INCOME TAXATION

TAX 411

CREDIT TO MR. JISRYL H. RAZ, CPA

 PHILIPPINE TAXATION SYSTEM
Protection

GOVERN CONFLICT
------------ PEOPLE
MENT REMEDIES
- Assessment
- File and Paytaxes
- Collection
- Protest the
assessment

- Enforcement of Taxes: Taxes - Claim for Tax

Refund/Credit
1. Summary Proceedings
2. Judicial Proceedings

2
 LESSON 1. Principles of
taxation and its remedies
A. Nature, scope, classification
and essential characteristics
General Principles
Nature
a.Plenary – full and complete in all respect
b.Comprehensive – it covers persons, businesses,
activities, professions, rights and privileges.
c.Supreme – it is supreme ONLY insofar as the selection
of the subject of taxation is concerned
d.Not Absolute – it is subject to limitations
General Principles
Purpose
a. Primarily, to raise revenue
b. Regulatory - To regulate (inflation, economic and
social stability, social control, etc.)
c. Compensatory - To compensate the benefits
provided by the government to the people
General Principles
Characteristics of Taxation (ILS)
a.Inherent power of the state.
b.Exclusively lodged with the legislative body
c.Subject to inherent and constitutional
limitations
General Principles
Theories of Taxation
1.Necessity Theory (Theory of Taxation) –
the power to tax is an attribute of
sovereignty emanating from necessity
(national defense, health, education, public
facilities, etc.).
General Principles

2.Lifeblood Theory (Importance of

Taxation) – without taxes, the
government would be paralyzed for lack
of the motive power to activate and
operate it.
General Principles

3. Benefits – Protection Theory/ Reciprocal

Duties (Basis of Taxation) – there is a
symbiotic relationship between the State
and the citizens whereby in exchange of the
protection and benefits that the citizens
received from the State, taxes are paid.
General Principles
Aspects of Taxation (shared by both executive
and legislative body)

1.Levy – the imposition or making of tax laws

2.Assessment – similar to audit
3.Collection – enforcement of tax
General Principles
Note:
1.Levy is often called as tax legislation or tax
policy.
2.Assessment and collection are collectively
termed as tax administration.
3.Levy and assessment comprise the impact of
taxation, while tax collection comprises the
incidence of taxation.
General Principles

4. An impact of taxation is a point on

which tax is originally imposed.
5. An incident of taxation is a point on
which the tax burden finally rests or
settles down.
B. Principles of a sound tax
system
General Principles
1. Principles or Canons of a Sound Taxation System (FEA)

a. Fiscal Adequacy – sufficiency to meet government

expenditures and other public needs (Government Budget
Balance). This is in consonance of the Lifeblood Theory.
i. Budget Deficit =
Government Revenues < Government Expenditures
ii. Budget Surplus =
Government Revenues > Government Expenditures
General Principles
b. Equality or Theoretical Justice – based on the taxpayer’s
ability to pay; must be progressive

c. Administrative Feasibility – capability of being

effectively enforced. Tax laws should not obstruct business
growth and economic development.
C. Limitations of the power
of taxation
General Principles
5. Limitations in Taxation Power
a. Inherent Limitations (PENTI)
a.1. Public purpose
a.2. Exemption of the Government
a.3. Non-delegability of the power to tax
a.4. Territoriality
a.5. International Comity
General Principles
b. Constitutional Limitations
b.1. Due process clause
b.2. Equal protection clause
b.3. Freedom of speech and of the press
b.4. Non-impairment of contracts
b.5. Rule requiring that appropriations,
revenue and tariff bills shall originate
exclusively from the House of
Represenatatives (Congress)
 General Principles
b.6. Uniformity, equality, and progressivity of taxation
b.7. Tax exemption of the properties actually,
directly and exclusively used for religious,
charitable and educational purposes.
b.8. Voting requirement (2/3) in connection with the
legislative grant of tax exemption
b.9. Non-impairment of the jurisdiction of the Supreme
Court in tax cases
 General Principles
b.10. Exemption from taxes of the revenues and
assets of educational institutions, including
grants, endowments, donations and
contributions

b.11. Power of the Presidentto veto any particular

item (item veto) or items in an appropriation,
revenue or tariff bill (pocket veto).
General Principles
b.12. Necessity of an appropriation before money
may be paid out of the public treasury

b.13. Non-appropriation of public money or

property for the use, benefit or support of
any sect, church or system of religion
D. DIFFERENCES AMONG THE 3
POWERS OF THE GOVERNMENT
 GOVERNMENT

EMINENT
POLICE TAXATION
DOMAIN
POWER POWER
POWER
Comparisons
POLICE TAXATION EMINENT DOMAIN

Power to MAKE and Power to ENFORCE Power to TAKE private

IMPLEMENT laws for contribution to raise property for public use with
the general welfare government funds just compensation

Plenary, comprehensive,
Merely to take private
Broader in application and supreme BUT NOT
property
ABSOLUTE

