NOTES ON INCOME TAXATION

ACC 311
1ST SEMESTER, S.Y. 2023-2024

CHAPTER 1 – BASIC PRINCIPLES

TAXATION

 It is the process or means by which the sovereign, through its lawmaking body, raises income to defray the
necessary expenses of the government.
 The government cannot continue to exist without financial means thus it is the lifeblood of the government.
 In the Philippines, the premier tax agency is the Bureau of Internal Revenue (BIR).
 It is an inherent power of sovereignty.
The inherent powers of the state are:
1. Taxation. The power of the state by which the sovereign raises revenue to defray the necessary
expenses of the government.
2. Eminent Domain. The power of the state to take private property for public use upon payment of just
compensation.
3. Police Power. The power of the state to enact laws to promote public health, public morals, public
safety, and the general welfare of the people.

Purposes of Taxation

1. Primary (Revenue or Fiscal) – to raise to promote the general welfare and protection of its citizens
2. Secondary
a. Regulatory
b. Compensatory
c. Income redistribution
d. Encourage economic growth through granting of tax incentives or exemptions

Objectives of Taxation

 Aids in achieving various economic and social objectives, like:

1. Shifting wealth from the rich to the poor
2. Maintaining price stability
3. Stimulating economic growth
4. Encouraging full employment
 Congress tends to use tax provisions in two (2) ways:

Prepared by: MARJ JULES LORAIN V. JUNTILLA, CPA

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1. Tax rules are enacted for the purpose of mitigating certain undesirable economic and social conditions
already existing. Example: Tax based on income earned
2. Other tax rules provide incentives for certain desirable activities. Example: Employment of PWDs in
businesses
 When in doubt:
1. Tax laws are strictly construed against the government, and liberally in favor of the taxpayer.
2. Tax exemptions are strictly construed against the taxpayer, and liberally in favor of the government.

Aspects of Taxation

1. Levying or imposition of tax – requires legislative intervention (In the Philippines, it is Congress that levies taxes.)
2. Assessment of tax – an administrative function (BIR)
3. Collection of tax levied – an administrative function (BIR)

Basic Principles of a Sound Tax System

1. Fiscal adequacy – “Sources of revenue are sufficient to meet government expenditures”

2. Equality or theoretical justice – “The tax imposed must be appropriate to taxpayer’s ability to pay”
3. Administrative feasibility – “The law must be capable of convenient, just, and effective administration”

Limitations on the Power of Taxation

A. Inherent Limitations (TIP-END)

1. Territoriality of taxation
2. International comity or treaty
3. Tax is for a public purpose
4. Exemption of the government from taxation
5. Non-delegation of the power of taxation
B. Constitutional Limitations
1. Due process of law – notice and hearing
2. equal protection of the law –equality among equals
3. uniformity in taxation – taxation of same class
4. progressive system of taxation – use of graduated tax table
5. non-imprisonment for non-payment of debt or poll tax
6. non-impairment of obligation and contract
7. freedom to exercise religion
8. freedom of the press
9. non-appropriation of public funds or property for the benefit of any church, sect or system of religion
10. exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosque from
property taxes
11. exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions for
educational purposes
12. concurrence of a majority of all members of Congress for the passage of a law granting tax exemption (voting
separately)
13. non-impairment of the jurisdiction of the Supreme Court to review tax cases – the final arbiter
14. appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives but the
Senate may propose or concur with amendments
15. each local government unit shall exercise the power to create its own sources of revenue and shall have a
share in the national taxes (Internal Revenue Allotments)

