Introduction to Taxation

Florendo Dauz Jr., CPA, MBA, MSA

Taxation defined
Taxation is the inherent power of the sovereign,
exercised through the legislature, to impose
burdens upon subjects and objects within its
jurisdiction for the purpose of raising
revenues to carry out the legitimate objects of
government.
Taxes
Taxes are the enforced proportional
contributions from persons and property
levied by the law-making body of the State by
virtue of its sovereignty for the support of the
government and all public needs.
Inherent Powers of the State
• Taxation power is the power of the State to
enforce proportional contribution from its
subjects to sustain itself.
• Police power is the general power of the State
to enact laws to protect the well-being of the
people
• Eminent domain is the power of the State to
take private property for public use after
paying just compensation.
Theory of Taxation
• Lifeblood Theory
- Without revenue raised from
taxation, the government
will not survive, resulting in
detriment to society
- Revenues should be raised to defray
expenditures for public purposes
Basis of Taxation

Benefit-received principle/ theory

• This principle serves as the basis of taxation
and is founded on the reciprocal duties of
protection and support between the State and
its inhabitants. Also called “symbiotic
relation” between the State and its citizens.
Basis of Taxation (Continued)
• In return for his contribution, the taxpayer
receives the general advantages and protection
which the government affords the taxpayer and
his property. One is compensation or
consideration for the other; protection for
support and support for protection.
• However, it does not mean that only those who
are able to and do pay taxes can enjoy the
privileges and protection given to a citizen by the
government.
Essential elements of a tax
1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a
right or privilege.
5. It is levied by the State which has jurisdiction over
the subject or object of taxation.
6. It is levied by the law-making body of the State.
7. It is levied for public purpose or purposes.
Purposes of taxation
1. Revenue or fiscal: The primary purpose of
taxation on the part of the government is to
provide funds or property with which to
promote the general welfare and the
protection of its citizens and to enable it to
finance its multifarious activities.
Purposes of taxation
2. Non-revenue or regulatory: Taxation may also
be employed for purposes of regulation or
control. (Also called Sumptuary purpose of taxation)
a) Imposition of tariffs on imported goods to
protect local industries.
b) The adoption of progressively higher tax rates
to reduce inequalities in wealth and income.
c) The increase or decrease of taxes to prevent
inflation or ward off depression.
Philippine Taxes
A. Internal revenue taxes imposed under the
NIRC
1. Income tax
2. Transfer taxes
a. Estate Tax
b. Donor’s Tax
3. Percentage taxes/ Business Tax
a. Value Added Tax – 12%
b. Percentage Taxes – 3%
Philippine Taxes

4. Excise taxes
5. Documentary stamp tax

B. Local/Municipal Taxes
C. Tariff and Customs Duties
D. Taxes/Tax incentives under special laws
CLASSIFICATION OF TAXES
AS TO SUBJECT MATTER OR OBJECT
1. Personal, poll or capitation tax
Tax of a fixed amount imposed on persons
residing within a specified territory, whether
citizens or not, without regard to their property
or the occupation or business in which they may
be engaged, i.e. community tax.
AS TO SUBJECT MATTER OR OBJECT
2. Property tax
Tax imposed on property, real or personal, in
proportion to its value or in accordance with
some other reasonable method of
apportionment.
3. Excise tax
A charge imposed upon the performance
of an act, the enjoyment of a privilege, or the
engaging in an occupation.
AS TO WHO BEARS THE BURDEN
1. Direct tax
A direct tax is demanded from the person
who also shoulders the burden of the tax.
2. Indirect tax
A tax which the taxpayer can shift to
another.
AS TO SCOPE OF THE TAX
1. National tax
A national tax is imposed by the national
government.

2. Local tax
A local tax is imposed by municipal
corporations or local government units (LGUs).
AS TO THE DETERMINATION OF AMOUNT
1. Specific tax
A specific tax is a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or measurement. It
requires no assessment other than the listing
or classification of the objects to be taxed.
AS TO THE DETERMINATION OF AMOUNT
2. Ad valorem tax
An ad valorem tax is a 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.
AS TO GRADATION OR RATE
1. Proportional tax
Tax based on a fixed percentage of the amount of
the property receipts or other basis to be taxed.
Example: real estate tax.
2. Progressive or graduated tax
Tax the rate of which increases as the tax base or
bracket increases. Example: income tax.
3. Regressive tax
Tax the rate of which decreases as the tax base or
bracket increases. There is no such tax in the Philippines.
ASPECTS (PROCESS) OF TAXATION
1. Levying or imposition of the tax which is a
legislative act.
2. Collection of the tax levied which is
essentially administrative in character.
The first is taxation, strictly speaking, while
the second may be referred to as tax
administration. The two processes together
constitute the taxation system.
Three basic principles of a sound
tax system
1.Fiscal adequacy
It means that the sources of revenue should be
sufficient to meet the demands of public expenditures.
2. Equality or theoretical justice
It means that the tax burden should be
proportionate to the taxpayer’s ability to pay. This is the
so-called “ability to pay principle.”
3. Administrative feasibility
It means that tax laws should be capable of convenient,
just and effective administration.
The following are the inherent limitations.

