FUNDAMENTALS OF TAXATION

Ways for the Government to Generate Funds

 Some countries borrows from the local and international banks
 Sells public lands and other government properties
 And invest in corporation
Taxes are the main source of funds for its necessary expenses.
In the Philippines, the process of taxation is unpopular and oftentimes controversial, like the
imposition of EVAT.
The constitution mandates the government to collect fees from individual who earn income or
whom properties or businesses. The process of collecting these fees is called taxation.
Two stages of taxation
Legislative levies or impose a tax

Nature of Taxation
 Taxation is state power exercised through the country’s legislative body. In the
Philippines, tax law are passed both in the House of Representative and the Senate.
 The principle of the taxation states that taxes are collected to support the government in
its expenses and services for public welfare. This principles resides in our Constitution,
which lays down the relationship between the government and the people. This is known
as the reciprocal duties of protection of protection and support between the state and its
citizens.
 The constitution obliges each individual to pay taxes as a form of support to the
government. In turn, the government or the state use these funds to protect or serve its
people.
 The constitution also states that revenues through taxation must only be uses these funds
for government operations and for public welfare.
 The government must use of taxes wisely, rightfully, effectively

Purpose
 The purpose of taxation is to raise revenues from all possible sources to support
government expenditures and services and promote the general wellbeing and protection
of its citizens.
 Tax collection is vital for a country’s progress
 It is important for every citizen to pay his/her taxes.
 Government project will not materials if funds are inadequate.
  The government, for its part, is expected to create tangible and intangible programs
intended to improve the lives of the people and to enhance their moral and material
values.
 Taxes safeguard newly opened industries by extending tax exemptions to pioneering and
new enterprises. They also shield domestic producers by levying higher custom duties on
imported goods.

Canons of Taxation
The canon of taxation refer to the basic principles of a sound tax system.
It underscores the following: fiscal adequacy, administrative feasibility, and theoretical
justices.
Fiscal adequacy means that taxes collected by the Bureau of Internal Revenue (BIR) must be
sufficient to fund the necessary government expenditures and basic services in a given fiscal
year.
 This also means that revenues must be capable of adjusting to variations in public
expenditures.
Administrative feasibility means that payment of taxes must be taxpayer friendly, i.e., tax laws
must be capable of simple, just and effective administration.
 This also signifies that payment of taxes must be accessible and convenient. The time for
payment and manner of collection must not be burdensome to the taxpayer.
Theoretical justice refers to the “ability-to-pay” principle. This means that a tax burden must
be proportion to the taxpayer’s level of income, i.e., people who earn more should be taxed at
much higher rate than those who earn less. Thus, a person whose income is PHP 15,000/month
should not pay the same amount of tax as a person earning PHP 40,000/month.

BASIS OF TAXATION
There are different government institution that administer and enforce the different policies and
taxes; they function based on the legal foundation and provision. These are the legal bases:
1. The Constitution, the fundamental law of the land
2. Statutes, law passed by Congress
3. Presidential Decrees
4. Bureau if Internal Revenue rules and regulations;
5. Judicial decisions by the Supreme Court on tax cases;
6. Provincial, city, and municipal ordinance
7. Observance of international agreements; and
8. Administrative rulings and opinions

OBJECTS OF TAXATION
Taxes are levied on different taxable entities.
Taxable entities are those that bear burden of taxation. The following are the examples:
1. Individual who earn a considerable amount of income as a worker or as a businessman in a
partnership or corporations, including those who inherited a property or were given a gift or
donation of a considerable value.
2.Tangible and intangible properties, whether personal properties (movable properties0 that can
be moved or relocated such as vehicles, furniture, patents, and ownership tiles or real properties
(immovable properties) which refers to real estate’s that include land, buildings, and houses.
3. Transactions, consumption interest, imports and exports and privileges

SITUS OF TAXATION
Situs – Latin word for “place” or “location”. It refers to the place where taxes are to be paid. As
a general rule, the taxing power cannot go beyond the territorial limits of the taxing authority.
Taxes are paid where the taxable entity can be found.
1. Income tax – This is paid either in the place where the income is earned or the place of
residence of the tax payer.
2. Real Property tax – this is paid where the property is situated.
3. Personal Property Tax – it can be either tangible or intangible. Taxes or intangible properties
are paid in the place where the property is located, similar to real property tax. On the other
hand, the situs of taxation of intangible properties is the owner’s domicile. This refers to the
place where the owner permanently resides.
4. Business occupation taxes - This is paid in the place where the business or occupation is
located.

Limitations on Taxation
 Taxation is limited to certain provision. There are two limitations – inherent and
constitutional.

Inherent limitations – are rooted in the nature of taxation itself. These are specific limitations
that are not affected by changes in the provisions of the Constitution. Below are inherent
limitations of taxation.
1. The tax revenues must be used for public purpose – this means that the revenues
collected form the people must be returned to them.
2. There should be proper delegation of legislative power of tax. – The 1987
Constitution delegates to Local Government Units (LGU’s) the power to tax subject to
such limitations as may be provided by the Congress (Art. X, Sec. 5). Likewise, Congress
cannot delegate the power to tax, except to authorize the president, subject to limitations
and restrictions, to impose tariff rates, import and export quotas, and other duties.
3. Government entities are exempted. – The government obtains its revenue from taxing
the people. Taxing the government itself will not generate income. That is why it is
accepted from taxation.
4. There are territorial jurisdictions. – Only those persons, properties, and transactions
situated within the territorial limits if the state are taxable. But all Filipino citizens who
work abroad are still subject to taxation as long as they maintain Filipino Citizens.
5. There is an observance of international law. – Foreign ambassadors and their
properties enjoy reciprocal tax exemptions.

Constitutional limitations – are those limitations provided in the Constitution. These limitations
are more prone to change when a new Constitution is introduced in the country.
Here are the Constitutional limitations of taxation:
1. Observance due process of law – Article III, Section 14.1 of the Constitution says that,
“No person shall be hold to answer for a criminal offense without due process of law”
2. Equal protection of the law – no person shall be deprived of life, liberty, or property
without due process of law, now shall any person be denied the equal protection of the
laws. (Art. III, Sec. 1)
3. Uniformity and equity rule – the rule of taxation must be inform, equitable, and
progressive (Art. VI, Sec 28.1). The reason for this is that not all persons, properties, or
transactions are identical or similarly situated.
4. Non-imprisonment for non-payment of poll tax – No person shall be imprisoned for
debt or non-payment of a poll tax (Art. III, Sec. 20). A poll taps (personal or
capitalization tax) is a fixed amount imposed on individuals residing within a specified
territory.
 5. No appropriation for religious purposes – no public money or property shall be
appropriated, applied, paid or employed; directly or indirectly, for the use, benefit or
support.

AVOIDING TAXATION
The following are other concepts related to taxation in terms of avoidance or
nonpayment.

Shifting
This is the transferring of the tax burden from one person to another.
Capitalization
This is done by reducing the price of a taxable product or service to lower the tax that
will be imposed on its consumption.
Tax Avoidance
This refers to the availing by the taxpayer of legally allowable means in reducing or
minimizing the tax due on certain properties, items, and services. This is also known as “tax
minimization”
Tax Evasion
This refers to the use by the taxpayer of illegal means in escaping, defeating, or lessening
the tax due. Also referred to as “tax dodging”, this crime implies malice, fraud, or bad faith on
the part of the taxpayer.
Tax Exemption
This means the bestowal of immunity by the taxing authority on a taxpayer from the
obligation of tax payment.