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INTRODUCTION TO TAX

And Income Taxation


POINTERS
I. INTRODUCTION
A. Memorize definition of taxation and tax
1. Taxation is the act of laying a tax, the process or means by which the
sovereign, through its lawmaking body, raises income to defray the
necessary expenses of government.
2. Tax enforced proportional and pecuniary contribution from persons
and property levied by the law-making body of the state having
jurisdiction over the subject of the burden for the support of the
government and all public needs.
B. Essential characteristics of tax
1.
2.
3.
4.
5.

It is an enforced contribution.
It is proportionate in character.
It is generally payable in money.
It is levied on persons or property.
It is levied by the sate which has jurisdiction over the person or
property.
6. It is levied by the law-making body of the state,
7. It is levied for public purpose of purposes.
C. Theory, basis and nature of taxation
1. Lifeblood doctrine or Necessity Theory
2. Benefits-received principle.
D. Extent of the legislative power to tax
1.
2.
3.
4.

The subjects or objects to be taxed


The purpose or object of the tax so long as it is public
The amount or rate of the tax
The manner, means, and agencies of collection of the tax

E. Revenue and non-revenue objectives of Taxation


F. Basic principle of a sound tax system
1. Fiscal adequacy means that the sources of revenue should be
sufficient to meet the demands of public expenditure
2. Equality or theoretical justice means that the tax burden should be in
proportion to the taxpayers ability-to-pay principle
3. Administrative feasibility means that tax laws should be capable of
convenient, just and effective administration

II. CLASSIFICATIONS/DISTINCTIONS
A. As to subject matter or object
1. Personal, poll or capitation (Ex. Community tax)
2. Property (Real Estate Tax)
3. Excise (Professional Tax)
B. As to who bears the burden
1. Direct tax (Income Tax)
2. Indirect tax (Value Added Tax)
C. As to determination of amount
1. Specific Tax (Taxes on distilled spirits, wines, liquors, cigarettes)
2. Ad valorem Tax (Real Estate Tax)
D. As to purpose
1. General, fiscal or revenue (Income tax, VAT)
2. Special or regulatory (Protective tariffs or custom duties
E. As to scope or authority imposing the tax
1. National tax (National internal revenue taxes)
2. Local tax (Real estate tax)
F. As to graduation or rate
1. Proportional (real estate tax)
2. Progressive or graduated (income tax)
3. Regressive
III. DISTINCTIONS FROM OTHER SOURCES OF INCOME
A.
B.
C.
D.
E.
F.
G.

Tax vs. toll


Tax vs. Penalty
Tax vs. special assessment
Tax vs. license or permit fee
Tax distinguished from debt
Tax vs. subsidy
Tax vs. custom duties

IV. STATES INHERENT POWERS


A. Power of Eminent Domain
1. The existence of public use or benefit for the taking
2. The payment of just compensation
3. The observance of due process in the taking
B. Police Power referred to as the power of the state to enact such laws in
relations to persons or property as may promote public health, public
morals, public safety and the general prosperity and welfare of its
inhabitants.
C. Memorize distinctions and similarities between powers of taxation,
eminent domain and police power.
V. LIMITATIONS ON THE POWER OF TAXATION
A. Constitutional limitations
1. Due process clause
2. Equal protection of the laws
3. Rule of uniformity and equity in taxation
4. No imprisonment for non-payment of poll tax
5. Non-impairment of the obligation of contracts
6. Non-infringement of religious freedom

7. No appropriation for religious purposes


8. Exemption of religious, charitable and educational entities, non-profit
cemeteries and churches from property taxation
9. Exemption on non-stock, no-profit educational institutions from taxation
10. Concurrence by a majority of all the members of the Congress for the
passage of a law granting tax exemption
11. Power of the President to veto any particular item or items in a revenue
or tariff bill
12. Non-impairment of the jurisdiction of the Supreme Court in taxes
B. Inherent limitations
1. Requirement that levy must be for a public purpose
2. Non-delegation of the legislative power to tax
Exceptions:
a. Delegation to the President
b. Delegation to local governments
c. Delegation to administrative agencies
3. Exemption from taxation of government entities
4. International comity
5. Territorial jurisdiction
VI. SITUS OF TAXATION
A.
B.
C.
D.
E.

