General Principles of Taxation

Tax 111 – Income TaxationFerdinand C. Importado

CPA, MBA

Objectives

At the end of this lecture, the students shall be able to:• Define taxation.• Discuss the purposes of taxation.• Identify the theory and basis of taxation.• Describe the principles of a sound tax

system.• List the nature of taxation.

Objectives

At the end of this lecture, the students shall be able to:• Explain the limitations of taxation

(constitutional and inherent).• Identify the aspects of taxation.

What is taxation?

Taxation is the process or means by which the sovereign, through its lawmaking

body, raises income to defray the necessary expenses of the government.

Purpose of taxation

Primary purpose• To provide funds or property with which

to promote the general welfare of its citizens and to enable it to finance its multifarious activities.

Purpose of taxation

Secondary purposes• To strengthen anemic enterprises by

giving tax exemptions.• To protect local industries against

foreign competition through imposition of high customs duties on imported goods.

Purpose of taxation

Secondary purposes• To reduce inequalities in wealth and

income by imposing progressively higher taxes.

• To prevent inflation by increasing taxes or ward off depression by decreasing taxes.

Theory and basis of taxation

• Theory– The existence of the government is a

necessity.– The government cannot continue without a

means to pay its expenses.– The government has the rights to compel its

citizens and property within its limits to contribute.

Theory and basis of taxation

• Basis– Taxation is based on the reciprocal duties of

protection and support between the government and its people.

– Government receives taxes from the people which is used to perform functions of government and other benefits.

– Benefit-received theory.

Basic principles of sound tax system

• Fiscal adequacy• Equality or theoretical justice • Administrative feasibility

Fiscal adequacy

• The source of government revenue should be efficient to demand the needs of public expenditure.

• Creating new taxes or new tax machinery or by merely changing the rates applicable to existing taxes.

Equality or theoretical justice

• The tax burden should be proportionate to the taxpayer’s ability to pay.

• Ability-to-pay principle

Administrative feasibility

• The tax laws should be capable of convenient, just and effective administration.

• Each tax should be:– Clear and plain to the taxpayer.– Capable of uniform enforcement– Convenient as to time, place and manner of

payment. – Not unduly burdensome upon or discouraging to

business activity

Nature of taxation

• It is inherent in sovereignty. • Legislative in character. • Subject to constitutional and inherent

limitations.

Limitations of taxation

• Inherent limitations – restrictions on the power exists from the very nature of the power of taxation itself.

• Constitutional limitations – restrictions in the exercise of the power of taxation as expressly provided in the Philippine Constitution.

Constitutional limitations

• Due process.• Equal protection of the laws.• Rule of uniformity and equity in taxation.• Non-imprisonment for non-payment of poll

tax. • Non-impairment of the obligations and

contracts. • Non-infringement of religious freedom.

Constitutional limitations

• No appropriation for religious purposes.• Exemption of religious, charitable or

educational entities, non-profit cemeteries, and churches from taxation.

• Exemption of revenues and assets of non-stock, non-profit educational institutions and donations for educational purposes from taxation.

Constitutional limitations

• Concurrence by a majority of all members of the Congress for the passage of a law granting any tax exemption.

• Power of the President to veto any particular item or items in a revenue or tariff bill.

• Non-impairment of the jurisdiction of the Supreme Court in tax cases.

Inherent limitations

• Requirement that levy must be for a public purpose.

• Non-delegation of the legislative power to tax, except:– Delegation to the President– Delegation to local governments– Delegation to administrative bodies

Inherent limitations

• Exemption from taxation of government entities.

• International comity• Territorial jurisdiction

Aspects of taxation

• Levy – deals with the provisions of law which determines:– The person or property to be taxed– The sum or sums to be raised– The rate of the tax– The time and manner of levying, receiving

and collection the tax.

Aspects of taxation

• Collections – constituted of the provisions of law which prescribe the manner of enforcing the obligation on the part of those taxes to pay the demand thus created.