GENERAL PRINCIPLES OF TAXATION & ICSD, CTT, CPA INTRODUCTION TO INCOME

TAXATION

WHAT IS TAXATION? – inherent power by which the sovereign through its law-making body
raises revenue to defray the necessary government expenditures.
CHARACTERISTICS DERIVED FROM ABOVE:
a. Inherent power of the state
b. Exclusively lodged with the legislature
c. Purposes: (1) To raise revenue to defray expenses of gov’t & (2) to mitigate evils arising
from the inequalities of wealth by a progressive scheme of taxation which places the
burden on those best able to pay
THE LIFEBLOOD DOCTRINE IN TAXATION – taxes are indispensable to the subsistence of the
government. Without taxes, gov’t would be paralyzed for lack of motivation to operate. IT
CAN BE INFERRED FROM ABOVE THE FFG.:
A. THEORY OF TAXATION – gov’t necessity from funding
B. BASIS OF TAXATION – mutuality of support between the people (via services received) and
the gov’t (via taxes paid by the people)
- SYMBIOTIC RELATIONSHIP in tax
PHILOSOPHIES IN TAXATION
A. BENEFIT RECEIVED THEORY – the more benefit one received, the more taxes he should pay B.
ABILITY TO PAY THEORY – taxpayers should be required to contribute based on their capacity to
sacrifice for the support of the government (i.e., those who have more should be taxed more
even if they receive less, those who have less should be taxed less even if they benefit more)
INHERENT POWERS OF THE STATE
a. Taxation – power of the State to enforce proportional contributions from its subjects to
sustain itself.
b. Police Power – power of the State to enact laws to protect the well-being of the people
c. Eminent Domain – power of the State to take private property for public use
MATTERS OF TAXATION POLICE POWER EMINENT DOMAIN
DIFFERENCES

Authority Government Government Gov’t + Private

Utilities

Purpose Gov’t Support Protect the Public Use

general welfare of
the people

Persons Affected Community/Individuals Community/Individuals Owner of the

Property

Imposed Amount Unlimited Limited to cost of No amount

regulation imposed (Gov’t
pays just
compensation)

Importance Most important Most superior Important

Relationship with Inferior to the “non Superior to the Superior to the

the Constitution impairment clause” “non impairment “non impairment
of the Constitution clause” of the clause” of the
Constitution Constitution

Effectivity Prospective Retrospective Retrospective

Impairment of X – by the nature

Contracts of ✓ ✓ - by prescription
 imprescriptibility

Transfer of X – taxes, being X – state will just

✓ - state will take
Property Rights only generally regulate to protect
(Property payable in money, liberty and rights over property to
Taken?) will just form part utilize it for public use
of public funds

Sources:
Income Taxation – Banggawan Quicknotes Taxation – De Vera Income Taxation Made Easy – Ballada CPAR Handouts on Taxation –
Llamado

DISCLAIMER: THIS MATERIAL SHOULD NOT BE REPRODUCED FOR SALE | CREDITS TO THE RIGHTFUL OWNER | ALL NOTES MENTIONED WERE TAKEN
FROM VARIOUS RESOURCE MATERIALS FROM TAXATION AUTHORS AND REVIEWERS AND WERE COMPILED FOR EDUCATIONAL/LECTURE PURPOSES
ONLY. CREDITS TO THE AUTHORS. NO COPYRIGHT INFRINGEMENT INTENDED.
GENERAL PRINCIPLES OF TAXATION & ICSD, CTT, CPA INTRODUCTION TO INCOME
TAXATION

Benefit Received
(In general) ✓ ✓ ✓

SCOPE OF TAXATION POWER – comprehensive, plenary, unlimited, supreme, awesome power

