Republic of the Philippines

North Eastern Mindanao State University

Cantilan Campus, Surigao del Sur
Website: www.sdssu.edu.gov.ph

TAXATION
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MODULE 1. TAXATION
Intended Learning Outcomes
With the help of this module, the students will be able to:
 Discuss the concept, scope and limitations of Taxation and its necessity
for every government.
 Demonstrate knowledge on types of taxation schemes, accounting
period, accounting methods and tax returns.
 Comprehend and demonstrate knowledge on tax, its elements, and
classifications.
 Explain the concept of gross income and elaborate the types of income
taxpayers.

1 INTRODUCTION TO TAXATION

DEFINITION, SCOPE AND LIMITATION OF TAXATION

DEFINITION
Taxation is a mode of raising revenue for public purposes. The term is ordinarily used to express
the exercise of the sovereign power to raise revenues for the expenses of the government. It is the
act of laying a tax.
NEW PRACTICE
OLD PRACTICE

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STAGES OR COVERAGE OF TAXATION

Taxation covers three (3) separate areas or aspects of government activity, namely:
1. Levying or imposition of the tax. This involves the passage of tax laws. This is generally a
legislative act. In the Philippines, the taxing power is exercised by Congress.

2. Assessment. This is the process of determining the correct amount of tax due.

3. Collection and payment. The act of compliance with the tax law by the taxpayer.

BASIS OF TAXATION
1. Lifeblood Theory
Taxes are the lifeblood of the nation. Without increase revenue from taxation, the government
will not survive resulting in detriment to society.

2. Benefits Protection Theory

Taxes are what we pay for a civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it.

According to this theory, the State demands and receives taxes from the subjects of taxation
within its jurisdiction so that it may be enabled to carry its mandate into effect and perform
the functions of government. The citizen pays from his property the portion demanded in
order that he may, by means thereof, be secured in the enjoyment of the benefits of organized
society.

Public Service

Government People

Taxes

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.

LIMITATION ON THE POWER OF TAXATION

The limitations of the taxation power are classified into two:
1. Constitutional Limitation – those expressly found in the Constitution or implied from its
provisions; and

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2. Inherent Limitation – those which restrict the power although they are not embodied in the
constitution.

Constitutional Limitations
1. Due process of law
The constitution provides that “No person shall be deprived of life, liberty or property
without due process of law”. There must be appropriate notice to the taxpayer and the tax
imposed is for public purpose.

2. Equal protection of the laws

Equal protection of the law is a specific constitutional guarantee of the equality of the
persons. The equality it guarantee is “legal equality” or as it is usually put, the equality of all
persons before the law, which does not treat the persons differently because of who he is or
what he possesses.

3. Rule of uniformity and equity in taxation

A tax is uniform, within the constitutional requirement, when it operates with the same force
and effect and in every place where the subject of it is found.

4. Prohibition for imprisonment for non-payment of a poll tax

A poll tax can be understood as the cedula tax or residence certificate tax. The constitution
does not prohibit the cedula tax but it prohibits imprisonment for nonpayment of the cedula
or residence tax.

5. Non-impairment of the obligation of contracts

There is impairment of obligation of contracts ‘when a right is taken or when a person is
deprived of the means for enforcing such right”.

6. Non-infringement of religious freedom

The prohibition proceeds from the provisions of the constitution that “No law shall be made
respecting an establishment of religion or prohibiting the free exercise thereof.”

7. Non appropriation for religious purpose

This limitation is based on the constitutional provision which reads: “No public money or
property shall be appropriated, applied, paid or employed, directly or indirectly, for the use,
benefit or support of any sect, church, denomination, sectarian institution or system of
religious or of any priest, preacher, minister or other religious teacher or dignitary as such,
except when such priest, preacher, minister or dignitary is assigned to the armed forces or to
any penal institution or government orphanage.

8. Exemption from taxation of religious, charitable, non-profit and non-stock institutions and
non-profit cemeteries.
The present constitution has added “charitable institutions, mosques and non-profit
cemeteries are required that for the exemption of “lands, buildings and improvement,” they
should not only be ‘exclusively’ but also ‘actually’ and ‘directly’ used for religious,
charitable or educational purposes.

9. Concurrence by a majority of all the members of Congress for the passage of a law granting
exemption.

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This limitation is based on the constitutional provision that “No law granting any tax
exemption shall be passed without the concurrence of a majority of all the members of the
Congress.

