INCOME TAXATION

WEEK 1: CHAPTER 1: POWER OF TAXATION

What is TAXATION?
It is an inherent power of the state where through its law- making body raises revenue to defray the
necessary expenses of the government.

TAXATION is also:

 exercise of an inherent power

 a legislative process
 a mode of government cost distribution
 a power to destroy
 a power to influence/regulate

INEHERENT POWERS OF THE STATE

 Taxation Power
 Police Power
 Eminent Domain

PURPOSE & OBJECTIVES

RAISE REVENUE NON-REVENUE

Raise revenue to defray expenses of the
government for public purpose.
 Promotion of general welfare
 Regulation
 Reduction of social inequality
 Encourage economic growth
 Protectionism

IMPORTANCE THEORY BASIS OF TAXATION

IMPORTANCE THEORY BASIS

Life-blood doctrine Necessity theory Mutuality of support

THEORIES OF COST ALLOCATION

 Benefit-received theory
 Ability to pay theory

SCOPE OF THE TAXATION POWER

Comprehensive Plenary Unlimited Supreme

2 SCHOOLS OF THOUGHTS RECONCILED

“Power to tax is the power to destroy”

“Power to tax is not the power to destroy while the Supreme Court sits”

STAGES OF THE EXERCISE OF TAXATION POWER

IMAPCT OF TAXATION INCIDENCE OF TAXATION

Levy Enforcement
Imposition Collection

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal Adequacy
2. Administrative Feasibility
3. Theoretical Justice
4. Consistency with Economic Goals

WHAT IS TAX?

Enforced proportional contribution levied by the law-making body of the State to raise revenue for
public purpose.

CHARACTERISTICS OF TAX

Forced contribution
Generally payable in money
Exclusively levied by the legislature
Assessed in accordance with some reasonable rule of apportionment
Imposed by the State within its jurisdiction
Levied for a public purpose

CLASSIFICATION OF TAXES

SUBJECT MATTER BURDEN

Personal Tax Direct Tax
Property Tax Indirect Tax
Excise Tax
Customs Duties

PURPOSE MEASURE OF APPLICATION

General Tax Specific Tax
Specific Tax Ad Valorem Tax

TAXING AUTHORITY RATE

National Tax Progressive Tax
Local Tax Regressive Tax
Proportionate Tax
OTHER IMPOSITIONS OTHER THAN TAX

Toll License or Free Customs Duties

Penalty Margin Fee Impost
Compromise Penalty Debt Tithe
Special Assessment Subsidy Tribute

WEEK 2: CHAPTER 2: LIMITATIONS OF TAXING POWER

LIMITATIONS
Inherent
Constitutional
Contractual

TAXPAYER SUIT
A case filed by a bona fide taxpayer impugning the validity, legality or constitutionality of a tax law
or its implementation.

INHERENT LIMITATIONS
Public Purpose
Non-Delegation of the taxing power
Territoriality or Situs of Taxation
Tax Exemption of the Government
International Comity

GENERAL RULE:

 Power of taxation is exercised by the legislature

 A delegated authority could no longer be further delegated

EXCEPTIONS:

 Authority of president to fix tariff rates, import and export quotas tonnage and wharfage
dues, and other duties or imposts
 Local Government (Local Ordinances)
 Delegation to administrative agencies for implementation and collection

SITUS:

 Personal – residence or domicile of taxpayer

 Real property – location of property
 Personal property tax – tangible where located, intangible where it is used
 Business tax – place of business
 Excise or privilege – where performed
 Sales – where sold
 Income tax – citizenship, residence, source
  Transfer tax – residence or citizenship or location of property
 Franchise – who grants the franchise
 Corporate – law on incorporation

GOVERNMENT:

 Administrative Agencies
 Government function – exempt
 Proprietary function – taxable
 GOCCs – taxable except: GSIS, SSS, PHIC, PCSO, PAGCOR
 Government Educational Institutions – exempt but other activities taxable

