ONLINE LEARNING MODULE

TAXN 1016 (Income Taxation)

Academic Year 2020-2021

Lesson 1: General Principles and Concepts of Taxation

Topic: A. Nature of Taxation

B. Scope of Taxation
C. Aspects of Taxation
D. Limitations of Taxation
E. Other Principles in Taxation
F. Kinds of Taxpayer
a. Individuals
b. Estate
c. Partnership
d. Corporation

Learning Outcomes: At the end of this module, you are expected to provide and differentiate the
general concepts of taxation and acknowledge its application to Philippine
Taxation system

LEARNING CONTENT

Introduction:
This introductory lesson focuses on reinforcing your prior knowledge on taxation. You have studied
Financial Accounting and Reporting and Intermediate accounting. Recall that income generated from business
operation is subject to tax. It is therefore through this course that we will deal on the overview and application
of, fundamental concepts of the Philippine Income Taxation System. Later in the next modules, imposition of
Income Taxation to Individuals and Corporations will be highlighted. The TRAIN Law will be our basis in our
discussions.

Moreover, what would your response should I ask you the e question “Why is taxation important?” A lot
of people would answer that Taxation foster economic growth and development. Further, you would also hear
reasons such as
1. Governments need sustainable sources of funding for social programs and public investments
2. Programs providing health, education, infrastructure and other services are important to achieve the
common goal of a prosperous, functional and orderly society.
3. Governments raise revenues.
4. Taxation is a key ingredient in the social contract between citizens and the economy.
5. Taxation plays a critical role in various scenarios.

Lesson Proper

To start with, we define Taxation as a process or means by which the sovereign through its law making
body (Congress) imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising
revenue to carry out the legitimate objects of government.

Dissecting the definition, the following essential elements can be expounded.

a. As a state power – payment of tax is not voluntary payment or donation but an enforced proportional
contribution from its subjects for public purpose.
 Tax is payable in money which must be in legal tender.
 Payment of taxes should be based on the ability to pay. A graduated tax rate is in place under
the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

b. A legislative process – The process of levying taxes by the legislature of the State (Congress).
 The power of imposing taxes is purely legislative function and cannot be delegated.
 The limitation arises from the doctrine of separation of powers among the three branches of
government.
 Taxes is levied on persons, property or exercise of a right or privilege.

c. A mode of cost distribution -The state allocates its costs or burden to its subject who are benefited by its
spending.
 Taxes levied is for public purposes

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  The more benefit one receives from the government, the more taxes he should pay (Benefit
Received Theory)
 Taxpayers contribute based on their relative capacity to sacrifice for the support of the
government (ability to pay Theory).

From the above definition, we can say that taxation primarily raises funds for the general welfare and protection
of its citizens and to enable the government to finance its multifarious activities. Taxation may also be employed
as device for regulation or control to achieve conditions envisioned by the government such as promotion of
general welfare, reduction of social inequality and economic growth. To illustrate,

Taxes for raising revenues Income tax, Business Tax, Transfer Tax, Local Tax
Taxes for regulation Taxes on Alcohol (wine, liquor, sweetened beverages), Cigarettes, amusement
taxes (night/day clubs, cockpits, race tracks)
Taxes for attaining Granting tax incentives to promote new/pioneer industries and encourage
economic objectives growth of local industries

Elements of Sound Taxation

1. Fiscal Adequacy – the amount of revenues (taxes) raised should be adequate to meet government
expenditures and sustain the level of public service demanded by the citizens and policy makers.
2. Theoretical Justice – the tax burden should be proportionate to the taxpayers’ ability to pay.
3. Administrative Feasibility – Tax laws must be capable of effective and efficient enforcement. The tax
system must be simple enough that stakeholders understand who and how taxes are assessed, collected
and complied with, what is being taxed, and how tax burden affects them. Complicated tax rules makes
harder for government to monitor and enforce tax collections.

Inherent Powers of the State

These powers of the state are natural, inseparable, and inherent (fundamental) to every government. Once a
government is established, the exercise of these powers by the government is presumed understood and
acknowledged by the people even in the absence of an express grant of power in the constitution.

1. POLICE POWER – the State enacts laws to protect the general well-being of the people. It restraints and
regulates the use of liberty and property

2. TAXATION POWER – The State enforces proportional contribution from its subjects to sustain itself. It
raises revenue to defray the necessary expenditures of the government.

3. EMINENT DOMAIN – The State takes private property for public use after paying just compensation (fair
market value of the property at the time it is taken).

Similarities of the three powers of the State.

