PRELIM HANDOUTS

WHAT IS TAXATION?
Taxation may be defined as a State power, a legislative process, and a mode of
government 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 of levying taxes by the legislature of the State to enforce
proportional contributions from its subject for public purpose.
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.
THE THEORY OF TAXATION
Every government provides a vast array of public services including defense, public
order and safety, health, education, and social protection among others.
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 government’s necessity for funding is the theory
of taxation.

THEORIES OF COST ALLOCATION

Taxation is a mode of allocating government costs or burden to the people. In
distributing the costs or burden, the government regards the following general
considerations in the exercise of its taxation power:
1. benefit received theory
2. ability to pay theory
Benefit received theory
The benefit received theory presupposes that the more benefit one receives from the
government, the more taxes he should pay.
Ability to pay theory
This 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.
In short, those who have more should be taxed more even if they benefit less from the
government. Those who have less shall contribute less even if they receive more of the
benefits from the government.
Aspects of the Ability to Pay Theory
1. Vertical Equity
This proposes that the extent of one’s ability to pay is directly proportional to
the level of his tax base.
For example, A has P200,000 income while B has P400,000. In taxing income,
the government should tax B more than A because B has greater income; hence, a
greater capacity to contribute.
2. Horizontal Equity
Horizontal Equity requires consideration of the particular circumstance of the
taxpayer.
Example, Businessmen A and B both have P300,000 income. A incurred
P200,000 in business expenses while B incurred only P50,000 business expenses. The
government should tax B more than A because he has lesser expenses and thus
greater capacity to contribute taxes.
Note: Vertical equity is a gross concept while horizontal equity is a net concept.
The Lifeblood Doctrine
Taxes are essential and indispensable to the continued subsistence of the government.
Without taxes, the government would be paralyzed for lack of motive power to activate
or operate it.
Taxes are the lifeblood of the government, and their prompt and certain availability to
serve the people for whose benefit taxes are collected.
Implication of the lifeblood doctrine in taxation
1. Tax is imposed even in the absence of a 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 capital expenditures and prepayments is not allowed
effectively defers the collection of income tax.
c. A lower amount of deduction is preferred when a claimable expenses
subject to limit.
d. A higher tax based is preferred when the tax object has multiple tax
bases.
INHERENT POWERS OF THE STATE
A government has its basic needs and rights which co-exist with its creation. It has
rights to sustenance, protection, and properties. The government sustains itself the
power of taxation, secures itself and well-being of its people by police power, and
secures its own properties to carry out its public services by power of eminent domain.
These rights, dubbed as “powers” are natural, inseparable, and inherent to every
government. No government can sustain or effectively operate without these powers.
Therefore, the exercise of these powers by the government is presumed understood
and knowledge by the people from the very moment they establish the government.
These power are naturally exercisable by the government even in the absence of an
express grant of power in the Constitution.
The Inherent Power of the State
1. Taxation power is the power of the State to enforce proportional contribution
from its subjects to sustain itself.
2. Police power is the general power of the State to enact laws to protect well-
being of the people.
3. Eminent Domain is the power of the State to take private property for public
use after paying just compensation.
SCOPE OF THE TAXATION POWER
The scope of taxation is widely regarded as comprehensive, plenary, unlimited and
supreme.
However, despite the seemingly unlimited nature of taxation, it is not absolutely
unlimited. Taxation has its own inherent limitations and limitations imposed by the
Constitution.
THE LIMITATIONS OF THE TAXATION POWER
A. Inherent limitations
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power

