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Philippine Tax System & Income Tax

General Principles and


Concepts of Taxation
Philippine Tax System & Income Tax

INHERENT POWERS OF THE STATE


The three inherent powers
1. Police Power - refers to the inherent power of
the sovereign state to legislate for the
protection of health, welfare and morals of the
community. It is exercised usually to guard
against excesses or abuses of individual liberty.
This power is restricted by the “due process
clause” of the Constitution which provides that
no person may be deprived of “life, liberty, or
property, without due process of law.”
The three inherent powers
Examples of police power are preservation of
natural resources, segregation of lepers from the
public, imprisonment of convicted criminals, and
regulation of the of various professions.
The three inherent powers
2. Eminent Domain refers to the power of the
sovereign state to take private property for a
public purpose. It is founded upon the idea chat
the common necessities and interests of the
community transcend individual rights in
property. The State may expropriate private
property when it is necessary to promote
general welfare.
The three inherent powers
Since eminent domain is inherent in sovereignty,
pertinent provisions in the Constitution are not
grants of the power, but rather limitations upon
its exercise.
The Constitution limits the exercise of the power
by providing that property may not be taken
without just compensation. “Just compensation”
means paying the owner the full monetary
equivalent of the property taken for public use.
Definitions of Taxation
Taxation is defined as:

1. A power by which an Independent State, through its law-


making body, raises and accumulates revenue from its
inhabitants to pay the necessary expenses of the
government.

2. A process or act of imposing a charge by governmental


authority on property, individuals or transactions to raise
money for public purposes.

As a process, it passes a legislative undertaking through the


enactment of tax laws by the Congress which will be
implemented by the Executive Branch of the government
Definitions of Taxation
government through its Bureau of Internal Revenue (BIR) to
raise revenue from the inhabitants in order to pay the
necessary expenses of the government.

3. A means by which the Sovereign State through its law-


making body demands for revenue in order to support its
existence and carry out its legitimate objectives.

