INCOME TAXATION

CHAPTER 1:
INTRODUCTION TO
TAXATION
BAC 102 1ST SEMESTER 2022-2023 SECTION B 7:00-8:30 PM TTH
Chapter 1 - Learning Outcomes
 After this chapter, readers must be able to comprehend and demonstrate
mastery of the following:

 Concept of taxation and its  Fundamental principles

necessity for every government surrounding taxation
 Lifeblood doctrine and its  Various escapes from taxation
implication to taxation allocation  Concept of tax amnesty and
 Theories of government cost condonation
 Inherent power of the State
 Scope of the taxation power
 Limitations of the taxation power
 Stages of taxation
 Concept of situs in taxation
What is Taxation?
 Taxes maybe defines as follows:

 As a State Power
 Taxation is an inherent power of the State to enforce a proportional
contribution from its subjects for public purpose.
 As a Process
 Taxation
is a process of levying taxes by the legislature of the State to
enforce proportional contributions from its subjects for public purpose.
 As a mode of Cost Distribution
 Taxation is a mode by which the State allocates its costs or burden to
its subjects who are benefited by its spending
The Theory of Taxation
 The government's necessity for funding is the theory of
taxation.

The Basis of Taxation

 The mutuality of support between the people and the
government is referred to as the basis of taxation.
Public Service

Government People

Taxes
Theories of Cost Allocation
 Benefit Received Theory
 The benefit received theory presupposes that the more benefit one
receives from the government, the more taxes he should pay.

 Ability To Pay Theory

 The ability to pay theory presupposes that taxation should also
consider the taxpayer's ability to pay. Taxpayers should be required
to contribute based on their relative capacity to sacrifice for the
support of the government.

 Inshort, those who have more should be taxed more even if they
benefit less from the government. Those who have less shall
contribute less even if they receive more of the benefits from the
government
Aspects of the Ability to Pay Theory
 Vertical equity
 Vertical equity proposes that the extent of one's ability to pay is directly
proportional to the level of his tax base.
 For example, Alpha has P200,000 income while Bravo has P400,000. In taxing
income, the government should tax Bravo more than Alpha because Bravo
has greater income; hence, a greater capacity to contribute.
 Horizontal equity
 Horizontal equity requires consideration of the particular circumstance of the
taxpayer.
 For example, Businessmen Alpha and Bravo both have P300,000 income.
Alpha incurred P200,000 in business expenses while Bravo incurred only
P50,000 business expenses. The government should tax Bravo more than
Alpha because he has lesser expenses and thus greater se le capacity to
contribute taxes
The Lifeblood Doctrine
 Taxes are essential and indispensable to the continued subsistence
of the government. taxes, the government would be paralyzed for
lack of motive power to activate or operate it. (CIR vs. Algue)

 Taxes are the lifeblood of the government, and their prompt and
certain availability are an imperious need. Upon taxation depends
the government's ability to serve the people for whose benefit
taxes are collected. (Vera vs. Fernandez)
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.
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.
Inherent Powers of the State - Comparison
Point of Difference Taxation Police Power Eminent Domain
Exercising Authority Government Government Government and
Private Utilities
Purpose For the support of the To protect the general For public use
government welfare of the people

Persons Affected Community or class of Community or class of Owner of the property

individuals individuals
Amount of Imposition Unlimited (Tax is based Limited to cover No amount imposed
on government need) regulation (just compensation is
paid)
Importance Most important Most superior Important
Relationship with the Inferior to “Non- Superior to “Non- Superior to “Non-
Constitution impairment clause” impairment clause” impairment clause

Limitation Constitutional and Public Interest and Public purpose and

Inherent Limitations due process just compensation
Inherent Powers of the State - Similarities
 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 a 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
Scope Of The Taxation Power
 The scope of taxation is widely regarded as comprehensive,
plenary, unlimited and supreme.

 However, despite the seemingly unlimited nature of taxation, it is

not absolutely unlimited. Taxation has its own inherent limitations
and limitations imposed by the Constitution.
Inherent Limitation Of Taxation
Territoriality of taxation

The government can only demand tax obligations upon its

subjects or residents within its territorial jurisdiction.
Exception:
 In income taxation, resident citizens and domestic corporations are
taxable on income derived both within and outside the Philippines.
 In transfer taxation, residents or citizens such as resident citizens, non
resident citizens and resident aliens are taxable on transfers of
properties located within or outside the Philippines
Inherent Limitation Of Taxation
International comity

No country is powerful than the other. It is by this principle that

each country observes international comity or mutual courtesy or
reciprocity between them. Hence,
 Governments do not tax the income and properties of other
governments.
 Governments give primacy to their treaty obligations over their own
domestic tax laws.
Inherent Limitation Of Taxation
Public purpose
Tax is intended for the common good. Taxation must be exercised
absolutely for public purpose. It cannot be exercised to further any private
interest.

