MODULE 1

BASIC PRINCIPLES OF TAXATION

1. Taxation is a power inherent in every sovereign state to impose a change or burden upon
persons, properties or rights, to raise revenues for the use and support of the government
and enable it to discharge its appropriate functions (Am. Jur.). That which is imposed is
called tax.

The basic principles of a sound tax system are:

(a) Fiscal Adequacy. The sources of revenues, as a whole, should provide enough funds
to meet the expanding expenditures of the government;
(b) Theoretical Justice. Taxes must be based on the taxpayer’s ability to pay;
(c) Administrative Feasibility;The tax should be clear to the taxpayer, not unduly
burdensome and discouraging to business, convenient as to time and manner of
payment, and capable of enforcement by competent public officials.
2. Which of the following statement is not correct?
(a) Taxes may be imposed to raise revenues or to provide disincentives to certain
activities within the state;
(b) The state can have the power of taxation even if the Constitution does not expressly
give it the power to tax;
(c) For the exercise of the power of taxation, the state can tax anything at anytime;
(d) The provisions of taxation in the Philippine Constitution are grants of power and not
limitations on taxing powers.

Answer: d

3. A religious order, a lessee of a piece of land, constructed a seminary and church on a

portion of the land. On the portion of the land not used as seminary and church, it
constructed a one-storey building that is sub-leased to private individuals selling religious
materials, food and refreshments. The rent income is used to finance teaching at the
seminary.
Statement 1: the rent income of the religious order is subject to income tax;
Statement 2: the exemption from taxation provided in the Philippine constitution
prohibits the imposition of any tax on the religious order.
(a) True,true; (b) False, false; (c) True, false (d) False, True;

Answer: c

4. Under the Philippine constitution, a non-profit, non-stock educational institutional is

exempt from income tax.
Statement 1: this exemption from tax applies whether the educational institution is ran by
a religious order or not.
 Statement 2: the policy consideration for the tax exemption is to encourage the
establishment of educational institutions which public service oriented and not profit-
motivated.
(a)True,true; (b) False, false; (c) True, false (d) False, True;
Answer: a
5. A non-profit, non-stocked educational corp. earned interest on its banks deposits, on
which: Its information return file with the Bureau of Internals Revenue carried the item,
there is a certification from the depositary bank of the amount of interest on which there
was no withholding income tax; and there is a certification from the corporation on the
utilization of the income, or the use to which it is intended.
Statement 1: if is a compliance with the documentation to the exemption, hence, there is
no income tax to the interest income.
Statement 2: even without the documentation, the income is still exempt from income tax
pursuant to the provision of the Philippine constitution, if it can be shown that the income
was used actually, directly and exclusively for the purpose for which the corporation was
organized.
(a) True,true; (b) False, false; (c) True, false (d) False, True;

Answer: a

6. One of the characteristics of the internal revenue laws is that they are:
(a) Criminal in nature.
(b) Penal in nature.
(c) Political in nature
(d) Generally prospective in application.

Answer: d

7. One of the characteristics of our internal revenue laws is that they are:
(a) Criminal in nature.
(b) Penal in nature.
(c) Generally prospective in operation although the tax statute may nevertheless operate
retrospectively provided it is clearly the legislative intent.
(d) Answer not given

Answer: c

8. In case of conflict between tax laws and generally accepted accounting principles
(GAAP):
(a) Both tax laws and GAAP should be enforced.
(b) GAAP shall prevail over tax laws.
(c) Tax laws shall prevail over GAAP.
(d) The issue shall be resolved by the courts.
Answer: c

9. The following are similarities of the inherent power of taxation, eminent domain and
police power except one:
(a) Are necessary attributes of sovereignty.
(b) Interfere with private rights and property.
(c) Affect all persons or the public.
(d) Are legislative in implementation.

Answer: c

10. Tax as distinguished from license fee:

(a) Non-payment does not necessarily render the business illegal.
(b) A regulatory measure;
(c) Imposed in the exercise of police power;
(d) Limited to cover cost of regulation.

