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Study Guide in TAXATION (BAC 103)
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STUDY GUIDE FOR MODULE NO. ___
Chapter 1: BASIC PRINCIPLES OF TAXATION
MODULE OVERVIEW
Most people receive their initial exposure to the Philippine income tax system when first faced with the
responsibility of filing their own tax returns. As a result, tax work is sometimes viewed as a robotized process of
filing out government forms-not a very challenging activity.
Actually, the perception of tax work as a routine clerical process is a grossly distorted view of the tax
profession. Historically, most professional-level work has concerned conceptual issues. In today's society, that
emphasis is greater than ever with computer systems handling an ever-increasing share of the mechanical
chores of tax practice. This allows tax professionals and business managers to devote an even greater share
of their time to substantive matters.
In approaching the study of taxation, you should try to keep three basic points in mind:
1. Do not get lost in the detail of tax rules. It is that ability to apply the rules of tax law to real-life situations
that is important-not just having the talent to recite such rule by rote. In studying any area of tax law, you should
be alert for possible decision making implications.
2. Keep in mind that tax rules are a matter of law. Hence, only legal authority (e.g., a statute, a regulation,
a court case) can ever be a tax authority. If the "correct application" of law to a given set of facts results in a
solution at odds with some accounting, economic, social, or moral theory, it is still the law that controls. As a
practical matter, most tax disputes arise over differences in opinion concerning what constitutes the "correct
application" of tax law to specific situations.
3. Give close attention to the use of language, particularly the wording of tax authorities. Verbal
distinctions are often critical. Terms having similar meanings in everyday speech may have been defined
differently in tax law.
MODULE LEARNING OBJECTIVES
At the end of the chapter, the students can:
1. Define taxation.
2. Describe the nature, basis and objectives of taxation.
3. Differentiate the three inherent powers of the State,
4. Explain the principles of a sound taxation system.
5. Identify and explain constitutional and inherent limitations.
6. Describe various sources of taxation laws.
7. Name and describe the situs of taxation and its application.
8. Define tax and describe its essential characteristics.
9. Identify and distinguish classification of taxes.
10. Have a fair knowledge of the sources of tax authority and the sources of tax laws.
11. Describe the powers of the Commissioner of Internal Revenue.
12. Distinguish between income and capital.
LEARNING CONTENT 1.1– Definition, Nature and Basis of 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. Taxation, as a power of the State, is inherent in sovereignty.
Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need
(Commissioner vs. Pineda, 21 SCRA 105). A government cannot continue to exist and operate without financial
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means. This inherent power gives the government the right to tax citizens and properties within its jurisdiction.
Taxation is an indispensable and inevitable price for civilized society; without taxes, the government would be
paralyzed (Commissioner vs. Algue, Inc., L-28896, Feb. 17, 1988, 158 SCRA 9).
Objectives of Taxation
Taxation is much more than just a means of raising revenue for the government. It is also one of the major
means by which the national government attempts to achieve various economic and social objectives. These
objectives include shifting wealth from the rich to the poor, maintaining price stability, stimulating economic
growth, and encouraging full employment.
In its efforts to achieve these objectives, Congress tends to use tax provisions in two different ways. First, some
tax rules are enacted for the purpose of mitigating certain undesirable economic and social conditions already
existing. For instance, low-income individuals often pay little or no national income taxes because of the
elaborate system of exclusions, deductions, and credits of current law. Second, other tax rules provide
incentives for certain desirable activities. For instance, business can claim deductions for depreciation of
productive assets much faster than the assets actually wear out. This provides incentive for businesses to invest
in these assets, leading to increased employment of low- and middle-income workers.
State Powers
1. Taxation. The power of the state by which the sovereign raises revenue to defray the necessary expenses
of the government.
2. Eminent Domain. The power of the state to take private property for public use upon payment of just
compensation.
3. Police Power. The power of the state to enact laws to promote public health, public morals, public safety and
the general welfare of the people.
