COLLEGE OF ACCOUNTANCY

C-BAC7 Taxation (Income Taxation)

Second Semester AY 2021-2022

Course : C- BAC7: Taxation (Income Taxation)

Module : Module No. 1: Principles of Taxation and Its Remedies

Time Frame : 3 hours

A. Overview

This learning material discusses the basic principles and importance of taxation as well as the
nature and different classification of taxes.

This is relevant to Business Administration students because this will help you appreciate the
importance of TAXATION in our country, in general, and in the profession, in particular.

You will be able to achieve the desired learning outcomes by devoting time and effort in studying
this material, listening and participating actively in the online discussion, and accomplishing the
tasks assigned in the Classwork section of the Google Classroom for this course.

B. Desired Learning Outcomes

After studying this module, you should be able to:

1. Discuss the concept of taxation and its necessity to the existence of every government;
2. Differentiate the three inherent powers of the government;
3. Determine the limitations of the power of taxation;
4. Discuss the various forms of escape from taxation;
5. Identify the nature, characteristics and classification of taxes; and,
6. Explain the system of taxation in our country.

C. Values Integration

In studying this module, it is hoped that you will be able to develop and manifest the following UA
Core Value/s:

✓ Servant Leadership
✓ Integrity
✓ Excellence
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

D. Content/Discussion

3 INHERENT POWERS OF THE STATE

1. TAXATION is an inherent power of the State, through its law making body, to enforce
proportional contributions from its subjects in order to defray its necessary expenses.

Taxation is considered a State power, a legislative process, and a mode of government cost
distribution. The government can exercise its power of taxation through its legislative branch
(Congress and Senate). It has the power enforce proportional contributions (in the form of
taxes) from its subjects for public purpose. It provides public services such as defense, public
order and safety, health, education and social protection among others. However, a
government cannot exist without a system of funding. Thus, it has to impose tax laws in order
for it to survive. The scope of taxation is regarded as comprehensive, plenary and supreme.
However, it is not absolute unlimited. It is subject to inherent and constitutional limitations.

2. POLICE POWER is a general power of the State to enact laws to protect the well-being of the
people. The government implements the tax laws.

3. EMINENT DOMAIN is the power of the State to take private property for public use after paying
just compensation. It could be exercised by the government and public utility companies.

COMPARISON OF THE THREE INHERENT POWERS OF THE STATE

A. As to exercising authority
Taxation - government
Police power - government
Eminent Domain – government and public utility companies

B. As to purpose
Taxation - for the support of the government
Police power - to protect the general welfare of the people
Eminent Domain – for public use

C. As to persons affected
Taxation - community or class of individuals
Police power - community or class of individuals
Eminent Domain – owner of the property

D. As to amount of imposition
Taxation - unlimited ( tax is based on government needs )
Police power - limited to cover the cost of regulation
Eminent Domain – no amount imposed

E. As to importance Taxation -
most important Police power
- most superior Eminent
Domain – important

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

F. As to relationship with the constitution

Taxation - inferior to non impairment clause of the constitution
Police power - superior to non-impairment clause of the constitution
Eminent Domain – superior to non-impairment clause of the constitution

G. As to limitation
Taxation - constitutional and inherent limitation
Police power - public interest and due process
Eminent Domain – public purpose and just compensation

SIMILARITIES OF THE THREE POWERS OF THE STATE

1. They are all necessary attributes of the 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
Constitutional grant. However, the Constitution may impose conditions or limits for their exercise.
6. They all 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.

OBJECTIVES OF TAXATION

A. PRIMARY OBJECTIVE – to raise revenue in order to defray the necessary expenses of the government

B. SECONDARY OBJECTIVES:

1. To reduce excessive inequalities of wealth

2. To protect local producers against foreign competition
3. To encourage the growth of local industries.

LIMITATIONS OF THE POWER OF TAXATION - inherent and constitutional limitations

A. INHERENT LIMITATIONS – co exist with the power of taxation

1. Territoriality of taxation – the power of taxation is limited to its territorial jurisdiction. The
Philippine government normally provides public services within the boundaries of the State. Thus,
the government can only impose its tax laws upon its subjects or residents within its boundaries.
It cannot enforce this power upon subjects outside its territorial jurisdiction, because it will result
into encroachment of foreign sovereignty.

