TAXATION

2nd Semester, AY 2022-2023

School of Business, Hospitality and Tourism Management
Divine Word College of Calapan

Grace D. Luzon
PART 1
General Principles of Taxation
 1. The Power of Taxation
the power of the state to raise and accumulate revenue from its
inhabitants to pay the necessary expenses of the government

Three inherent 2. Police Power

the power of the state to legislate for the protection of health,
powers of state general welfare, safety and morals of the public. It involves the
power to regulate both liberty and property for the promotion of
the public good

3. Eminent Domain
the power to take property for a public purpose
Principles of Taxation

Taxation defined:

Taxation is a power inherent in every sovereign state

to impose a charge or burden upon persons, properties or
rights, to raise revenues, for the use and support of the
government, and to enable it to discharge its appropriate
functions.
Principles of Taxation

Taxation defined:

Taxation is the process or means by which the

sovereign state through its law-making body, imposes
burdens upon subjects and objects within its jurisdiction
for the purpose of raising revenues to carry out the
legitimate objects of government.
 As to nature, taxation is an inherent power of the state,
and is essentially a legislative power.

Nature and Scope As to scope, in the absence of limitations prescribed by

of Taxation the fundamental law or constitution, the power of taxation
is unlimited and comprehensive , and if there is any
limitation at all, it is the sense of responsibility of the
members of the legislature and their constituents
Taxation distinguished from eminent domain:

❑ Taxation reaches all the persons , properties, etc., covered by the

tax, while eminent domain reaches only a particular owner or
property.
❑ There is payment of money by a taxpayer in taxation, while there
is a taking of property by the government in eminent domain.
❑ In taxation, the taxpayer is presumed to receive a benefit from the
government, while in eminent domain, the property owner
receives a benefit by way of just compensation.
Taxation distinguished from police power:

❑ Taxation is for the purpose of raising revenues, while police power

is for purpose of regulation.
❑ In taxation, there is no limit on the amount of the tax that may be
imposed, while in police power, the license fee must be, as a
general rule, just enough to carry out regulation
 A. Inherent limitations:
1. The tax must be levied for a public purpose
2. The power of taxation cannot be delegated
3. The rule on double taxation
Limitations on the 4. Government instrumentalities and agencies are
power of taxation exempt from tax
5. The power of taxation is limited to the territorial
jurisdiction of the taxing state
6. The tax laws cannot apply to the property of
foreign governments (international comity)
 B. Constitutional limitations:
1. No law impairing the obligation of contracts shall be
passed
2. No person shall be imprisoned for debt or non-payment
of a poll tax
Limitations on the
3. The rule on taxation shall be uniform and equitable
power of taxation 4. Charitable institutions, churches, parsonages or
convents appurtenant thereto , mosques, and non-
profit cemeteries, and all kinds of lands buildings and
improvements actually, directly, or exclusively used for
religious or charitable purposes shall be exempt from
taxation
Types of Due Process:
1. Substantive Due Process
guarantees that a law shall not be
unreasonable, arbitrary, or capricious,
and that the means selected shall have
a reasonable and substantial relations
to the object being sought
2. Procedural Due Process
guarantees fairness in the
enforcement of laws which effect
deprivation. The essential elements of
procedural due process are notice,
and the opportunity to be heard and
to defend in an orderly proceeding
adapted to the nature of the case
Basic Principle of a Sound Tax System

1. Fiscal Adequacy
means that the sources or revenue should be sufficient to meet the demands of public
expenditures.

2. Equality or Theoretical Justice

means that the tax imposed should be proportionate to the taxpayer’s ability to pay.

3. Administrative Feasibility
means that the tax laws should be capable of convenient , just , and effective administration.
 Theory or Basis of Taxation

1. Life-blood Theory
Taxes are lifeblood of the government. Without taxes, no government can function.
Taxes must be levied in order to defray the various governmental functions.

2. Benefits Protection Theory (Symbiotic Relationship)

Taxes are what we pay for a civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it.
According to this theory, the State demands and receives taxes from the subjects of
taxation within its jurisdiction so that it may be enabled to carry its mandate into effect
and perform the functions of the government. The citizen pays from his property the
portion demanded in order that he may, by means thereof, be secured in the enjoyment
of the benefits of organized society.
 Tax

❑ Tax is the enforced proportional contribution from persons

and property, levied by the state, by virtue of its sovereignty,
for the support of government and for all public needs.

