4.

They are generally exercised by the

1 legislature.
5. They contemplate an equivalent
compensation or benefit.

Fundamental Principles
TAXATION - is the process or means. by
which the sovereign (independent State),
through its law-making body (the
legislature), imposes burdens upon subjects
and objects within its jurisdiction for the
purpose of raising: revenues to carry out
the legitimate‘ objects of government. In
simple terms, it is the act of — levying a
tax to apportion the cost of government
among those who, in some measure, are
privileged to enjoy its benefits and must
therefore bear its burdens.
THREE INHERENT POWERS OF
THE STATE
1. P O L I C E P O W E R - It is the
power of the State for promoting
public welfare by restraining and
regulating the use of liberty and PURPOSES OF TAXATION
property.
2. E M I N E N T D O M A I N - It is the 1. Primary: Revenue or Fiscal Purpose -
power of the State to acquire private to provide funds or property with
property for public purpose upon which to promote the general welfare
payment of just compensation. and the protection of its citizens and
3. T AXA T I O N - It is the power by to enable it to finance its multifarious
which the State raises revenue to - activities.
defray the necessary expenses of the 2. Secondary: Regulatory Purpose (or
government. Sumptuary/Compensatory)
a. Promotion of General
SIMILARITIES OF INHERENT Welfare
POWERS b. Reduction of Social
Inequality
1. They are indispensable to c. Economic Growth
government existence.
2. They can exist independent of the THEORIES AND BASIS OF TAXATION
constitution.
3. They are means by which the state 1. Theory (Authority): LIFEBLOOD
interferes with private rights and THEORY and/or NECESSITY
properties. THEORY - The power of taxation is
essential because the government can
 neither exist nor endure without
taxation. “Taxes are the lifeblood of
the government and their prompt and
certain availability is an imperious
need’ (Lifeblood Doctrine).
2. BENEFITS PROTECTION
THEORY (SYMBIOTIC
RELATIONSHIP) / BASIS of
Taxation: BENEFITS RECEIVED
or RECIPROCITY THEORY - The
State collects taxes from the subjects
of taxation in order that it may be
able to perform the functions of
government. The citizens, on the
other hand, pay taxes in order that
they may be secured in the enjoyment
of the benefits of organized society.
This theory spawned the Doctrine of
Symbiotic Relationship which
means, taxes are what we pay for a
civilized society.
SCOPE OF TAXATION (CUPS)
Comprehensive — as. it covers. persons,
businesses, activities, professions, rights
and privileges.
Unlimited - In the absence of limitations
prescribed by law or the constitution, the
power to tax is unlimited and
comprehensive. Its force is so searching
to the extent that the courts scarcely
venture to declare that it is subject to
restrictions.
Plenary —as it is complete; the BIR may
avail of certain remedies to - ensure
collection of taxes.
Supreme - in so far as the selection of the
subject of taxation.
BASIC PRINCIPLES OF SOUND TAX
SYSTEM
1. Fiscal Adequacy - The fundamental
purpose of taxation is to raise the
revenue necessary to fund public
services. Consequently, it is
necessary that the sources of
revenues must be adequate to meet
government expenditures and sustain
the level of public services demanded
by citizens and. | policymakers.
2. Theoretical Justice or Equity (ability
to pay principle”) - Taxpayer's ability
to pay must be taken into
consideration. The tax burden should
be proportionate to the taxpayer's
ability to pay.
3. Administrative Feasibility - The tax
system should be as simple as
possible, and should minimize
gratuitous complexity.
ESSENTIAL ELEMENTS OF TAX
1. Enforced Contribution - Payment of
tax is not voluntary payment or
donation, but an enforced
contribution, exacted pursuant to
legislative authority.
2. Generally payable in money – It is a
pecuniary burden payable in money
which must be in legal tender.
3. Proportionate in character or
uniform. - Payment of taxes should
be based on the ability to pay theory
or theoretical justice. The use of a
graduated tax rates is in consonance
with this rule.
4. Exacted pursuant to legislative
authority. The power of “imposing” a
 tax, being purely legislative function.
Congress cannot delegate such
power.
5. For raising revenue for public
purpose and needs.
ASPECT OF TAXATION (LAC)
1. Levying or imposition of the tax
which is a legislative act or function.
(Legislative in nature)
2. Assessment or determination of the
correct amount of applicable tax.
(Administrative/Executive in nature)
3. Collection of the tax levied which is
essentially administrative in
character. The national agency
charged with the function. of
collecting internal revenue taxes is
the Bureau of Internal Revenue.
(Administrative/Executive in nature)
CONSTITUTIONAL LIMITATIONS
1. No person shall be deprived of life,
liberty or property without.
a. Due Process of law
b. Equal Protection of Law
Rule of Uniformity and equity in taxation
a. Uniformity
b. Equality
“The rule of taxation shall be uniform
and equitable.” {t requires the
uniform application and operation,
without discrimination, of the tax in
every place where the subject of the
tax is found. I
2. No person shall be imprisoned for
debt or non-payment of poll tax.
