Income Taxation- CHAPTER 1 Subjects of Taxation

General Principles of Income Taxation 1. Persons

- Natural - human being/ life
Taxation - Juridical - legal life (given by the government)
- Is the process or means by which the sovereign through its law- Partnership, corporation, joint venture, association
making body imposes burdens upon subjects and objects within its 2. Property
jurisdiction for the purpose of raising revenues to carry out legitimate - Real - immovable property
objects of government
- Personal - movable property
- State power, a legislative process and mode of government cost
• Tangible
distribution.
• Intangible
- Rule of taxation covers all
- Is a mode of allocating government costs or burden to the people 3. Privilege (Excise)
distributing the cost or burden, the government regards the - Donation (Donor’s tax)
following general considerations in the exercise of its taxation power: - Estate
1. Benefited received theory – presupposes that the more benefit one - Inheritance *estate tax – will be a burden on successor via
receives from the government, the more taxes he should pay. diminished value of inheritance (estate itself will be tax)
2. Ability to pay theory – presupposes that taxation should also consider
the taxpayer’s ability to pay. Taxpayers should be required to Essential elements of tax
contribute based on their relative capacity to sacrifice for the support
1. It is an enforced contribution
of the government.
- Payment of tax is not voluntary payment or donation, but an
enforced contribution, exacted pursuant to legislative authority.
Inherent Powers of the State (Inherent means built-in, inborn, ingrained)
2. It is generally payable in money
A government has its basic needs and rights which co-exist with its - It is pecuniary burden payable in money which must be in legal
creation. In the rights to sustenance, protection and properties. tender.
The government sustains itself the power of taxation, secures itself and the 3. It is proportionate in character
well-being of its people by police power, and secures its own properties to carry - Payment of taxes should be based on the ability to pay theory or
out its public services by the power of eminent domain. theoretical justice. The use of a graduated tax rates is in
a. Taxation Power (Power of Taxation) consonance with this rule.
- Lifeblood Theory/ Doctrine
4. It is levied on persons property or the exercise of right or privilege
- Is the power of the State to enforce proportional contribution (raise
5. It is levied by the law-making body of the state. The power of
revenue) from its subjects to sustain itself
imposing a tac being purely legislative function, Congress cannot
b. Police Power
- Is the general power of the State to enact laws to protect well-being delegate such power.
of the people 6. It is levied for public purpose.
- Promoting public welfare by restraining and regulating the use of
liberty and property. The property taken in the exercise of this power
is destroyed because it is noxious or intended for a noxious purpose.
c. Power Of Eminent Domain
- Is the power of the State to take private property for public use after
paying a just compensation
LIMITATIONS OF THE TAXATION POWER
A. Inherent Limitations (natural limitation)
1. Territorial jurisdiction (territoriality of taxation)
- 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 PH.
*OFW are not taxable unless they have business or earning income
in the PH.
2. International Comity
- Polite and friendly agreements among nations
- Under international law, property of a foreign state may not be
taxed by another state.
- No country is more powerful then the other. It is by principle that
each country observes international comity or mutual courtesy or
reciprocity between them.
3. 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.
4. Exemption of the government
- Government can exercise the power of taxation upon anything
including itself.
- However, the government normally does not tax itself as this will
not raise additional funds but will only impute additional costs.
- Keyword is Redundancy
5. Non-delegation Power
- The legislative 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
- Power of lawmaking, including taxation, is delegated by the
people to the legislature.
• Legislative – levying (president, mayors, etc)
• Executive –Assessment and Collection (congress & senate)
• Judiciary – impose sanctions, role of judiciary (all court)
CONGRESS → SENATE→EXECUTIVE→BIR→National Treasury
Bill Bill Law Collection
Veto Power- power of the president to reject the bill
B. Constitutional Limitations (in the constitution or implied from its
provision)
1. Observance of due process of law
- No one should be deprived of his life, or liberty without due
process of law. Tax laws should neither be harsh nor oppressive.
- Simply right to be heard, be noticed, remain silent
2. Equal protection of the law
- No person shall be denied the equal protection of law.
- Taxpayers should be treated equally both in terms of rights
conferred and obligations imposed.
3. Uniformity rule of taxation
- Shall be uniform and equitable
- Taxpayers under dissimilar circumstances should not be taxed the
same.
- They should be classified according to commonality in attributes,
and the tax classification to be adopted should be based on
substantial distinction.
4. Progressive System of taxation
- Tax rates increases as the tax base increases.
- It is consistent with the taxpayer’s ability to pay.
- Aids in an equitable distribution of wealth to society by taxing the
rich more than the poor.
5. Non-diversification of tac collections
- Tax collections should be used only for public purpose. It should
never be diversified or used for private purpose.
6. 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 should be raised to and
be finally decided by the supreme court of the Ph.
7. Appropriations, revenue, or tariff bills shall originate exclusively in
the House of Representatives, but the senate may propose or concur
with amendments.
8. Each LGU shall exercise the power to create its own sources of
revenue and shall have a just share in the national taxes.
- Constitutional recognition of the local autonomy of local
governments and an express delegation of the taxing power.
9. Non-imprisonment for non -payment of poll-tac (personal of
capitation tax)
- No one shall be imprisoned because of his poverty, and no one
shall be imprisoned for mere inability to pay debt.
 10. Non-impairment of obligation and contract
- state should set an ex. Of good faith among its constituents.
- Tax exemptions granted under contract should be honored and should not
be cancelled by a unilateral government action.
