Chapter 1 – Fundamental Principles of Taxation (Income Taxation)

LEARNING OBJECTIVES

• After this chapter the learner should be able to:
– Discuss the history, definition, nature and basis of taxation.
– Enumerate aspects and purposes of taxation, the basic principles of a sound tax system and identify the different inherent powers of the State.
– Contrast inherent from constitutional limitations on the taxing power.
– Determine the correct situs (place of taxation).
– Define tax, list its essential characteristics and classifications.
– Distinguish a tax from other government‐imposed charges.

HISTORICAL DEVELOPMENT OF PHILIPPINE TAXATION

• Pre-colonial / Ancient Filipinos
– Tributes paid to the village chieftain (datu) for protection were called buwis or handug.
– Everybody, including alipin (slaves) & timawa (freemen) paid, except the datu’s own household of maharlikas.

• Spanish period ( 1521\text{–}1898 )
– Introduced the first “modern” tax system.
– All Filipino males aged 16 to 60 were compelled to pay tributo to the King of Spain (thru the colonial government). One tribute = 8 reales = \text{Php }1.
– Accepted substitutes: gold, chickens, textile, rice or forced labor (Polo y Servicio).
– 1884: Tributo was abolished and replaced by the cédula personal – an identification certificate that had to be carried at all times. Failure to show it to the guardia civil meant imprisonment as an indocumentado.

• American period ( 1898\text{–}1935 )
– Initially continued the Spanish tax system ( 1898\text{–}1903 ).
– Internal Revenue Law of 1904 created the Bureau of Internal Revenue (BIR) on 1 Aug 1904.
– Urbana (urban rental tax) replaced by a land tax covering both urban & rural properties.
– Imposed the industria (business) tax.
– 1937: cédula tax permanently abolished.

• Post-Commonwealth / Modern era
– 1987 Philippine Constitution imposes limitations on the taxing power:
▪ “Taxation shall be uniform and equitable, and Congress shall evolve a progressive tax system.”
– Dual framework:
▪ National taxes – collected through the BIR.
▪ Local taxes – imposed & collected by LGUs under the Local Government Code of 1991.

CONTEMPORARY TAX ADMINISTRATION

• The taxing authority is lodged in the Department of Finance (DOF), with the following key agencies:
– Bureau of Internal Revenue (BIR) – national internal taxes; founded 01 Aug 1904.
– Bureau of Customs, Bureau of the Treasury, Bureau of Local Government Finance, Insurance Commission, National Tax Research Center, Central Board of Assessment Appeals, SEC, etc.
– BIR FY 2021 budget: \text{Php }9.93\text{ billion} (law-enforcement & tax collection).

SOURCES OF PHILIPPINE TAX LAW

• 1 — 1987 Constitution (Art VI §28).
• 2 — Statutes & Presidential Decrees.
• 3 — Revenue Regulations (DOF).
• 4 — BIR rulings (Commissioner of Internal Revenue).
• 5 — Decisions of the Supreme Court & Court of Tax Appeals.
• 6 — National Internal Revenue Code (NIRC of 1997, as amended).
• 7 — Local Government Code of 1991.
• 8 — Provincial, city, municipal & barangay ordinances.
• 9 — Tax treaties & international agreements.

DEFINING TAXATION

• Taxation = the power by which the sovereign, through its law-making body, raises revenue to finance necessary governmental expenditures.
– Power – inherent authority to demand contributions for public purposes.
– Process – legislative enactment of tax laws and executive implementation.
– Means – method of apportioning the cost of government among those who benefit from it.

INHERENT POWERS OF THE STATE

• 1 — Police Power – enact laws to promote public health, morals, safety & general welfare.
• 2 — Eminent Domain – take private property for public use with just compensation.
• 3 — Taxation – raise revenues to defray governmental expenses.

Similarities

• Inherent (exist even without constitutional grant).
• Exist independently of the Constitution.
• Modes of State interference with private rights/property.
• Essentially legislative in character.
• Presuppose some form of equivalent compensation.

Distinctions (selected matrix)

PURPOSES OF TAXATION

• Primary (Fiscal) – raise funds to support government functions (defense, healthcare, education, infrastructure).
• Secondary (Non-fiscal):
1. Promote general welfare (e.g., sin taxes to discourage smoking).
2. Reduce social inequality (progressive rates, wealth taxes).
3. Stimulate or slow economic growth (tax incentives, counter-cyclical policies).

THEORIES & BASIS OF TAXATION

• Necessity Theory – Government existence is necessary; taxation follows that necessity.
• Lifeblood Theory – Taxes are the lifeblood of the State; without them gov’t cannot survive.
– Manifestations:
▪ No estoppel against the government in tax matters.
▪ Collection generally cannot be enjoined (only the Court of Tax Appeals may grant injunctions).
▪ Taxes cannot be set-off or compensated with claims against the State (not a debt).
▪ Congress exclusively selects tax objects (subjects).
▪ A valid tax may destroy property or businesses ("power to destroy").
• Benefits-Received / Reciprocity Theory – Citizens who receive more benefits from the State should bear a greater tax burden (fairness principle).

