CHAPTER 1: Introduction to Taxation
The Inherent Powers of the State
1. Police Power. The general power of the
State to enact laws to protect the well-being
of the people. Regulate your right to liberty
and property. “Salus Populi Est Suprema
Lex.”
2. Eminent Domain. The power of the
State to take private property for public use
after paying just compensation.
3. Taxation Power. The power of the State
to enforce proportional contribution from its
subjects to sustain itself.
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 to the State.
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
government even without Constitutional
grant. However, The Constitution may
impose conditions or limits for their
exercise.
6. They are 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
government units may be limited by the
national legislature.
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
• Every government provides a vast array of
public services including defense, public
order and safety, health, education, and
social protection, among others.
• A system of government is indispensable
to every society. Without it, the people will
not relish the benefits of a civilized and
orderly society.
• The government 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,
and the people provide funds that
finance the government.”
Theories of Cost Allocation
• Taxation is a mode of allocating
government
costs
or
burden;
the
government regards the following general
considerations in the exercise of its power:
1. Benefit received theory. The benefit
received theory presupposes that the more
benefit one receives from the government,
the more taxes he should pay.
2. Ability to pay theory. The ability to pay
theory presupposes that taxation should
also consider the taxpayer’s ability to pay.
Those who have more should be taxed
more even if they benefit less from the
government (Vertical & Horizontal Equity).
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.
Principles of a Sound Tax System:
• Fiscal Adequacy. The sources of the
government funds must be sufficient to
cover government costs. The government
must not incur a deficit.
• Theoretical Justice or Equity. Taxation
should consider the taxpayer’s ability to pay.
Exercise of taxation should not be
oppressive, unjust, or confiscatory.
• Administrative feasibility. The tax laws
should be capable of efficient and effective
administration to encourage compliance.
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.
The Limitations of the Taxation Power
A. Inherent Limitations
B. Constitutional Limitations
A. Inherent Limitations:
1. Non-delegation of the taxing power.
The 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.
2. Exemption of the government from
taxation. The government does not tax
itself as this will not raise additional funds.
3. International comity. In the UN
convention, countries of the world agreed to
one fundamental concept of co-equal
sovereignty wherein all nations are deemed
equal with one another. Principle that each
country observes international comity or
mutual courtesy or reciprocity between
them.
3.1 Governments do not tax the
income
and
properties
of
other
governments.
3.2 Governments give primacy to
their treaty obligations over their own
domestic tax laws.
4. Territoriality of taxation. Public services
are normally provided within the boundaries
of the state. Thus, the government can only
demand tax obligations upon its subjects or
residences within its territorial jurisdiction.
5. Public Purpose. Tax is intended for the
common good. Taxation must be exercised
absolutely for public purposes. It cannot be
exercised further any private interest.
B. Constitutional Limitations:
1. Due Process of Law. No one should be
deprived of his life, liberty, or property
without due process of law. Tax laws should
neither be harsh nor oppressive.
2. Equal Protection of the law. No person
shall be denied the equal protection of the
law. Taxpayers should be treated equally
both in terms of rights conferred and
obligations imposed.
3. Uniformity rule in taxation. The rule of
taxation shall be uniform and equitable.
Taxpayers under dissimilar circumstances
should not be taxed the same.
4. Progressive system of taxation. Tax
rates increase as the tax base increases.
5. Non-imprisonment for non-payment of
debt or poll tax. No one shall be
imprisoned because of his poverty, and no
one shall be imprisoned for mere inability to
pay debt. Applies only to Basic Community
Tax.
6. Non-impairment of obligation and
contract. State should not be set
aside its obligations from contracts by the
exercise of its taxation power.
7. Free worship rule. The properties and
revenues of religious institutions
such as tithes or offerings are not subject to
tax.
8. Exemption of religious, charitable or
educational
entities,
non-profit
cemeteries, churches and mosques,
lands, buildings, and improvements from
property taxes.
9. Non-appropriation of public funds or
property for the benefit of any
church,sect, or system of religion.
10. Exemption from taxes of the
revenues and assets of non-profit, nonstock educational institutions including
grants, endowments, donations, or
contribution for educational purposes.
11. Concurrence of a majority of all
members of Congress for the passage of
a law granting tax exemption. The
Constitution requires the vote of the majority
of all members of Congress in the grant of
tax exemption.
12. Non-diversification of tax collections.
Tax collections should be used only for
public purpose. It should never be
diversified for private purpose.
13. Non-delegation of the power of
taxation. The principle of checks and
balance requires taxation power as part of
lawmaking to be vested exclusively in
Congress.
14. Non-impairment of the jurisdiction of
the Supreme Court to review tax cases.