Inherent Limitations
1. Requirement that levy must be for a public purpose
The power to tax exists for the general welfare. Hence, implicit in the power is the limitation
that it should be exercised only for a public purpose.

2. Non-delegation of the legislative power to tax

The power to impose tax is purely legislative; Congress cannot delegate the power to others.
One of the reason is the doctrine of separation of powers among the executive, legislative
and judicial branch.

3. Exemption from taxation of government entities

Government agencies and instrumentalities are generally exempted from taxation, unless
otherwise provided by law.

4. International Comity
Under International Comity, the property of a foreign state or government may not be taxed
by another. Foreign diplomats/ambassadors are also exempted from taxation. This principle
is based on the sovereign equality among states under international law.

5. Territorial Jurisdiction
A state may not tax property lying outside the borders or right or privilege in another state.
The reason is that tax laws do not operate beyond a country’s jurisdiction limits.

MEANING OF TAX
Taxes are the enforced proportional contributions from persons and property, levy by the state
for virtue of its sovereignty for the support of the government and for all public needs.
Taxes are compulsory contributions to support the state. It is considered as the lifeblood of a
government that without which, a government may not be able to perform and expenditures are
financed by tax revenues.

PRINCIPLES OF A SOUND TAX SYSTEM

According to Adam Smith, governments should adhere to the following principles or canons to
evolve a sound tax system
 Fiscal Adequacy
Fiscal adequacy requires that the sources of government funds must be sufficient to cover
government costs. Hence, taxes should increase in response to increase in government
spending.

 Administrative Feasibility

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Administrative feasibility suggests that tax laws should be capable of efficient and effective
administration to encourage compliance. Government should make it easy for the taxpayers
to comply by avoiding administrative bottlenecks and reducing compliance costs.

 Theoretical Justice
This means that the tax burdens should be proportionate to the taxpayer’s ability to pay.

ESSENTIAL ELEMENTS OR CHARACTERISTICS OF A TAX

1. It is an enforced contribution. All citizens are required to pay their taxes. Failure to do so is
subjected to penalty provided by law.

2. It is generally payable in money. Payments of checks, promissory notes or in kind are not
accepted. The taxpayer must pay their taxes in terms of prevailing currency.

3. It is proportionate in character. Collection of taxes is based upon the income and the
property of the taxpayer. The higher the income, the higher the tax and the lesser the
income, the lesser the tax.

4. It is levied on persons, property or property rights. A person who receives an income based
on skills and practice of profession are required to pay their taxes. People are also taxed
based on acquired properties deemed as taxable.

5. It is levied for public purposes. It is intended to raise revenue for public purposes. It is
considered for public purpose if the proceeds thereof are used for the support of the
government for the welfare of the community.

CLASSIFICATION OF TAX
1. As to Purpose
a. General, Fiscal or Revenue – tax imposed for the general purpose
b. Regulatory – a tax imposed to regulate business, conduct, acts or transactions

2. As to Subject Matter
a. Personal, Poll or Capitalization – Tax of a fixed amount imposed on individual residing
within a specified territory without regard to property or the occupation in which they
may be engaged.
b. Property – Tax imposed on property whether real or personal in proportion to its value.
c. Excise – Tax imposed upon the performance of an act, the enjoyment of privilege or the
engaging in an occupation

3. As to who bears the Burden

a. Direct Tax – When both the impact and incidence of taxation rest upon the same
taxpayer, the tax is said to be direct. The tax is collected from the person who is intended
to pay the same.
b. Indirect Tax – When the tax is paid by any person other than the one who is intended to
pay the same, the tax is said to be indirect. The statutory taxpayer is the person named by
the law to pay the tax. An economic taxpayer is the one who actually pays the tax.

4. As to determination of amount

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a. Specific – tax of a fixed amount imposed on a per unit basis such as per kilo, liter or
meter.
b. Ad valorem - tax of a fixed proportion imposed upon the value of the tax object.

5. As to Authority imposing the tax

a. National – tax imposed by the national government
Examples:
1. Income tax – tax on annual income, gains or profits
2. Estate tax – tax on gratuitous transfer of properties by a decedent upon death
3. Donor’s tax – tax on gratuitous transfer of properties by a living donor
4. Value-added tax – consumption tax collected by VAT business taxpayers
5. Other percentage tax – consumption tax collected by non-VAT business taxpayers
6. Excise tax – tax on sin products and non-essential commodities such as alcohol,
cigarettes and metallic minerals. This should be differentiated with the privilege tax
which is also called excise tax
7. Documentary stamp tax – a tax on documents, instruments, loan agreements and
papers evidencing the acceptance, assignment, sale or transfer of an obligation, right
or property incident thereto.

b. Municipal or Local – tax imposed by municipal government or local government

Example: real property tax, professional tax, business taxes, fees and charges

FORMS OF ESCAPE 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. Evasion
Use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of the tax.
The following are the indication of fraud in tax evasion:
a. Failure to declare for taxation purposes true and actual income derived from business for
two consecutive years.
b. Substantial under-declaration of income tax returns of the taxpayer for four
consecutive years coupled with intentional overstatement of deductions.

