CXopy, Well Organized Foret Cah Terese Teale) asta ae WAU ta eel le alg With Update Package Optional Tax Eick INCOME Laws Principles and Applications REX B. BANGGAWAN, CPA, MBAINCOME TAXATION LAWS, PRINCIPLES AND APPLICATIONS Well Organized Comprehensive Illustrative Simplified CREATE Law Updated Self-taught Designed for OBE An Integrated Principle-based Approach A Guide to Understanding and Mastering Income Tax Principles and Applications For Accountancy students CPA Board Exam candidates Finance & Business students, Law students Taxpayers and Tax practitioners By REX B. BANGGAWAN, CPA, MBA.INCOME TAXATION 2021 EDITION OVERVIEW OF CONTENTS Introductory concepts to taxation The concept of tax, tax laws and tax administration The concept of gross income under taxation Taxation schemes, accounting period, methods and income reporting Final income taxes Capital gains taxes Overview of the regular income tax Exclusions and exempt income Income subject to regular income tax Compensation income Fringe benefits and the fringe benefits tax Dealings in properties subject to regular tax Allowable deductions from gross income Specific regular tax rules applicable individuals Specific regular tax rules applicable to corporations‘THE CONCE MAP OF INCOME TAXATION Introductory concepts (Chapters 1-2) Capital Gains Taxation Regular Income Taxation Fringe benefits Gains on dealings in properties r Gross income Less: Deductions from gross income XXX Taxable income P_XXX J J Individual Taxpayers (Progressive Income Tax) Corporate Income Taxpayers (Corporate Income Tax) Chapter 15A-15B Special individual tax rules: Taxable estates Taxable trusts Special corporate tax rules: Gross income tax McIT Branch profit remittance taxTABLE OF CONTENTS PARTI INTRODUCTORY CONCEPTS CHAPTER 1 Introduction to Taxation 1-34 Definition of taxation : Theories of cost allocation The Lifeblood Doctrine ‘The inherent powers of the State The scope of taxation Inherent limitations Constitutional limitations Stages of taxation Situs of taxation Other fundamental doctrines in taxation Double taxation Escape from taxation Tax amnesty and tax condonation Exercise Drills 6 BSIkadea 1 i 1 ©. CHAPTER 2 Taxes, Tax Laws, and Tax Administration 35+ Taxation laws and tax exemption laws Sources of laws and administrative issuances Nature of Philippine tax laws Elements of tax Classification of taxes Tax distinguished with similar items Tax system Tax collection system 2 Principles ofa sound tax system Tax administration Powers of the BIR and the CIR Other agencies with tax related functions Taxpayer classification for purposes of tax administration Exercise Drills ww ww wo oo SEGURA ae PARTI INCOME RECOGNITION, MEASUREMENT AND REPORTING, AND TAXPAYER CLASSIFICATIONS CHAPTER 3 Introduction to Income Taxation 63-99 The concept of income 63 Elements of gross income 63 Capital items deemed with infinite value 64 Recovery of loss capital vs. recovery of loss profits 65 The concept of realized benefit 66 Complex transactions 67eer Mode of realization of benefits ‘Types of income taxpayers Individual income taxpayers Classification rule for individual taxpayers Taxable estates and trusts Corporate taxpayers ‘The general rules in income taxation Situs of income Exercise Drills CHAPTER 4 Tax Schemes, Periods, and Methods and Reporting CHAPTER Income taxation schemes Classification of gross income Accounting period Short accounting period Accounting methods. Tax reporting ‘Types of tax returns Mode of filing income tax returns ‘Taxpayers mandated to use the eFPS Groupings of eFPS taxpayers Payment of taxes Penalties for filing of returns and late payment of taxes Exercise Drills PART DL SPECIAL INCOME TAXATION 5 Final Income Taxation Features of final income taxation ‘The final withholding system ‘Taxpayers subject to final income tax Items of passive income subject to final tax Final tax to individuals and corporations Final tax on interest from banks Final tax on dividends Final tax on royalties Final tax on prizes Final tax on winnings Final tax on informer’s reward Final tax on “tax free” covenant bonds Exceptions to the final taxation of certain taxpayers ‘The tax sparing rule Other applications of the final income tax Final withholding tax return: Entities exempt from final tax Exercise Drills aia, 69 70 7 72 74 74 77 78 83-99 100-135 100 101 102 103 105 118 118 118 119 119 121 121-124 125-135 136-171 136 136 137J CHAPTER 6 Capital Gains Taxation 172-227 Classification of taxpayer's properties 