Handout #1

Income taxation
A.Y. 2019-2020

General Principles of Taxation

Taxation Defined
The exercise of the sovereign power to raise revenues for the expenses of the government.
Stages/Coverage/ ASPECTS of Taxation
1. Levying or imposition of tax. This involves the passage of the tax law which is generally a legislative act. In the
Philippines, the taxing power is exercised by Congress.
2. Assessment. The process of determining the correct amount of tax due. Executive or administrative in nature.
Done by the bureau of Internal Revenue.
3. Collection and payment. The act of compliance with the tax law by the taxpayer. Executive or administrative in
nature. Done by the bureau of Internal Revenue.
3 Inherent Power of the State:
1. Power to Tax
2. Police power
3. Power of Eminent Domain

Power to Tax
Subject to inherent and constitutional limitations, the power of taxation is regarded as supreme, plenary, unlimited
and comprehensive. As long as the legislature, in imposing a tax does not violate applicable constitutional
limitations or restrictions, the courts have no concern with the wisdom or policy of the exaction, the political or other
collateral motives behind it, the amount to be raised, or the persons, property, or other privileges to be taxed.
Police Power
Police power is the inherent power of a sovereign state to legislate for the protection of the health, general
welfare, safety, and morals of the public. It involves the power to regulate both liberty and property for the
promotion of the public good.
Power of Eminent Domain
The power of eminent domain is the inherent power of a sovereign state to take private property for a public
purpose. The Constitution limits the exercise of this power by providing that: “Private property shall not be taken for
public use without just compensation”.

Distinctions among the Three Inherent Powers

A. Purpose:
Taxation To raise revenues for the expenses of the State.
Police Power To promote the general welfare thru regulations.
Eminent Domain To facilitate the State’s need of property for public use.
B. Amount of Exaction
Taxation No limit.
Police Power Limited to the cost of regulation.
Eminent Domain No exaction but private property is taken for public purpose.

C. Benefits Received
Taxation No special or direct benefit is received by an
individual taxpayer. The public receives the
general benefit of protection of persons,
property and the promotion of the general
welfare.
Police Power No direct benefit is received by an individual.
A healthy economic standard of society is
attained.
Eminent Domain A direct benefit results in the form of just
compensation to the property owner.

D. Non-Impairment of Contracts
Taxation Obligations of contracts may not be impaired. Tax
exemptions bilaterally agreed upon between the
government and the taxpayer cannot be
withdrawn.
Police Power Obligations of contracts may be impaired.
Eminent Domain Obligations of contracts may be impaired.

E. Transfer of Property Rights

Taxation Taxes paid becomes part of the public funds.
Police Power No transfer, but only restraint in the exercise of
property rights.
Eminent Domain Transfer is effected in favor of the State.
F. Scope
Taxation All persons, property, rights, and privileges.
Police power All persons, property, rights, privileges, and
liberties.
Eminent Domain Only upon specific property.

G. Authority which exercises the power

Taxation Exercised by the government or its political
subdivision.
Police Power Exercised by the government or its political
subdivision.
Eminent Domain May be exercised by public service
corporations or private entities operating
public utilities if granted by law.
Limitations on the Power to Tax

1. Inherent limitations

A. Public Purpose. The tax must be for public purpose.

B. International Comity. This principles limits the authority of the government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its property held and activities undertaken in that
capacity. As a rule, the Philippine government cannot tax foreign ambassadors nor impose real property
taxes upon foreign embassies.
C. Territoriality/Territorial Limits. The levy must apply within territorial limits for the exercise of effective tax
jurisdiction.
D. Double Taxation.
Direct Double taxation – Where:
1. The same subject is taxed twice;
2. By the same taxing authority;
3. Within the same jurisdiction;
4. During the same taxing period;
5. Covering the same kind or character of tax.
Indirect double taxation, which lacks one or more of the elements of direct double taxation, is also
permissible.
There is no constitutional prohibition against double taxation in the Philippines, though it is not favored.
E. Exemptions from taxation of the government, any political subdivision thereof, or agencies performing
purely governmental functions.
F. The taxing power of the legislature may not be delegated as a rule.
Exemption: 1. President, to fix tariffs rates, imports and export quotas, tonnage and wharf age dues, and
other duties and imposts 2. Each local government units shall have the power to create its own sources
3. Delegation to administrative agencies of implementation and collection of the tax.

