 INCOME TAXATION

 PRINCIPLES OF TAXATION

 DEFINITION,NATURE, AND BASIS OF 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. Taxation, as a power of the State,
is inherent in sovereignty.

 Taxes – are the lifeblood of the government and their prompt and certain availability are an
imperious need. A government cannot continue to exist and operate without financial means.

 Purpose of Taxation

Primary – To raise revenue

Secondary – To regulate

 Objectives of Taxation

 Taxation is much more than a means of raising revenue for the government.

 It is also a means by which the national government attempts to achieve various economic and
social objectives.

 These objectives includes shifting wealth from rich to the poor, maintaining price stability,
stimulating economic growth, and encouraging full employment.

 In an effort to achieve these objectives, Congress tends to use tax provisions in two different
ways.

 First, some of the tax rules are enacted for the purposes of mitigating certain undesirable
economic and social conditions already existing.

For example – low income individuals often pay little or no national income taxes because of the
elaborate systems of exclusions, deductions, and credits of current law.

 Second, other tax rules provide incentives for certain desirable activities.

Example – business can claim deductions for depreciation of productive assets much faster that
the assets actually wear out. This provides incentives for businesses to invest in these activities, leading
to increased employment of low-and middle-income workers.

 State Powers

 Taxation. The power of the state by which the sovereign raises revenue to defray the necessary
expenses of the government.
 Eminent Domain. The power of the state to take private property for public use upon payment
of just compensation.

 Police Power. The power of the state to enact laws to promote public health, public morals,
public safety and the general welfare of the people.

 Aspects of Taxation

 Levying of the tax. The imposition of tax requires . In the Philippines, it is the Congress that
levies taxes; and

 Collection of the tax levied. This is essentially an administrative function.

 BASIC PRINCIPLES OF A SOUND TAX SYSTEM

 Fiscal Adequacy. Sources of Revenue are sufficient to meet government expenditures.

 Equality or theoretical justice. The tax imposed must be proportionate to taxpayer’s ability to
pay; and

 Administrative feasibility. The law must be capable of convenient, just and effective
administration.

 LIMITATIONS ON THE POWER OF TAXATION

1. The power of taxation is subject to Constitutional limitations. Constitutional limitations are

those provided for in the constitution or implied from its provisions.

2. Inherent limitations are restrictions to the power to tax attached to its nature.

 The Constitutional Limitations:

 1. Due process of law;

 2. Equal protection of law;

 3. Rule of uniformity and equity;

 4. President’s power to veto separate items in revenue or tariff bills;

 5. Exemption from property taxation of religious, charitable or educational entities, non-profit

cemeteries, churches and convents appurtenant thereto;

 The Constitutional Limitations:

 6. No public money shall be appropriated for religious purposes;

 7. Majority of all the members of the Congress granting tax exemptions;

  8. The Congress may not deprive the Supreme Court of its jurisdiction in all cases involving the
legality of any tax , impost or assessment or toll or any penalty imposed in relation to tax;

 9. No imprisonment for nonpayment of poll tax; and

 10. Tax collections shall generally be treated as general funds of the government.

 Inherent Limitations

1. Purpose. Taxes may be levied only for public purpose;

2. Territoriality. The State may tax persons and properties under its jurisdiction;

3. International comity. The property of a foreign State may not be taxed by another.

4. Exemption. Governmental agencies performing governmental functions are exempt from

taxation;

5. Non-delegation. The power to tax being legislative in nature may not be delegated.

 Some Doctrine in Taxation

1) Prospectivity of Tax Laws – “Taxes maybe imposed retroactively by law but, unless so expressed
by such law, these taxes must only be imposed prospectively – a law applicable to cases arising
after its enactment.” Supreme Court rulings (Hydro Resources vs. Court of Appeals).