Territoriality of taxation
Public services are normally provided within the boundaries of the State. Thus, the
government can only demand tax obligations upon its subjects or residents within its
territorial jurisdiction. There is no basis in taxing foreign subjects abroad since they
do not derive benefits from our government. Furthermore, extraterritorial taxation will
amount to encroachment of foreign sovereignty.
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
These obligations can only be demanded and enforced by the Philippine government
upon its citizens and residents. It cannot enforce these upon subjects outside its
territorial jurisdiction as this would result in encroachment of foreign sovereignty.
Exception to the territoriality principle
1. In income taxation, resident citizens and domestic corporations are taxable on
income derived both within and outside the Philippines.
2. In transfer taxation, residents or citizens such as resident citizens, non-resident
citizens and resident aliens are taxable on transfers of properties located within
or outside the Philippines.
International comity
In the United Nations Convention, countries of the world agreed to one fundamental
concept of co-equal sovereignty wherein all nations are deemed equal with one another
regardless of race, religion, culture, economic condition or military power.
No country is powerful than the other. It is by this principle that each country
observes international comity or mutual courtesy or reciprocity between them. Hence,
1. Government do not tax the income and properties of other government.
2. Governments give primacy to their treaty obligations over their own domestic
tax laws.
Embassies or consular offices of foreign governments in the Philippines including
international organizations and their non-Filipino staff are not subject to income taxes
or property taxes. Under National Internal Revenue Code (NIRC), the income of foreign
government and foreign government-owned and controlled corporations are not
subject to income tax.
When a state enters into treaties with other states, it is bound to honor the
agreements as a matter of mutual courtesy with the treaty partners even if the same
conflicts with its local tax laws.
Public Purpose
Tax is intended for the common good. Taxation must be exercise absolutely for public
purpose. It cannot be exercises to further any private interest.
Exemption of the government
The taxation power is broad. The government can exercise absolutely anything
including itself. However, the government normally does not tax itself as this will not
raise additional funds but will only impute additional costs.
Under the NIRC, government properties and income from essential public functions
are not subject to taxation. However, the income of the government from its properties
and activities conducted for profit, including income from government-owned and
controlled corporations is subject to tax.
Non-delegation of the 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.
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.
Exceptions to the rule of non-delegation
1. Under the Constitution, local government units are allowed to exercise power
to tax to enable them to exercise their fiscal autonomy.
2. Under the Tariff and Customs Code, the President is empowered to fix the
amount of tariffs to be flexible to trade conditions.
3. Other cases that require expedient and effective administration
implementation of assessment and collection of taxes.

B. Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
Observance of Due Process of law
No one should be deprived of his life, liberty, or property without due process of law.
Tax laws should neither be harsh nor oppressive.
Aspects of due process
1. Substantive due process
Tax must be imposed only for public purpose, collected only under authority of a valid
law and only by the taxing power having jurisdiction. An assessment without a legal
basis violates the requirement of due process.
2. Procedural due process
There should be no arbitrariness in assessment and collection of taxes, and the
government shall observe the taxpayer’s right to notice and hearing. The law
established procedures which must be adhered to in making assessments and in
enforcing collections.
Under NIRC, assessments shall be made within three years from the due date of filing
of the return or from the date of actual filing, whichever is later. Collection shall be
made within five years from the date of assessment. The failure of the government to
observe these rules violates the requirement of due process.
Equal protection of the law
No person shall be denied the equal protection of the law. Taxpayers should be treated
equally both in terms of rights conferred and obligations imposed.
This rule applies where taxpayers are under the same circumstances and conditions.
This requirement would mean Congress cannot exempt sellers of “ballot” while
subjecting sellers of “penoy” to tax since they are essentially the same goods.
Uniformity rule in taxation
The rule of taxation shall be uniform and equitable. Taxpayers under dissimilar
circumstances should not be taxed the same. Taxpayers should be classified according
to commonality in attributes, and the tax classification to be adopted should be based
on substantial distinction. Each class is taxed differently, but taxpayers falling under
the same class are taxed the same. Hence, uniformity is relative equality.
Progressive system of taxation
Congress shall evolve a progressive system of taxation. Under the progressive system,
tax rates increase as the tax base increase. The Constitution favors progressive tax as
it is consistent with the taxpayer’s ability to pay. Moreover, the progressive system
aides in an equitable distribution of wealth to society by taxing the rich more than the
poor.
Non-imprisonment for non-payment of debt or poll tax
As a policy, no one shall be imprisoned because of his poverty, and no one shall be
imprisoned for mere inability to pay debt.
However, this Constitutional guarantee applies only when the debt is acquired by the
debtor in good faith. Debt acquired in bad faith constitute estafa, a criminal offense
punishable by imprisonment.
Is non-payment of tax equivalent to non-payment of debt?
Tax arises from law and is a demand of sovereignty. It is distinguished from debt
which arises from private contracts. Non-payment of tax compromises public interest
while non-payment of debt compromises private interest. The non-payment of tax is
similar to a crime. The Constitution guarantee on non-imprisonment for non-payment
of debt does not extend to non-payment of tax except tax poll.
Poll, personal, community or residency tax
Poll tax has two components:
a. Basic community tax
b. Additional community tax
The constitutional guarantee of non-imprisonment for non-payment of poll tax applies
only to the basic community tax. Non-payment of the additional community tax is an
act of tax evasion punishable by imprisonment.
Non-impairment of obligation and contract
The State should set an example of good faith among its constituents. It should not set
aside its obligations from contracts by the exercise of its taxation power. The
exemptions granted under contract should be honored and should not cancelled by a
unilateral government action.
Free worship rule
The Philippine government adopts free exercise of religion and does not subject its
exercise to taxation. Consequently, the properties and revenues of the religious
institutions such as tithes or offerings are not subject to tax. This exemption however,
does not extend to income from properties or activities of religious institutions that are
propriety or commercial in nature.
Exemption of religious, charitable or educational entities, non-profit cemeteries,
churches and mosques, lands, and improvements from property taxes.
The Constitutional exemption from property tax applies for properties actually,
directly, and exclusively (i.e. primarily) used for charitable, religious, and
educational purposes.
In observing this Constitutional limitation, the Philippines follows the doctrine of use
wherein only properties actually devoted for religious, charitable, or educational
activities are exempt from real property tax.
Under the doctrine of ownership, the properties of religious, charitable, or educational
entities whether or not used in their primary operations are exempt from real property
tax. This, however, is not applied in the Philippines.
Non-appropriation of public funds or property for the benefit of any church, sect,
or system of religion
This constitutional limitation is intended to highlight the separation of religion and the
State. To support freedom of religion, the government should not favor any particular
system of religion by appropriating public funds or property in support thereof.
It should be noted, however, that compensation to priest, imams, or religious
ministers working with the military, penal institutions, orphanages, or leprosarium is
not considered religious appropriation.
Exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions including grants, endowments, donations, or
contributions for educational purposes
The Constitution recognizes the necessity of education in state building by granting
tax exemption on revenues and assets of non-profit educational institutions. This
exemption, however, applies only on revenues and assets that are actually, directly,
and exclusively devoted for educational purposes.
Consistent with this constitutional recognition as a necessity, the NIRC also exempts
government educational institutions from income tax and subjects’ private educational
institutions to a minimal income tax.
Concurrence of a majority of all members of Congress for the passage of a law
granting tax exemption
Tax exemption law counters against the lifeblood doctrine as it deprives the
government of revenues. Hence, the grant of tax exemption must proceed only upon a
valid basis. As a safety net, the Constitution requires the vote of the majority of all
members of Congress in the grant of tax exemption.
In the approval of an exemption law, an absolute majority or the majority of all
members of Congress, not a relative majority or quorum majority, is required.
However, in the withdrawal of tax exemption, only a relative majority is required.

Non-diversification of tax collections

Tax collections should be used only for public purpose. It should never be diversified
or used for private purpose.

Non-delegation of the power of taxation

The principles of checks and balances in a republican state requires that taxation
power as part of lawmaking be vested exclusively in Congress.
However, delegation may be made on matters involving the expedient and effective
administration and implementation of assessment and collection of taxes. Also, certain
aspect aspects of the taxing process that are non-legislative in character and
delegated.
Hence, implementing administrative agencies such as the Department of Finance and
the Bureau of Internal Revenue (BIR) issues revenue regulations, rulings orders, or
circulars to interpret and clarify the application of the law. But even so their functions
are merely intended to interpret or clarify the proper application of the law. They are
not allowed to introduce new legislations within their quasi-legislative authority.

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 can be raised to and be finally decided by the Supreme Court of
the Philippines.

Appropriations, revenue, or tariff bills shall originate exclusively in the House of

Representatives, but the Senate may propose or concur with amendments.
Laws that add income to the national treasury and those that allows spending therein
must originate from the House of Representatives while Senate may concur
amendments. The origination of a bill by Congress does not necessarily mean that the
House bill must become the final law. It was held constitutional by the Supreme Court
when Senate changed the entire house version of a tax bill.