Persons residence of the taxpayer


Real Property where the real property is located
Tangible Personal property where it is physically located
Intangible personal property domicile of the owner
Income residence of the taxpayer or where the taxpayer derives its
income
F. Business, occupation and transaction place where the business is done,
or the occupation is engaged in, or the transaction took place
G. Gratuitous transfer of property where the donor is residing or where the
property is located
VII. DOUBLE TAXATION
A. Strict sense(prohibited) or direct duplicate taxation
1. Taxing twice
2. By the same taxing authority
3. Within the same jurisdiction or taxing district
4. For the same purpose
5. In the same year
6. Some of the property in the territory
B. Broad sense (allowed) or indirect duplicate taxation
VII. FORMS OF ESCAPE FROM TAXATION
A. Shifting transfer of burden of a tax by the original payer or the one on
whom the tax was assessed or imposed to another
- Impact of taxation point on which the tax is originally imposed, the
statutory taxpayer
- Incidence of taxation point on which the tax burden finally rests or
settles down.
1. Forward shifting
2. Backward shifting

3. Onward shifting
B. Capitalization means the reduction in the price of the taxed object equal
to the capitalized value of future taxes which the Purchaser expects to be
called upon to pay.
Transformation the method of escape whereby the manufacturer or
producer upon whom the tax has been imposed, fearing the loss of his
market if he should add the tax to the price, pays the tax and endeavors to
recoup himself by improving his process of production thereby turning out
his units of products at a lower cost.
C. Tax Evasion (tax dodging) the use by the taxpayer of illegal or fraudulent
means to defeat or lessen the payment of tax
1. The end to be achieved
2. An accompanying state of mind which is described as being evil, in
bad faith, willful or deliberate and not accidental
3. A course of action which is unlawful
D. Tax avoidance (tax minimization) use by the taxpayer of legally
permissible alternative tax rates or methods of assessing taxable property
or income, in order to avoid or reduce tax liability
E. Tax exemption grant of immunity to particular persons or corporations or
to persons or corporations of a particular class from a tax which persons
and corporations generally within the same state or taxing authority are
obliged to pay
1. Power to exempt is naturally inherent to a state because it is an
attribute of sovereignty
2. It is not inherent to a local government unit since municipal
corporations are not clothed with inherent power to tax
Grounds for Tax exemption
1. May be based on contract in which case the public represented by the
government is supposed to receive a full equivalent therefor
2. May be based on some ground of public policy
3. May be created in a treaty on grounds of reciprocity or to lessen the
rigors of international double or multiple taxation
Nature of Tax Exemption
1. A mere personal privilege of the grantee
2. Generally revocable by the government unless exemption is founded
on a contract
3. Implies a waiver on the part of the Government of its right to collect
what otherwise would be due to it
4. Not necessarily discriminatory so long as the exemption has a
reasonable foundation or rational basis
Kinds of Tax Exemption
1. As to manner of creation;
a. Express or affirmative exemption
b. Implied exemption or exemption by omission
2. As to scope or extent:
a. Total
b. Partial
3. As to object:
a. Personal
b. Impersonal
Construction of tax exemption statutes