2. International Comity – in the UN Convention, countries of the world agreed to one fundamental
concept of co-equal sovereignty wherein all nations are deemed equal with one another regardless of
race, religion, culture, economic condition or military power. Thus, mutual courtesy or reciprocity
between them is observed. Hence, governments do not tax the income and properties of other
governments and they give priority to their treaty obligations over their own domestic laws. That’s
why under the National Internal Revenue Code (NIRC), the income of foreign government and foreign
government owned and controlled corporations are not subject to income tax. Example of this is
exemption from income and property taxes of embassies or consular offices

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C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

of foreign governments in the Philippines including international organizations and their non-
Filipino staff.

3. Public purpose - tax laws are created to raise revenue for public use and not for private interest of
any person.

4. Exemption of the government – the government normally does not tax itself because this will not
raise additional funds but will only impute additional costs.

5. Non-delegation of the taxing power – the legislative taxing power is vested exclusively in Congress
and it could not be delegated to the other branches of the government (Executive and Judicial).
Although there are instances under the Constitution, wherein local government units are allowed
to exercise the power to tax to enable them to exercise their fiscal autonomy. Also, under the Tariff
and Custom Code, the President is empowered to fix the amount of tariffs to be flexible to trade
conditions, and other cases that require expedient and effective administration and
implementation of assessment and collection of taxes

B. CONSTITUTIONAL LIMITATIONS – these are found in our Constitution.

1. Observance of due process of law – No one should be deprived of his life, liberty or property without
due process of law. Tax laws should neither be harsh or oppressive. There are two aspects of due
process that must be considered, namely substantive due process and procedural due process.

2. Equal protection of the law - taxpayers should be treated equally both in terms of rights conferred
and obligations imposed.

3. Uniformity rule in taxation – taxpayers should be classified according to commonality in attributes

and the tax classification to be adopted should be based on substantial distinction. Each class is tax
differently, but taxpayers belonging to the same class are taxed the same. For example, non-VAT
taxpayers are subject to percentage tax while VAT registered taxpayers are liable to pay Value
added tax.

4. Progressive system of taxation – under this system, the tax rates increases as the tax base increases.
This is in consistent with the taxpayer’s ability to pay theory. And this system aids in the equitable
distribution of wealth to society by taxing the rich more than the poor.

5. Non-imprisonment for non-payment of debt or poll tax. As a policy, no one shall be imprisoned because
of his poverty, and no one shall be imprisoned for mere inability to pay debt, for as long as the debt was
acquired in good faith. Debt acquired in bad faith constitute estafa, a criminal offense punishable by
imprisonment. The Constitutional guarantee on non-imprisonment for non-payment of debt does not
extend to non-payment of tax except poll tax (personal, community, residency tax). Poll tax has two
components – basic and additional community tax. The Constitutional guarantee of non-imprisonment
for non-payment of poll tax applies only on the basic community tax. Thus, non-payment of additional
community tax constitutes tax evasion punishable by imprisonment.

6. Non-impairment of the obligation and contract – the State should set an example of good faith
among its constituents. If it has granted tax exemption under a contract, the State should honor
such contract and should not cancel the same by a unilateral government action.

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

7. Free worship rule - the Philippine government adopts free exercise of religion and does not
subject its exercise to taxation. Thus, the properties and revenue of religious institutions such as
tithes or offering are not subject to tax. However, this exemption does not apply to other income
that are proprietary or commercial in nature. So, if the religious institution has other income such
as rental income from properties, they must pay the corresponding tax due on that income.

8. Exemption of religious, charitable or educational entities, nonprofit cemeteries, churches and mosques,
lands, buildings and improvements from property tax. The exemption applies only for properties
actually, directly and exclusively used for charitable, religious and educational purposes.

9. Non appropriation of public funds or property for the benefit of any church, sect, or system of
religion. The government should not favor any particular system of religion by appropriating
public funds or property in support thereof.

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. Education is
necessary in nation building. Thus, the government provides tax exemption on income and
properties of the said institutions. Likewise, it also provides special rate of 10% income tax on
taxable net income of private stock educational institutions.

11. Concurrence of a majority of all members of the Congress for the passage of a law granting tax
exemption. The grant of tax exemption must proceed only upon a valid basis and it requires the
vote of the majority of all members of the Congress.