1. All are necessary attributes of the sovereignty.
2. All are inherent to the State.
3. All are legislative in nature and character
4. All are ways in which the State interferes with private rights and properties.
5. They exist independently of the constitution although the conditions for their exercise may be prescribed
by the constitution.
6. They presuppose an equivalent form of compensation received, directly or indirectly, by the persons
affected by the exercise of the power

Comparison of the three powers of the State

Taxation Police Power Eminent Domain
Government and private
Authority Government Government
utilities
To make and implement To take private property for
Nature To raise government funds
laws for general welfare public use
For the support of the To protect the general
Purpose Public use
government welfare of the people
Person Community or class of Community or class of
Owner of the property
affected individuals individuals
No imposition (owner is paid
Amount of No limit (tax is based on Limited (to cover cost of
equivalent to the fair value of
imposition government needs) regulation)
the property)

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 Importance More important Most important Important
Plenary, comprehensive, General power to make and A power to take private
Scope
supreme implement law property for public use
No transfer of title(just a
Contribution becomes part There is a transfer of title to
Effect restraint on the injurious use
of public fund property
of property
No direct and immediate
In form of protection and benefit but may arise from
Benefits Market value of the property
benefits received from the maintenance of a
Received taken
government healthy economic standard
of society
Constitutional and Inherent Public interest and due Public purpose and just
Limitation
Limitations process compensation
Relationship Inferior to the “non- Superior to the “non- Superior to the “non-
With the impairment clause” of the impairment clause” of the impairment clause” of the
constitution constitution constitution constitution

Theory of Taxation

The power of taxation is founded on the theory that a system of government is necessary or indispensable
to every society (Necessity Theory). For the government to succeed in preserving the State’s sovereignty, do
public improvement for the enjoyment of the citizenry, provide protection to the State’s territory, a system of
funding is necessary. The government cannot continue to perform its basic function of serving and protecting
the people without means of paying its expenses. Thus, the state has the right to compel all its citizens and
property within its limits to contribute. Taxes are the lifeblood of government and their prompt and certain
availability is an imperious need. (Lifeblood Doctrine).

Implications of the LIFEBLOOD DOCTRINE

1. Tax is imposed even in the absence of a constitutional grant.
2. “No estoppel against the government”, meaning the state cannot be prevented from collecting taxes by
the neglect of its agents and erroneous application and enforcement of law by public officers.
3. The courts are not allowed to interfere with the collection of taxes. Collection of taxes cannot be enjoined
(stopped) by injunction/restriction.
4. Taxes could not be the subject of compensation or set-off since claim for taxes is not a debt or contract.
5. The government reserves the right to choose the objects (subjects) of taxation. Only Congress has the
right to select.
6. Claims for tax exemption are construed against taxpayers.
7. A valid tax may result in the destruction of the taxpayer’s property.
Example. Imposition of custom tax on illegally imported pork (doubled dead) and eventually confiscate
the items because it is dangerous to health.
8. In income taxation:
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditure and prepayments is not allowed as it effectively defers the collection
of income tax.
c. A lower amount of deduction is preferred when a claimable expense is subject to a limit.
d. A higher tax base is preferred when the tax object has multiple tax bases.

Basis of Taxation

The basis of taxation is the BENEFITS RECEIVED or RECIPROCITY THEORY. The government
provides benefits to the people in the form of public services in the forms of free usage of public infrastructures
(roads, bridges, parks, etc.), access to public health and education services, protection and security of person
and property or comfort of living in a civilized and peaceful society. Consequently, the people provides the funds
needed by the government, a symbiotic relationship. To illustrate:

Public Service
Government People
Taxes

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SCOPE of the Taxation Power

The power of taxation is the most the absolute of all government powers. It has the broadest scope
among the government powers because in the absence of limitations, it is widely regarded as comprehensive,
unlimited, plenary and supreme.
 Comprehensive – covers persons, businesses, activities, profession, rights and privileges
 Unlimited – courts cannot declare its subjects to any restrictions
 Plenary – BIR may avail of certain remedies to ensure collection of taxes
 Supreme – in so far as the selection of the subject of taxation

Limitations of Taxation

A. INHERENT
1. Territoriality of Taxation
Public services is provided within the boundaries of the State. You cannot tax foreign subjects abroad
because they are not protected or benefited from our government.
2. International Comity
A mutual courtesy or reciprocity between states for the reason of sovereign equality among states.
Embassies or consular offices of foreign governments in the Philippines are exempted from Philippine
taxation because these entities are actually extensions of the foreign land and are not subject of
Philippine taxation. When a state enters into treaties with other states. It is bound to honor and
respect the agreements as a matter of mutual courtesy. Should conflicts arise with local tax law, the
treaty agreement prevails. Property of a foreign state may not be taxed by another state due to
immunity from suit of a state.

