LEARNING MATERIAL

INCOME TAXATION

BASED ON CURRENT LECPA SYLLABUS 2022

PRINCIPLES OF TAXATION

DEFINITION OF TAX AND TAXATION

▪ Taxation is an act of collecting money from the citizens and business entities in order to cover the
costs of general government services, goods and activities.

▪ Tax is a mandatory payment or charge collected by local, state, and national governments from
individuals or businesses .

Taxes are the LIFEBLOOD OF THE STATE. It is needed in order for the government to function and
operate and do its duties for the welfare of the people.

What is the purpose of taxation?

PRIMARY PURPOSE- The primary purpose why the government impose taxes is to generate
revenue/funds for the government so that it can provide public goods and services. Some examples of
public goods and services that are funded by taxes include national defense, healthcare, education, and
infrastructure.

SECONDARY PURPOSE:

a. Regulatory- for regulation and control for the promotion of general welfare.

Example: tobacco and alcoholic products have higher taxes in order to regulate consumption.
b. Compensatory purposes (from the word compensate -> to give back to the inhabitants the expected
economic and social benefits:

➢ Taxes are imposed for the equitable distribution of wealth and income in order to reduce social
inequality (persons who earn more are taxed more )
➢ Economic growth
➢ Protect local industries against foreign competitions (ex. Imposition of high custom duties on
imported goods.

NATURE OF TAXATION

INHERENT POWER OF THE STATE – It is inherent or essential, a built-in power of the state to tax because
taxes guarantee the state's existence. There is an inherent power of the state to tax because without the
power of taxation, the government will not function. The government needs taxes the same way our
human body needs blood in order to live.

➢ THE POWER TO TAX EXIST WITHOUT ANY CONSTITUTIONAL GRANT.

➢ THE 1987 CONSTITUTION DOES NOT GIVE THE PHILIPPINE GOVERNMENT THE POWER OF
TAXATION BECAUSE THERE IS NO NEED TO DO SO.

LEGISLATIVE IN CHARACTER- Although taxation exists without legislation because it is inherent, it is

legislative in nature because laws must set, determine the coverage, object, nature, extent, and situs of
the tax. Legislation is required to set parameters in the imposition of tax.
SUBJECT TO INHERENT AND CONSTITUTIONAL LIMITATIONS- Generally, the power of taxation is
unlimited, but due to inherent limitations, it is not absolutely unlimited. It is subject to constraints
because if the power were infinite, it could do more harm than good. As Chief Justice Marshall famously
said, 'the power to tax is the power to destroy' (MARSHALL DOCTRINE).

LIMITATIONS:

1. INHERENT LIMITATION
➢ Public purpose
➢ Non-delegability of the taxing power - ( with exceptions: Can be delegated to LGUs, President
can fix the amount of tariff, other cases that require expedient and effective administration and
implementation of assessment and collection of taxes.)
➢ Exemption of the government - (under the NIRC, income of the government from its properties
and activities conducted for profit, including income from government-owned and controlled
corporations are subject to taxes)
➢ International comity – the property of a foreign State may not be taxed by another. (May
kasabutan) or treaty.
➢ Situs of taxation (Territoriality)- The State may tax persons and properties under its jurisdiction.

2. CONSTITUTIONAL LIMITATION
➢ Due process of law
➢ Equal protection of law
➢ Uniformity in taxation
• Taxpayer falling under the same class are taxed the same rate

➢ Progressive system
• Higher tax base, higher tax rate

➢ Non-imprisonment for non-payment of poll tax

➢ Non-impairment of obligations and contracts
➢ Free worship clause
➢ Exemption of religious, charitable, non-profit cemeteries and churches and mosque from
property taxes
• Only if the property is actual, directly, exclusively used for charitable, religious,
educational purposes.
➢ Exemptions from taxes of the revenues and assets of non-profit, non-stock educational
institutions
• applies only on revenues and assets that are actually, directly , exclusively devoted for
educational purposes.

➢ Non-appropriation of public funds or property for the benefit of any church, sect, religion

➢ No money shall be paid out of Treasury except in pursuance of an appropriation

➢ Concurrence of majority of all the members of the Congress for the passage of law granting tax
exemption
➢ Non-diversification of tax collections
• Must be used for public purpose only.