Each local government unit shall exercise the power to create its own sources of
revenue and shall have a just share in the national taxes.
This is a constitutional recognition of the local autonomy of local governments and an
express delegation of the taxing power.
STAGES OF THE EXERCISE OF TAXATION POWER
1. Levy or imposition
2. Assessment and collection
Levy or imposition
This process involves the enactment of tax law by Congress and is called impact of
taxation. It is also referred to as the legislative act in taxation.
Congress is composed of two bodies:
1. The House of Representatives, and
2. The Senate
As mandated by the Constitution, tax bills must originate from the House of
Representatives. Each may, however, have their own versions of proposed law which is
approved by both bodies, but tax bills cannot originate exclusively from the Senate.
Matters of legislative discretion in the exercise of taxation
1. Determining the object of taxation
2. Setting the tax rate of the amount to be collected
3. Determining the purpose for the levy which must be public use
4. Kind of tax to be imposed
5. Apportionment of the tac between the national and local government
6. Situs of taxation
7. Method of collection
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 of 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.
Examples of Situs Rules:
1. Business tax situs: Businesses are subject to tax in the place where the business
is conducted.
Illustration
A taxpayer is involved in car dealership abroad and restaurant operation in the
Philippines.
The restaurant business will be subject to business tax in the Philippines since the
business is conducted herein, but the car dealing business is exempted because the
business is conducted abroad.
2. Income tax situs on services: Service fees are subject to tax where they are
rendered.
Illustration
A foreign corporation leases a residential space to a non-resident Filipino citizen
abroad.
A rent income will be exempt from Philippine taxation as the leasing service is
rendered abroad.
3. Income tax situs on sale of goods: The gain on sale is subject to tax in the place of
sale.
Illustration
While in China, a non-resident OFW citizen agreed with a Chinese friend to sell his
diamond necklace to the latter. They stipulated that the delivery of the item and the
payment will be made a week later in the Philippines. The sale was consummated as
agreed.
The contract of sale is consensual and is perfected by the meeting of the minds of the
contracting parties. The perfection of the contract of sale is in China. The situs of
taxation is in China. The gain on the sale of the necklace will be taxable abroad and
exempt in the Philippines.
4. Property tax situs: Properties are taxable in their location.
Illustration
An overseas Filipino worker has a residential lot in the Philippines.
He will still pay real property tax despite his absence in the Philippines because his
property is located herein.
5. Personal tax situs: Persons are taxable in their place of residence.
Illustration
Ahmed Lofti is a Sudanese studying medicine in the Philippines.
Ahmed will pay personal tax in the Philippines even if he is an alien because he
residing in the Philippines.

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. As such, taxation
power carries with it the power to destroy.
However, the taxation power does not include the power to destroy if it is used
solely for the purpose of raising revenue. (Roxas vs. CTA)

2. 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.
While the Marshall Doctrine and the Holme’s Doctrine appear to contradict
each other, both are actually employed in practice. A good manifestation of the
Marshall Doctrine is the imposition of excessive tax on cigarettes while
applications of the Holme’s Doctrine include the creation of Ecozones with tax
holidays and provision of incentives, such as the Omnibus Investment Code
(E.O 226) and the Barangay Micro-Business Enterprise (BMBE) Law.

3. Prospectivity of tax laws

Tax laws are generally prospective in operation. An ex post facto law or a law
that retroacts is prohibited by the Constitution.
Exceptionally, income tax laws may operate retrospectively if so intended by
Congress under certain justifiable conditions. For example, Congress can levy
tax on income earned during periods of foreign occupation even after the war.

4. Non-compensation or set-off
Taxes are not subject to automatic set-off or compensation. The taxpayer
cannot delay payment of tax to wait for the resolution of a lawsuit involving his
pending claim against the government. Tax is not a debt; hence, it is not subject
to set-off. This rule is important to allow government sufficient period to
evaluate the validity of the claim.

Exemptions:
a. Where the taxpayer’s claim has already become due and demandable such
as when the government already recognized the same and an appropriation
for refund was made
b. Cases of obvious overpayment
c. local taxes
5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to another entity by contract.
Contracts executed by the taxpayer to such effect shall not prejudice the right
of the government to collect.

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 be waving
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.
The government is not subject to estoppel. The error of any government
employee does not bind the government. It is held that the neglect or omission
of government officials entrusted with the collection of taxes should not be
allowed to bring harm or detriment to the interest of the people. Also erroneous
application of the law by public officers do not block subsequent correct
application of the same.

