INCOME TAXATION

TAXATION
State power – inherent power to enforce a proportional contribution from its
subjects for public purpose.

Process – process of levying taxes by the legislature of the state to enforce

proportional contributions from its subjects for public purpose.

Mode of government cost distribution

– the state allocates its costs or burden to its subjects who are benefited by its
spending.

THE THEORY OF TAXATION

A government cannot exist without a system of funding. The government’s
necessity for funding is the theory of taxation.

THE BASIS OF TAXATION

The government provides benefits to the people in the form of public services,
and the people provide the funds that finance the government.

 Taxpayers cannot avoid payment of taxes under the defense of absence of

benefit received.

 The direct receipt or actual availment of government services is not a

precondition to taxation.

THEORIES OF COST ALLOCATION

1. Benefit received theory – the more benefit he receives; the more taxes he
should pay.

2. Ability to pay theory – based on their capacity to sacrifice for the support of
the government.
 ASPECTS OF ABILITY TO PAY THEORY
1. Vertical equity – directly proportional to the level of his tax base (Gross
concept)
2. Horizontal equity – requires consideration for the particular circumstance of the
taxpayer. (Net concept)

THE LIFEBLOOD DOCTRINE

 Without taxes the government would be paralyzed for lack of motive power
to activate or operate it.
 Taxes are the lifeblood of the government, and their prompt and certain
availability are an imperious need

IMPLICATION OF THE LIFEBLOOD DOCTRINE OF TAXATION

1. Tax is imposed even if the absence of Constitutional grant.
2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose objects of taxation.
4. The courts are not allowed to interfere with the collection of taxes.
5. In income taxation:
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditures 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 limit.
d. A higher tax base is preferred when the tax objects has multiple tax
bases.

INHERENT POWERS OF THE STATE

1. Taxation power – to enforce proportional contribution from its subjects to
sustain itself.
2. Police power – to enact laws to protect the well-being of the people

3. Eminent domain – to take private property for public use after paying just
compensation.
 4. These rights, dubbed as “powers” are natural, inseparable and inherent to
every government.

SIMILARITIES OF THE THREE POWERS OF THE STATE

1. Necessary attributes of sovereignty.
2. Inherent to the State.
3. Legislative in nature.
4. Ways in which the State interferes with private rights and properties.
5. Exist independently of the Constitution/ and are exercisable by the
government even without Constitutional grant.
6. Presuppose an equivalent form of compensation received by the persons
affected by the exercise of the power.
7. The exercise of these powers by the local government units may be limited
by the national legislature
SCOPE OF THE TAXATION POWER
 Comprehensive
 Plenary
 Unlimited
 Supreme

THE LIMITATIONS OF THE TAXATION POWER

INHERENT LIMITATIONS

A. Territoriality of taxation – it cannot enforce upon subjects outside its territorial

jurisdiction.

Two-fold obligations of taxpayers

1. Filing of returns and payments of taxes
2. Withholding of taxes on expenses and its remittance to the government.
B. International comity – mutual courtesy or reciprocity between countries (no
country is powerful than the other)
1. Governments do not tax the income and properties of other governments.
2. Governments give primacy to their treaty obligations over their own
domestic tax laws.

C. Exemption of the government – this will not raise additional funds but will only
impute additional costs.
1. Income of the government from its properties and activities conducted
for profit including income from government owned and controlled
corporations is subject to tax.
D. Public Purpose
E. Non-delegation of the taxing power – legislative taxing power is vested
exclusively in Congress.
 What has been delegated cannot further be delegated.

EXCEPTIONS TO THE RULE OF NON- DELEGATION

1. Under the Constitution, local government units are allowed to exercise the
power to tax to enable them to exercise their fiscal autonomy.
2. Under the Tariff and Customs Code, the President is empowered to fix the
amount of tariffs to be flexible to trade conditions.
3. Other cases that require expedient and effective administration and
implementation of assessment and collection of taxes.

CONSTITUTIONAL LIMITATIONS
1. Due process of law

Aspects of Due Process

1. Substantive due process – tax must be imposed only for public purpose,
collected only under authority of a valid law and only by the taxing
power having jurisdiction.
 2. Procedural due process – there should be no arbitrariness in assessment
and collection of taxes, and the government shall observe the taxpayer’s
right to notice and hearing.

 Under the NIRC, assessments shall be made within three years from the due
date of filing of the return or from the date of actual filing, whichever is
later.
 Collection shall be made within five years from the date of assessment

2. Equal protection of the law – taxpayers should be treated equally both in

terms of rights conferred and obligations imposed (same circumstances).

o Congress cannot exempt sellers of “balot” while subjecting sellers of

“penoy” to tax since they are essentially the same goods.