Doctrines of Taxation
 Prospectivity of tax laws, unless a statute explicitly and clearly states that it is to operate retroactively.
 Double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against
the legality of a tax measure unless it is direct duplicate taxation.
a. Direct duplicate taxation – both taxes are imposed for the same purpose by the same taxing authority, with
the same jurisdiction or taxing district, for the same taxable period, and for the same kind or character of a
tax.
b. Indirect duplicate taxation – other than direct duplicate taxation. It is not unconstitutional, it is avoided to not
bring injustice to the taxpayer.
 Setoff of taxes or legal compensation is not allowed in taxation.
 Escape from taxation can be:
a. Tax avoidance (Tax minimization or Tax planning) – taxpayer minimizes his tax liability by taking advantage
of legally available tax planning opportunities.
b. Tax evasion (Tax dodging) – taxpayer resorts to unlawful means to lessen or to get away with his tax liability.
It connotes the following factors:
Prepared by: MARJ JULES LORAIN V. JUNTILLA, CPA
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1. The end to be achieved;

2. An accompanying state of mind that is described as being in bad faith, willful, or deliberate and not
accidental; and
3. A course of action or failure of action that is unlawful.

Situs of Taxation

 This is the place of taxation and is determined by the following factors:

1. Subject matter – what is being taxed (ex. person, property, etc.)
2. Nature of tax – which tax is being imposed (ex. income tax, import duties, real property tax, etc.)
3. Citizenship of taxpayer
4. Residence of the taxpayer
 The following situs of taxation applies:
1. Persons – the residence of the taxpayer
2. Real property or tangible personal property – location of the property
3. Intangible personal property – the domicile of the owner (unless he/she acquired a situs elsewhere)
4. Business, occupation, and transaction – the place where business is being operated, occupation being
practiced, and transaction completed
5. Gratuitous transfer of property – taxpayer’s residence or citizenship, or location of property

TAXES

 Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the
State by virtue of its sovereignty for the support of the government and all public needs.
 Essential characteristics are:
1. It is an enforced contribution;
2. It is levied by the lawmaking body;
3. It is proportionate in character;
4. It is generally payable in money;
5. It is imposed for the purpose of raising revenues; and
6. It is to be used for public purposes.

Classification of Taxes

I. As to authority (who imposes the tax)

1. National tax – imposed by the National Government. National internal revenue taxes (DIVE-PESO)
a. donor’s tax
b. income taxes
c. value-added tax
d. estate tax
e. other percentage taxes
f. excise tax
g. documentary stamp tax
h. other taxes as may be imposed
2. Local tax – tax imposed by local governments (provincial/city/municipal/barangay)
a. real property tax
b. professional tax
c. business taxes, fees, and charges
d. community tax
II. As to purpose (P-FRS)
1. Fiscal – general, fiscal or revenue- a tax imposed for the general purpose of the
government or to raise revenue for government needs, e.g. income tax, transfer taxes
(estate/donor’s taxes)
2. Regulatory – for purposes of the regulation (exercise of police power), e.g. PRC and
driver’s licenses
3. Special or sumptuary – a tax imposed for a special purpose or to achieve some social or
economic ends, e.g. Special Education Fund under Local Government Code to be used
exclusively for education; Php 500 million collected from Tax Amnesty shall be used
exclusively for purposes of establishing tax database and any excess shall be allocated
to augment appropriations for the social mitigating measures and the Build, Build, Build
Infrastructure projects.
III. As to subject matter or object (SM-PPPE)
1. Personal, poll or capitation – tax of a fixed amount imposed on individuals residing within a specified
territory e.g. community tax certificate/cedula

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2. Property tax – tax imposed on property, whether real or personal e.g. real property tax / factory
machinery
3. Excise tax – tax on commodities/excisable articles e.g. sin products
(alcohol/cigarettes/automobiles/minerals/jewelries/non-essential services)
4. Privilege tax – tax imposed upon the performance of an act, the enjoyment of a privilege or the engaging
in an occupation, e.g. Professional tax (issued PTR); estate and donor’s tax on the privilege to transmit
property from one person to another.

