INTRODUCTION TO TAXATION

Taxation may be defined as a State power, a legislative process, and a mode of

government cost distribution.

1. As a state power
Taxation is an inherent power of the State to enforce a proportional contribution from its
subjects for public purpose.
2. As a 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. As a 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

* A system of government is indispensable to every society

* Government cannot exist without a system of funding
* The government’s necessity 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 mutuality of support between the people and the government is the
basis of taxation
Receipt of benefits is conclusively presumed

● Every citizen and resident of the State directly or indirectly benefits from the
public services rendered by the government
● In taxation, receipt of benefits by the people is conclusively presumed
● Thus, taxpayers cannot avoid payment of taxes under the defense of
absence of benefit received.
● The direct receipt or actual 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. In distributing

the costs/burden, the government regards the following general considerations:

1. Benefit Received Theory

 Presupposes that the more benefit one receives from the government, the more
taxes he should pay

2. Ability to pay theory

 Taxation should also consider the taxpayer’s ability to pay
 Taxpayers should be required to contribute based on their relative capacity to
sacrifice for the support of the government
 Those who have more should be taxed more even if they benefit less from the
government
Aspects of Ability to pay theory

1. Vertical Equity
 Proposes that the extent of one’s ability to pay is directly proportional to the level of
his tax base
 Gross concept

2. Horizontal Equity
 Requires consideration of the particular circumstance of the taxpayer
 Net concept
Vertical Theory
For example, A has P200,000 income while B has P400,000. In
taxing income, the government should tax B more than A because B
has greater income; hence, a greater capacity to contribute.

A B
Horizontal Theory

For example, Businessmen A and B both have P300,000 income. A

incurred P200,000 in business expenses while incurred only P50,000
business expenses. The government should tax 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.

Horizontal equity is the principle that taxpayers with equal income should pay
equal tax. Vertical equity requires that tax obligations vary in proportion to
income such that B has a same income of A, but A have more expenses than B.

Horizontal equity is a tax principle whereby equals are treated as equals hence
individuals with the same income should pay an equal amount of tax. On the
other hand, vertical equity is a method of tax collection based on the income
amount whereby taxes paid increase with an increase in income.
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
 Taxes are the lifeblood of the government, and their prompt and certain availability
are an imperious need
 Upon taxation depends the government’s ability to serve the people for whose benefit
taxes are collected
Implication of the Lifeblood Doctrine in taxation
1. Tax is imposed even in the absence of a constitutional grant
2. Claims for tax exemption are construed against taxpayers
3. The gov’t reserves the right to choose the objects of taxation
4. The courts are not allowed to interfere with the collection of taxes
5. In income taxation:
a. Income received in advance is taxable upon receipt
b. Deduction for capital expenditures and prepayments is not
allowed as it effectively defers the collection of income tax
c. A lower amount of deduction is preferred when a claimable
expense is subject to limit
d. A higher tax base is preferred when the tax object has multiple
tax bases
 INHERENT POWERS OF THE STATE
 These rights dubbed as powers are natural, inseparable¸ and
inherent to every government
 No government can sustain or effectively operate without these
powers
 The exercise of these powers by the government is presumed
understood and acknowledged by the people from the very
moment they establish their government
 These powers are naturally exercisable by the government
even in the absence of an express grant of power in the
Constitution

1. Taxation Power – the power of the State to enforce proportional

contribution from its subjects to sustain itself
2. Police Power – is the general power of the State to enact laws to protect the well-being
of the people

Exercising Authority: Government

Purpose: To protect the general welfare of the people
Persons affected: Community or class of individuals
Amount of imposition: Limited (to cover cost of regulation)
Importance: Most superior
Relationship with constitution: Superior to the “Non-impairment
clause” of the Constitution
Limitation: Public interest and due process
3. Eminent Domain – the power of the State to take private property for public use after
paying just compensation

Exercising Authority: Government & private utilities

Purpose: For public use
Persons affected: Owner of the property
Amount of imposition: No amount imposed (just compensation)
Importance: Important
Relationship with constitution: Superior to the “Non-impairment
clause” of the Constitution
Limitation: Public purpose and just compensation
Similarities of the three powers of the state
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 gov’t even
without Constitutional grant
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 gov’t units may be limited by the national
legislature
Scope of the Taxation Power
 is widely regarded as comprehensive, plenary(complete, congress), unlimited, and
supreme
 it is not absolutely unlimited
 it has its own inherent and constitutional limitations
Inherent Limitations
1. Public purpose
 Tax is intended for the common good
 Must be exercised absolutely for public purpose
 Cannot be exercised to further any private interest

