Introduction to Income

Taxation

By
MTB
Basic Principles of Taxation
Taxation defined

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.
 Purposes of Taxation.
1. Revenue purpose – taxes imposed primarily
to raise revenue to finance various activities
of the government in the promotion of the
general welfare and protection 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.
3. Compensatory purpose – taxes may be
used to make up for the benefits received.
 Nature of Taxation
The power of taxation has the following
natural qualities:
1. Inherent power of sovereignty – it
exist co-extensive with sovereignty.
The government can exercise the
power even without any provisions in
the Constitution mentioning it.
2. Essentially a legislative Function – the law
making body of the government and its
political subdivisions exercises the power of
taxation.
3. For public purpose – taxes are public
money, and it is 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 of all the inherent
powers of the State – without money,
the government cannot dispense and
exercise any of its powers and/or
functions for its people. In the absence
of the limitations provided by the
Constitution, the power of taxation is
unlimited, complete and supreme.
7. Territorial in Scope – as a rule, tax
laws do not operate beyond a country’s
jurisdictional limits unless there exists
a privity of relationship between the
taxing State and the object of the tax.
5. Subject to International Comity - as a
matter of international courtesy,
property of a foreign state may not be
taxed by another state based on the
principle of sovereign equality among
states under international law.
6. Generally Payable in Money – taxes
are contributions payable in money.
 Inherent Powers of the State
1. Power of Taxation – the power to
demand enforced contribution for
public purpose(s).
2. Power of Eminent Domain – power to
take private property for public use
upon paying the owner a just
compensation to be ascertained
according to law.
3. Police Power – power to enact such
laws in relation to persons and
property as may promote public health,
public morals, public property and the
general welfare of the people.
 Similarities among the inherent
powers of the State
1. They are inherent powers of the state
2. The constitute the three ways by which
the state interferes with the private rights
and property
3. They are legislative in nature and
character
4. They presuppose an equivalent
contribution
5. They all underlie and exist independently
of the Constitution
6. They are all necessary attributes of
sovereignty
7. The provisions in the Constitution are just
limitations on the exercise of these powers
Distinctions of the inherent powers
1. As to concept:
taxation – power to enforce contribution
to raise governmental funds
police power – power to make and
implement laws for the general
welfare
eminent domain – power to take private
property for public use with just
compensation
2. As to scope –
taxation – plenary, comprehensive and
supreme
police power – broader in application,
general power to make and implement
laws
eminent domain – merely a power to
take private property for public use
3. As to authority-
taxation – exercised only by government
or its political subdivisions
police power – exercised only by
government or its political subdivisions
eminent domain – may be granted to
public service or public utility companies
4. As to purpose
taxation – money is taken to support the
government
police power – property is taken or
destroyed to promote general welfare
eminent domain – private property is
taken for public purpose
5. As necessity of delegation
taxation – power to make tax laws cannot
be delegated
police power – can be expressly
delegated to the government units by the
law making body
eminent domain – can be expressly
delegated to the local government units
by the law-making body
6. As to the person affected
taxation – operates on a community or
class of individuals
police power – operates on a community
or class of individuals
eminent domain – operates on the
particular private property of an individual
7. As to benefits
taxation – continuous protection and
organized society
police power – healthy economic
standard of society
eminent domain – market value of the
property expropriated
8. As to amount of imposition
taxation – generally no limit
police power – cost of regulation, license
and other necessary expenses
eminent domain – no imposition
9. As to importance
taxation – inseparable for the existence
of the nation – it supports police power
and eminent domain
police power – protection, safety and
welfare of society
eminent domain – common necessities
and interest of society transcend
individual rights in property
10. As to relationship to constitution –
taxation – subject to Constitutional and
inherent limitations; inferior to non-impairment
clause
police power – relatively free from
Constitutional limitations; superior to non-
impairment clause
eminent domain – superior to and may
override Constitutional impairment provisions
because the welfare of the State is superior to
any private contract
12. As to limitation
taxation – constraints by constitutional
and inherent limitations
police power – limited by the demand for
public interest and due process
eminent domain – bounded by public
purpose and just compensation
 Basis of Taxation
1. Principle of necessity – the government cannot
exist without any means to pay its expenses;
lifeblood of the government
2. Reciprocal duties – under the “benefits received
principle”, the collects taxes from the subjects of
taxation so that it can perform its functions. The
citizens , on the other hand contribute taxes so
they may continuously be sustained with security
and benefits of the organized society
 Limitations on the Power of
Taxation
A. Constitutional Limitations
1. Due Process and Equal Protection of
Law –