As a means, it is a way of collecting and apportioning the cost


of government among those who are privileged to enjoy its
benefits.
Nature of Taxation Power
The power to tax is an attribute of sovereignty that is exercised
by the government for the betterment of the people within its
jurisdiction whose interest should be served, enhanced and
protected.
The nature of taxation power is as follows:
1. Inherent power of sovereignty;
2. Essentially a legislative function;
3. For public purposes;
4. Territorial in operation;
5. Tax exemption of government;
6. The strongest among the inherent powers of the government;
and
7. Subject to Constitutional and inherent limitations.
1. Inherent Power of Sovereignty
Taxation is as old as government itself. Its
existence commences concurrently with the four
elements of a state - people, territory, sovereignty
and government.
From the moment a state is born, it automatically
possesses the power to collect taxes from its
inhabitants.
The government having sovereignty can enforce
contributions upon its citizens even without a
specific provision in the Constitution authorizing it.
It is so because the State has the supreme power
to command and enforce obedience to its will
from the people within its jurisdiction.
1. Inherent Power of Sovereignty
Any provision in the Constitution regarding
taxation does not create rights for the
sovereignty to have the powder to tax but it
merely constitutes limitations upon the
supremacy of tax power.
Only the national government exercises the
inherent power of taxation of the state. Local
government units do not possess the inherent
power.
2. Essentially a Legislative Function
The law-making body of the government and its
political subdivisions exercise the power of
taxation. The powers to enact laws and
ordinances, and to impose and collect taxes are
given to the Congress.
Non-delegation of Legislative Power to Tax. In its
strict sense, the power to make tax laws cannot
be delegated to other branches of the
government.
2. Essentially a Legislative Function
Since peculiarly and exclusively legislative in nature, the
power to make tax laws cannot be exercised by the
executive or judicial branch of the government.
Therefore, when the power to tax is delegated to the
local government units (LGU), only the legislative
branch of the LGU can exercise the power. Also, if
delegated to the President, it is limited to
administrative discretion subject to valid standards.
2. Essentially a Legislative Function
Examples of taxation power that cannot be delegated
are the following:
a. Power to select the coverage, object or property to be taxed;
b. Determining the nature and purposes for which taxes shall be
collected;
c. Determining the place or situs of tax imposition;
d. Fixing the amount to be imposed and tax rates;
e. Granting tax exemptions or condonations; and
f. Setting down the rules of taxation in general.
3. For Public Purposes
The power of taxation flows forth from the
legitimate objective of supporting the services of
the government. Since public taxes are public
money, they must be used to finance recognized
public needs such as constructions and
maintenance of roads to facilitate mobility;
providing health care, education, security,
promotion of science, commerce, industry, and
others for the welfare of the general public.
3. For Public Purposes
Thus, in order to consider appropriation of taxes
valid, it must be for the common good of the
people. No individual or private person shall
primarily be enriched or benefited by the public
funds.
It has been held that tax has been utilized for public
purpose if the welfare of the nation or the greater
portion of its population has benefited with its use.
3. For Public Purposes
Thus, in order to consider appropriation of taxes valid,
it must be for the common good of the people. No
individual or private person shall primarily be enriched
or benefited by the public funds.
It has been held that tax has been utilized for public
purpose if the welfare of the nation or the greater
portion of its population has benefited with its use.
The Supreme Court held that the legislature has no
power to appropriate public revenues for anything but
for public purpose - general welfare of the nation.
4. Territorial in Operation
As a rule, the power to tax can only be exercised within
the territorial jurisdiction of a taxing authority, except
when there exists a “privity of relationship” between
the taxing State and the object of tax.
Where privity of relationship exists, the state can still
exercise its taxing powers over its citizen outside its
territory. It is because the fundamental basis of the
right to tax is the capacity of the government to
provide benefits and protection to the object of the
tax.
4. Territorial in Operation
The taxing authority must observe “tax situs.” Its tax
laws are effective and enforceable only within its
territorial limits.
The State cannot tax property wholly and exclusively
within the jurisdiction of another state since it does not
afford protection on property beyond its territorial
boundaries for which a tax is supposed to compensate.
Taxation is bound to observe International Comity. The
tax laws are not applicable to the property of foreign
government.
4. Territorial in Operation
International Comity is the courteous recognition,
friendly agreement, interaction and respect accorded
by one nation to the laws and institutions of another.
As a matter of international courtesy, property of one
foreign state may not be taxed by another because of
the principle of sovereign equality among states under
international law. Since one State cannot exercise its
sovereign dominion over another, a nation cannot
impose taxes to the properties of other nations.
5. Tax Exemption of the
Government
Exemption from taxation is a grant of immunity to
particular persons or corporations of a particular class
from a tax. The State immunity from taxation is
inherent in its power to impose tax.
The state cannot be taxed without its consent;
otherwise, such is derogation to its Sovereignty.
derogation to its Sovereignty.
Tax exemption applies only to government entities
through which the government immediately and
directly exercises its governmental functions
5. Tax Exemption of the
Government
like the Armed Forces of the Philippines AFP).
If, however, the government entities are performing
proprietary functions such as Philippine National
Railways (PNR) and National Power Corporation (NPC)
they are generally subject to tax in the absence of tax
exemption provisions in their charters or the law
creating them. Therefore, agencies performing
governmental functions are exempt from tax unless
expressly taxed, while those performing proprietary
functions are subject to tax unless expressly exempted.
6. The Strongest among the
Inherent Powers
Taxation power is the strongest of all inherent powers
of the government because, without money, the
government can neither survive nor dispense any of its
other powers and functions effectively.
In the absence of limitations provided by the
Constitution, the power to tax is unlimited, complete
(plenary), with wide extent of application
(comprehensive) and with highest degree (supreme).
6. The Strongest among the
Inherent Powers
If there is any limitation at all, it is the sense of
responsibility by the members of the law-making body
to the people that restricts its exercise.
Taxation reaches every trade or occupation, every
object of industry, and every species of possession. It
imposes a burden which, in case of failure to discharge,
may be followed by seizure or confiscation of property.
7. Subject to Inherent and
Constitutional Limitations
Although taxation power is supreme, its exercise is not
absolute because it is subject to Inherent and
Constitutional Restrictions.
As an inherent power, its very' purpose and nature
restrict taxation. Tax power should be exercised for its
very nature, purpose and jurisdiction.
A violation of these inherent limitations is tantamount
to taking a property without due process of law.
7. Subject to Inherent and
Constitutional Limitations
Our Constitution assumes the existence of taxation and
it also provides some provisions to limit the exercise of
tax power. Its main purpose is to protect the objects of
taxation against its abusive implementation.
