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Income taxation 01 - Chapter 1 Summary

Accountancy (STI College)

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TAXATION  Gross concept

 State power – inherent power to 2. Horizontal equity – requires
enforce a proportional contribution consideration for the particular
from its subjects for public purpose. circumstance of the taxpayer.
 Net concept
 Process – process of levying taxes by
the legislature of the state to enforce THE LIFEBLOOD DOCTRINE
proportional contributions from its  Without taxes the government would
subjects for public purpose. be paralyzed for lack of motive power to
activate or operate it.
 Mode of government cost distribution
– the state allocates its costs or burden  Taxes are the lifeblood of the
to its subjects who are benefited by its government, and their prompt and
spending. certain availability are an imperious
need.
THE THEORY OF TAXATION
 A government cannot exist without a IMPLICATION OF THE LIFEBLOOD DOCTRINE OF
system of funding. The government’s TAXATION
necessity for funding is the theory of 1. Tax is imposed even if the absence of
taxation. Constitutional grant.
2. Claims for tax exemption are construed
THE BASIS OF TAXATION against taxpayers.
 The government provides benefits to 3. The government reserves the right to
the people in the form of public choose objects of taxation.
services, and the people provide the 4. The courts are not allowed to interfere
funds that finance the government. with the collection of taxes.
5. In income taxation:
 Taxpayers cannot avoid payment of a. Income received in advance is
taxes under the defense of absence of taxable upon receipt.
benefit received. b. Deduction for capital expenditures
and prepayments is not allowed as
 The direct receipt or actual availment of it effectively defers the collection of
government services is not a income tax.
precondition to taxation. c. A lower amount of deduction is
preferred when a claimable expense
THEORIES OF COST ALLOCATION is subject to limit.
1. Benefit received theory – the more d. A higher tax base is preferred when
benefit he receives; the more taxes he the tax objects has multiple tax
should pay. bases.

2. Ability to pay theory – based on their INHERENT POWERS OF THE STATE

capacity to sacrifice for the support of 1. Taxation power – to enforce
the government. proportional contribution from its
subjects to sustain itself.
ASPECTS OF ABILITY TO PAY THEORY
1. Vertical equity – directly proportional 2. Police power – to enact laws to protect
to the level of his tax base. the well-being of the people.

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3. Eminent domain – to take private

property for public use after paying just 1. Governments do not tax the income
compensation. and properties of other
governments.
 These rights, dubbed as “powers” are 2. Governments give primacy to their
natural, inseparable and inherent to treaty obligations over their own
every government. domestic tax laws.

SIMILARITIES OF THE THREE POWERS OF THE 3. Public purpose

STATE
1. Necessary attributes of sovereignty. 4. Exemption of the government – this
2. Inherent to the State. will not raise additional funds but will
3. Legislative in nature. only impute additional costs.
4. Ways in which the State interferes with
private rights and properties.  Income of the government from its
5. Exist independently of the Constitution/ properties and activities conducted for
and are exercisable by the government profit including income from
even without Constitutional grant. government owned and controlled
6. Presuppose an equivalent form of corporations is subject to tax.
compensation received by the persons
affected by the exercise of the power. 5. Non-delegation of the taxing power –
7. The exercise of these powers by the legislative taxing power is vested
local government units may be limited exclusively in Congress.
by the national legislature.
 What has been delegated cannot
SCOPE OF THE TAXATION POWER further be delegated.
 Comprehensive
 Plenary EXCEPTIONS TO THE RULE OF NON-
 Unlimited DELEGATION
 Supreme 1. Under the Constitution, local
government units are allowed to
THE LIMITATIONS OF THE TAXATION POWER exercise the power to tax to enable
A. INHERENT LIMITATIONS them to exercise their fiscal autonomy.
1. Territoriality of taxation – it cannot 2. Under the Tariff and Customs Code, the
enforce upon subjects outside its President is empowered to fix the
territorial jurisdiction. amount of tariffs to be flexible to trade
conditions.
Two-fold obligations of taxpayers 3. Other cases that require expedient and
1. Filing of returns and payments of effective administration and
taxes implementation of assessment and
2. Withholding of taxes on expenses collection of taxes.
and its remittance to the
government. B. CONSTITUTIONAL LIMITATIONS
1. Due process of law
2. International comity – mutual courtesy
or reciprocity between countries (no Aspects of Due Process
country is powerful than the other).

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1. Substantive due process – tax must 5. Non-imprisonment for non-payment of

be imposed only for public purpose, debt or poll tax
collected only under authority of a
valid law and only by the taxing  Applies only when the debt is acquired
power having jurisdiction. by the debtor in good faith.