11. Free worship rule
- Does not subject free exercise of religion to taxation
- Properties and revenues of religious institution such as tithes or offerings
are not subject to tax.
12. Exemption of religious, charitable or educational entities, non-profit
cemeteries, churches and mosques, lands, buildings, and
improvements from property tax.
13. Non-appropriation of public funds or property for the benefit of any
church, sect or system of religion.
- Highlight the separation of religion and the State.
14. Exemption from taxes of the revenues and assets of non-profit, non-
stock educational institutions including grants, endowments,
donations or contributions for educational purposes.
15. Concurrence of a majority of all members of congress for the passage
of a law granting tax exemption.
Stages of the exercise of taxation power
1. Levy or imposition (impact of taxation and legislative act)
2. Assessment and collection (incidence of taxation or administrative act of
taxation)
Situs of Taxation
- Place of taxation
1. Business tax situs
- Business are subject to tax in the place where the business is conducted.
2. Income tax situs on services
- Are subject to tax where service are rendered
3. Income tax situs on sale of goods
- Gain of sale is subject to tax in the place of sale
4. Property tax situs
- Are taxable in their location
5. Personal tax situs
- Taxable in their place of residence
Intangibles
a. Cash In Bank – depository Bank
b. Accounts Receivable – domicile or residence of the debtor
c. Franchise, patents, copyrights, trademarks – where such rights are exercised.
Other Fundamental Doctrines in Taxation
1. Marshall Doctrine
- The power to tax involves the power to destroy
- Taxation power can be used as an instrument of police power
- It can be used to discourage or prohibit undesirable activities or
occupation.
2. Holme’s Doctrine
- Taxation power is not the power to destroy while the court sits.
- Taxation power ma be used to build or encourage beneficial activities
or industries by the grant of tax incentives
3. Prospectivity of Tax laws
- tax laws are generally prospective in operation. (present & future)
- As ex post facto law or a law that retroacts is prohibited
4. Non-compensation or set-off
- Taxes are not subject to automatic set-off or compensation.
- Taxpayer cannot delay payment of tax to wait for the resolution of
lawsuit involving his pending claim against the government.
- Tax is no a debt, hence, it is not subject to set-off
5. Non-assignment of taxes
- 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.
- Tax amnesty
- Did not take his chance to lower the tax
7. Doctrine of Estoppel
- 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
- Government is not subject to estoppel. (error of government
employee is not an error of the government)
8. Judicial Non-interference
- 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.
- When the law clearly provides for taxation, taxation is the general
rule unless there is a clear exemption.
- Taxation is the rule, exemption is the exception.
Classifications of Taxes 5. As to Rate
1. As to Purpose a. Proportional- fixed rate (VAT)
a. Fiscal- solely for the general purpose of taxation (public purpose) b. Progressive (graduated)- tax imposes increasing rates as the tax base
b. Regulatory- resolved certain issues of the country (devise for increases.
regulation and control) c. Regressive- imposes decreasing tax rates as the tax base increases
c. Sumptuary – tax levied to achieve some social or economic objectives d. Mixed – combination of any of the three
2. As to Incidence (who bears the burden) 6. As to taxing authority
a. Direct- tax which is demanded from the person who also shoulders the a. National- tax imposed by the national government
burden of the tax, or for which the taxpayer is directly or primarily b. Local- tax imposed by the municipal or local government
liable or which he cannot shift to another. Escapes from Taxation
The statutory tax payer is the economic tax payer - Are the means available to taxpayer to limit or even avoid the
Example: corporate or individual income tax, community tax (one who impact of taxation.
pays) a. Tax Evasion
b. Indirect- tax which is demanded from one person in the expectation - Also known as tax dodging,
and intention that he shall indemnify himself at the expense of another, - Refers to any act or trick that tends to illegally reduce or avoid
falling finally upon the ultimate purchaser or consumer, tax imposed the payment of tax
upon goods before they reach the consumer who ultimately pays for it b. Tax Avoidance
not as tax but as a part of the purchase price. - Also known as tax minimization
The statutory taxpayer is the same person named by law to pay the - Refers to any act or trick that reduces or totally escapes taxes by
tax. And economic taxpayer is the one who actually pays the tax any legally permissible means
Example: VAT (collect the tax but do not pay for it) c. Tax Exemption
3. As to Subject Matter - Also known as tax holiday
a. Personal, poll, or capitation taxes- a tax on perosns who are residents - Refers to the immunity privilege or freedom from being subject
of a particular territory to a tax, which others are subject to.
Example: community (formerly residence) tax - Granted by the constitution, law or contract.
b. Property- tax imposed on property whether personal or real
c. Excise- any tax which do not fall within the classification of a poll tax Distinction of Taxes With Similar Items
or property tax. Tax imposed upon the performance of an act of TAX REVENUE
enjoyment of a privilege or engagement in an occupation Refers to the amount imposed by the Refers to all income collections of the
4. As to Amount government for public purpose. government which includes taxes,
a. Specific- tax of a fixed amount imposed by the head or number, or by tariff, licenses, toll, penalties and
Based on revenue
some standard of weight or measurement, requires no assessment others
(valuation) other than a listing or classification of the objects to be
taxed TAX LICENSE FEE
b. Ad Valorem- tax of a fixed proportion of the value of the property with Has a broader subject than license. Emanates from police power and is
respect to which the tax is assessed, requires the intervention of imposed to regulate the exercise of a
POST-ACTIVITY IMPOSITION
assessors or appraisers to estimate the value of such property before privilege such as the commencement
the amount due from each taxpayer can be determined. The phrase ad Are imposed after the commencement of a business
valorem means literally according to value of a business or profession
PRE-ACTIVITY IMPOSITION
Imposed before the engagement of
business and profession.