Answer: a

11. Which statement refers to police power as distinguished from taxation?

(a) It can only be imposed to specific property or properties;
(b) The amount imposed depends on whether the activity is useful or not;
(c) It involves the taking of property by the government;
(d) The amount imposed has no limit.

Answer: b

12. The distinction of a tax and permit or license fee is that a tax is:
(a) Imposed for regulation;
(b) One which involves the exercise of police power;
(c) One in which there is generally no limit on the amount that may be imposed;
(d) Answer not given

Answer: c

13. Which of the following is not an example of excise tax:

(a) Transfer tax;
(b) Sales tax;
(c) Real property tax;
(d) Income tax

Answer: c

14. Value-added tax is an example of:

(a) Graduated tax;
 (b) Progressive tax;
(c) Regressive tax;
(d) Proportional tax.

Answer: d

15. The power of taxation is inherent in sovereignty being essential to the existence of any
government. Hence, even if not mentioned in the constitution the state can still exercise
the power.
It is essentially a legislative function. Even in the absence of any constitutional
provision, taxation power falls to congressas part of the general power of law-making.
(a) True,true; (b) False, false; (c) True, false (d) False, True;

Answer: a

16. Which of the following is not a scheme of shifting the incidence of taxation?
(a) The manufacturer transfers the tax to the consumer by adding the tax to the selling
price of goods sold;
(b) The purchaser asks for a discount or refuses to buy at regular prices unless it is
reduced by the amount equal to the tax he will pay.
(c) Changing the terms of the sale like FOB shipping point in the Philippines to FOB
destination abroad, so that the title passes abroad instead of in the Philippines.
(d) The manufacture transfers the sales tax to the distributor, then in turn to the
wholesaler, in turn to the retailer and finally to the consumer.

Answer: c

17. The proportional contributions by persons and property levied by the law-making body of
the State by virtue of its sovereignty for the support of the government and all public
needs is referred to as:
(a) Taxes;
(b) Special assessment;
(c) License fees;
(d) Answer not given.

Answer: a

18. One of the characteristic of a tax is that:

(a) It is generally based on contract;
(b) It is generally payable in money;
(c) It is generally assignable;
(d) Answer not given.

Answer: b
19. Tax of a fixed proportion of the value of the property with respect to which the tax is
assessed and requires the intervention of assessors or appraisers to estimate the value of
such property before the amount due from each taxpayer can be determined is known as:
(a) Specific;
(b) Ad valorem;
(c) Special or regulatory
(d) Answer not given.

Answer: b

20. Which of the following statement is not correct?

(a) An inherent limitation of taxation may be disregarded by the application of a
constitutional limitation;
(b) The property of an educational institution operated by a religious order is exempt
from property tax, but its income is subject to income tax;
(c) The prohibition of delegation by the state of the power of taxation will still allow the
bureau of Internal Revenue to modify the rules in time for filling of returns and
payment of taxes;
(d) The power of taxation is shared by the legislative and executive departments of
government.

Answer: c

21. For an enhancement on revenue collection, the bureau of Internal Revenue may adopt
measures that will minimize or eliminate tax evasion. In this regard:
Statement 1: a donation or gift of money or property directly to a political candidate i9s
subject to the donor`s tax under the National Internal Revenue code, and hence, the donor
may be required to withhold a donor`s tax with it.
Statement 2: a payment of money to a person who made campaign materials to a political
candidate is income payment by the payor to the payee, and hence the payor may be
required to withhold an income tax to it.
(a) True,true; (b) False, false; (c) True, false (d) False, True;

Answer: a

22. Statement 1: A license fee at an amount at an amount that is more than necessary for
regulation is a tax, and hence may be imposed only on a clear authority under the law to
impose tax.
Statement 2: A tax levied for a special purpose (as road tax), which is spent for purposes
other than those stated in the law for its use, If involving a huge amount, may tantamount
to the crime to plunder.
(a) True,true; (b) False, false; (c) True, false (d) False, True;
 Answer: a

23. Which statement is correct? A revenue regulation, as a source of tax law, is:
(a) promulgated by the Bureau of Internal Revenue;
(b) promulgated by the Department of Finance;
(c) promulgated by the Department of Finance upon the recommendation of the Bureau
of Internal Revenue;
(d) an interpretation of the revenue law by the Bureau of Internal Revenue.

