Income

Taxation
Module 1: Fundamental
Principles of Taxation
Intended Learning Outcomes

ILO 1 Demonstrate an extensive

knowledge of the nature and concepts
of income taxation using TRAIN
Law. 
ILO 2 Explain the government’s
inherent power to impose taxes and
enforce collection thereof.
ILO 3 Correctly demonstrates
resolution of tax problems of
individuals and corporate taxpayers.
ILO 4 Execute skills in resolving
income tax problems of individuals
and corporations. 
 Taxation Defined
Taxation is the process or means by which the sovereign
(independent state), through its law-making body (the
legislature), imposes burdens upon subjects and objects
within its jurisdiction for the purpose of raising revenues to
carry out the legitimate objects of the government. In simple
terms, it is an act of levying a tax to apportion the cost of
government among those who, in some measure, are
privileged to enjoy its benefits and must therefore bear its
burdens. It is a power inherent in every sovereign state being
essential to the existence of every government.
Taxation Defined
Hence, even if not mentioned in the constitution, the
state can still exercise the power. Therefore, any
constitutional provision regarding the state’s power to
tax should not be interpreted as a “grant of power”, but
merely a limitation on the state’s power to tax. Taxes, on
the other hand, are the enforced proportional
contributions or charges 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.
The Three (3) Inherent Powers of the State
1. Police Power. It is the power of the state promoting
public welfare by restraining and regulating the use of
liberty and property. It may be exercised only by the
government. The property taken in the exercise of this
power is destroyed because it is noxious or intended for
noxious purposes. 
2. Power of taxation. It is the power by which the State
raises revenue to defray the necessary expenses of the
government. 
3. Power of Eminent Domain. It is the power of the
state to acquire private property for the public purpose
upon payment of just compensation. 
Similarities among the three (3) inherent powers 
1. They are inherent in the state. 
2. They exist independently of the constitution although
the conditions for their exercise may be prescribed by
the constitution. 
3. Ways by which the State interferes with private rights
and property. 
4. Legislative in nature and character. 
5. Presuppose an equivalent compensation received,
directly or indirectly, by the persons affected. 
Table 1 : Distinctions Among the Three (3) Inherent Powers

Taxation  Police Power  Eminent Domain

Power to enforce  Power to make and Power to take private

1. Nature  contributions to raise implement laws for the property for public use with
government funds. general welfare. just compensation.

2. Authority  Government only  Government only  May be granted to public

service/utility companies

3. Purpose  For the support of the Promotion of general The taking of private
government welfare through  property for public use.
regulation
4. Persons affected Community or a class of Community or a class of On all individuals as the
individuals. Applies to all individuals. Applies to all  owner of the personal
persons, property and persons, property and property. Only particular 
exercises that may be exercises that may be property is comprehended.
subject thereto subject thereto
Table 1 : Distinctions Among the Three (3) Inherent Powers
5. Scope  Plenary, comprehensive,  Broader in application. Merely to take a private
supreme General power to make and property for public use.
implement law.

6. Effect  Contribution becomes part No transfer of title. There There is a transfer of title to
of public fund may just be a restraint on property.
the injurious use
of property.

7. Benefits received In form of protection and No direct and immediate Market value of property

benefits received from benefit but only such as may  taken.
government arise from the maintenance
of a healthy economic 
standard society

8. Amount of imposition No limit  Sufficient to cover cost of No imposition. The owner

the license and the is paid equivalent to the
necessary expenses of fair value of his property.
police surveillance and 
regulation
PURPOSES OF TAXATION 
1. Primary:

Revenue or Fiscal Purpose 

- to provide funds or property with which to promote general welfare
and protection of its citizens 

2. Secondary:
Regulatory Purpose 
- employed as a device for regulation or control 
 
Effects:
● Promotion of General Welfare 
 ● Reduction of Social Inequality 
 ● Economic Growth 
THEORY and BASIS of TAXATION 
1. Theory (Authority) 
a. Necessity Theory 
● to preserve the state’s sovereignty 
● a means to give for protection and facilities
b. Lifeblood Theory 
● used to continue to perform the government’s
basic function of serving and protecting its people 
● give tangible and intangible benefits 
THEORY and BASIS of TAXATION 
2. Basis of Taxation:
BENEFITS RECEIVED OR RECIPROCITY THEORY
The basis is the reciprocal duties of protection and
support between the state and its inhabitants. The state
collects taxes from the subjects of taxation in order that it
may be able to perform the functions of government. The
citizens, on the other hand, pay taxes in order that they
may be secured in the enjoyment of the benefits of
organized society. This theory spawned the Doctrine of
Symbiotic Relationship which means taxes are what we
pay for a civilized society. (Commissioner v. Algue) 
MANIFESTATION OF LIFEBLOOD THEORY
1. Rule of “No Estoppel against the government” 