2. Constitutional Limitations

A. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person
be denied of equal protection of the law.
B. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation.
Uniformity – persons or properties falling under the same class should be taxed the same kind
and rate of tax.
Equality – the same means and methods be applied impartially to all members of each class.
C. No person shall be imprisoned for non-payment of a poll tax.
D. 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.
E. No law granting any tax exemption shall be passed without the concurrence of a majority of all the
members of Congress.
F. No lay impairing the obligation of contracts shall be passed.
Tax exemption bilaterally agreed between the government and the taxpayer, such exemption cannot be
withdrawn without violating the non-impairment clause.
G. No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof.
Exemption: When such priest, preacher, minister, or dignitary is assigned to the armed forces of the
Philippines or to any penal institution, or government orphanage or leprosarium.
 H. All appropriation, revenue, or tariff bills shall originate exclusively in the House of Representatives, but
the Senate may propose or concur with amendments.
I. The Congress may, by law, authorize the President to fix within specified limits, and subject to such
limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharf age
dues, and other duties or imposts within the framework of the national development program of the
government.
J. The Supreme Court shall have the power to review, reverse, modify, or affirm on appeal or certiorari as
the law or the Rules of Court may provide, final judgments and orders of lower courts in all cases involving
the legality of any tax, imposts, assessment, or toll, or any imposed in relation thereto.
K. All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties.
L. The President shall have the power to veto any particular item or items in an appropriation, revenue, or
tariff bill, but the veto, shall not affect the item or items to which he does not object.
M. All money collected or any tax levied for a special purpose shall be treated as a special fund and paid out
for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned,
the balance, if any, shall be transferred to the general funds of the Government.

Basic Principles of a Sound tax System

1. Fiscal Adequacy – which means that the sources of revenues should be sufficient to meet the demands of
public expenditures.
2. Equality or Theoretical Justice – which means that the tax imposed should be proportionate to the
taxpayer’s ability to pay; and
3. Administrative Feasibility – which means that the tax laws should be capable of convenient, just, and
effective administration.
Theory or Basis of Taxation
1. Life-blood Theory – taxes are the lifeblood of the government. Without taxes, no government can function.
2. Benefit Protection Theory (Symbiotic Relationship) – taxes are what we pay for a civilized or organized
society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and
operate it.
Essential Elements or Characteristics of a Tax
1. Enforced contributions
2. Exacted pursuant to legislative authority
3. For raising revenue for public needs
4. Proportionate in character or uniform
5. Payable in money
6. Imposed within the state’s jurisdiction
7. Personal to the taxpayer

Classifications of Taxes

A. According to scope or exercising authority

National Tax Municipal or Local Tax
Imposed by the National Government Imposed by Local Government Unit
Ex. Income tax, Estate tax, Donor’s tax Ex. Occupational tax, Real Property tax
 B. According to subject matter or object
Personal, capitation, or poll Property tax Excise tax
tax
Fixed amount imposed upon Imposed on property Imposed upon the performance
persons of a certain class of an act; the exercise of a right;
without regards to property, or the engaging in business or
trade, business, or occupation profession
Ex. Community tax Ex. RPT Ex. VAT, Donor’s tax, Estate tax,
Income tax, Occupational tax,
Excise tax

C. According to who bears the burden of the tax

Direct tax Indirect tax
The liability for the tax (impact), and the burden The liability or impact for the tax falls on the
thereof (incidence) fall on the same taxpayer. original taxpayer, but the burden or incidence
thereof is shifted to another.