2. Avoidance
Exploitation by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income in order to avoid or reduce tax liability.

3. Exemption
A grant of immunity, express or implied, to particular person or corporations from the
obligations to pay taxes.

The government exempts the following to encourage and promote their growth:
1. Cooperatives
2. Cottage industries
3. Organizations or institutions engaged in non-profit undertakings
a. Religious, charitable, scientific, athletic or cultural purposes
b. Donations to social welfare, cultural and charitable institutions
c. Social security benefits, retirement gratuities, pensions and other similar benefits
receive by retired employees

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d. Benefits received by member of GSIS

B. Those that result to loss of government revenue.

1. Shifting
The process by which tax burden is transferred from statutory taxpayer to another without
violating the law.

2. Capitalization
This pertains to the adjustment of the value of an asset cause by changes in tax rates. For
instance, the value of a mining property will correspondingly decrease when mining output is
subjected to higher taxes.

3. Transformation
The manufacturer or the producer upon whom the tax has been imposed, pays the tax and
endeavor to recoup himself by improving his process of production, thereby turning out
its units at a lower cost.

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 as tax remission.

Tax Amnesty vs. Tax Condonation

1. Amnesty covers both civil and criminal liabilities, but condonation covers only civil
liabilities of the taxpayer.
2. Amnesty operates retrospectively by forgiving past violations. Condonation applies
prospectively to any unpaid balance of the tax.
3. Amnesty is conditional upon the taxpayer paying the government a portion of the tax
whereas condonation requires no payment.

TAX ADMINISTRATION
Tax administration refers to the management of the tax system. Tax administration of the
national tax system in the Philippines is entrusted to the Bureau of Internal Revenue which is
under the supervision and administration of the Department of Finance.

Chief Officials of the Bureau of Internal Revenue

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1 Commissioner
4 Deputy Commissioners, each to be designated to the following:
a. Operations group
b. Legal Enforcement group
c. Information Systems group
d. Resource Management group

POWERS AND DUTIES OF THE BUREAU OF INTERNAL REVENUE

1. Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties and fines and judgments in all cases decided in its
favor by the courts
3. Giving effect to and administering the supervisory and police powers conferred to it by the
NIRC and other laws
4. Assignment of internal revenue officers and other employees to other duties
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials
6. Issuance of receipts and clearances
7. Submission of annual report, pertinent information to Congress and reports to the
Congressional Oversight Committee in matters of taxation

POWERS OF THE COMMISSIONER OF INTERNAL REVENUE (CIR)

1. To interpret the provisions of the NIRC, subject to review by the Secretary of Finance.
2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals.
3. To obtain information and to summon, examine, and take testimony of persons to effect tax
collection.
4. To make assessment and prescribe additional requirement for tax administration and
enforcement.
5. To examine tax returns and determine tax due thereon.
6. To conduct inventory taking or surveillance.
7. To prescribe presumptive gross sales and receipts for a taxpayer when:
a. The taxpayer failed to issue receipts; or
b. The CIR believes that the books or other records of the taxpayer do not correctly reflect
that declaration in the return.
8. To terminate tax period when the taxpayer is:
a. Retiring from business.
b. Intending to leave the Philippines.
c. Intending to remove, hide or conceal his property.
d. Intending to perform any act tending to obstruct the proceeding for the collection of the
tax or render the same ineffective.
9. To prescribe real property values
10. To compromise tax liabilities of taxpayers
11. To inquire into bank deposits, only under the following instances:
a. Determination of the gross estate of a decedent
b. To substantiate the taxpayer’s claim of financial incapacity to pay tax in an application
for tax compromise.
12. To accredit and register tax agents.
13. To refund or credit internal revenue taxes.
14. To abate or cancel tax liabilities in certain cases.

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15. To prescribe additional procedures or documentary requirements.

16. To delegate his powers to any subordinate officer with a rank equivalent to a division chief of
an office.

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