INCOME TAXATION NOTES

Chapter 1

Taxation

 The process or means by which the independent state through its law-
making body or the legislature, imposed burden upon subjects and
objects within its jurisdiction for the purpose of raising revenues to
carry out the legitimate objects of government.
 One of the three inherent powers of the state

Taxes

 Enforced proportional contributions or charges from persons and

properties levied by the legislature for the support of the government
and all public needs.

The Three Inherent Powers of the State

1. Police Power – to promote public welfare by restraining and regulating

the use of liberty and property. Only the government can exercise this
power.
2. Power of Taxation - raises revenue to defray the necessary expenses of
the government.
3. Power of Eminent Domain – power to acquire private property for
public purpose upon payment of just compensation.

Similarities among the Three Inherent Power of the State

1. They are inherent in the state

2. They exist independently of the Constitution, providing only conditions
for their exercise
3. Ways by which the state may interfere with private rights and property
4. Legislative in nature and character
5. Presuppose and equivalent compensation received directly or indirectly
by the persons affected

Purposes of Taxation

1. Primary: Revenue or Fiscal Purpose – to provide funds or property with

which to promote the general welfare and protection of Its citizen and
to enable it to finance its activities.
 2. Secondary: Regulatory Purpose- often employed as a devise for
regulation or control to promote general welfare, reduce social
inequality, and foster economic growth

Theory and Basis of Taxation

1. Theory
A. Lifeblood Theory – taxes are the lifeblood of the government and
their prompt and certain availability is an imperious need.
B. Necessity Theory – existence of government is a necessity
2. Basis
A. Benefits Received Theory – taxpayers benefits from taxes
through the protection the state affords them.
B. Reciprocity Theory – state collects taxes from the subjects of
taxation in order that it may be able to perform the functions of
government.

Manifestation of the Lifeblood Theory

A. Rule of No Estoppel against the Government

B. Collection of Taxes cannot be stopped by Injuction
C. Taxes could not be subjected to Compensation or Set-off
D. Right to select objects (subjects) of taxation
E. A valid tax may result in the destruction of the taxpayer's
property

Scope of the Power to Tax

A. Comprehensive
B. Unlimited
C. Plenary
D. Supreme

Essential Elements of Tax

1. It is an enforced contribution
2. It is generally payable in money
3. It is proportionate in character
4. It is levied on persons, property, or the exercise of a right or privilege
5. It is levied by the law-making body of the state
6. It is levied for public purpose

Aspects of Taxation

1. Levying or imposition (Legislative)

 2. Assessment or computation (Executive)
3. Collection (Executive)

Nature/Characteristics of the State’s Power to Tax

1. It is inherent in sovereignty
2. It is legislative in character
a. Exception to non-delegation rule
i. Delegation to the President for tariff rates, import and
export quotas, tonnage and wharfage dues among others
ii. Delegation to Local Government Units under Sec.5 of the
Constitution
iii. Delegation to Administrative Agencies like BIR to value
property, assess and collect taxes, and perform other
computations.
iv. It is subject to Constitutional and inherent Limitations
3. Exemption of the government entities, agencies and instrumentalities
4. International Comity
5. Territoriality Principle
6. Strongest among the three inherent powers of the state

Classification of Taxes

1. As to Scope
a. National – imposed by the National Government (income tax,
transfer tax, business tax)
b. Local – imposed by LGUs (Poll Tax, Real Property Tax, Professional
Tax)
2. As to Subject Matter or Object
a. Personal, poll, or capitation
b. Property
c. Excise
3. As to who bears the Burden
a. Direct
b. Indirect
4. As to the Determination of Amount
a. Specific
b. Ad Valorem
5. As to Purpose
a. Primary, Fiscal, or Revenue Purpose
 b. Secondary, Regulatory, or Sumptuary
6. As to Graduation Rate
a. Proportional – based on fixed percentages
b. Progressive or graduated – rate increases as the tax base
increases
c. Regressive – rate decreases as the tax base increases
7. As to Taxing Authority
a. National
b. Local

Elements of a Sound Tax System (FAT)

1. Fiscal Adequacy – raise revenue to defray necessary expenses of the

government
2. Administrative Feasibility – must be capable of effective and efficient
enforcement
3. Theoretical Justice – taxpayer’s ability to pay must be taken into
consideration

Limitations on the State’s Power to Tax

1. Inherent Limitations (TIPEN)

a. Territoriality Principle – tax laws cannot operate beyond a state’s
territorial limits
b. International Comity – property of a foreign state may not be taxed
by another state; mutual respect
c. Public Purpose – tax must always be imposed for public purpose
d. Exemption of the Government - Exemption of the government
entities, agencies and instrumentalities
e. Non-delegation of the power to tax – legislative act such as
imposition, enactment, levying cannot be delegated but assessment
and collection may be
2. Constitutional Limitation
a. Due process of law - right to notice and hearing
b. Equal protection of laws
c. Rule of uniformity and equity in taxation
d. Prohibition against imprisonment for non-payment of poll tax
e. Prohibition against impairment of obligations and contracts
f. Prohibition against infringement of religious freedom
g. Prohibition against appropriation of proceeds of taxation for the use,
benefit, or support of any church
 h. Prohibition against taxation of religious, charitable, and educational
entities from real property tax
i. Prohibition against taxation of non-stock, non-profit educational
institutions
j. Others:
 Grant of Tax Exemption
 Veto of appropriation, revenue, tariff bills by the President
 Delegated authority of President to impose tariff rates, import
duties and export quotas, tonnage, and wharfage dues
 Non-impairment of the Supreme Court jurisdiction
 Revenue Bills shall originate exclusively from the House of
Representatives
 Infringement of press freedom
 Revocation of Tax Exemptions

Situs of Taxation

It means “place” of taxation. It is the state or political unit which has

jurisdiction to impose a particular tax.

