TAXATION 1 – INCOME TAXATION 2020

Chapter
1

GENERAL PRINCIPLES AND CONCEPTS OF TAXATION

INHERENT POWERS OF THE STATE The sovereign State is born and will exist
continuously with essential powers necessary for its survival. These powers are called
“inherent powers” because they exist as the central force in order that a government can
command, maintain peace and order, and survive, irrespective of any constitutional provision.

The three inherent powers of the Sovereign State are summarized as

follows:

• Police Power – The power to protect citizens and provide for safety and welfare of
society.
• Eminent Domain Power – The power to take private property (with just compensation)
for public use.
• Taxation Power – The power to enforce contributions to support the government, and
other inherent powers of the State.

TAXATION DEFINED

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.

As a power, it refers to the inherent power of a state, coextensive with sovereignty to

demand contributions for public purposes to support the government.

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

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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 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.
To be exempted from taxation, the real property must be exclusively used for religious,
educational and charitable purposes.

No Imprisonment for Non-payment of Poll Tax Art. III, Section 20 of the Philippine
Constitution provides that” no person shall be imprisoned for debt or non-payment of a poll
tax.”

The term “poll tax” means a tax imposed on a person as a resident within a territory of the
taxing authority without regard to his property, business or occupation. A good example of a
poll tax is community tax.

It is to be noted that the prohibition of imprisonment applies only to the non-payment of poll
tax. Consequently, imprisonment for non-payment of other taxes (not poll tax in nature) or
imposition of fine would not be contrary to the Constitution.

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. 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.

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.

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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 indispensible partnership between the people and the government.

PURPOSES OF TAXATION The following are the

objectives in the exercise of taxing power:

1. Revenue purpose 2.
Regulatory purpose 3.
Compensatory purpose

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. b. Personal
properties – includes movable properties such as car and other personal belongings.
c. Tangible properties – that which may be felt or touch 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.

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.

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 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.

To avoid injustice and unfairness, doubts as to whether double taxation has been imposed
should be resolved in favour of the taxpayer.

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.
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How to Counteract Indirect Double Taxation? Indirect double

taxation may be counteracted 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.

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.

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.

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.

Tax avoidance is valid if used by the taxpayer in good faith. The law does not forbid it and
it does not constitute tax fraud.
Tax Option Taxpayers may choose to pay lower tax rate in some transactions as
permitted by Tax Laws.

For instance, a taxpayer who sells an investment in stocks directly to the buyer may opt to
pay 5% to 10% tax based on capital gains, but if he opted to sell the investments in stocks
through stock market, he is required to pay a tax of 1⁄2 of 1% based on the selling price.

Shifting Shifting, basically, is the transfer of tax burden to another; the imposition of tax is
transferred from the statutory tax payer to another without violating the law. This is best
exemplified by indirect taxes like the value-added tax (VAT).

Transformation The producer absorbs the payment of tax to reduce prices and to maintain
market share. He recovers his additional tax expense by improving the process of production.
The tax, therefore, is transformed into a gain through the medium of production.

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Exemption from Taxation Exemption from taxation, denotes a grant of immunity, expressed
or implied, to a particular person, corporation, or to persons or corporation of a particular
class, from a tax upon property or an excise which persons and corporations generally within
the same taxing district are obliged to pay.

Tax exemptions are generally granted in the basis of (a) reciprocity, (b) public policy and, (c)
contracts.

Tax exemptions, including its equivalent provisions such as deductions, tax amnesty, and tax
condonations shall be governed by the following principles:

1. They are not presumed. 2. When granted, they are strictly constructed against the
taxpayer. 3. They are highly disfavored and may almost be said “to be directly contrary to
the intention of
 tax
laws.”

Hence, he who claims tax exemptions must be able to justify his claim
or right.

Essential Characteristics of
Taxes The essential
characteristics of tax are:

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 collecting
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;
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; 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.

Classification 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).

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);

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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 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 tax
payer can be determined (e.g., Real Estate Tax, Custom Duties and Excise Tax on
fermented liquors, cigars, cigarettes, 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.

4. As to Who Bears the

Burden:
 a. Direct. These taxes are non-transferrable. They are demanded from persons who
are bound by law to pay the tax. The liability for the payment of tax as well as the
burden of the tax falls on the same person (e.g., Community Tax, Income Tax,
Transfer taxes, Traveller’s tax and Corporate Income Tax). b. Indirect. These taxes are
transferrable. The liability for the payment of tax falls on one person
but the burden thereof can be shifted or passed to another. Indirect taxes 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, Custom Duties, Amusement
tax, Excise tax on specific 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:
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 are: 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). 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).

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 c. Regressive
Rate
The rate of the tax decreases as the tax base or bracket increases. There is no
regressive tax in the Philippines. Note: Regressive tax rate is not the same with
“regressive taxation system” which exist when there are more indirect taxes than direct
taxes putting the burden more on the low-income sector of the population for, they buy
more consumable goods on which indirect taxes are collected. d. Digressive Rate
A fixed rate is imposed on a certain amount but diminishes gradually on sums below it.
In digressive rate, the tax rate is arbitrary because the increase in tax rate is not
proportionate to the increase of tax base. e. Mixed Tax
A system that uses all or a combination of the different taxes based
on rates.

OTHER
CHARGES/FEES

1. Penalty 2.
Revenue 3. Debt 4.
Toll 5. License fee 6.
Customs duties 7.
Subsidy 8. Tariff 9.
Margin fee 10.
Special Assessment

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.

Nature of Tax Laws The Philippine Internal Revenue laws are generally civil in nature; they
are neither political nor penal in nature.

Although tax laws deal with the fundamental relationship of people with the government,
basically they are not political in nature. They remain effective even if foreign invaders occupy
our country. They are deemed to be the laws of the occupied territory and not of the
occupying enemy. Hence, it is valid and legal that income tax returns shall be filed and paid
by the inhabitants even if foreign invaders occupy our country.

Even if there are some penalties provided for violation of tax laws, they are not penal in
nature. The internal revenue law provides for some penalties for tax delinquencies only to
effect timely payments of taxes or punishes tax evasion for neglect of duty by those subjects
of taxation.

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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 Memorandum Orders; 7. BIR Rulings; 8.
Judicial Decisions; and 9. Local Tax Ordinances

BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum Orders

These are administrative ruling 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 are of authority.

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.
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 interpretation are not conclusive and
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.

A BIR Ruling is first published in an Internal Revenue Bulletin and later transferred to the
appropriate Cumulative Bulletin.

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.

By the nature of its jurisdiction, the decision of the Court of Tax Appeals are still appealable
to the Court of Appeals and finally to the Supreme Court. The decision of the Supreme Court
on any matter is final and executory.

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.

Chapter 1 – General Principles and Concepts of

Taxation