Therefore, if a tax law violates the Constitution, such
law shall be declared null and void.
Any tax law that contradicts the limitation of taxation is
also unconstitutional.
Similarities among Taxation,
Eminent Domain and Police Powers
1. They are inherent powers of the state;
2. They 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 compensation;
5. They all underlie and exist independently of the
Constitution;
6. They are all necessary attributes of sovereignty; and
7. The provisions in the Constitution are just limitations on
the exercise of these powers.
Inherent Limitations
Inherent limitations are the natural restrictions to safeguard
and ensure that the power of taxation shall be exercised by
the government only for the betterment of the people
whose interest should be served, enhanced and protected.
1. Taxes may be levied only for public purposes;
2. Being inherently legislative, taxation may not be delegated;
3. Tax power is limited to territorial jurisdiction of the State;
4. Taxation is subject to international comity; and
5. Government entities are generally tax-exempt.
Constitutional Limitations
Constitutional limitations are provisions of the fundamental
law of the land that restrict the supreme, plenary, unlimited
and comprehensive exercise by the State of its inherent
power to tax.
As a rule, the Constitution does not create the power to tax on
the State. Instead, it simply defines and regulates the exercise of
tax power in order to safeguard the interest of affected
taxpayers.
Constitutional Limitations
The Constitutional provisions that limit the exercise of the
power to tax are as follows:
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, nonprofit cemeteries, churches
and convents appurtenant thereto;
Constitutional Limitations
The Constitutional provisions that limit the exercise of the
power to tax are as follows:
6. No public money shall be appropriated for religious
purposes;
7. Majority of all the members of the Congress granting tax
exemption;
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. Tax collection shall generally be treated as general funds
of the government.
Constitutional Limitations
1. Due Process of Law - Art III, Section 1 of the
Constitution provides that “No person shall be deprived
of life, liberty, or property without due process of law,
nor shall any person be denied the equal protection of
the laws.”
The phrase “due process of law” mandates a
fundamental right of protection that life, liberty or
property shall only be taken away from any person
(natural or juridical) if its exercise is not contrary to the
fundamental law of the land and it is done after
compliance with the established procedure prescribed
by law.
Constitutional Limitations
1. Due Process of Law - Due process requires giving notice
to the taxpayer, providing him hearing, so as to be given
fair opportunity to assert his substantial rights before a
competent court before he shall be denied or deprived
of his property for non-payment of tax.
Essentially, due process requires that the law should be
reasonable and not oppressive (substantive), and it
requires opportunity to be heard in proper court of
litigation before judgment is rendered affecting one’s
person or property
Constitutional Limitations
1. Due Process of Law - The purpose of due process is to
secure the individual from the abusive exercise of the
taxing power of the government. This prevents the
latter to encroach against the life, liberty and property
of individual persons and thus protect property from
confiscation without proper trial.
2. Equal Protection of Law – “Equal protection of law”
means that all persons subject to legislation shall be
treated alike under similar circumstances and
conditions both in the privileges conferred and liabilities
imposed.
Constitutional Limitations
2. Equal Protection of Law – The purpose of this
Constitutional mandate is to protect persons belonging
to the same class against intentional and arbitrary
discrimination.
There is denial of equal protection of laws if there is
discrimination in the implementation of tax laws. For
instance, a tax ordinance applicable to similar persons,
firms or corporations in the same class which are
subject to the same rate are taxed impartially imposing
the ordinance to some and favoring the others.
Constitutional Limitations
3. Rule of Uniformity and Equity in Taxation - Art. VI,
Section 28. par. 1 of the Constitution states that “The
rule of taxation shall be uniform and equitable.
Congress shall evolve a progressive system of taxation.”
A tax is said to be uniform in application if it operates
with the same force and effect in every place where the
subject may be found, not when it singles out one
particular class for taxation or exemption.
“Equality in taxation” is similar to progressive system of
taxation. The tax laws and their implementation must
be fair, just, reasonable and proportionate to one’s
ability to pay.
Constitutional Limitations
3. Rule of Uniformity and Equity in Taxation - The primary
requisite of equity principle is that a progressive tax rate
shall be applied equally to all persons, firms and
corporations, and transactions placed in similar
classification and situation.
The progressive system of taxation means that the tax
laws shall give emphasis on direct rather than indirect
taxes or on the ability-to-pay principle of taxation. An
example of this kind is the current individual income
tax system that imposes rates progressing upwards as
the tax base (taxpayer’s taxable income) increases.
Constitutional Limitations
4. President’s Veto Power – Art. VI, Section 27 (2) of the
Constitution provides that “Every bill passed by the
Congress shall, before it becomes a law be presented to
the President. If he approves the same, he shall sign it;
otherwise, he shall veto it and return the same with his
objections at large in its journal and proceed to
reconsider it....”
Veto power refers to the Executive’s power to refuse to
sign into law a bill that has been passed by a legislature.
Constitutional Limitations
4. President’s Veto Power – It can be classified into (a)
item veto - the power to veto items in appropriation
bills without affecting any other provisions of such bills,
and (b) pocket veto - the power to disapprove legislative
act by the President with the result that bills shall fail to
become laws.
The President shall communicate his veto of any bill to
the House where it originated within thirty days after
the date of receipt thereof; otherwise, it shall become
a law as if he had signed it.
Constitutional Limitations
4. President’s Veto Power – If the President vetoed the bill,
two-thirds of the members of the House are required to
make such bill to become a law.
The power of the President to “remit fines and
forfeitures” does not include civil penalties regarding
nonpayment of tax and other violation of tax laws. Such
power embraces only fines and forfeitures involving
criminal liabilities upon conviction by final judgment.
Constitutional Limitations
5. Exemption from Property Taxation – Art. VI, Section 28,
par 3 of the Constitution provides that “Charitable
institutions, churches, parsonages or convents
appurtenant thereto, mosques and 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.”
This exemption is granted to them in return for the
benefits they have afforded to the public welfare.
Constitutional Limitations
5. Exemption from Property Taxation – The Supreme
Court, however, held that such tax exemption for the
above provision should be applicable only to real
property taxes and not to transfer taxes. Hence, if a land
owned by religious order is sold, it is subject to a final
tax of 6% based on the selling price or fair market value
whichever is higher.
In general, special assessments are not covered by the
exemption because by nature they are not classified as
taxes. To be exempted from taxation, the real property
must be exclusively used for religious, educational and
charitable purposes.
Constitutional Limitations
5. Exemption from Property Taxation – It would appear,
therefore, that “idle lands” or property used by others
for other purposes although owned by religious,
educational and charitable institutions could be
subjected to real estate tax. Furthermore, the income of