Notwithstanding the existence of Court and
Tax Appeals, which is a special court, all
cases involving taxes can be raised to and
be finally decided by the Supreme Court of
the Philippines.
15. Appropriations, revenue, or tariff bills
shall originate exclusively in the House
of Representatives, but the Senate may
propose or concur with amendments.
Laws that add income to the national
treasury and those that allow spending
therein must originate from the House of
Representatives.
16. Each local government unit shall
exercise the power to create its own
sources of revenue and shall have a just
share in the national taxes. This is a
constitutional recognition of the local
autonomy of local governments and an
express delegation of the taxing power.
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 the impact of
taxation. Congress is composed of two
bodies:
Senate
and
House
of
Representatives.
• Matters of legislative discretion in the
exercise of taxation.
1.1 Determining the object of taxation
1.2 Setting the tax rate or amount to be
collected.
1.3 Determining the purpose for the levy
which must be public use.
1.4 Kind of tax to be imposed
1.5 Apportionment of the tax between the
national and local government.
1.6 Situs of Taxation.
1.7 Method of Collection.
4. Property tax on situs: Properties are
taxable in their location.
5. Personal tax situs: Persons are taxable
in their place of residence.
2. 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
administrative function.
Types of Double Taxation
1. Direct double taxation. This occurs
when all the elements of double taxation
exist for both impositions.
Illustration:
An income tax of 10% on monthly sales and
2% income tax on the annual sales (total
monthly sales)
2. Indirect double taxation. This occurs
when at least one of the secondary
elements of double taxation is not common
for both impositions.
Illustration:
The national government levies business
tax on sales or gross receipts of business
while the local government
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.
Situs Rules
1. Business Tax: Businesses are subject to
tax in the place where the business is
conducted.
2. Income tax situs on services: Service
fees are subject to tax where they are
rendered.
3. Income tax situs on sale of goods: The
gain on sale is subject to tax in the place of
sale.
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.
Escapes from taxation are the means
available to the taxpayer to limit or avoid the
impact of taxation.
Categories of Escapes fromTaxation:
A. Those that result 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.
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 tax. Tax
exemptions may be granted by the
Constitution, law or contract.
B.Those do not result in loss of government
revenue.
1. Shifting – this is the process of
transferring tax burden to other taxpayers.
Forms of shifting
a. Forward shifting – Shifting of tax
which follows the normal flow of
distribution.
b. Backward shifting – This is the
reverse of forward shifting.
c. Onward shifting – This refers to
any tax shifting in the distribution
channel that exhibits forward and
backward shifting.
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 wastes or losses for the
taxpayer to form savings to compensate for
the tax imposition increase in taxes.
Tax Amnesty. 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. An
absolute forgiveness or waiver by the
government.
Tax Condonation. Is forgiveness of the tax
obligation of a certain taxpayer under
certain justifiable grounds. This is also
referred to
as tax remission.
CHAPTER 2: Taxes, Tax Laws, and Tax
Administrations
Taxation Law refers to any law that arises
from the exercise of the taxation power of
the state.
Types of Taxation Laws.
1. Tax Laws – These are laws that provide
for the assessment and collection of taxes.
Examples:
a.The National Internal Revenue Code
(NIRC)
b.The Tariff and Customs Code (R.A.1937
amended P.D. 1464)
c.The Local Tax Code (Book II- Local
Government Code of 1991).
d.The Real Property Tax Code (P.D.464)
2. Tax exemption laws – These are laws
that grant certain immunity from taxation.
Examples:
a.The MinimumWage Law (R.A. No.
602,R.A. 4180)
B. The Omnibus Investment Code of 1987
C. Barangay Micro-Business Enterprise
(BMBE) Law
d. Cooperative Development Act (R.A.
9520)
Sources of Taxation Laws
1. Constitution
2. Statues and Presidential Decrees
3. Judicial Decisions or Case Laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax treaties and conventions with foreign
countries
8. Revenue Regulations
Types of Administrative Issuances
1. Revenue Regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue bulletins
6. BIR rulings
3. Excise of privilege tax – A tax imposed
upon performance of an enjoyment of a
privilege or engagement in an occupation.
Nature of Philippine Tax Laws
• Philippine tax laws are civil and not
political in nature.
• Our internal revenue laws are not penal in
nature because they do not define crime.
Their penalty provisions are merely
intended to secure taxpayers’ compliance.
C. As to incidence
1. Direct Tax – When both the impact and
incidence of taxation rest upon the same
taxpayer.
2. Indirect Tax – When the tax is paid by
any person other than the one who is
intended to pay the same.
Tax is an enforced proportional
contribution levied by the lawmaking
body of the State to raise revenue for
public purpose.
D. As to amount
1. Specific Tax – a tax of a fixed amount
imposed on a per unit basis such as kilo,
liter or meter, etc.