2. Collection of taxes cannot be stopped by injunction 

● Court of Tax Appeals – have the authority to grant
injunction to restrain collection of internal revenue
tax, fee or charge 

3. Taxes could not be the subject of compensation or set-

off 
● Tax is compulsory not bargain. 
MANIFESTATION OF LIFEBLOOD THEORY
4. Right to select objects (subjects) of taxation 
a. Subject or object to be taxed 
b. Purpose of the tax (as long as it is a public purpose) 
c. Amount or rate of the tax 
d. Kind of tax 
e. Apportionment of the tax 
f. Situs (place) of taxation 
g. Manner, means, and agencies of collection of the tax 
5. A valid tax may result in the destruction of the taxpayer’s
property. 
● Lawful tax cannot be defeated. 
● Bring out the insolvency of the taxpayer 
● Forfeiture of property through police power
SCOPE OF THE POWER OF TAXATION 
The power of taxation is the most absolute of all the powers of
the government.

a) Comprehensive – covers all (persons, businesses,

professions, right and privileges)

b) Unlimited – In the absence of limitations provided by the law or

the constitution, the power to tax is unlimited and comprehensive.
Its force is so searching to the extent that the courts scarcely venture
to declare that it is subject to any restrictions. 

c) Plenary – it is complete; BIR may avail of certain remedies to

ensure collection of taxes.

d) Supreme – in so far as the selection of the subject of taxation 

ESSENTIAL ELEMENTS OF TAX 
a) It is an enforced contribution. 
b) It is generally payable in money. 
c) It is proportionate in character. 
d) It is levied on persons, property or rights. 
e) It is levied by the law-making body of the
state. 
f) It is levied for public purpose. 

ASPECTS OF TAXATION 
a) Levying or imposition of tax 
b) Assessment or determination of the correct
amount 
c) Collection of tax 
NATURE/CHARACTERISTICS of the State’s Power to Tax 
1. It is inherent in sovereignty. 
The state, having sovereignty can enforce contribution
(tax) even in the absence of a constitutional provision
because the state has the supreme power to command and
enforce obedience to its will from the people within its
jurisdiction. 
2. It is legislative in character. 
The power to tax (levying or imposition) is peculiarly
and exclusively legislative in nature. It cannot be
exercised by the executive or judicial branches of the
government. 
EXCEPTIONS TO
NON-DELEGATION RULE
a. Delegations as provided for in the 1987 Constitution such as
“Delegation to the President” under Section 28 Article VI stating
that the Congress may authorize, by law, the President to fix,
within specified limits and subject to such limitations and
restrictions as it may impose: 
● Tariff rates 
● Import and export quotas 
● Tonnage and wharfage dues 
● Other duties or imposts within the framework of the
national development program of the government

b. Delegation to local government units as provided under

Section 5, Article X of the Constitution. The power of local
government units to impose taxes and fees is always subject to
the limitations which Congress may provide, the former having
no inherent power to tax. 
EXCEPTIONS TO
NON-DELEGATION RULE
c. Delegation to administrative agencies 
Certain aspects of the taxing process that are not really
legislative in nature are vested in administrative agencies
such as: 
● Power to value property 
● Power to assess and collect taxes 
● Power to perform details of computation, appraisement
or adjustment 
d. It is subject to Constitutional and inherent limitations 
Exemptions of government entities,
agencies and instrumentalities. 

Immunity is necessary in order that governmental

functions will not be impeded. Otherwise, the government
will be taxing itself to raise money for itself. The following
rules shall apply in determining whether or not government
entities or agencies are subject to tax: 

a. Agencies performing governmental function are tax

exempt unless expressly taxed.
b. Agencies performing proprietary functions are
subject to tax unless expressly exempted 
Exemptions of government entities,
agencies and instrumentalities.

c. GOCCs performing proprietary functions are subject

to tax, however the following are granted tax
exemptions: 
● Government Service Insurance System (GSIS) 
● Social Security System (SSS) 
● Philippine Health Insurance Corporation (PHIC) 
● Philippine Charity Sweepstakes Office (PCSO) 
● Local Water Districts (RA 10026) 