2. Non-delegation / Improper delegation of Taxing Power

 Legislative taxing power is vested exclusively in Congress and is non-delegable
pursuant to the doctrine of separation of the branches of the government to ensure a
system of checks and balances
 The power of lawmaking, including taxation, is delegated by
the people to the legislature
 It is held that what has been delegated cannot be further
delegated
Exceptions to the rule of non-delegation
1. Under the constitution, LGUs are not allowed to exercise the
power to tax to enable them to exercise their fiscal anatomy
2. Under the Tariff and Customs code, the president is
empowered to fix the amount of tariffs to be flexible to trade
conditions
3. Other cases that require expedient & effective administration

3. Territoriality of Taxation
 Public services are normally provided within the boundaries of
the State
 The government can only demand tax obligations upon its
subjects or residents within its territorial jurisdiction
 Extraterritorial taxation will amount to encroachment of foreign
sovereignty
Two-fold obligations of taxpayers:
a. Filing of returns and payment of taxes
Two-fold obligations of taxpayers:

a. Filing of returns and payment of taxes

b. Withholding of taxes on expenses & its remittance to the gov’t

Exception to the territoriality principle

1. In income taxation, resident citizens and domestic

corporations are taxable on income derived 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 Phils.

3. Double Taxation
4. Exemption of the Government

 Government properties and income from essential public functions are not subject to
taxation
 However, income of the government from its properties and activities conducted for
profit including income from government owned and controlled corporations (GOCCs)
is subject to tax
 Cannot tax government instrumentalities
5. International Comity

 Mutual courtesy or reciprocity between countries

 Governments do not tax the income and properties of other governments
 Governments give primacy to their treaty obligations over their own domestic tax laws
 Embassies or consular offices of foreign in Philippines including international
organizations and their non-Filipino staff are not subject to income taxes or property
taxes
 Income of foreign government and foreign GOCCs are not subject to income tax
Stages of the Exercise of Taxation Power
1. Levy or Imposition
 This process involves the enactment of a tax law by Congress
and is called impact of taxation
 Also referred to as the legislative act in taxation

Congress is composed of two bodies:

1. The House of Representatives
2. The Senate
 Tax bills must originate from the House of Representatives
 Each may have their own versions of a proposed law which is
approved by both bodies
 Tax bills cannot originate exclusively from the Senate
Matters of legislative discretion in the exercise of taxation

1. Determining the object of taxation

2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which must be public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the national & local gov’t
6. Situs of taxation
7. Method of collection
 Assessment and Collection
 The tax law is implemented by the administrative branch of the government
 Implementation involves assessment or the determination of the tax liabilities of taxpayers and
collection
 This stage is referred to as incidence of taxation or the administrative act of taxation

Situs of Taxation

Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the tax
object.
Situs Rules serve as frames of reference in gauging whether the tax object is within or outside the
tax jurisdiction of the taxing authority
1. Business tax . Businesses are subject to tax in the place where the
busyness is conducted.

Illustration: A tax payer is involved in car dealership abroad and

restaurant operation in the Philippines. The restaurant business only will
be subject to business tax in the Philippines.
2. Income tax situs on service. Service fees are subject to tax where they are
rendered.

Illustration: A foreign corporation leases a residential space to a non-

resident Filipino citizen abroad. The rent income will be exempt from
Philippine taxation.
3. Income tax situs on sale of goods. The gain of sale is subject to tax in the
place of sale.

Illustration: While in China, a non-resident OFW citizen agreed with a

Chinese friend to sell hi diamond necklace to the latter. They stipulated that
the delivery of the item and the payment will be made a week later in the
Philippines. These as consummated as agreed. The perfection of the contract
sale is in China so the situs of taxation is China, thus, gain on sale is
exempted in the Philippines.
 4. Property tax situs. Properties are taxable in their location.

Illustration: An overseas Filipino worker has a residential lot in the

Philippines. He is still subject to real property tax because his property is
located in the Philippines.
5. Personal tax situs. Persons are taxable in their place of residence.

Illustration: Ahmed Lofti is a Sudanese studying medicine in the

Philippines. Admed is subject to personal tax even if he is an alien
because he is residing in the Philippines.
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 elements of double taxation exists for both
impositions.