12. Non diversification of tax collection. Tax collections should be used only for public purpose.

13. Non-delegation of the power of taxation. The power of taxation is vested exclusively to the
Congress. However, to have effective administration and implementation of assessment and
collection of taxes, certain aspects of the taxing process that are non-legislative in character are
delegated. Thus the DOF and BIR may issue revenue regulations, rulings, orders and circulars to
clarify and interpret the application of the law.

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
raised to and finally decided by the Supreme Court of the Philippines.

15. Appropriations, revenue or tariff bills shall originate exclusively in the House of Representative,
but the Senate may propose or concur with amendments

16. Each local government unit shall exercise the power to create its own sources of revenue and shall
have a just share in the national taxes

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

STAGES OF THE EXERCISE OF TAXATION POWER

1. LEVY OR IMPOSITION – it involves the enactment of a tax law by the Congress and is called the impact
of taxation. It is at this stage wherein the following matters are determined

a. Determination of the object of taxation – persons, properties or rights

b. Setting of tax rates or the amount to be collected
c. Determining the purpose for the levy which must be public use
d. Kind of tax to be imposed
e. Apportionment of the tax between the national and local government
f. Situs of taxation
g. Method of collection

2. ASSESSMENT AND COLLECTION - the tax law is implemented by the administrative branch of the
government. It is at this stage wherein the tax liabilities of taxpayers are determined and collected. It
is also referred to as incidence of taxation or the administrative act of taxation.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. FISCAL ADEQUACY – the sources of government funds must be sufficient to cover government costs.

2. THEORETICAL JUSTICE OR EQUITY – taxes imposed upon taxpayers must be based on their ability to
pay. Tax laws should not be oppressive, unjust or confiscatory.

3. ADMINISTRATIVE FEASIBILITY – tax laws should be capable of efficient and effective administration
to encourage compliance.

SITUS OF TAXATION – place of taxation. It serves as a frame of reference whether the tax object is within or
outside the tax jurisdiction of the taxing authority. Example of situs rules are as follows:

a. Business tax situs – place where the business is conducted. A taxpayer operates trading business in
USA and beauty parlor in the Philippines. The trading business is not subject to business tax because it
is beyond the territorial jurisdiction of the Philippine government, while the beauty parlor is subject
to business tax.

b. Income tax situs on service. Service fees are subject to tax where they are rendered

c. Income tax on sale of goods. The gain on sale is subject to tax on the place of sale

d. Property tax situs. Properties are taxable based on their location.

e. Personal tax situs. Persons are taxable in their place or residence.

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

1. Marshall Doctrine – the power to tax is the power to destroy. Taxation power can be used as an instrument
of police power. It can used to discourage or prohibit undesirable activities or acts. As such,

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C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

taxation power carries with it the power to destroy. A good manifestation of this doctrine is the
imposition of excessive tax on cigarettes to discourage the smokers to promote good health.

2. Holme’s Doctrine – Taxation is not a power to destroy while the court sits. Taxation power may be
used to build or encourage beneficial activities or industries by the grant of tax exemption. The
government created Ecozones and provides tax holidays and incentives, BMBE Laws to encourage
investors and to create job opportunities for Filipino citizens.

3. Prosperity of the tax laws. Tax laws are generally prospective in nature. A law that retroacts is
prohibited by the Constitution.

4. Non-compensation or set off. Taxes are not subject to automatic set-off or compensation. A taxpayer
cannot delay payment of tax to wait for a resolution of a lawsuit involving his pending claim against
the government.

5. Non-assignment of taxes. Tax obligations cannot be assigned or transferred to another entity by

contract.

6. Imprescriptibility in taxation. Presciption is the lapsing of a right due to passage of time. The
government’s right to collect taxes does prescribe unless the law itself provides for such prescription.
Under the NIRC, tax prescribes if not collected within 5 years from the date of its assessment. In the
absence of an assessment, tax prescribes if not collected by judicial action within 3 years from the date
is required to be filed. However, taxes due from the taxpayer who did not file a return or those who
filed fraudulent returns do not prescribe.

7. Doctrine of estoppel. Under the doctrine of estoppel, any misrepresentation made by one party
toward another who relied on therein in good faith will be held true and binding against that person
who made the representation. The government is not subject to estoppel. The error of any
government employee does not bind the government.

