Tax1 1 Basic Principles of Taxation 01.30.11-long - for printing- without answers

Tax1a Basic Principles of Taxation

Basic Principles of Taxation Rubenil B. Ibuyan, CPA, MBA

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NATURE, SCOPE, CLASSIFICATION, AND ESSENTIAL CHARACTERISTICS 1. What What is tax taxat atio ion? n? Taxation is an act, process, or means by which the sovereign (Independent State) through its law-making body (legislative branch of the government) makes demand for revenue in order to support its existence and carryout its legitimate objectives, 2. Explain Explain the the nature nature of taxation taxation powe power r The power of taxation generally refers to the combination of the following natural qualities. 1. Inherent power of Sovereignty 2. Essentially a legislative Function 3. For Public Purposes 4. The strongest of all the inherent powers of the State 5. Subject to International Treaty or Comity 6. Normally Payable in Money 7. Territorial in Scope Definition: 1. Inherent power of Sovereignty – the power of taxation is co-extensive with sovereignty. It is existing inseparably with the State. The government could exercise this power even without any provision in the Constitution mentioning it. i. Taxation Taxation begins begins its existence existence from from the time time a state state is born born with the the concurrence concurrence of its four elements which are people, territory, sovereignty and government. 2. Essentially a legislative Function – The Law-making body of the government and its political subdivisions exercise the power of taxation. 3. For Public Purposes – Taxes are public money, and its appropriation to be valid must be for the common good of the people, such that no individual or particular entity shall primarily be enriched or benefited from its use. 4. The strongest strongest of all inherent powers of the State - Without money, the government government cannot cannot exist permanently and cannot dispense and exercise any of its powers and / or functions for its people. i. In the absence o the limitations provided by the Constitutions, the power of taxation is unlimited, complete, and supreme. The members of the lawmaking body could impose taxes on things and rights at appropriate rates within boundaries of its inherent restrictions. 5. Subject to Inherent International Treaty or Comity – As a matter of international courtesy, property of a foreign state may not be taxed by another state based on principle of sovereign equality among states of international international law. One state cannot exercise its sovereign dominion over another, therefore, a nation cannot impose enforced contribution to the properties of other nations. 6. Normally payable payable in Money Money – Taxes are contributions contributions normally normally payable payable in the form form of money. 7. Territorial in Scope – As a rule, tax laws do not operate beyond a country’s jurisdictional jurisdictional limits unless there exists a privity of relationship relationship between the taxing State and the object of the tax. Where privity of relationship exists, the state can still exercise its taxing powers over its citizens outside its territory because the personal jurisdiction jurisdiction of his government over him still remains. 3. What is the the basis basis of of taxation taxation? ? Taxation is based on “necessity” and reciprocal duties of protection and support” between the state and its inhabitants. Taxation Taxation is the “lifeblood” or the “bread and butter” of the government. Therefore, Therefore, it is necessary that every citizen must pay his taxes. The government



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cannot exist without means to pay its necessary expenses. The citizen pays taxes to support the government in order that he may continuously be sustained with security and benefits of an organized society.

PURPOSE OF TAXATION 4. What are the two main purposes of the exercise of taxation power? Taxation power is exercised for two main purposes; to raise revenue (fiscal) and to regulate certain activities or consumption (regulatory) 1. Fiscal purpose – taxes are imposed primarily to raise the necessary revenue to finance various activities of the government in the promotion of the general welfare and promotion of the public. 2. Regulatory purpose – taxation power could also be exercised to regulate inflation, achieve economic and social stability, and to serve as a key instrument for social control. STAGES (ASPECTS) OF TAXATION 5. What are the three (3) stages of taxation process? 1. Levy or imposition aspect 2. Assessment aspect 3. Collection Definition: Levy – pertains to the passage of tax laws and tax ordinances to legislature 2. Assessment – refers to the appraisal and valuation process of the subject or object of taxation to arrive at total amount of collectible tax. 3. Collection – involves the effective administrative implementation of obtaining payment of tax from the taxpayer. 6. Which of the aspects of taxation process could not be delegated to other branches of the government? The levying or imposition aspect of taxation could not in anyway to be delegated and which should be exclusively exercised by the law-making body; while the other stages of taxation may lawfully be delegated to other branches of the government. The collection aspect of taxation could even be delegated to private entity. 1.