➢ Non-impairment of the jurisdiction of the Supreme Court to review tax cases. (Judicial Branch-
law-interpreting body)
➢ Appropriation, revenue, tariff bills must originate from House of Representatives but the Senate
may propose or concur with amendment. ( Both HOR and Senate are part of the Congress
legislative branch)
*Tariff- tax on imported goods
*Appropriation- setting aside money for specific purpose

➢ The President shall have the power to veto any particular item(s) in an appropriation, revenue or
tariff. (Executive branch- Law enforcing body)
 ➢ LGUs can create its own sources of revenues (delegation of taxing power to LGUs)

BRANCHES OF THE GOVERNMENT

EXECUTIVE- LAW ENFORCING BODY ( THE PRESIDENT and VICE PRESIDENT)

LEGISLATIVE- LAW MAKING BODY ( CONGRESS/ HOUSE OF REPRESENTATIVES/SENATE)

JUDICIAL- LAW INTERPRETING BODY ( THE SUPREME COURT)

WITHOUT LIMITATION , GENERALLY THE SCOPE OF TAXATION IS:

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 of tax is
unlimited and comprehensive.

PLENARY — other term is complete; taxes must be paid completely by the taxpayer and BIR may avail of
certain remedies to ensure the collection of taxes.

SUPREME – it is supreme because whatever subject may be selected to pay the tax.

CLASSIFICATION OF TAXATION

Classification of Taxes

1. As to the scope:

a. National — imposed by the national government.

b. Local — imposed by local government.

2. As to subject matter or object:

a. Personal, poll, or capitation — tax of a fixed amount imposed upon an individual, whether citizens or
not, residing within a specified territory without regard to their property or the occupation in which he
may be engaged. ( Community tax)

b. Property — a tax imposed on property, whether real or personal, in proportion to its value. ( Ex. Real
property tax)

c. Excise — any tax which does not fall w/in the classification of a poll tax or a property tax. This is a tax
on the exercise of certain rights and privilege. (ex. Income tax, estate tax, donor tax, VAT)

3. As to who bears the burden:

a. Direct — a tax which is demanded from the person who also shoulders the burden of the tax or tax
which taxpayer cannot shift to another.

b. Indirect - a tax which is demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another.
4. As to determination of amount:

a. Specific — tax of fixed amount imposed by the head or number.

Example : last 2023, Cigarettes are taxed 40 php per pack (excise tax)

b. Ad Valorem - tax fixed proportion of the value of the property with respect to which the tax is
assessed.

Example: Real property tax, VAT, Income tax, donor’s tax, estate tax.

Real property taxes shall be appraised at its current and fair market value.

1. Residential

Fair Market Value Assessment Levels

Over Not Over

0 175,000 0%

175,000 300,000 10%

300,000 500,000 20%

500,000 750,000 25%

750,000 1,000,000 30%

1,000,000 2,000,000 35%

2,000,000 5,000,000 40%

5,000,000 10,000,000 50%

10,000,000 60%

Sample computation of RPT:

Maria’s house is located in Manila with a FMV is 1,500,000 php. Determine Maria’s RPT.

THE 1,500,000 FMV falls in the 35% assessment bracket thus Maria will pay RPT of:

1,500,000 php x 35% = 525,000 assessed value. (BASED ON VALUE)

BASIC REAL PROPERTY TAX (2% CITY, 1% PROVINCE) = 525,000 x 2% = 10,500

+ SPECIAL EDUCATION FUND (1%) = 525,000 X 1% = 5,250

TOTAL RPT (residential building)= 15,750 php

5. As to purpose:

a. Primary, Fiscal, or Revenue Purpose — tax imposed generally for government.

b. Secondary, Regulatory, Special or Sumptuary Purpose — tax imposed for a specific purpose.

6. As to graduation or rate:

a. Proportional — tax based on a fixed percentages. (Ex. VAT and percentage tax )

b. Progressive or graduated tax: the rate of which increases as the tax base. (Income tax)

c. Regressive — tax rate of which decreases as the tax base.

7. As to taxing authority:

a. National — taxes imposed under the National Internal Revenue Code.

b. Local — taxes imposed by local Government units.

ESCAPE FROM TAXATION

1. Tax evasion or tax dodging - means failure to pay or underpayment of tax by concealing income
or information from tax authorities. This is considered illegal.
2. Tax avoidance or tax minimization- An action taken to lessen tax liability and maximize after-tax
income. This is legal.
3. Tax shifting- tax shifting means shifting the burden of tax from one taxpayer to another without
violating the law

Example: the seller is the one who is liable to pay VAT to the taxing authorities but the seller
shifts the burden of paying the tax to the buyer by adding the amount of tax paid to the price of
the product.