 Direct double taxation – Where, the same subject is taxed twice;

1. By the same taxing authority;

2. For the same purpose;

3. Within the same jurisdiction;

4. During the same taxing period; and

5. Covering the same kind or character of tax

 Indirect double taxation –example :

1)When a business tax is imposed by the municipality government prior to the issuance of a business
license to a tax payer for engaging in an advertising business. His income from his advertising business
shall later be imposed income tax by the national government.

2) When an item of income is taxed in the Philippines and the same income is taxed in another country,
there is a case of indirect duplicate taxation which is not legally prohibited because the taxes are
imposed by different taxing authority.

 The usual method of avoiding the occurrence of double taxation are:

1) allowing reciprocal exemptions either by law or by treaty;

2) allowance of tax credit for foreign taxes paid;

3) allowance of deduction for foreign taxes paid;

4) reduction of the Philippine tax rate.

 Escape from Taxes

 Tax Avoidance – it happens when tax payer minimizes his tax liability by taking advantage of
legally available tax planning opportunities or called tax minimization. This is avoiding the
charging of tax and this is legal.

 Tax planning- it is the process of controlling one’s actions so as to avoid undesirable tax
consequences. Taxes can be avoided by not engaging in those activities that are taxed.

 Tax Evasion – occurs when the taxpayer resorts to unlawful means to lessen or get away with
hiss tax liability. This is also called tax dodging. Ex. Under-declaration of sales, overstatement of
expenses, and backdating important document. Tax Evasion avoiding the payment of tax and is
illegal.

 SITUS OF TAXATION

 The situs of taxation is the place of taxation. The rule is that the State may rightfully levy and
collect taxes where the subject being taxed has a situs under its jurisdiction. The situs of
taxation is determined by a number of factors:

 1) Subject matter or what is being taxed. He may be a person or it may be a property, an act or
activity.

 2) Nature of tax – or which tax to impose. It may be an income tax, an import duty or a real
property tax.

 3) Citizenship of the taxpayers; and

 4) Residence of the taxpayer.

 Application of Situs of taxation

 Person – 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 being completed.

 Gratuitous transfer of property – taxpayer’s residence or citizenship, or location of the property.

 TAXES

 Taxes are enforced proportional contributions from persons and property levied by the
lawmaking body of the State by virtue of its sovereignty for the support of the government and
all public needs.

 Is any contribution imposed by the government upon individuals, for the use and service of the
state, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise,
subsidy, aid, supply, or other name.

 Tax, in its essential characteristics is not a debt.

 Essential Characteristics of a Tax

 It is an enforced contribution;

 It is levied by the lawmaking body;

 It is proportionate in character;

 It is generally payable in money;

 It is imposed for the purpose of raising revenues; and

 It is to be used for public purpose.

 Types of rates structures

 Regressive – average rate decreases as the tax base increases.

 Proportional or uniform taxes – the average rate remains constant for all levels of the tax base.

 Progressive – the average rate of tax increases as the tax bases increases.

 CLASSIFICATION OF TAXES

 As to subject matter

1) Personal, poll or capitation – tax of a fixed amount imposed on individual whether citizens or not,
residing within a specified territory without regard to their property or the occupation in which they
may be engaged. Example : community tax.

2) property – tax imposed on property, whether real or personal, in proportion either to its value or
in accordance with some other reasonable method of apportionment. Example : real estate tax.
 3) Excise – tax imposed upon the performance of an act, the enjoyment of a privilege or the engaging
in an occupation. Examples : fuel producers, importers.

 As to who bears the burden

a) Direct - Tax demanded from persons who are intended or bound by law to pay the tax.
Examples: community tax, income tax, estate tax, donor’s tax.

b) Indirect – tax which the taxpayer can shift to another. Examples: customs duties, value-added tax,
some percentage taxes.

 As to determination of amount

a) Specific – tax imposed based on a physical measurement, as by head or number, weight, or length
or volume. Examples: tax on distilled spirits, fermented liquors, cigars, wines, fuel products, etc.

b) Ad valorem – Tax of fixed proportion of the property; needs an independent appraiser to

determine its value. Examples: real estate tax, certain customs duties, income tax, transfer taxes, etc.

