TAXATION

1. CONCEPTS OF TAXATIONCONCEPTS OF TAXATION
ECONOMICS: its concepts and principlesECONOMICS: its concepts and principles
By:By: DOMINIC DEUSDEDITHDOMINIC DEUSDEDITH

2. Definition of TermsDefinition of Terms
TAXATIONTAXATION is defined in many ways.is defined in many ways.
Commonly heard definitions include:Commonly heard definitions include:
It is theIt is the processprocess by which the sovereign, through its law makingby which the sovereign, through its law making
body, races revenues use to defray expenses of government.body, races revenues use to defray expenses of government.
It is a means of government inIt is a means of government in increasing its revenueincreasing its revenue under theunder the
authority of the law, purposely used to promote welfare andauthority of the law, purposely used to promote welfare and
protection of its citizenry.protection of its citizenry.
It is theIt is the collectioncollection of the share of individual and organizationalof the share of individual and organizational
income by a government under the authority of the law.income by a government under the authority of the law.

3. Concept of TaxationConcept of Taxation
TaxationTaxation is the inherent power of the state tois the inherent power of the state to
impose and demand contribution upon persons,impose and demand contribution upon persons,
properties, or rights for the purpose ofproperties, or rights for the purpose of
generating revenues for public purposes.generating revenues for public purposes.
The power of taxation upon necessity and isThe power of taxation upon necessity and is
inherent in every government or sovereignty.inherent in every government or sovereignty.

4. Principles and Theories of TaxationPrinciples and Theories of Taxation
 The Benefit Principle.The Benefit Principle. This principle holds the individualsThis principle holds the individuals
should be taxed in proportion to the benefits they receive fromshould be taxed in proportion to the benefits they receive from
the governments and that taxes should be paid by those peoplethe governments and that taxes should be paid by those people
who receive the direct benefit of the government programs andwho receive the direct benefit of the government programs and
projects out of the taxes paid.projects out of the taxes paid.
 The Ability-to-Pay Principle.The Ability-to-Pay Principle. This principle holds that taxesThis principle holds that taxes
should relate with the people’s income or the ability to pay, thatshould relate with the people’s income or the ability to pay, that
is, people with greater income or wealth and can afford to payis, people with greater income or wealth and can afford to pay
more taxes should be taxed at a higher rate than people with lessmore taxes should be taxed at a higher rate than people with less
wealth. Ex. Individual income tax.wealth. Ex. Individual income tax.
 The Equal-Distribution Principle.The Equal-Distribution Principle. This principle thatThis principle that
income, wealth, and transaction should be taxed at a fixedincome, wealth, and transaction should be taxed at a fixed
percentage; that is, people who earn more and buy more shouldpercentage; that is, people who earn more and buy more should
pay more taxes, but will not pay a higher rate of taxes.pay more taxes, but will not pay a higher rate of taxes.

5. Structures of a Tax SystemStructures of a Tax System
 A tax is proportional.A tax is proportional. Meaning the government takes an amount ofMeaning the government takes an amount of
money from a person which is indirect proportion to his income. Ex. Benmoney from a person which is indirect proportion to his income. Ex. Ben
salary is 10,000pesos and the government is deducting 10% of his salarysalary is 10,000pesos and the government is deducting 10% of his salary
for tax. After a year his income increases to 15,000pesos and thefor tax. After a year his income increases to 15,000pesos and the
governments now deducts 12% of his salary for tax. The said tax isgovernments now deducts 12% of his salary for tax. The said tax is
proportional.proportional.
 A tax is regressive.A tax is regressive. Meaning that the governments takes a largerMeaning that the governments takes a larger
percentage of a persons income per tax, while he is receiving a lowerpercentage of a persons income per tax, while he is receiving a lower
income. Ex. Ben’s salary 10,000pesos and government is asking him to payincome. Ex. Ben’s salary 10,000pesos and government is asking him to pay
15% of his salary for tax which is contrary to our given example in15% of his salary for tax which is contrary to our given example in
number 1.number 1.
 A tax is progressive.A tax is progressive. Meaning that the government takes a lagerMeaning that the government takes a lager
percentage of his salary for tax due to his high salary. Ex. Ben has apercentage of his salary for tax due to his high salary. Ex. Ben has a
monthly income of 30,000pesos and the governments deducted 20% ofmonthly income of 30,000pesos and the governments deducted 20% of
his salary for tax. The tax amount is proportionately equal to someone’shis salary for tax. The tax amount is proportionately equal to someone’s
status in the society. A rich man should pay more than a poor man.status in the society. A rich man should pay more than a poor man.

