General Principles

of Taxation
Tax 111 – Income Taxation
Ferdinand C. Importado
CPA, MBA
What are taxes?

Taxes are enforced proportional

contributions from persons and properties
levied by the lawmaking body of the
government by virtue of its sovereignty for
the support of the government and public
need.
Elements of a tax

• Enforced contribution
• Generally payable in money
• Proportionate in character
• Levied on persons, properties, or the
exercise of a right or privilege
• Levied by the state which has jurisdiction
over the subject or object of taxation
• Levied by the lawmaking body of the state
• Levied for public purpose
Levied for public purpose
examples

• Construction of roads and bridges.

• Pensions to retired government
employees and their widow and children.
• Assistance to victims of calamities
• Social welfare and healthcare projects.
As to subject matter or object

• Personal, poll or capitation tax – tax of a

fixed amount imposed on individuals
(citizens or aliens), residing within a
specified territory without regard to their
property or occupation in which they may
be engaged.
• Example: Community tax
As to subject matter or object

• Property tax – tax imposed on property

(real or personal), in proportion either to its
value or in accordance with some other
reasonable method of apportionment.
• Example: Real property tax
As to subject matter or object

• Excise of privilege tax – tax imposed

upon the:
– Performance of an act
– Enjoyment of a privilege
– Engaging in an occupation
• Example: Income tax
As to who bears the burden

• Direct tax – tax that is demanded from the

person who also shoulders the burden of
the tax. (e.g. Income tax, estate tax,
donor’s tax)
• Indirect tax – tax demanded from one
person in the expectation and intention
that he shall indemnify himself at the
expense of the others. (e.g. VAT,
percentage tax)
As to determination of amount

• Specific tax – tax of a fixed amount

imposed by the head or number, or by
some standard of weight or measurement;
it requires no assessment other than a
listing of classification of the subjects to be
taxed. (e.g. Excise tax on distilled spirits,
cigars and cigarettes)
As to determination of amount

• Ad valorem tax – tax of a fixed proportion

of the value of the property with respect to
which the tax is assessed; it requires the
intervention of assessors or appraisers to
estimate the value of such property before
the amount due from each taxpayer can
be determined. (e.g. Real estate tax)
As to purpose

• General, fiscal or revenue tax – tax that

is imposed solely to raise revenue for
government expenditures. (e.g. Income
tax, VAT)
• Special or regulatory tax – tax imposed
for a special purpose. (e.g. Sugar
adjustment taxes, Oil price stabilization
fund)
As to authority imposing

• National – tax imposed by the national

government. (e.g. Internal revenue taxes,
customs duties)
• Municipal or local – tax imposed by
municipal agencies. (e.g. Sand and gravel
tax, occupation tax)
As to graduation or rate

• Proportional – tax based on a fixed

percentage of the amount of the property,
receipts or other basis to be taxed. (e.g. VAT)
• Progressive – tax the rate of which
increases as the tax base or bracket
increases. (e.g. Income tax, estate tax,
donor’s tax)
• Regressive – tax the rate of which
decreases as the tax base or bracket
increases.
Inherent powers