172 Analysis of taxpayer's properties 173 Asset classification rules 174 ‘Types of gains on dealings in properties 176 Scope of the capital gains taxation 176 Capital gains on the sale of stocks directly to buyer 176 Meaning of domestic stocks 176 Meaning of “other disposition” 477 Tax on sale of stacks through the PSE 178 Tax basis of stocks 180 Costing procedures for stocks 180 Capital gains tax rates for domestic stocks 183 Transactional compliance 184 Annualized capital gains tax 184 Installment payment of the two-tiered capital gains tax 187 Special rules on wash sales and tax-free exchanges 189 Tax free exchanges of property 193 Corporate reorganization 193 Initial acquisition of control 197 Capital gains tax on the sale of real property 201 Nature and scope of the 6% capital gains tax 203 Exceptions to the 6% capital gains tax 204 Installment payment of the 6% capital gains tax 207 Documentary stamp tax on the sale of capital 209 Exercise Drills 211-227 PART IV REGULAR INCOME TAXATION CHAPTER 7 Introduction to Regular Income Taxation ‘The regular income tax model and its characteristics Determination of taxable income of individual taxpayé ‘The classification and globalization rule Determination of taxable income of corporations Income tax reporting format for individual taxpayers Sales, revenue, receipts or fees Non-operating income Income tax reporting format for corporate taxpayers ‘Types of regular income tax Scope of the progressive income tax of individuals Computation of progressive income tax for individuals Determination of the corporate income tax Income tax forms Required attachments in the annual income tax returns Determination of tax due during transition of tax rates Quarterly filing of income tax returns Exercise DrillsUNIT 1- GENERAL RULES ON GROSS INCOME, CHAPTER 8 CHAPTER 9 Regular Income ation ~ Exclusions in Gross Income 259-288 List of exclusions from gross income 259 Proceeds of life insurance and return of premium 260 Gitts, bequests, and devises or descent 261 Compensation for injuries and sickness 262 Income exempt under treaty 263 Retirement benefits and termination benefits 263-265 Miscellaneous exempt benefits 266 Investment income of the government & foreign government 267 Prizes and awards 267 Mandatory contributions to SSS, GSIS, PhilHealth and HDMF 267 Contribution to Personal Equity Retirement Account (PERA) 268 Gain on sale of bonds with more than 5 year maturity 269 Gains on redemption of shares in mutual funds. 269 Income from sale of gold to the BSP 270 Other exempt income under the NIRC and special laws 272 Barangay Micro-business Enterprises (BMBEs) 272 Covid-19 benefits 272 Qualification of exemption on exempt entities 276 Exercise Drills 277-288 Regular Income Taxation - Inclusions in Gross Income 289-331. List of inclusions in gross income subject to regular tax Interest income Rent and royalty income Dividends Conditional exemption of foreign-source dividends Annuities Prizes and winnings Partner's distributive share in GPP net income General criteria for inclusion in gross income Other sources of gross income subject to regular tax ‘Tax benefit on recoveries of past deductions Refund of non-deductible taxes Special considerations in reporting gross income The effect of accounting methods and situs The effect of VAT The effect of creditable withholding tax The power of the CIR to redistribute income and expense The transfer pricing regulation 289 291 292 293 294 296 297 298 299 299 300 303 304 304 307 308 309 310 Exercise Drills 315-331UNIT 2 - SPECIAL RULES ON GROSS INCOME CHAPTER 10 Compensation income CHAPTER 11 CHAPTER 12 Employer-employce relationship Elements of an employer employee relationship Types of employees as to function and taxability he tax model on compensation income Non-taxable compensation income De minimis benefits empt benefits under treaty Necessity or convenience of the employer rule Components of taxable compensation income Regular compensation Non-compensation items Supplemental compensation 13! month pay and other benefits Ilustrations: Compensation income ‘Taxability of minimum woge earners Rules of change in minimum wage status The withholding tax on compensation Benefits not subject to withholding tax on compensation Deadline of the withholding tax on compensation Treatment of the withholding tax on compensation Exercise Drills Fringe Benefits Taxation Tax treatments of fringe benefits Scope of the fringe benefit tax Exempt fringe benefits to the fringe