8. Judicial non-interference. Generally, courts are not allowed to issue injunction against the government
in pursuit to collect tax as this would unnecessarily defer tax collection.

9. Strict Construction of the Law. Taxation is the rule, exemption is the exception. When tax laws are
vague, the doctrine of strict legal construction is observed. Vague tax laws are construed against the
government and in favor of the taxpayer. Vague tax exemptions are construed against the taxpayer
and in favor of the government

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 – same object

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

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

Types of Double Taxation

1. Direct Double Taxation – occurs when all the elements of double taxation exists for both imposition
2. Indirect double taxation – occurs when at least one of the secondary elements of double taxation is not
common for both impositions.

Remedies of Double Taxation

1. Provision of tax exemption – only one law is allowed to the tax object while the other tax law exempts
the same tax object. Example if a business transaction is already subject to VAT, it should be exempted
from percentage tax.

2. Allowing foreign tax credit – allow the tax payments made in a foreign country to be deducted from
the tax due imposed by the domestic tax law.

3. 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 tax treatment to Filipino non-
resident therein.

4. Entering into treaties or bilateral agreements – countries may stipulate for a lower tax rates of their
residents if they engage in transactions that are taxable by both of them.

ESCAPE FROM TAXATION – are the means available to the taxpayer to limit or even avoid the impact of taxation

A. Those that result to loss of government revenue

1. Tax evasion – refers to any act or trick that tends to illegally reduce or avoid the payment of tax. It is
also known as tax dodging. Examples of this act are gross understatement of income or overstatement
of expenses, non-declaration of income and misrepresentation of the nature or amount of transaction
to take advantage of the lower rate.

2. Tax avoidance – refers to an act or trick that reduces or totally escapes taxes by any legally
permissible means. It is also known as tax minimization. This can be done by selection and execution
of transaction that would expose the taxpayer to lower rates, maximizing tax options, tax carry overs
or tax credits, and careful tax planning.

3. Tax exemption – refers to the immunity, privilege or freedom from being subject to a tax to which
others are subject to. It is also known as tax holiday. Tax exemptions may be granted by the
Constitution, law or contract.

B. Those that do not result to loss of government revenue

1. Shifting – process of transferring tax burden to another person

a. Forward shifting – follows the normal flow of distribution (from manufacturers to wholesalers,
retailers to consumers.
b. Backward shifting – reverse of forward shifting. It is common to non-essential commodities where
buyers have considerable market power and commodities with numerous substitute products.

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

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

2. Capitalization – 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 tax rates e.g. change in packaging, lesser
advertisements, etc.

TAX 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. It is an absolute
forgiveness or waiver by the government on its right to collect and is retrospective in application. It covers
both civil and criminal liabilities.

TAX CONDONATION – is a forgiveness of tax obligation of a certain taxpayer under certain justifiable ground.
It covers only civil liabilities of the taxpayer.

TAXES – enforced proportional contribution levied by the lawmaking body of the State to raise revenue for
public purpose. They are considered as the lifeblood of every government.

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 proportionate 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 (income tax, VAT, percentage tax, Donor’s
tax and Estate tax)
2. Regulatory – a tax is imposed to regulate business, conduct, acts or transactions (municipal license)
3. Sumptuary – a tax levied to achieve some social or economic objectives. sin taxes)

B. AS TO SUBJECT MATTER

1. Personal, poll or capitation – a tax on persons who are residents of a particular territory (community
tax)
2. Property taxes – a tax imposed on properties located within a particular territory (real property taxes)
3. Excise or privilege tax – a tax imposed upon performance of an act, enjoyment of privilege or
engagement in an occupation ( income tax, VAT, percentage tax, transfer taxes)

C. AS TO INCIDENCE

1. Direct tax – when both the impact and incidence of taxation rest upon the same taxpayer. The tax
liability cannot be transferred to another person. (income tax, transfer taxes)

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

2. Indirect tax – when tax is paid by another person other than the one who is intended to pay the same.
The tax liability can be transferred to another person (VAT)