• Eminent domain – the power of the state

to take private property for public use upon
paying to the owner a just compensation.
• Police power – the power of the state to
enact such laws in relation to persons and
properties as may promote public health,
public morals, public safety, and the
general welfare of the people.
• Taxation
Distinctions
Eminent Police
Taxation
domain power
Liberty and
Regulates Property Property
property
Public
Exercised by Government Government
companies
Property taken Public use Destroyed Public use
Concrete, full Concrete, full
Compensation and fair Intangible and fair
equivalent equivalent
Limit Market value Cost of license No limit
Terminologies
• Permit or license fee – charge imposed
under the police power for purposes of
regulation.
• Toll – a sum of money for the use of
something, generally applied to the
consideration which is paid for the use of a
road, bridge of a public nature.
• Special assessment - an enforced
proportional contribution from owners of
lands for special benefits resulting from public
improvements.
Permit versus tax
Permit or license
Tax
fee
Levied by virtue of Police power Taxation
Purpose Regulation Revenue generation
Limit Cost of regulation No limit
Persons, properties,
Legitimate business occupation, exercise
Imposed on
or occupation of rights or privilege
legal or not
Effect of non- Does not render
Becomes illegal
payment illegal
Toll versus tax
Toll Tax
Demand of Proprietorship Sovereignty
Compensation for
Support of
Purpose the use of property
government
or improvements
Government or
Imposed by Government
private individuals
Tax versus special assessment
Special
Tax
assessment
Application General Specific
Persons, properties,
Levied on occupation, exercise Land
of rights or privilege
Necessity and
Basis Wholly on benefits
partially on benefits
Debt versus tax
Debt Tax
Contract, express or
Source Law
implied
Assignable Yes No
Payable Money and in kind Money
Non-payment No imprisonment Imprisonment
Tax versus customs duties
Tax Customs duties
Persons, properties, Commodities
Imposed on occupation, exercise imported or
of rights or privilege exported
• Taxes include customs duties.
• An act granting exemptions from all taxes of any kind and
nature carries with it exemptions from customs duties.
Double taxation

Direct duplicate or direct double taxation

• Taxing twice for the:
– Same purpose
– Same taxing authority
– Same jurisdiction
– Same period
– Some of the property in the same territory
Revenue

• Refers to all funds or income derived by the

government, whether from tax or any other
source.
– Grants received from other government
– Donations from non-government sources
– Loans from other entities (private and gov’t entity)
– Administrative revenues (fines, penalties,
forfeitures)
– Commercial revenues (GOCC)
– Tax (internal revenue and customs duties)
Situs of taxation

• This shall mean the place of taxation.

• The state which has jurisdiction to tax the
person, property or transactions may
rightfully levy and collect the tax.
Situs of taxation
Object Situs of taxation
Business, occupation, Place of business, occupation or
transaction transaction
Real and tangible
Location of property
personal property
Domicile of the owner unless the
Intangible personal
property has acquired a business status
property
in another jurisdiction
Place where earned, citizenship or
Income
domicile of the owner
Gratuitous transfer of Residence or citizenship of the taxpayer
property or location of the property
Escape from taxation

• Means or methods by which the taxpayer

saves the tax or escapes the burden of tax
payment.
• It may or not result to a loss of revenue to
the government.
• Legal or illegal mean
Forms of escape from taxation

• Do not reduce revenue collection of the

government
– Shifting
– Capitalization
– Transformation
• Result in loss of revenue of the government
– Tax evasion
– Tax avoidance
– Exemption from taxation
Do not reduce government
revenue

• Shifting – transfer of tax burden by one

on whom the tax is assessed to another.
• Capitalization – 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.
Do not reduce government
revenue

• 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 costs without sacrificing quality
of the product.
Result in loss to government
revenue
• Tax evasion – fraudulent or forbidden
schemes or devices designed to lessen or
defeat taxes.
• Tax avoidance – exploitation by the
taxpayer of the legally permissible
alternative tax rates or methods of
assessing taxable property or income in
order to reduce tax liability.
Result in loss to government
revenue

• Exemption from taxation – grant of

immunity to particular persons or
corporations or to persons or corporations
of a particular class from a tax which
persons and corporations generally within
the same taxing district are obliged to pay.
Tax amnesty

• Immunity from all criminal and civil

obligations arising from non-payment of
taxes.
• General pardon given to all taxpayers.
• It applies only to past periods (retroactive
application).
Amnesty versus Exemption
Tax amnesty Tax exemption
Civil and
Civil liability
Immunity criminal
only
obligations
Application Retroactive Prospective
Set-off or compensation

• Taxes are not subject to set-off or

compensation.
• A person cannot refuse to pay tax on the
ground that the government owes him an
amount equal to or greater than the tax
being collected.
Taxpayer’s suit

• A taxpayer has a sufficient personality and

interest to seek judicial assistance with a
view of restraining what he believes to be
an attempt to unlawfully disburse public
funds.