ACC 26

INCOME TAXATION

(INTRODUCTION TO
TAXATION)

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Learning Outcomes:
2

 At the end of the lesson, the students shall be able to:

 Define Taxation and taxation system

 Demonstrate Concepts of Taxation and its necessity for every

Government
 Describe the Nature and Scope of taxation

 Explain the fundamentals principles surrounding taxation

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 3 INHERENT POWERS OF STATE
3

 Police Power – the power of promoting public

welfare and regulating the use of liberty and
property.
 Power of TAXATION – the power which raises
revenue for the expenses of the government.
 Power of Eminent Domain – the to acquire private
property for public purpose upon payment of just
compensation.

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 What is TAXATION?
4

• Taxation is the process by which the sovereign,

through its law-making body, imposes burdens
for the purpose of raising revenues to carry out
legitimate objects of the government.

• TAXES- the enforced contributions levied by the

law-making body of the state for the support of the
government and all the public needs.

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 PURPOSES OF TAXATION
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• Primary : Revenue or Fiscal Purposes

• to provide funds or property with which to promote general
welfare and protection of its citizens.
• Secondary : Regulatory purpose
• Employed as a devise for regulation and control
– EFFECTS: - a. promotion of general welfare
b. Reduction of social inequality
c. Economic growth

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 Bases of TAXATION
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 The government may be able to perform its functions while the citizens may be secured in the
enjoyment of the benefits.

Public Service

Government People

Taxes

1. Principle of Necessity – without money, the government cannot pay its expenses and therefor
cannot exist.
2. Reciprocal duties – (benefit-received or compensation theory) In return for the contribution of
the taxpayer, he/she receives the general advantages and protection which the government
affords the taxpayer and his/her property.

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 THEORIES OF TAXATION
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> NECESSITY THEORY

 to preserve the state’s sovereignty
 a means to give protection and facilities

>LIFE BLOOD THEORY

- used to continue to perform the government’s basic function of
serving and protecting its people
- give tangible and intangible benefits

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 MANIFESTATION OF LIFEBLOOD THEORY
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 1. Rule of “ No estoppel against the government”.

 2. Collection of taxes cannot be stopped by
injunction.
 - Court of tax Appeals – have the authority to grant
an injunction to restrain the collection on internal
revenue tax, fee, or charge
 3. Taxes could not be subject to compensation or
set-off
 - Tax is compulsory not bargain

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 Continuation…
9

• 4. Rights to select objects (subjects) of taxation

• a. subject or object to be taxed
• b. purpose of the tax (as long as it is a public
purpose
• c. amount or tax rate
• d. kind of tax
• e. apportionment of the tax
• f. situs (place of taxation)
• g. manner, means, and agencies of collection of the
tax.
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 Continuation…
10

 5. A valid tax may result in the destruction of the

taxpayer’s property
 - lawful tax cannot be defeated
 - bring out the insolvency of the taxpayer
 - forfeiture of property through police power

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 SCOPE OF TAXATION
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 The Power of TAXATION is the most absolute of

all powers of the government.
• Comprehensive covers all (persons, business, professions)
• Unlimited – absence of limitations
• Plenary – it is complete
• Supreme

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 ESSENTIAL ELEMENTS OF TAX
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 It is an enforced contribution
 Generally payable in money
 It is proportionate in character
 It is levied on persons, property or right
 It is levied by the law making body of the state
 It is levied for public purpose

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 Sources of Tax Laws
13

 Constitution
 NIRC
 Tariff & Customs Code
 Local Government Code (Book II)
 Local Tax Ordinances/City or Municipal Tax Codes
 Tax Treaties and international agreements
 Special Laws
 Decision of the Supreme Court and CTA
 Revenue rules and regulations and administrative
ruling and opinion

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 LIMITATION ON THE STATE POWER TO TAX
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 1. INHERENT LIMITATIONS
 1.aTerritoriality of taxation – the government can only
demand tax obligations upon its subjects or residents
within its territorial jurisdiction
 Exception:
 In income taxation, RC and DC are taxable on income
derived within and without the Philippines
 In transfer taxation, RC, NRC & RA are taxable on
transfer of properties located within or without the
Philippines

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 LIMITATION ON THE STATE POWER TO TAX
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 1. INHERENT LIMITATIONS
 1.b International Comity (or mutual courtesy or
reciprocity)
 government do not tax the income and properties of
other governments.
 Government gives primacy to their treaty obligations
over their own domestic tax laws
e.g. embassies or consular office of foreign governments in the
Philippines including international organization and their non-
Filipino staff are not subject to income tax

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 LIMITATION ON THE STATE POWER TO TAX
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 1. INHERENT LIMITATIONS
 1.c Public Purpose – Taxes are intended for a common
good. It must be exercised absolutely for public
purpose. It cannot be exercised to further any private
interest.

