INCOME TAXATION

Enhancement
Program
Introduction to Taxation
Learning Objectives
• Concept of taxation and its necessity for every
government
• Lifeblood doctrine and its implication to taxation
• Theories of government cost allocation
• Inherent power of the State
• Scope of the taxation power
• Limitations of the taxation power
• Stages of taxation
• Concept of situs in taxation
• Fundamental principles surrounding taxation
• Various escapes from taxation
• Concept of tax amnesty and condonation
 What is Taxation?
Taxation can be defined as:
• As a state power - Taxation is an inherent power of the State to
enforce a proportional contribution from its subjects for public purpose.

• As a legislative process – Taxation is a process of levying taxes by the

legislative of the State to enforce proportional contributions from its
subjects for public purpose.

• As a mode of government 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 Basis of Taxation

PAY TAXES
PEOPLE/CITIZEN GOVERNMENT
• Earn money by • Serves its people
working 8 hrs/day by way of public
order, health
• Earn by way of education, social
business PUBLIC protection, etc.
SERVICE
Theories of Cost Allocation
o Benefit Received Theory
• it presupposes that the more benefit one receives from the
government, the more taxes he should pay.

o Ability to Pay Theory

• it presupposes that taxation should also consider the taxpayer’s
ability to pay. Taxpayers should be required to contribute bases on
their relative capacity to sacrifice for the support of the
government.

In short, those who have more should be taxed more even if they receive less from
the government. Those who have less shall contribute less even if they receive more
of the benefits from the government.
 The Lifeblood Doctrine
• It is said that 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.
Implications of the lifeblood doctrine in Taxation:
Implications of the lifeblood doctrine in Taxation:
1. Taxes is imposed even in the absence of a Constitutional grant.
2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose the object of taxation
4. The courts are not allowed to interfere with the collection of taxes
5. In income Taxation:
1. Income received in advance is taxable upon receipt
2. Deduction for capital expenditures and prepayments is not allowed as it
effectively defers the collection of income tax.
3. A lower amount of deduction is preferred when a claimable expense is subject
to limit.
4. A higher tax base is preferred when the tax object has multiple tax bases.
 The Inherent Power of the State
1. Taxation Power – is 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.

3. Eminent Domain – is the power of the State to take private property

for public use after paying just compensation.
Scope of the Taxation Power
• The scope of Taxation is widely regarded as comprehensive, plenary,
unlimited and supreme.
• However, despite the seemingly unlimited nature of taxation, it is not
absolutely unlimited. Taxation has its own inherent limitations and
limitations imposed by the Constitution.

Inherent limitations
1. Territoriality of taxation
2. International Comity/mutual courtesy/reciprocity
3. Public Purpose – cannot exercise for private interest
4. Exemption of the government – government cannot tax itself
5. Non – delegation of the taxing power – it is vested exclusively in Congress.
Constitutional Limitations
1. Due process of law – tax laws should neither be harsh nor oppressive.
2. Equal protection of law – taxpayers must be treated equally.
3. Uniformity rule in taxation – uniform and equitable
4. Progressive system in taxation – tax rates increases as tax base increase
5. Non-imprisonment for non-payment of debt or poll tax – this limitation only applies on
community tax (cedula). Tax evasion is considered a crime.
6. Non-impairment of obligations and contracts – tax exemptions granted under contract
should be honored and should not be cancelled by a unilateral government actions.
7. Free worship rule – religious collections such as tithes of offerings are not subject to tax,
but activities of the religious group which is proprietary or commercial in nature is
TAXABLE.
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and
mosque from property taxes.
9. Non-appropriation of public funds or property for the benefit of any church, sect or
system of religion.
Constitutional Limitations – Cont.
10. Exemption from taxes of the revenues and assets of non-profit, non-
stock educational institutions.
11. Concurrence of a majority of all members of Congress for the passage of
a law granting tax exemption.
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax
cases.
15. The requirement that appropriations, revenue, or tariff bills shall
originate exclusively im the House of Representatives.
16. The delegation of taxing power to local government units.
 Stages of the Exercise of Taxation Power
• Levy or Imposition
o This process involves the enactment of a tax law by Congress and is called
impact of taxation. It is also referred to as the legislative act in taxation.
o Tax bills must originate from the House of Representatives
(Congressman/Congresswoman). Tax bills CANNOT exclusively originate from
the Senate.
• Assessment and Collection
o 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 referred to as incidence of taxation or the
administrative act of taxation.
 Situs of Taxation
• Situs of Taxation refers to the place of taxation. It is the tax jurisdiction
that has the power to levy taxes upon the tax object.
• Examples of Situs Rules:
o Business Tax Situs – business are subject to tax in the place where the
business is conducted
o Income tax situs on services – Service fees are subject to tax where they are
rendered.
o Income tax situs on sale of goods – the gain on sale is subject to tax in the
place of sale.
o Property tax situs – properties are taxable in their location.
o Personal tax situs – persons are taxable in their place of residence.
 Double Taxation
• Double taxation occurs when the same taxpayer is taxed twice by the
same tax jurisdiction for the same thing.
• Double taxation can cause burden to taxpayers!
• Elements of Double Taxation
o Primary Element: Same object
o Secondary Element:
• Same type of tax
• Same purpose of tax
• Same taxing jurisdiction
• Same tax period
 How can double taxation be minimized?
• Provision for tax exemption
• Allowing foreign tax credit – tax payments made from the foreign land
can be used as tax credit or tax deduction in the Philippines if the same
object had been taxed.
• Allowing reciprocal tax treatment – if foreign countries exempt from tax
the Filipino in their land, the Philippines must do the same thing on the
foreign taxpayers.
• Entering into treaties or bilateral agreements – nations can agree or can
stipulate lower tax rates if they engage in transactions with both of them.
 Escapes from Taxation
• Those that results 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. (ex. Understatement of
income or overstatement of expense.)
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.
(ex. Careful tax planning, maximizing tax options or the use of tax credits).
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 exemption may be granted by the Constitution, law or contract. (ex.
Engage in transactions or business which are tax exempted).
 Escapes from Taxation – cont.
• Those that do not result to loss of government revenue
1. SHIFTING –this is the process of transferring tax burden to other taxpayers.

2. CAPITALIZATION – this pertains to the adjustment of the value of an asset

caused by changes in tax rates.

3. TRANSFORMATION – this pertains to the elimination of the wastes or

losses by the taxpayer to form savings to compensation for the tax imposition
or increase in taxes.
• TAX AMNESTY
o 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 state. It is an absolute forgiveness or waiver by the
government on its right to collect and is retrospective in application

• TAX CONDONATION
o Tax condonation is forgiveness of the tax obligation of a certain taxpayer under
certain justifiable grounds. This is also referred to as tax remission.

Note!: 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
o Amnesty covers both civil and criminal liabilities, but condonation
covers only civil liabilities of the taxpayer.

o Amnesty operates retrospectively by forgiving past violations.

Condonation applies propestively to any unpaid balance of the tax;
hence, the portion already paid by the taxpayer will not be refunded.

o Amnesty is also conditional upon the taxpayer paying the government a

portion of the tax whereas condonation requires no payment.
QUESTIONS????
REACTIONS!!!!!
END