BAM 127: INCOME

TAXATION
ELDEN S. BACAN, CPA
BASIC PRINCIPLES IN
TAXATION
Objectives

At the end of this lecture, the students shall be

able to:
• Define taxation.
• Discuss the purposes of taxation.
• Identify the theory and basis of taxation.
• Describe the principles of a sound tax
system.
• List the nature of taxation.
Objectives

At the end of this lecture, the students shall be

able to:
• Explain the limitations of taxation
(constitutional and inherent).
• Identify the aspects of taxation.
What is taxation?

Taxation is the process or means by which

the sovereign, through its lawmaking body,
raises income to defray the necessary
expenses of the government.
Purpose of taxation

Primary purpose
• To provide funds or property with which
to promote the general welfare of its
citizens and to enable it to finance its
multifarious activities.
Purpose of taxation

Secondary purposes
• To strengthen anemic enterprises by
giving tax exemptions.
• To protect local industries against foreign
competition through imposition of high
customs duties on imported goods.
Purpose of taxation

Secondary purposes
• To reduce inequalities in wealth and
income by imposing progressively
higher taxes.
• To prevent inflation by increasing taxes
or ward off depression by decreasing
taxes.
Theory and basis of taxation

• Theory
– The existence of the government is a
necessity.
– The government cannot continue without a
means to pay its expenses.
– The government has the rights to compel its
citizens and property within its limits to
contribute.
Theory and basis of taxation

• Basis
– Taxation is based on the reciprocal duties of
protection and support between the
government and its people.
– Government receives taxes from the people
which is used to perform functions of
government and other benefits.
– Benefit-received theory.
Basic principles of sound tax
system

• Fiscal adequacy
• Equality or theoretical justice
• Administrative feasibility
Fiscal adequacy

• The source of government revenue should be

efficient to demand the needs of public
expenditure.
• Creating new taxes or new tax machinery or
by merely changing the rates applicable to
existing taxes.
Equality or theoretical justice

• The tax burden should be proportionate to the

taxpayer’s ability to pay.
• Ability-to-pay principle
Administrative feasibility

• The tax laws should be capable of convenient,

just and effective administration.
• Each tax should be:
– Clear and plain to the taxpayer.
– Capable of uniform enforcement
– Convenient as to time, place and manner of
payment.
– Not unduly burdensome upon or discouraging to
business activity
Nature of taxation

• It is inherent in sovereignty.
• Legislative in character.
• Subject to constitutional and inherent
limitations.
Limitations of taxation

• Inherent limitations – restrictions on the

power exists from the very nature of the
power of taxation itself.

• Constitutional limitations – restrictions in

the exercise of the power of taxation as
expressly provided in the Philippine
Constitution.
Constitutional limitations
• Due process.
• Equal protection of the laws.
• Rule of uniformity and equity in taxation.
• Non-imprisonment for non-payment of poll
tax.
• Non-impairment of the obligations and
contracts.
• Non-infringement of religious freedom.
Constitutional limitations

• No appropriation for religious purposes.

• Exemption of religious, charitable or
educational entities, non-profit cemeteries, and
churches from taxation.
• Exemption of revenues and assets of non-
stock, non-profit educational institutions and
donations for educational purposes from
taxation.
Constitutional limitations

• Concurrence by a majority of all members of

the Congress for the passage of a law
granting any tax exemption.
• Power of the President to veto any
particular item or items in a revenue or
tariff bill.
• Non-impairment of the jurisdiction of the
Supreme Court in tax cases.
Inherent limitations

• Requirement that levy must be for a public

purpose.
• Non-delegation of the legislative power to
tax, except:
– Delegation to the President
– Delegation to local governments
– Delegation to administrative bodies
Inherent limitations

• Exemption from taxation of government

entities.
• International comity
• Territorial jurisdiction
Aspects of taxation

• Levy – deals with the provisions of law

which determines:
– The person or property to be taxed
– The sum or sums to be raised
– The rate of the tax
– The time and manner of levying, receiving
and collection the tax.
Aspects of taxation

• Collections – constituted of the provisions of

law which prescribe the manner of enforcing
the obligation on the part of those taxes to pay
the demand thus created.
Situs of Taxation

• 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
 Example Situs/place
Tax on services Where service is rendered

Business tax Where business is conducted

Property tax Where property is located

Personal tax Where an individual resides

Double Taxation

Occurs when the same taxpayer is

taxed twice by the same tax jurisdiction
for the same thing.
Types of Double Taxation

 Direct double taxation – occurs when

all the element of double taxation exists
for both impositions.