Property is taken or
Money is taken to support Property is taken for public
destroyed to promote
the government use
general welfare

Cannot be delegated, if
delegated, it should be to
Can be expressly Can be expressly
the legislative department
delegated delegated
of the LGU (e.g. to make
ordinances)
Comparisons
POLICE TAXATION EMINENT DOMAIN
Limited to the cost of Generally, NO limit on No imposition as to
regulation, license amount amount, instead, it is the
and other necessary Government which is to
expense compensate the property
taken.
Relatively FREE from Subject to Superior to and may
Constitutional Constitutional and override Constitutional
limitations Inherent limitations impairment provision
Superior to Non- Inferior to Non-
Impairment Clause Impairment Clause
E. SITUS/ PLACE OF
TAXATION
F. Double taxation (direct and
indirect)
General Principles
Double Taxation
It is taxing the same property twice when it should
be taxed once.

Kinds of Double Taxation:

1. Direct Duplicate Taxation – double taxation in the
objectionable or prohibited sense; not allowed in
the Philippines. This constitutes a violation of
substantive due process.
General Principles
Elements of Direct Duplicate Taxation:
1.Same property or subject matter is taxed
twice
2.Same purpose
3.Same taxing authority
4.Same taxing period
5.Same kind or character of tax
General Principles
2. Indirect Duplicate Taxation – legal/permissible.
The absence of one or more of the above-
mentioned elements.

This does not necessarily violate the equal

protection of laws.
General Principles
How to avoid Double taxation?

1.Tax Credits
2.Tax Refund
3.Specific provisions of the NIRC which allows tax
minimization like vanishing deductions, input
taxes, etc.
 F. Different Taxes (essential
characteristics, classification, tax
vs. other charges (toll, special
assessment, license fee, debt)
Concept of Tax
1. It is an enforced proportional contribution
from the persons and property levied by the
law-making body of the State.

2. Taxation vs. Tax

a. Taxation is the process or means of imposing and
enforcing contributions.
b. Tax is the enforced contribution, itself, which
generally payable in money.
Concept of Tax
Characteristics of Taxes
1.Forced charge
2.Generally payable in money
3.Exclusively levied by the legislative body
4.Assessed in accordance with some reasonable rule
of apportionment (ability-to-pay principle)
5.Imposed by the State within its jurisdiction
6.Levied for public purpose
Concept of Tax
Classification of Taxes
1. As to subject matter:
a.Personal tax – imposed upon persons of certain class with
fixed amount (e.g. Community tax or poll tax)
b.Property tax – assessed on property of certain class (e.g.
Real Property tax)
c.Excise tax – imposed on the exercise of privilege (e.g.
income tax, donor’s tax, estate tax, etc.)
d.Custom duties – charged upon the commodities being
imprted into or exported from a country (e.g. tariffs)
Concept of Tax
2. As to burden:
a. Direct tax – both incidence or liability for the payment
of tax as well as the impact or burden of the tax falls
on the same person (e.g. income tax)

b. Indirect tax – the incidence or liability for the payment

of tax falls on one person but the impact or burden of
the tax falls on another person (e.g. VAT)
Concept of Tax

3. As to purpose
a. General tax – levied for the general or
ordinary purposes of the government

b. Special tax – levied for special purpose

Concept of Tax
4. As to measure of application
a. Specific tax – imposes a specific sum by the head
or number or by some standard of weight or
measurement (e.g. excise tax on cigarettes)

b. Ad Valorem tax – tax upon the value of the article

or thing subject to taxation (e.g. VAT of 12% regardless
of the value of sales)
Concept of Tax
5. As to taxing authority
a. National tax – levied by the National
Government (e.g. income tax, business
taxes, transfer taxes)

b. Local tax – imposed by the Local Government

(e.g. Poll tax, real property taxes)
Concept of Tax
6. As to rate
a. Progressive tax – rate or amount of tax increases as the
amount of income increases (e.g.
normal/tabular/schedular tax of 5% - 32%, tabular tax
for donor’s tax and estate tax)

b. Regressive tax – rate dcreases as the amount of income to

be taxed increases (not applicable in the Philippines)

c. Proportionate tax – based on fixed proportion or rate of the

value of the property assessed (e.g. VAT of 12%)
G. Tax evasion vs. tax
avoidance
Escape from Taxation
1. Tax Avoidance (Tax Planning) – legal and permissible
means
a. Shifting – the process by which the tax burden is
transferred from the statutory taxpayer to another
without violating the law.

b.Transformation – the manufacturer or producer pays

the tax imposed upon him and endeavors to recoup
himself by improving his process of production, thereby
turning out his units of production at a lower cost.
Escape from Taxation
c. Capitalization – a mere increase in the value of the property
is not an income but merely an unrealized increase in
capital.

d. Tax-exemption – a grant of immunity to a particular persons

or corporations from the obligation to pay taxes

2. Tax Evasion (Tax Dodging) – the use of illegal or fraudulent

means to defeat or lessen the payment of tax