SCOPE (ATTRIBUTES) OF THE TAXING POWER

• Unlimited – Courts seldom impose restrictions.
• Plenary – BIR may use wide remedies for collection.
• Comprehensive – Covers persons, property, rights, privileges, activities.
• Supreme – Legislature chooses tax subjects & methods, subject only to constitutional limits.

ESSENTIAL ELEMENTS OF A VALID TAX

1. Enforced contribution (compulsory).
2. Generally payable in money (legal tender).
3. Proportional to ability to pay (theoretical justice).
4. Levied on persons, property or the exercise of a right/privilege.
5. Imposed by the law-making body (non-delegable, with limited exceptions).
6. Imposed for a public purpose.

THREE ASPECTS (STAGES) OF TAXATION

\boxed{1}\;\text{Levy}\rightarrow legislative enactment.
\boxed{2}\;\text{Assessment}\rightarrow executive determination of liability.
\boxed{3}\;\text{Collection}\rightarrow administrative enforcement/remedies.

NATURE & CHARACTERISTICS OF THE TAXING POWER

1. Inherent in sovereignty – co-exists with people, territory, government.
2. Essentially legislative – potestas delegata non delegare potest (non-delegation rule).
– Exceptions: (a) Limited delegation to the President (tariff & taxation powers within set limits). (b) LGUs under Local Gov’t Code. (c) Administrative agencies (subordinate legislation / detail-filling).
3. Tax exemption of government – Gov’t entities performing governmental (not proprietary) functions are immune (e.g., GSIS, SSS, PHIC, PCSO, Local Water Districts).
4. International comity – Respect for jurisdictional boundaries; taxes generally limited to territorial jurisdiction unless there exists privity of relationship (citizens abroad).
5. Subject to constitutional & inherent limitations – Any tax in conflict with the Constitution is null and void.
6. Strongest of inherent powers – Other powers futile without funding.

WHAT IS A TAX?

• "Enforced proportional contribution levied by the law-making body of the State for public purposes." Key attributes mirror the six elements above.

SITUS (PLACE) OF TAXATION

CLASSIFICATIONS OF TAXES

1. By Subject Matter / Object
– Poll/Capitation – fixed amount per individual (e.g., Community tax).
– Property – on real/personal property (Real Estate Tax).
– Excise – on exercise of a right/privilege (Income, VAT, Estate, Donor’s tax).

2. By Incidence / Who Bears the Burden
– Direct – cannot be shifted (Income, Estate, Donor’s, Community tax).
– Indirect – shiftable to another (VAT, percentage taxes, customs duties, excise on goods).

3. By Determination of Amount
– Specific – fixed amount per unit/measure (Excise on cigarettes, alcohol).
– Ad valorem – proportionate to value (Income tax, VAT, estate & donor’s tax).

4. By Purpose
– General (Primary) – for general government needs (Income, Estate, Donor’s).
– Special (Secondary) – earmarked for specific purpose (Protective tariffs, motor vehicle user’s charge).

5. By Graduation / Rate Structure
– Proportional – fixed percentage (VAT at 12\%).
– Progressive / Graduated – rate increases as base increases (Individual income tax).
– Regressive – rate decreases as base increases (rarely used; considered inequitable).

6. By Imposing Authority / Scope
– National – under the Tax Code (NIRC) – internal revenue taxes, customs duties, travel tax.
– Local – imposed by LGUs – real property tax, municipal business taxes & fees.

PRACTICAL, ETHICAL & PHILOSOPHICAL IMPLICATIONS

• Taxation embodies a social contract: citizens surrender part of their resources for collective goods.
• Must balance fiscal adequacy, administrative feasibility & theoretical justice.
• Progressive design addresses equity & social justice but may dampen incentives if excessive.
• Compliance is both a legal duty and a moral obligation (“taxes are the price we pay for civilization”).
• Abuse or misuse of the taxing power (confiscatory rates, unequal treatment) threatens legitimacy and may be struck down by courts.

CONNECTIONS & REAL-WORLD RELEVANCE

• Understanding these principles is foundational for advanced topics in Income Taxation, Business Taxation, and Transfer Taxes.
• Provides context for:
– How Congress crafts tax legislation.
– How the BIR assesses/collects, and taxpayers’ remedies (protests, appeals to the CTA).
– Ongoing debates on tax reform (e.g., TRAIN, CREATE laws) aimed at making the system more progressive & competitive.
• Illustrates the dynamic interplay among public finance, economic policy, and constitutional law.

QUICK MEMORY AIDS

• “LIFE” of the State – LIfeblood, Fiscal necessity, Equity.
• “PET” limitations – Public purpose, Equality/Uniformity, Territoriality.
• 3 Stages – L-A-C → Levy → Assessment → Collection.
• 6 Elements of Tax (E-M-P-B-L-P) – Enforced, Money, Proportional, Base (persons/property), Law-making body, Public purpose.

"A tax in the amount of 50 pesos well collected is worth more than a tax of 100 pesos badly administered." – Paraphrased fiscal maxim