Introduction to Taxation

WHAT IS TAXATION?

Taxation may be defined as a State power, a legislative process, and a mode of government cost distribution.

*The government’s necessity for funding is the theory of taxation.

The Basis of Taxation – mutuality of support between the people and the government.

THEORIES OF COST ALLOCATION

1. Benefit received theory – presupposes that the more benefit one receives from the government, the more taxes he
should pay.
2. Ability to pay theory – presupposes that taxation should also consider the taxpayer’s ability to pay.

Aspects of the Ability to Pay Theory

1. Vertical equity proposes that the extent of one’s ability to pay is directly proportional to the level of his tax base.
2. Horizontal equity requires consideration of the particular circumstance of the taxpayer.

The Lifeblood Doctrine

Implication of the lifeblood doctrine in taxation:

1. Tax is imposed even in the absence of a Constitutional grant.

2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose the 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 object has multiple tax bases.

The Inherent Powers of the State

1. Taxation power is the power of the State to enforce proportional contribution from its subjects to sustain itself.
2. Police power is the general power of the State to enact laws to protect the well-being of the people.
3. Eminent domain is the power of the State to take private property for public use after paying just compensation.

Similarities of the three powers of the State

1. They are all necessary attributes of sovereignty.

2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and properties.
5. They all exist independently of the Constitution and are exercisable by the government even without Constitution
grant. However, the Constitution may impose conditions or limits for their exercise of the power.
6. The exercise of these powers by the local government units may be limited by the national legislature.
Comparison of the three powers of the State

Point of Difference Taxation Police Power Eminent Domain

Exercising
Authority Government Government Government and private utilities
For the support of the To protect the general
Purpose government welfare of the people For public use
Community or class of Community or class of
Persons affected individuals individuals Owner of the property
Limited (Imposition is No amount imposed. (The
Amount of Unlimited (Tax is based limited to cover cost of government pays just
Imposition on government needs.) regulation.) compensation.)
Importance Most important Most superior Important
Inferior to the "Non- Superior to the "Non-
Relationship with impairment Clause" of impairment Clause" of Superior to the "Non-impairment
the Constitution the Constitution the Constitution Clause" of the Constitution
Constitutional and Public interest and due Public purpose and just
Limitation inherent limitations process compensation

SCOPE OF THE TAXATION POWER

1. Comprehensive
2. Unlimited
3. Plenary
4. Supreme
THE LIMITATION OF THE TAXATION POWER

A. Inherent limitations
1. Territoriality of taxation
2. International Comity
3. Public Purpose
4. Exemption of the government
5. Non-delegation of the taxing power

B. Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque from property
taxes
9. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
 11. Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. The requirement that appropriations, revenue, or tariff bills shall originate exclusively in the House of the
Representatives
16. The delegation of taxing power to local government units

STAGES OF THE EXERCISE OF TAXATION POWER

1. Levy or imposition

2. Assessment and collection

Matters of legislative discretion in the exercise of taxation

1. Determining the object of taxation

2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which must be public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the national and local government
6. Situs of taxation
7. Method of collection

SITUS OF TAXATION

Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the tax object.

Examples of Situs Rules:

1. Business tax situs: Businesses are subject to tax in the place where the business is conducted.
2. Income tax situs on services: Service fees are subject to tax where they are rendered.
3. Income tax situs on sale of goods: The gain on sale is subject to tax in the place of sale.
4. Property tax situs: Properties are taxable in their location.
5. Personal tax situs: Persons are taxable in their place of residence.

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

1. Marshall Doctrine
2. Holme’s Doctrine
3. Prospectivity of tax laws
4. Non-compensation or set-off
5. Non-assignment of taxes
6. Imprescriptibility in taxation
7. Doctrine of estoppel
8. Judicial Non-interference
9. Strict Construction of Tax Laws

DOUBLE TAXATION

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 element: Same object

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

Types of Double Taxation

1. Direct double taxation

This occurs when all the element of double taxation exists for both impositions.
2. Indirect double taxation
This occurs when at least one of the secondary elements of double taxation is not common for both impositions.

How can double taxation be minimized?