3. Uniformity rule in taxation – the rule of taxation shall be uniform and

equitable.

o Taxpayers under dissimilar circumstances should not be taxed the

same.

o Uniformity is relative equality.

4. Progressive system of taxation – tax rates increase as the tax base increases.
Aids in an equitable distribution of wealth t society by taxing the rich more
than the poor

5. Non-imprisonment for non-payment of debt or poll tax

 Applies only when the debt is acquired by the debtor in good faith.

 Debt is acquired by the debtor in bad faith constitutes a estafa, a criminal

offense punishable by imprisonment.
 Applies only to the basis community tax.

 Non-payment of the additional community tax is an act of tax evasion

punishable by imprisonment.

6. Non-impairment of obligation and contract – it should no set aside its

obligations from contracts by the exercise of its taxation power.

7. Free worship rule – does not extend to income from properties or activities
of religious institutions that are proprietary or commercial in nature.

8. Exemption of religious or charitable entities, non-profit cemeteries,

churches and mosques, lands, buildings and improvements from
property taxes – actually, directly and exclusively used for charitable,
religious, and educational purposes.

 Doctrine of use – properties actually devoted for religious, charitable, or

educational activities are exempt from real property tax.
 Doctrine of ownership – properties of religious, charitable, or educational
entities whether or not used in their primary operations are exempt from real
property tax (not applied in PH)

9. Non-appropriation of public funds or property for the benefit of any

church, sect or system of religion – intended to highlight the separation of
religion and the State.

 Compensation to priests, imams, or religious ministers working with the

military, penal institutions, orphanages or leprosarium is not considered
religious appropriation.
10. Exemption from taxes of the revenues and assets of non-profit, non-
stock educational institutions including grants, endowments, donations,
or contributions for educational purposes
– applies only on revenues and assets that are actually, directly and
exclusively devoted for educational purposes.

 Exempts government educational institutions from income tax and subjects’

private educational institutions to a minimal 10% income tax.

11. Concurrence of a majority of all members of Congress for the passage of

a law granting tax exemption – requires the vote of the majority of all
members of Congress.

 In the approval of an exemption law, an absolute majority or the majority of

all members of Congress is required.

 In the withdrawal of tax exemption, only a relative majority or quorum

majority is required.

12. Non-diversification of tax collections – it should never be diversified for

private purposes
13. Non-delegation of the power of taxation – requires that taxation power as
part of lawmaking be vested exclusively in Congress.
14. Non-impairment of the jurisdiction of the Supreme Court to review tax
cases
– notwithstanding the existence of the Court of Tax Appeals, which is a
special court, all cases involving taxes can be raise to and be 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, but the Senate
may propose or concur with amendments
 16. The delegation of taxing power to local government units shall exercise
the power to create its own sources of revenue and shall have a just
share in the national taxes – this is a constitutional recognition of the local
autonomy of local government and an express delegation of the taxing
power

STAGES OF HE EXERCISE OF TAXATION POWER

1. Levy or imposition – enactment of a tax law by Congress and is called
impact of taxation or legislative act in taxation.

Congress is composed of two bodies:

1. The House of Representatives
2. The Senate

 Tax bills cannot originate exclusively from the Senate.

2. Assessment and collection – referred to as incidence of taxation or the

administrative act of taxation.

SITUS OF TAXATION – the place of the taxation.

Situs rules serve as frames of reference in gauging whether the tax object is
within or outside the tax jurisdiction of the taxing authority.

Examples:
1. Business tax situs – where the business is conducted.
2. Income tax situs on services – where they are rendered.
3. Income tax situs on sale of goods – place of sale.
4. Property tax situs – location.
5. Personal tax situs – place of residence

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

1. Marshall Doctrine – “the power to tax involves the power to destroy”.
  Does not include the power to destroy if it is used solely for the purpose
of raising revenue.
 Imposition of excessive tax on cigarettes.

2. Holme’s Doctrine – “taxation power is not the power to destroy while the
court sits”.
 Include the creation of Ecozones with tax holidays and provision of
incentives.

3. Prospectivity of tax laws – tax laws are generally prospective in operation.

 an ex post facto law or a law that retroacts is prohibited by the
Constitution.

4. Non-compensation or set-off – tax is not a debt; hence, it is not subject to

set-off.
 Exceptions:
a. Taxpayer’s claim has already become due and demandable.
b. Cases of obvious overpayment of taxes.
c. Local taxes

5. Non-assignment of taxes – tax obligations cannot be transferred to another

entity by contract.