CONSTITUTIONAL LIMITATIONS

 Due Process of Law

 Equal Protection of the law
 Uniformity rule
 Progressive system
 Non-imprisonment for non-payment of debt or poll tax
 Non-impairment of obligation and contract
 Free worship rule
 Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque
from property tax.
 Non-appropriation of public funds or property for the benefit of any church, sect or system
of religion
 Exemption from taxes of the revenues and assets of non-profit, non-stock educational
institution
 Concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption
 Non-diversification of tax collections
 Non-delegation of the power of taxation
 Non-impairment of the jurisdiction of the Supreme Court to review tax cases
 The requirement that appropriations, revenue or tariff bills shall originate exclusively in the
House of Representatives.
 Delegation of taxing power to LGU.

Due Process – “No one should be deprived of his life, liberty or property without due process of the
law”

ASPECTS OF DUE PROCESS:

Substantive – for public purpose, collected by the right authority

Procedural – gov adhere to taxpayer’s right to notice and hearing

Equal Protection – no bias

Uniformity Rule – equality

Progressive – tax rate increases as the tax base increases

Applies only to debt in good faith. Debt acquired in bad faith constitutes “estafa”, a criminal
offense punishable by imprisonment

Poll tax – (basic) a tax levied on every adult, without reference to income or resources.

Non-payment of additional community tax is an act of tax evasion punishable by imprisonment.

Tax laws originate from Congress, while Senate can suggest amendments. It will still be
constitutionalized by the Supreme Court.

Constitution allows LGUs to make tax laws to survive

CONTRACTUAL LIMITATIONS

Bilateral Agreement – it cannot be withdrawn w/o violating non-impairment law

Unilateral Agreement – it can be withdrawn by virtue of another law
Franchise – can be withdrawn at anytime

DOUBLE TAXATION
Taxing of a taxpayer more than once by the same tax jurisdiction for the same object.

Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the
same thing.

ELEMENTS OF DOUBLE TAXATION

PRIMARY SECONDARY
Object Tax type
Purpose
Jurisdiction
Period
TYPES OF DOUBLE TAXATION
1.DIRECT DOUBLE TAXATION
2.INDIRECT DOUBLE TAXATION

Direct double taxation is DISCOURAGED. Oppressive and burdensome, counter against EQUAL
PROTECTION and uniformity in constitution

REMEDIES OF DOUBLE TAXATION

 Tax Sparing Rule

 Tax Deduction
 Tax Credits
 Exemptions
 Treaties
 Principle of Reciprocity
ESCAPES OF TAXATION

Tax Evasion (Tax Dodging) Shifting

Tax Avoidance (Tax Minimization) Capitalization
Tax Exemption (Tax Holiday) Transformation

Phil Tax System is on PAY AS YOUFILE, but for tax evaders it’s PAY AS YOU LIKE

KINDS OF EXEMPTION

EXTENT OBJECT
Total Personal – directly in favour of certain person
Partial Impersonal – in favour of creation class

BASIS FORM
Constitutional Express
Statutory – emanates from legislation Implied

ESCAPES OF TAXATION

CONDONATION AMNESTY
 Forgiveness  General pardon & Absolute forgiveness
 Civil Liabilities only  Both Civil and Criminal liabilities
 Prospective  Retrospective
 Without Payment  With Certain Payment

Eg. SSS Condonation Program Eg. BIR Tax Amnesty Program

WEEK 3: CHAPTER 3: TAX LAWS

TAX LAWS

Sets of rules that provide means for the State to raise revenue

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

TYPES OF TAXATION LAW: Tax laws and Tax Exemption Laws

STAGES IN MAKING TAX LAW

PROPOSAL  All revenue bills must originate from the House of Representatives
 It should pass 3 readings by a majority vote in technical committee,
deliberation and journals of congress.
SENATE VERSION  It should again pass 3 readings by a majority vote in technical
committee, deliberation and journals of senate.
SIGNING  The President may veto some part of the bill before signing.
 The President signs a bill into law for its implementation
 SOURCES OF TAX LAWS