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 LIMITATION ON THE STATE POWER TO TAX
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 1. INHERENT LIMITATIONS
 1.d Exemption of the government – Even the
government can exercise power 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.
 Government properties and income from essential
public functions are not subject to taxation. However,
income of the government from its properties and
activities conducted for profit including income from
government owned and controlled corporation is
subject to tax.
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 LIMITATION ON THE STATE POWER TO TAX
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 1. INHERENT LIMITATIONS
 1.e Non-delegation of 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 constitution, LGU are allowed to exercise the power to tax
enable them to exercise their fiscal autonomy.
• Under the tariff and customs Code, the President is empowered to
fix the amount of tariff to be flexible to trade condition
• Other cases that require expedient and effective administration and
implementation of assessment and collection of taxes

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 LIMITATION ON THE STATE POWER TO TAX
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 2. CONSTITUTIONAL LIMITATIONS
 2.a Due process of law – No one should be deprived of
his life, liberty, or property without due process of law.
Tax should be neither harsh nor oppressive.
 2.b. Equal protection of law-taxpayers should be
treated equal both in terms of rights conferred and
obligation imposed
 2.c. Uniformity rule of taxation – Taxpayer under
dissimilar circumstances should not be taxed the same.
 2.d. Progressive system of taxation-tax rates increase as
tax base increase.

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 LIMITATION ON THE STATE POWER TO TAX
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 2. CONSTITUTIONAL LIMITATIONS
 2.e. non imprisonment for non-payment of debt or poll
tax – this applies only to basic community tax.
 2.f .non impairment of obligation and contract
 2.g. free worship rule
 2.h. exemption from taxes of the revenues and assets of
non-profit, non stock educational institutions including
grant, endowment, donations, or contributions for
educational purposes
 2.i. concurrence of a majority of all members of
congress for the passage of a law granting tax
exemption
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 LIMITATION ON THE STATE POWER TO TAX
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 2. CONSTITUTIONAL LIMITATIONS
 2.j. non-diversification of tax collection-taxes should be
used for public purpose only
 2.k non delegation of the power of taxation
 2.l. non-impairment of the jurisdiction of the supreme
court to review tax cases
 2.m Appropriations, revenue or tariff shall originate
exclusively in the House of Representative, but the
Senate may propose or concur with amendments
 2.n. LGU shall exercise the power to create its own
sources of revenue and shall a just share in the national
taxes.
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 COMPARISON OF THE 3 POWERS OF STATE
Point of 22
Difference Taxation Police Power Eminent Domain

Exercising Government and

Government Government
Authority Private Utilities
For the support of To protect the general
Purpose For public use
government welfare of the people
Persons Community or class Community or class of
Owner of the property
Affected of individuals individuals

Unlimited (tax is Limited (Imposition is No amount

Amount of
based on government limited to cover cost of imposed(The gov’t pay
Imposition
needs) regulation) just compensation)
Importance Most important More superior Important
Relationship Inferior to “non- Superior to the “non- Superior to the “non-
with the impairment clause “of impairment clause” of impairment clause” of
constitution the Constitution the constitution the constitution

Constitutional and Public interest and due Public purpose and due
Limitation
inherent limitations process process
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 STAGES OF THE EXERCISE OF TAXATION POWER
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1. LEVYING OR IMPOSITION – the process involve the

enactment of a tax law by congress and is called impact of
taxation or legislative act in taxation
 Congress composed of 2 bodies:
• 1. The House of Representatives
• 2. The Senate
 Matters or Legislative Discretion in the exercise of taxation
 Determining the object of Taxation
 Setting the tax rate or amount to be collected
 Determining the purpose for the levy – must be public use
 Kind of tax to be imposed
 Apportionment of the tax between Nat’l and local gov’t
 Situs of Taxation
 Method of Collection

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 STAGES OF THE EXERCISE OF TAXATION POWER
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2. ASSESSMENT AND COLLECTION – the tax law is

implemented by the administrative branch of gov’t.
Implementation involve assessment or the determination of
tax liabilities of tax payers and collection. This stage is
referred to as incidence of taxation or the administrative
act of taxation

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 SIMILARITIES of the 3 Powers of State
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 They are all necessary attributes of sovereignty