benefits tax The fringe benefits tax and its characteristics Procedural computations of the fringe benefits tax Rules on valuation of fringe benefits Special guidelines on monetary value determination Fringe benefits tax rates Grossed-up rates Computation of the fringe benefits tax Accounting entries Exercise Drills Dealings in Properties Dealings in properties subject to regular income tax Determination and treatment of gain or loss The holding period rule Presentation of gains or losses in the income tax return ‘The effect of situs rules on dealings in properties Net capital loss carry-over Special rules in tax basis determination ‘Tax free exchanges Merger or consolidation 332-378 332 333 333 334 334 335 338 340 341 342 342 344 347 352 356 359 360 363 363 364 365-378 379-409 379 380 382 383 384 385 386 394 394 395 396 399-409 410-449 410 410 412 413 415 416 418 421 422Initial acquisition of control 422 Exchanges not plainly for stocks 423 Wash sales 430 ‘Transactions considered exchanges 434 ercise Drills 436-449 UNIT 3 — DEDUCTIONS ON GROSS INCOME CHAPTER 13 Principles of Deductions 450-493 Business expense vs. personal expel 450 Allocation of common expenses 451 Business expense vs. capital expenditures 451 Rules on deducting capital expenditures 453 Depreciation methods 453 Special considerations with deductions 457 Asset related acquisition costs 459 he effects of accounting methods on deductions 462 The effect of VAT on deductions 463 ‘The general principles of deductions 463 ‘The LOAN Principle 464 The Matching Rule 466 The Related Party Rule 467 ‘The Withholding Rule and rules of withholding 469 Summary of expanded withholding tax rates 470 Penalties for late withholding and remittances 472 Periods in which deductions or credits are taken 473 Non-deductible expenses 43 ‘Tax reporting classification of deductions 473, Modes of claiming deductions 474 Exercise Drills 476-493 CHAPTER 13-A Regular Allowable Itemized Deductions 494-536 List of itemized deductions 494 Interest expense 494 Taxes 500 Foreign income tax credit 501 Losses 504 Bad debts 507 Depreciation expense 509 Amortization expense on intangible assets 511 Depletion expense 511 Charitable contributions 515 Contributions to pension 519 Research and Development and general expenses 521 Entertainment and amusement expenses 522 Exercise Drills 525-536i SE EE —t—t—Ss CHAPTER 13-B Special Allowable Itemized Deductions and 537-572 Net Operating Loss Carry-over 537 List of special deductions 538 Special expenses under the NIRC and special laws rt Deduction incentives under special laws 356 Net Operating Loss Carry-over 27 NOL vs. NOLCO 559 Requisites for the deductibility of NOLCO sé Rules in carry-over of NOLCO be NOLCO for individual taxpayers 564 NOLCO and merger and consolidation 7 Exercise Drills 565-5 CHAPTER 13-C Optional Standard Deduction 573-5" The Optional Standard Deduction (OSD) ‘Taxpayers mandatorily required to use itemized deductions 573 OSD percentages and bases 574 Rules on determination of OSD for individuals 576 Other taxable income from operations 576 Non-operating income 877 OSD for corporate taxpayers pe Cost of services OSD for general professional partnership including partners 585 Exercise Drills 590-598 UNIT 4— SPECIFIC REGULAR TAX RULES PER TAXPAYER CLASS Sub-Unit 1 Special Regular Tax Rules for Individual taxpayers CHAPTER 14 Individual Income Taxation 599-637 Income tax tables for individual taxpayers 599 Taxpayers subject to percentage tax 600 Pure compensation income earners 600 Conditions for substituted filing system 601 Pure business and or professional income earner 604 Mixed income earner 606 The 8% optional income tax 607 Interim transition to the Value Added Tax 613 Taxable estates and trusts 616 Consolidation of two or more trusts 618 Employee trust fund 619 Return of married taxpayers 620 Individuals with PERA accounts 621 Where to file Income Tax Returns 622 Installment payment of regular income tax 623 Amendment of income tax return 625 Exercise Drills 626-637Sub-Unit 2 Special Regular Tax Rules for Corporate taxpayers CHAPTER 15-A Corporate Income Taxation - Special Corporations General classification and tax rules for corporations Domestic MSME corporations Sub-classification of corporate taxpayers Exempt corporations The classification rule Requisites of exemption of non-profit corporations Exception to the classification rule Taxation of cooperatives Allocation of common expenses of exempt corporations Reporting requirements for