1. Republic Acts/Statutes/Tax Code

2. Presidential Decree/Executive Orders

3. Court Decisions

4. Revenue Regulations

NATURE OF TAX LAWS

Not Political Civil Not Penal

Public purpose is always presumed

RULES IN TAX IMPOSITION Legislative intention must be considered
Where the language is plain and there is no doubt tax laws must
be given their ordinary meaning

Highly disfavoured in law and not presumed

RULES IN TAX EXEMPTIONS If ambiguous, there is no exemption
Taxation is the rule, tax exemption is the exception
Strictly construed against the taxpayer
Tax exemptions are personal

Omnibus Investment Code – incentives for investors

OTHER SOURCES OF TAX LAWS

REVENUE REGULATIONS Secretary of Finance, upon recommendation of the Commissioner of

Internal Revenue
Interpretations of administrative body
BIR RULINGS General interpretation of tax laws, upon a request of a tax payer. To
clarify a provision of law
REVENUE ISSUANCES
WEEK 3: CHAPTER 4: TAX ENFORCEMENT & COLLECTION

AGENCIES IN TAX ADMINISTRATION

Bureau of Internal Revenue (BIR) – National Taxes

Bureau of Customs (BOC) – International Taxes

Provincial, city and municipal assessors and treasurers – Local Taxes

BIR ORGANIZATION & FUNCTION

Supervision and control of the Department of Finance

Under the office of the President

BIR COMPOSITION

1 Commissioner
6 Deputy Commissioners
Regional Revenue Directors
Revenue District Officers
Revenue Officers

POWER & DUTIES OF THE BIR

 Assessment & Collection of all national internal revenue taxes, fees, and charges
 Enforcement of all forfeitures, penalties, and fines connected therewith
 Give effect to and administer the supervisory and police powers conferred by the code
 Execution of judgment in all cases decided in its favor by the Court of Tax Appeals and other
courts.

ASSESSMENT

Synonymous to tax audit

A finding that taxpayer has not paid the correct tax
Written notice to taxpayer

POWERS & DUTIES OF THE COMMISSIONER

 Interpret tax law and decide tax cases

 Obtain information, summon, examine and take testimony of persons
 Make assessments; prescribe additional requirements for tax administration and
enforcement
 Authority to delegate power
 Make arrests and seizures

SOURCES OF INTERNAL REVENUE

 Income Tax
 Business Tax
 Estate Tax
 Donor’s Tax
 Excise tax
 Documentary stamp tax

TAX TREATY RELIEF

Exemption of non-resident (aliens) taxpayer relief from certain income tax:

Business profits, profits from shipping and air transport, capital gains, income from services
 REMEDIES: THE STATE AND THE TAXPAYER

STATE COMMON TAXPAYER

ADMINISTRATIVE LEVER (BIR)
ASSESSMENT COMPROMISE PROTEST
COLLECTION ABATEMENT REFUND
JUDICIAL LEVEL
CICILSUIT/ACTION APPEAL TO CTA
CRIMINAL SUIT/ACTION TRO/INJUCTION
CRIMINAL SUIT AGAINST
ERRING BIR OFFICIALS

ASSESSMEMNT

A FINDING that taxpayer has not paid the correct tax

WRITTEN NOTICE to taxpayer to effect that the amount stated therein is due as a tax and containing
a demand for the payment thereof
Prescription within 3 years from actual filing or deadline whichever is later

BURDEN OF PROOF

TAXPAYER - There is a presumption of correctness on the part of the Commissioner of Internal

Revenue.

WHAT IS LETTER OF AUTHORITY

OFFICIAL DOCUMENT that AUTHORIZES a BIR Revenue Officer to EXAMINE a taxpayer’s books of
accounts and other accounting records in order to determine his correct internal revenue tax
liabilities.

OTHER BIR NOTICES

TAX VERIFICATION NOTICE (TVN) – evaluation of tax on one-time transaction cases

LETTER NOTICE (LN) – communication of significant discrepancy between sales/purchases reported
obtained from third parties from Reconciliation of Listing for Enforcement System (RELIEF) filings or
other agencies.