❑ Tax is an enforced, proportional, pecuniary contribution,

from persons and property within the taxing jurisdiction,
levied by the State by virtue of its sovereign power to tax, to
raise revenue for the support of the government and for its
public needs.
 Essential Elements or
Characteristics of a Tax

1. Enforced contribution
2. Exacted pursuant to legislative authority
3. For raising revenue for public needs
4. Proportionate in character or uniform
5. Payable in Money
6. Imposed within the state’s jurisdiction
7. Personal to the taxpayer
 Canons of a Tax

❑ Proportional to one’s ability to pay

❑ Certain and not arbitrary
❑ Convenient to pay
❑ Economical to collect
 1. According to scope or exercising authority

❑ National Tax
Classification levied and collected by the national government. It is enforced
throughout the country.
of Taxes Examples: Income Tax, Estate Tax, Donor’s Tax, Value-Added Tax

❑ Municipal or Local tax

imposed and collected by local governments
Examples: Occupation Tax, Real Estate Tax, Local Business tax
 2. According to subject matter or object

❑ Personal, Capitation, or Poll Tax

a fixed amount imposed upon persons, or upon persons of a certain class,
residing within the jurisdiction of the taxing authority, without regard to their
property or occupation or business in which they may be engaged.
Example: Community Tax
Classification
❑ Property Tax
of Taxes A tax assessed against all properties, or all properties of a certain class, located
within the jurisdiction of the taxing authority, in proportion to its value, or on
some other method of apportionment.
Example: Real Estate Tax
❑ Excise Tax
A tax upon the performance of an act, or the exercise of a right or privilege, or
the engaging in business, practice of profession, or pursuit of occupation.
Examples: Value Added tax, Donor’s Tax, Income Tax, Occupation tax, Estate tax
 3. According to who bears the burden of the tax

❑ Direct Tax
It is where the tax liability for the tax (impact) and the burden of the
tax(incidence) falls on the same taxpayer. It is a tax payable by the
Classification person upon whom it is directly or originally imposed by law.
Example: Income tax
of Taxes

❑ Indirect Tax
It is where the liability for the tax(impact) falls on the original taxpayer,
but the burden (incidence) thereof is shifted to another person. In other
words, the burden of an indirect tax can be legally shifted to or passed
on to others.
 4. According to purpose

❑ General or Revenue Tax

The tax is levied without a specific or predetermined purpose. Thus, the
Classification revenue collected can be appropriated for general public purposes.
Example: Income Tax, Value Added Tax
of Taxes
❑ Special Tax
Tax is imposed for a special purpose
Example: Protective Tariff
 5. According to the rate applied

❑ Proportional Tax
the tax is based on a fixed percentage of the property or amount of income
receipts.
Classification
Examples: Real Estate Tax, VAT, Donor’s Tax and Estate Tax
of Taxes
❑ Progressive Tax
The tax rate increases as the tax base increases.
Examples: Income Tax on individuals

❑ Regressive Tax
The rate of tax decreases as the tax base increases
 6. According to measurement/determination of the amount due

❑ Specific Tax
It is a tax of fixed amount measured by the head or number, or by some
standard of weight or measurement, and it requires no assessment other
Classification than a listing or classification of the subjects to be taxed.
of Taxes Examples: Excise tax on cigarettes, processed gas, waxes and petrolatum,
naptha, regular gasoline, pyrolysis gasoline

❑ Ad valorem Tax
Tax is a fixed proportion of the value of the property with respect to which
the tax is assessed, and requires the intervention of the assessors or
appraisers in certain cases. It is a tax based on the value of the property
Examples; Real Estate Tax, Excise taxes on Automobiles
 1. The tax laws are prospective, generally.
2. Tax exemption are to be construed strictly against the
taxpayer.
3. Revenue laws are not political in nature
Nature or Construction 4. Legislative intention must be considered

of Tax Laws 5. A statute will not be construed as imposing a tax unless it

does so clearly, and unambiguously
6. In case of doubt, tax statutes are construed most strongly
against the government, and liberally in favour of the citizen
7. Tax laws are special laws and prevail over general laws.
8. Tax laws are not penal in character
 1. The 1987 Constitution
2. Tax Statutes such as the National Internal Revenue Code,
The Customs Modernization and Tariff Act and the Local
Government Code
3. Executive Orders on Taxation, and the local tax ordinances
Sources of Tax Laws 4. Tax treaties and convention with foreign countries
5. Judicial decisions
6. Rules and regulations promulgated by the Department of
Finance, the Bureau of Internal Revenues,, Bureau of Customs,
etc.
7. Administrative interpretations and opinions of tax officials
particularly those of the Commissioner of Internal Revenue
Forms of escape from taxation

1. Shifting the burden of the tax

2. Capitalization
3. Transformation
4. Tax Exemption
5. Tax Avoidance
6. Tax Evasion
 1. Income Tax
2. Estate Tax
Taxes imposed under 3. Donor’s tax
the National Internal 4. Value Added tax
5. Other Percentage Tax
Revenue Code
6. Excise tax
7. Documentary Stamps taxes
Tax Administration

A system involving assessment, collection, and

enforcement of taxes, including the execution of
judgement in all tax cases decided in favour of
the Bureau of Internal Revenue by the courts.
Powers and Duties of the Bureau of Internal Revenue
❑ The assessment and collection of all national internal revenue taxes, fees, and charges.
❑ The enforcement of all forfeiture, penalties, and fines connected therewith
❑ The execution of judgements in all cases decided in its favour by the Court of Tax Appeals,
and the ordinary courts
❑ The giving effect to and the administering of the supervisory and police power conferred to
it by the Tax Code or other laws