exempt corporations Special domestic corporations ‘The Pre-dominance test ‘Taxation of FCDUs, EFCDUs Special resident foreign corporations Tax on OBUs ‘Taxation of RHQs and ROHQs of multinational companies ‘Tax on international carriers BO! or PEZA-registered enterprises ecial non-resident foreign corporations CHAPTER 15-B Corporate Income Taxation - Regular Corporations Appendix 1 Appendix 2 Appendix 3 Appendix 4 The repular corporate income tax The minimum corporate income tax ‘Timing of MCI imposition ‘The MCIT concept of “Gross income” MCIT basic application MCIT Integr plication Excess MCIT carry-ove Corporate tax transition schedule Quarterly MCIT Relief from the imposition of the MCIT ‘The branch profit remittance tax xercise Drills Appendices Table summary for final income tax rates Withholding tax tables on compensation Income tax table for individual taxpayers List of compromise penalties relevant to income tax 638-682 638 639 641 642 642 644 645, 648 650 651 651 651 653 658 659 660 660 666 666 669-682 683-721 683 683 684 685 one 689 691 694 699 700 701 706-721- Introduction to Taxation CuAPTER 1 INTRODUCTION To Taxation Chapter Overview and Objectives ‘This chapter discusses the fundamental principles of uation this chapter, readers bah following: must be able to comprehend and demonstrate mastery Concept of taxation and its necessity Lifeblood doctrine and its implestonto neat Theories of government cost allocation Inherent power of the State Scope of the taxation power Limitations of the taxation power Stages of taxation Concept of situs in taxation . Fundamental principles surrounding taxation 10. Various escapes from taxation 11, Concept of tax amnesty and condonation ~eErnaneenr WHAT IS TAXATION? Taxation may be defined as a State power, a legislative process, and a mode of government cost distribution. a 1. Asa state power Taxation is an inherent power of the State to enforce a proportional contribution from its subjects for public purpose. 2. Asa process Taxation is a process of levying taxes by the legislature of the State to enforce proportional contributions from its subjects for public purpose. 3. Asa 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.Chapter 1 - Introduction to Taxation Assystem of government is indispensable to every society. Without i, the peop, will not relish the benefits of a civilized and orderly society. However, a government cannot exist without a system of funding. The government's neces, for funding is the theory of taxation. The Basis of Taxation The government provides benefits to the people in the form of public services. the people provide the funds that finance the government. This mutual, support between the people and the government is referred to as the bas, taxation, This mutuality is illustrated as follows: Public services Government People ft taxes Receipt of benefits is conclusively presumed Every citizen and resident of the State directly or indirectly benefits from: public services rendered by the government. These benefits can be in the fore daily free usage of public infrastructures, access to public health or educatio. services, the protection and security of person and property, or simply comfort of living in a civilized and peaceful society which is maintained by! government. While most public services are received indirectly, their realization by e citizen and resident is undeniable. In taxation, the receipt of these benefits by people is conclusively presumed. Thus, taxpayers cannot avoid payment of under the defense of absence of benefit received. The direct receipt or at availment of government services is not a precondition to taxation. THEORIES OF COST ALLOCATION Taxation is a mode of allocating government costs or burden to the people distributing the costs or burden, the government regards the following get considerations in the exercise of its taxation power: 1. Benefit received theory 2. Ability to pay theoryChapter 1 - Introduction to Benefit received theory The benefit received theory presupposes that the more bencfit one receives fr the government, the more taxes he should pay. Ability to pay theory The ability to pay theory presupposes that taxpayer's ability to pay. their relative capacity to tion should also consider the xpayers should be required to contribute based or 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 1 4 Vertical equity 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. th government should tax B more than A because B has greater income; hence, a grea capacity to contribute. 