TAX
Is a levy of government; hence, it is a
demand of sovereignty.
Amount depends on the needs of the
government
Both the government and private
entities impose toll, but private
entities cannot impose taxes
TAX
Arises from law
Non-payment leads to imprisonment
Generally payable in money
TAX
Is an amount imposed upon persons,
properties or privileges
Principles of a Sound System
TOLL
Is a charge for the use of other’s
property; hence, it is a demand of
ownership
Amount depends upon the value of
the property
DEBT
Arises from private contracts
Non-payment does not lead to
imprisonment
Can be subject to set-off
Can be paid in kind (dacion en pago)
SPECIAL ASSSESSMENT
Is levied by the government on lands
adjacent to a public improvement.
Imposed on land only and is intended
to compensate the government for a
part of the cost of the improvement
- 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. The government must not incur a
deficit.
- A budget deficit paralyzes the government’s ability to deliver
the essential public services to the people. Hence, taxes should
increase in response to increase in government spending.
2. Theoretical Justice
- Or equity suggest that taxation should consider the taxpayer’s
ability to pay.
- Also suggests that the 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.
- Government should make it easy for the taxpayer to comply by
avoiding administrative bottlenecks and reducing compliance
costs.

TAX TARIFF
Broader than tariff Amount imposed on imported or
exported commodities
Amount imposed upon persons,
privilege, transactions or properties.

TAX PENALTY
Is an amount imposed for the support Amount imposed to discourage an
of the government. act.
Arises from the law May be imposed by both the
government and private individuals

May rise from law or contract