COLLECTION

Collection is enforceable once assessment became final and executory.

WARRANT OF DISTRAINT/LEVY

Warrant of Distraint/Levy or Warrant of Garnishment is a summary procedure forcing the taxpayer

to pay.

Distraint – seizure of personal property

Levy – seizure of real property
Garnishment – seizure of interest such as bank accounts, etc.
TAX LIEN

A legal claim or charge in a property established as a security in case of default in payment of taxes.

AUCTION SALE

An auction sale is a public sale. The goods are sold to all members of the public at large who are
assembled in one place for the auction.

FORFEITURE

The loss or giving up of something as a penalty for wrongdoing

DISTRAINT VS. LEVY

DISTRAINT LEVY
Personal Property Real Property
Forfeiture is not provided Forfeiture is authorized
Not give n the right of redemption Right of redemption is granted in case of real property
levied upon and sold, or forfeited to the government

CIVIL ACTION

These are actions instituted by the government to collect internal revenue taxes.

CRIMINAL ACTION

In consonance with the Constitutional limitations “No person shall be imprisoned for non-payment
of debt or poll tax”.

BIR DENIAL OR ADVERSE DECISION

ADMINISTRATIVE APPEAL – file a motion for reconsideration with the CIR within 30 days from
receipt of adverse decision
JUDICIAL APPEAL – file a petition for review with the CTA within 30 days from receipt of adverse
decision

COMMON REMEDIES

Compromise

Abatement

COMPROMISE

Mutual concession between the taxpayer and the government in settling a tax deficiency amicably

ABATEMENT

Cancellation or obliteration of taxes upon the authority of the BIR under certain circumstances.
ACTUAL DISTRAINT – kinuha ung property

CONSTRUCTIVE DISTRAINT – prevented from using pero di kinuha ung property

TAXATION POWER IS HIGHER THAN POLICE POWER

DISTRAINT – MAGHIHINTAY NG HIGHEST BIDDER

LEVY – PAG WALANG HIGHEST BEADER IKOCLOSE NA AT MAPUPUNTA NA SA GOVERNMENT

POLL TAX – COMMUNITY TAX

QUIZ:

TAXPAYER SUIT - A case filed by a bona fide taxpayer impugning the validity, legality or
constitutionality of a tax law or its implementation.

(NON-DELEGATION OF THE TAXING POWER, PUBLIC PURPOSE, TERRITORIALITY OR SUITS OF

TAXATION, INTERNATIONAL COMMITTEE) Which is not an inherent limitation of taxation power?

(TRUE, FALSE) According to the constitutional limitation there is non-imprisonment for non-payment
of debt or tax.

(TRUE, FALSE) According to the constitutional limitation we will be using regressive system of
taxation.

(TRUE, FALSE) According to the constitutional limitation of taxation there should be no appropriation
of public funds or property for the benefit of any church, sect or system of religion.

(TRUE, FALSE)According to the constitutional limitation of taxation there is no delegation of the

power of taxation so delegation of taxation power to LGU is void.

(TRUE, FALSE) According to the constitutional limitation of taxation there is non-impairment of the
jurisdiction of the Supreme Court to review tax cases, so al tax cases should be reviewed by the
Supreme Court.

(DOUBLE MONEY, DOUBLE JEOPARDY, DOUBLE TAXATION, DOUBLE KILL) Taxing of a taxpayer
more than once by the same tax jurisdiction for the same object.

(TRUE, FALSE) Direct double taxation is valid.

(TAX AVOIDANCE, TAX DODGING, TAX EXEMPTION, CAPITALIZATION) Which is an illegal escape of
taxation?

(TRUE, FALS) Amnesty is a general pardon & absolute forgiveness.

(TRUE, FALSE) Condonation forgives both civil and criminal liabilities.

(TRUE, FALSE) Amnesty requires certain payment to apply.