PARTI
REVIEWER IN INCOME TAXATION
TAXATION – is the process or means by which the sovereign,
through its lawmaking body, raises revenue to defray the necessary
expenses of the government.
TAXES – the enforced proportional contributions from persons and
property levied by the lawmaking body of the Sate by virtue of its
sovereignty for the support of the government and all public need
PRIMARY PURPOSE OF TAXATION – to raise revenue to finance
government expenditures
ESSENTIAL ELEMENTS OF TAX (P E G L4)
1. Proportionate in character
2. Enforced contribution
3. Generally payable in money
4. Levied on persons, property or right/privilege5
5. Levied by the State which has jurisdiction over the subject
or object of taxation
6. Levied by the lawmaking body of the State
7. Levied for public purpose/s
SCOPE OF TAXATION – unlimited, comprehensive, plenary and
supreme, subject to limitations enumerated in the constitution and
the will of the legislature
THEORY OF TAXATION – Lifeblood theory, government is a
necessity, without taxes, the government would be paralyzed
BASIS OF TAXATION – reciprocal duties of protection and support
between the State and its inhabitants. (Benefit-received principle)
PRINCIPLES OF A SOUND TAX SYSTEM (F E A)
a. Fiscal Adequacy – revenue must be sufficient to meet
the demands of public expenditures
b. Equality or Theoretical Justice – the tax burden should
be proportionate to the taxpayer’s ability to pay;
progressive
c. Administrative Feasibility – capable of convenient, just
and effective administration
NATURE/CHARACTERISTICS OF THE STATE’S POWER TO TAX
(I L S)
a. Inherent in sovereignty – taxation may be exercised by the
State although not expressly granted by the Constitution
b. Legislative in character – only the legislative can impose
tax and enact tax laws
c. Subject to constitutional and inherent limitations – taxation
is not an absolute power that can be exercised by the
legislature anyway is pleases
INHERENT LIMITATIONS (N E P T I)
1. Non-delegation of legislative power to tax
2. Exemption from taxation of government entities
3. Levied for Public purpose
4. Territorial jurisdiction
5. International comity
CONSTITUTIONAL LIMITATIONS
1. Due process
2. Equal protection of the laws
3. Rule of uniformity and equity in taxation
4. Non-imprisonment for non-payment of poll tax
5. Non-imprisonment of the obligation of contracts
6. Non-infringement of religious freedom
7. No appropriation for religious purposes
8. Exemption of religious, charitable or educational entities,
non-profit cemeteries, and churches from taxation
9. Exemption of revenues and assets of non-stock, non-profit
educational institutions and donations for educational
purposes from taxation
10. Concurrence by a majority of all the members of the
Congress for the passage of a law granting any tax
exemption
11. Power of the President to veto any particular item or items
in a revenue or tariff bill
12. Non-impairment of the jurisdiction of the Supreme Court in
tax cases
ASPECTS OF TAXATION
a. Levy – determines the person or property to be taxed, the
sum/s to be raised, the rate and the time and manner of
levying, receiving and collecting taxes
b. Collection – prescribes the manner of enforcing the
obligation on the part of those taxed to pay the demand
thus created
CLASSIFICATION OF TAXES (S W D P A G)
1. Subject matter or object
a. Personal, poll or capitation - tax imposed on
individuals within a specified territory without regards
to their property/occupation
b. Property – on property whether real or personal
c. Excise (privilege) – upon the performance of an act,
enjoyment of a privilege or engaging in an occupation
2. Who bears the burden
a. Direct – demanded from the person who shoulders the
burden of tax
b. Indirect – demanded from one person in the
expectation and intention that he shall indemnity
himself at the expense of another
3. Determination of amount
a. Specific – tax of fixed amount
b. Ad valorem – tax of a fixed proportion of the value of
the property with respect to which the tax is assessed;
requires the intervention of assessors/appraisers to
estimate the value
4. Purpose
a. General, fiscal or revenue – impose solely to raise
revenue
b. Special or regulatory – for special purpose; to achieve
some social or economic ends
5. Authority imposing the same
a. National – imposed by national government
b. Municipal or fiscal – imposed by municipal
corporations
6. Graduation or rate
a. Proportional – tax based on a fixed percentage
amount
b. Progressive – tax rate increases as the tax
base/bracket increases
c. Regressive – tax rate decreases as tax base/bracket
increases
THREE INHERENT POWERS OF THE GOVERNMENT (P E T)
1. Police power – power of the State to enact such laws in
relation to persons and property as may promote public
health, morals, safety and the general welfare of the
people.