4. Tax exemption- the government grants immunity to particular persons, corporations, or a

particular class of persons or nature of business, it is privilege without which they would be
taxed like others similarly situated.

Ex. Minimum wage earners, nonprofit educational institution which income are used for
educational purposes etc.

Other forms of escape from taxation:

5. Tax Capitalization
• Instead of deducting the full cost of an asset in the year it was purchased, businesses can
capitalize the cost and gradually deduct it over the useful life of the asset through
methods like depreciation or amortization. This means that while the expense is still
accounted for, it's spread out over several years, potentially lowering taxable income in
each of those years and deferring the associated tax liability.

6. Tax transformation
▪ the manufacturer or producer upon whom the tax has been imposed, fearing the
loss of his market if he should add the tax to the price, pays the tax and endeavors to
recoup himself by improving his process of production, thereby turning out his units
at a lower cost.
INHERENT POWERS OF THE STATE

1. Power of taxation: the state is able to demand from the members of society their proportionate
share contribution in the maintenance of the government.
2. Police power: Police Power is the inherent power and constitutional authority of the
government to adopt and enforce regulations and laws to promote public health, safety, morals,
and general welfare.
➢ the right to require persons selling real estate to be licensed
➢ the right to regulate pollution, environmental control, and rent control

3. Power of eminent domain: enables the state to forcibly acquire private property, upon payment
of just compensation, for some intended public use. Example of public use are public
institutions such as schools, public utilities, highway construction, railroads and more.

Similarities:

The three inherent of the state are similar in the following respects:

1. They are inherent in the state and maybe exercise by it without need of express constitutional grant.

2. They are not only necessary but indispensable. the state cannot continue or effective unless it is able
to exercise them.

3. They are methods by which the state interferes with private rights.

➢ POWER OF TAXATION - Example: If you fail to pay/ delinquent in paying real property taxes , the
local government unit concerned may avail of the remedies by administrative action thru levy on
real property or by judicial action. The city or municipality may auction off your property.

➢ POLICE POWER- right to damage or destroy private property without compensation to the owner
when it is necessary to protect the public interest.
 Example: when a condominium unit is on fire and the fire department must destroy an
adjoining unit to extinguish the fire and save the rest of the building.

➢ EMINENT DOMAIN- right to acquire private property for public use with just compensation.

4. They all presuppose an equivalent compensation for the private rights interfered with.

5. They are exercise merely by legislature. (Law)

Differences:

The three inherent powers of the state differ from each other in the following ways:
1. The police power regulate both liberty(freedom) and property. the power of eminent domain and the
power of taxation affect only property rights.

2. The police power and power of taxation maybe exercise only by the government. The power of
eminent domain maybe exercise by private entities.

THEORY OF COST ALLOCATION- mode of allocating government cost or burden to the people.

Considerations:

a. Benefits received theory- more benefit one receives from the government, the more taxes he
should pay.

b. Ability to pay theory- taxpayer should be required to contribute based on their capacity to pay.

CHARACTERISTICS OF TAX

a Forced contribution

b Generally payable in money

c Levied for public purpose

d Exclusively levied by legislature

e Levied within territorial and legal jurisdiction of the state

f Proportionate in character

ASPECTS OF TAXATION/STAGES

1. Levying or Imposition -passage of tax laws or ordinance through the legislature

/Legislative/Congress.
2. Assessment -Assess how much should be paid / administrative/BIR/BOC.
3. Collection- process of collecting tax /administrative/BIR/BOC.

PRINCIPLES OF SOUND TAX SYSTEM

A. Fiscal adequacy- sources of government fund must be sufficient to cover government cost.
B. Theoretical justice (Equity)- taxation should consider the taxpayer’s ability to pay.
C. Administrative feasibility- Tax laws should be capable of efficient and effective administration to
encourage compliance. (Ease of paying taxes.)

Example:

➢ E- filing and e-payment of taxes

➢ Substituted filing system for employees
➢ Final withholding tax on non-resident aliens or corporation.
SITUS OF TAXATION

The situs of income is the place of taxation of income. It is the jurisdiction that has the authority to
impose tax upon the income.