BASIC PRINCIPLES OF A SOUND TAXATION SYSTEM 7. What are the three basic principles of a sound taxation system? The taxation to be effective is guided by three basic principles 1. Fiscal Adequacy 2. Theoretical Justice 3. Administrative Feasibility Definition 1. Fiscal Adequacy – which requires that the sources of government revenue should be capable of raising the amount that should be sufficient to meet the demand of public expenditures regardless of business condition. 2. Theoretical Justice – which requires that the tax burden must be proportionate to the taxpayer’s ability to pay. 3. Administrative Feasibility – which should enable the system to conveniently implement a just and an effective tax administration. LIMITATIONS OF THE POWER OF TAXATION 8. Taxation is the most supreme among the inherent powers of the government. Could taxation be regarded as an absolute power which the government could exercise without restriction?



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No. Although the power of taxation is supreme, plenary and comprehensive, it is till subject to some inherent and constitutional limitations. 9. What are the inherent limitations on the exercise of power of taxation? 1. It is exercised primarily for public purposes. 2. It is legislative in nature (non-delegation of the legislative power) 3. Its exercise limited to the territorial jurisdiction of the state. 4. It honors and gives due respect to international comity 10. What are the constitutional limitations on the exercise of power of taxation? 1. Due process of law 2. Equal protection of law 3. Rule of uniformity and equity in taxation 4. Non-impairment of obligations and contracts 5. Non-imprisonment for non-payment of poll tax 6. President’s power to veto tax bills 7. Non appropriation for religious purposes SIMILARITIES AND DISTINCTION AMONG INHERENT POWERS OF THE GOVERNMENT 11. What are the three inherent powers of the government? The following powers are inherent to the existence of the government: 1. Taxation power – a power by which an Independent Sate, through its law-making body, raises and accumulates revenue from its inhabitants to pay the necessary expenses of the government. 2. Police power – a power of the Sovereign State to legislate for the protection of the health, welfare and morals of the community. 3. Eminent domain – a power of the Sovereign State to take private property for a public purpose even without the owner’s consent.

12. What are the three basic similarities of the three inherent powers of the government? 1. Inherent to the existence of the government 2. Exercised for public purposes 3. Legislative in nature and character 4. Presuppose equivalent compensation 5. All underlie and exist independently on the Constitution, but their exercise can only be limited by the Constitution. 6. All are necessary attributes of the Sovereign State 13. What are the basic distinctions of the three inherent powers of the government? 1. Police power is broader than taxation and eminent domain because it involves a general power to make and implement laws. 2. The law on public service or public utility entity may grant eminent domain while police power and taxation power are to be exercised only by government units. 3. Both taxation and eminent domain are limited by the non-impairment clause in the Constitution, but not police power. 4. The exercise of police power merely restricts the use of property, while eminent domain requires the take over of specific property. In taxation, now specific property is being taken, because this requires payment, generally in money. 5. The exercise of eminent domain requires payment of just compensation to the private property owner, while in taxation and police power, the government has to receive tax or fee for its exercise.

SITUS OF TAXATION



14. What is situs of taxation? Situs of taxation refers to the place of taxation, or to the State or political unit which has jurisdiction to impose tax. 15. The following are the factors which are determinant to the situs of taxation 1. Citizenship of the taxpayer 2. Residency of the taxpayer 3. Nature, kind or classification of tax being imposed 4. Subject or object of taxation 5. Source of income 6. Place of exercise, business or occupation being taxed Additional Note: The following situs of taxation apply Persons- residence of the taxpayer Real property or tangible personal property – location of the property Intangible personal property – as a rule, situs is the domicile of the owner unless he has acquired a situs elsewhere Income – Taxpayer’s residence or citizenship, or place where the income was earned. Business, occupation and transaction – place where business is being operated, occupation being practiced and transaction completed Gratuitous transfer or property – taxpayer’s residence or citizenship, or location of the porperty • • •

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NATURE, CHARACTERISTICS, KINDS OF TAXES 16. What does the term “taxes” means? Taxes are obligations created by law. These are civil liabilities of the taxpayer which may give rise to his criminal liability if he refuses to pay. Taxes are the lifeblood of the government because these are main sources of government revenues. These are forced contributions from those who are receiving protections directly or indirectly from the government to support its multiple functions. 17. What are the characteristics of taxes? 1. A forced contribution 2. Proportionate in character 3. Imposed by the legislative boy 4. Generally payable in money 5. For public purposes 6. Levied on person, property or right 7. Imposed by the sovereign state which has jurisdiction

18. What are classifications of taxes? 1. Local and national, as to authority collecting it 2. Direct or indirect, as to who bears the burden 3. Specific and advalorem, as to determination of the amount 4. Fiscal and regulatory, as to purpose 5. Personal, property, or excise, as to object 6. Proportionate, prorgressive and regressive as to rate

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TAX INVASION AS DISTINGUISED FROM TAX AVOIDANCE 19.