2. Horizontal equity Horizontal equity requires consideration of the particular circumstance of the taxpayer. For example, Businessmen A and B both have P300,000 income. & 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. 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. (CIR vs, Algue) Taxes are the lifeblood of the government, and their prompt and certain availability are an impcrious need. Upon taxation depends the government's ability to serve the people for whose benefit taxes are collected. (Vera vs Fernandez)Chapter 1 - Introduction to Taxatior Implication of the lifeblood doctrine in ta ation Tax is imposed even in the absence of a Constitutional gra Claims for tax exemption are construed against taxpayers The government reserves the right to choose the objects of taxation The courts are not allowed to interfere with the collection of taxes In income taxation: a. Income received in advance is taxable upon receipt b. Deduction for capital expenditures and prepayments is not allo effectively defers the collection of income tax A lower amount of deduction is preferred when a claimable ex subject to limit. d. Ahigher tax base is preferred when the tax object has multiple ta INHERENT POWERS OF THE STATE A government has its basic needs and rights which co-exist with its creation. It: rights to sustenance, protection, and properties. The government sustains itself the power of taxation, secures itself and the well-being of its people’b; 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 ee government. No government can sustain or eliectively operate without th powers. Therefore, the exercise of these powers by the government is presur understood and acknowledged by the people from the very moment they estab their government. These powers are naturally exercisable by the governm: even in the absence of an express grant of power in the Constitution. The Inherent Powers of the State 4. Taxation power is the power of the State to enforce proportional contri 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 pi use after paying just compensation.Chapter 1 - Introduction to Taxation Comparison of the three powers of the State Point of Eminent Difference Taxation Police Power Domain Exercising Government Government Government and Authority _| private utilities Purpose For the support of | To protect the For public use the government | general welfare of the people Persons Community or | Community or Owner of the affected class of class of property individuals individuals Amount of Unlimited Limited No amount Imposition (Tax is based on (Imposition is imposed. government limited to cover | (The government needs.) cost of regulation.) pays just compensation.) Importance Most important_| Most superior Important Relationship Inferior tothe | Superiortothe | Superior to the with the “Non-impairment | “Non-impairment | “Non-impairment Constitution Clause” of the Clause” of the Clause” of the Constitution Constitution Constitution Limitation Constitutional Publicinterest | Public purpose andinherent | and due process and just limitations compensation Similarities of the three powers of the State 1. They are all necessary attributes of sovereignty. 2. They are all inherent to the State. 3. They are all legislative in nature. 4. They are all ways in which the State interferes with private rights and properties. 5. They all exist independently of the Constitution and are exercisable by the government even without a Constitutional grant. However, the Constitution may impose conditions or limits for their exercise. 6. They all presuppose an equivalent form of compensation received by the persons affected by the exercise of the power. 7. The exercise of these powers by the local government units may be limited by the national legislature.Chapter 1 - Introduction to Taxation OPE OF THE TAXATION POWER the scope of taxation is widely regarded as comprehensive, plenary, unlimite and supreme. However, despite the seemingly unlimited nature of taxation, it is not absolute unlimited. Taxation has its own inherent limitations and limitations imposed 5 the Constitution. ‘THE LIMITATIONS OF THE TAXATION POWER AY Inherent limitations Territoriality of taxation International comity Public purpose Exemption of the government Non-delegation of the taxing power 1 2. 3. 4. 5. 