INCOME TAXATION

Chapter 1 - Introduction to Taxation

When exemption is claimed, it must be shown indubitably to exist. At the outset, every
presumption is against it. A well-founded doubt is fatal to the claim; it is only when the
terms of the concession are too explicit to admit fairly of any other construction that the
proposition can be supported. (Ibid)
Tax exemption cannot arise from vague inference. Tax exemption must be clear and
unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of
law conferring on the taxpayer, in clear and plain terms, exemption from a common
burden. Any doubt whether a tax exemption exists is resolved against the taxpayer. (see
Digital Telecommunications, Inc. vs. City Government of Batangas, et al)

DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax
jurisdiction for the same thing.
Elements of double taxation
1. Primary element: 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
This occurs when all the element of double taxation exists for both impositions.
Examples:
a. An income tax of 10% on monthly sales and a 2% income tax on the annual
sales (total of monthly sales)
b. A 5% tax on bank reserve deficiency and another 1% penalty per day as a
consequence of such reserve deficiency
2. Indirect double taxation
This occurs when at least one of the secondary elements of double taxation is not
common for both impositions.

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Examples:
a. 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.
b. The national government collects income tax from a taxpayer on his income
while the local government collects community tax upon the same income.
c. The Philippine government taxes foreign incomes of domestic corporations
and resident citizens while a foreign government also taxes the same income
(international double taxation).
Nothing in our law expressly prohibits double taxation. In fact, indirect double taxation is
prevalent in practice. However, direct double taxation is discouraged because it is
oppressive and burdensome to taxpayers. It is also believed to counter the rule of equal
protection and uniformity in the Constitution.
How can double taxation be minimized?
The impact of double taxation can be minimized by any one or a combination of the
following:
a. Provision of tax exemption
b. Allowing foreign tax credit (deduction for taxes paid abroad)
c. Allowing reciprocal tax treatment between the home country and a foreign
country.
d. Entering into treaties or bilateral agreements.

ESCAPES FROM TAXATION

Escapes from taxation are the means available to the 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. In income taxation, this can be
perpetrated by undue understatement of income, overstatement of expenses or
non-declaration of income.

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2. Tax avoidance, also known as tax minimization, refers to any act or trick that
reduces or totally escapes taxes by any legally permissible means. This may be
done by selecting tax options allowed by the law which minimizes tax liability or
by careful tax planning to reduce tax exposure.
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. Tax exemptions
may be granted by the Constitution, law, or contract.
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 - This is the process of transferring tax burden to other taxpayers. Forms of
shifting
a. Forward shifting -This is the shifting of tax which follows the normal flow of
distribution (i.e. from manufacturer to wholesalers, retailers to consumers).
Forward shifting is common with essential commodities and services such as
food and fuel.
b. Backward shifting - This is the reverse of forward shifting. Backward shifting
is common with non-essential commodities where buyers have considerable
market power and commodities with numerous substitute products.
c. Onward shifting - This refers to any tax shifting in the distribution channel that
exhibits forward shifting or backward shifting.
Shifting is common with business taxes where taxes imposed on business
revenue can be shifted or passed-on to customers.
2. Capitalization - This pertains to the adjustment of the value of an asset caused by
changes in tax rates.
For instance, the value of a mining property will correspondingly decrease when mining
output is subjected to higher taxes. This is a form of backward shifting of tax.
3. Transformation - This pertains to the elimination of wastes or losses by the taxpayer
to form savings to compensate for the tax imposition or increase in taxes.

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.

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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.

Because they deprive the government of revenues, tax exemption, tax refund, tax
amnesty and tax condonation are construed against the taxpayer and in favor of the
government.
Tax Amnesty vs. Tax Condonation
Amnesty covers both civil and criminal liabilities, but condonation covers only civil
liabilities of the taxpayer.
Amnesty operates retrospectively by forgiving past violations. Condonation applies
prospectively to any unpaid balance of the tax; hence, the portion already paid by the
taxpayer will not be refunded.
Amnesty is also conditional upon the taxpayer paying the government a portion of the
tax whereas condonation requires no payment.

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