Ex. Income tax Ex. VAT, Excise tax, Custom Duties

D. According to purpose
General or Revenue tax Special tax
Levied without a specific or pre-determined Levied for special purpose.
purpose.
Ex. Income tax, VAT, etc. Ex. Protective tariffs

E. According to rate applied

Proportional Progressive Regressive
Based on a fixed percentage of The tax rate increases as the tax The tax rate decreases as the
the tax base. base increases. tax base increases.
Ex. RPT, VAT Ex. Income tax Ex. None

F. According to measurement of the amount due

Specific Ad Valorem
Measured by number, or based on weight or Based on the value of the property and may
physical measurement. require the intervention of assessors and
appraisers.
Ex. Excise tax on lubricating oils, waxes, Ex. RPT, Excise tax on liquors, cigarettes packed
petroleum, etc. by machine, and auto mobiles

Nature or Construction of Tax Laws

1. Tax laws, like other statutes, are to be construed as having only a prospective operation unless the purpose
and intention of the legislature to give retrospective effect is expressly declared or is necessarily implied from
the language used. Tax laws are not penal in character but rather it is civil in nature.
2. A statute will not be construed as imposing a tax unless it does so clearly, and unambiguously.
In case of doubt, statutes imposing a tax are construed most strongly against the Government, and
liberally in favor of the citizen because burdens are not to be imposed beyond what the statutes expressly
can clearly import.
 3. Tax exemptions are to be construed strictly against the taxpayer.
Exemption from taxation is construed strictissimi juris, i.e. strictly against the exemption. Hence, exemption
must be anchored firmly on an express provision of law. He who claims exemption must be able to justify his
claims by the clearest grant of organic and statute law.

4. Our internal revenue laws are not political in nature and as such were continued in force during the period of
enemy occupation and in effect were actually enforced by the occupation government.
5. Legislative intention must be considered. Tax statutes are to receive a reasonable construction with a view to
carrying out their purpose and intent.
6. Tax laws are special laws, and prevail over general laws.

Sources of Tax Laws

1. The 1987 Constitution;

2. Tax statutes such as the National Internal Revenue Code, the Tariff and Customs Code, the VAT Laws, the
Revised Documentary Stamp Tax Law, the Amended Excise Tax Law, and portions of the Local Government
Code;
3. Executive orders on taxation, and local tax ordinance;
4. Tax treaties and conventions with foreign countries;
5. Judicial decisions;
6. Rules and regulations promulgated by the Department of Finance, the Bureau of Internal Revenue, Bureau of
Customs;
7. Administrative interpretations and opinions of tax officials particularly those of the Commissioner of Internal
Revenue.
Forms of Escape from Taxation
1. Shifting the burden of tax.
2. Capitalization. By not selling property which has increased in value, the owner avoids the income tax to be
paid on the gain if the same is sold. An increase in value of an assets is merely an unrealized increase (gain) in
capital.
3. Transformation. The manufacturer or producer upon whom the tax has been imposed, fearing the loss of his
market if he should add the tax the price, pays the tax. He then endeavors to recoup the tax paid by making his
production more efficient and lowering his cost of production.
4. Tax exemptions. Exemption from taxation is the freedom from the burden of paying tax.
5. Tax avoidance. Tax avoidance occurs when the means used to minimize taxes are legal and not prohibited by
law.
6. Tax evasion. Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or
defeat taxes.
Tax and License Distinguished

Tax License
Purpose To raise revenue
Limitations on taxation Subject to constitutional and To regulate the action,
inherent limitations on the power businesses, industries,
to tax professions
Amount Unlimited Limited to the cost of regulation
(licensing, inspection,
surveillance)
Effect of non-payment Does not make the business Makes the business illegal
illegal
Special Assessment Defined

A special assessment is in the nature of a tax upon property levied according to benefits conferred on the
property. The whole theory of a special assessment is based on the doctrine that the property against which it is levied
derives some special benefit from the improvement their property being increased in value by the expenditure to an
amount at least equal to the sum they are required to pay.