Answer: c

24. congress enacted a law increasing the personal exemptions of individuals under the
income tax law to a uniform P50,000 for all individuals, regardless of status of the
individuals. The law took effect sometime within the year. The secretary of finance will
allow the increase on personal exemption to a date:
(a) on the effective of the law within the year;
(b) as of the beginning of the year in which the law was passed by the congress;
(c) as at the beginning of the succeeding year;
(d) only when congress passes a law clearly stating the effective of the increase

Answer: a

25. Which of the following has no power of taxation?

(a) Provinces;
(b) Cities;
(c) Barangays
(d) Barrios.

Answer: d
26. A tax must be imposed for a public purpose. Which of the following is not a public
purpose?
(a) National defense;
(b) Public education;
(c) Improvement of the sugar industry;
(d) None of the above.

Answer: d

27. The basic community tax of P5.00 of an individual is:

(a) A personal tax;
(b) A direct tax;
(c) A national tax
 (d) An ad valorem tax.

Answer: b

28. In 2011, a person was given by a special law the privilege to operate a public utility
(franchise), in consideration of which, he was required by that law to pay a franchise tax.
This franchise can be amended by:
(a) An amendment of that special law only;
(b) An amendment of that special law or a law of general application;
(c) An amendment of a revenue regulation;
(d) None of the above

Answer: b

29. A tax on business is:

(a) Direct tax;
(b) Indirect tax;
(c) Property tax;
(d) None of the above.

Answer: b

30. Which is the correct best statement? A tax reform at any given time underscores the fact
that:
(a) Taxation is an inherent power of the state;
(b) Taxation is essentially a legislative power;
(c) Taxation is a power that is very broad;
(d) The state can and should adopt progressive taxation.

Answer: c

31. Which statement gives the correct answer? That a feasibility study needs or need not look
into the taxes of different political subdivisions of government which may be alternative
sites of business is because:
(a) Provinces, cites and municipalities must have uniform taxes between and among
themselves;
(b) The local taxes of one political subdivision need not be uniform with the local taxes
of another political subdivision;
(c) Businesses that are subject to national business taxes are exempt from local business
taxes;
(d) Local business taxes may be credited against national business taxes.

Answer: b
32. Which statement is wrong?
(a) A tax is a demand of sovereignty;
(b) A toll is demand of owner ship;
(c) A special assessment is a tax;
(d) Customs duty is a tax.

Answer: c

33. A fundamental rule in taxation is that the property of one country may not be taxed by
another country. This is known as:
(a) International law;
(b) International comity;
(c) Reciprocity;
(d) International inhibition.

Answer: b

34. In this power of the state, the person who is parting with his money/property is presumed
to receive a benefit:
(a) Taxation;
(b) Political power;
(c) Eminent domain;
(d) None of the above.

Answer: a

35. In all, except one, there can be a classification of the subject matter being required to
shoulder the burden. Which is the exception?
(a) Tax;
(b) License fee;
(c) Toll;
(d) Eminent domain.

Answer: d

36. There can be no tax unless there is a law imposing the tax is consistent with the doctrine
or principle of:
(a) Uniformity in taxation;
(b) Due process of law;
(c) Non-delegation of the power to tax;
(d) The power of taxation is very broad and the only limitation is the sense of
responsibility of the members of the legislature to their constituents.

Answer: c
37. Which of the following is not an element of direct double taxation?
(a) Two taxes;
(b) Same subject matter;
(c) Same year;
(d) Same amount.

Answer: d

38. Statement 1: the value-added tax is a property tax;

Statement 2: the estate tax is a direct tax.
(a) True, true; (b) False, false; (c) True, false (d) False,
True.

Answer: d

39. Statement 1: because the power of taxation is inherent in the state, the inherent limitation
on the power of taxations always applies.
Statement 2: inherent limitations on the power of taxations must give way to
constitutional limitations.
(a) True, true; (b) False, false; (c) True, false (d) False,
True.

