INCOME TAXATION
WEEK 1: INTRODUCTION TO INCOME TAXATION
TAXATION
Taxation may be defined as a state power,
legislative process, and a mode of agreement cost
distribution.
1. As a state power – Taxation is an inherent
power of the State to enforce a proportional
contribution from its subjects for public purpose.
2. As a process – Taxation is a process levying
taxes by the legislature of the State enforce
proportional contributions from is subjects for
public purposes.
3. 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.
THEORY OF TAXATION
A system of government is indispensable to
every society. Without it, the people will not relish the
benefits of a civilized and orderly society. However, a
government cannot exist without a system of funding.
THE BASIS OF TAXATION
The government provides benefits to the people
in the form of public services, the people provide the
funds that finance the government This mutuality
support between the people and the government is
referred to as the basis of taxation.
RECEIPT OF BENEFIT IS CONCLUSIVELY
PRESUMED
Taxpayers cannot avoid payment of under the
defense of absence of benefit received. The direct receipt
or act availment of government services is not a
precondition to taxation.
THEORIES OF COST ALLOCATION
1. Benefit Received Theory
The benefit received theory presupposes that the
more benefit he receives from the government, the more
taxes he should pay.
2. 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.
ASPECTS ABILITY TO PAY THEORY
1. Vertical Equity – proposes that the extent of
one’s ability to pay is directly proportional to the
level of this tax base.
2. Horizontal Equity – this requires consideration
of the particular circumstance of the taxpayer.
THE LIFEBLOOD DOCTRINE
Taxes are the lifeblood of the government, and
their prompt and certain availability are an imperious
need. Upon taxation depends on 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
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 capit.al expenditures and
prepayments are not allowed as
effectively defers the collection of
income tax.
 INCOME TAXATION
c. A lower amount of deduction is
preferred when a claimable expense
subject to limit.
d. A higher tax base is preferred when the
tat abject has multiple tax base.
6. 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 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 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 TAXATION POWER
A. INHERENT LIMITATIONS
a. Territoriality of taxation – two-fold
obligations of taxpayers:
1. Filing of returns and payment
of taxes.
2. Withholding of taxes on
expenses and its remittance to
the government.
b. International comity
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. Public purpose – tax is intended for the
common good. Taxation must be
exercised absolutely for public purposes.
It cannot be exercised to further any
private interest.
d. Exemption of the government – the
government normally does not tax itself
as this will not raise additional funds but
will only impute additional costs.
e. Non-delegation of the taxing power –
the power of lawmaking, including
taxation, is delegated by the people to
the legislature, So as not to spoil the
purpose of delegation, it is held that
what has been delegated cannot be
further delegated.
B. CONSTITUTIONAL LIMITATIONS
a. Due process of law – substantive due
process and procedural due process.
b. Equal protection of the law –
taxpayers should be treated equally both
in terms of rights conferred and
obligations imposed
c. Uniformity rule in taxation –
taxpayers under dissimilar
circumstances should not be taxed the
same.
d. Progressive system of taxation – under
the progressive system, tax rates
increase as the tax base increases.
e. Non-imprisonment for non-payment
of debt or poll tax – no shall be
imprisoned because of his poverty, and
no one shall be imprisoned for mere
inability to pay debt.
 INCOME TAXATION
f. Non-impairment of obligation and
contract – tax exemptions granted
under contract should be honored and
should not be cancelled by unilateral
government action.
g. Free worship rule – the Philippine
government adopts free exercise of
religion and does not subject its exercise
to taxation.
h. Exemption of religious or charitable
entities, non-profit cemeteries,
churches and mosque, from property
taxes.
i. Non-appropriation of public funds or
property for the benefit of a church,
sect or system of religion.
j. Exemption from taxes of the revenues
and assets of non-profit, non-stock
educational institutions.
k. Concurrence of a majority of all
members of Congress for the passage
of law granting tax exemption
l. Non-diversification of tax collections
m. Non-delegation of the power of
taxation
n. Non-impairment of the Jurisdiction of
the Supreme Court to review cases.
o. The requirement that appropriations,
revenues, or tariff bills originate
exclusively in the HOR
p. The delegation of taxing power to
local government
STAGES OF EXERCISES OF TAXATION POWER
1. Levy or imposition
This process involves the enactment of a tax law by
Congress and is called impact of taxation It is also
referred to as the legislative act in taxation.
2. Assessment and collection
The Tax law is implemented by the administrative
branch of the government Implementation involves
assessment or the determination of the tax liabilities of
Taxpayers and collection. This stage is referred to as
incidence 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.
Example of Situs Rules
1. Business tax situs – businesses are subject to
tax in the place where the business 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 – “The power of tax
involves the power to destroy”
2. Holmes’ Doctrine – “Taxation power is not the
power to destroy while the court sits”
3. Prospectivity of tax laws – income tax laws
may operate retrospectively if so, intended by
Congress under certain justifiable conditions.
4. Non-compensation or set-off – tax is not a
debt; hence, it is not subject to set-off.