Aspects of Taxation
1. Levying of the tax. The imposition of tax requires legislative intervention Philippines, it is Congress that levies
taxes; and
2. Collection of the tax levied. This is essentially an administrative function.
Basic Principles of a Sound Tax System
1. Fiscal adequacy. Sources of revenue are sufficient to meet government expenditures;
2. Equality or theoretical justice. The tax imposed must be proportionate to taxpayers’ ability to pay; and
3. Administrative feasibility. The law must be capable of convenient, just and effective administration.
Limitations on the Power of Taxation
The power of taxation is, however, subject to constitutional and inherent limitations. Constitutional limitations
are those provided for in the constitution or implied from its provisions while inherent limitations are restrictions
to the power to tax attached to its nature. The following are the inherent limitations:
1. Purpose. Taxes may be levied only for public purpose;
2. Territoriality. The State may tax persons and properties under its jurisdiction;
3. International comity. The property of a foreign State may not be taxed by another;
4. Exemption. Governmental agencies performing governmental functions are exempt from taxation.
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5. Non-delegation. The power to tax being legislative in nature may not be delegated.
Situs of Taxation
The situs of taxation is the place of taxation. The rule is that the State may rightfully levy and collect
the tax where the subject being taxed has a situs under its jurisdiction. The situs of taxation is
determined by a number of factors:
1. Subject matter-or what is being taxed. He may be a person or it may be a property, an act or
activity
2. Nature of tax-or which tax to impose. It may be an income tax, an import duty or a real property
tax
3. Citizenship of the taxpayer; and
4. Residence of the taxpayer.
The following situs of taxation apply
1. Persons-Residence of the taxpayer.
2. Real property or tangible personal property - Location of the property
3. Intangible personal property - As a rule, situs is the domicile of the owner has acquired a situs elsewhere.
4. Income Taxpayer's residence or citizenship, or place where the income earned.
5. Business, occupation and transaction - Place where business is being operated. Occupation being practiced
and transaction completed.
6. Gratuitous transfer of property - Taxpayer's residence or citizenship, or location of the property.
Taxes
Taxes are enforced proportional contributions from persons and property levied by the lawmaking
body of the State by virtue of its sovereignty for the support of the government and all public needs.
Tax, in a general sense, is any contribution imposed by the government upon individuals, for the
use and service of the state, whether under the name of toll, tribute, tallage, gabel, impost, duty,
custom, excise, subsidy, aid, supply, or other name. Tax, in its essential characteristics, is not a
debt (Block's Law Dictionary).
Essential Characteristics of a Tax
1. It is an enforced contribution
2. It is levied by the lawmaking body,
3. It is proportionate in character,
4. It is generally payable in money,
5. It is imposed for the purpose of raising revenues; and
6. It is to be used for public purpose.
Classification of Taxes
1. As to subject matter or object
a. Personal, poll or capitation - Tax of a fixed amount imposed on individuals, whether citizens or not, residing
within a specified territory without regard to their property or the occupation in which they may be engaged.
Example: community tax.
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b. Property Tax imposed on property, whether real or personal, in proportion either to its value or in accordance
with some other reasonable method of apportionment. Example: real estate tax.
c. Excise - Tax imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an
occupation. Examples: estate tax, donor's tax, income tax, value-added tax.
2. As to who bears the burden
a. Direct-Tax demanded from persons who are intended or bound by law to pay the tax. Examples: community
tax, income tax, estate tax, donor's tax.
b. Indirect Tax which the taxpayer can shift to another. Examples; customs duties, value-added tax, some
percentage taxes.
3. As to determination of amount
a. Specific-Tax imposed based on a physical unit of measurement, as by head or number, weight, or length or
volume. Examples: tax on distilled spirits, fermented liquors, cigars, wines, fireworks, etc.
b. Ad valorem - Tax of a fixed proportion of the value of property; needs an independent appraiser to détermine
its value. Examples: real estate tax, certain customs duties, excise taxes on cigarettes, gasoline and others.
Excise taxes on certain specific goods imposed under the National Internal Revenue Code are either specific
or ad valorem taxes.
4. As to purpose
a. General, fiscal or revenue - Tax with no particular purpose or object for which the revenue is raised, but is
simply raised for whatever need may arise.