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 6. Non-impairment of obligation and contract 7. Free worship rule 8. Exemption of religious or charitable entities, non-profit cemeterie churches and mosque from property taxes 9. Non-appropriation of public funds or property for the benefit of at church, sect or system of religion 10, Exemption from taxes of the revenues and assets of non-profit, non-sto educational institutions Concurrence of a majority of all members of Congress for the passage of law granting tax exemption 12. Non-diversification of tax collections 13. Non-delegation of the power of taxation 14, 11. Non-impairment of the jurisdiction of the Supreme Court to review t cases 15. The requirement that appropriations, revenue, or tariff bills sh originate exclusively in the House of Representatives 16. The delegation of taxing power to local government unitsChapter 1 - Introduction to Taxation INHERENT LIMITATION OF TAXATION 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. af Exception to the territoriality principle 1, Inincome 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, 7 1. Governments do not tax the income and properties of other governments. 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 the National Internal Revenue Code (NIRC), theChapter 1 - Introduction to Taxation income of foreign government and foreign government-owned and controle, corporations are not subject to income tax. _ When a state enters into treaties with other states, it is bound to honor th agreements as a matter of mutual courtesy with the treaty partners © the same conflicts with its local tax laws. Public purpose / ely Tax is intended for the common good. Taxation must be exercised absolutely for public purpose, It cannot be exercised to further any private interest. Exemption of the government : The taxation power is broad, The government can exercise the power upor anything including itself. However, the government normally does not tax itself a 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 governmen from its properties and activities conducted for profit, including income fron 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 th government to ensure a system of checks and balances. The power of lawmaking, including taxation, is delegated by the people to th legislature. So as not to spoil the purpose of delegation, it is held that what ha been delegated cannot be further delegated. Exceptions to the rule of non-delegation 1. Under the Constitution, local government units are allowed to exercise th power to tax to enable them to exercise their fiscal autonomy. 2. Under the Tariff and Customs Code, the President is empowered to fix th amount of tariffs to be flexible to trade conditions. —_ Other cases that require expedient and effective administration an implementation of assessment and collection of taxes. CONSTITUTIONAL LIMITATIONS OF TAXATION Observance of due process of law No one should be deprived of hi law. Tax laws should neither be fy life, liberty, or property without due process ¢ harsh nor oppressive, 8Chapter 1 - Introduction to Taxation Aspects of Due Process 4. 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 the 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 “palot” 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 increases. The Constitution favors progressi x as it is consistent with the taxpayer's ability to pay. Moreover, the progressive system aids in an equitable distribution of wealth to society by taxing the rich more than the poor.— — 1 - Introduction to Taxation Non-imprisonment for non-payment of debt or poll tax Asa policy, no one shall be imprisoned because of his poverty, and no one shall j, 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 constitutes estafa, a criming, 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 deby which arises from private contracts. Non-payment of tax compromises public interest while the non-payment of debt compromises private interest. The non. payment of tax is similar to a crime. The Constitutional guarantee on nop. imprisonment for non-payment of debt does not extend to non-payment of tay, except poll tax. 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 tay 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, Tax exemptions granted under contract should be honored and should not be 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 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 proprietary or commercial in nature. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosques, lands, buildings, and from property taxes provements 10