2. Procedural due process – there  Debt is acquired by the debtor in bad

should be no arbitrariness in
assessment and collection of taxes,
and the government shall observe
the taxpayer’s right to notice and
hearing.
faith constitutes a estafa, a criminal
offense punishable by imprisonment.
 Applies only to the basis community
tax.

 Under the NIRC, assessments shall be  Non-payment of the additional

made within three years from the due community tax is an act of tax evasion
date of filing of the return or from the punishable by imprisonment.
date of actual filing, whichever is later.
6. Non-impairment of obligation and
 Collection shall be made within five contract – it should no set aside its
years from the date of assessment. obligations from contracts by the
exercise of its taxation power.
2. Equal protection of the law – taxpayers
should be treated equally both in terms 7. Free worship rule – does not extend to
of rights conferred and obligations income from properties or activities of
imposed (same circumstances). religious institutions that are
proprietary or commercial in nature.
 Congress cannot exempt sellers of
“balot” while subjecting sellers of 8. Exemption of religious or charitable
“penoy” to tax since they are essentially entities, non-profit cemeteries,
the same goods. churches and mosques, lands,
buildings and improvements from
3. Uniformity rule in taxation – the rule of property taxes – actually, directly and
taxation shall be uniform and equitable. exclusively used for charitable, religious,
and educational purposes.
 Taxpayers under dissimilar
circumstances should not be taxed the  Doctrine of use – properties actually
same. devoted for religious, charitable, or
educational activities are exempt from
 Uniformity is relative equality. real property tax.

4. Progressive system of taxation – tax  Doctrine of ownership – properties of

rates increase as the tax base increases.
 Aids in an equitable distribution of
wealth t society by taxing the rich more
than the poor.
religious, charitable, or educational
entities whether or not used un their
primary operations are exempt from
real property tax (not applied in PH).

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9. Non-appropriation of public funds or as part of lawmaking be vested

property for the benefit of any church, exclusively in Congress.
sect or system of religion – intended to
highlight the separation of religion and 14. Non-impairment of the jurisdiction of
the State. the Supreme Court to review tax cases
– notwithstanding the existence of the
 Compensation to priests, imams, or Court of Tax Appeals, which is a special
religious ministers working with the court, all cases involving taxes can be
military, penal institutions, orphanages raise to and be finally decided by the
or leprosarium is not considered Supreme Court of the Philippines.
religious appropriation.
15. The requirement that appropriations,
10. Exemption from taxes of the revenues revenue, or tariff bills shall originate
and assets of non-profit, non-stock exclusively in the House of
educational institutions including Representatives, but the Senate may
grants, endowments, donations, or propose or concur with amendments
contributions for educational purposes
– applies only on revenues and assets 16. The delegation of taxing power to local
that are actually, directly and exclusively government units shall exercise the
devoted for educational purposes. power to create its own sources of
revenue and shall have a just share in
 Exempts government educational the national taxes – this is a
institutions from income tax and constitutional recognition of the local
subjects’ private educational autonomy of local government and an
institutions to a minimal 10% income express delegation of the taxing power.
tax.
STAGES OF HE EXERCISE OF TAXATION POWER
11. Concurrence of a majority of all 1. Levy or imposition – enactment of a tax
members of Congress for the passage law by Congress and is called impact of
of a law granting tax exemption – taxation or legislative act in taxation.
requires the vote of the majority of all
members of Congress. Congress is composed of two bodies:
1. The House of Representatives
 In the approval of an exemption law, an 2. The Senate
absolute majority or the majority of all
members of Congress is required.  Tax bills cannot originate exclusively
from the Senate.
 In the withdrawal of tax exemption,
only a relative majority or quorum 2. Assessment and collection – referred to
majority is required. as incidence of taxation or the
administrative act of taxation.
12. Non-diversification of tax collections –
it should never be diversified for private SITUS OF TAXATION – the place of the taxation.
purposes.  Situs rules serve as frames of reference
in gauging whether the tax object is
13. Non-delegation of the power of within or outside the tax jurisdiction of
taxation – requires that taxation power the taxing authority.