6. Significance of TaxationSignificance of Taxation
Primary purpose:Primary purpose: generates funds or revenues use to defraygenerates funds or revenues use to defray
expenses incurred by the government in promoting the generalexpenses incurred by the government in promoting the general
welfare of its citizenry.welfare of its citizenry.
Other purposes:Other purposes:
 to equitably contribute to the wealth of the nationto equitably contribute to the wealth of the nation
 to protect new industriesto protect new industries
 to protect local producersto protect local producers

7. Characteristics of TaxCharacteristics of Tax
 It is enforced contribution.It is enforced contribution. Its payment is not voluntary nature,Its payment is not voluntary nature,
and the imposition is not dependent upon the will of the personand the imposition is not dependent upon the will of the person
taxed.taxed.
 It is generally payable in cash.It is generally payable in cash. This means that payment byThis means that payment by
checks, promissory notes, or in kind is not accepted.checks, promissory notes, or in kind is not accepted.
 It is proportionate in character.It is proportionate in character. Payment of taxes should be basePayment of taxes should be base
on the ability to pay principle; the higher income of the tax payeron the ability to pay principle; the higher income of the tax payer
the bigger amount of the tax paid.the bigger amount of the tax paid.
 It is levied (It is levied (to impose; collectto impose; collect) on person or property.) on person or property. There areThere are
taxes that are imposed or levied on acts, rights or privileges. Ex.taxes that are imposed or levied on acts, rights or privileges. Ex.
Documentary tax.Documentary tax.

8.  It is levied by the state which has jurisdiction over the person orIt is levied by the state which has jurisdiction over the person or
property.property. As a general rule, only persons, properties, acts, rightAs a general rule, only persons, properties, acts, right
or transaction with in the jurisdiction of the taxing state areor transaction with in the jurisdiction of the taxing state are
subject for taxation.subject for taxation.
 It is levied by the law making body of the state.It is levied by the law making body of the state. This means thatThis means that
a prior law must be enacted first by the congress beforea prior law must be enacted first by the congress before
assessment and collection may be implemented of the 1987assessment and collection may be implemented of the 1987
constitution.constitution.
 It is levied for public purposes.It is levied for public purposes. Taxes or imposed to support theTaxes or imposed to support the
government for implementation of projects and programs.government for implementation of projects and programs.

9. Basic Principles of a Sound Tax SystemBasic Principles of a Sound Tax System
 Fiscal adequacy.Fiscal adequacy. Means that the sources of revenue taken as a whole should beMeans that the sources of revenue taken as a whole should be
sufficient to meet the expanding expenditures of the government regardless ofsufficient to meet the expanding expenditures of the government regardless of
business, export taxes, trade balances, and problems of economic adjustment.business, export taxes, trade balances, and problems of economic adjustment.
Revenues should be capable expanding or contracting annually in response toRevenues should be capable expanding or contracting annually in response to
variations of public expenditures.variations of public expenditures.
 Equality or Theoretical Justice.Equality or Theoretical Justice. Means the taxes levied must be base upon theMeans the taxes levied must be base upon the
ability of the citizen to pay.ability of the citizen to pay.
 Administrative Feasibility.Administrative Feasibility. This principle connotes that in a successful taxThis principle connotes that in a successful tax
system, such tax should be clear and plain to taxpayers, capable of enforcement bysystem, such tax should be clear and plain to taxpayers, capable of enforcement by
an adequate and well-trained staff of public office, convenient as to the time andan adequate and well-trained staff of public office, convenient as to the time and
manner payment, and not unduly burdensome upon on discouraging to businessmanner payment, and not unduly burdensome upon on discouraging to business
activity.activity.
 Consistency or Compatibility with Economic Goals.Consistency or Compatibility with Economic Goals. This refer to the taxThis refer to the tax
laws that should be consistent with economic goals or programs of thelaws that should be consistent with economic goals or programs of the
government. This are the basic services intended for the masses.government. This are the basic services intended for the masses.