Answer: d

40. Which statement is wrong? “The tax should be based on the taxpayer’s ability to pay”.
(a) As a basic principle of taxation, this is called “theoretical justice;”
(b) As a theory of taxation, this is called “ability –to-pay-theory”
(c) No person shall be imprisoned for non-payment of a tax;
(d) A graduated tax table is in consonance with this rule.

Answer: c

41. Statement 1: the power to tax can be delegated to units of local government, but with
limitations, as may be provided by law.
Statement 2: the power to tax cannot be delegated to the executive department of the
national government.
(a) True, true; (b) False, false; (c) True, false (d) False,
True.

Answer: a

42. Which of the statement is false?

(a) A tax is a demand of sovereignty while a toll is a demand of property ownership;
 (b) Non-payment of a tax does not make the activity tax unlawful;
(c) A grant of police power to a unit of local government carries with it a grant of the
power to tax.
(d) Customs duty is a tax.

Answer: c

43. Some franchise holders who are paying the franchise tax are being required by an
amendatory law to pay the value added tax, while others remain subject to the franchise
tax. Which of the following constitutional provisions makes the law unconstitutional?
(a) No law shall be passedimpairing the obligations of contracts;
(b) The rule on taxation shall be uniform;
(c) No person shall be deprived of property without due process of law;
(d) None of the above.

Answer: d

44. Under the basic principle of a sound tax system, the government should not incur a deficit:
(a) Theoretical justice;
(b) Administrative feasibility;
(c) Fiscal adequacy;
(d) None of the above.

Answer: c

45. That the legislative body can impose a tax at any amount underscores the legal truism
that:
(a) Taxation is an inherent power if the state;
(b) Taxation is a very broad power of the state;
(c) Taxation is essentially a legislative power;
(d) None of the above.

Answer: b

46. The City of Manila, claiming that it can impose taxes under the local government code,
imposed a tax on banks (in addition to the percentage tax on banks imposed in the
National Internal Revenue Code). The banks within the City of Manila objected for the
various reasons given below. Which would justify the objections of the banks?
(a) The power of taxations cannot be delegated;
(b) The rule on double taxations;
(c) Uniformity in taxations;
(d) None of the above.

Answer: d
47. The amount required is dictated by the needs of the government in:
(a) License fee;
(b) Tax;
(c) Toll;
(d) None of the above.

Answer: b

48. This is a demand of ownership:

(a) License fee;
(b) Tax;
(c) Toll;
(d) None of the above.

Answer: c

49. No person shall be imprisoned for non-payment of this:

(a) Property tax;
(b) Excise tax;
(c) Poll tax;
(d) None of the above.

Answer: c

50. As a basic principle of taxation, that “taxes must be based on the taxpayer’s ability to
pay” is called:
(a) Equality in taxation;
(b) Ability-to-pay theory;
(c) Theoretical justice;
(d) Equity in taxation.

Answer: c

51. Which of the following may not raise money for the government?
(a) Power of taxation;
(b) Police power;
(c) Eminent domain;
(d) None of the above.

Answer: c

52. Which is not and essential characteristic of tax?

(a) It is unlimited as to amount;
 (b) It is payable in money;
(c) It is proportionate in character;
(d) It is a regular payment.

Answer: d

53. Statement 1: direct double taxation involves two taxes by the same taxing authority (e.g.
National Government)
Statement 2:indirect double taxation involves two taxes by two different taxing
authorities (e.g., National Government and a unit of local government).
(a) True, true; (b) False, false; (c) True, false (d) False,
True.

Answer: a

54. Statement 1: Direct double taxation is prohibited by the Philippine constitution.

Statement 2: Indirect double taxation is allowed by the Philippine constitution.
(a) True, true; (b) False, false; (c) True, false (d) False,
True.

Answer: d

55. Statement 1: tax evasion, which is the use of means to escape a tax that is already a
liability, is prohibited by law and is punishable;
Statement 2: tax avoidance which is the use of means to prevent the accrual of a tax, or to
minimize a tax that may accrue, is likewise prohibited by law and is punishable.
(a) True, true; (b) False, false; (c) True, false (d)
False, True.