The impact of double taxation can be minimized by any one or a combination of the following:

a. Provision of tax exemption

b. Allowing foreign tax credit (deduction for taxes paid abroad)
c. Allowing reciprocal tax treatment between the home country and a foreign country
d. Entering into treaties or bilateral agreements

ESCAPES FROM TAXATION

Escapes from taxation are the means 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.
B. Those that do not result to loss of government revenue
1. Shifting- This is the process of transferring tax burden to other taxpayers.

Forms of shifting
a. Forward shifting – This is the shifting of tax which follows the normal flow of distribution.
b. Backward shifting – This is the reverse of forward shifting.
c. Onward shifting- This refers to any tax shifting in the distribution channel that exhibits forward shifting or
backward shifting.
2. Capitalization – This pertains to the adjustment of the value of an asset caused by changes in tax rates.
3. Transformation – This pertains to the elimination of wastes or losses by the taxpayer to form savings to
compensate for the tax imposition or increase in taxes
Tax Amnesty

Amnesty is a general pardon granted by the government for erring taxpayers 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.

Tax Condonation

Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. This is also
referred to as tax remission.

TAXES, TAX LAWS, AND TAX ADMINISTRATION

TAXATION LAW

Taxation law refers to any law that arises from the exercise of the taxation power of the State.

Types of taxation laws

1. Tax laws – These are laws that provide for the assessment and collection of taxes.
Examples:
a. The National Internal Revenue Code (NIRC)
b. The Tariff and Customs Code
c. The Local Tax Code
d. The Real Property Tax Code
2. Tax Exemption laws – These are laws that grant immunity from taxation.
Examples:
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987 (E.O. 226)
c. Barangay Micro-Business Enterprise (BMBE Law)
d. Cooperative Development Act

Sources of Taxation

1. Constitution
2. Statues and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax Treaties and conventions with foreign countries
8. Revenue Regulations

Types of Administrative Issuances

1. Revenue Regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue bulletins
 6. BIR rulings

Types of rulings

1. Value Added Tax (VAT) rulings

2. International Tax Affairs Division (ITAD) rulings
3. BIR rulings
4. Delegated Authority (DA) rulings

TAX

Tax is an enforced proportional contribution levied by the lawmaking body of the State to raise revenue for public purpose.

Elements of a Valid Tax

1. Tax must be levied by the taxing power having jurisdiction over the object of taxation.
2. Tax must not violate constitutional and inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.

Classification of Taxes

A. As to purpose
1. Fiscal or revenue tax- a tax imposed for general purpose
2. Regulatory – a tax imposed to regulate business, conduct, acts or transactions
3. Sumptuary – a tax levied to achieve some social or economic objectives
B. As to subject matter
1. Personal, poll or capitation – a tax on persons who are residents of particular territory
2. Property tax – a tax on properties, real or personal
3. Excise or privilege tax – a tax imposed upon the performance of an act, enjoyment of a privilege or engagement
in an occupation
C. As to incidence
1. Direct tax – When both the impact and incidence of taxation rest upon same taxpayer, the tax is said to be
direct.
2. Indirect tax – When tax is paid by any person other than the one who is intended to pay the same, the tax is
said to be indirect.
D. As to amount
1. Specific tax – a tax of a fixed amount imposed on a per unit basis such as per kilo, liter or meter, etc.
2. Ad valorem – a tax of a fixed proportion imposed upon the value of the tax object
E. As to rate
1. Proportional tax – This is flat or fixed rate tax. The use of proportional tax emphasizes equality as it subjects all
taxpayers with the same rate without regard to their ability of pay.
2. Progressive or graduated tax – This is a tax which imposes increasing rates as the tax base increase it gets more
tax to those who are more capable. It aids in lessening the gap between rich and the poor.
3. Regressive tax – This tax imposes decreasing tax rates as the tax base increase. This is the total reverse of
progressive tax. This is the total reverse of progressive tax. Regressive tax is regarded as anti-poor. It directly
violates the Constitutional guarantee of progressive taxation.
F. As to imposing authority
1. National tax – tax imposed by the national government
 Examples:
a. Income tax – tax on annual income, gains or profits
b. Estate tax – tax on gratuitous transfer of properties by a decedent upon death
c. Donor’s tax – tax on gratuitous transfer of properties by a living donor
d. Value Added Tax – consumption tax collected by VAT business taxpayers
e. Other Percentage Tax – consumption tax collected by non-VAT business taxpayers
f. Excise tax – tax on sin products and non-essential commodities such as alcohol, cigarettes and metallic
minerals. This should be differentiated with the privilege tax which is also called excise tax.
g. Documentary stamp tax – a tax on documents, instruments, loan agreements and papers evidencing the
acceptance, assignment, sale or transfer of an obligation, right or property incident thereto.
2. Local tax – tax imposed by the municipal or local government
Examples:
a. Real property tax
b. Professional tax
c. Business taxes, fees, and charges
d. Community tax
e. Tax on banks and other financial institutions