2. Ad Valorem – a tax of fixed proportion
imposed upon the value of the tax object.
Ex. Manner of Computation in Excise Tax
● Specific Tax: No. of units/Other
measurements x Specific Tax Rate
● Ad Valorem Tax: No. of units/Other
measurements x Selling Price x Ad
Valorem Tax Rate
Elements of a Valid Tax
1. Tax must be levied by the taxing power
having jurisdiction over the object of
taxation.
2. Tax must not violate constitutional and
inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.
Classification of Taxes
A. As to purpose
1. Fiscal or revenue tax – a tax imposed
for general purpose.
2. Regulatory – a tax is imposed to
regulate business, conduct, acts and
transactions.
3. Sumptuary – a tax levied to achieve
some social or economic objectives
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.
E. As to rate
1. Proportional tax – This is a flat or fixed
rate tax.
2. Progressive or graduated tax – This tax
which imposes increasing rates as the tax
base increases.
3. Regressive tax – This tax is imposing
decreasing tax rates as the tax base
increases.
F. As to imposing authority
1. National tax – tax imposed by the
national government. e.g., Income Tax,
Donor’s tax, Value Added Tax, OPT, Excise
Tax and Documentary Stamp Tax
2. Local tax – tax imposed by the municipal
or local government. e.g., Real property tax,
Professional tax, Business Taxes, fees, and
charges, community tax.
Tax System – refers to the methods or
schemes of imposing , assessing, and
collecting taxes.
• Includes all the tax laws, and regulations,
the means of their enforcement, and the
government
offices,
bureaus
and
withholding agents which are part of the
machineries of the government in tax
collection.
Types of Tax System:
1. Progressive system – employed in the
taxation of Income of Individuals, and
transfers of properties by individuals (Direct
taxes).
2. Proportional system – employed in
taxation of corporate income and
business (Indirect taxes).
3. Regressive system – not employed in
the Philippines.
Tax Collection System
A. Withholding system on Income Tax
The payor of the income withholds or
deducts the tax on the income before
releasing the same to the payee and remits
the same to the government.
1. Creditable withholding tax
1.1
Withholding
tax
on
compensation
1.2 Expanded withholding tax
2. Final withholding tax - a system of tax
collection wherein payors are required to
deduct full tax on certain income payments.
B. Withholding system on business tax
● Value Added Tax
● PercentageTax
C. Voluntary compliance system
Under this collection system, the taxpayer
himself determines his income, reports the
same through income tax returns and pays
the tax to the government “self-assessment
method”.
D. Assessment and enforcement system
Under
this
collection
system,
the
government
identifies
non-compliant
taxpayers, assess their tax dues including
penalties, demands for taxpayer’s voluntary
compliance or enforces collections.
Tax Administration
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 (BIR) which is under the
supervision and administration of the
Department of Finance.
Chief Officials of the Bureau of Internal
Revenue:
1. One (1) Commissioner
2. Four (4) Deputy Commissioners, each to
be designated to the following:
a. Operations group
b. Legal Enforcement group
c. Information System group
d. Resource Management group
Other Agencies Tasked with Tax
Collections or Tax Incentives Related
Functions
1. Bureau of Customs – collection of tariffs
on imported articles and collection of VAT
on importation.
2. Board of Investments – Promotion of
investments in the Philippines.
3. Philippine Economic Zone Authority –
Promote investments in export-oriented
manufacturing industries in the Philippines.
4. Local Government Tax Collecting Unit –
Provinces,
municipalities,
cities
and
barangays also impose and collect various
taxes to rationalize their fiscal autonomy.
CHAPTER 3: Introduction to Regular
Income Tax
The Concept of Income
• Income is regarded as the best measure of
taxpayers’ ability to pay tax. It is an
excellent object of taxation in the allocation
of government costs.
• The tax concept of income is simply
referred to as “gross income” under NIRC.
• Gross Income or Inclusion in Gross
Income. Is an item of income.
• Gross Income simply means taxable
income.
• Gross Income. Inflow of wealth to the
taxpayer from whatever source legal or
illegal, that increases net worth.
• Taxable Income. Refers to certain items of
gross income less deductions and personal
exemptions allowable by law.
Elements of Gross Income
1. It is a return on capital that increases net
worth.
2. It is a realized benefit.
3. It is not exempted by law, contract, or
treaty.
Return on Capital. Capital means wealth or
property. Gross Income is a return on
wealth property that increases the
taxpayer’s net worth.
Realized Benefit.
• The “benefit” concept means any
advantage derived by the taxpayer.
• There is a benefit when there is an
increase in the net worth of the taxpayer.
• An increase in net worth occurs when one
receives income, donation or inheritance.
• The term realized means earned.