it could destroy

LIMITATIONS OF TAXATION POWER

I. INHERENT LIMITATIONS (T I P E N)
A. TERRITORIALITY – tax can be imposed only within the boundaries of the State a.
Exemption: Resident Citizens and Domestic Corporations (W/IN and W/O) B.
INTERNATIONAL COMITY – mutual courtesy and reciprocity between states a. Ex:
Embassies and Consulates of foreign gov’t – not subject to income tax C. PUBLIC
PURPOSE – must be intended solely for public purposes
D. EXEMPTION OF THE GOVERNMENT – gov’t does not tax itself or by itself is EXEMPT
a. Rules:
i. Administrative Agencies
1. Government function – exempt unless law so provides
2. Proprietary function – taxable unless law so provides
ii. GOCCS
1. General Rule: TAXABLE – ex. PAGCOR
2. Exceptions: SSS, PHIC
E. NON-DELEGATION OF THE TAXING POWER – vested exclusively in Congress
a. Exemption (Examples):
i. Local Gov’t – they can legislate local taxes and implement
ii. Tariffs and Customs Code – President can adjust/fix amount of tariffs to be
flexible to trade conditions
II. CONSTITUTIONAL LIMITATIONS
A. OBSERVANCE OF DUE PROCESS OF LAW – no one should be deprived of his life, liberty,
property w/o due process of law
B. EQUAL PROTECTION OF LAW – taxpayers should be subjected under the same circumstances
and conditions (e.g., on how you tax CORNICK & MANI vendors)
C. UNIFORMITY RULE – uniform and equitable; each class is taxed differently but taxpayers
falling under the same class are taxed the same
a. Ex of Uniformity – All manufacturing employees are one example of class, also every
Managers of different divisions are another example of a class; they should be taxed
uniformly
b. Ex. Of Equity/Equitability – tax of manufacturing employees should differ from
managers’ tax; those who earn less will be taxed less and vice-versa
 D. PROGRESSIVE SYSTEM – tax rate increases as the tax base increases, consistent with ability to
pay theory
E. NON-IMPRISONMENT FOR NON-PAYMENT OF DEBT OR POLL TAX – non-imprisonment for
inability to pay debt; except if in bad faith
a. Tax arises from law, debt arises from private contracts
b. As to poll tax, it only applies to BASIC COMMUNITY TAX (ADDITIONAL COMMUNITY
TAX if not paid, implies tax evasion)
F. NON-IMPAIRMENT OF OBLIGATION AND CONTRACT – it should honor certain obligations and
contracts
G. FREE WORSHIP RULE
H. EXEMPTION OF RELIGIOUS, CHARITABLE OR EDUCATION ENTITIES, NON-PROFIT CEMETERIES,
CHURCHES, AND OSQUES, LANDS, BUILDINGS, AND IMPROVEMENTS FROM PROPERTY TAXES
Sources:
Income Taxation – Banggawan Quicknotes Taxation – De Vera Income Taxation Made Easy – Ballada CPAR Handouts on Taxation –
Llamado

DISCLAIMER: THIS MATERIAL SHOULD NOT BE REPRODUCED FOR SALE | CREDITS TO THE RIGHTFUL OWNER | ALL NOTES MENTIONED WERE TAKEN
FROM VARIOUS RESOURCE MATERIALS FROM TAXATION AUTHORS AND REVIEWERS AND WERE COMPILED FOR EDUCATIONAL/LECTURE PURPOSES
ONLY. CREDITS TO THE AUTHORS. NO COPYRIGHT INFRINGEMENT INTENDED.
GENERAL PRINCIPLES OF TAXATION & ICSD, CTT, CPA INTRODUCTION TO INCOME
TAXATION

a. For properties actually, directly, and exclusively used for charitable, religious,
educational purposes.
I. NON-APPROPRIATION OF PUBLIC FUNDS OR PROPERTY FOR THE BENEFIT OF ANY CHURCH
OR SECT – separation of the church and the State
J. EXEMPTION FROM TAXES OF THE REVENUES AND ASSETS OF NON-STOCK, NON-PROFIT
EDUCATIONAL INSTITUTIONS – as long as for educational purposes, it is exempt. K.
CONCURRENCE OF A MAJORITY OF ALL MEMBERS OF CONGRESS FOR THE PASSAGE OF A
LAW GRANTING TAX EXEMPTION
a. Approval of tax exemption law – ABSOLUTE MAJORITY (all whether present or not)
b. Withdrawal of tax exemption law – RELATIVE MAJORITY (Majority of present + 1) c.
Construction of Tax Laws:
i. Vague tax laws – construed against gov’t, in favor of taxpayers
ii. Vague tax exemption laws – construed against taxpayers, in favor of gov’t
L. NON-DIVERSIFICATION OF TAX COLLECTIONS – tax collections should only be for public
purposes
M. NON-DELEGATION OF THE TAXATION POWER
N. NON-IMPAIRMENT OF THE JURISDICTION OF THE SUPREME COURT TO REVIEW TAX CASES –
all tax cases can only be finally decided by the Supreme Court of the Philippines O. REVENUE,
APPROPRIATIONS, TARIFF BILLS SHOULD ORIGINATE EXCLUSIVELY IN THE HOUSE OF
REPRESENTATIVES, BUT SENATE MAY PROPOSE OR CONCUR IN AMENDMENTS a. How to make
a tax law?
i. All bills must originate exclusively from HOR
ii. Passing of three (3) readings by a majority vote in the technical committee
iii. President signs the bill into a law for implementation (but may veto it)
P. POWER OF LOCAL GOV’T TO EXERCISE THE POWER TO CREATE ITS OWN SOURCES OF
REVENUEAND HAVE JUST SHARE IN NATIONAL TAXES