6. Imprescriptibility in taxation – prescription is the lapsing of a right due to

the passage of time.
 Tax prescribes if not collected within 5 years from the date of its
assessment.
 In the absence of assessment, tax prescribes if not collected by judicial
action within 3 years from the date the return is required to be filed.
 Taxes due from taxpayers who did not file a return or those who filed
fraudulent returns do not prescribe.
 7. Doctrine of estoppel – any misrepresentation made by one party toward
another who relied therein in good faith will be held true and binding
against that person who made the misrepresentation.
 The error of any government employee does not bind the government.

8. Judicial Non-interference – courts are not allowed to issue injunction

against the government’s pursuit to collect tax as this would unnecessarily
defer tax collection (Lifeblood Doctrine).

9. Strict Construction of Tax Laws – “taxation is the rule; exemption is the

exemption”
 There is no room for interpretation, there is only room for application.
 When taxation laws are vague, the doctrine of strict legal construction is
observed

Vague tax laws – construed against the government and in favor of the taxpayers

o It means no tax law.

o Obligation arising from law is not presumed

Vague exemption laws – construed against the taxpayer and in favor of the
government.
o It means no exemption law.
o Construed strictly against the taxpayer in accordance with the
lifeblood doctrine.

 Tax exemption cannot arise from vague inference.

DOUBLE TAXATION – occurs when the same taxpayer is taxed twice by the
same tax jurisdiction for the same thing.

ELEMENTS OF DOUBLE TAXATION

1. Primary elements:
a. same object
 2. Secondary elements:
a. Same purpose of tax
b. Same taxing jurisdiction
c. Same tax period
d. Same type of tax

TYPES OF DOUBLE TAXATION

1. Direct double taxation – all element of double taxation exists for both
impositions.
 Discouraged because it is oppressive and burdensome to taxpayers.

2. Indirect double taxation – at least one of the secondary elements of double

taxation is not common for both impositions.
 Prevalent in practice.

How can double taxation be minimized?

A. Provision of tax exemption – only one tax law is allowed to apply to the tax
object while other tax law exempts the same tax object
B. Allowing foreign tax credit – tax payments in the foreign tax law is
deductible against the tax due of the domestic tax law.

C. Allowing reciprocal tax treatment – provisions in tax laws imposing a

reduced tax rates or even exemption if the country of the foreign taxpayer
also give the same treatment to Filipino non-residents therein.

D. Entering into treaties or bilateral agreements – countries may stipulate

for a lower tax rates for their residents if they engage in transactions that are
taxable by both of them.

ESCAPES FROM TAXATION – available to the taxpayer to limit or even avoid

the impact of taxation.

Categories of Escapes from Taxation

A. Those that result to loss of government revenue
1. Tax evasion – also known as tax dodging, refers to any act or trick that
tends to illegally reduce or avoid the payment of tax.

2. Tax avoidance – also known as tax minimization, refers to any act or trick
that reduces or totally escapes taxes by any legally permissible means.

3. Tax exemption – also known as tax holiday, refers to the immunity,

privilege or freedom from being subject to a tax which others are subject to.
All forms of tax exemptions can be revoked by Congress except those
granted by the Constitution and those granted under contracts
B. Those that do not result to loss of government revenue

1. Shifting – transferring tax burden to other taxpayers.

 Common with business taxes where taxes imposed on business revenue
can be shifted or passed-on to customers.

a. Forward – normal flow of distribution (manufacturer to customers).

 common with essential commodities and services such as foods and
fuel.

b. Backward – reverse of forward shifting.

 Common with non-essential commodities where buyers have
considerable market power and commodities with numerous
substitute products.

c. Onward – any tax shifting in the distribution channel that exhibits

forward or backward shifting.
2. Capitalization – adjustment of the value of an asset cause by changes in tax
rates.
 This is a form of backward shifting of tax.

3. Transformation – elimination of wastes or losses by the taxpayer to form

savings to compensate for the tax imposition or increase in taxes.
TAX AMNESTY – general pardon granted by the government for erring taxpayer
to give them a chance to reform and enable them to have a fresh start to be part of a
society with a clean slate.
 Absolute forgiveness or waiver by the government on its right to collect and
is retrospective in application.
 Covers both civil and criminal liabilities

 Conditional upon the taxpayer paying the government of a portion of the

tax.

TAX CONDONATION – forgiveness of the tax obligation of a certain taxpayer

under certain justifiable grounds.
 Also referred to as tax remission.
 Construed against the taxpayer and in favor of the government.
 Covers civil liabilities of the taxpayer.
 Applies prospectively to any unpaid balance of the tax; hence, the porting
already paid by the taxpayer will not be refunded.
 Requires no payment