3. International Comity (Polite arrangements among nations) 

4. Limitation of territorial jurisdiction 
5. Strongest among the inherent powers of the state
 CLASSIFICATION OF TAXES 
1. As to scope: 
● National- imposed by the national government 
● Local – imposed by the local government 
2. As to subject matter or object: 
● Personal, poll, or capitation – tax of a fixed amount imposed upon
individuals residing within a specified territory. 
● Property – tax imposed on property in proportion to its value 
● Excise – tax on certain rights and privileges (sin products or
imported goods)
3. As to who bears the burden: 
● Direct – taxpayer cannot shift to another 
● Indirect – indemnify himself at the expense of another 
4. As to determination of fixed amount: 
● Specific- tax of fixed amount by number, standard of weight, or
measurement ● Ad valorem – tax of fixed proportion of the value of
the property
CLASSIFICATION OF TAXES 
5. As to purpose: 
● Primary, Fiscal, or Revenue Purpose 
● Secondary, Regulatory, Special, or Sumptuary Purpose 

6. As to graduation or rate: 
● Proportional – tax based on fixed percentages of amount 
● Progressive – tax the rate of which increases as the
tax base or bracket increases ● Regressive - tax the rate
of which decreases as the tax base or bracket increases 
7. As to taxing authority: 
● National – imposed under National Internal Revenue Code,
collected by Bureau of Internal Revenue 
● Local – imposed by LGU’s 
ELEMENTS OF SOUND TAX SYSTEM 
a. Fiscal Adequacy – sources must be adequate 

b. Theoretical Justice or Equity – tax should be

proportionate 

c. Administrative Feasibility – law must be capable of

effective and efficient enforcement 
LIMITATIONS ON THE STATE’S POWER TO TAX
1. Inherent Limitations 
2. Constitutional Limitations 
● Due process of law 
● Equal protection of laws 
● Rule of uniformity and equity in taxation 
A progressive system of taxation means that tax
laws shall place emphasis on direct taxes rather than
indirect taxes with the ability to pay as the principal
criterion. Regressive tax rates refer to tax rates which
decreases as the tax base or bracket decreases.
Regressive tax rates should be differentiated from a
regressive tax system of taxation which exists when
there are more indirect taxes imposed than direct taxes. 
LIMITATIONS ON THE STATE’S POWER TO TAX 
● Prohibition against imprisonment for non-payment
of poll tax 
● Prohibition against impairment of obligation and
contracts 
● Prohibition against infringement of religious
freedom
● Prohibition against appropriation of proceeds of
taxation for the use, benefit or support of any
church 
● Prohibition against taxation of religious,
charitable and educational entities
● Prohibition against taxation of non-stock, non-
profit educational institutions
● Others: 
a. Grant of tax exemption 
b. Veto of appropriation, revenue
and tariff bills by the President 
c. Delegated authority of the
President to impose tariff rates,
import and export quotas,
tonnage and wharfage dues 
d. Non-impairment of the Supreme
Court jurisdiction 
e. Revenue bills shall originate
exclusively from the House of
Representatives 
f. Infringement of press freedom 
g. Revocation of tax exemptions 
 SITUS OF TAXATION

Literally, the situs of taxation means “place of

taxation”. It is the state or political unit which has
jurisdiction to impose a particular tax. The state
where the subject to be taxed has a situs may
rightfully levy and collect the tax. The situs is
necessarily in the state which has jurisdiction or
which exercises dominion over the subject in
question. 

FACTORS IN DETERMINING THE SITUS OF

TAXATION 
a. Subject matter ( person, property, or activity) 
b. Nature of tax 
c. Citizenship 
d. Residence of the taxpayer 
e. Source of Income 
f. Place of excise, business or occupation being
taxed 
 TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS
1. Tax versus TOLL 
A toll is a sum of money for the use of something, generally
applied to consideration which is paid for the use of a road,
bridge or the like of a public nature. 
2. Tax versus PENALTY 
Penalty is a sanction imposed as a punishment for a violation
of law or acts deemed injurious. The violation of tax may give
right to imposition of penalty. 
3. Tax versus SPECIAL ASSESSMENT 
Special assessment is an enforced proportional contribution
from owners of lands for special benefits resulting from public
improvements. In Republic v. Bacolod, a special
assessment is a levy on property which derives some special
benefits from improvement. Its purpose is to finance such
improvements thus accruing only to the owners thereof, who,
after all pay the assessment. 
TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS 

It is not a tax measure intended to raise revenues for the

government because the proceeds thereof may be
devoted to the specific purpose for which the assessment
was authorized. 
Characteristics of Special Assessment 
● Levied only on land 
● Not a personal liability of the person assessed 
● Based wholly on benefits (not necessary) 
● Exceptional both as to time and place 
4. Tax versus REVENUE 
Revenue refers to all funds or income derived by the
government, whether from tax or any other source. 
TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS 