The non-imprisonment rule
applies to non-payment of poll
tax which is punishable only by a
surcharge, but not to other
Violations like falsification of
community tax certificate and
non Payment of other taxes.
3. Prohibition against infringement of
religious.
No law shall be made
respecting an establishment
of religion, or prohibiting the
free exercise thereof. The free
exercise and enjoyment. of
religious profession and
worship, without
discrimination or preference,
shall forever be allowed. No
religious test shall be.
required for the exercise of
civil or political rights.
4. Prohibition against taxation of
religious, charitable and educational
entities.
All lands, buildings and
improvements actually and
exclusively used for religious,
charitable or educational
purposes shall be exempt from
taxation.
5. No law impairing the obligation of
contracts shall be passed.
The obligation of a contract is
impaired when its terms or
conditions are changed by
law or by a party without the
consent of the other, thereby
weakening the position or
rights of the latter.
Tax law: prospective
application. not retrospective
application: future oriented,
not affected the previous
years. In taxation it is
generally prospective but it
can have retrospective
application.
 6. Prohibition against taxation of non
stock, non profit educational
institutions.
As long as it is actually, directly
and exclusively for educational
purposes shall be exempt from
taxes and duties.
INHERENT LIMITATIONS
1. Territorial Limits - Tax laws cannot
operate beyond a State's territorial
limits. Property outside one’s
jurisdiction does not receive any
protection from the State.
2. Public Purpose - A tax must always
be imposed for a public purpose,
otherwise, it will be declared as
invalid. No tax law may be enacted
CLASSIFICATION OF TAXES
for the purpose of raising revenue for
private purposes. It has been ‘said
that the best test of rightful taxation is
that the proceeds of the tax must be
used:
a. For the support of the
government; or
b. For some of the recognized
objects of government: or
c. To promote the welfare of the
community.
3. Exemption of government, political
subdivisions or agencies performing
PURELY governmental functions.
4. Non-Delegation Doctrine – Taxing
power of the legislature may not
delegated except:
a. The President can fix tariff
rates, imports and export
quotas, tonnage and wharfage
dues and other duties and
imports.
b. The Local government shall
have the power to create its
own sources of revenues and
to levy taxes, fees and charges
subject to such guideline and
limitations.
5. International Comity - As a rule
Philippine Government cannot tax
foreign ambassadors nor impose real
property taxes upon foreign
embassies.
6. Double Taxation - There is no
constitutional prohibition against
double taxation though it is not
favored.
a. Same Subject is taxed twice.
b. Same taxing authority.
c. Within same jurisdiction.
d. During the same taxing
period.
e. Covering the same kind or
character of tax.
1. According to scope or exercising
authority.
a. National Tax - imposed by
the National Government (e.g.
income tax, estate tax,
donor’s tax, VAT other
percentage taxes,
documentary stamp tax)
b. Municipal or Local Tax -
imposed by local government
units such as municipal
corporations (e.g. real estate
tax and professional tax
receipts).
2. According to who bears the burden of
the tax.
a. Direct — tax which is
demanded from the person
who also shoulders the
burden of tax or tax which the
taxpayer cannot shift to
another.
b. Indirect — tax which is
demanded from one person in
the expectation an’ intention
that he shall indemnify
 himself at the expense of
another.
3. According to the rate applied.
a. Proportional — tax based on
a fixed percentages of amount
of the property, receipts, or
other basis to be taxed.
b. Progressive or graduated —
tax the rate of which increases
as the tax base or bracket
increases.
c. Regressive — tax the rate of
which decreases as the tax
base or bracket increases.
CONSTRUCTION OF TAX LAWS
1. Tax laws are prospective generally,
but can have retrospective
application.
2. Rule in case of doubt in Tax law.
a. In case of doubt, statutes
imposing a tax are construed
most strongly against the
government and liberally in
favor of the citizen because
burdens are not to be imposed
beyond what the statutes
expressly
declares.
and
b. Tax Exemptions are to be
clearly
construed strictly against the
taxpayer – The one who
claims exemption must be
able to justify his claims.
3. Revenue laws are not political in
nature.
4. Legislative intention must be
considered.
5. Tax laws are special laws and prevail
over general laws. Special laws are
created separately from constitution.
MEANS OF AVOIDING OR ESCAPE
FROM TAX
1. Shifting - transfer of the burden of a
tax by the original payer or the one
on whom the tax was assessed or
imposed to someone else, transferred
is not the payment of the tax but the
burden of the tax. Only indirect taxes
maybe shifted.
2. Capitalization - not selling a property
to increased its value.
3. Tax Evasion - the use by the taxpayer
of illegal or fraudulent means to
defeat or lessen the payment of a tax.
It is also known as ‘tax dodging’.