STAGES OF THE TAXING POWER

a. Levy or Imposition – “Impact of Taxation”; legislative act - CONGRESS
b. Assessment and Collection – “Incidence of Taxation”; administrative act – BIR

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

A. Marshall Doctrine – the power to tax involves the power to destroy; “discourage or prohibit”;
Ex. Excise taxes on cigarettes
B. Holme’s Doctrine – the power to tax is not the power to destroy while the court sits;
“encourage”; Ex. Tax incentives and holidays for Eco-Zones
C. Prospectivity of Tax Laws
 D. Non-compensation or set-off
E. Non-assignment of taxes
F. Imprescriptibility in Taxation – certain rules on period of assessment and collection (To be
discussed in Tax Remedies Discussion)

THE CONCEPT OF DOUBLE TAXATION – occurs when the same taxpayer is taxed twice by the
same tax jurisdiction for the same thing.
TYPES:
A. Direct Double Taxation – ex. 5% income tax on annual sales and 1% income tax on monthly
sales; HIGHLY DISCOURAGED, INVALID
B. Indirect Double Taxation – ex. National government imposes taxes on cigarettes via excise
taxes, Local gov’t imposes also local taxes on the same thing; PREVALENT IN PRACTICE,
VALID

Sources:
Income Taxation – Banggawan Quicknotes Taxation – De Vera Income Taxation Made Easy – Ballada CPAR Handouts on Taxation –
Llamado

DISCLAIMER: THIS MATERIAL SHOULD NOT BE REPRODUCED FOR SALE | CREDITS TO THE RIGHTFUL OWNER | ALL NOTES MENTIONED WERE TAKEN
FROM VARIOUS RESOURCE MATERIALS FROM TAXATION AUTHORS AND REVIEWERS AND WERE COMPILED FOR EDUCATIONAL/LECTURE PURPOSES
ONLY. CREDITS TO THE AUTHORS. NO COPYRIGHT INFRINGEMENT INTENDED.
GENERAL PRINCIPLES OF TAXATION & ICSD, CTT, CPA INTRODUCTION TO INCOME
TAXATION

ESCAPES FROM TAXATION

A. Tax Evasion (or Tax Dodging) – illegal means to avoid payment of taxes; understatement of
income or overstatement of purchases/expenses
B. Tax Avoidance (or Tax Minimization) – legally permissible means to escape/reduce taxes, e.g.,
tax planning
C. Tax Exemption (or Tax Holiday) – privilege or freedom from being subject to tax

SOURCES OF TAXATION LAWS

1. Constitution 7. Tax Treaties
2. Statutes and Presidential Decrees 8. Revenue Regulations
3. Judicial Cases Ex: Tax Laws – NIRC, Local Tax Code, CREATE, TRAIN 4. Executive Orders and
Batas Pambansa Ex. Tax Exemption Laws – Minimum Wage Law, 5. Administrative Issuances
BMBE Law, Omnibus Investment Act 6. Local Ordinances

CHARACTERISTICS OF PHILIPPINE INCOME TAX

A. Generally payable in money and proportionate
B. Uniform and equitable and for public purposes only
C. Levied by the same taxing power having jurisdiction over the object of taxation
D. Not violative of inherent and constitutional limitations