2. Eminent domain – power of the state or those to whom the
power has been delegated to take private property for
public use upon paying to the owner a just compensation
3. Taxation – power by which the sovereign, thru its
legislature, raises revenue to support the necessary
expenditure of the government
SIMILARITIES OF PET
a. Inherent in the State
b. Exist independently of the constitution
c. Constitutes the 3 methods by which the State interfers with
private rights and property
d. Legislative in character
e. Each presupposes an equivalent compensation
DISTINCTIONS OF PET
a. As to authority
P&T – exercised by the government
E – granted also to public service
companies/utilities
b. As to purpose (property is taken)
P – destroyed to promote public welfare
E – for public use
T – to support the government
c. As to persons affected
P&T – group or class of individuals
E – individual as the owner of a particular
property
d. As to effect
P – no transfer of title; there is restraint on
injurious use of property
E – there is transfer of property
T – becomes part of public funds
e. Amount of imposition
P – amount is limited to cover cost of liscense
and expenses of police surveillance and
regulation
E – no imposition, property owner is paid its
market value
T – no limit on the amount of tax
f. As to relationship to the non-impairment clause of the
constitution
P – superior
E – inferior
T – inferior
DOUBLE TAXATION – not unconstitutional but being discouraged
a. Direct duplicate taxation – taxing twice for the same
purpose, by the same authority in the same jurisdiction, in
the same period
b. Indirect duplicate taxation – extends to all cases in which
there is a burden of two or more pecuniary impositions
REVENUE – refers to all funds or income derived by the government,
whether from tax or any other sources
SITUS OF TAXATION – place of taxation; the state which has
jurisdiction over the object being taxed may rightfully levy and collect
the tax
1. Business, occupation or transaction – place where the
business is conducted, where occupation is practiced or
where the transaction took place
2. Real and tangible personal property – location of the
property
3. Intangible personal property – domicile of the owner unless
the property has acquired a business situs in another
jurisdiction
4. Income – place where the same is earned or citizenship or
domicile of the owner
5. Gratuitous transfer of property – residence or citizenship of
the taxpayer or location of the property
INTERPRETATIONS OF TAX LAWS
General rule: In case of doubt as to whether a taxpayer is covered by
the tax or not, the doubt shall be resolved in favor of the taxpayer
and strictly against the government
Exception: In cases of tax exemptions and deductions
BASIC FORM OF ESCAPE FROM TAXATION
1. Those that do not reduce revenue collection
a. Shifting – transfer of tax burden by one on whom tha
tax is assessed to another. Possible only when there
is exchange of commodities.
b. Capitalization – the reduction in the selling price of
income-producing property by an amount equal to the
capitalized value of future taxes that may be paid by
the purchaser
c. Transformation – method by which the manufacturer
or producer upon whom the tax is imposed pays the
2.
tax and strives to recover such expense through lower
production without sacrificing the quality of their
product.
Those that result in loss of revenue collection
a. Tax evasion – fraudulent schemes designed to
lessen/defeat taxes (tax dodging)
b. Tax avoidance – exploitation of the taxpayer of legally
permissible alternative tax rates or methods to reduce
tax liability (tax minimization)
c. Exemption from taxation – grant of immunity to
particular persons/corporations from a tax
RULE ON SET-OFF OR COMPENSATION
a. No set-off or compensation is admissible against demands
for taxes levied for general or local purposes
b. Reason: Taxes are not in the nature of contract between
parties; the government and the taxpayer are not mutually
creditors and debtors of each other and the claim for taxes
is not such a debt, demand, contract or judgment as is
allowed to be set-off
c. Exception: Where both the claims of the government and
the taxpayer against each other have already become due
and demandable as well as fully liquidated
GLOBAL SYSTEM OF TAXATION – a system employed where the
tax system views indifferently the tax base and generally treats in
common all categories of taxable income of the individual
SCHEDULAR SYSTEM OF TAXATION – a system which itemizes
the different incomes and provides for varied percentage taxes
OTHER DOCTRINES IN TAXATION
a. TAX AMNESTY – an immunity from all criminal and civil
obligations arising from nonpayment of taxes; applies only
to past periods (retroactive application)
b. TAXPAYER’S SUIT – this suit can only be allowed if the
act involves a direct and illegal disbursement of public
funds derived from taxation
c. EQUITABLE RECOUPMENT – this states that a claim for
refund which is prevented by prescription may be allowed
to be used as payment for unsettled tax liabilities if both
taxes arise from the same transaction in which
overpayment is made and underpayment is due
SOURCES OF TAX LAWS
a. The Constitution – the provisions of the constitution dealinf
on taxation merely regulate the exercise of the power of
taxation. They are not actually grants of the power,
because taxation can be exercised by the government; the
power of taxation is not a mere constitutional grant.
b. Statutory Enactments – refers to tax laws passed by the
Congress
c. Administrative rulings and regulations – issued from time to
time by the Commissioner of Internal Revenue. They are
usually rendered on request of taxpayers to clarify certain
provisions of a tax law (also known as BIR Rulings)
STEPS IN THE LEGISLATIVE PROCESS
Under the 1987 Philippine Constitution, all revenue and tariff bills
shall originate from the House of Representatives.