such organizations deriving from profit activities or sale
of properties, regardless of the disposition made of
such income, is subject to tax.
Constitutional Limitations
6. Public Money Not Religious Purposes – Art VI, Section
29 of the Constitution provides that “No public money
or property shall ever be appropriated, applied, paid or
used directly or indirectly for the use, benefit, or support
of any sect, church, denomination, sectarian, institution,
or system of religion, or for the use, benefit or support
of any priest, preacher, minister, or other religious
teacher or dignitary as such, except when such priest,
preacher, minister, or dignitary is assigned to the armed
forces, or to any penal institution, or government
orphanage or leprosarium.”
Constitutional Limitations
6. Public Money Not Religious Purposes – This limitation is
fundamentally supported by the principle that taxes can
only be levied for public purposes. Thus, the Congress
has no power to appropriate funds for private purposes
with the exception specified in the above-cited
Constitutional provision.
The doctrine stated above is to further stress the
principle of the separation of the church and the State.
In concurrence with the Constitution, the State shall
have no official religion, or shall not set up a church,
whether or not supported with public funds or prefer
one religion over another.
Constitutional Limitations
6. Public Money Not Religious Purposes – Likewise, the
church should not interfere in purely political matters or
affairs exclusively for the State. Consequently, the
Constitution prohibits against infringement of religious
freedom.
7. Congress Granting Tax Exemption - Art. VI, Section 28,
par. 4 of the Constitution provides that “No law
granting any tax exemption shall be passed without the
concurrence of a majority of all the members of the
Congress.”
Constitutional Limitations
7. Congress Granting Tax Exemption - It shall be observed
that the above Constitutional provision requires the
concurrence of a majority not of the attendees
constituting a quorum but of all the members of the
Congress.
Art. VI, Section 24 of the Constitution provides that “All
appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application and
private bills shall originate exclusively in the House of
Representatives, but the senate may propose or concur
with amendments. ”
Constitutional Limitations
8. Supreme Court’s Final Judgment in All Tax Cases - “The
Supreme Court shall have the power to review, revise,
reverse, modify or affirm on appeal or certiorari, as the
laws or the Rules of Court may provide, final judgments
and orders of lower courts in all cases involving the
legality of any tax, impost, assessment, or toll or any
penalty imposed in relation thereto.”
Art. VI, Section 30 of the Constitution provides that “no
law shall be passed increasing the appellate Jurisdiction
of the Supreme Court as provided in this Constitution
without its advice and concurrence. ”
Constitutional Limitations
8. Supreme Court’s Final Judgment in All Tax Cases - The
Power of Judicial Review in taxation is limited only to
the interpretation and application of tax laws. The
judicial tribunals have no concern on the wisdom of
taxing act. Its power does not include inquiry on the
policy of legislation. Neither can it legitimately question
or refuse to sanction the provisions of any law
consistent with the Constitution.
9. Taxes as General Funds of the Government - Art. VI,
Section 29, par. 3 of the Philippine Constitution states
that “All money collected on any tax levied for
Constitutional Limitations
9. Taxes as General Funds of the Government – “…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.”
Thus, collection of fee with the nature of taxes intended
for the promotion of sugar industry shall be treated as a
special fund. Such fund shall be used for its intended
purpose and none of its part shall be used for exclusive
benefit of any private person.
Constitutional Limitations
9. Taxes as General Funds of the Government – Once the
purpose is achieved, the unspent amount shall be
transferred to the general fund of the government.
Importance of Taxation
Taxation power exists inseparably with the State because it
is essential for the existence of the government
Taxation is very important for a continuous existence of a
nation. It is the primary source of government revenue
that is used to effectively and permanently perform
government functions. Without revenue, there can be
no continuing government. Without government, there
can be no civilization.
Without taxation, the other inherent powers (police and
eminent domain powers) would be paralyzed. For this
reason, even the police power of the government may
be exercised through taxation power.
Importance of Taxation
Taxation power exists inseparably with the State because it
is essential for the existence of the government
Taxation is very important for a continuous existence of a
nation. It is the primary source of government revenue
that is used to effectively and permanently perform
government functions. Without revenue, there can be
no continuing government. Without government, there
can be no civilization.
Without taxation, the other inherent powers (police and
eminent domain powers) would be paralyzed. For this
reason, even the police power of the government may
be exercised through taxation power.
Basis of Taxation
Taxation is basically established based on the principles of
(a) necessity, and (b) reciprocal duties of protection and
support between the State and inhabitants.
Based on the Principle of Necessity. The government has a
right to compel all its citizens, residents and property
within its territory to contribute money. It is because
the government cannot exist without any means to pay
its expenses - a necessary burden to preserve the
State’s sovereignty.
Taxation is the “lifeblood” or the “bread and butter” of the
government and every citizen must pay his taxes.
Basis of Taxation
Taxes, being the lifeblood of the government, their prompt
and certain availability is of the essence.
Taxation is exercised to raise revenue for the very
existence of the government to serve the people
for whose benefit taxes are collected. These
reasons make the payment of taxes compulsory.
Based on Reciprocal Duties. Under the “benefits-received
principle,” the government collects taxes from the
subjects of taxation in order that it may be able to
perform its functions.
Basis of Taxation
Based on Reciprocal Duties. The government’s right to tax
income emanates from its being a silent partner in the
production of income through means of providing
protection, proper business climate, and peace and
order to the taxpayers in the making of earnings.
The citizen, on the other hand, pays taxes to support
the government in order that he may continuously be
sustained with security and benefits of an organized
society.
Basis of Taxation
Based on Reciprocal Duties. The symbiotic relationship and
partnership between the taxing authority and the
subject of taxation is enough to justify the imposition of
tax power.
The payment of taxes may therefore mean helping the
government to finance its legitimate objectives. The
government revenue is used to serve the people for
whose benefit taxes are collected This is an
indispensable partnership between the people and the
government.
Purposes of Taxation
1. Revenue Purpose - The primary purpose of taxation is
to raise revenue by collecting funds or property for the
support of the government in promoting the general
welfare and protecting its inhabitants.
2. Regulatory Purpose. Regulatory, also known as
Sumptuary, is a secondary objective of imposing tax.
This objective is accomplished to
a) Regulate inflation,
b) Achieve economic and social stability, and
c) Serve as key instrument for social control.
Purposes of Taxation
The amount of taxes may be increased to curve spending
power and minimize inflation in times of prosperity. It may
be reduced to expand business and ward off depression in
times of declining economic condition.
Taxes may be imposed to encourage economic growth by
granting tax exemptions, tax relief and incentives to attract
investments that will create employment.
Taxes may be used as a tool and weapon in international
relations.
Purposes of Taxation