 As to purpose

1) General, fiscal or revenue – tax with no particular or object for which the revenue is raised for
whatever need may arise. Examples: income tax, value-added tax.

2) Special or regulatory – tax imposed for a special purpose regardless of whether revenue is raised or
not, and is intended to achieve some social or economic end. Example: protective tariff or customs
duties on certain imported goods to protect local industries against foreign competition.

 As to authority imposing the tax or scope

1) National – tax imposed by the national government. Examples: internal revenue taxes, tariff and
customs duties.

2) Municipal or local – Tax imposed by municipal governments for specific needs. Examples: real
estate taxes, municipal licenses.

 As to graduation or rate

1) Proportional – tax based on a fixed percentage of the amount of property income or other basis to
be taxed. Examples: percentage taxes, real estate taxes, estate and donor’s tax.

2) Progressive or graduated – tax rate increases as the tax base increases. Example : income tax.

3) Regressive or – tax rate decreases as the tax base. Not true in the Philippines.
  Tax Distinguish from other fees

1. From toll. Toll is the sum of money for the use of something, generally applied to the
consideration which is paid for the use of a road, bridge, or the like, of a public nature.

A toll is a demand for proprietorship, is paid for the use another’s property and maybe imposed by
the government or private individuals or entities; while a tax is a demand for sovereignty, is paid for the
support of the government and maybe imposed only by the State.

 2. From Penalty. Penalty is any sanction imposed as a punishment for violation of law or acts
deemed injurious. Violation of tax laws may give rise to the imposition of penalty.

 A penalty is designed to regulate conduct and may be imposed by the government or private
individuals or entities. Tax, on the other hand, is primarily aimed at raising revenue and may be
imposed only by the government.

 From special Assessment. Special assessment is an enforced proportional contribution from the
owners of lands for special benefits resulting from public improvements.

 Special assessment is levied only on land, is not a personal liability of the person assessed, is
based wholly on benefits and is exceptional both as to time and place. Tax levied on persons, or
exercise of privilege, which may be made a personal liability of the person assessed, is based on
necessity and is of general application.

 From Permit or license fee. Permit or license fee is a charge imposed under the police power for
purposes of regulation.

 License fee is imposed for regulation and involves the exercise of police power while tax is levied
for revenue and involves the exercise of the taxing power. Failure to pay a license fee makes an
act or business illegal while failure to pay a tax does not necessarily make an act or business
illegal.

 From debt. A debt is generally based on contract, is assignable and may be paid in kind while a
tax is based on law, cannot generally be assigned and is generally payable in money. A person
cannot be imprisoned for non-payment of debt while he can be for non-payment of tax (except
poll tax).

 From Revenue. Revenue is broader than tax since it refers to all funds or income derived by the
government taxes included. Other sources of revenues are government services, income from
public enterprises and foreign loans.

 From customs duties. Customs duties are taxes imposed on goods exported from or imported
to a country. Customs duties are actually taxes but the latter is broader in scope.

 TAX LAWS
  Sources of Tax Authority

 The three branches of the national government

1) The President and his administration (executive)

2) The Congress ( legislative)

3) Courts ( judicial)

Congress creates statutory law.

a) House Bill 5636 – amending the NIRC of 1997

b) Republic act 10963 – Tax Reform for Accelaration and Inclusion – TRAIN Law – (effective Jan
2018)

c) RA 11534 – Corporate Recovery and Tax Incentives for

Enterprise Act CREATE-(effective July 2020)

 The administration branch of the national government includes:

1) Department of Finance (DOF) of which the

Bureau of Internal (BIR) is a bureau.