8. Judicial non-interference
Generally, courts are not allowed to issue injunction against the government
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. Hence the maxim, “Taxation is the rule, exemption is
exemption.”
When the language of the law is clear and categorical, there is no room for
interpretation. There is only room for application. However, when taxation laws
are vague, the doctrine of strict legal construction is observed.

Vague tax laws

Vague tax laws are construed against the government and in favor of taxpayers.
A vague tax law means no tax law. Obligation arising from law is not presumed.
The Constitutional requirement of due process requires laws to be sufficiently
clear and expressed in their provisions.

Vague exemption laws

 Vague tax exemption laws are construed against the taxpayer and in favor of
the government. A vague tax exemption law means no exemption law. The claim
for exemption is construed strictly against the taxpayer in accordance with the
lifeblood doctrine.

The right of taxation is inherent to the State. It is a prerogative essential to the

perpetuity of the government. He who claims exemption from the common
burden must justify his claims by the clearest grant of organic or statute law.

When exemption is claimed, it must be shown indubitably to exist. At the

outset, every presumption is against it. A well-founded doubt is fatal to the
claim; it is only when the terms of the concession are too explicit to admit fairly
of any other construction that the proposition can be supported.

Tax exemption cannot arise from vague inference. Tax exemption must be clear
and unequivocal. A taxpayer claiming a tax exemption must point to a specific
provision of law conferring on the taxpayer, in clear and plain terms, exemption
from a common burden. Any doubt whether a tax exemption exists is resolved
against the taxpayer.

DOUBLE 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

Types of Double taxation

1. Direct double taxation
This occurs when all the element of double taxation exists for both impositions.
Examples:
a. An income tax of 10% on monthly sales and a 2% income tax on the
sales annual sales (total of monthly sales)
b. A 5% tax on bank reserve deficiency and another 1% penalty per day
consequence of such reserve deficiency
2. Indirect double taxation
 This occurs when at least one of the secondary elements of double taxation not
common for both impositions.
Examples:
a. The national government levies business tax on the sales or gross receipts of
business while the local government levies business tax upon the same sales
or receipts.
b. The national government collects income tax from a taxpayer on his income
while the local government collects community tax upon the same income.
c. The Philippine government taxes foreign income of domestic corporation and
resident citizens while a foreign government also taxes the same income
(international double taxation).
Nothing in our law expressly prohibits double taxation. In fact, indirect double
taxation is prevalent in practice. However, direct double taxation is discouraged
because it is oppressive and burdensome to taxpayers. It is also believed to counter
the rule of equal protection and uniformity in the Constitution.

How can double taxation be 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 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 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 give the
same treatment to Filipino non-residents therein
d. Entering into treaties or bilateral agreements – countries may stipulate for lower
tax rates for their residents if they engage in transactions that are taxable by
both of them

ESCAPES FROM TAXATION

Escapes from taxation are the means available to the taxpayer to limit or even avoid
the impact of taxation.
A. Those that result to loss of government revenue
1. Tax evasion, also known as tax dodging, refers to any act or trick that tends
to illegally reduce or avoid the 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 the nature or amount of transaction to take advantage of
lower taxes.

2. Tax avoidance, also known as tax minimization, 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, refers to the immunity, privilege
or freedom from being subject to a tax which others are subject to. Tax
exemptions may be granted by the Constitution, law, or contract.
All forms of tax exemptions can be revoked by Congress except those granted
by the Constitution and those granted under contracts.

B. Those that do not result to loss of government revenue

1. Shifting – this is the process of transferring tax burden to other taxpayers.
Forms of shifting
a. Forward shifting – This is the shifting of tax which follows the normal flow
of distribution (i.e. from manufacturer to wholesalers, retailers to consumer).
Forward shifting is common with essential commodities and services such
as food and fuel.
b. Backward shifting – This is the reverse of forward shifting. Backward
shifting is common with non-essential commodities where buyers have
considerable market power and commodities with numerous substitute
products.
c. Onward shifting- This refers to any tax shifting in the distribution channel
that exhibits forward shifting or backward shifting.
Shifting is common with business taxes where taxes imposed on business
revenue can be shifted or passed-on to customers.

