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Chapter 1 Income Taxation- Reviewer for Beginners 2019 by
ENRICO B. TABAG, CPA MBA
Strategic management (Jose Rizal Memorial State University)
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INCOME TAXATION
CHAPTER 1
Fundamental Principles of Taxation
The Inherent Powers of the State

Inherent power means existing as a natural or basic part of every sovereign State,
without being conferred or granted by the people or the Constitution.
The 3 Inherent Powers of the State:
1. POWER TO TAX - The act of levying a tax. It's the process or means by which the
sovereign (independent State), through its law-making body (legislative branch), raises
income to defray the necessary expenses of the government. It is the power by which
the State raises revenue to defray the necessary expenses of the government.
2. POLICE POWER - it is the power of the state of promoting public welfare by restraining
and regulating the use of liberty and property. It may be exercised only by the
government. The property taken in the exercise of this power is destroyed because it is
noxious or intended for a noxious purpose.
3. EMINENT DOMAIN - it is the power to take private property for public purpose upon
payment of just compensation.
SIMILARITIES among Taxation, Eminent Domain and Police Power
a. They are inherent in the State.
b. They exist independently of the constitution although the conditions for their
exercise may be prescribed by the constitution.
c. Ways by which the State Interfere with private rights and property.
d. Legislative in nature and character.
e. Presuppose an equivalent compensation received, directly or indirectly, by the
persons affected.
Purposes of Taxation
1. Primary Purpose - To raise revenues/funds to defray the necessary expenses of the
government (also called Revenue or Fiscal Purpose).
2. Secondary Purpose:
a. Regulatory Purpose - Taxation is employed as a devise for regulation or control
(to implement the police power of the State for the promotion of the general
welfare) by means of which certain effects or conditions envisioned by the
government may be achieved.
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b. Compensatory Purposes
 Reduction of Social Inequality
 Economic Growth
 Protect local industries against unfair competition
Nature and Characteristics of Taxation
1.
2.
3.
4.
5.
6.
7.
8.
Inherent Power – may be exercised although not expressly granted by the constitution.
Essentially a legislative function only - the legislative can impose taxes.
Subject to inherent and constitutional limitations - not an absolute power.
For public purpose.
The strongest of all the inherent powers of the State.
Subject to international treaty or comity.
Generally payable in money.
Territorial in scope.
In the absence of inherent and constitutional limitations, the power to tax is
comprehensive, plenary, supreme and unlimited. It is so comprehensive that in the words
of Justice Marshall, the power to tax includes the power to destroy.
Taxes Defined
Are enforced proportional contributions from persons and property, levied by the
State by virtue of its sovereignty for the support of the government and for all its public
needs.
ESSENTIAL CHARACTERISTICS OF TAX
a.
b.
c.
d.
e.
f.
A tax is a forced charge, imposition or contribution.
It is a pecuniary burden payable in money.
It is imposed for public purpose.
It is imposed pursuant to a legislative authority.
It is levied within the territorial and legal jurisdiction of a state.
It is assessed in accordance with some reasonable rule of apportionment
Theory of Taxation
1. Necessity Theory - The existence of government is a necessity. The government cannot
continue to perform of serving and protecting its people without means to pay its
expenses. For this reason, the state has the right to compel all its citizens and property
within its limits to contribute.
2. Lifeblood Doctrine - Taxes are the lifeblood of the government without which can neither
exist nor endure.
MANIFESTATION OF THE LIFEBLOOD THEORY:

No Estoppel against the Government.
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