What is the main distinction between tax avoidance and tax invasion? Tax avoidance is the legal means to lessen or totally eliminate the tax liability. Examples are tax shifting, transformation, and other exercise of legal options, which reduce the tax burden. Tax evasion is the illegal means to reduce tax payment. Example is the willful understatement of the income or the overstatement of deductions from what is lawfully authorized or permitted. •

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DOUBLE TAXATION 20. Define double taxation Double taxation is an act by the sovereign of taxing twice for the same purpose in the same year upon the same property or the same person with the same nature or character of tax. 21.

What are the classifications of double taxation? Direct duplicate taxation – This is double taxation in its strict sense. It is prohibited because it consists imposition of the same tax on the same property for the same purpose by the same State during the same taxable period. This kind of double taxation violates the constitutional provision of uniformity and equal protection, as well as the principle that tax must not be excessive, unreasonable and equitable. Therefore, such taxation should, whenever and wherever possible, be avoided to prevent injustice or unfairness. Indirect duplicate taxation – This is double taxation in its broad sense. It extends to • all cases in which there is a burden of two or more pecuniary impositions. It is usually allowed as long as there is no violation of equal protection and uniformity clauses of the Constitution. •

TAX ADMINISTRATION 22. What are the main agency implementing the National Internal Revenue Laws? The Bureau of Internal Revenue is the administrative agency of the government in charge with the primary function of administering the National Internal Revenue laws and regulations. It is responsible for the collection of National Internal Revenue taxes. It is under the executive supervision and control of the Department of Finance. The Internal Revenue Commissioner heads it (Sec. 2) 23.

What are the powers of the Commissioner of Internal Revenue 1. To interpret tax laws and to decide on tax cases. 2. To obtain information, to summon and take testimony to effect tax collection 3. To make assessment and prescribe additional requirements for tax administration and enforcement Examination of returns and determination of tax due. Failure to submit required returns, statements, reports and other documents Authority to conduct inventory-taking, surveillance and prescribe presumptive gross sales and receipts Authority to terminate taxable period. Authority to prescribe real property values. • • •

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Tax1a Basic Principles of Taxation • • •


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Authority of the Commissioner to inquire deposit accounts Authority to accredit and register tax agents. Authority of the Commissioner to prescribe additional procedural or documentary requirements.

Check-up Quiz NATURE, SCOPE, CLASSIFICATION, AND ESSENTIAL CHARACTERISTICS 1. Which of the following statements is not correct? a. The power of tax is inherent to the existence of the government which could be exercised even without its provision in the Constitution. b. Taxation is the strongest among the inherent powers of the state and considered as an absolute power. c. Constitutional provisions regarding taxation may limit the exercise of the power of taxation. d. Taxes appropriated for National Defense may be regarded as for public purpose. 2. Taxes are public money which should be used for public purposes. Which o the following is not regarded as for public purposes? a. Appropriation for public education b. Appropriation for Comprehensive Agrarian Reform Program of the government c. Appropriation for the Church d. Appropriation for governmental projects 3. Which of the following could not exercise the levying function of taxation? a. City council b. Provincial board c. Provincial governor d. Congress 4. Statement: Taxation power could readily be exercised by the State upon its existence. True or False 5. Statement: Any provision in the Constitution regarding taxation merely constitutes limitations upon the supremacy of taxation power.

6. Which of the following statement is not correct? a. In the absence of any Constitutional provisions, the power of taxation is unlimited except for the restrictions of its inherent limitations. b. The power of taxation is plenary (full, complete), comprehensive, and most supreme among the inherent powers of the State. c. The exercise of taxation is also restricted by the sense of responsibility of the members of the law-making body. d. The power of taxation is separably existing from the State, and such could be exercised by the President even without provision in the constitution. PURPOSE OF TAXATION 7. Which of the following is generally serving the regulatory function of taxation? a. real estate tax b. income tax c. custom duties d. estate tax 8. Which of the following could not be considered as a purpose of taxation? a. To raise revenue to support the government b. To distribute wealth of the nation c. To check inflation d. To impose monetary burden to the people 9. Which of the following business taxes serve more the regulatory functions of taxation? a. Value Added Tax b. Percentage Tax c. Excise Tax d. All of the above STAGES (ASPECTS) OF TAXATION 10.Fixing the rate to be imposed is best described as a (an)