Exemption of the government

The government can exercise the taxation power upon anything
including itself. Under the NIRC, government properties and income from
essential public functions are not subject to taxation. However, the income
of the government from its properties and activities conducted for profit,
including income from government-owned and controlled corporations is
subject to tax
Inherent Limitation Of Taxation
Non-delegation of the taxing power
The legislative taxing power is vested exclusively in Congress and is
non delegable, pursuant to the doctrine of separation of the
branches of the government to ensure a system of checks and
balances.
Exception:
 Under the Constitution, local government units are allowed to exercise
the power to tax to enable them to exercise their fiscal autonomy.
 Under the Tariff and Customs Code, the President is empowered to fix
the amount of tariffs to be flexible to trade conditions.
 Other cases that require expedient and effective administration and
implementation of assessment and collection of taxes
Constitutional Limitation Of Taxation
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 nor oppressive.
Aspects of due process:
 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. An assessment without a legal basis
violates the requirement of due process
 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. The law established procedures
which must be adhered to in making assessments and in enforcing
collections.
Constitutional Limitation Of Taxation
Equal protection of the law
Taxpayers should be treated equally both in terms of rights
conferred and obligations imposed.
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.
Progressive system of taxation
Tax rates increase as the tax base increases. The Constitution
favors progressive tax as it is consistent with the taxpayer's ability to
pay.
Constitutional Limitation Of Taxation
Non-imprisonment for non-payment of debt or poll
tax(basic community 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.
However, this Constitutional guarantee applies only when the debt is
acquired by the debtor in good faith. Debt acquired in bad faith
constitutes “estafa”, a criminal offense punishable by imprisonment.
Non-payment of tax is not equivalent to non-payment of debt.
Non-payment of tax compromises public interest while the non-
payment of debt compromises private interest. The non-payment of
tax is similar to a crime.
Constitutional Limitation Of Taxation
Non-impairment of obligation and contract
Government should not set aside its obligations from contracts by
the exercise of its taxation power.

Free worship rule

The Philippine government adopts free exercise of religion and
does not subject its exercise to taxation. Consequently, the properties
and revenues of religious institutions such as tithes or offerings are not
subject to tax. This exemption, however, does not extend to income
from properties or activities of religious institutions that are proprietary
or commercial in nature.
Constitutional Limitation Of Taxation
Exemption of religious, charitable or educational
entities, non-profit cemeteries, churches and mosques,
lands, buildings, and improvements from property taxes
The Constitutional exemption from property tax applies for properties
actually, directly, and exclusively (i.e. primarily) used for charitable, religious,
and educational purposes.

Non-appropriation of public funds or property for the

benefit of any church, sect, or system of religion
This is intended to highlight the separation of religion and the State. To
support freedom of religion, the government should not favor any particular
system of religion by appropriating public funds or property in support
thereof.
Constitutional Limitation Of Taxation
Exemption from taxes of the revenues and assets of non-profit,
non-stock educational institutions including grants,
endowments, donations, or contributions for educational
purposes
The Constitutional exemption from property tax applies for properties actually,
directly, and exclusively (i.e. primarily) used for charitable, religious, and
educational purposes.

Non-appropriation of public funds or property for the benefit

of any church, sect, or system of religion
The Constitution recognizes the necessity of education in state building by
granting tax exemption on revenues and assets of non-profit educational
institutions. This exemption, however, applies only on revenues and assets that are
actually, directly, and exclusively devoted for educational purposes.
Constitutional Limitation Of Taxation
Concurrence of a majority of all members of
Congress for the passage of a law granting tax
exemption
Tax exemption law counters against the lifeblood doctrine as it
deprives the government of revenues. Hence, the grant of tax
exemption must proceed only upon a valid basis.

Non-diversification of tax collections

Tax collections should be used only for public purpose. It should
never be diversified or used for private purpose.
Constitutional Limitation Of Taxation
Non-delegation of the power of taxation
The principle of checks and balances in a republican state
requires that taxation power as part of lawmaking be vested
exclusively in Congress however there were exceptions to this.

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 be
finally decided by the Supreme Court of the Philippines.
Constitutional Limitation Of Taxation
Appropriations, revenue, or tariff bills shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments
The origination of a bill by Congress does not necessarily mean that the
House bill must become the final law. It was held constitutional by the
Supreme Court when Senate changed the entire house version of a tax bill.