Examples: income tax, value-added tax.
b. Special or regulatory-Tax imposed for a special purpose regardless of whether revenue is raised or not, and
is intended to achieve some social or economic end.
Example: protective tariffs or customs duties on certain imported goods to protect local industries against foreign
competition.
5. As to authority imposing the tax or scope
a. National-Tax imposed by the national government.
Examples: internal revenue taxes, tariff and customs duties.
b. Municipal or local - Tax imposed by municipal governments for specific needs. Examples: real estate taxes,
municipal licenses.
6. As to graduation or rate
a. Proportional - Tax based on a fixed percentage of the amount of property income or other basis to be taxed.
Examples: percentage taxes, real estate taxes.
b. Progressive or graduated Tax rate increases as the tax base increases. Examples: income tax, estate tax,
donor's tax. c. Regressive - Tax rate decreases as the tax base increases. Example: value-added tax.
Tax Distinguished from Other Fees
1. From toll. Toll is a sum of money for the use of something, generally applied to the consideration which is
paid for the use of a road, bridge or the like, of a public nature. A toll is a demand of proprietorship, is paid for
the use of another's property and may be imposed by the government or private individuals or entities; while
tax is a demand of sovereignty, is paid for the support of the government and may be imposed only by the State.
2. From penalty. Penalty is any sanction imposed as a punishment for violation of law or acts deemed injurious.
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Violation of tax laws may give rise to imposition of penalty.
A penalty is designed to regulate conduct and may be imposed by the government or private individuals or
entities. Tax, on the other hand, is primarily aimed at raising revenue and may be imposed only by the
government.
3. From special assessment. Special assessment is an enforced proportional contribution from owners of lands
for special benefits resulting from public improvements.
Special assessment is levied only on land, is not a personal liability of the person assessed, is based wholly on
benefits and is exceptional both as to time and place. Tax is levied on persons, property, or exercise of privilege,
which may be made a personal liability of the person assessed, is based on necessity and is of general
application.
4. From permit or license fee. Permit or license fee is a charge imposed under the police power for purposes of
regulation.
License fee is imposed for regulation and involves the exercise of police power while tax is levied for revenue
and involves the exercise of the taxing power. Failure to pay a license fee makes an act or a business illegal
while failure to pay a tax does not necessarily make an act or a business illegal
5. From debt. A debt is generally based on contract, is assignable and may be paid in kind while a tax is based
on law, cannot generally be assigned and is generally payable in money. A person cannot be imprisoned for
non-payment of debt while he can be for non-payment of tax (except poll tax).
6. From revenue. Revenue is broader than tax since it refers to all funds or income
derived by the government taxes included. Other sources of revenues are
government services, income from public enterprises and foreign loans.
7. From customs duties. Customs duties are taxes imposed on goods exported from or imported to a country.
Customs duties are actually taxes but the latter is broader in scope.
TAX LAWS
Sources of Tax Laws
1. Constitution;
2. Statutes and Presidential Decrees;
3. Revenue Regulations by the Department of Finance;
4. Rulings issued by the Commissioner of Internal Revenue and Opinions by the Secretary of Justice;
5. Decisions of the Supreme Court and the Court of Tax Appeals: The "rational basis test" is applied to gauge
the constitutionality of an assailed law in the face of an equal protection' challenge. It has been held that "in
areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor
infringes constitutional rights must be upheld again equal protection challenge if there is any reasonably
conceivable state of facts that could provide a rational basis for the classification." Under this test, it is sufficient
that the legislative classification is rationally related to achieving some legitimate State interest (British American
Tobacco vs. Jose Isidro Camacho, et al, G.R. 163583, Apr. 15, 2009).
6. Provincial, city, municipal, and barangay ordinances subject to limitations set forth in the Local Government
Code; and
7. Treaties or international agreements the purpose of which is to avoid or minimize double taxation.
Philippine Tax Laws and Taxes
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1. National Internal Revenue Code of 1997 (P.D. 1158, as amended);
a. income taxes (individual and corporate);
b. estate and donor's taxes;
c. value-added tax;
d. other percentage taxes;
e. excise tax; and
f. documentary stamp tax.
2. Tariff and Customs Code of 1978 (P.D. 1464, as amended);
a. import duties; and
b. export duties.