Illegal way usually involves fraud to
lessen or defeat tax
4. Tax Avoidance - is the 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. Legal way to
minimize taxes
5. Tax Exemption - freedom from
burden of paying tax. In other words
it is immunity from paying certain
tax. like PWD and senior exempt
from vat.
2
Income Taxation
INCOME - all wealth which flows into the
taxpayer other than a mere return of capital.
Classification of Income According to
source:
1. Income from sources within the
Philippines.
2. Income from sources without the
Philippines.
3. Income from sources partly within
and partly without the Philippines.
Situs of Income - literally, situs means place
of taxation of the income or the country
which has jurisdiction to impose tax. Income accordance with law.
may be taxed in one or more or all of the
following places or countries. 2. NON-RESIDENT CITIZEN
a. Citizen who establishes the
A. Place where taxpayer is a citizen. fact of his physical presence
B. Place where the taxpayer is resident. abroad with a definite
C. Place where the income is earned or intention to reside therein.
derived. b. Citizen working or deriving
Types of Taxable Income income from abroad which
requires him to be physically
present abroad most of the
time (183 days or more)
during the year.
c. Citizen who leaves for abroad
either as an immigrant or for
employment on a permanent
basis.
3. RESIDENT ALIEN
a. His purpose in coming to the
Philippines requires an
extended stay in the country
and makes his home
temporarily in the
Philippines.
INDIVIDUAL TAXPAYERS - natural b. Not a mere transient or
persons with income derived from within the sojourner as determined by
territorial jurisdiction of a taxing authority. his intention regarding the
nature and length of stay.
CATEGORIES OF INDIVIDUAL 4. NON RESIDENT ALIEN
TAXPAYERS a. Engage in Trade or Business
1. RESIDENT CITIZEN (ETB) – If stay in the
a. Those who are citizens of the Philippines for more than 180
Philippines at the time of the days during the year.
adoption of the 1987 b. Not Engage in Trade or
Philippine Constitution; Business (NETB) – If stay in
b. Those whose fathers or the Philippines is for 180 days
mothers are citizens of the or less.
Philippines; IMPORTANCE OF CLASSIFICATION OF
c. Those born before January 17, TAXPAYER
1973, of Filipino mothers,
who elect Philippine
citizenship upon reaching the
age of
majority;
d. Those who are
naturalized in

(A) Taxable Compensation Income =
Gross Compensation Income – Non
Taxable/Exempt Income*
*Non-Taxable/Exempt
Income includes :
(1) SMW,Holiday
pay,Overtime pay,night shift
differential and hazard pay of
an MWE
(2) First P 90,000 of 13th
month pay and other benefits
(3) De Minimis Fringe Benefit
(4) Employee’s share of SSS,
GSIS, Philhealth and PAG-
IBIG contributions
(5) Union Dues
(B)
(C) Purely SELF-EMPLOYED individuals
or MIXED EARNERS can avail of the 8%
income tax rate if the gross sales/receipts
from their business/profession plus non-
operating income does not exceed the VAT
threshold of P 3,000,000
The 8% tax is in lieu of (1) the
graduated rates and (2) the OPT under section
116 of the tax code.
However, this options is not available to the
following individual taxpayers
(1) Vat – registered taxpayers
(2) Taxpayers subject to OPT other than the
3% OPT under section 116
(3) Partners of general professional
partnership (GPP)
(4) Individuals enjoying income tax
exemption (ex.BMBE’s)
(5) Taxpayers who fail to signify their
intertion to avail of the 8% income tax rate in
the 1st Quarter Income tax return or in the
first 1st Quarter Percentage Tax Return, or in
the initial quarterly return of the taxable year
upon commencement of a new business or
practice of profession
(D)Net of P 250,000 if individual taxpayer is a
self employed
individual earning
income purely from
self employment or
practice of
profession. Mixed
Income earners are
not allowed this P
250,000 deduction.
(E)In the case of
NRAs not engaged in
trade or business (NRA-NETB)
1.The 25% tax on gross income is FINAL
TAX to be deducted and withheld by payor
of the income and remitted to the BIR.
2.The payor of the income is constituted by
law as a withholding agent
3.The NRA-NETB does not have to file a
Philippine income tax return because the tax
on the income received is considered paid,
said having been deducted by the payor of
the income
(A) MWE shall be exempt from the payment
of income tax on their statutory minimum
wage. Holiday pay, overtime pay, night
differential pay, and hazard pay received by
such minimum wage earner shall likewise be
exempted from income tax.
The Following Income payments to MWEs
are taxable and subject to withholding:
1.Additional compensation received from his
employer, other than the SMW, holiday pay,
overtime pay, hazard pay and night shift
differential pay, such as (a) commissions, (b)
honoraria, (c) fringe benefits, (d) benefits in
excess of the allowable statutory amount of
“13th month pay and other benefits” of P
90,000, € taxable allowances and (f) other
taxable income
2.Income from the conduct of trade, business
or practice of profession (except income
subject to final tax) in addition to his
compensation income.