• Purpose. Taxes may be levied only for public

purpose;
• Territoriality. The State may tax persons and
properties under its jurisdiction;
• International Comity. the property of a foreign State
may not be taxed by another.
• Exemption. Government agencies performing
governmental functions are exempt from taxation
• Non-delegation. The power to tax being legislative in
nature may not be delegated. (subject to exceptions)
 CONSTITUTIONAL LIMITATIONS
1. Due process of law
2. Equal protection of laws
3. Rule of uniformity and equity in taxation
4. Prohibition against imprisonment for non-
payment of poll tax
5. Prohibition against impairment of obligation of
contracts
6. Prohibition against infringement of religious
freedom
 CONSTITUTIONAL LIMITATIONS
• 7. Prohibition against appropriation of
proceeds of taxation for the use, benefit, or
support of any church
• 8. Prohibition against taxation of religious,
charitable and educational entities
• 9. Prohibition against taxation of non-
stock, non-profit educational institutions
 CONSTITUTIONAL LIMITATIONS
10. Others
a. Grant of tax exemption
b. Veto of appropriation, revenue, tariff bills by the
President
c. Non-impairment of the SC jurisdiction
d. Revenue bills shall originate exclusively from the
House of Representatives
e. Infringement of press freedom
f. Grant of franchise
 SITUS IN TAXATION
Literally, situs of taxation means place of taxation. It is the
State or political unit which has jurisdiction to impose a
particular tax
The determination of the situs of taxation depends on
various factors including the:
1. Nature of the tax;
2. Subject matter thereof (i.e. person, property, act or activity;
3. Possible protection and benefit that may accrue both to the
government and the taxpayer;
4. Residence or citizenship of the taxpayer; and
5. Source of the income.
 Double Taxation
In its strict sense, referred to as direct duplicate
taxation, double taxation means:
1. taxing twice;
2. by the same taxing authority;
3. within the same jurisdiction or taxing district;
4. for the same purpose;
5. in the same year or taxing period;
6. some of the property in the territory.
 Means of Avoiding or Minimizing
the Burden of Taxation
Six basic forms of escape from taxation
1. Shifting
2. Capitalization
3. Evasion
4. Exemption
5. Transformation
6. Avoidance
 Ways of shifting the tax burden
1. Forward shifting
When the burden of the tax is transferred from a factor of
production through factors of distribution until it finally
settles on the ultimate purchaser or consumer.
2. Backward shifting
When the burden of the tax is transferred from the consumer or
purchaser through the factors of distribution to the factor of
production.
3. Onward shifting
When the tax is shifted two or more times either forward or
backward.
 Sources of Tax Laws
1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances/ City or municipal tax codes
6. Tax treaties and international agreements
7. Special laws
8. Decisions of the Supreme Court and the Court of Tax Appeal
9. Revenue rules and regulations and administrative rulings and
opinions
 Distinction of Tax
Tax distinguished from Toll
- A tax is demand of sovereignty, while toll is demand for
proprietorship.
- A tax is paid for the use of the government’s property,
while a toll is paid for the use of another’s property.
- A tax may be imposed by the government only, while a toll
is enforced by the government or a private individual or
entity.

Tax distinguished from Penalty

- A tax is intended to raise revenue, while penalty is
designed to regulate conduct.
- A tax may be imposed by the government only while a
penalty may be imposed by the government or a private
individual.
Tax distinguished from Debt
- A tax is base on law, while a debt is based on contract.
- A tax may not be assignable, while a debt is assignable.
- A tax is generally payable in cash, while debt is payable in
cash or in kind.
- A person may be imprisoned for a non-payment of taxes,
but any person may not be imprisoned for non-payment of
debt.