It is an instrument to encourage foreign trade by providing
tax incentives or protect local industries against foreign
competition by imposing additional taxes on imported
goods.
For example, if the Philippines would like to restrict trade
relations with some foreign countries, it can impose higher
custom and tariff rates on imported products. On the other
hand, if the Philippines would like to open trade relations
with other countries, it can reduce taxes on importation.
Purposes of Taxation
As a tool to protect trade relation, special duties may be
created to protect new conditions, such as:
(1) Discriminatory duty - this special duty is designed to
offset any foreign discrimination against our local
commerce.
(2) Countervailing duty - it may be imposed to offset any
foreign subsidy granted to imported goods to the prejudice
of our local industries.
Purposes of Taxation
(3) Marking duty - it is generally imposed as additional
duty tax on imported articles and/or containers with
improper classifications.
(4) Dumping duties - it refers to the additional duty
taxes imposed on imported goods with prices lesser than
their fair market values to protect local industries.
Purposes of Taxation
3. Compensatory Purpose. A tax may be used to make
up for the benefit received. For example, an excise tax on
gasoline consumed is imposed on vehicle owners using
roads. In this case, the tax is compensatory for the use of
road.
Taxation is a way of giving back the expected economic and
social benefits due to the inhabitants
Taxes may be imposed for the equitable distribution of
wealth and income in society.
In income taxation, higher taxes are collected from those
who earn more and use the funds collected for the welfare
of the people in general.
Objects of Taxation
Objects of taxation may refer to the subject to which taxes
are imposed. Generally, taxes are imposed on the following:
1. Persons, whether natural or juridical persons
a. Natural person - refers to individual taxpayers.
b. Juridical person - includes corporations, partnerships,
and any association.
2. Properties, whether real, personal, tangible or intangible
properties.
a. Real properties - immovable properties such as land or
house and lot.
Objects of Taxation
b. Personal properties - includes movable properties such as
car and other personal belongings.
c. Tangible properties - that which may be felt or touched
and are necessarily corporeal, either real or personal
properties.
d. Intangible properties - properties that are “rights” rather
than physical objects. Examples are patents, stocks, bonds,
goodwill, trademarks, franchises and copyrights.
Objects of Taxation
3. Excise objects, such as:
a. Transaction - the act of conducting activities related to
any business or profession. It may involve selling, servicing,
leasing, borrowing, mortgaging or lending.
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
The principle of “prospectivity of tax laws” states that a tax
bill must only be applicable and operative after becoming a
law.
Thus, the effectivity of the tax law commences upon its
approval and its scope would only cover the present and
future transactions.
The retroactive application of tax laws shall not be applied
unless there is a clear intent of the legislature that such law
shall also be imposed on past transactions.
Certain Doctrines in Taxation
2. Imprescriptibility of Taxes
The rule on “tax imprescriptibility” states that unless
otherwise provided by the tax law itself, taxes in general are
not cancelable.
Though the Tax Code provides for the limitation in the
assessment and collection of taxes imposed, such
prescriptive period will only be applicable to those taxes
that were returnable. The prescriptive period shall start
from the time :he taxpayer files the tax return and declares
his tax liability.
Certain Doctrines in Taxation
2. Imprescriptibility of Taxes
The Court held that there is no time limit on the right of the
BIR Commissioner to assess taxes on unreasonable
accumulated earnings of the corporation.
The law on prescription being a remedial measure should
be interpreted liberally in order to protect the taxpayer.
Certain Doctrines in Taxation
3. Double Taxation
Double Taxation means an act of the sovereign by taxing
twice for the same purpose in the same year upon the
same property or activity of the same person, when it
should be taxed once, for the same purpose and with the
same kind of character of tax.
The Supreme Court held that there is no constitutional
prohibition against double taxation in the Philippines
therefore, it is not a valid defense against the validity of a
tax measure.
Certain Doctrines in Taxation
3. Double Taxation
This decision, however, springs valid constitutional defenses
against oppression and inequality in the implementation of
tax power.
To avoid injustice and unfairness, doubts as to whether
double taxation has been imposed should be resolved in
favor of the taxpayer.
Certain Doctrines in Taxation
3. Double Taxation
Indirect Duplicate Taxation. This is double taxation in its
broad sense. It extends to all cases in which there is a
burden of two or more pecuniary impositions. It is usually
allowed as long as there is no violation of the equal
protection and uniformity clauses of the Constitution.
Direct Duplicate Taxation. This is double taxation in its
strict sense. It is prohibited because it comprises imposition
of the same tax on the same property for the same purpose
by the same state during the same taxing period.
Certain Doctrines in Taxation
3. Double Taxation
This kind of double taxation violates the constitutional
provision of uniformity and' equal protection, as well as the
principle that tax must not be excessive, unreasonable and
inequitable. Therefore, such taxation should, whenever and
wherever possible, be avoided to prevent injustice or
unfairness.
Certain Doctrines in Taxation
3. Double Taxation
How to Counteract Indirect Double Taxation?
Indirect double taxation may be counteract through the
application of:
1. Tax exemptions;
2. Reciprocity clause/tax treaty;
3. Tax credit; and
4. Allowance for deductions such as vanishing deduction
in Estate Tax.
Certain Doctrines in Taxation
3. Double Taxation
There is no double taxation in the following 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 taxpayer’s final product and
the storage of raw materials used in the production of
the final product.
Certain Doctrines in Taxation
4. Escape from Taxation
The ways by which a taxpayer could escape tax burdens
may be through tax evasion, and tax avoidance.
“A tax evader breaks the law (tax evasion), the tax avoider
sidesteps it (tax avoidance)”. The “doctrine of escape from
taxation” permits the taxpayer to minimize (if not to
escape) payment of tax by lawful means.
Certain Doctrines in Taxation
4. Escape from Taxation
Tax Evasion
Under this method, the taxpayer uses unlawful means to
evade or lessen the payment of tax. This form of tax
dodging is prohibited and therefore subject to civil and/or
criminal penalties. Examples: Non-inclusion of sales,
deliberate fabrication of expenses, and forming an artificial
person to evade taxation or to deliberately reduce taxable
income.
Certain Doctrines in Taxation
4. Escape from Taxation
Tax Avoidance
This is also called Tax Minimization. It is the reducing or
totally escaping payment of taxes through legally
permissible means.
Examples of tax avoidance are:
1. Selling shares of stock through a stock exchange in
order to avail of the lower tax rates.
2. Estate planning within the means sanctioned by the Tax
Code has been held to be one of permissible tax
minimization.
Certain Doctrines in Taxation
4. Escape from Taxation
Forms of Tax Avoidance
Several forms to tax avoidance, which could be legally used
by the taxpayer, to minimize his income tax liability are:
1. Tax option;
2. Shifting;
3. Transformation; and
4. Exemption.
Certain Doctrines in Taxation
5. 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.
Certain Doctrines in Taxation
7. Set-off 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.
A person cannot refuse to pay tax on the basis that the
government owes him an amount equal to or greater than
the tax being collected. The collection of a tax cannot await
the results of a lawsuit against the government.
Certain Doctrines in Taxation
7. Set-off Taxes