Collection of taxes cannot be enjoined (stopped) by injunction.
Taxes could not be the subject of compensation or set-off.
A valid tax may result in the destruction of the taxpayer's property.
Right to select objects (subjects) of taxation.
Basis of Taxation
The Benefits Protection Theory - The basis of taxation is the reciprocal duties of
"protection and support" between the state and its inhabitants. The state collects taxes from
the subjects of taxation in order that it may be able to perform the functions of government.
The citizens, on the other hand, pay taxes in order that they may be secured in the
enjoyment of the benefits of organized society. This theory spawned the Doctrine of
Symbiotic Relationship which means, taxes are what we pay for a civilized society.
DISTINCTIONS AMONG THE THREE (3) INHERENT POWERS OF THE STATE
Taxation
Police Power
NATURE
Power to enforce
contributions to raise
government funds.
Power to make and
implement laws for the
general welfare.
Power to take private
property for public use with
just compensation.
AUTHORITY
Government only.
Government only.
May be granted to public
service/utility companies.
PURPOSE
For the support of the
Government.
Promotion of general welfare
through regulation.
The taking of private property
for public use.
PERSONS
AFFECTED
Community or a class of
individuals.
Applies to all persons,
property and excises that
may be subject thereto.
Community or a class of
individuals.
Applies to all persons,
property and excises that
may be subject thereto.
On an individual as the
owner of personal property.
Only particular property is
comprehended.
TYPE OF
PROPERTY
Property is wholesome and is
devoted to public use or
purpose.
Property is noxious or
intended for a noxious
purpose and as such taken
and destroyed.
Property is wholesome and is
devoted to public use or
purpose.
EFFECT
Contribution becomes part of
public fund.
No transfer or title. There
may just be a restraint on the
injurious use of property.
There is a transfer of title to
property.
RIGHTS
AFFECTED
Property right.
Property right and liberty.
Property right.
SCOPE
Plenary, comprehensive,
supreme.
Broader in application.
General power to make and
implement law.
Merely a power to take
private property for public
use.
BENEFITS
RECEIVED
In form of protection and
benefits received from
government.
No direct and immediate
benefit but only such as may
arises from the maintenance
of a healthy economic
standard of society.
Market value of property
taken.
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Eminent Domain
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AMOUNT OF
IMPOSITION
No limit
Sufficient to cover cost of the
license and the necessary
expenses of police
surveillance and regulation.
No imposition. The owner is
paid equivalent to the fair
value of his property.
Similarities among the three Inherent Powers
1. They are inherent in the State.
2. Undertie and exist independently of the constitution although the conditions for their
exercise may be prescribed by the constitution.
3. Ways by which the State Interfere with private rights and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received, directly or indirectly, by the persons
affected.
Scope of the Taxing Power of the Legislative
The Supreme Court held that the power of taxation is the most absolute of all powers
of the government. It has the broadest scope of all the powers of the government because in
the absence of limitations, it is considered as comprehensive, unlimited, plenary, and
supreme (130 SCRA 654). The matters within the competence of the legislature include the
determination of the following:
1. The subject or object (person, property, or excises/privileges) to be taxed. Excises or
privileges to be taxed.
2. The purpose of the tax as long as it is a public purpose.
3. The amount or rate of the tax.
4. Kind of tax.
5. Apportionment of the tax (i.e., whether the tax shall be general or limited to a particular
locality or partly general and partly local)
6. Situs of taxation.
7. The manner or method of collection.
Stages/Aspects of Taxation
1. Levying or Imposition - This process involves the passage of tax laws or ordinances
through the legislature.
2. Assessment and Collection - This process involves the act of administration and
Implementation of tax laws by the executive through its administrative agencies such as
the Bureau of Internal Revenue or Bureau of Customs.
3. Payment of Tax - This process involves the act of compliance by the taxpayer in
contributing his share to pay the expenses of the government.
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Principles of Sound Tax System
1. Fiscal Adequacy - The sources of government revenue must be sufficient to meet
government expenditures and other public needs.
2. Administrative Feasibility - Tax laws must be capable of convenient, just and effective
administration- free from confusion and uncertainty.
3. Theoretical Justice - A good tax system must be based on the taxpayer's ability to pay.
This suggests that taxation must be progressive conformably with the constitutional
mandate that congress shall evolve a progressive system of taxation.
LIMITATIONS ON THE TAXING POWER
A. Inherent Limitations - inherent limitations proceed from the very nature of the taxing
power itself. The taxing power has very distinct and positive limitations some of which
inhere in its very nature and exist whether declared or not declared in the written
constitution.
1. Public purpose
Proceeds from tax must be used for:
a. Support of the government.
b. Some of the recognized objects of government.
c. To promote the welfare of the community (not individuals).
2. Situs of taxation or territoriality- the taxing power of a country is limited to person and
property within and subject to its jurisdiction.
PLACE OF TAXATION
a. The state where the subject to be taxed has a situs may rightfully levy and collect
the tax.
b. The situs is necessarily in the State which has jurisdiction or which exercises
dominion over the subject in question.
FACTORS TO CONSIDER IN DETERMINING SITUS OF TAXATION
a.
b.
c.
d.