Tax Distinguished from Other Fees

1. Toll – is a sum of money for the use of something, generally applied to the consideration which is paid for the use
of a road, bridge, or the like, of a public nature.
2. Penalty – is any sanction imposed as a punishment for violation of law or acts deemed injurious. However,
violation of tax laws may give rise to the imposition of penalty.
3. Special assessment – is an enforced proportional contribution from owners of lands for special benefits resulting
from public improvements.
4. Permit or license fee – is a charge imposed under the police power for purposes of regulation.
5. Debt – is generally based on contract, is assignable, and may be paid in kind while the tax is based on law,
cannot generally be assigned and is generally payable in money. A person cannot be imprisoned for non-payment
of debt while he can be for non-payment of tax (except poll tax)
6. Revenue – is broader than tax since it refers to all funds or income derived by the government taxes included.
7. Custom duties – are taxes imposed on goods exported from or imported to a country. This is a kind of tax.

TAX LAWS

 Tax law, in general, is composed of:

a. The Code;
b. Regulations and Rulings; and
c. Decisions of various courts that hear tax cases.
 There are three branches of the national government:
a. The President and his administration (executive);
b. The Congress (legislative); and
c. The Courts (judicial).
 Congress creates statutory law – The National Internal Revenue Code (NIRC) – Republic Act 8424.
 Sources of Tax Laws are:
a. Constitution;
b. Statutes and Presidential Decrees;
c. Revenue Regulations by the DOF;
d. Rulings issued by the Commissioner of Internal Revenue and Opinions by the Secretary of Justice;
e. Decisions of the Supreme Court and the Court of Tax Appeals;
f. Provincial, city, municipal, and barangay ordinances are subject to limitations set forth in the Local
Government Code; and
g. Treaties or international agreements the purpose of which is to avoid or minimize double taxation.

Philippine Tax Laws

1. National Internal Revenue Code of 1997;

a. Income taxes (individual and corporate)
b. Estate and donor’s tax
c. Value-added tax
d. Other percentage taxes
e. Excise tax
f. Documentary stamp tax
2. Tariff and Customs Code 1978;
a. Import duties
b. Export duties
3. Local Government Code of 1991;
a. Real property tax
b. Business taxes, fees, and charges
c. Professional tax
d. Community tax
e. Tax on banks and other financial institutions
4. Special Laws
a. Motor Vehicle Law
b. Private Motor Vehicle Tax Law
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c. Philippine Immigration Act of 1940

d. Travel Tax Law

Bureau of Internal Revenue (BIR)

 BIR is part of the Department of Finance (DOF).

 The chief officials of the Bureau are the Commissioner and seven (7) Deputy Commissioners assigned to the
following:
1. Information system;
2. Legal and inspection;
3. Operations;
4. Resource management;
5. Tax reforms administrations;
6. Special concerns; and
7. Large taxpayers.
 Powers and duties of BIR:
1. Assessment and collection of all national internal revenue taxes, fees, and charges;
2. Enforcement of all forfeitures, penalties, and fines;
3. Execution of judgments in all cases in its favor by the Court of Tax Appeals and ordinary courts; and
4. Administration of supervisory and police powers conferred to it.

INCOME AND INCOME TAXES

 Income, in its broad sense, means all wealth, which flows into the taxpayer other than a mere return of capital.
 Capital is a fund or property existing at one distinct point in time.
 Income tax is a tax on all yearly profits arising from property, profession, trade, or business, or is a tax on a
person’s income, emoluments, profits, and the like. It is regarded as an excise (privilege) tax.

General Procedures in Determining Income Tax

Step 1: Identify the taxpaying party or entity which the tax computation formula applies.

Step 2: Determine the taxpayer’s gross income.

Step 3: Determine the expenses and certain other items that can be “deducted” in computing the taxpayer’s taxable
income.

Step 4: Apply the appropriate tax rate to the taxpayer’s taxable income to find the tax due.

Step 5: Subtract applicable tax credits/payments from the taxpayer’s tax due to determine the tax payable.

Step 6: Increase the tax by penalties and interests to obtain the total amount payable.

Prepared by: MARJ JULES LORAIN V. JUNTILLA, CPA