Chief Officials of the Bureau of Internal Revenue

The BIR shall have a chief to be known as the Commissioner of Internal Revenue, and four(4)
assistant chiefs to be known as Deputy Commissioners
PART 2
Introduction to Income Tax
 Concept of Income Tax

❑ An income tax is one levied on the income from property or

an occupation.
❑ It is a direct tax upon the thing called “income”.
❑ It is imposed upon persons within the jurisdiction of the
state to raise revenue for the support of the government.
 Income Tax in the Philippines

❑ It is a tax on income, either gross or net, realized during the taxable year.
❑ It is generally imposed on the newt income of citizens, resident aliens, domestic
corporations, and non-resident aliens and foreign corporations engaged in trade
or business within the Philippines.
❑ It is also imposed on the gross income of non-resident aliens and foreign
corporations not doing business in the Philippines
❑ It is further imposed as a final tax on certain passive income( interest income,
royalties, prizes, and other winnings), cash and property dividends, capital gains
from the sale of domestic shares of stock and real property classified as capital
assets located in the Philippines.
 Purpose of Income Tax

Philippine Income Tax has the following characteristics:

1. A national tax
2. A general tax
3. An excise tax
4. A direct tax
5. A progressive tax
6. The income tax system is a comprehensive system
7. Semi-global or semi scheduler system
 Meaning of Income

❑ Income means all wealth which flows into the taxpayer other
than a mere return of capital.
❑ It includes gain derived from the sale or other disposition of
capital assets.
❑ Income is a gain derived from labor or capital, or both labor
and capital, and includes the gain derived from the sale or
exchange of capital assets.
❑ Income is the amount of money coming to a person or
corporation within a specified time, whether as payment for
services , interest or profit from investment
 1. There must be a gain or profit whether
in cash or its equivalent
Requisites for
2. The gain must be realized or received
taxability of income
3. The gain must not be excluded by law or
international treaty from taxation
Illustration 1

In its first year, a domestic corporation did not derive any

income nor any gain as it had not yet started commercial
operations in said year. However, it was assessed a deficiency
tax by BIR. The BIR found that the corporation overstated in its
pre-operating expenses, some of which were unsubstantiated.
Should such disallowed expenses give rise to income tax?
Solution to Illustration 1

In order for income tax to be imposed, three elements should be present:

1. There must be gain or profit
2. The gain or profit is realized
3. Such gain or profit is not exempted by law or treaty from income
tax

In this case, no income tax shall be imposed in the absence of the first 2
elements above.

Furthermore, assuming that the disallowance of the pre-operating

expenses was proper, no income tax may result therefrom. It should be
noted that the tax payer did not benefit from the deduction of the
disallowed expenses. Hence the BIR erred in translating and subjecting
such disallowed expenses to income tax.
 1. Income from sources within the
Philippines
Classification of 2. Income from sources outside the
Income according Philippines

to source 3. Income from sources partly within

and partly outside the Philippines
“Source” refers to the activity, or property, or labor that give rise to or produced an income.

Examples:

❑ If the income is derived from labor or service, the source of income is the place where
labor or service is performed.
❑ If the income is derived from capital, the source of income is the place where the capital
is employed.
❑ If the income is derived from the sale of real property, the source of income is the place
where the real property is located.
Situs of Income

The situs of the income is the place of taxation of the income or the country
which has jurisdiction to impose the tax. For income tax purposes, income
may be taxed in one or more or all of the following places or countries:

❑ The place where taxpayer is a citizen.

❑ The place where the taxpayer is a resident
❑ The place where the income is earned or derived
Income Tax System of the Philippines
The income tax system in the Philippines may be characterized under
2 general categories.
1. Gross Income Taxation
whereby a final tax is imposed
on the gross amount of
specified types of income such
as interest income, royalty,
prizes, dividends, and capital
gains. This is also known as the
scheduler system of taxation.
2. Net Income Taxation
whereby certain deductions are
allowed and subtracted from the
aggregate of incomes not subject to
final tax, and the tax computed is
based on the resulting net income
therefrom. This is also known as
the global system of taxation.
 1. Ordinary Income
a. Compensation Income - earned or arises out of an
employer-employee relationship
b. Professional Income - derived from professional
services like medical and legal services.
Types of Taxable c. Business Income - obtained from profits in
engaging trade or business
Income
2. Passive Income
earned without any action on the part of the taxpayer.
The taxpayer merely waits for the income to be received
or realized . Examples are dividend and interest income
received by shareholders

3. Capital Gains
gains from selling capital assets
References

Llamado, Christopher P. and de Vera Jack L. A., Philippine Income Tax, Volume One, 2019 Edition.

Reyes, Virgilio D., A Study on Income Tax Law and Accounting Under the Train Law, 2019 Edition.

Tabag,Enrico D. and Garcia, Earl Jimson R. , Income Taxation, 2021 Edition