2 ) Two commonly type of administrative tax authorities are:

a) Revenue Regulations – administrative interpretations of statutes enacted by Congress to tend

to be somewhat more detailed than the Code itself.

b) Revenue Rulings – much more detailed, as they are issued in order to explain the tax results of
every specific transactions.

 Sources of Tax Laws

 Constitution;

 Statutes and Presidential Decrees;

 Revenue Rulings by the Department of Finances

 Rulings issued by the Commissioner of Internal Revenue and options by the Secretary of Justice;

 Decisions of the Supreme Court and the Court of Tax Appeals;

 Provincial, city, municipal and barangay ordinances subject to limitations set forth in the Local
Government Code; and

 Treaties or international agreements the purpose of which is to avoid or minimize double

taxation.

 Philippine Tax Laws

 National Internal Revenue Code of 1997 (P.D. 1158 as amended)

 TRAIN Law – (RA 10963)

1) Income taxes ( individual and corporate);

2) Estate and donor’s taxes;

3) value-added tax;

4) other percentage taxes;

5) excise tax; and

6) documentary stamp tax

 CREATE Law (RA 11534)

 Tariff and Customs Code of 1978 (P.D. 1464 as amended)

1) import duties; and

2) export duties

• Local Government Code of 1991 ( R.A. 7160)

1) real property tax;

2) business taxes, fees and charges;

3) professional tax;

4) community tax; and

5) tax on banks and other financial institutions.

 Special Laws

1) Motor Vehicle Law (R.A. 4136)

2) Private Motor Vehicle Tax Law

 3) Philippine Immigration Act of 1940 (C.A. 613 as

amended) – immigration tax and

4) Travel Tax Law (P.D. 1183, as amended) – travel tax

 Tax Laws versus GAAP and GAAS

 All returns required to be files by the Tax Code shall be prepared always in conformity with the
provisions of the Tax Code, and the rules and regulations issued implementing sais Tax Code.

 Taxability of income and deductibility of expenses shall be determined strictly in accordance

with the provisions of the Tax Code and the rules implementing the said Tax code.

 In case there is conflict between the GAAP and GAAS on the other side and the Tax Code on the
other side, the provisions of the Tax Code and rules and regulations issued implementing the
said Tax Code shall prevail. (Revenue Memorandum Circular 22-04, april 12, 2004)

 Powers and Duties of the BIR

 Composed of Commissioner and seven (7) Deputy Commissioners.

 Powers and duties:

1) Assessment and collection of all national internal revenue taxes, fees, and charges;

2) Enforcement of all forfeitures, penalties, and fines;

3) Execution of judgments in all cases decided in its favor by the Court of Tax Appeals and ordinary
courts;

4) Administration of supervisory and police powers conferred to it.

 Powers of the Commissioner

 Interpret tax laws and decide tax cases;

 Obtain information, and to summon, examine, and take testimonies of persons;

 Make assessments an prescribe additional requirement for tax administration and enforcement

 Delegate powers vested in him by the Code to any subordinate officer with rank equivalent to a
division chief or higher;

 Suspend business operations of a taxpayer;

  Comprise, abate and refund or credit taxes.

 Section 3 of R. A. 10021, amending section 6(f) of R.A. 8424 or Tax Reform Act of 1997, provides
the Commissioner with the authority to inquire into bank deposit accounts and other related
information held by financial institutions of

- Decedent to determine hiss gross estate;

- Any taxpayer who have filed an application for compromise of his tax

liability for reason of his incapacity; and

- A specific taxpayer subject of a request for the supply of tax information from a foreign

tax authority pursuant to an international convention or agreement on tax matters to which the

Philippine is a signatory or a party.

 Income and Income Taxes

 Income - means all wealth, which flows into the taxpayer other than a mere return of capital.

- It is a return of money from one’s business, labor, or capital invested e.g . Gains, profits,
salary and wages.

- as the amount of money coming to a person or corporation within a specified time, whether
as payment of services, interest or profit from investment.

- unless otherwise specified, it means cash or its equivalent.