1. General rule in the construction of tax statutes, exemptions are not


favored and are construed in strictissimi juris against the taxpayer.
2. Taxation is the rule and exemption, the exception, and therefore, he
who claims exemption must be able to justify his claim or right thereto,
by a grant expressed in terms too plain to be mistaken and too
categorical to be misinterpreted
F. Tax Amnesty general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of tax evasion or
violation of a revenue or tax law. It partakes of an absolute forgiveness or
waiver by the government of its right to collect what is due it and to give
tax evaders who wish to relent a chance to start with a clean slate.
VIII. NATURE, CONSTRUCTION, APPLICATION AND SOURCES OF TAX
LAWS
A. Nature of internal revenue law
1. Not political in nature
2. Tax laws are civil and not penal
B. Construction of tax laws
1. In every case of doubt, tax statutes are construed strictly against the
government and liberally in favor of the taxpayer.
- Taxes being burdens, they are not to be presumed beyond what the
statute expressly and clearly declares
2. Where taxpayer claims exemption. Tax exemptions are strictly
construed against the taxpayer asserting the claim and liberally in
favor of the government
C. Application of tax laws
1. Generally prospective. (present time)
2. Exception: When the statute expressly declares.
D. Sources of tax laws
1. 1987 Constitution
2. Legislation or statutes, including Presidential Decrees and Executive
Orders
3. Administrative rules and regulations and ruling or opinions of tax
officials particularly the Commissioner of Internal Revenue
4. Judicial decisions
E. Existing tax laws
1. National Internal Revenue Code of 1997
2. Tariff and Customs Code of 1978 (P.D. No. 1464 as amended)
3. Special laws
4. Local Government Code of 1991
F. Authority of Secretary of Finance to promulgate rules and regulations. The
Secretary of Finance, upon the recommendation of the Commissioner of
Internal Revenue, shall promulgate all needful rules and regulations for
the effective enforcement of the provisions of the Code.
1. Requisites for validity of regulations
a. They must not be contrary to law and the Constitution
b. They must be published in the Official Gazetter
G. Secretary of Finance has the power to revoke, repeal or abrogate the acts
or previous rulings of his predecessors in office.

- NATIONAL TAXATION
I. NATIONAL INTERNAL REVENUE TAXES
A.
B.
C.
D.
E.

Income taxes
Estate tax
Donors tax
Value-added tax
Other percentage taxes
1. On small business enterprises
2. On carriers and keepers of garages
3. On franchise holders or grantees
4. On persons paying for overseas communications service
5. On banks and non-bank financial intermediaries performing quasibanking functions
6. On other non-bank financial intermediaries
7. On life insurance companies and agents of foreign insurance
companies
8. On proprietors, lessees or operators of amusement places
9. On winners of prizes in horse races and jai-alais and owners of
winning race horses
10. On sale, barter, exchange of shares of stocks
F. Excise tax on certain goods
G. Documentary stamp tax
H. Such as other taxes as are or hereafter may be imposed by law and
collected by the Bureau of Internal Revenue
II. National taxes imposed by special laws
A.
B.
C.
D.
E.
F.

Customs duties
Sugar adjustment taxes
Taxes on narcotic drugs
Travel tax
Motor vehicle users charge tax
Energy taxes

III. Modes of payment of internal revenue taxes


A. Electronic payment system
B. Over-the-counter cash payment
C. Bank debit system
D. Check

IV. INCOME TAX


A. General Principles
1. A citizen of the Philippines residing therein is taxable on all income
derived from sources within and without the Philippines
2. A non-resident citizen is taxable only on income derived from sources
within the Philippines;
3. An individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable only on
income from sources within the Philippines; a seaman who is a citizen
of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged

exclusively in international trade shall be treated as an overseas


contract worker
4. An alien individual, whether a resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines
5. A domestic corporation is taxable on all income derived from sources
within and without the Philippines
6. A foreign corporation, whether engaged or not in trade or business in
the Philippines, is taxable only on income derived from sources within
the Philippines
B. 1. Income means all wealth which flows into the taxpayer other than as a
mere return of capital
2. Income tax tax on the net income or the entire income realized in one
taxable year
C. Classification of Taxpayers
1. Individuals:
a. Citizens who are divided into:
1)
Resident citizens those citizens whose residence is within the
Philippines
2)
Non-resident citizens those citizens whose residence is not
within the Philippines
b. Aliens who are divided into:
1) Resident Aliens those individuals whose residence is within
the Philippines and are not citizens thereof
2) Non-resident aliens those individuals whose residence is not
within the Philippines but temporarily in the country and are not
citizens thereof; divided into:
a) Those engaged in trade or business within the Philippines
b) Those who are not so engaged
2. Corporations:
a. Domestic those incorporated under our laws
b. Foreign those incorporated under the laws of their respective
countries; divided into:
1) Resident those engaged in trade or business within the
Philippines
2) Non-resident those who are not so engaged
3. General partnership:
a. General professional partnership
b. General co-partnership
4. Estates and trusts
D. Rates of individual income tax
1. The individual income tax payable by citizens, resident or non-resident,
and resident aliens is imposed at progressive or graduated rates.
(Effective January 01, 2000, the rate of income tax shall be 32%,
Sec. 24 (A))
2. A non-resident alien individual engaged in trade or business in the
Philippines is subject to income tax in the same manner as an
individual citizen and a resident alien on taxable income derived from
sources within the Philippines
3. For other non-resident aliens, not so engaged, the tax is 25% of the
entire or gross income received from sources within the Philippines,

and 15% of the gross income received as compensation, salaries and


other emoluments by reason of his employment at:
a. By regional or area headquarters and regional operating
headquarters of multinational companies; or
b. By offshore banking units established by a foreign corporation in
the Phils.;
c. By foreign petroleum service contractor or subcontractors operating
in the Phils.
4. Certain passive incomes are subject to a separate and final income tax
imposed as fixed rates
E. Important:
1. Taxable income pertinent items of gross income specified in the Tax
Code less the deductions, if any, including personal and additional
exemptions authorized by such types of income by the Tax Code or
other special laws
2. Net compensation income gross compensation less personal and/or
additional exemption and premium payments on health and/or hospital
insurance under certain compensation
3. Net income gross business/professional income less allowable
deductions
4. Gross income all income of whatever kind and derived by a taxpayer
from whatever source but not including exempt income (exclusions)
and items of gross income (passive income) subject to final tax
o Entire income received by non-resident aliens not engaged in
trade or business within the Philippines which is subject to a flat
rate of 25% of such income
F. Items of Gross Income:
1. Compensation for services in whatever form paid including salaries,
commissions and similar items
2. Gross income derived from conduct of trade or business or exercise of
a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
G. Requisites for income to be taxable
1. There must be gain or profit
2. The gain must be received or realized
3. The gain must not be included by law or treaty from taxation
H. Exclusion income that is exempt from tax, hence, not considered in
determining gross income.
1. Life insurance proceeds to beneficiaries upon the death of the insured
are not subject to tax, as they are considered more as an indemnity
rather than as gains or profits or which is compensatory in nature
2. Value of property acquired by inheritance or donation as it is subject to
estate tax or donors tax, as the case may be
3. Retirement benefits, pensions, etc. received by government officials
and employees from the GSIS and SSS is recognition for their services