Tax1a Basic Principles of Taxation a. Tax administration aspect b. Tax legislative function c. Aspect of taxation which could be delegated d. Function that could be exercised b the executive branch 11.Which of the following is considered as tax administrative function? a. Collection of taxes b. Fixing of tax rates c. Prescribing the date and place of payment of tax d. Determination of the subject or object of taxation 12.The determination of the tax base in accordance with the pertinent law is a (an) a. Imposition aspect of taxation b. Assessment aspect of taxation c. Collection aspect of taxation d. Payment of taxes 13.Which of the following could exercise the levying aspect of taxation? a. Barangay council b. City Mayor c. Judiciary d. The President of the Philippines

BASIC PRINCIPLES OF A SOUND TAXATION SYSTEM 14.Which tax principle dictates that the government must maintain an ideal budgetary system? a. Fiscal adequacy b. Theoretical justice c. Administrative feasibility d. All of the above 15.Which tax principle is described in the statement: The more income earned by the taxpayer, the more tax he has to pay. a. Fiscal adequacy b. Theoretical justice c. Administrative feasibility d. All of the above 16.Which of the following is not in harmony with the basic tax principles? a. Clear and concise b. Vague and burdensome c. Convenient to the taxpayer d. Convenient to the government


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LIMITATIONS OF THE POWER OF TAXATION 17.Which constitutional limitation is being complied with the serving of assessment notice to delinquent taxpayer? a. Due process of law b. Equal protection of law c. Rule of uniformity d. Non-impairment clause 18.What constitutional provision is described when tax bill is required to be presented for the approval of the executive branch of the government? a. Legislative in nature b. Non-impairment clause c. Due process of law d. President’s power to veto 19.Which of the following pertains to the provision in the fundamental law of the land restricting the exercise of power of taxation? a. International comity b. Territorial jurisdiction c. Inherent limitation d. Constitutional limitation 20.Which of the following pertains to the Constitutional provision requiring that tax apportionment must be more or less just in light with the taxpayer’s ability to shoulder the taxpayer in accordance to his wealth, property and income, or proportionate to the benefits received from the government? a. Due process of law b. Equal protection of law c. Equity in taxation d. Rule of uniformity in taxation 21.Which of the following pertains to the Constitutional guaranty which provides that all taxable articles and properties of the same class, should be taxed at the same rate? a. Equity in taxation b. Rule of uniformity in taxation c. Equal protection of law d. Due process of law 22.Which Constitutional provision requires that all persons subject to legislation should be treated alike under similar circumstances and

Tax1a Basic Principles of Taxation conditions both in privileges conferred and liabilities imposed? a. Equity in taxation b. Equal protection of law c. Due process of law d. For public purposes 23.Which limitation on the power of taxation inherently implied that the State’s primary concern is for the common good of the people? a. Equity in taxation b. Equal protection of law c. Due process of law d. For public purposes 24.Which of the following restrictions on the power of taxation recognizes that the country’s tax laws shall not be applied to the property of foreign government? a. Taxation is inherently a legislative function b. Exercise of taxation is subject to international comity c. Due process of law d. Equal protection of law 25.Which restriction on the power of taxation limits its imposition on properties which are within physical boundaries of the State imposing it? a. Inherently legislative b. Territorial jurisdiction c. International comity d. Equal protection of law 26.Which of the following limitations on the power of taxation restricts the delegation of taxation power to those ministerial and advisory in nature, such as valuation and assessment of object of taxation a. Inherently legislative b. Due process of law c. International comity d. Non-impairment clause 27. Which restriction is described in the non-taxability of the property within the foreign country’s embassy which is located within the territorial jurisdiction of the taxing State? a. Inherently legislative b. Territorial jurisdiction


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c. International comity d. Non-impairment clause SIMILARITIES AND DISTINCTION AMONG INHERENT POWERS OF THE GOVERNMENT 28.Which of the following is a characteristic of taxation which distinguishes it from police power and eminent domain? a. For public purposes b. Legislative in nature c. Generally payable in money d. Inferior to non-impairment clause in the Constitution 29.Which of the following generally does not raise money to the government? a. Taxation power b. Police power c. Eminent Domain d. None of the above