TAX SYTEM

The tax system refers to the methods or schemes of imposing, assessing, and collecting taxes. It includes all the tax laws
and regulations, the means of their enforcement, and the government offices, bureaus and withholding agents which are
part of the machineries of the government in tax collection. The Philippine tax system is divided in two: the national tax
system and the local tax system.

Types of Tax Systems According to Imposition

1. Progressive – employed in the taxation of income of individuals, and transfers of properties by individuals
2. Proportional – employed in taxation of corporate income and business
3. Regressive – not employed in the Philippines

Types of Tax System According to Impact

1. Progressive system
A progressive tax system is one that emphasizes direct taxes. A direct tax cannot be shifted. Hence, it encourages
economic efficiency as it leaves no other resort to taxpayers than to be efficient. This type of tax system impacts
more upon the rich.
2. Regressive system
A regressive tax system is one that emphasizes indirect taxes. Indirect taxes are shifted by businesses to
consumers; hence, the impact of taxation rests upon the bottom end of the society. In effect, a regressive tax
system is anti-poor.

TAX COLLECTION SYSTEMS

1. Withholding system – Under this collection system, the payor of the income withholds or deducts the tax on the
income before releasing the same to the payee and remits the same to the government. The following are the
withholding taxes collected under this system:
a. Withholding tax on compensation – a tax withheld by the employer from payments of compensation income to
employees
 b. Expanded withholding tax – a withholding tax prescribed on certain income payments and is creditable against
the income tax due of the payee for the taxable quarter or year in which particular income was earned.
c. Final withholding tax – a kind of withholding tax which prescribed on certain income payments and is not
creditable against any income tax due of the payee for the taxable year.
d. Withholding tax on government payments – the tax withheld by the national government agencies and
instrumentalities including government-owned and controlled corporations on their payments to taxpayers,
suppliers, or payees.
2. Voluntary compliance system – Under this collection system, the taxpayer himself determines his income, reports
the same through income tax returns and pays the tax to the government. This system is also referred to as the
“Self-assessment method.” A portion of the tax due payable herein may have been withheld under the withholding
system, such as:
a. Withholding tax on compensation by compensation earners
b. Expanded withholding tax by taxpayer engaged in business or exercise of profession
3. Assessment or enforcement system – Under this collection system, the government identifies non-compliant
taxpayers, assesses their tax dues and penalties, and enforces collections by coercive means such as summary
proceeding or judicial proceedings when necessary.

PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal adequacy requires that the sources of government funds must be sufficient to cover government costs.
2. Theoretical justice or equity suggests that taxation should consider the taxpayer’s ability to pay.
3. Administrative feasibility suggests that tax laws should be capable of efficient and effective administration to
encourage compliance.

TAX ADMINISTRATION

Tax administration refers to the management of the tax system. Tax administration of the national tax system in the
Philippines is entrusted to the Bureau of Internal Revenue which is under the supervision and administration of the
Department of Finance.