 Indirect double taxation – occurs

when at least one of the secondary
elements double taxation is not
comment for both impositions.
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

 Tax evasion
 Tax avoidance
 Tax exemption
Categories of Escapes from
Taxation
b. Those that do not result to loss of
government revenue
 Shifting
• Forward shifting- when burden of tax is
transferred from a factor of production through
the factors of distribution until it finally settles on
the ultimate purchaser or consumer
• Backward shifting – when the burden is
transferred from consumer through factors of
distribution to the factors of production;
• Onward shifting- when the tax is shifted 2 or more
times either forward or backward.
Categories of Escapes from
Taxation
b. Those that do not result to loss of
government revenue

 Capitalization
 Transformation
Tax 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.
Tax Condonation

is a forgiveness of the tax obligation of

a certain taxpayer under certain
justifiable grounds. This is also
referred to as tax remission.
Taxes, Tax Laws and Tax
Administration
TAXATION LAW

Taxation law refers to any law that

arises from exercise of the taxation
power of the state.
Types of taxation laws

Taxation law refers to any law that

arises from exercise of the taxation
power of the state.
Types of taxation laws

 Tax laws – these are the laws that

provide for the assessment and
collection of taxes.
 Tax exemption laws – these are laws
that rant certain immunity from
taxation.
Sources of Taxation Laws

• Constitution
• Statutes and Presidential Decrees
• Judicial decisions and case laws
• Executive orders and Batasang
Pambansa
• Administrative issuance
• Local ordinance
• Tax treaties and conventions with
foreign countries
• Revenue regulations
NATURE OF PHILIPPINE TAX
LAWS
Philippine tax laws are civil and not
political in nature.
Classification of Taxes

A. As to purpose
1. Fiscal or revenue tax – a tax imposed
for general purpose
2. Regulatory – a tax imposed to regulate
business, conduct, act or transaction.
3. Sumptuary – a tax levied to achieve
some social or economic objectives
Classification of Taxes

B. As to subject matter
1. Personal poll or capitation – a tax on
persons who are residents in particular
territory.
2. Property tax – a tax on properties, real or
personal
3. Excise or privilege tax – a tax imposed upon
the performance of the enjoyment of a
privilege or engagement in occupation.
Classification of Taxes

C. As to incidence
1. Direct tax – The tax is collected from
the person who is intended to pay the
same.
2. Indirect tax – tax is paid by any person
other than the one is intended to pay
the same, the tax is said to be indirect.
Classification of Taxes

D. As to amount
1. Specific tax – A tax of a fixed amount
imposed on a per unit basis such as
per kilo, liter or meter, etc.
2. Ad valorem – a tax of a fixed
proportion imposed upon the value of
the tax object.
Classification of Taxes

E. As to rate
1. Proportional tax – This is a flat or fixed -
rate.
2. Progressive or graduated tax – a tax which
imposes increasing rates as the tax base
increase.
3. Regressive tax – imposes decreasing tax
rates as the tax base increase.
4. Mixed tax – a combination of any of the
above types of tax.
Classification of Taxes

E. As to imposing authority
1. National Tax – Tax imposed by the national
government.
• Income tax – tax on annual income, gains or profits.
• Estate tax – tax on gratuitous transfer of properties by a
decedent upon death
• Donor’s tax – tax on gratuitous of properties of a living donor
• Value added tax – consumption tax collected by VAT business
taxpayers.
• Other percentage tax – consumption tax collected by non-VAT
business taxpayers.
• Excise tax – tax on sin products and non-commodities such as
alcohol, cigarettes and metallic minerals.
Classification of Taxes

E. As to imposing authority (Continuation)

2. Local tax – tax imposed by the municipal or

local government.
• Real property tax
• Professional tax
• Business taxes fees and charges
• Community tax
• Tax on banks & other financial institutions
TAX SYSTEM

The tax system refers to the methods

or schemes of imposing assessing and
collecting taxes.
Types of tax systems
according to imposition
1. Progressive – employed in the
taxation of income of individuals,
and transfers of properties by
individuals.
2. Proportional – employed in taxation
of corporate income and business.
3. Regressive – not employed in the
Philippines.
Types of tax systems
according to impact
1. Progressive system – one that
emphasizes direct tax. A direct tax
cannot be shifted.
2. Regressive system – one that
emphasizes indirect taxes. An
indirect tax is shifted by business to
consumers.
TAX COLLECTION SYSTEMS

A. Withholding system on income tax – under

this collection system, the payor of the income
withholds or deduct the tax on the income
before releasing.
1. Creditable withholding tax
• Withholding tax on compensation – an estimated tax
required by the government to be withheld by
employers against the compensation income to their
employees.
• Expanded withholding tax – an estimated tax
required by the government to be deducted on
certain income payments made by taxpayers
TAX COLLECTION SYSTEMS

A. Withholding system on income tax – under

this collection system, the payor of the income
withholds or deduct the tax on the income
before releasing. (Continuation)
1. Final withholding tax – a system of tax
collection wherein payors are required to
deduct the full tax on certain income
payments.
TAX COLLECTION SYSTEMS

B. Withholding system on business tax –

when the national government agencies and
instrumentalities including GOCCs purchase
goods or services from private suppliers, the
law requires withholding of the relevant
business tax.
TAX COLLECTION SYSTEMS

C. Voluntary compliance system – The taxpayer himself

determines his income, reports the same through
income tax returns and pays the tax to the government.
This system is also referred to as the self-assessment
method.