30.Which statement refers to police power as distinguished from taxation? a. The benefit derived by the payer is the protection provided by the state b. It is inherent to the existence of the State c. It involves only restriction on the usage of property d. Specific property is being taken over by the government 31.The following are similarities of taxation, police power and eminent domain, except a. All are inherent to the existence of the State b. All have a corresponding form of compensation c. All are superior to the nonimpairment clause d. All are limited for public purposes

SITUS OF TAXATION 32.Which of the following income is taxable in the Philippines? a. Salary received for working abroad by non-resident citizen

Tax1a Basic Principles of Taxation b. Interest income earned by a non-resident alien the Philippines c. Business income earned in the USA by an American corporation d. Cash dividend received by a non-resident citizen from a foreign corporation 33.Which of the following is subject to Philippine estate tax? a. Personal property of a nonresident citizen decendent located outside the Philippine at date of death b. Real property of a non-resident alien decedent located outside the Philippines at date of dearth c. All of the above d. None of the above 34.Where is the place of payment of real property tax for a building located in Baguio, owned by an individual whose residence is in Manila, and those working place is in Quezon City? a. Treasurer’s office of Baguio b. Treasurer’s office of Manila c. Treasurer’s office of Quezon City d. Treasurer’s office of any of the three mentioned cities 35.Value Added Tax is a national business tax. Where should this tax be paid for the sales of a business entity doing business in Baguio, whose owner is a resident of Makati? a. City treasurer of Baguio b. Revenue District of Baguio c. Revenue District Office of Makati d. Wherever of the three mentioned offices at the convenience of the taxpayer NATURE, CHARACTERISTICS, KINDS OF TAXES 36.Which of the following is not a characteristic of a tax? a. Generally payable in money b. Generally based on a contract c. Forced contribution d. Proportionate to the capability of the taxpayer to pay


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37.Which of the following is the general classification of Income Tax? a. Regulatory tax b. Indirect tax c. Advalorem tax d. Proportionate as to rate 38.Which of the following is not an excise tax? a. Value Added tax b. Income Tax c. Real estate tax d. Donor’s tax 39.

Which of the following is the classification of value-added tax? a. Progressive as to rate b. Proportionate tax rate c. Transfer tax d. Specific tax

40.All of the following, except one is an example of direct tax. a. Income tax b. Donor’s tax c. Value Added Tax d. Estate tax

TAX INVASION AS DISTINGUISED FROM TAX AVOIDANCE 41.In which of the following taxes could an income tax be classified? a. Regulatory tax b. Local tax c. Progressive tax rate d. Indirect tax 42. Which of the following is to be regarded as to tax minimization through legal means? a. Not declaring all taxable income b. Padding of expenses for deduction from income c. Opting to transfer the property through sale rather through donation where tax liability would higher d. All of the above 43.Which of the following could be described as tax evasion? a. Using two sets of books of accounts

Tax1a Basic Principles of Taxation b. Non-issuance of commercial invoice c. All of the above d. None of the above DOUBLE TAXATION 44.Which of the following is not an example of double taxation? a. Taxing a fringe benefit which has been subjected to final withholding income tax b. Taxing gain on sale of real estate (capital asset) based on normal tax which has been subjected to final tax. c. Taxing stockholders’ dividend income derived from the same corporation whose income has been subjected to income tax d. All of the above 45. Which of the following remedies would counter-act double taxation? a. Reciprocity and/or tax credit b. Tax exemption and allowable deductions c. Tax benefit agreements d. All of the above

TAX ADMINISTRATION 46. Which of the following is not a National Internal Revenue Tax? a. Income tax b. Donor’s tax c. Estate tax d. None of the above 47. Which of the following is not within the scope of authority of the BIR Commissioner? e.


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a. To exercise the levying function of taxation b. To interpret tax laws c. To assess and collect BIR taxes d. To decide cases involving National Internal Revenue taxes 48.Which of the following is within the scope of authority of the BIR Commissioner? a. To inquire into bank deposit accounts b. To terminate taxable period c. To prescribe real property values d. All of the above 49.The BIR Commissioner has the authority to delegate powers vested on him under the Tax Code, which of the following powers of the Commissioner could not be delegated? a. The power to recommend the promulgation of rules and regulations by the Secretary of Finance, and the power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau of Internal Revenue b. The power to compromise or abate tax liability c. The power to assign or re-assign internal revenue officers to establishments where articles subject to excise tax are produced or kept. d. All of the above

Tax1 1 Basic Principles of Taxation 01.30.11-long - for printing- without answers

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