Chief Officials of the Bureau of Internal Revenue

1. 1 Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
a. Operations group
b. Legal Enforcement group
c. Information Systems Group
d. Resource Management Group

POWERS OF THE BUREAU OF INTERNAL REVENUE

1. Assessment and collection of taxes

2. Enforcement of all forfeitures, penalties and fines, and judgments in all cases decided in its favour by the courts
3. Giving effect to, and administering the supervisory and police powers conferred to it by the NIRC and other laws
4. Assignment of internal revenue officers and other employees to other duties
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials
6. Issuance of receipts or clearances
7. Submission of annual report, pertinent information to Congress and reports to the Congressional Oversight
Committee in matters of taxation
POWERSOF THE COMMISSIONER OF INTERNAL REVENUE

1. To interpret the provision of the NIRC, subject to review by the Secretary of Finance
2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals, such as:
a. Disputed assessments
b. Refunds of internal revenue taxes, fees, or other charges
c. Penalties imposed
d. Other NIRC and special law matters administered by the BIR
3. To obtain information and to summon, examine, and take testimony of persons to effect tax collection

Purpose: For the CIR to ascertain:

a. The correctness of any tax return or in making a return when none has been made by the taxpayer
b. The tax liability of any person for any internal revenue tax or in correcting any such liability
c. Tax compliance of the taxpayer

Authorized acts:

a. To examine any book, paper, record or other data relevant to such inquiry
b. To obtain on a regular basis any information from any person other than the person whose internal revenue
tax liability is subject to audit
c. To summon the person liable for tax or required to file a return, his employees, or any person having
possession or custody of his books of accounts and accounting records to produce such books, papers, records
or other data and to give testimony
d. To take testimony of the person concerned, under oath, as may be relevant or material to the inquiry
e. To cause revenue officers and employees to make canvass of any revenue district
4. To make assessments and prescribe additional requirement for tax administration and enforcement
5. To examine tax returns and determine tax due thereon
6. To conduct inventory taking or surveillance
7. To prescribe presumptive gross sales and receipts for a taxpayer when:
a. The taxpayer failed to issue receipts; or
b. The CIR believes that the books or other records of the taxpayer do not correctly reflect the declaration in the
return.
8. To terminate tax period when the taxpayer is;
a. Retiring from business
b. Intending to leave the Philippines
c. Intending to remove, hide, or conceal his property
d. Intending to perform any act tending to obstruct the proceedings for the collection of the tax or render the
same ineffective
9. To prescribe real property values
10. To compromise tax liabilities of taxpayers
11. To inquire into bank deposits, only under the following instances:
a. Determination of the gross estate of a decedent
b. To substantiate the taxpayer’s claim of financial incapacity to pay tax in an application for tax compromise
12. To accredit and register tax agents
13. To refund or credit internal revenue taxes
14. To abate or cancel tax liabilities in certain cases
15. To prescribe additional procedures or documentary requirements
16. To delegate his power to any subordinate officer with a rank equivalent to a division chief of an office
 Non-delegated power of the CIR

The following powers of the Commissioner shall not be delegated:

1. The power to recommend the promulgation of rules and regulations to the Secretary of Finance.
2. The power to issue rulings of first impression or to reverse, revoke or modify any existing rulings of the Bureau.
3. The power to compromise or abate any tax liability
Exceptionally, the Regional Evaluation Boards may compromise tax liabilities under the following:
a. assessments are issued by the regional offices involving basic deficiency tax of P500,000 or less, and
b. minor criminal violations discovered by regional and districts officials

Composition of the Regional Evaluation Board

a. Regional Director as chairman

b. Assistant Regional Director
c. Heads of the Legal, assessment and Collection Division
d. Revenue District Officer having jurisdiction over the taxpayer
4. The power to assign and reassign internal revenue officers to establishments where articles subject to excise tax
are produced or kept.

Rules in assignments of revenue officers to other duties

1. Revenue officers assigned to an establishment where exercisable articles are kept shall in no case stay there for
more than 2 years.
2. Revenue officers assigned to perform assessments and collection function shall not remain in the same assignment
for more than 3 years.
3. Assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed 1 year.

Agents and Deputies for Collection of National Internal Revenue Taxes

The following are constituted agents for the collection of internal revenue taxes:

1. The Commissioner of Customs and his subordinates with respect to collection of national internal revenue taxes on
imported goods.
2. The head of appropriate government offices and his subordinates with respect to the collection of energy tax.
3. Banks duly accredited by the Commissioner with respect to receipts of payments of internal revenue taxes
authorized to be made thru banks.

OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES RELATED FUNCTIONS

1. Bureau of Customs
2. Board of Investments
3. Philippine Economic Zone Act
4. Local Government Tax Collecting Agent

Reference: Rex Banggawan, Income Taxation, 2019