Subject matter (person, property, or activity)
Nature of the tax
Citizenship
Residence of the taxpayer
APPLICATION OF SITUS OF TAXATION
SUBJECT MATTER
SITUS
Persons
Residence of the taxpayer
Real Property
Location
Tangible Personal Property
Location
Intangible Personal Property
Domicile of the owner
Income
Residence, citizenship, source of income
Business
Place of business
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
Gratuitous Transfer of Property
Residence or citizenship of the transferor or
location of property
3. International comity or treaty - a State cannot tax another State based on the
principle of Sovereign Equality among States. i.e. tax law passed imposing taxes on
foreign ambassadors is not a valid law.
4. Non-delegability of the Taxing power (Enactment of Tax Laws) - Power of taxation is
purely legislative, hence the power cannot be delegated either to the executive or
judicial departments. The limitation arises from the doctrine of separation of powers
among the three branches of the government.
EXCEPTIONS TO THE RULE AGAINST DELEGATION:
a. Delegation to the President, subject to some limitations and restrictions, to fix
within specified limits, tariff rates and tonnage or wharfage duties and other duties
and imposts.
b. Delegation to local governments the power to create its own sources of revenues
and to levy taxes, subject to such limitations as may be provided by law.
c. Delegation to administrative agencies certain aspects of the taxing process that
are not legislative such as:
 the power to fix value of property for purposes of taxation pursuant to fixed
rules
 the power to assess and collect taxes.
5. Exemption of the government
a. Agencies performing governmental functions are tax exempt unless expressly
taxed
b. Agencies performing proprietary functions are subject to tax unless expressly
exempted.
c. GOCCS performing proprietary functions are subject to tax, however the
following are granted exemptions:
 Government Service Insurance System (GSIS)
 Social Security System (SSS)
 Philippine Health Insurance Corporation (PHIC)
 Local Water Districts (RA 10026)
 Philippine Charity Sweepstakes Office (PCSO) - already taxable
beginning Jan. 1, 2018 under the TRAIN Law
B. Constitutional Limitations on the Taxing Power - the following provisions may be said
to be limitations prescribed in the Constitution on the taxing power of the government.
1. Observance of due process of law
2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of poll tax
6. Non-impairment of the obligations of contracts
7. Free-worship clause
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8. Exemption of charitable institutions, churches, parsonages, or convents appurtenant
thereto, mosques, and non-profit cemeteries, and all lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or
educational purposes.
9. Exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions including grants, endowments, donations. or contributions for
educational purposes.
10. Non-appropriation of public funds or property for the benefit of any church, sect or
system of religion, etc.
11. No money shall be paid out of the Treasury except in pursuance of an 1 appropriation
made by law.
12. Concurrence of a majority of ALL MEMBERS OF CONGRESS for the passage of a
law granting tax exemption.
13. Non-diversification of tax collections
14. The President shall have the power to veto any particular item(s) in an appropriation,
revenue or tariff, but the veto shall not affect the item(s) to which no objection has
been made.
15. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
16. Appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments.
17. 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.
NATIONAL TAXES vs. LOCAL TAXES
NATIONAL
Inherent Power
LOCAL
Delegated Power
NATURE
Legislative
in
nature
through enactment of tax
laws by the Congress and
the Senate.
Legislative
in
nature
through enactment of local
ordinances by the local
legislative branch.
PROCESS
1. Levying = Congress
2. Assessment/Collection
= BIR & BOC
1. Levying = Legislative
branch of the LGU
2. Assessment/Collection
= Treasurer