10. Classification of TaxesClassification of Taxes
1.1. As to subject matterAs to subject matter
 Personal, Poll or Capitation Tax (ex. Residence Tax)Personal, Poll or Capitation Tax (ex. Residence Tax)
 Property Tax. (ex. Real State Tax)Property Tax. (ex. Real State Tax)
 Excise Tax (ex. RVAT)Excise Tax (ex. RVAT)
2.2. As to who bears the burdenAs to who bears the burden
 Direct Tax (ex. Income Tax)Direct Tax (ex. Income Tax)
 Indirect Tax (ex. Buying of goods and services (RVAT) )Indirect Tax (ex. Buying of goods and services (RVAT) )
3.3. As to determination of accountAs to determination of account
 Specific Tax (ex. Taxes on wines)Specific Tax (ex. Taxes on wines)
 Ad Valorem Tax (ex. Tax according to value such as Real EstateAd Valorem Tax (ex. Tax according to value such as Real Estate
Tax.Tax.

11. 4.4. As to purposeAs to purpose
 General Tax (ex. Almost All Taxes)General Tax (ex. Almost All Taxes)
 Special TaxSpecial Tax
5.5. As to scopeAs to scope
 National Tax (ex. National Revenue Taxes)National Tax (ex. National Revenue Taxes)
 Local TaxLocal Tax

12. Distinction of TaxDistinction of Tax
Tax distinguished from TollTax distinguished from Toll
- A tax is demand of sovereignty, while toll is demand forA tax is demand of sovereignty, while toll is demand for
proprietorship.proprietorship.
- A tax is paid for the use of the government’s property, whileA tax is paid for the use of the government’s property, while
a toll is paid for the use of another’s property.a toll is paid for the use of another’s property.
- A tax may be imposed by the government only, while a toll isA tax may be imposed by the government only, while a toll is
enforced by the government or a private individual or entity.enforced by the government or a private individual or entity.
Tax distinguished from PenaltyTax distinguished from Penalty
- A tax is intended to raise revenue, while penalty is designed toA tax is intended to raise revenue, while penalty is designed to
regulate conduct.regulate conduct.
- A tax may be imposed by the government only while aA tax may be imposed by the government only while a
penalty may be imposed by the government or a privatepenalty may be imposed by the government or a private
individual.individual.

13. Tax distinguished from DebtTax distinguished from Debt
- A tax is base on law, while a debt is based on contract.A tax is base on law, while a debt is based on contract.
- A tax may not be assignable, while a debt is assignable.A tax may not be assignable, while a debt is assignable.
- A tax is generally payable in cash, while debt is payable inA tax is generally payable in cash, while debt is payable in
cash or in kind.cash or in kind.
- A person may be imprisoned for a non-payment of taxes, butA person may be imprisoned for a non-payment of taxes, but
any person may not be imprisoned for non-payment of debt.any person may not be imprisoned for non-payment of debt.
Tax distinguished from other TermsTax distinguished from other Terms
- Revenue. This refers funds or income derived by theRevenue. This refers funds or income derived by the
government whether from tax or any other source in anothergovernment whether from tax or any other source in another
sense.sense.
- Internal Revenue. It refers to taxes imposed by the legislatureInternal Revenue. It refers to taxes imposed by the legislature
other than duties on imports and exports.other than duties on imports and exports.
- Customs Duties. These are taxes imposed on goods exportedCustoms Duties. These are taxes imposed on goods exported
into a country.into a country.

14. Entities Exempted from TaxationEntities Exempted from Taxation
 Religious InstitutionsReligious Institutions
 Charitable InstitutionsCharitable Institutions
 Non-Profit, Non-Stock Educational InstitutionsNon-Profit, Non-Stock Educational Institutions
 Non-profit CemeteriesNon-profit Cemeteries
 Government InstitutionsGovernment Institutions
 Foreign DiplomatsForeign Diplomats

15. Situs of TaxationSitus of Taxation
SitusSitus is a latin term which means “situation”,is a latin term which means “situation”,
“location”, or “place.” In short, its literal meaning“location”, or “place.” In short, its literal meaning
refers to a place taxation. In real property, the rules isrefers to a place taxation. In real property, the rules is
tax is imposed to a place or state where the property istax is imposed to a place or state where the property is
located and subject to be tax has a jurisdiction over thelocated and subject to be tax has a jurisdiction over the
said property.said property.