D. AS TO AMOUNT

1. Specific tax – a tax of specific amount imposed based on a unit of measurement such as per kilo, liter,
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 – fixed tax rate. Tax rate remains the same regardless of the tax base (VAT,
percentage tax, donor’s tax, estate tax)
2. Progressive or graduated tax – tax rate increases as the tax base increases. (income tax on individual
taxpayers)
3. Regressive tax – tax rate decreases as the tax base increases. It is anti-poor and violates constitutional
guarantee of progressive taxation.
4. Mixed tax – combination of the above types of tax

F. AS TO IMPOSING AUTHORITY

1. National tax – imposed by the national government. Taxes found in the NIRC. ( income tax, estate tax,
donor’s tax, VAT, percentage tax, excise tax, documentary stamp tax)
2. Local tax – imposed by local government ( real property tax, professional tax, business taxes, fees and
charges, community tax, tax on banks and other similar financial institutions

DISTINCTION OF TAXES WITH SIMILAR ITEMS

Tax vs Revenue

Tax refers to the amount imposed by the government for public purpose. Revenue refers to all income
collection of the government which include taxes, tariffs, licenses, toll, penalties and others.

Tax vs License fees

Tax has a broader subject than license. Tax emanates from taxation power and imposed upon any object such
as persons, properties and rights.

License fees emanates from police power and is imposed to regulate the exercise of a privilege such as
commence of a business.

Tax vs toll

Tax is a levy of the government; hence it is a demand of sovereignty. Toll is a charge for the use of other’s
properties; hence it is a demand of ownership

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

Tax vs debt

Tax arises from laws while debt arises from contracts. Non-payment of tax may lead to imprisonment, while
non-payment of debt does not lead to imprisonment. Tax is not subject to set off while debt can be set-off. Tax
is payable in money while debt can be paid in kind.

Tax vs special assessment

Tax is an amount imposed upon persons, properties or privileges. Special assessment is levied by the
government on lands adjacent to a public improvements.

Tax vs tariffs

Tax is an amount imposed upon persons, properties or privileges. Tariff is amount imposed on imported or
exported commodities.

Tax vs penalty

Tax is amount imposed for the support of the government. Penalty is an amount imposed to discourage an act.
Penalty is imposed both by the government and private entities. It may arise both from law and contract
while tax arises from laws.

TAX COLLECTION SYSTEM

1. Withholding system on income tax – the payor of the income withholds or deducts the tax on the
income before releasing the same to the payee and remits it to the government (withholding tax on
compensation, expanded withholding tax and final withholding tax)

2. Withholding system on business tax – it is deducted by the national government agencies and
instrumentalities as well as GOCCs on the purchase of goods and services from private entities

3. Voluntary compliance system – the taxpayer himself determines his income, computes the tax due and
pay the same to the government.

4. Assessment or enforcement system – the government identifies non-compliant taxpayers, assess their
tax dues including penalties, demands taxpayer’s voluntary compliance or enforces collections by
coercive means like summary proceeding or judicial proceeding when necessary.

E. Assessment of Learning

For the self-regulated assessment of what you had learned from this module, please accomplish
the progress check/activity posted in our Google Classroom and submit it on or before due date.

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 COLLEGE OF ACCOUNTANCY
C-BAC7 Taxation (Income Taxation)
Second Semester AY 2021-2022

F. References

Banggawan, R. B. (2019). Income Taxation Laws, Principles and Applications. Baguio City: Real
Excellence Publishing.

Ampongan, O. E. (2015). CPA Review in Taxation. Iriga City, Philippines: Ampongan, Omar Erasmo G.

De Leon, H. S., & De Leon, H. M. (2016). The Fundamentals of Taxation. Manila City, Philippines: REX
Book Store.

De Leon, H. S., & De Leon, H. M. (2016). The Law on Income Taxation (with Illustration, Problem and
Solution. Manila City, Philippines: REX Book Store.

Duncano, D. A. (2017). Easy Guide to Taxation for Entrepreneurs. Mandaluyong City: Anvil Publishing,
Inc.

Duncano, D. A. (2016). National Internal Revenue Code of 1997 As Amended Updated with Annotations.
Mandaluyong City, Philippines: Anvil Publishing, Inc.

Congratulations for having completed this module!

See you in the next module!

Modules prepared by : Ligaya T. David

Reviewed/updated by : Rodelia R. Talavera

Faculty: RODELIA R. TALAVERA Page 12