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 and
2. When there is an actual compromise between the
taxpayer and the tax officer.
Certain Doctrines in Taxation
8. Taxpayer Suit
A “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.
Therefore, the following legal questions would be improper
to be classified as taxpayer suit:
1. Where the disbursement does not involve funds raised
by taxation, and
2. To stop the Commission on Election from holding an
exercise of suffrage or question its inaction to call a
special election.
Certain Doctrines in Taxation
9. Compromises
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.
Certain Doctrines in Taxation
9. Compromises
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 for Finance, has the power to
compromise cases involving the imposition of fines,
surcharges and forfeitures.
Certain Doctrines in Taxation
9. Compromises
4. The Local Government Code has no provision regarding
compromise; however, tax liability (not criminal liability)
is not prohibited from being compromised (Arts. 2034
and 2035, civil Code). Even so, there is no specific
authority given to any public official to execute the
compromise so as to render it effective.
Certain Doctrines in Taxation
10. Power to Destroy
The power of taxation is sometimes viewed as the 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.
The principle implies that an imposition of lawful regulatory
taxes would be destructive to the taxpayers and business
establishments because the government can compel
payment of tax and forfeiture of property through the
exercise of police power.
Power to Build
While tax power is so extensive that it seems it can destroy,
it is primarily a tool that creates, builds and sustains the
upliftment of social condition of the people in general as it
continuously supports the other inherent powers of the
State that preserve the fundamental rights of the people.
Therefore, so long as the tax is exercised with caution to
minimize injury to the proprietary rights of a taxpayer and
does not violate any constitutional and inherent limitations,
it is valid and cannot be judicially restrained merely because
of its prejudicial effects to a particular taxpayer.
Situs of Taxation
Situs of Taxation refers to the place of taxation, or the state
or political unit which has jurisdiction to impose tax over its
inhabitants. It is the application of the principle of territorial
jurisdiction which limits the exercise of tax power in
defining the objects of taxation. It defines boundaries of the
taxing power over the objects of taxation in terms of
location whether or not they shall be subject to tax.
Protection is the basic consideration that justifies tax situs.
Situs of Taxation
The following factors are determinants to the 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; and
6. Residence of the taxpayer;
Nature of Taxation
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.
Nature of Taxation
Taxes are obligations created by law. Taxes arise from law
and could only be imposed by the government. Taxes must
be imposed even without previous agreement between the
government and the taxpayers.
A tax creates a civil liability on the part of a taxpayer who
failed or refused to pay giving rise to a criminal liability that
could be the subject-of criminal prosecution under existing
laws.
In taxation, it is one’s civil liability to pay taxes that gives
rise to criminal liability, unlike criminal cases where criminal
liability gives rise to civil liability.
Nature of Taxation
Taxes are generally personal to the taxpayer. Their
payment should be borne specifically by the person with tax
liability.
Since law vests a corporation with personality that is
separate and distinct from those persons composing it, its
tax delinquency cannot be enforced against its
stockholders.
The stockholders, however, may be held liable for the
unpaid taxes of a dissolved corporation if it appears that the
corporate assets have been transferred in favor of the said
stockholders.
Essential Characteristics of Taxation
1. Enforced contribution. The imposition shall not be
dependent upon the will of the taxpayer;
2. Imposed by the legislative body. The Congress makes
tax laws;
3. Proportionate in character. The “ability to pay principle”
is the basic rule in colleting taxes. Those who earn
more, contributes more than those who earn lesser;
4. Payable in the form of money. Money is the preferred
payment of taxes. If property is taken to satisfy tax
liability, the property is sold through public auction to
satisfy the tax obligation;
Essential Characteristics of Taxation
5. Imposed for the purpose of raising revenue. Taxes are
the primary source of government funds to finance its
expenditures and projects;
6. Used for a 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. Objects
of taxation are either tangible or intangible properties,
including business transactions;