Answer: c

56. Which statement is true?

The prohibition in the Philippine constitution on taxation on religious corp. is;
(a) A prohibition on imposition of excise taxes on the corp.
(b) A prohibition on imposition of property taxes on the corp.
(c) A prohibition on imposition of any and all local taxes on the corp.
(d) A prohibition on imposition of any and all national taxes on the corporation.

Answer: b

57. Pioneer enterprises are exempt from certain taxes on a certain period of time that are
otherwise applicable to other enterprises. Which of the ff. statements is wrong?
(a) This violates the constitutional requirement of rule of uniformity in taxation.
(b) This is a sound tax incentive for development of the national economy.
 (c) This will provide employment opportunities;
(d) This will not involve unconstitutional delegation of the power of taxation even as
certain government agencies, other than the congress of the Philippines, will
determine who qualify pioneer enterprises.

Answer: a

58. Statement 1: a tax amnesty that forgives delinquency of prior years is a legislative act of
the govn`t.
Statement 2: a tax compromise that lowers the delinquent from a tax payer is an
executive act pursuant to a legislative grant of power to the executive department of the
government.

Answer: d

59. Statement 1: a revenue regulation must not be contrary to the provision of the law that it
implements.
Statement 2: a revenue regulation cannot expand the provision of the law that implements
by imposing a penalty when the law that authorizes the revenue regulation does not
impose a penalty.

Answer: a

60. Which statement is false?

(a) A law that impose a tax on sugar mill and centrals where the revenue collected may
be used to improve the sugar industry is a tax for a public purpose and the law is
constitutional;
(b) A law that imposes a tax on movie goers in a city, where the revenue will be used to
improve flood control infrastructures in the low areas in the city is constitutional;
(c) A law that gives tax privileges to manufacturers in defined industrial areas, which are
not enjoyed by other manufacturers elsewhere is not discriminatory and is
constitutional;
(d) None of the above.

Answer: d

61. One of the ff. is false.

(a) Police power and license fee are for purposes of regulation;
(b) Any license fee should only raise an amount necessary to carry outregulation;
(c) The power to impose a license fee does not carry with it the power to impose a tax.
(d) A business or activity subject to a license fee does not become illegal because no
license fee was paid for it.

Answer: b
 62. Statement 1: the tax that is allowed by the law to be passed on by a tax payer to another is
called an indirect tax.
Statement 2: business taxes which is not allowed by the law to be passed on by sellers of
goods and services to buyers are nonetheless imperceptibly passed on because they are
factored to in on the selling price.

Answer: a

63. Statement 1: a tax imposed by a law can bechangedon its applicability to persons,
properties, etc., only by an amendment of the particular law that imposed it.
Statement 2. The applicability of a tax imposed by a law on certain persons, properties,
etc., may be changed by another or new law that makes reference to the original law that
imposed the tax.
(a) True, true; (b) False, false; (c) True, false; (d) False, true.

Answer: d

64. A franchise is a law granting to a person the privilege to operate a public utility (e.g.,
selling electricity or water). For the privilege, the franchisee will have to pay a franchise
tax. In effect it is a contract between the franchisee and the government. In addition to the
activity covered by the franchise, the franchisee may sell other services (e.g., renting out
its equipment), which is subject to the value-added tax.
Statement 1.A law may be passed requiring the holder of the franchise to pay on its main
activity a tax other than the franchise tax (e.g., the value-added tax);
Statement 2.The franchisee may not be required to pay a tax other than the franchise tax
on its main activity because the franchise is a contract that governs the relationship
between the government and the franchise holder.
(a) True, true; (b) False, false; (c) True, false; (d) False, true.

Answer: c

65. A non-payment of a tax is a civil liability (payment of the tax) and a criminal liability
(fine and/or imprisonment)
Statement 1.A civil case has to be filed in court apart of a criminal case to be filed in
court.
Statement 2. A case filed with the Court of Tax Appeals covers both the civil and
criminal aspects of the case.
(a) True, true; (b) False, false; (c) True, false; (d) False, true.

Answer: d