5. Tax versus SUBSIDY 

Subsidy is a pecuniary aid directly granted the
government to an individual or private commercial
enterprise deemed beneficial to the public. Subsidy
is not a tax although tax may have to be imposed to
pay it. 
6. Tax versus PERMIT OR LICENSE FEE 
Permit or a license fee is a charge imposed under the
police power for purposes of regulation. 
TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS 
7. Tax versus DEBT
Debt  Tax

Based on contract  Based on law

May be paid in kind  Generally payable in money

assignable /maybe the subject of set-off or Cannot generally be assignable/subject of set-off

compensation or compensation

A person cannot be imprisoned for non- Imprisonment is a sanction for 

payment of debt (except when it arises from non-payment of tax (except poll tax)
crime)

Draw interest when stipulated or when of Does NOT draw interest except only when
prescription default delinquent
TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS 

8. Tax versus CUSTOM DUTIES 

Custom duties are taxes imposed exported from or imported
into a country.

9. Tax versus TARIFF 

Tariff may be used in one of three (3) senses: 
● A book of rates drawn usually in alphabetical order
containing the names of several kinds of merchandise
with the corresponding duties to be paid for the same; or 
● The duties payable on goods imported or exported; or 
● The system or principle of imposing duties on the
importation or exportation of goods. 
DOUBLE TAXATION
In its strict sense, double taxation referred to is direct
duplicate taxation. In its broad sense, double taxation is
referred to as indirect double taxation. It extends to all cases
in which there is a burden of two or more impositions. 
DIRECT DOUBLE TAXATION means taxing twice: 
1. By the same taxing authority, jurisdiction or taxing district 
2. For the same purpose 
3. In the same year or taxing period 
4. Same subject or object 
5. Same kind or character of the tax 
MEANS OF AVOIDING OR
MINIMIZING THE BURDEN OF TAXATION
1. Shifting – the transfer of the burden of tax by the original
payer to someone else

2. Transformation – the producer pays the tax and endeavor

to recoup himself by improving his process of production.

3. Evasion – the use of illegal means to defeat or lessen tax.

4. Tax Avoidance – the exploitation of legally permissible

alternative tax rates of assessing taxable income to reduce
tax liability.

5. Exemption – the grant of immunity to particular persons

of a particular class
GROUNDS FOR GRANTING TAX EXEMPTION 
● May be based on contract 
● May be based on some public policy 
● May be on grounds of reciprocity or to lessen the
rigors of international or multiple taxation 
Nature of power to grant tax exemption 
● National government.
The power to grant tax exemptions is an attribute of
sovereignty for the power to prescribe who or what
persons or property shall be tax implies the power to
prescribe who or what persons or property shall not be
taxed.

● Local governments.
Municipal corporations are clothed with no inherent
power to tax or to grants exemptions. But the moment
the power to impose a particular tax is granted, they also
have the power to grant exemption therefrom unless
forbidden by some provision of the Constitution or law. 
KINDS OF EXEMPTION 
As to basis : 
● Constitutional. Immunities from taxation which originate from
the Constitution 
● Statutory. Immunities from taxation which emanates
from legislation 

As to form: 
● Express. Exemptions expressly granted by statute. 
● Implied. When particular persons, property or rights are
deemed exempt as they fall outside the scope of the taxing
provision itself. 

As to extent: 
● Total. Connotes absolute immunity. 
● Partial. One where a collection of a part of the tax is
dispensed with. 
Amnesty 
It is the general or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of
evasion or violation of revenue or tax law. It partakes of an
absolute forgiveness or waiver of the government of its right to
collect. It is a way to give tax evaders, who wish to relent or
willing to reform a chance to do so. 
Amnesty involves immunity from all criminal, civil and
administrative liabilities from non-payment of taxes. 

6. Capitalization – the reduction in the selling price of income

producing property by an amount equal to the capitalized value 
7. Avoidance – the tax saving device within the means sanctioned
by the law. 
SOURCES OF TAX LAWS 
1. Constitution 
2. National Internal Revenue Code 
3. Tariff and Customs Code 
4. Local Government Code (Book II) 
5. Local tax ordinances/ City or municipal tax codes 
6. Tax treaties and international agreements 
7. Special Laws 
8. Decision of the Supreme Court and the Court of Tax
Appeals 
9. Revenue rules and regulations and administrative
ruling and opinion