2. Capitalization – This pertains to the adjustment of the value of an asset

caused by changes in tax rates.
For instance, the value of a mining property will correspondingly decrease
when mining output is subjected to higher taxes. This is a form of backward
shifting tax.
 3. Transformation – This pertains to the elimination of wastes or losses by the
taxpayer to form savings to compensate for the tax imposition or increase in
taxes.

Tax Amnesty
Amnesty is a general pardon granted by the government for erring taxpayers to give
them a chance to reform and enable them to have a fresh start to be part of a 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.
Tax Condonation
Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain
justifiable grounds. This is also referred to ass 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 of 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 of the
tax whereas condonation requires no payment.

TAXES, TAX LAWS, AND TAX ADMINISTRATION

TAXATION LAW
Taxation law refers to any law that arises from the exercise of the taxation power of
the State.
Types of taxation laws
1. Tax laws – These are laws that provide for the assessment and collection of
taxes.
Examples:
a. The National Internal Revenue Code (NIRC)
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.
Examples:
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987 (E.O. 226)
c. Barangay Micro-Business Enterprise (BMBE) Law
d. Cooperative Development Act

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
6. Local ordinances
7. Tax Treaties and Conventions with foreign countries
8. Revenue Regulations
Types of Administrative Issuances
1. Revenue regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue bulletins
6. BIR Rulings
Revenue Regulations are issuances signed by the Secretary of Finance upon
recommendation of the Commissioner of Internal Revenue (CIR) that specify,
prescribe, or define rules and regulations for the effective enforcement of provisions of
the National Internal Revenue Code (NIRC) and related statues.
Revenue regulations are formal pronouncements intended to clarify or explain the law
and carry into effect its general provisions by providing details of administration and
procedure. Revenue regulation has the force and effect of a law, but is not intended to
expand or limit the application of the law; otherwise, it is void.
Revenue Memorandum Orders (RMOs) are issuances that provide directive instructions;
prescribe guidelines; and outline processes, operations, activities, workflows, methods,
and procedures necessary in the implementation of stated policies, goals, objectives,
plans, and programs of the Bureau in all areas of operation except auditing.
Revenue Memorandum Rulings (RMCs) are issuances that publish pertinent applicable
portions as well as amplifications of laws, rules, regulations, and precedents issued by
the BIR and other agencies/offices.
Revenue Bulletins (RB) refer to periodic issuances, notices, and official announcements
of the Commissioner of Internal Revenue that consolidate the Bureau of Internal
Revenue’s position on certain specific issues of law or administration in relation to the
provisions of ta Tax Code, relevant tax laws, and other issuances for the guidance of
the public.
BIR Rulings are official positions of the Bureau to queries raised by taxpayers and
other stakeholder’s relative to clarification and interpretation of tax laws.
Rulings are merely advisory or a sort of information service to the taxpayer such that
none of them is binding except to the addressee and may be reversed by the BIR at
anytime.
Types of rulings
1. Value Added Tax (VAT) rulings
2. International Tax Affairs Division (ITAS) rulings
3. BIR Rulings
4. Delegated Authority (DA) rulings
Generally Accepted Accounting Principles (GAAP) vs. Tax Laws
Generally accepted accounting principles or GAAP are not laws, but are mere
conventions of financial reporting. They are benchmarks for the fair and relevant
valuation and recognition or income, expense, assets, liabilities, and equity of a
reporting entity for general purpose financial reporting. GAAP accounting reports are
intended to meet the common needs of a vast number of users in the general public.
Tax laws including rules, regulations, and rulings prescribe the criteria for tax
reporting, special form of financial reporting which is intended to meet specific needs
of tax authorities.
Taxpayers normally follow GAAP in recording transactions in their books. However, in
the preparation and filing of tax returns, taxpayers are mandated to follow the tax in
cases of conflict with GAAP.
NATURE OF PHILIPPINE TAX LAWS
Philippine tax laws are civil and not political in nature. They are effective even during
periods of enemy occupation. They are laws of the occupied territory and not by the
occupying enemy. Tax payments made during occupations of foreign enemies are
valid.
Our internal revenue laws are not penal in nature because they do not define crime.
Their penalty provisions are merely intended to secure taxpayer’s compliance.