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Examples: 6. Imprescriptibility in taxation –

1. Business tax situs – where the business prescription is the lapsing of a right due
is conducted. to the passage of time.
2. Income tax situs on services – where  Tax prescribes if not collected
they are rendered. within 5 years from the date of its
3. Income tax situs on sale of goods – assessment.
place of sale.  In the absence of assessment, tax
4. Property tax situs – location. prescribes if not collected by
5. Personal tax situs – place of residence. judicial action within 3 years from
the date the return is required to be
OTHER FUNDAMENTAL DOCTRINES IN filed.
TAXATION  Taxes due from taxpayers who did
1. Marshall Doctrine – “the power to tax not file a return or those who filed
involves the power to destroy”. fraudulent returns do not prescribe.
 Does not include the power to
destroy if it is used solely for the 7. Doctrine of estoppel – any
purpose of raising revenue. misrepresentation made by one party
 Imposition of excessive tax on toward another who relied therein in
cigarettes. good faith will be held true and binding
against that person who made the
2. Holme’s Doctrine – “taxation power is misrepresentation.
not the power to destroy while the  The error of any government
court sits”. employee does not bind the
 Include the creation of Ecozones government.
with tax holidays and provision of
incentives. 8. Judicial Non-interference – courts are
not allowed to issue injunction against
3. Prospectivity of tax laws – tax laws are the government’s pursuit to collect tax
generally prospective in operation. as this would unnecessarily defer tax
 an ex post facto law or a law that collection (Lifeblood Doctrine).
retroacts is prohibited by the
Constitution. 9. Strict Construction of Tax Laws –
“taxation is the rule; exemption is the
4. Non-compensation or set-off – tax is exemption”
not a debt; hence, it is not subject to  There is no room for interpretation,
set-off. there is only room for application.
 Exceptions:  When taxation laws are vague, the
a. Taxpayer’s claim has already doctrine of strict legal construction
become due and demandable. is observed.
b. Cases of obvious overpayment
of taxes.  Vague tax laws – construed against
c. Local taxes the government and in favor of the
taxpayers.
5. Non-assignment of taxes – tax o It means no tax law.
obligations cannot be transferred to o Obligation arising from law is
another entity by contract. not presumed.

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deductible against the tax due of the

 Vague exemption laws – construed domestic tax law.
against the taxpayer and in favor of
the government. c. Allowing reciprocal tax treatment –
o It means no exemption law. provisions in tax laws imposing a
o Construed strictly against the reduced tax rates or even exemption if
taxpayer in accordance with the the country of the foreign taxpayer also
lifeblood doctrine. give the same treatment to Filipino non-
residents therein.
 Tax exemption cannot arise from vague
inference. d. Entering into treaties or bilateral
agreements – countries may stipulate
DOUBLE TAXATION – occurs when the same for a lower tax rates for their residents if
taxpayer is taxed twice by the same tax they engage in transactions that are
jurisdiction for the same thing. taxable by both of them.

ELEMENTS OF DOUBLE TAXATION ESCAPES FROM TAXATION – available to the

1. Primary elements:
a. 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 – all element of
double taxation exists for both
impositions.
 Discouraged because it
oppressive and burdensome to
taxpayers.
taxpayer to limit or even avoid the impact of
taxation.
Categories of Escapes from 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.
2. Tax avoidance – also known as tax
is minimization, refers to any act or trick
that reduces or totally escapes taxes by
any legally permissible means.

2. Indirect double taxation – at least one
of the secondary elements of double
taxation is not common for both
impositions.
 Prevalent in practice.
How can double taxation be minimized?
a. Provision of tax exemption – only one
tax law is allowed to apply to the tax
object while other tax law exempts the
same tax object.
b. Allowing foreign tax credit – tax
payments in the foreign tax law is
3. Tax exemption – also known as tax
holiday, refers to the immunity, privilege
or freedom from being subject to a tax
which others are subject to.
 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 – transferring tax burden to
other taxpayers.

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 Common with business taxes where TAX CONDONATION – forgiveness of the tax
taxes imposed on business revenue obligation of a certain taxpayer under certain
can be shifted or passed-on to justifiable grounds.
customers.  Also referred to as tax remission.
 Construed against the taxpayer and in
a. Forward – normal flow of favor of the government.
distribution (manufacturer to  Covers civil liabilities of the taxpayer.
customers).  Applies prospectively to any unpaid
 common with essential balance of the tax; hence, the porting
commodities and services such already paid by the taxpayer will not be
as foods and fuel. refunded.
 Requires no payment.
b. Backward – reverse of forward
shifting.
 Common with non-essential
commodities where buyers
have considerable market
power and commodities with
numerous substitute products.

c. Onward – any tax shifting in the

distribution channel that exhibits
forward or backward shifting.

2. Capitalization – adjustment of the value

of an asset cause by changes in tax
rates.
 This is a form of backward shifting
of tax.

3. Transformation – elimination of wastes

or losses by the taxpayer to form
savings to compensate for the tax
imposition or increase in taxes.

TAX AMNESTY – 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 part of a society with a clean
slate.
 Absolute forgiveness or waiver by the
government on its right to collect and is
retrospective in application.
 Covers both civil and criminal liabilities.
 Conditional upon the taxpayer paying
the government of a portion of the tax.

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