to the government, and retirement benefits received by officials and


employees of private firms under certain conditions
4. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic achievements
or granted to athletes in sports competitions
5. Gains from the sale or retirement of bonds or other certificates of
indebtedness with a maturity of more than five (5) years
I. Deductions items or amounts which the law allows to be deducted under
certain conditions from the gross income of a taxpayer in order to arrive at
the taxable income.
Basic Principles about deductions:
1. The taxpayer seeking a deduction must point to some specific
provisions of the statute authorizing the deduction
2. He must be able to prove that he is entitled to the deduction authorized
or allowed
J. Amount of Personal Exemptions allowable to Individuals
1. Basic Personal Exemption (Sec. 35 of NIRC, as amended by Republic
Act No. 9504):
a. P 50,000 for single, married or Head of the Family
2. Additional Exemption Additional exemption of P25,000 for each
dependent not exceeding four (4)
Dependent means a legitimate, illegitimate or legally adopted child
chiefly dependent upon and living with the taxpayer if such dependent
is not more than 21 years of age, unmarried and not gainfully
employed or if such dependent, regardless of age, is incapable of selfsupport because of mental or physical defect
K. Itemized Deductions from Corporate Income:
1. Ordinary and necessary business expenses, including research or
development expenditures
2. Interests (paid on indebtedness)
3. Taxes (except certain taxes like income tax)
4. Losses (not compensated for by insurance or other forms of indemnity)
5. Bad debts (actually ascertained to be worthless)
6. Depreciation of property
7. Depletion of natural resources (like oil and gas wells and mines)
8. Charitable and other contributions
9. Pension trust contributions
L. Computation of individual income tax
1. For pure compensation income:
Gross income (all income from within and without)
Less: Premium payments on health and/or hospitalization insurance
_________________________
Net income from all sources
Less: Personal and/or additional exemptions
_________________________
Taxable Income
Multiplied by: Tax rate under Sec. 24
_________________________
Amount of income tax payable
2. For business and/or professional income
Gross income (all income from within and without)

Less: Allowable itemized deductions or 40% OSD


_________________________
Net income from all sources
Less: Personal and/or additional exemptions
_________________________
Taxable Income
Multiplied by: Tax rate under Sec. 24(A)
M. Certain Passive Income
1. Interests from ay currency bank deposit (not covered under foreign
currency deposit system) and yield from deposit substitutes and from
trust funds, Royalties, Prizes and other Winnings- subject to 20% final
tax rate
Exceptions:
- Books and other literary works and musical compositions, 10%
- Prizes not more than P10,000 and other winnings graduated
2. Cash and property dividends from a domestic corporation and regional
operating headquarters of multinational companies
3. Capital gains from sales of shares of stocks the net capital gains
realized from the sale, exchange or other disposition of shares of
stocks in any domestic corporation not traded through the stock
exchange are taxed as:
Not over P 100,000 5%
In excess of P 100,000 - 10%
4. Capital gains from sales of real property capital gains are presumed
to have been realized from the sale, exchange or disposition of real
property located in the Philippines classified as capital assets.
Note: Memorize this one:
Capitals assets means property held by the taxpayer whether or not
connected with his trade or business, but does not include ordinary
assets which are:
(1) Stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year
(2) Property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business
(3) Property used in the trade or business of a character which is
subject to depreciation
(4) Real property used in the trade or business
5. Informers reward to persons instrumental in the discovery of violations
of the Tax Code or in the discovery and seizure of smuggled goods is
subject to a final withholding tax of 10%
N. Non-individual Taxpayers
1. Corporations As used in the Code, the term corporation shall include
partnerships, no matter how created or organized, joint stock
companies, joint account, associations or insurance companies.
It does not include:
a. General professional partners

b. Joint venture or consortium formed for the purpose of undertaking


of construction projects or engaging in petroleum, coal, geothermal
and other energy operations
O. Improperly accumulated earnings tax equal to 10% of the improperly
accumulated taxable income is imposed on every corporation formed or
availed of for the purpose of avoiding the income tax with respect to its
stockholders of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed
P. Tax return sworn statement or declaration executed in accordance with
law on a required form wherein the taxpayer states the facts as to the
nature and extent of his/her tax liability for a taxable year
1. When to file. The return, covering income of the preceding taxable
year, shall be filed on or before April 15 of each case, or in meritorious
cases, within the extension which may be granted by the
Commissioner of Internal Revenue
2. Where to file. The return shall be filed with an authorized or accredited
Agent bank or with the Revenue District Officer, Revenue Collection
Officer or duly authorized treasurer of the city or municipality where the
taxpayers residence or principal place of business is located.