 They are all inherent to the state
 They are all legislative in nature
 They are all ways in which state interferes with private right
and properties
 They all exist independently of the constitution and are
exercisable by the government even without Constitutional
grant.
 They are all presuppose an equivalent form of compensation
received by the persons affected by the exercise of the power.
 The exercise of these powers by the local government units
maybe limited by the national legislature.
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 DOUBLE TAXATION
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 Double taxation occurs when the same taxpayer is

taxed twice by the same tax jurisdiction for the same
thing.
 Elements of double taxation
 Primary : same object
 Secondary
 Same type of tax
 Same purpose of tax
 Same taxing jurisdiction
 Same tax period

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 Types of Double Taxation
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 Direct double taxation – occurs when all the element

of double taxation exists for both impositions:
> e.g. an income tax of 10% on monthly sales and 2%
income tax on the annual sales
 Indirect Double Taxation – occurs when at least one
of the secondary elements of double taxation is not
common for both impositions
 e.g. the national gov’t collects income tax from a taxpayer on
his income while the local gov”t collects community tax upon
the same income.

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 How can double taxation is minimized?
28

 Provision of tax exemption – only one tax law is allowed to

apply to the tax object while the other tax law exempt the
same tax object.
 Allowing foreign tax credit-tax payment made in foreign
country is deductible against tax due of the same tax object.
 Allowing reciprocal tax payment – imposing reduction or
exemption if the country foreign taxpayer also give same
treatment to Filipino non-resident therein.
 Entering into treaties or bilateral agreement – countries
may stipulate for a lower tax rates for their residents if they
engage in transactions that are taxable by both of them.

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 Escape from Taxation
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- Are the means available to taxpayer to limit or even avoid the
impact of taxation
A. THOSE THAT RESULT TO LOSS OF GOV’T REVENUE:
 Categories:
 a. Tax Evasion or tax dodging – refers to any act or trick that tends to
illegally reduce or avoid the payment of tax.
 e.g. gross understatement of income, overstatement of expenses
 b. Tax Avoidance or Tax minimization – refers to any act or trick that
reduces or totally escapes taxes by any legally permissible means.
e.g. selection or execution of transaction that would expose
taxpayer to lower taxes.
 c. Tax exemption or Tax holiday – refers to the immunity privilege or
freedom from being subject to tax which others are subject to. Tax
exemption may be granted by the Constitution, Law, or Contract.

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 Escape from Taxation
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- Are the means available to taxpayer to limit or even avoid the
impact of taxation
B. THOSE THAT DO NOT RESULT TO LOSS OF GOV’T
REVENUE:
1. SHIFTING – process transferring tax burden to other TP
 a. Forward shifting – shifting of tax that follow normal flow of
distribution
 e.g. manufacture to wholesaler to retailer to consumers
 b. Backward shifting- this is a reverse of forward shifting. It is
common to non-essential commodities where buyers have
considerable market power.
 c. Onward shifting – refers to any tax shifting in the distribution
channel that exhibits forward shifting or backward shifting.

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 Escape from Taxation
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- Are the means available to taxpayer to limit or even avoid the
impact of taxation
B. THOSE THAT DO NOT RESULT TO LOSS OF GOV’T
REVENUE:
2. CAPITALIZATION – pertains to the value of an asset
caused by changes in tax rates
 e.g. value of mining property will correspondingly decrease when
the mining output is subjected to higher rates
 3. TRANSFORMATION– pertains to elimination of wastes
and losses by the taxpayer to form savings to compensate
for the tax imposition or increase in taxes.

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 TAX AMNESTY VS. TAX CONDONATION
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 Tax Amnesty – is a general pardon granted by the

government for erring taxpayer to give them a
chance to reform and enable them to have a fresh
start to be a part of the society with a clean slate.
 Tax Condonation or remission– Is a forgiveness of
the tax obligation of a certain taxpayer under certain
justifiable grounds.

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 TAX AMNESTY VS. TAX CONDONATION
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AMNESTY
Covers both civil and criminal
liability
Operates retrospectively by
forgiving past violations
Conditional upon the taxpayer
paying the government a portion of
tax
CONDONATION
Covers only civil liability of the
taxpayer
Applies prospectively to any unpaid
balance of the tax, hence, the
portion paid can not be refunded
Requires no payment

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 Other Fundamental Doctrine in Taxation
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 Marshall Doctrine – power to tax involves 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.
 Prospectively of tax laws – tax laws are generally prospective in
operation.
 Non-compensation or set off –
 Non- assignment of taxes
 Imprescriptibility in taxation
 Doctrine of Estoppel
 Judicial Non-inference
 Strict Construction of Tax Law

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End of Lesson
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 What I Have Learned?

 Prepare for a Quiz

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