Example: imposition of final withholding tax on cash dividends and requiring

the taxpayer to declare this tax-paid income in his tax returns

2. Indirect double Taxation

This occurs when at least one of the secondary elements of double taxation is
not common for both imposition

Example: Interest income of banks on their deposits with other banks to the 5%
gross receipts tax (GRT) despite the same income having been subjected to 20%
Final withholding tax (FWT).
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

Those that result to loss of the government revenue

1. Tax Evasion. Also known as tax dodging, refers to any or trick that tends to
illegally reduce or avoid the payment of tax.
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.
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. This may be granted
by the Constitution, law, or contract.
4. SHIFTING - the transfer of the burden of a tax
by the original payer or the one whom the tax was
assessed or imposed to another or someone else. It
should be borne in mind that what is transferred is
not the payment of the tax but the burden of the
tax.
 WAYS OF SHIFTING THE BURDEN
2. Backward shifting
1. Forward shifting
When the burden of the tax is transferred from
When the burden of the tax is the consumer or purchaser through the factors
transferred from a factor of production of distribution to the factor of production.
through factors of distribution until it
finally settles on the ultimate purchaser Example: Consumer or purchaser may shift tax
or consumer. imposed on him to retailer by purchasing only
after the price is reduced, and from the latter to
Example: Manufacturer or producer the wholesaler, and finally to the manufacturer
or producer. The burden is shifted backward to
may shift tax assessed to wholesaler, the one who is selling. From the point of sale, it
who in turn shifts it to the retailer, who is the seller who shoulders the burden. The tax
also shifts it to the final purchaser or in fact is shouldered by the seller, not anymore
consumer. the buyer.
4. CAPITALIZATION - – reduction in the price of the taxed object equal to the
capitalized value of future taxes which the purchaser expects to be called upon
to pay; by not selling property which has increased in value, the owner avoids
the income tax paid on the gain if the same is sold. An increase in the value of an
asset is merely an unrealized increase (gain) in capital.

5. 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 of products at a lower cost.
● Tax Amnesty is a general pardon granted by the government for erring
taxpayers to give them a chance and enable them to have a fresh start to be
part of the society with a clean state. It is an absolute forgiveness or waiver
by the government on its right to collect and is retrospective in application.

● Tax Condonation is forgiveness of the tax obligation of a certain taxpayer

under certain justifiable grounds. This is also referred to as tax remission.
 Elements of valid tax
Tax is an enforced proportional contribution levied by the lawmaking
body or State to raise revenue for public purpose. Below are the elements
of a valid tax:
-Tax must be levied by the taxing power having jurisdiction over
the object taxation.
-Tax must not violate constitutional and inherent limitations.
-Tax must be uniform and equitable.
-Tax must be for public purpose.
-Tax must be proportional in character.
-Tax is generally payable in money.
 Classification of taxes
A. As to purpose

1. Fiscal or revenue tax – a tax imposed for general purpose

Example: personal income tax, corporate tax, property tax, value added tax

2. Regulatory – a tax imposed to regulate business, conduct, acts or transactions

Example: sugar adjustment tax, oil price stabilization fund, protective tariffs or
custom duties

3. Sumptuary – a tax levied to achieve some social or economic objectives. It also

refers to an excise or valorem tax applied to goods and services that support a habit
viewed by society as undesirable.
Examples: Tax on sale of goods, tobacco, legalized gambling, alcoholic
beverages
Classification of taxes
B. As to subject matter
1. Personal, poll or capitation – a tax on persons who are residents of
a particular territory

2. Property tax – a tax on properties, real or personal.

3. Excise or privilege tax – a tax imposed upon the performance of

an act, enjoyment of a privilege or engagement in an occupation
Example: Fuel, Tobacco and alcohol
C. As to incidence
1. Direct tax – When both the impact and incidence of taxation rest upon
the same taxpayer, the tax is said to be direct. The statutory taxpayer is
the economic taxpayer. (Example: income tax, corporate tax, capital
gain tax & property tax)
Statutory taxpayer is the person whom the tax is imposed by law and who
paid the same even if he shift the burden thereof to another.
Economic taxpayer – is an individual or business entity that is obligated to
pay taxes to a federal, state, or municipal government body.

