INCOME TAXATION

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 MODULE 1

LEARNING OBJECTIVES:

After studying this module, the learners should be able to:

1. Appreciate the reason behind the life blood doctrine.

2. Determine the necessary expenses that will be paid using tax revenue.

3. Determine the importance of taxpayer’s suit.

Inherent powers of the State

The State have three (3) inherent powers, namely:

1. Police power – the power to enact legislation that may interfere with
personal liberty or property in order to promote general welfare. 1

2. Power of Eminent domain – the power of the State to take private

property for public use2.

3. Power of taxation – the power to levy taxes to be used for public

purpose.3

Lifeblood doctrine

There is a symbiotic relationship between the State and the taxpayers.

The State is expected to exert utmost effort to cater the needs of its citizens
(taxpayers), pertaining to, health, safety and education, and others which
are directly related to public purpose. But it is impossible for the State to do
these things without funds. Hence, the taxpayers are expected to provide for
it, through paying tax. “Taxes are the nation's lifeblood through which

1
Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, 14 March 2008
2
Apo Fruits Corporation, et al. v. LBP, G.R. No. 164195, 12 October 2010
3
Supra

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government agencies continue to operate and which the State discharges its
functions for the welfare of its constituents.” 4

Taxation Defined

Taxation is a process by which a state, through its legislative body,

raises revenue, by imposing burdens upon its citizen, to defray necessary
expenses of the government.

It is very important to note that the tax collected must only be used
for public purpose. 5

Public purpose

In traditional sense, public purposes are those acts that will directly
benefit the public, such as:

1. Building various infrastructures, i.e. bridges, roads, public school

buildings, etc.
2. Delivering basic services

The above interpretation of public purpose has been broadened.

Nowadays, aside from the acts which were considered essential government
functions (traditional sense), it includes those acts that promote social
justice, such as, but not limited to:

1. Relocating illegal settlers

2. Building low cost housing6

Taxpayer’s suit

It is now clear that the tax collected must only be used for public
purpose. But this is far from reality. Corruption besets our country since
time immemorial without a sign of ceasing. With this kind of problem, tax

4
Asian Transmission Corp. v. CIR, G.R. No. 230861, 19 September 2018
5
P.D. 1445 Sec. 4 [2]
6
Yap v. COA, G.R. No. 158562, 23 April 2010

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fund is always on the danger of being used improperly. The question is, is
there anything that the taxpayer can do?

The answer is yes. “It is hornbook principle that a taxpayer is allowed

to sue where there is a claim that public funds are illegally disbursed, or that
public money is being deflected to any improper purpose, or that there is
wastage of public funds through the enforcement of an invalid or
unconstitutional law. A person suing as a taxpayer, however, must show that
the act complained of directly involves the illegal disbursement of public
funds derived from taxation. In other words, for a taxpayer’s suit to prosper,
two requisites must be met namely, (1) public funds derived from taxation
are disbursed by a political subdivision or instrumentality and in doing so, a
law is violated or some irregularity is committed; and (2) the petitioner is
directly affected by the alleged act.” 7

Aspects of taxation

The process of taxation have three (3) aspects:

1st: Levying – creation of tax laws which will be done by the legislative
body of the government;

2nd: Assessing – determination of tax to be paid by the taxpayer;

3rd: Collecting - collection of tax due.

Limitations on the power of

taxation.
----------------------------------

There are two (2) limitations on the power of taxation, namely:

1. Inherent limitations

1.1 Purpose – the reason of the State in imposing tax is to defray

the necessary expenses of the government, it must be for public
purpose. “The reason for this is simple. The power to tax exists

7
Landbank of the Philippines v. Cacayuran, G.R. No. 191667, 17 April 2013

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 for the general welfare; hence, implicit in its power is the
limitation that it should be used only for a public purpose.” 8

1.2 Who can exercise it – generally, the power to impose tax is

legislative in nature. Only the congress may impose tax.

1.3 Applicability – tax laws will only be effective within the

jurisdiction of the taxing authority.

2. Constitutional limitations

These are the limitations expressed in the 1987 Philippine Constitution,

such as, but not limited to:

2.1 Due process clause

2.2 Equal protection clause
2.3 Uniformity and equity
2.4 Non-imprisonment for non-payment of poll tax

Characteristics of sound tax

system
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For a tax system to considered sound, three (3) characteristics must

be present, namely:

1. Fiscal adequacy – sources of revenues must be sufficient to meet

government expenditures.9

2. Administrative feasibility – tax laws can be effectively administered

and enforced with least inconvenience to the taxpayers. 10

3. Theoretical justice or equity – tax imposition must be equitable and

based on the taxpayer’s ability to pay.

8
Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, 14 March 2008
9
Chavez v. Ongpin, et al., G.R. No. 76778, 6 June 1990
10
Diaz, et al. v. Secretary of Finance, et al., G.R. No. 193007, 19 July 2011

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Tax evasion and Tax avoidance
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Taxpayers may escape paying taxes in two (2) ways:

1. Tax evasion – this is an illegal way of not paying tax.

- Also known as tax dodging.

Examples:

A. Fraudulent filing or income tax return wherein the

declared net taxable income is only Php1,000,000
but in truth, it should be Php10,000,000.

B. Willful non-filing of income tax return

2. Tax avoidance - “tax saving device within the means sanctioned by

law”.11
- Also known as tax minimization.

Example:

Donating the amount Php1,000,000 in installment,

i.e. Php200,000 per year to avoid paying donor’s tax.

[Note: Donor’s tax is 6% on annual total gifts

exceeding Php250,000]

END OF MODULE 1

11
Commissioner of Internal Revenue v. Estate of Toda, G. R. No. 147188, 14 September 2004

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Suggested readings:

https://taxreform.dof.gov.ph/tax-reform-packages/p1-train/train-tax-myths/

https://www.dof.gov.ph/bir-files-347-tax-cases-before-doj-tax-appeals-
court/