7.
Essential Characteristics of Taxation
8. Commonly required to be paid at regular intervals. The
dates for paying of taxes are fixed by the law to comply
with the principle of administrative feasibility; and
9. Imposed by the sovereign state within its jurisdiction.
The enforcement of tax is subject to territorial
jurisdiction and international comity.
Classifications of Taxes
Taxes are grouped according to the following classifications:
1. As to Purpose:
a. Revenue or Fiscal. These taxes are imposed solely for
the purpose of raising revenue for the government (e.g.
Income tax, value added tax, and transfer taxes).
b. Regulatory, Special or Sumptuary. These taxes are
imposed for the purpose of achieving some social or
economic goals having no relation to the raising of
revenue (e.g. Customs duties, Protective tariff on
imports to control foreign trade and excise tax).

b.
Classifications of Taxes
Taxes are grouped according to the following classifications:
2. As to Object or Subject Matter:
a. Personal, Poll, or Capitation. These taxes are fixed in
amount and imposed on persons residing within a
specified territory regardless of the amount of their
property or their occupation or business (e. g.
Community Tax);
b. Property. These taxes are imposed on personal or real
property based on its proportionate value or in
accordance with some other reasonable method of
apportionment, (e.g. Real Estate Tax); and
Classifications of Taxes
c. Excise. These taxes are imposed upon the performance
of a right or act, the enjoyment of a privilege or the
engagement in an occupation (e.g. Professional tax,
Income Tax, Estate Tax, Donor’s Tax and Value-Added
Tax).
3. As to Determination of Amount:
a. Ad Valorem. These taxes are fixed amounts in
proportion to the value of the property with respect to
which the tax is assessed. It requires the intervention of
Assessors to estimate the value of such property before
the amount due from each taxpayer can be determined
Classifications of Taxes
(e.g. Real Estate Tax, Custom Duties and Excise Tax on
fermented liquors, cigars, cigarette, gasoline and
automobiles)
b. Specific. These taxes are fixed amounts imposed and
based on some standard of weight or measurement,
head or number, length or volume. It requires
independent assessment other than a listing or
classification of the subject to be taxed like excise taxes
on distilled spirits, wines, fireworks and
cinematographic films.
Classifications of Taxes
4. As to Who bears the Burden:
a. Direct. These taxes are non-transferable. They are
demanded from persons who are bound by law to pay
the tax. The liability for the payment of tax as well ad
the burden of the tax falls on the same person (e.g.
Community Tax, Income Tax, Transfer Tax, Corporate
Income Tax).
b. Indirect. These taxes are transferable. The liability for
the payment of tax falls on one person but the burden
thereof can be shifted or passed to another.
Classifications of Taxes
4. As to Who bears the Burden:
b. Indirect taxes are are imposed on commodities. They
form part of the purchase price of the commodity or
service and passed on to the customers (e.g. VAT,
Customs Duties, Amusement tax, Excise tax on specified
goods, and Percentage taxes).
5. As to Scope or Authority Collecting the Tax:
a. National. Those taxes collected by the National
Government. Examples of national taxes are:
Classifications of Taxes
1) Estate and Donor’s Taxes;
2) Income Tax;
3) Value - Added Tax;
4) Excise Tax;
5) Customs Duties; and
6) Documentary Stamp Taxes
b. Local or Municipal. Those taxes collected by the
Municipal Governments. Examples of local or municipal
taxes:
Classifications of Taxes
1) Community tax;
2) Municipal licenses taxes;
3) Professional tax; and
4) Real estate tax.
6. As to Rate or Graduation:
a. Proportional or Flat Rate
The rate of the tax is based on a fixed percentage of the
amount of the property, receipt or other basis to be taxed
(e.g. Real estate tax and VAT).
Classifications of Taxes
b. Progressive or Graduated Rate
The rate of the tax increases as the tax base or bracket
increases (e.g. Income Taxes, Estate Taxes and Donor’s
Taxes).
Other Charges/Fees
1. Penalty is any sanction imposed, as a punishment for .
violations of law or acts deemed injurious. It arises from
law and/or contracts. It is imposed to regulate conduct
through punishment and suppression of injurious acts
or unlawful behaviors. The government or a private
person may impose it.
2. Revenue refers to all funds or income derived by the
government whether from tax or from other sources.
For example, all national internal revenue taxes,
financial assistance from another government,
donations from private individuals.
Other Charges/Fees
3. Debt is an obligation to pay or render service for a
definite fuure period of time based on contract. It is
payable in money or in kind, subject to legal
compensation, and may be assigned.
Imprisonment is not covered by non-payment of debt.
Debt draws interest when there is an agreement
between the contracting parties.
4. Toll is a compensation for the use of somebody else’s
property determined by the cost of the improvement. It
is a demand of proprietorship as compensation for the
use of property, which may be imposed by a private
Other Charges/Fees
Individual or entity or the government.
5. License fee is a contribution enforced by the
government primarily to restrain and regulate business
or occupation.
It is required for the commencement of a business or
profession rendering the business illegal in case of non-
payment. However, it is always subject to revocation.
The power to collect license fee does not include the
power to tax.
Nonpayment of tax does not make the business illegal
although it might be a ground for criminal prosecution
against the person(s) violating the law.
Other Charges/Fees
6. Customs duties are imposition on imported goods
brought into the country to protect local industry.
Taxes are broader than customs duties because all
customs duties are taxes but not all taxes are customs
duties.
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. A subsidy is
not a tax although a tax may have to be imposed to pay
it.
Other Charges/Fees
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
reserves.
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. It is levied only on land and not a personal
liability of the person assessed.
Tax Law Defined
Tax Law is that body of laws which codifies all national tax
laws including income, estate, gift, excise, stamp and other
taxes. Such law comprises of the Republic Act 8424 entitled
“The Comprehensive Tax Reform of the Philippines,”
otherwise known as the “National Internal Revenue Code of
1997” or the “Tax Code.” It also includes Republic Act. 9337
- The VAT Reform Law, and local tax ordinances issued by
the local government.
The Tax Code is an example of a special law which prevails
over a general law such as the Civil Code or the Rules of
Court.
Tax Law Defined
Internal Revenue Taxes - taxes imposed by the legislative
body other than custom duties on imports. The following
national taxes are classified as Internal Revenue Taxes under
the administration of the BIR:
1. Income tax;
2. Transfer Taxes (Estate tax and Donor’s Tax);
3. Business Taxes (VAT, Percentage tax and Excise tax);
4. Documentary Stamps Tax (DST); and
5. Such other taxes as may be imposed and collected by
the BIR.
Sequence of the Interpretation of
Tax Laws
The BIR commissioner issues BIR rulings on particular tax
case which could be overruled by BIR rulings of succeeding
BIR Commissioner.
The Revenue Regulations are issued by the Department of
Finance to cover the implementing guidelines pertaining to
a particular Section of the Tax Code.
The Revenue Regulations are overruled by Court decisions
upon issuance of such resolution.
Sources of Philippine Tax Laws
In its endeavor to effectively exercise tax power, the
Philippine Republic makes laws which may be comprised of
the following:
1. Constitution of the Philippines;
2. Statutes;
3. Executive Orders;
4. Tax Treaties and Conventions with foreign countries;
5. Revenue Regulations promulgated by the Department
of Finance;
6. BIR Revenue Memorandum Circulars and Bureau of
Customs
Sources of Philippine Tax Laws
7. BIR Rulings;
8. Judicial Decisions; and
9. Local Tax Ordinances.