“No person shall be deprived of

life, liberty, or property without due
process of law, nor shall any person be
denied the equal o\protection of laws”.
Due process – any deprivation of life,
liberty, or property by the government
is with due process provided:
1. Deprivation is done after
compliance with the reasonable
methods of procedures prescribed by
law.
Example: Give notice first before
selling one’s property at public auction.
2. Deprivation is done under the
authority of a valid law ( not contrary to
constitution) or of the constitution
itself.
Example: Law imposing tax for
private purpose is void.
2. Equal Protection of Law – all persons
subject to legislation shall be treated
alike under like circumstances and
conditions both in the privileges
conferred and liabilities imposed.
3. Uniformity and Equity

“The rule of taxation shall be uniform and

equitable. The congress shall evolve a progressive
system of taxation”.
Uniformity in taxation – all taxable articles or
properties of the same class shall be taxed at the
same rate.

Equity in Taxation – implies that the amount of tax

must be just in the light of the taxpayer’s ability to
pay.
4. Non-imprisonment for Non-Payment of a
Poll Tax
“ No person shall be imprisoned for debt
or non-payment of a poll tax.” (Sec. 10,
Art.III)
5. Non-Impairment of the Obligation of
contract
“ No law impairing the obligation of the
contracts shall be passed”. (Sec. 10, Art.III)
6. Non- Infringement of Religious
Freedom
- “The free exercise and enjoyment
of religious profession and workship,
without discrimination or preference,
shall forever be allowed”.
7. Public Money shall be Used for Public
Purpose
8. Properties Constitutionally Exempt from
Taxation
“ Charitable institutions, churches and
parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all
lands, buildings, and improvements actually,
directly, and exclusively used for religious,
charitable, or educational purposes, shall be
exempt from taxation”. (Sec. 28 (3), Art. VI)
9. President’s power to veto separate items
in revenue or tariff bill
pocket veto – total
item veto – part/partial
10. Majority of all the members of the
Congress granting tax exemption
11. The Congress may not deprive the
Supreme Court of the jurisdiction in all
cases involving the legality of any tax,
impost, or assessment, or toll, or any
penalty imposed in relation to tax
12. Tax collection should generally be
treated as general fund of the government
 B. Inherent Limitations
1. Tax must be for public purpose – use for the
general public
2. Non-Delegation of the Power to Tax – power
of taxation is purely legislative in function
3. Exemption of Government Agencies or
Instrumentalities from Taxation –
government is exempt from taxes provided
not doing proprietary functions.
4. International Comity – the property of
foreign government may not be taxed
by another
5. Territorial Jurisdiction – has authority
within its boundaries, except if there is
privity in relationships
 Objects of Taxation-refer to the
subject to which taxes are imposed
1. Persons – a) natural person – refers to
individual taxpayers, b) juridical person –
includes, corporations, partnerships, and
any associations
2. Properties – a) real properties –
immovable properties, such as land, or
house and lot
 b) personal properties – includes
movable properties such as car and other
personal belongings, 1) tangible and 2)
intangible
3. Excise objects – a) transaction – act of
conducting activities related to any
business or profession, b) privilege – a
benefit derived through gratuitous transfer
by fact of death or donation
c) right – a power, faculty or demand
inherent in one person and incidental to
another,
d) interest – an advantage accruing from
anything
 Certain Doctrines in Taxation
1. Prospectivity of tax laws – application
covers present and future
2. Imprescriptibility of taxes – unless
otherwise provided by the law itself,
taxes in general are not cancelable
3. Double taxation – a) direct double
taxation, b) indirect double taxation
 How to counteract double taxation
1. Tax exemptions
2. Reciprocity clause/tax treaty
3. Tax credit
4. Allowance for deductions such as
vanishing deduction in Estate Tax
 There is no double taxation in the
ff. cases:
1. By taxing corporate income and
stockholders’ dividends from the same
corporation
2. A tax imposed by the state and the local
government upon the same occupation,
calling or activity
3. Real estate tax and income tax collected
on the same real estate property leased
for earning purposes
4. Taxes are imposed on the taxpayers’ final
product and the storage of raw materials
used in the production of the final product
4. Escape from taxation:
a) tax evasion – taxpayer uses unlawful
means
b) tax avoidance – or tax minimization,
reducing or totally escaping payment of
taxes through legal means
 Forms of tax avoidance
1. Tax option – may use lower tax rates
2. Shifting – transfer burden to another
3. Transformation – absorbs the payment of tax
to reduce prices and to maintain market share,
recover by improving the process of production
4. Exemption – grant of immunity, expressed or
implied, to a particular person, corporation, or
