue District of Baguio
c. Revenue District Office of
Makati
d. Wherever of the three
mentioned offices at the
convenience of the taxpayer
NATURE, CHARACTERISTICS, KINDS OF
TAXES
36.Which of the following is not a
characteristic of a tax?
a. Generally payable in money
b. Generally based on a contract
c. Forced contribution
d. Proportionate to the capability
of the taxpayer to pay
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Rubenil B. Ibuyan, CPA, MBA
37.Which of the following is the general
classification of Income Tax?
a. Regulatory tax
b. Indirect tax
c. Advalorem tax
d. Proportionate as to rate
38.Which of the following is not an excise
tax?
a. Value Added tax
b. Income Tax
c. Real estate tax
d. Donor’s tax
39. Which of the following is the
classification of value-added tax?
a. Progressive as to rate
b. Proportionate tax rate
c. Transfer tax
d. Specific tax
40.All of the following, except one is an
example of direct tax.
a. Income tax
b. Donor’s tax
c. Value Added Tax
d. Estate tax
TAX INVASION AS DISTINGUISED FROM
TAX AVOIDANCE
41.In which of the following taxes could
an income tax be classified?
a. Regulatory tax
b. Local tax
c. Progressive tax rate
d. Indirect tax
42. Which of the following is to be
regarded as to tax minimization
through legal means?
a. Not declaring all taxable income
b. Padding of expenses for
deduction from income
c. Opting to transfer the property
through sale rather through
donation where tax liability
would higher
d. All of the above
43.Which of the following could be
described as tax evasion?
a. Using two sets of books of
accounts
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b. Non-issuance of commercial
invoice
c. All of the above
d. None of the above
DOUBLE TAXATION
44.Which of the following is not an
example of double taxation?
a. Taxing a fringe benefit which
has been subjected to final
withholding income tax
b. Taxing gain on sale of real
estate (capital asset) based on
normal tax which has been
subjected to final tax.
c. Taxing stockholders’ dividend
income derived from the same
corporation whose income has
been subjected to income tax
d. All of the above
45. Which of the following remedies would
counter-act double taxation?
a. Reciprocity and/or tax credit
b. Tax exemption and allowable
deductions
c. Tax benefit agreements
d. All of the above
TAX ADMINISTRATION
46. Which of the following is not a National
Internal Revenue Tax?
a. Income tax
b. Donor’s tax
c. Estate tax
d. None of the above
47. Which of the following is not within the
scope of authority of the BIR
Commissioner?
e.
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Rubenil B. Ibuyan, CPA, MBA
a. To exercise the levying function
of taxation
b. To interpret tax laws
c. To assess and collect BIR taxes
d. To decide cases involving
National Internal Revenue taxes
48.Which of the following is within the
scope of authority of the BIR
Commissioner?
a. To inquire into bank deposit
accounts
b. To terminate taxable period
c. To prescribe real property
values
d. All of the above
49.The BIR Commissioner has the
authority to delegate powers vested
on him under the Tax Code, which of
the following powers of the
Commissioner could not be delegated?
a. The power to recommend the
promulgation of rules and
regulations by the Secretary of
Finance, and the power to issue
rulings of first impression or to
reverse, revoke or modify any
existing ruling of the Bureau of
Internal Revenue
b. The power to compromise or
abate tax liability
c. The power to assign or re-assign
internal revenue officers to
establishments where articles
subject to excise tax are
produced or kept.
d. All of the above