3. Local Government Code of 1991 (R.A. 7160);
a. real property tax;
b. business taxes, fees and charges; c. professional tax;
d. community tax; and
e. tax on banks and other financial institutions.
4. Special Laws
a. Motor Vehicle Law (R.A. 4136)-motor vehicle fees;
b. Private Motor Vehicle Tax Law (P.D. 1958)-private motor vehicle tax;
c. Philippine Immigration Act of 1940 (C.A. 613, as amended) - immigration tax; and
d. Travel Tax Law (PD 1183)
LEARNING ACTIVITY Section 1.1 – Definition, Nature and Basis of Taxation
Reflective Thinking: Answer the following questions.
1. Define taxation.
2. Describe the nature, basis and objectives of taxation.
3. Differentiate the three inherent powers of the State,
4. Explain the principles of a sound taxation system.
5. Identify and explain constitutional and inherent limitations.
6. Describe various sources of taxation laws.
7. Name and describe the situs of taxation and its application.
8. Define tax and describe its essential characteristics.
9. Identify and distinguish classification of taxes.
LEARNING CONTENT Section 1.2 – Income and Income Taxes
INCOME AND INCOME TAXES
Income Defined and Distinguished from Capital
Income, in its broad sense, means all wealth, which flows into the taxpayer other than a mere return of capital.
It is the return in money from one's business, labor, or capital invested, e.g., gains, profits, salary and wages.
The words 'income from any source whatever disclose a legislative policy to include all income not expressly
exempted from the class of taxable income under our laws (Commissioner vs. BOAC, L-65773, Apr. 30, 1987,
citing Madrigal vs. Rafferty, 38 Phil. 14).
Income is also defined as the amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash
or its equivalent. Income may also be thought of as a flow of the fruits of one's labor.
Capital is a fund or property existing at one distinct point of time. Income, on the other hand, denotes a flow of
wealth during a definite period of time. While capital is wealth, income is the service of wealth. In the Madrigal
case, the Supreme Court made an essential distinction between capital and income:".capital is a fund, while
income is a flow; capital is wealth, while income is the service of wealth; capital is a "tree" and income is the
"fruit" "
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Income Tax Defined, Base and Nature
Income tax is a tax on all yearly profits arising from property, profession, trade or business, or is a tax on a
person's income, emoluments, profits and the like.
Income tax is generally regarded as an excise (privilege) tax. It is not levied upon persons, property, funds, or
profits as such but upon the right of a person to receive income or profits. Income tax is based on income, either
gross or net, realized in one taxable year.
General Procedures in Determining Income Tax
The following page is a generalized overview of the computational procedure by which the national income tax
is determined. Being familiar with the basic steps of the tax determination process should help you maintain
perspective when studying subsequent chapters of this text.
Step 1 is to identity the taxpaying party or "entity" to which the tax computation formula applies. Some legal
entities are taxed; others are not. Taxpaying entities include individuals, most corporations, private partnerships
and estates. Unincorporated businesses such as proprietorships and general professional partnerships (GPPs)
are not taxed; rather, their income is taxed directly to the owners of such businesses. Citizenship and residency
are also considered. Other entities such as trusts are treated in yet another fashion, with their incomes being
taxed to the trusts if retained, but taxed to the trust's beneficiaries if distributed. Pertinent chapters are Chapters
2 'Individuals, 3 & 4 Corporations,' 5 'Estates and Trusts' and 6 'Partnerships and Partners."
Step 2 is to determine the taxpayer's "gross income." Appreciation in market value is not generally regarded as
income for tax purposes unless realized through a sale or exchange. Even if income is realized, the Code
provides for several specific types of Income to be "excluded," that is, not counted for purposes of measuring
gross income. The source of income (whether within the Philippines or without) must also be known. Tax
concepts that underlie the determination of gross income are covered in Chapter 7 'Gross Income."
Step 3 is to determine the expenses and certain other items that can be "deducted" in computing the taxpayer's
"taxable income." General criteria for deductible business expenses are set forth in Chapter 10 Allowable
Deductions, while several specific personal deductions are discussed in Chapter 2 'Individuals."