Characteristics of Special Assessment

1. Levied only on land

2. Cannot be made a personal liability of the person assessed
3. Based wholly on benefits
4. Exceptional as to time and locality
Tax Special Assessment
Imposed on all property (real or personal) in a Imposed only on property which benefit from the
prescribed area. improvement.

Tax and Debt Distinguished

Tax Debt
Sources of obligations Law Contract
Obligee Due to government in its Due to oblige under a contract;
sovereign capacity May be due to government in its
corporate capacity
Form of payment Money Money, property, or services
Interest No interest except in cases of If stipulated or if the payment is
delinquency in delay
Assignability Not assignable Generally assignable
Compensation/Set-off No Yes
Incarceration for non-payment Yes, except for non-payment of No person can be imprisoned for
poll tax non-payment of debts
(Constitution)

Tax and Toll Distinguished

Tax Toll
Demand for sovereignty Demand of ownership or proprietorship
Imposed by the government May be imposed by private persons or entities
May be based on income or on the value of the Largely based on the cost of the property used, or
property on the cost of the improvement used
Forced contribution Compensation charged by the owner for the
voluntary use of the property/improvement

Tax Administration
It is a system involving assessment, collection, and enforcement of taxes, including the execution of judgment in
all tax cases decided in favor of the Bureau of Internal Revenue by the courts.
Powers and Duties of the Bureau of Internal Revenue (BIR)
1. The assessment and collection of all national internal revenue taxes, fees, and charges;
2. The enforcement of all forfeitures, penalties, and fines connected therewith;
3. The execution of judgments in all cases decided in its favor by the Court of Tax Appeals, and the ordinary court;
4. The giving effect to and the administering of the supervisory and police power conferred to it by the Tax Code or
other laws.
Chief Officials of the Bureau of Internal Revenue
The Bureau of Internal Revenue shall have a chief to be known as the Commissioner of Internal Revenue, and
six (6) assistant chiefs to be known as Deputy Commissioner.

Power of the Commissioner of Internal Revenue

1. Power to interpret tax laws subject to review by the Secretary of Finance;
2. Power to decide disputed assessments, refunds of internal revenue taxes, fees and other charges, penalties
imposed in relation thereto, other matters arising under the National Internal Revenue Code or other laws or
portions thereof administered by the Bureau of Internal Revenue, subject to the exclusive appellate jurisdiction of
the Court of tax Appeals;
3. Power to examine any book, paper, record, or other date which may be relevant or material to a tax inquiry;
4. Power to obtain information from any person other than the person whose internal revenue tax liability is subject
to audit or investigation or from any office of officer of the national or local government agencies and
instrumentalities;
5. Power to summon the person liable for tax or required to file a return, or any officer or employee of such person,
or any person having possession, custody, or care of the books of accounts and other accounting records;
6. Power to take such testimony of the person concerned, under oath, as may be relevant or material to such
inquiry;
7. Power to make assessment;
8. Power to prescribe real property values by dividing the country into different zones and determining the FMV of
real properties located in each zone;
9. The Commissioner is authorized to inquire into the bank deposits and other related information held by financial
institutions of;
a. A decedent to determine his gross estate;
b. A taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to
pay his tax liability; and
c. A taxpayer who is subject of a request for the supply of tax information from a foreign tax authority pursuant to
an international agreement or treaty.
10. The Commissioner has the authority to accredit and register individuals and general professional
partnerships (GPPs) and their representatives who prepare and file tax returns, statements, reports and other
papers, or who appear before the BIR, for taxpayers;
11. Power to accredit importers and customs brokers;
12. Power to prescribe additional procedural or documentary requirements in connection with the submission or
preparation of financial statements accompanying the tax returns.