CLASSIFICATIONS OF TAXES
A. As to subject matter
a. Personal Tax – ex. Cedula (Community Tax)
b. Property Tax – ex. Real Property Tax
c. Excise Tax – ex. Donor’s Tax
B. As to burden
a. Direct Tax – impact and incidence of taxation rests on the same taxpayer; statutory
taxpayer = economic taxpayer
b. Indirect Tax – incidence of taxation falls on one taxpayer but burden of paying can be
shifted to another; statutory taxpayer ≠ economic taxpayer
C. As to purpose
a. General tax – levied for general purposes
b. Special Tax – levied for special purposes
D. As to amount imposed
 a. Ad Valorem Tax – tax of a fixed proportion upon the value of the article or thing
subject to taxation Ex. Final Taxes on Prizes, on Winnings, on Dividends
b. Specific – tax of a fixed amount imposed on a per unit basis, eg. Per kilo, per liter Ex.
Taxes on Fuel, Taxes on Liquors and Distilled Spirits
E. As to taxing theory
a. National Tax – imposed by the National Govt
b. Local Tax - imposed by the local government
F. As to rate
a. Progressive – tax rate increases as tax base increases & vice-versa
b. Regressive – tax rate increases as tax base decreases & vice-versa
c. Proportionate – based on fixed proportion of the value of the property assessed

Sources:
Income Taxation – Banggawan Quicknotes Taxation – De Vera Income Taxation Made Easy – Ballada CPAR Handouts on Taxation –
Llamado

DISCLAIMER: THIS MATERIAL SHOULD NOT BE REPRODUCED FOR SALE | CREDITS TO THE RIGHTFUL OWNER | ALL NOTES MENTIONED WERE TAKEN
FROM VARIOUS RESOURCE MATERIALS FROM TAXATION AUTHORS AND REVIEWERS AND WERE COMPILED FOR EDUCATIONAL/LECTURE PURPOSES
ONLY. CREDITS TO THE AUTHORS. NO COPYRIGHT INFRINGEMENT INTENDED.
GENERAL PRINCIPLES OF TAXATION & ICSD, CTT, CPA INTRODUCTION TO INCOME
TAXATION

OTHER IMPOSITIONS ASIDE FROM TAXES

A. Toll – amount charged for cost of property used
B. License Fee – imposed for the commencement of a business activity
C. Debt – sum of money due upon contract or one which is evidenced by judgment D.
Special Assessment - levied only on land based wholly on benefit accruing thereon as a
result of improvements or public works undertaken by gov’t
E. Tariff – amount imposed on imported articles
F. Penalty – amount imposed to discourage an act or for punishment of a crime

PRINCIPLES OF A SOUND TAX SYSTEM

A. Fiscal Adequacy – sources of gov’t funds must be sufficient to cover gov’t costs and
expenditure. It must maintain a sound budgetary system and must not incur a deficit. B.
Theoretical Justice – considers taxpayer’s ability to pay. Implementation of tax should be
justified and not oppressive.
C. Administrative Feasibility – Tax Administration and Implementation should be administered
through effective and efficient means. Ex. Ease of Doing Business Act, E-filing and E-payment
of taxes, Substituted filing for employees.

TAX ADMINISTRATION IN THE PHILIPPINES

AGENCY PRIMARILY INVOLVED: BUREAU OF INTERNAL REVENUE (BIR)
Powers and Duties of BIR:
➢ Assessment and Collection of all national internal revenue taxes, fees, charges

➢ Enforcement of all forfeitures, penalties, and fines connected therewith

➢ Execution of judgment in all cases decided in its favor by the Court of Tax Appeals and the
ordinary courts
➢ Give effect to and administer the supervisory and police powers conferred to it by the Code
or other laws
➢ Assignment of internal revenue officers and other employees

➢ Provision of forms, receipts, certificates, stamps, etc.