Constitution of the Philippines


The term Constitution refers to that body of rules and
maxims in accordance with which the powers of
sovereignty are habitually exercised. It is often referred to
as the supreme or fundamental law of the land because all
other laws must conform to it. It is the basis in determining
the legality of all-governmental actions and decisions.
Sources of Philippine Tax Laws
Constitution of the Philippines
A constitutional provision regarding taxation is primarily
intended to limit and regulate the exercise of taxation
power. The State can exercise the power to tax even if the
Constitution is completely silent about taxation.
Statutes
Statutes are laws enacted and established by the will of the
legislative department of the government. The present tax
statutes of the Philippines are embodied in the R.A. Act
8424, which is now the prevailing NIRC effective January 1,
1998, which was amended per R.A. 9337 - The VAT Reform
Law.
Sources of Philippine Tax Laws
Statutes
The tax legislative process begins in the Department of
Finance and other government agencies where tax
problems are analyzed and solutions are proposed for the
President’s consideration.
The President transmits his recommendations to the
Congress, " here the two powerful tax committees, the
“Ways and Means Committee” and the “Finance
Committee,” carefully review them.
Sources of Philippine Tax Laws
Statutes
The tax legislative process begins in the Department of
Finance and other government agencies where tax
problems are analyzed and solutions are proposed for the
President’s consideration.
The President transmits his recommendations to the
Congress, " here the two powerful tax committees, the
“Ways and Means Committee” and the “Finance
Committee,” carefully review them.
Sources of Philippine Tax Laws
Statutes
In these committees, the bills are revised to compromise
the conflicts of major opposing interest, and are sent in
turn to the House and Senate floors for approval. A
conference committee settles differences between the two
bills; the revised version is returned to both houses for
approval. The bill becomes law when the President signs it
or when Congress passes it over his veto.
Sources of Philippine Tax Laws
Executive Orders
Executive orders are regulations issued by the President or
some administrative authority under his direction for the
purpose of interpreting, implementing, or giving
administrative effect to a provision of the Constitution or of
some law or treaty.
Tax Treaties and Conventions
These refer to the treaties or international agreements with
foreign countries regarding tax enforcement and
exemptions. They have the force and effect of law.
Sources of Philippine Tax Laws
Revenue Regulations by the Department of Finance
The Secretary of Finance upon the recommendation of the
Commissioner shall promulgate all needful rules and
regulations for the effective enforcement of the provisions
of the Tax Code.
Revenue Regulations are rules or orders having force of law
issued by executive authority of the government to ensure
uniform application of the tax law.
In order that administrative regulations may be considered
valid, all of the following requisites must be complied with:
Sources of Philippine Tax Laws
1. The regulations must be useful, practical and necessary
for the enforcement of the law;
2. They must be reasonable in their provisions;
3. They must not be contrary to law; and
4. They must be duly published in the Official Gazette.
Regulations contrary to or inconsistent with law are null
and void. Hence, a regulation that is merely an
interpretation of the statute when once determined to have
been erroneous becomes inoperative and of no legal or
binding force.
Sources of Philippine Tax Laws
Rulings of the Secretary of Finance are not binding on the
courts because the duty and power of interpreting the laws
is primarily a function of the judiciary.
The Secretary of Finance is vested with authority to revoke,
repeal or abrogate acts or previous rulings of his
predecessors in office because these are not binding on
their successors.
Regulations and administrative rules usually implement tax
laws. The regulations cannot increase nor decrease the
requirements of the law, nor embrace matters not covered
or intended to be covered by the statute.
Sources of Philippine Tax Laws
BIR Revenue Memorandum Circulars and Bureau of
Customs Memorandum Orders
These are administrative rulings or opinions which are less
general interpretations of tax laws being issued from time
to time by the Commissioner of the Internal Revenue or
Commissioner of the Bureau of Customs, as the case may
be. They are primarily intended to maintain uniform
application of tax laws within the department or area of
authority.
Sources of Philippine Tax Laws
BIR Revenue Memorandum Circulars and Bureau of
Customs Memorandum Orders
A memorandum has the status of advisory or sort of
information service. For this reason, they can be reversed
anytime.
As the chief legal officer of the government, the Secretary
of Justice may also give memorandum concerning tax
issues.
Sources of Philippine Tax Laws
BIR Revenue Memorandum Circulars and Bureau of
Customs Memorandum Orders
It is to be noted that the Courts generally respect the
interpretations made by the executive officer whose duty is
to enforce the law. However, such interpretations are not
conclusive m z shall be disregarded if found erroneous by
the court.
BIR Rulings
BIR Rulings are expressed official interpretation of the tax
laws as applied to specific transactions. Unlike a Revenue
Regulation, it is more limited in application.
Sources of Philippine Tax Laws
BIR Rulings
A BIR Ruling is first published in an Internal Revenue
Bulletin and later transferred to the appropriate Cumulative
Bulletin.
BIR Rulings are not the final interpretations of the tax laws.
They are considered the best opinion or advisory at the
moment and are considered sound law until changed by the
court. These rulings are not current and prospective in
applications.
Sources of Philippine Tax Laws
Judicial Decisions
These refer to the decisions for application made
concerning tax issues by the proper courts exercising
judicial authority of competent jurisdiction. These courts
may be the Supreme Court and the Court of Tax Appeals.
Their decisions on tax laws comprise the greater portion of
tax jurisprudence. They form part of the legal system of the
Philippines.
Sources of Philippine Tax Laws
Local Tax Ordinances
These are tax ordinances issued by the Province, City,
Municipality and Barrio subject to such limitations as
provided by the Local Government Code and the Real
Property Tax Code.
END OF
CHAPTER 1