3. Public or Governmental purpose

Tax is intended for the common good (general public) and cannot be exercised for private interest.
Proceeds of taxes collected should be used to promote the welfare of the community or the greater
portion of the population is benefited.
4. Exemption of the Government entities, agencies and instrumentalities
Government does not tax itself as this will not raise additional funds but rather just impute additional
cost. Income from essential public activities are not subject to taxation but profit oriented activities
from government owned and controlled corporations are taxable.
5. Non-delegation of the taxing power
The legislative taxing power is solely vested with Congress and cannot be delegated pursuant to
the doctrine of separation of the branches of government to ensure a system of check and balance.

Exceptions to the non- delegation of taxing power:

a. Under the Tariff and Custom code, the President is empowered to fix amount of tariffs to be
flexible to trade conditions and in consonance with the national development program of the
government.
b. Under the constitution, local governments units are allowed to impose taxes and fees to enable
them to exercise their fiscal autonomy.
c. Other cases that require expedient and effective administration and implementation of
assessment and collection of taxes such as
i. Power to value property
ii. Power to assess and collect taxes
iii. Power to perform details of computation, appraisement or adjustment

B. CONSTITUTIONAL
1. Due process of law
No one should be deprived of his life, liberty or property without the process of law or notice of hearing.
Tax laws should not be harsh, oppressive or confiscatory. An assessment without legal basis violates
the requirement of due process. The law established procedures which must be adhered to in making
assessments and in enforcing collections.
2. Equal protection of the law
All persons subject to legislation shall be treated alike under similar circumstances and conditions
both in the privileges conferred and liabilities imposed. Congress may group persons or properties
to be taxed and it is sufficient if all members on the same c lass are subject to the same rate and the
tax is administered impartially upon them.
3. Uniformity rule in taxation
It requires the uniform and equitable application and operation, without discrimination, of the tax in
every place where the subject of the tax is found. Taxpayers should be classified according to
commonality in attributes and the tax classification to be adopted should be based on substantial
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 distinction. Each class is taxed differently but taxpayers falling under the same class are taxed the
same.
4. Progressive system of taxation
Tax rates increases as the tax base increases or it is based on the taxpayer’s ability to pay.
Progressive tax system aids in an equitable distribution of wealth to society by taxing the rich more
than the poor.
5. Non-imprisonment for non-payment of debt or poll tax
No one shall be imprisoned because of his poverty, or for inability to pay debt acquired in good faith.
The constitutional guarantee for of non-imprisonment for non-payment of poll tax applies only to the
basic community tax of five pesos (P5.00)
6. Non-impairment of obligation and contract
The government should not set aside its obligations from contracts by the exercise of its taxation
powers. Tax exemptions under contract should be honored and should not be cancelled by a
unilateral government action.
7. Free worship rule
The free exercise and enjoyment of religious profession and worship, without discrimination or
preference, shall forever be allowed. The properties and revenues of religious institutions such as
tithes or offerings are not subject to tax. However, income from properties or activities of religious
institutions that are proprietary or commercial in nature shall be taxable.
8. Exemption of religious or charitable entities, non-profit cemeteries, churches, mosque from property taxes
Exemption from real property tax applies for properties actually, directly and exclusively use for
charitable, religious and educational purposes.
9. Non-appropriation of public funds of property for the benefit of any church, sect or system of religion
No public money or property shall be appropriated, applied, paid or employed for the use, benefit and
support of any church, denomination, sectarian denomination or system of religion. This limitation
intends to highlight the separation of the state and religion. However, compensation of priests, imams,
or religious ministers working with the military, penal institutions, orphanages are not considered
religious appropriations.
10. Exemption from taxes of the revenues and assets of non-stock educational institutions
All revenues and assets of non-profit, non-stock educational institutions used actually, directly and
exclusively for educational purposes shall be exempt from taxes and duties.
11. Concurrence of a majority of all members of Congress for the passage of law granting tax exemption
Tax exemption law counters against the lifeblood doctrine as it deprives the government of revenues.
No law granting any tax exemption shall be passed without the concurrence of a majority of all
members of Congress voting separately.
12. Non-diversification of tax collection
Tax collections should be used only for public purposes and never be diversified for private use.
13. Non-delegation of the power of taxation
The principle of checks and balances requires that taxation power as part of lawmaking be vested
exclusively with Congress. However, delegation may be made on matters involving the expedient
and effective administration and implementation of assessment and collection of taxes.
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
All cases involving taxes can be raised to and finally decided by the Supreme Court of the Philippines
15. The requirement that appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives
Laws that add income to the national treasury and those that allows spending therein must originate
from the House of Representative while Senate may concur with amendments
16. The delegation of taxing power to local government units
Each local government unit shall exercise the power to create its own source of revenue and shall
have a just share in the national taxes.