Powers of the Commissioner of Internal Revenue:
➢ Power to interpret tax laws and decide tax cases (Quasi-judicial function) o
Interpret provisions of the Internal Revenue Code and other tax laws
o Decide cases on disputed assessments, refund of internal revenue taxes, fees,
charges, fines, etc.
➢ Power to obtain information, summon, examine and take testimony of persons ➢ Power
to make assessments, prescribe additional requirements for tax administration and
enforcement
o Prescribe zonal values
o Terminate taxable period
o Examination of returns and determination of tax dues etc
o Authority to inquire into bank deposits
o Authority to register tax agents
➢ Authority to delegate power
o May delegate powers to subordinates, subject to limitations

Sources:
Income Taxation – Banggawan Quicknotes Taxation – De Vera Income Taxation Made Easy – Ballada CPAR Handouts on Taxation –
Llamado

DISCLAIMER: THIS MATERIAL SHOULD NOT BE REPRODUCED FOR SALE | CREDITS TO THE RIGHTFUL OWNER | ALL NOTES MENTIONED WERE TAKEN
FROM VARIOUS RESOURCE MATERIALS FROM TAXATION AUTHORS AND REVIEWERS AND WERE COMPILED FOR EDUCATIONAL/LECTURE PURPOSES
ONLY. CREDITS TO THE AUTHORS. NO COPYRIGHT INFRINGEMENT INTENDED.
GENERAL PRINCIPLES OF TAXATION & ICSD, CTT, CPA INTRODUCTION TO INCOME
TAXATION

WHAT IS INCOME AND THE ELEMENTS OF GROSS INCOME? – Income is fruit. It is the Return on
Capital that increases wealth. It is a realized benefit. It is not exempted by law. EXAMPLE: Selling
Price P 1,000.00 - Total Return
Cost 700.00 - Return of Capital
Gross Income P 300.00 - Return on Capital

HOW DOES THE PHILIPPINES TAX INCOME?

A. Partly Global System of Income Taxation – some income, particularly active income, are
compounded together and then reduced by certain deductions and expenses to arrive at
gross income, then be subjected to the same set of tax rates
B. Partly Schedular System of Income Taxation – some income, like capital gains and passive
income, are categorized into different categories and are accorded different tax
treatments, with each treatment having own schedule of tax rates
THUS – SEMI-GLOBAL / SEMI-SCHEDULAR.

GENERAL CLASSIFICATIONS OF INCOME TAXPAYERS

I. Individuals
a. Resident Citizen – Those who are citizens at the time of the adoption of the 1987
Constitution; born by Filipino parents; born before Jan. 17, 1973 of Filipino mothers
who elect PH citizenship upon reaching 18; naturalized // < 183 days
b. Non-Resident Citizen – establishes to the satisfaction of the fact of his physical
presence abroad with a definite intention to reside therein; citizen with employment
abroad on a permanent basis; citizen who has been previously considered as non
resident citizen and who arrives in the Philippines at any time during the taxable year
 to reside permanently in the Philippines shall likewise be treated as a non-resident
citizen for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the Philippines;
citizen who derives income from abroad which requires him to stay abroad ≥ 183
days during the year (183 days is aggregated)
c. Resident Alien – not a citizen but residence is within the PH; purpose in the PH
requires an extended stay and makes his home temporarily in the PH; > 1 year stay d.
Non-Resident Alien
i. Engaged in Trade/Business (ETB) – stay in PH ≥ 180 days but < 1 yr
ii. Not Engaged in Trade/Business (NET) – stay in PH < 180 days
e. Taxable Estates and Trusts
i. Estates – properties, rights, obligations of a deceased person not
extinguished by his death
ii. Trusts – arrangement whereby one person (grantor/trustor) transfers
property to another person (beneficiary) which will be held under the
management of a third person (Trustee/Fiduciary).
II. Corporate
a. Domestic Corporation – corporation organized in accordance with Philippine Laws /
Ex. San Miguel Corporation
b. Foreign Corporation – organized under a foreign Law
i. Resident Foreign Corporation (RFC) – foreign corp.which operates business in
the PH through a permanent establishment / Ex. Mcdo Philippines
ii. Non-Resident Foreign Corporation (NRFC) – foreign corp. which does not
operate in the PH / Ex. Wal-Mart of US

Sources:
Income Taxation – Banggawan Quicknotes Taxation – De Vera Income Taxation Made Easy – Ballada CPAR Handouts on Taxation –
Llamado