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
This is a constitutional recognition of the local autonomy of local
governments and an express delegation of the taxing power.
Stages Of The Exercise Of Taxation Power
 Levy or imposition -involves the enactment of a tax law
by Congress and is called impact of taxation/legislative
act in taxation.
 Assessment and Collection - This stage is referred to as
incidence of taxation or the administrative act of
taxation.
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. 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:
 Business tax situs: Businesses are subject to tax in the place where
the business is conducted
 Income tax situs on services: Service fees are subject to tax where
they are rendered
 Income tax situs on sale of goods: The gain on sale is subject to tax
in the place of sale.
 Property tax situs: Properties are taxable in their location
 Personal tax situs: Persons are taxable in their place of residence
Other Fundamental Doctrines In Taxation
 Marshall Doctrine - "The power to tax involves the power
to destroy." Taxation power can be used as an instrument
of police power.
 Holme's Doctrine - "Taxation power is not the 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 incentives.
 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.
Other Fundamental Doctrines In Taxation
 Non-compensation or set-off - Taxes are not subject to
automatic set-off or compensation. The taxpayer cannot
delay payment of tax to wait for the resolution of a lawsuit
involving his pending claim against the government.
 Exceptions:
 Where the taxpayer's claim has already become due and
demandable such as when the government already recognized
the same and an appropriation for refund was made.
 Cases of obvious overpayment of taxes
 Local taxes
 Non-assignment of taxes - Tax obligations cannot be assigned
or transferred to another entity by contract. Contracts
executed by the taxpayer to such effect shall not prejudice
the right of the government to collect.
Other Fundamental Doctrines In Taxation
 Imprescriptibility in taxation - Prescription is the lapsing of
a right due to the passage of time. The government's right
to collect taxes does not prescribe unless the law itself
provides for such prescription.
 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. However, it does not
apply to the government. The error of any government
employee does not bind the government.
Other Fundamental Doctrines In Taxation
 Judicial Non-interference - Generally, courts are not
allowed to issue injunction against the government's
pursuit to collect tax as this would unnecessarily defer tax
collection.
 Strict Construction of Tax Laws - 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
 Vague exemption laws - construed against the taxpayer and
in favor of the government
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
 Primary element: Same object
 Secondary elements:
 a. Same type of tax

 b. Same purpose of tax

 c. Same taxing jurisdiction

 d. Same tax period

Double Taxation
 Types of Double Taxation.
 Direct
double taxation - This occurs when all the element of
double taxation exists for both impositions
 Example: An income tax of 10% on monthly sales and a 2% income
tax on the annual sales (total of monthly sales)
 Indirectdouble taxation - This occurs when at least one of
the secondary elements of double taxation is not common
for both impositions.
 Example:The national government collects income tax from a
taxpayer on his income stat while the local government collects
community tax upon the same income.
How can double taxation be minimized?
 Provision of tax exemption - only one tax law is allowed to apply
to the tax object while the other tax law exempts the same tax
object
 Allowing foreign tax credit - both tax laws of the domestic
country and a foreign country tax the tax object, but the tax
payments made in the foreign tax law are deductible against
the tax due of the domestic tax law
 Allowing reciprocal tax treatment - provisions in tax laws
imposing a reduced tax rates or even exemption if the country
of the foreign taxpayer also gives the same treatment to Filipino
non-residents therein.
 Entering into treaties or bilateral agreements - countries may
stipulate for a lower tax rate for their residents if they engage in
transactions that are taxable by both of them
Escapes From Taxation
 Categories of Escapes from Taxation
 A. Those that result to loss of government revenue
Tax evasion or Tax dodging - any act or trick that tends
to illegally reduce or avoid the payment of tax. Involves
fraudulent act to take advantage of lower taxes.
 Example :

 a. This can be achieved by gross understatement of

income, non declaration of income, overstatement of
expenses or tax credit.
 b. Misrepresenting the nature or amount of transaction
Escapes From Taxation
 Categories of Escapes from Taxation
 A. Those that result to loss of government revenue
Tax avoidance or tax minimization - refers to any act or
trick that reduces or totally escapes taxes by any legally
permissible means.
 Example :

 a.
Selection and execution of transaction that would
expose taxpayer to lower taxes.
 b. Maximizing tax options, tax carry-overs or tax credits
 c. Careful tax planning
Escapes From Taxation
 Categories of Escapes from Taxation
 A. Those that result to loss of government revenue
Tax exemption or tax holiday - refers to the immunity,
privilege or freedom from being subject to a tax
which others are subject to.
Example :
Exemption of religious, charitable or educational
entities, non-profit cemeteries, churches and
mosques, lands, buildings, and improvements from
property taxes
Escapes From Taxation
 Categories of Escapes from Taxation
 B. Those that do not result to loss of government revenue
 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 (i.e.
from manufacturer to wholesalers, retailers to consumers). Forward shifting is common with
essential commodities and services such as food and fuel.

 b. Backward shifting - Backward shifting is common with non-essential commodities where

buyers have considerable market power and commodities with numerous substitute
products.

 c. Onward shifting - This refers to any tax shifting in the distribution channel that exhibits
forward shifting or backward shifting
Escapes From Taxation
 Categories of Escapes from Taxation
 B.Those that do not result to loss of government
revenue
 Capitalization
- This pertains to the adjustment of the value
of an asset caused by changes in tax rates.
Example
 The
value of a mining property will correspondingly decrease
when mining output is subjected to higher taxes.
 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. It is an absolute forgiveness or waiver by
the government on its right to collect and is
retrospective in application.
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. Because they deprive the
government of revenues, tax exemption, tax
refund, tax amnesty, and tax condonation are
construed against the taxpayer and in favor of
the government.
Tax Amnesty vs Tax Condonation
 Amnesty covers both civil and criminal liabilities,
but condonation covers only civil liabilities of the
taxpayer.
 Amnesty operates retrospectively by forgiving past
violations. Condonation applies prospectively to any
unpaid balance of the tax; hence, the portion already
paid by the taxpayer will not be refunded.
 Amnesty is also conditional upon the taxpayer paying
the government a portion of the tax whereas
condonation requires no payment
END OF LESSON

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