Types ofTransfers
1. Bilateral transfers or exchanges,such
as: (onerous transactions) a. Sale b. Barter
2. Unilateral transfers,such as: (gratuitous
transactions)
a. Succession – transfer of property
upon death.
b. Donation
3. Complex transactions. Partly gratuitous
and partly onerous.
The following income are exempted by
the Constitution, law contracts or
treaties from
taxation:
1. Income of qualified employee trust fund.
2. Revenue of non-profit, non-stock
educational institutions.
3. SSS, GSIS, Pag-ibig, or PhilHealth
benefits.
4. Salaries andWages of minimum wage
earners and qualified senior citizens.
5.
Regular
income
of
Barangay
Micro-business Enterprises (BMBEs)
6. Income foreign governments and foreign
government-owned
and
controlled
corporations.
7. Income of international missions and
organizations with income tax immunity.
Types of Income Taxpayers
A. Individuals
1. Citizen
1.1 Resident citizen
1.2 Non-resident citizen
2.Alien
2.1 Resident alien
2.2 Non-resident alien
2.2.1 engaged in trade or
business
2.2.2 not engaged in trade or
business
3.Taxable estates and trusts
B. Corporations
1. Domestic corporation
2. Foreign corporation
a. Resident foreign corporation
b. Non-resident foreign corporation
Citizens. Under the Constitutions citizens
are:
a. Those who are citizens of the Philippines
at the time of adoption of the Constitution on
February 2, 1987.
b. Those whose fathers or mothers are
citizens of the Philippines.
c. Those born before January 17, 1973 of
Filipino mothers who elected Filipino
citizenship upon reaching the age of
majority.
d. Those who are naturalized in accordance
with the law.
Classifications of Citizens.
A. Resident citizen. A Filipino citizen
residing in the Philippines.
B. Non-resident citizen includes:
1. A citizen of the Philippines who
establishes to the satisfaction of the
Commissioner the fact of his physical
presence abroad with a definite intention to
reside therein;
2. A citizen of the Philippines who leaves
the Philippines during the taxable year to
reside abroad, either as immigrant or for an
employment on permanent basis;
3. A citizen of the Philippines who works
and derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the time
during taxable year.
4. Filipino citizen who stayed outside the
Philippines for 183 days or more during the
taxable year and has established a proof to
the BIR Commissioner of his definite
intention to reside
outside the Philippines on a permanent
basis as an immigrant or employee. (Sec. 2,
Rev. Reg. 9-99)
Alien
An alien who lives in the Philippines with no
definite intention as to his stay (floating
intention)
1. Resident Alien
● One who comes to the Philippines
for a definite purpose which in its
nature would require an extended
stay and to that end makes his home
temporarily in the Philippines;
● An alien who has acquired a
residence in the Philippines and
retains his status as such until he
abandons the same and actually
departs from the Philippines.
2. Non-resident Alien
● An alien inside the country for 180
days who comes to the Philippines
for a definite purpose which in its
nature
may
be
promptly
accomplished;
● One who may either be a:
○ (a) NRA engaged in a trade
or business (NRAETB) in the
Philippines or
○ (b) NRA not engaged in trade
or business (NRANETB) in
the Philippines. A NRA who
shall come to the Philippines
and stay for an aggregate of
more than 180 days shall be
deemed a NRAETB
Taxable Estates and Trusts
1. Estate. Estate refers to the properties,
rights, and obligations of a deceased person
not extinguished by his death. Estates
under judicial settlement are treated as
individual taxpayers. The estate is taxable
on the income of the properties left by the
decedent.
2. Trust. A trust is an arrangement whereby
one-person (grantor or trustor) transfers
(i.e., donates) property to another person
(beneficiary), which will be held under the
management of a third party (trustee or
fiduciary).
Corporate Income Taxpayers
Corporation shall include partnerships, no
matter how created or organized, joint-stock
companies, joint accounts, association, or
insurance companies, except general
professional partnerships and a joint
venture or consortium formed for the
purpose
of
undertaking
construction
projects or engaging in petroleum, coal,
geothermal, and other operations pursuant
to an operating consortium agreement
under a service contract with the
government.
• Includes profit-oriented and non-profit
institutions such as charitable institutions,
cooperatives, government agencies and
instrumentalities, associations, leagues,
civic or religious and other organizations.
• Domestic Corporation is a corporation
that is organized in accordance with
Philippine Laws.
• Foreign Corporation is one organized
under a foreign law.
Types of Foreign Corporation
1. Resident foreign corporation (RFC) – a
foreign corporation which operates and
conduct business in the Philippines through
a permanent establishment (i.e., a branch)
2. Non-resident foreign corporation
(NIRC) – a foreign corporation which does
not operate or conduct business in the
Philippines.