DISCLAIMER: THIS MATERIAL SHOULD NOT BE REPRODUCED FOR SALE | CREDITS TO THE RIGHTFUL OWNER | ALL NOTES MENTIONED WERE TAKEN
FROM VARIOUS RESOURCE MATERIALS FROM TAXATION AUTHORS AND REVIEWERS AND WERE COMPILED FOR EDUCATIONAL/LECTURE PURPOSES
ONLY. CREDITS TO THE AUTHORS. NO COPYRIGHT INFRINGEMENT INTENDED.
GENERAL PRINCIPLES OF TAXATION & ICSD, CTT, CPA INTRODUCTION TO INCOME
TAXATION

c. Partnerships
d. Joint Ventures e. Co-Ownerships
TAXPAYER WITHIN WITHOUT

Resident Citizen
✓ ✓

Non-Resident Citizen
✓

Resident Alien
✓

Non-Resident Alien
✓

Domestic Corporation
✓ ✓

Resident Foreign Corporation

✓

Non-Resident Foreign
✓
Corporation
SITUS OF PHILIPPINE INCOME TAXATION
➢ Situs means location, how and where do we tax certain income?

Income Situs

Interest Income Residence of debtor

Income from Services Place of Performance

Rent Location of Property

Royalty Place of use

Gain on sale of REAL PROPERTY Location of Property

Gain on sale of PERSONAL PROPERTY Place of Sale

Sale of Shares Domestic: Income WITHIN

Foreign: Income WITHOUT

Dividends From Domestic Corporation: WITHIN

From Foreign Corporation:
PREDOMINANCE TEST

Predominance Test:
a. WITHIN – if 50% or more of the
gross income of the foreign
corporation (for the preceding
3 years prior to dividend
declaration) was derived
WITHIN the Philippines
FORMULA: (Phil. GI / Total GI) x
Dividend = Income Within
b. WITHOUT - if less than 50% of
the gross income of the foreign
corporation (for the preceding
3 years prior to dividend
declaration) was derived
WITHIN the Philippines

Sources:
Income Taxation – Banggawan Quicknotes Taxation – De Vera Income Taxation Made Easy – Ballada CPAR Handouts on Taxation –
Llamado

DISCLAIMER: THIS MATERIAL SHOULD NOT BE REPRODUCED FOR SALE | CREDITS TO THE RIGHTFUL OWNER | ALL NOTES MENTIONED WERE TAKEN
FROM VARIOUS RESOURCE MATERIALS FROM TAXATION AUTHORS AND REVIEWERS AND WERE COMPILED FOR EDUCATIONAL/LECTURE PURPOSES
ONLY. CREDITS TO THE AUTHORS. NO COPYRIGHT INFRINGEMENT INTENDED.
GENERAL PRINCIPLES OF TAXATION & ICSD, CTT, CPA INTRODUCTION TO INCOME
TAXATION

INTRODUCTION TO THE INCOME TAXATION SCHEMES UNDER THE NIRC

A. FINAL INCOME TAXATION
a. Characterized by final taxes, withheld at source
b. Payor of income remits the tax to the government
c. Applicable on certain PASSIVE INCOME: Ex. Interest from banks, royalties
 B. REGULAR INCOME TAXATION
a. Arises from active or regular income – those requiring considerable amount of effort
or undertaking from the taxpayer; or from gains from dealings in property treated as
ordinary assets, or those other than capital assets subject to capital gains tax
b. Applicable on ACTIVE INCOME: Ex. Compensation Income as an Employee
C. CAPITAL GAINS TAXATION
a. Imposed on capital gains on the sale, exchange, and other disposition of certain
capital assets
b. Applicable on Sale of Real Property and Sale of Domestic Shares Sold Directly to
Buyer

Sources:
Income Taxation – Banggawan Quicknotes Taxation – De Vera Income Taxation Made Easy – Ballada CPAR Handouts on Taxation –
Llamado

DISCLAIMER: THIS MATERIAL SHOULD NOT BE REPRODUCED FOR SALE | CREDITS TO THE RIGHTFUL OWNER | ALL NOTES MENTIONED WERE TAKEN
FROM VARIOUS RESOURCE MATERIALS FROM TAXATION AUTHORS AND REVIEWERS AND WERE COMPILED FOR EDUCATIONAL/LECTURE PURPOSES
ONLY. CREDITS TO THE AUTHORS. NO COPYRIGHT INFRINGEMENT INTENDED.