5. Non-assignment of taxes – Tax obligations
cannot be assigned or transferred to another
entity by contract.
6. Imprescriptibility in taxation - Prescription is
the lapsing of a right due to the passage of time.
When one sleep on his right over an
unreasonable period of time, he is presumed to
waiving his right. The government's right to
collect taxes does not prescribe unless the law
itself provides for such prescription.
7. Doctrine of estoppel - Under the 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.
8. 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. This rule is
anchored on the Lifeblood Doctrine.
9. Strict Construction of Tax Laws – “Taxation
is the rule, exception is the exception”. (Ex:
Vague tax laws, Vague exemption laws)
DOUBLE TAXATION
 INCOME 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 purpose of tax
c. Same taxing jurisdiction
d. Same tax period
TYPE 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 MINIMIZED?
The impact of double taxation can be minimized by any
one or a combination of the following:
a. 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.
b. 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.
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 gives the same treatment to Filipino non-
residents therein.
d. 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.
ESCAPE FROM TAXATION
A. Those that results to loss of government revenue.
Escapes on taxation are the means available to the
taxpayer to limit or to avoid the impact of taxation.
ESCAPE FROM TAXATION
1. Tax Evasion
 Also known as tax dodging.
 Refers to any act of trick that tends to
illegally reduce or avoid payment of tax.
 Examples:
a. This can be achieved by gross
understatement of income, non-
declaration of income,
overstatement of expenses or
tax credit.
b. Misrepresenting he nature or
amount of transaction to take
advantage of lower taxes.
2. Tax Avoidance
 Also known as tax minimization.
 It refers to any act or trick that reduces
or totally escapes taxes by any legally
permissible means.
 Examples:
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
3. Tax Exemptions
 Also known as tax holiday.
 It refers to the immunity privilege or
freedom from being subject to a tax
which are subject to tax exemption may
be granted by the Constitution, law, or
contract.
 All forms of tax exemptions ca be
revoked by Congress except those
granted by the Constitution and those
granted under contracts.
4. Tax Amnesty
 Amnesty is a general pardon granted by
the government for erring taxpayers to
 INCOME TAXATION
give them a chance to reform and enable
them to have a fresh start to be part of
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.
5. 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 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 the tax whereas
condonation requires no payment.
WEEK 2: INTRODUCTION TO INCOME TAXATION
TYPES OF TAXATION LAW
1. TAXATION LAW
 It refers to any law that arises from the
exercises of the taxation power of the
State.
a. The National Internal Revenue
Code
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 certain
immunity from taxation.
a. The Minimum Wage Law
b. The Omnibus Investment Code
of 1987 (E.O.226)
c. Barangay Micro-Business
Enterprise (BMBE) Law
TYPES OF TAXATION LAW
SOURCES OF TAXATION LAWS
1. Constitution
2. Statues and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
i. Revenue regulations
ii. Revenue memorandum orders
iii. Revenue memorandum rulings
iv. Revenue memorandum circulars
v. Revenue bulletins
vi. BIR rulings
6. Local Ordinances
7. Tax Treaties and Conventions with foreign
countries
8. Revenue Regulations
TYPES OF RULINGS
1. Value Added Tax (VAT) Rulings
2. International Tax Affairs Divisions (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
 INCOME TAXATION
1. Personal, poll or capitation – a tac on
persons who are residents of a 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 amount
1. Specific tax – a tax of a fixed amount
imposed on a per unit basis such as per
kilo, liter, meter, etc.
2. Ad valorem – a tax of a fixed
proportion imposed upon the value of
the tax object.
D. As to incidence
1. Direct tax – when both the impact and
incidence of taxation rest upon the same
taxpayer, the tax is said to be direct.
2. Indirect tax
 When the tax is paid by any
person other than the one who is
intended to pay the same, the
tax is said to be indirect.
 The statutory taxpayer is the
person named by the law to pay
the tax.
 An economic taxpayer is the
one who actually pays the tax.
E. As to rate
1. Proportional tax
 This is a 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 to pay.
2. Progressive or graduated tax
 This is a tax which imposes
increasing rates as the tax base
increase.
 The use of progressive tax rates
results in equitable taxation
because it gets more tax to those
who are more capable.
3. Regressive tax
 This tax imposes decreasing tax
rates as the tax base increase.
 Total reverse of progressive tax.
 This is regarded as anti-poor.
 It directly violates the
Constitutional guarantee of
progressive taxation.
4. Mixed tax – this tax manifest rates
which is a combination of any of the
above types of tax.
F. As to imposing authority
1. National tax – imposed by the national
government.
 Income tax
 Estate tax
 Donor’s tax
 Value Added Tax
 Other percentage tax
 Excise tax
 Documentary Stamp tac
2. Local tax – imposed by the municipal
or local government.
 Real property tax
 Professional tax
 Business taxes, fees, and
charges
 Community tax
 Tax on banks and other
financial institutions
DISTINCTION OF TAXES WITH SIMILAR ITEMS
Tax vs. Revenue
The amount imposed is tax but the amount collected is
revenue.