SUBJECT MATTER SITUS /PLACE/SUBJECT TO TAX

Persons In their place of residence
Real property Location of the property
Business In the place where business is conducted

Income on services In the place where the services are rendered

Income on sale of goods (gain on sale) In the place of sale (meeting of minds)

Tangible personal property Location of personal property

Intangible personal property (ex. Shares of Domicile of the owner of the intangible
stock, patent, trademark etc) personal property

Interest income and dividend income Source of income

a.Interest- residence of the debtor owing the
interest

Dividends- residence of the corporation who

declared the dividends

DOUBLE TAXATION- Double taxation refers to income taxes paid twice on the same income source

ELEMENTS OF DOUBLE TAXATION:

1. Primary element: same object

2. Secondary element
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period

TYPES OF DOUBLE TAXATION

Direct double taxation- all elements of double taxation exists.

Indirect double taxation-this occurs when at least one of the secondary elements of double taxation is
not common for both imposition.

IDENTIFYING DIRECT VS INDIRECT TAXATION

Sentence #1

1. Jennie is taxed by the national government with an income tax of 10% on monthly sales and a
2% income tax on annual sales for the period 2023. In the sentence, the income tax of 10% on
monthly sales and the 2% income tax on annual sales have the same object: the income from
sales. They are also the same type of tax (income tax), serving the same purpose (government
 revenue), under the same tax jurisdiction (national), and for the same tax period (2023). Since all
elements are present, there is DIRECT DOUBLE TAXATION.

Sentence #2

2. The national government levies business tax on the sales or gross receipts of business while the
local government levies business tax upon the same sales or receipts.

In the sentence, the sales or gross receipts is taxed twice by the national government and the local
government. Since at least one of the element (same jurisdiction) is not present (national and local
have different jurisdiction) then there is an INDIRECT DOUBLE TAXATION.

TAX AMNESTY VS TAX CONDONATION

TAX AMNESTY- Absolute forgiveness or waiver by the government on its right to collect on the past
delinquency taxes/ past violations by paying the government a portion of the taxes mandated by the
government. It is conditional, without payment of a portion of taxes mandated by government, no tax
amnesty.

TAX CONDONATION- Tax condonation is forgiveness of the tax obligation of a certain taxpayer under
certain and justifiable grounds. It applies prospectively to any unpaid balance of the tax. Hence the
portion already paid by the taxpayer will not be refunded. Tax condonation requires no payment.

TAXATION LAW- refers to any law that arises from the exercise of the taxation power of the state.

Tax laws:

➢ NATIONAL INTERNAL REVENUE CODE (NIRC)

➢ THE TARIFF AND CUSTOMS CODE
➢ THE LOCAL TAX CODE
➢ THE REAL PROPERTY TAX CODE

TAX EXEMPTION LAW: LAW THAT GRANT CERTAIN IMMUNITY FROM TAXATION

Example:

➢ The minimum wage law

➢ The Omnibus investment code of 1987
➢ Barangay Micro business enterprise (BMBE) Law
➢ Cooperative Development Act

TAX COLLECTION SYSTEM

A.Withholding system on income tax -Payor of the income withholds/deducts the tax on the income
before releasing the same to the payee and the payor remits the same to the government.

1. Creditable withholding tax

a. Withholding tax on compensation
b. Expanded withholding tax

2. Final withholding tax

Characterized by final taxes. Final taxes are withheld at source. Consequently, the income
received by the taxpayer under this system is net of tax. The tax withheld at source is final
and there would be no need to file an income tax return to report the income to the
government. Final taxation is applicable only to certain passive income, hence, not all
passive income is subject to final tax.
DIFFERENCE OF FWT AND CWT

FWT CWT
Income tax withheld Full Portion
Coverage of withholding Certain passive income Certain passive and active
income
Who remits the actual tax Income payor Income payor for the CWT and
the taxpayer for the balance
Necessity of income tax return Not required Required
for taxpayer -BIR FORM 1700 for annual ITR
-BIR FORM 1701Q Quarterly ITR
-BIR FORM 2316 Certificate of
Tax Withheld

B. Withholding system on business tax- when the government or GOCC’s purchase goods from private
suppliers, the law requires withholding of the relevant business tax.

C. Voluntary compliance system- taxpayer determines his income, report the same through income tax
returns and pays the tax to the government.

D.Assessment or enforced system- Government identifies non-compliant taxpayers, assess their tax
dues, including penalties, demands for taxpayer’s voluntary compliance and collections by coercive
means such as summary proceedings or judicial proceedings when necessary.

Sources of Tax Laws

a Constitution

b Tax Code

c Presidential Decrees/Statutes/Executive Orders (EOs)

d Tax treaties

f Court decisions

g BIR rulings

h Revenue issuances

1 Revenue regulations (RRs)

2 Revenue memorandum orders (RMOs)

3 Revenue memorandum circulars (RMCs)

i Local tax ordinances