D. Assessment or enforcement system – the

government identifies non-compliant tax payers,
assesses their taxes dues including penalties, demands
for taxpayer’s voluntary compliance or enforces
collections by coercive means such as summary
proceeding or judicial proceedings when necessary.
OTHER AGENCIES TASKED WITH
TAX COLLECTIONS OR TAX
INCENTIVES RELATED FUNCTIONS
1. Bureau of Customs – tasked to
administer collection of tariffs on
imported articles and collections of the
Value Added Tax on importation. The
BOC is headed by the customs
commissioner and is assisted by five
deputy commissioners and 14 district
collectors.
OTHER AGENCIES TASKED WITH
TAX COLLECTIONS OR TAX
INCENTIVES RELATED FUNCTIONS
2. Board of Investments – tasked to
lead the promotion of investments in
the Philippines by assisting Filipinos
and foreign investors to venture and
prosper in desirable areas of
economic activities.
OTHER AGENCIES TASKED WITH
TAX COLLECTIONS OR TAX
INCENTIVES RELATED FUNCTIONS
3. Philippine Economic Zone
Authority – created to promote
investments in export-oriented
manufacturing industries in the
Philippines
TAXPAYER CLASSIFICATION FOR
PURPOSE OF TAX ADMINISTRATION

1. Large taxpayers – under the

supervision of LTS and BIR national
office
2. Non-large taxpayers – under the
supervision of the RDO
CRITERIA FOR LARGE
TAXPAYERS
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. P1,000,000 aggregate
amount per year
CRITERIA FOR LARGE
TAXPAYERS
A. As to payment.
4. Withholding Tax - At least P1,000,000 annual
withholding tax payments remittances from all
types of withholding taxes.
5. Percentage Tax - At least P200,000
percentage tax paid or payable quarter for the
preceding year.
6. Documentary stamp tax - At least P1,000,000
aggregate amount per year
CRITERIA FOR LARGE
TAXPAYERS
B. As to financial conditions and results
of operations
1. Gross receipts or sales – P1billion total
annual gross sales.
2. Net worth – P300M total net worth at
the close of each calendar year
3. Gross purchases – P800M total annual
purchases for the preceding year
Tax Administration

• A system of collecting taxes in accordance

with the country’s tax policies
• It involves enforcement of taxes through the
following aspects of taxation
1. Assessment
2. Collection
• It also includes the execution of judgement
and capacity to act in all tax cases decided by
the court in favour of the Bureau of Internal
Revenue
Tax Administrative Agencies

The Department of Finance (DOF) is

primarily responsible for the fiscal
policies and general management of the
Philippine Government’s Financial
Resources.
Tax Administrative Agencies

It has executive supervision and control

over other agencies, such as:

1. Bureau of Internal Revenue (BIR) – the

government agency primarily in
charge to assess and collect all taxes
and charges imposed by the NIRC,
other tax laws and regulations
Tax Administrative Agencies

It has executive supervision and control

over other agencies, such as:

2. Bureau of Customs (BC) and Tariff

Commission (TC) – the main agencies
tasked to enforce the Tariff and Customs
Code (TCC). The BC also collects the
taxes on imports embodied in the NIRC
Tax Administrative Agencies

It has executive supervision and control

over other agencies, such as:

3. Land Transportation Office (LTO) – the

office responsible to collect registration
fees and motor vehicle tax.
Tax Administrative Agencies

It has executive supervision and control

over other agencies, such as:

4. Dully and lawfully authorized

collectors – these are persons, agencies
or duly accredited banks authorized by
the BIR, BC, TC, and LTO to collect taxes.
Tax Administrative Agencies

It has executive supervision and control

over other agencies, such as:

5. Local offices in charge in charge to

enforce local taxation
The following powers and duties as
provided by Sec 2 of the National Internal
Revenue Code:
1. To assess and collect all national
internal revenue taxes, fees and
charges
2. To enforce all forfeitures, penalties
and fines connected with the above
3. To execute judgements in all cases
decided in its favour by the Court of
Tax Appeals and the ordinary courts
The following powers and duties as
provided by Sec 2 of the National Internal
Revenue Code:
4. To administer, supervise and effect police powers
authorized by the NIRC and other laws, such as:
a. Assigning Internal Revenue Officers to
establishments where articles subject to excise tax are
produced
b. Providing and distributing forms, receipts,
certification, stamps and other BIR documents to
concerned officials
c. Issuing receipts for tax collected
d. Submitting annual report and pertinent information to
the Congress
Powers of the BIR
Commissioner
The Commissioner of Internal Revenue (CIR) is the
Chief Official of the BIR who has the following
powers or authority as provided by the Tax Code:
1. Interpret tax laws
2. Decide disputed tax assessments
3. Summon, and obtain information or testimony of
persons
4. Make assessments and prescribe additional tax
requirements
5. Compromise, abate and refund or credit taxes
6. Suspend the business operations of a tax payer
7. Delegate powers