to persons, corporations of a particular class,
from a tax upon property or an excise which
persons and corporations generally within the
same taxing district are obliged to pay
5. Exemption from taxation – denotes a
grant of immunity, expressed or implied, to
a particular person, corporation, or to
persons or corporations of a particular
class, from a tax upon property or an
excise which persons and corporation
generally within the same taxing district
are obliged to pay.
 Classifications of tax exemptions:
1. Expressed exemption – these are
statutory laws in nature as provided by
constitution, statute, treaties, ordinances,
franchises or similar legislative acts
2. Implied exemption – either intentional or
accidental
3. Contractual – lawfully entered into by the
government in contracts under existing
laws
 Exemptions shall be governed by
the following principles:
1. They are not presumed
2. When granted, they are strictly construed
against the taxpayer
3. They are highly disfavored and may
almost be said “to be directly contrary to
the intention of tax laws”
6. Equitable recoupment – this doctrine of
law states that a tax claim for refund,
which is prevented by prescription, may be
allowed to be used as payment for
unsettled tax liabilities if both taxes arise
from the same transaction in which
overpayment is made and underpayment
is due. This doctrine is not applicable to
cases where the taxes involved are totally
unrelated.
7. Set-off of taxes – this doctrine states that taxes
are not subject to set-off or legal compensation
because the government and the taxpayer are
not mutual creditor and debtor of each other.
Exceptions to this rule are the following:
1. Where both the claims of the government
and the taxpayer against each other have
already become due, demandable and fully
liquidated
2. When there is an actual compromise
between the taxpayer and the tax officer.
8. Taxpayer Suit – effected through court
proceedings and could only be allowed if
the act involves a direct and illegal
disbursement of public funds derived from
taxation.
9. Compromise – this doctrine provides that
compromises are generally allowed and
enforceable when the subject matter
thereof is not prohibited from being
compromised and the person entering
such compromise is duly authorized to do
so.
 The law allows the following persons to do
compromise in behalf of the government
1. Only the BIR Commissioner is expressly
authorized by the Tax Code to enter into
compromise for both civil and criminal liabilities
subject to certain conditions.
2. The Collector of Customs is given the power to
compromise with respect to customs duties
limited to cases where legitimate authority is
specifically granted, such as in the remission
of duties.
3. The Customs Commissioner, subject to
approval by the Secretary of Finance, has the
power to compromise cases involving the
imposition of fines, surcharges and forfeitures,
and
4. The Local Government Code has no provision
regarding compromise; however, tax liability
(not criminal liability) is not prohibited from
being compromised. Even so, there is no
specific authority given to any public official to
execute the compromise so as to render it
effective.
10. Power to destroy – viewed as a power to
destroy in the sense that a lawful tax
cannot be defeated just because its
exercise would be destructive or would
bring about insolvency to a taxpayer.
 Situs of Taxation
- Refers to the place, of taxation, or the state
or political unit which has jurisdiction to
impose tax over its inhabitants. Protection
is the basic consideration that justifies tax
situs.
 Factors that determine situs of
taxation:
1. Nature, kind or classification of the tax
being imposed
2. Subject matter of the tax (person,
property, rights or activity)
3. Source of the income being taxed
4. Place of the excise, privilege, business
or occupation being taxed
5. Citizenship of the taxpayer
6. Residence of the taxpayer
 General Rules of Tax Situs
1. Nature of Tax source
Income tax within outside
Filipino Resident yes yes
Filipino Nonresident yes no
Aliens Resident yes no
Aliens Nonresident yes no
2. Transfer Tax source
within outside
Filipino Resident yes yes
Filipino Nonresident yes yes
Aliens Resident yes yes
Aliens Nonresident yes no
3. Business tax yes no
 Nature of Taxes
Taxes – are forced burdens, charges,
exactions, impositions or contributions
assessed in accordance with some
reasonable rule of apportionment, by
authority of a sovereign state, upon the
person, property, or rights exercised,
within its jurisdiction, to provide public
revenues for the support of the
government, the administration of the law,
or the payment of public expenses.
1. Taxes are obligations created by law
2. Taxes are generally personal to the
taxpayer
 Essential Characteristics of Taxes
1. Enforced contribution – imposition not
dependent upon the will of the taxpayer.
2. Imposed by the legislative body –
Congress makes tax laws.
3. Proportionate in character – “ability to
pay principle” is the basic rule in
collecting taxes
4. Payable in the form of money – taxes are
paid in the form of cash. If property is
taken to satisfy tax liability, the property