Tax distinguished from other Terms

- Revenue. This refers funds or income derived by the
government whether from tax or any other source in
another sense.
- Internal Revenue. It refers to taxes imposed by the
legislature other than duties on imports and exports.
- Customs Duties. These are taxes imposed on goods
exported into a country.
TAX ADMINISTRATION
Department of Finance
The Department of Finance is the principal fiscal
and financial administrative arm of the
Philippine Government. As such, it is responsible
for the judicious and effective management of
the government’s tax program and borrowings
to achieve national development goals.
 Department of Finance
The Bureau of Internal Revenue (BIR) and the
Bureau of Customs (BOC) both of which are
under the DOF’s administrative supervision are
the agencies directly concerned with the
assessment and collection of national taxes,
duties, fees, and other charges.
 Bureau of Internal Revenue
Main functions and responsibilities the following:
a. Assessment and collection of all national internal
revenue
taxes, fees and charges;
b. Enforcement of all forfeitures, penalties and fines
connected therewith including the execution of
judgments in all cases decided in its favor by the Court
of Tax Appeals and the ordinary courts; and
c. Give effect to and administer the supervisory and police
powers conferred to it by the Tax Reform Act of 1997
and other laws.
 Bureau of Customs
Main functions and responsibilities :
a. Collect customs duties, taxes, and the corresponding
fees, charges and penalties;
b. Account for all customs revenues collected;
c. Exercise police authority for the enforcement of
tariff and customs laws;
d. Prevent and suppress smuggling, pilferage and all
other economic frauds within all ports of entry;
 Bureau of Customs
e. Supervise and control exports, imports, foreign mails,
and the clearance of vessels and aircrafts in all ports of
entry;
f. Administer all legal requirements that are appropriate;
g. Prevent and prosecute smuggling and other illegal
activities in all ports under its jurisdiction;
h. Exercise supervision and control over its constituent
units; and
i. Perform such other functions as may be provided by
law.
 POWERS AND DUTIES OF THE
BUREAU OF INTERNAL REVENUE
1. Assessment and collection of all national revenue
taxes, fees and charges;
2. Enforcement of all forfeitures, penalties, and fines
on internal revenue taxes, fees and charges;
3. Execution of judgments in all cases decided in its
favor by the Court of Tax Appeals and the ordinary
courts; and
4. Give effect and administer the supervisory and
police powers conferred to it by the Tax Code and other
laws. (Sec. 2, NIRC)
 Powers of the Commissioner on
Internal Revenue
1. To interpret tax laws and decide tax cases;
2. To obtain information, and to summon, examine
and take testimony of persons;
3. To make assessments and prescribe additional
requirements for tax administration and
enforcement;
4. To conduct inventory - taking, surveillance and to
prescribe presumptive gross sales and receipts;
5. To terminate taxable period;
 Powers of the Commissioner on
Internal Revenue
6. To prescribe real property values;
7. To inquire into bank deposit accounts;
8. To accredit and register tax agents;
9. To prescribe additional procedural or
documentary requirements; and
10. To delegate power to subordinates. (Sec. 4 to
8, NIRC)
 Powers of the Commissioner on
Internal Revenue
11. To prescribe presumptive gross sales and
receipts for a taxpayer.
12. To compromise tax liabilities of taxpayers
13. To refund or credit internal revenue taxes
14. To abate or cancel tax liabilities in certain
cases.
 Other Agencies Related to Tax
Collections or Tax Incentives
Primary source of Tax Collections:
National:
BIR
BOC
Local:
Local Government Tax Collecting unit
Tax Incentives
Board of Investments (BOI)
Philippine Economic Zone Authority (PEZA)
 Taxpayer Classification
1. Large Taxpayers – under the supervision of
the Large Taxpayer Services (LTS) of the BIR
National Office.
2. Non-large taxpayers – under the supervision
of the Revenue District Office (RDO)where
the taxpayer is situated.
 Large Taxpayers
A large taxpayer is a taxpayer, regardless of its
location in the country, which has been
classified and notified in writing by the Bureau
of Internal Revenue as one that has satisfied the
criteria for determining large taxpayers.
 Large Taxpayers
Taxpayer when it satisfies any or a combination of the following:
As to tax payment:
• Value Added Tax – Any taxpayer with net VAT paid or payable of at least
P200,000 per quarter for the preceding year;
• Excise Tax – Any taxpayer with an annual excise tax paid or payable of at
least P1 million for the preceding year;
• Income Tax – Any taxpayer with annual income tax paid or payable for at
least P1 million for the preceding year;
• Withholding Tax – Any taxpayer with annual withholding tax
payment/remittance from all types of withholding taxes of at least P1
million
• Percentage Tax – Any taxpayer with percentage taxes paid or payable of at
least P200,000 per quarter for the preceding year;
• Documentary Stamp Taxes – Any taxpayer with aggregate annual
documentary stamp taxes of at least P1 million;
 Large Taxpayers
Taxpayer when it satisfies any or a combination of the following:
As to financial condition and results of operation:
• Gross Sales/Receipts – Any taxpayer with total annual gross sales/receipts
of at least P1 billion for the preceding year;
• Net Worth – Any taxpayer with a total Net Worth at the close of each
calendar or fiscal year of at least P300 million;
• Gross Purchases – Any taxpayer with total annual gross purchases of at
least P800 million for the preceding year;
• Top corporate taxpayers listed and published by the Securities and
Exchange Commission (SEC).