2. 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. This occurs in the
case of business taxes where the statutory taxpayer is not the economic
taxpayer.(Example : VAT)
D. As to amount
1. Specific tax – a tax of a fixed
amount imposed on a per
unit basis such a per kilo,
liter or meter, etc.

2. Ad valorem – a tax of a fixed

proportion imposed upon the value
of the tax object
E. As to rate

1. Proportional tax – This is a flat or fixed rate tax. The use of proportional tax
emphasizes equality as it subjects all taxpayers with the same rate without regard to
their ability to pay.
2. Progressive or graduated tax – This is a tax which imposes increasing rates as the
tax base increase. The use of progressive tax rates results in equitable taxation
because it gets more tax to those who are more capable. It aids in lessening the gap
between the rich and the poor.
3. Regressive tax – This tax imposes decreasing tax rates as the tax base increase. This
is the total reverse of progressive tax. Regressive tax is regarded as anti-poor. It
directly violates the Constitutional guarantee of progressive taxation.
4. Mixed tax – This tax manifest tax rates which is a combination of any of the above
types of tax.
F. As to imposing authority

1. National tax – tax imposed by the national government

a) Income tax - tax on annual income, gains or profits

b) Estate tax - tax on gratuitous transfer of properties by a decedent upon death
c) Donor's tax - tax on gratuitous transfer of properties by a living donor
d) Value Added Tax - consumption tax collected by VAT business taxpayers
e) Other percentage tax - consumption tax collected by non-VAT business taxpayers
f) 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.
g) 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.
 Local – Impose by the municipal or local
Examples:

a) Real property tax

b) Professional tax
c) Business taxes, fees, and charges
d) Community tax
e) Tax on banks and other financial
institutions
Tax administered
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.
 Power 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.
(National Internal Revenue Code or NIRC – one of the tax laws that provide for
the assessment and collection of taxes)
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
the Congressional Oversight Committee in matters of taxation
Power of commissioner
1. To interpret the provisions of the NIRC, subject to review by the
Secretary Finance
2. To decide tax cases, subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals, such as:
a. Disputed assessments
b. Refunds of internal revenue taxes, fees, or other charges
c. Penalties imposed
d. Other NIRC and special law matters administered by the BIR
3. To obtain information and to summon, examine, and take testimony of
persons to effect tax collection
 Tax payer classification purposes
For purposes of effective and efficient tax administration, taxpayers are
classified into:

1. Large – under the supervision of the Large Taxpayer Service (LTS) of

the BIR

2. Non-large – under the supervision of the respective Revenue District

Offices (RDOs) where the business, trade or profession of the taxpayer is
situated.
 Criteria for determining Large tax payer
A. As to payment
1. Value Added Tax – At least P200,000 per quarter for the preceding
year
2. Excise Tax – At least P1,000,000 tax paid for the preceding year
3. Income Tax – At least P1,000,000 annual income tax paid for the
preceding year
4. Withholding Tax – At least P1,000,000 annual withholding tax
payments or remittances from all types of withholding taxes
5. Percentage tax – At least P200,000 percentage tax paid or payable per
quarter for the preceding year
6. Documentary stamp tax – At least P1,000,000 aggregate amount per
year
B. As to financial conditions and results of operations

1. Gross receipts or sales – P1,000,000,000 total annual gross sales or

receipts

2. Net worth – P300,000,000 total net worth at the close of each

calendar or fiscal year

3. Gross purchases - P800,000,000 total annual purchases for the

preceding year
Automatic classification of tax payer as large taxpayers
1. All branches of taxpayers under the Large Taxpayer's Service
2. Subsidiaries, affiliates, and entities of conglomerates or group of companies of a large
taxpayer
3. Surviving company in case of merger or consolidation of a large taxpayer
4. A corporation that absorbs the operation or business in case of spin-off of any large
taxpayer
5. Corporation with an authorized capitalization of at least P300,000,000 registered with the
SEC
6. Multinational enterprises with an authorized capitalization or assigned capital of at least
P300,000,000
7. Publicly listed corporations
8. Universal, commercial, and foreign banks (the regular business unit and foreign currency
deposit unit shall be considered one taxpayer for purposes of classifying them as large
taxpayer)
9. Corporate taxpayers with at least P100,000,000 authorized capital in banking insurance,
telecommunication, utilities, petroleum, tobacco, and alcohol industries
10. Corporate taxpayers engaged in the production of metallic minerals