is sold through public auction to satisfy
the tax obligation
5. Imposed for the purpose of raising
revenue – taxes are primary source of
government funds to finance its
expenditures and projects
6. Used for public purpose – money is taken from
the public so it can be returned to them in the
form of public benefits.
7. Enforced on some persons, properties or
rights.
8. Commonly required to paid at regular intervals
– the dates for paying taxes are fixed by the
law to comply with the principle of
administrative feasibility
9. Imposed by the sovereign state within its
jurisdiction – the enforcement of tax is
subject to territorial jurisdiction and
international comity
 Summary of Taxes
Object Major Income
Description Classification Classification
1. Person personal tax community tax
2. Property property tax real property tax
3. Rights business taxes a. VAT
b. other percentage
c. excise
Object Major Income
Description Classification Classification
transfer tax a. estate tax
b. donor’s tax
income tax a. final withholding tax
b. creditable withholding
c. annual income tax
 Classification of Taxes
1. As to purpose
a. Revenue or fiscal – to raise revenue
b. Regulatory – to achieve some economic
goal
2. As to object or subject matter
a. Personal, poll, or capitation – taxes fixed in
amount and imposed on persons residing
within a specified territory regardless of the
amount of their property or their occupation or
business.
 b. Property – taxes imposed on
personal or real property based on its
proportionate value or in accordance with
some other reasonable method of
apportionment
c. Excise – taxes imposed upon the
performance of a right or act, the
enjoyment of a privilege or the
engagement in an occupation.,
3. As to determination of amount
a. Ad valorem – taxes are fixed amounts
in proportion to the value of the property
with respect to which the tax is
assessed.
b. Specific – fixed amount imposed and
based on some standard of weight or
measurement, head or number, length or
volume.
4. As to who bears the burden
a. Direct – non transferable
b. Indirect – transferable
5. As to scope or authority collecting the tax
a. National – taxes imposed by the national
government
1. estate and donor’s tax 5. customs duties
2. income tax 6. documentary
3. VAT stamp taxes
4. excise tax
 b. Local or Municipal – taxes collected
by the municipal government
1. community tax
2. municipal license tax
3. professional tax
4. real estate tax
6. As to rate or graduation
a. Proportional or flat rate – tax is based
on a fixed percentage of the amount of
the property, receipt or other basis to be
taxed
b. Progressive or graduated rate – tax
rate increases as the tax base or bracket
increases
 c. Regressive – tax rate decreases as
the tax base or bracket increases.
d. Digressive – fixed rate is imposed on
a certain amount but diminishes gradually
on sums below it
e. Mixed tax – system that uses all or a
combination of the different taxes based
on rates
 Other Charges / Fees
1. Penalty – sanction imposed as a
punishment for violations of law or acts
deemed injurious.
2. Revenue – refers to all funds or income
derived by the government whether from
tax or from other sources.
3. Debt – is an obligation to pay or render
service for a definite future period of time
based on contract.
4. Toll – is a compensation for the use of
somebody else’s property determined by
the cost of the improvement.
5. License fee – is a contribution enforced
by the government primarily to restrain
and regulate business or occupation
6. Custom duties – are imposition on
imported goods brought into the country
to protect local industry
7. Subsidy – is a monetary aid directly
granted or given by the government to an
individual or private commercial
enterprises deemed beneficial to the
public
8. Tariff – is a schedule or list of rates,
duties or taxes imposed on imported
goods
9. Margin fee – is a tax on foreign
exchange designed to curb the
excessive demands upon our
international reserve
10. Special assessment – is an amount
collected by the government for the
purpose of reimbursing itself for certain
extended benefits regarding construction
of public works
 Tax Law Defined
Tax law – is a body of laws which codifies all
national tax laws including income, estate,
gift, excise, stamp and other taxes.
Internal Revenue Law – it includes all laws
legislated pertaining to the national
government taxes, which is embodied in
the NIRC
Internal Revenue Taxes – taxes imposed by the
legislative body other than custom duties on
imports.
1. income tax
2. transfer taxes (estate & donor’s tax)
3. business taxes (VAT, percentage & excise
tax)
4. documentary stamp tax (DST)
5. such other taxes as may be imposed &
collected by the BIR
 Nature of Tax Laws

Tax laws are generally civil in nature, neither

political nor penal in nature.
 Interpretation & application of tax
laws
1. Tax statute must be enforced as written
2. Imposition of tax burdens is not
presumed.
3. Doubts should be resolved liberally in
favor of the taxpayer
4. Tax exemption are strictly construed
against the taxpayer
5. Tax laws are applied prospectively
6. Tax laws prevail over civil laws