16. Double TaxationDouble Taxation
 Direct DuplicateDirect Duplicate
ElementsElements::
 Taxing twiceTaxing twice
 By the same taxing authorityBy the same taxing authority
 Within the same taxingWithin the same taxing
jurisdictionjurisdiction
 For the same purposeFor the same purpose
 In the same taxable periodIn the same taxable period
 Involving the same purposeInvolving the same purpose
 Indirect duplicateIndirect duplicate
Indirect duplicate taxation,Indirect duplicate taxation,
on the other hand, occurson the other hand, occurs
when taxes on the propertywhen taxes on the property
are not imposed by the sameare not imposed by the same
taxing authority. The localtaxing authority. The local
and national governmentsand national governments
imposed taxes on the sameimposed taxes on the same
property during one taxableproperty during one taxable
period. This kind ofperiod. This kind of
imposition is legal.imposition is legal.

17. Forms of Escape from TaxationForms of Escape from Taxation
6 forms of escape from taxation6 forms of escape from taxation
1.1. Shifting.Shifting. It is one way of passing the burden of taxIt is one way of passing the burden of tax
from one person to another. Ex. Taxes paid by thefrom one person to another. Ex. Taxes paid by the
manufacturer may be shifted to the consumer bymanufacturer may be shifted to the consumer by
adding the amount of the tax paid to price of theadding the amount of the tax paid to price of the
product.product.
Kinds of ShiftingKinds of Shifting
 Forward shiftingForward shifting occurs when the burden of the tax is transferredoccurs when the burden of the tax is transferred
from a factor of the production to the factor of distribution.from a factor of the production to the factor of distribution.
 Backward shiftingBackward shifting occurs when the burden of tax is transferredoccurs when the burden of tax is transferred
from the consumer to the producer or manufacturer.from the consumer to the producer or manufacturer.
 Onward shiftingOnward shifting occurs when tax is shifted to two or more timesoccurs when tax is shifted to two or more times
either forward or backward.either forward or backward.

18. 2.2. Capitalization.Capitalization. This refers to the reduction in the price of theThis refers to the reduction in the price of the
tax object to the capitalized value of future taxes which thetax object to the capitalized value of future taxes which the
purchaser expects to be called upon to pay.purchaser expects to be called upon to pay. Ex:Ex: A reductionA reduction
made by the seller on the price of the real estate, inmade by the seller on the price of the real estate, in
anticipation of the future tax to be shouldered by the futureanticipation of the future tax to be shouldered by the future
buyer.buyer.
3.3. TransformationTransformation occurs when the manufacturer or produceroccurs when the manufacturer or producer
upon whom the tax has been imposed pays the tax andupon whom the tax has been imposed pays the tax and
endeavor to “recoup” (endeavor to “recoup” (make up formake up for) himself by improving his) himself by improving his
process of productionprocess of production
4.4. Tax EvasionTax Evasion is the practice by the taxpayer throughis the practice by the taxpayer through illegal orillegal or
fraudulentfraudulent means to defeat or lessen the amount for tax. This ismeans to defeat or lessen the amount for tax. This is
also know as “tax dodging.”also know as “tax dodging.”

19. 5.5. Tax AvoidanceTax Avoidance is the exploitation by the taxpayer of legallyis the exploitation by the taxpayer of legally
permissible methods in order to avoid or reduce tax liability.permissible methods in order to avoid or reduce tax liability.
This is also known as “tax minimization.”This is also known as “tax minimization.”
6.6. Tax ExemptionTax Exemption is the grant of immunity or freedom from ais the grant of immunity or freedom from a
financial charge or obligation or burden to which others arefinancial charge or obligation or burden to which others are
subjected.subjected.
Grounds for tax exemption:Grounds for tax exemption:
Contract, wherein the government is the contracting party.Contract, wherein the government is the contracting party.
Public policyPublic policy
ReciprocityReciprocity

20. T H E E N DT H E E N D
Prepared by:Prepared by:
DOMINIC DEUSDEDITH, BITDOMINIC DEUSDEDITH, BIT