Tax vs. License fee
Taxes are imposed after the commencement of a
business or profession whereas license fee is imposed
before engagement in those activities.
Tax vs. Toll
Tax is a levy of government; hence, it is a demand of
sovereignty. Toll is a charge for the use of other's
property; hence, it is a demand of ownership.
Tax vs. Debt
Tax arises from law while debt arises from private
contracts.
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 improvement.
 INCOME TAXATION
Tax vs. Tariff same to the payee and remits the same
to the government.
Tax is broader than tariff. Tax is an amount imposed
 The following are the withholding taxes
upon persons, privilege, transactions, or properties.
collected under this system:
Tariff is the amount imposed on imported or exported
i. Creditable Withholding tax
commodities.
 Withholding tax on
Tax vs. Penalty compensation – an
Tax is an amount imposed for the support of the estimated tax required
government. Penalty is an amount imposed to by the government to be
discourage an act. withheld (i.e., deducted)
by employers against
TAX SYSTEM the compensation
This refers to the methods or schemes of income to their
imposing, assessing, and collecting taxes. It includes all employees
the tax laws and regulations, the means of their  Expanded withholding
enforcement, and the government offices, bureaus and tax – an estimated tax
withholding agents which are part of the machineries of required by the
the government in tax collection. government to be
deducted on certain
income payments made
by taxpayers engaged in
business. The creditable
Types of Tax Systems According to Imposition
withholding tax is
1. Progressive – employed in the taxation intended to support the
of income of individuals, and certain self-assessment method
local business taxes. to lessen the burden of
2. Proportional – employed in taxation of lump sum tax payment
corporate income and business. of taxpayer and also
3. Regressive – this is not employed in the provides for a possible
Philippines. third-party check for the
BIR of non-compliant
Types of Tax System According to Impact
taxpayers.
1. Progressive System
a. Emphasizes direct taxes
b. Direct tax cannot be shifted
c. Impacts more upon the rich
2. Regressive system
a. Emphasizes indirect taxes
b. Indirect taxes are shifted by businesses to
consumers
c. The impact of taxation rest upon the bottom
end of the society.
d. A regressive system is anti-poor.
TAX COLLECTION SYSTEM ii. FINAL WITHHOLDING
TAX
A. WITHHOLDING SYSTEM ON INCOME  A system of tax
TAX collection wherein
 Under this collection system, the payor payors are required to
of the income withholds or deducts the deduct the full tax on
tax on the income before releasing the
 INCOME TAXATION
certain income
payments
 The final withholding
tax is intended for the
collection of taxes from
income with high risk
of non-compliance.
SIMILARITES OF FINAL TAX AND
CREDITABLE WITTHOLDING TAX
 In both cases, the income payor withholds a
fraction of the income and remits the same to the
government.
 By collecting at the moment cash is available,
both serve to minimize cash flow problems to
the taxpayer and collection problems to the
government.
B. WITTHOLDING SYSTEM ON BUSINESS
TAX
 When the national government agencies
and instrumentalities including
government-owned and controlled
corporations (GOCCs) purchase goods
or services from private suppliers, the
law requires withholding of the relevant
business tax (i.e., VAT or percentage
tax).
C. 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.
D. ASSESSMENT OR ENFORCEMENT
SYSTEM
 Under this collection system, the
government identifies non-compliant
taxpayers, assesses their tax dues
including penalties, demands for
taxpayer's voluntary compliance or
enforces collections by coercive means
such as a summary proceeding or
judicial proceedings when necessary.
PRINCIPLE OF SOUND TAX SYSTEM
According to Adam Smith, governments should adhere
to the following principles or canons to evolve a sound
tax system:
1. Fiscal Adequacy – requires that the sources of
government funds must be sufficient to cover
government costs.
2. Theoretical justice – suggests that taxation
should consider the taxpayer’s ability to pay and
exercise of taxation should not be oppressive,
unjust, or confiscatory.
3. Administrative feasibility – suggests that tax
laws should be capable of efficient and effective
administration to encourage compliance.
The following are application of the principle
of administrative feasibility:
a. E-filing and e-payment of taxes
b. Substituted filing system for employees
c. Final withholding tax on non-resident
aliens or corporations
d. Accreditation of authorized agent banks
for the filing and payment of taxes.
TAX ADMINISTRATION
It refers to the management of the tax system.
The 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 Commissioner, 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.
 INCOME TAXATION
2. Enforcement of all forfeitures, penalties and
fines, and judgments in all case decided in its
favor by the courts administration.
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,
certificated, stamps, etc. to proper officials.
6. Issuance of receipts and clearances.
7. Submission of annual report, pertinent
information to Congress and reports to the
Congressional Oversight Committee in matters
of taxation.
OTHER AGENCIES TASKED WITH TAX
COLLECTIONS OR TAX INCENTIVES RELATED
FUNCTIONS
1. Bureau of Customs
2. Board of Investments
3. Philippine Economic Zone Authority
4. Local Government Tax Collecting Unit
5. Fiscal Incentives Review Board.