Aspects / Phases / Stages of Taxation

1. Levy – enactment or imposition of a tax law by Congress (legislative function). Matters of legislative
discretion in the exercise of taxation include
a. Determining the object of taxation
b. Setting the tax rate or amount to be collected
c. Determining the purpose for the levy which must be public use
d. Kind of tax to be imposed
e. Apportionment of the tax between national and local government
f. Situs of taxation
g. Method of collection
2. Assessment – determination of the correct amount of applicable tax (executive function)
3. Collection of the tax levied (executive/administrative function – BIR)
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SITUS or Place of Taxation
- The tax jurisdiction that has the power to levy taxes upon the tax object. It could also answer the
question “who has the power to impose and collect taxes on certain tax objects?’
- Factors to consider in determining situs of taxation are
 Subject matter (person, property or activity)
 Nature of tax
 Citizenship
 Residence of the taxpayer
 Source of income
 Place of business, occupation or excise being taxed.

a. Business tax – at the place where the business is conducted.

A taxpayer residing in Cabagan has a travel agency in Tuguegarao, a hotel in Manila and Leisure
Park in Japan.
The Business tax on the travel agency is paid in Tuguegarao, business tax on hotel in Manila and
business tax on the Leisure Park in Japan is exempted because it is outside the tax
jurisdiction (Philippines).

b. Income tax on services – taxed where they are rendered

An USL employee is to remit his income tax in Tuguegarao even if he if from Tuao.

c. Income tax on sale of goods – the gain on sale is taxed in the place of sale
Merchants doing trading business in Gamu is to pay his income tax and business tax in Gamu.

d. Property tax – where the properties are located

Taxes on a property located in Iguig will be paid in Iguig even if the taxpayer resides in Buguey.

e. Personal or Poll tax – persons are taxed at their place of residence

If the taxpayer permanently resides in Enrile, even if he works in Tuguegarao, he is to pay his poll
tax in Enrile.

DOUBLE TAXATION
It occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing or object.
Direct double taxation means taxing twice
a. By the same taxing authority, jurisdiction or taxing district
b. For the same purpose of tax
c. Same type of tax – same subject or object
d. In the same year or taxing period
e. Same kind or character of the tax.

How can double taxation be minimized?

a. Provision of tax exemption
b. Allowing foreign tax credit (deduction for taxes paid abroad)
c. Allowing reciprocal tax treatment between home country and a foreign country
d. Entering into treaties or bilateral agreements

Escapes from Taxation or means of avoiding or minimizing tax burden

1. Those that do not reduce revenue collection of the government
a. Shifting – a transfer of the tax burden by the original payer or the one on whom the tax was assessed
or imposed to someone else.
b. Capitalization – the reduction in the selling price of income-producing property by an amount equal to
the capitalized value of future taxes that may be paid by the purchaser.
c. Transformation – a method by which the manufacturer or producer upon whom the tax is imposed pays
the tax and strives to recover such expenses through lower production cost without sacrificing the
quality of his product. This is resorted to because of his fear to loss his market if he will add tax to the
selling price.

2. Those that result in loss of revenue to the government

d. tax evasion (tax dodging) – the fraudulent or forbidden schemes or devices designed to lessen or
defeat taxes.
e. tax avoidance (tax minimization) – the exploitation by the taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property or income in order to reduce tax liability.
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 f. tax exemption (tax holiday) – the grant of immunity to particular persons or corporations or to a
particular class from a tax which persons and corporations generally within the same state or taxing
district are obliged to pay. It is an immunity or privilege; a freedom from a financial charge or burden to
which others are subjected
.
Kinds of exemption
 constitutional – immunities emanating from the constitution
 statutory – immunities emanating from legislation
 express – exemptions expressly granted by stature
 implied – deemed exempt as they fall outside the scope of taxing provision itself
 total – absolute immunity
 partial – collection of a part is dispensed with

g. tax amnesty – an immunity from all criminal and civil obligations arising from non-payment of taxes. A
general pardon given to all taxpayers which applies only to past periods.
h. tax condonation (tax holiday) – forgiveness sof the tax obligation of a certain taxpayer under certain
justifiable grounds

Kinds of Taxpayer
a. Individuals
b. Estate
c. Partnership
d. Corporation

REFERENCES

Textbooks

1. Banggawan, Rex (2019) Income Taxation, Real Excellence Publishing

2. Ampongan, O. (2019), CPA Reviewer in Taxation, Arts Review Center, Inc.
3. Tabag, E. (2018), Income Taxation, Maxcore Publishing House.
4. Reyes, Virgilio (2019) Income Taxation

Online Reference

1. TRAIN Law (2020) Income Tax Tables in the Philippines. https://www.pinoymoneytalk.com/new-income-

tax-table-rates-philippines/
2. TRAIN Tax Law: Primer and BIR Sample Computation. https://www.pinoymoneytalk.com/bir-tax-law-
philippines/
3. Income Taxation https://www.bir.gov.ph/index.php/tax-information/income-tax.html
4. www.bir.gov.ph

*** END of LESSON 1***

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