Factors to Consider in Determining the Situs of Taxation

a. Subject matter
b. Nature of tax
c. Citizenship
d. Residence of the taxpayer
e. Source of income
f. Place of excise, business or occupation being taxed

SITUS
Persons Residence of the taxpayer
Real Property Location
Personal Property Location; place of sale or transaction
Intangible Personal GR: Domicile of the owner
Property
XPN: Intellectual Property Country where such are exercised
XPN: Receivables Domicile or residence of the debtor
XPN: Bank deposits Location of the depository bank

Income Occupation - where the occupation is

engaged in
Transaction- where the transaction took
place
 Business Place of Business
Gratuitous Transfer Residence or Citizenship of the Taxpayer

Tax vs. Toll

Toll Tax
 Demand of ownership  Demand of sovereignty
 Paid for the use of another’s  Paid for the support of the
property government
 Amount is based on cost  Amount is based on the
incurred necessities of the state
 May be imposed by the  May be imposed only by the
government or private state
individuals

Tax vs. Penalty

Penalty Tax
 Design to regulate a conduct  Primarily aimed at raising
 May be imposed by the revenue
government or private  May be imposed only by the
individuals or entities government

Tax vs. Special Assessment

Special Assessment
 Proportional contribution from
owners of lands benefited by
public improvements
 Levied only on land
 Not a personal liability of the
person assessed
 Based wholly on benefits

Tax vs. Revenue

Revenue is the amount collected referring to all funds or income

derived by the government from tax and any other source.

Tax vs. Subsidy

Subsidy is a pecuniary aid directly granted by the government to an

induvial or entity.
Tax vs. Permit or License Fee

Permit or License Fee Tax

 For regulation  For revenue
 Exercise of police power  Exercise of taxing power
 Amount is limited to the  Generally, no limit
necessary expenses of the  Imposed on persons or
regulation property
 Legal compensation  Collected after a period of
 Failure to pay license fee business
makes the act or business
illegal
 Collected before a business
starts
Tax vs. Customs Duties

Customs Duties are taxes imposed on goods imported from the

imported into a country.

Tax vs. Debt

Debt Tax
 Based on contract  Based on Law
 May be paid in kind  Generally payable in money
 Assignable/ may be subject of  Cannot be assigned/set-off or
set-off or compensation compensation
 A person cannot be  Imprisonment is a sanction for
imprisoned for non-payment nonpayment of tax (XPN: poll
of debt (XPN: crimes) tax)
 Draw interest when stipulated  Does not draw interest except
or when of prescription default only when delinquent

Double Taxation

1. In its strict sense, it refers to direct duplicate taxation.

2. In its broad sense, it refers to indirect double taxation.

Direct Double Taxation means taxing twice:

1. By the same taxing authority, jurisdiction or taxing district

2. For the same purpose
3. In the same year or taxing period
4. Same subject or object
5. Same kind/character of tax
Indirect Double Taxation happens when any of the elements described above
is not present.

Means of Avoiding or Minimizing the Burden of Taxation

1. Shifting – transfer of the burden of a tax by the original pawer or the

one on whom the tax was assessed or imposed to someone else.
Applies only to indirect taxes.
2. Transform – the producer or manufacturer pays the tax and endeavor
to recoup himself by improving his process of production.
3. Tax Evasion – use of illegal or fraudulent means to defeat or lessen
the payment of tax. Also known as tax dodging.
4. Tax Avoidance - the exploitation of the taxpayer of legally permissible
alternative tax rates or methods of assessing taxable property or
income to reduce tax liability. This is also called tax minimization.
5. Exemption – grant of immunity to particular persons or corporations
to be exempt from tax.
a. Amnesty – intentional overlooking by the state of its authority to
impose penalties to persons guilty of evasion. Forgiveness of the
government of its right to collect. Gives tax evaders a second
chance to start anew.
6. Capitalization – reduction in the selling price of income producing
property equal to the value of future taxes that may be paid by the
purchaser.

Nature of Internal Revenue Laws

- Not political in nature

- Tax laws are civil and not penal in nature.

Construction and Interpretation of Tax Laws or Tax Legislation

- Public Purpose is always presumed

- In case of doubt in tax law, it is strictly construed strongly against the
government and liberally in favor of the taxpayer.
- In case of doubt in tax exemption, it is strictly construed strongly
against the taxpayer and liberally in favor of the government.