Revenue Bill – is one that levies taxes and raises funds for the
government
Tariff Bill – specifies the rates or duties to be imposed on imported
articles
1. Tax bill is introduced in HOR and referred to the House
Committee on Ways and Means. First reading involves
only a reading of the number and title.
2. Proposal is considered by the CWM. Committee hearings
and public hearings are held. In case of several bills with
the same nature and purpose, they shall all be
consolidated. Committee may also introduce amendments
or propose substitute bill.
3. Tax bill is voted by the Committee, if approved it is reported
out to the HOR for a vote. Second reading in the House is
conducted.
4.
5.
6.
7.
8.
9.
If passed by the HOR, the bill is transmitted to the Senate
for consideration by the Senate CWM. Second reading in
the Senate.
Upon approval by the Senate, both the Senate and the
HOR versions are sent to the Bicameral Conference
Committee consisting of representatives of HOR and
Senate.
The two dissimilar versions are reconciled in the Bicameral
Conference Committee. This process of ironing out the
differences generally involves substantial compromise.
A final bill, approved by BCC, is then resubmitted to HOR
and Senate for approval. Third reading is conducted but
only the reading of the tile, no deliberations will be allowed.
If BCC bill is approved by the HOR and Senate, it is sent to
the President for approval or veto. This is known as
enrolled bill.
A bill becomes law when the President approve sit and
signs it. When the President vetoes it, both houses may
override the veto by 2/3 vote of all the members of each
house. If measure is met, the bill is converted into law over
the President’s objections and the President does not act
upon the measure within 30 days after it shall have been
presented to him.
c.
5.
Creditor is a corporation while the dev=btot is a
stockholder – it has the effect of a payment of
dividend
d. Creditor is a stockholder while debtor is the
corporation – amount condoned is considered as an
additional investment
Recovery of bad debt previously deducted (application of
the tax benefit rule)
a. Taxable – if deduction of bad debt has reduced the tax
liability of taxpayer
b. Not taxable – if there was no reduction in the tax
liability of the taxpayer
DIVIDEND INCOME
Dividends issued
by
Domestic
corporation
P A R T II
INCOME – all wealth which flows into the taxpayer other than a mere
return of capital
For tax purposes, INCOME is defined as the amount of money
coming to a person or corporation within a specified time.
TAXABLE INCOME – pertinent items of gross income specified in
the Code, less deductions, it is the amount of income that is taxed
INCOME TAX – tax on all yearly profits arising from property,
professions, trades or offices or as a tax on a person’s income,
emoluments, profits etc. It is a tax base on income, gross or net
GROSS INCOME –all income derived from whatever sources,
income reduced by exclusions, income from taxable sources
SPECIAL RULES ON GROSS INCOME
1. Compensation for personal services
a. Paid in cash – actual amount is taxable
b. Paid in kind – compensation income is the fair market
value of the property received
c. Tips and gratuities – taxable
2. Compensation paid in promissory note – promissory notes
received in payment of services constitute income to the
extent of their fair market value at the time of receipt. If the
note is subjected to a discounting of notes, the FMV is the
fair discounted value.
3. Transportation, representation and other allowances
received
a. General rule: Taxable as compensation income
b. Exception: If they are
i. Ordinary and necessary expenses of the
employer
ii. Paid or incurred in the pursuit of trade,
business or profession
iii. The employee is required to account/liquidate
c. The excess of advance over the actual expenses
incurred – taxable income if such amount is not
returned to the employer
d. Vacation and sick leave allowances – taxable except
monetized value of unutilized vacation leave credits
not exceeding 10 days.
4. Condonation of debt
a. Debtor rendered services to the creditor – taxable
income to the debtor
b. No services rendered – taxable gift to the creditor as
gift given to the debtor
Dividends
received by
Income Tax
Treatment
Domestic
NOT TAXABLE
Resident foreign
NOT TAXABLE
Nonresident
foreign
Domestic
GR: 30% WHT
Exception: 15%
if there is tax
sparing credit
30% income tax
Foreign
Domestic
NOT TAXABLE
30% income tax
Foreign
NOT TAXABLE
Resident foreign
Nonresident
foreign
RECEIPTS OF DIVIDENDS
Dividends – any distribution made by a corporation to its
shareholders out of its profits and payable to its shareholder, money
or property.
FORMS OF DIVIDENDS
a. Cash dividend – paid in cash
b. Stock dividend – distribution of a corporation to its
shareholders of the corporation’s own stock
c. Property dividend – paid in shares of stock of another
corporation or other property of the corporation
REFUND OF TAX – taxable if the tax