Step 4 is to apply the appropriate "tax rate" to the taxpayer's taxable income to find the "tax due." For any
particular taxpayer, the applicable rate depends on the type of taxpaying entity, level of income, and in the case
of an individual, his or her citizenship, residency and certain other aspects. The rules for determining appropriate
tax rates for each type of taxpayer are covered in the chapters cited in Step 1.
Step 5 is to subtract any applicable "tax credits/payments" from the taxpayer's tax due In finding the "tax
payable." Unlike deductions that reduce taxable income, tax credits/payments are a direct offset to the tax itself.
These credits are specified for various situations in numerous sections of the Code. Several credits available to
taxpayers are covered in Chapters 11 'Withholding Taxes' and 12 'Foreign Tax Credit.'
Step 6 is to increase the tax by "penalties and interests" to obtain the "total amount payable." Details of these
are discussed in Chapter 13 Penalties. In summary, most of the contents of this book can be viewed as an
amplification of these procedures.
LEARNING ACTIVITY Section 1. 2 – Income and Income Taxes
Analytical Skills: Answer the following questions.
1. Distinguish between income and capital.
2. Discuss the basic steps of the tax determination process.
EXERCISES : Answer the following
True or False
1. Regulatory tax is intended to achieve some social or economic end.
2. Special assessment is levied only on land and is a personal liability of the person assessed
3. Not all taxes imposed and collected by the Bureau of Internal Revenue are internal revenue taxes.
4. Even in the absence of any constitutional provision, taxation power falls under Congress as part of the general
power of lawmaking
5. Toll is a demand of proprietorship, is paid for the use of another's property and may be imposed only by the
government.
6. The Bureau of Internal Revenue functions under the supervision and control of the Bureau of Treasury.
7. There are two kinds of double taxation-evasion and avoidance
8. Penalty is designed to regulate conduct and may be imposed by the government, private individuals or
entities.
9. Progressive tax is not imposed in the Philippines.
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10. Subject to review by the Secretary of Finance, the BIR Commissioner has the exclusive power to interpret
provisions of the NIRC and other tax laws.
11. Income, unless otherwise specified, means cash or its equivalent.
12. The Constitution is a source of tax laws.
13. Income tax is a tax on all yearly profits arising from property, profession, trade or business.
14. The levying of tax is essentially an administrative function.
15. Donor's tax is a direct tax.
16. Excise taxes on specific goods imposed under the National Internal Revenue Code are specific
17. Tax evasion is known as tax minimization while tax avoidance is known as tax dodging
18. Import and export duties are provided for in the Tariff and Customs Code of 1978
19. In a gratuitous transfer of property, situs is the taxpayer's residence, citizenship or of the property.
20. Indirect double taxation is unconstitutional.
SUMMARY
Taxation is the process or means by which the sovereign, through its lawmaking body, raises income to
defray the necessary expenses of the government. Taxation, as a power of the State, is inherent in sovereignty.
The situs of taxation is the place of taxation. The rule is that the State may rightfully levy and collect the
tax where the subject being taxed has a situs under its jurisdiction.
Essential Characteristics of a Tax are : 1. It is an enforced contribution , 2. It is levied by the lawmaking
body, 3. It is proportionate in character,4. It is generally payable in money,5. It is imposed for the purpose of
raising revenues; and 6. It is to be used for public purpose.
Income is also defined as the amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash
or its equivalent. Income may also be thought of as a flow of the fruits of one's labor.
Capital is a fund or property existing at one distinct point of time. Income, on the other hand, denotes a
flow of wealth during a definite period of time. While capital is wealth, income is the service of wealth. In the
Madrigal case, the Supreme Court made an essential distinction between capital and income:".capital is a fund,
while income is a flow; capital is wealth, while income is the service of wealth; capital is a "tree" and income is
the "fruit".
REFERENCES
Book/s:
Ballada, Ballada Income Taxation Made Easy, 2022 Issue. ( 19th Edition ) DomDane Publishers (ISBN 978971-0165-20-9)
E-sources:
https://youtu.be/tgpZ7bf3QvQ
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