AUTHORITY


National Internal Revenue Taxes under the administration of the BIR:
a.
b.
c.
d.
e.
f.
Income Tax
Estate and donor's tax
Value-added tax
Other percentage taxes
Excise taxes
Documentary stamp taxes
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DOUBLE TAXATION
KINDS OF DOUBLE TAXATION:
a. Direct Duplicate Taxation, this is objectionable and prohibited because it violates the
constitutional provision on uniformity and equality. It means:
 Taxing twice
 By the same taxing authority
 Within the same jurisdiction or taxing district
 For the same purpose
 In the same year or taxing period
 Same kind or character of tax
b. Indirect Duplicate Taxation is not legally objectionable. It extends to all cases in
which there is a burden of two or more pecuniary imposition but impost by different
taxing authorities.
SOURCES OF TAX LAWS
a) Constitution
b) Tax Treaties and Conventions with Foreign Countries
c) The "Tax Code (RA No. 0424 National Internal Revenue Code, as amended; Le RA
10963 TRAIN Law), Tariff and Customs Code, and portion of the Local Government
Code
d) Statutes and laws like RA 1125 (an Act Creating the Court of Tax Appeals), RA 7716
(E-VAT Law)
e) Presidential Decrees
f) Executive Orders
g) Court Decisions
h) Revenue regulations promulgated by the Department of Finance
i) Administrative issuances of the BIR like Revenue Memorandum Circulars, and those
of the Bureau of Customs like Customs Memorandum Orders
j) BIR Rulings
k) Local Tax Ordinances
TAX LAWS
NATURE OF INTERNAL REVENUE LAWS - Tax laws are civil and not penal in nature,
although there are penalties provided for their violation. The purpose of tax laws in imposing
penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or
neglect of duty in respect thereof.
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CONSTRUCTION OR INTERPRETATION OF TAX LAWS IN CASE OF DOUBT OR
AMBIGUITY
a. Tax statutes are construed strictly against the government and liberally in favor of the
taxpayer. Taxes, being burdens, are not to be presumed beyond what the statute
expressly and clearly declares.
b. Provisions granting tax exemptions are construed strictly against the taxpayer
claiming tax exemption and liberally in favor of the government.
APPLICATION OF TAX LAWS
Tax laws are prospective in operation because the nature and amount of the tax could not be
foreseen and understood by the taxpayer at the time the transactions which the law seeks to
tax was completed.
EXCEPTION:
While it is not favored, a statute may nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative intent. But a tax law should not be given
retroactive application when it would be harsh and oppressive.
CLASSIFICATION OF TAXES
a. According to Subject Matter:
 Personal, Poll or Capitation Tax - tax of a fixed amount imposed upon individual,
whether citizens or not, residing within a specified territory without regard to their
property or the occupation in which he may be engaged (e.g basic community
tax)

Property Tax - tax imposed on property, whether real or personal, in proportion
either to its value, or in accordance with some other reasonable method of
apportionment (e.g. real estate tax)

Excise Tax - any tax which does not fall within the classification of a poll tax or a
property tax. This is a tax on the exercise of certain rights and privileges (e.g.
income tax, estate tax, donor's tax, VAT)
b. According to Who Bears the Burden:

DIRECT TAX (e.g. income tax, estate tax, donor's tax)
 Imposed on the person obliged to pay the same and this burden cannot be
shifted or passed on to another.
 A tax in which the taxpayer who pays the tax is directly liable therefor, that is,
the burden of paying the tax falls directly on the person paying the tax
 Demanded from the very person who, as intended, should pay the tax which
he cannot shift to another
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
INDIRECT TAX (e.g. VAT and OPT)
 Payment is demanded from a person who is allowed to transfer the burden of
taxation to another.
 A tax paid by a person who is not directly liable therefor, and who may
therefore shift or pass the tax to another person or entity, which ultimately
assumes the tax burden (Maceda v. Macaraig, 197 SCRA 771).
 Is demanded in the first instance form one person with the expectation that he
can shift the burden to someone else, not as a tax but as part of the purchase
price
c. According to Determination of Amount:
 Specific Tax - this is a fixed amount based on volume, weight or quantity of goods
as measured by tools, instruments, or standards. (e.g. excise tax on cigars and
liquors)
 Ad Valorem Tax - this imposition is based on the value of the property subject to
tax. (e.g. VAT, income tax, donor's tax and estate tax)
d. According to Purpose:
 Fiscal/General/Revenue Tax - levied without a specific or pre-determined
purpose. (e.g. income tax, donor's tax and estate tax)
 Regulatory/Special/Sumptuary Tax - those intended to achieve some social or
economic goals. (e.g. tariff and certain duties on imports)
e. According to Jurisdiction/Scope or Authority
 National Tax - imposed by the National Government
 Local Tax - imposed municipal corporations (e.g. real estate tax)
f.
According to Graduation or Rate
 Proportional/Flat Rate Tax - unitary or single rate (eg VAT, OPT)
 Progressive/Graduated Tax - as the tax base grows the tax rate increases (eg
income tax on individuals. estates, trusts, estate tax, donor's tax)
 Regressive Tax - the tax rate increases as the tax base decreases
TAX DISTINGUISHED FROM OTHER CHARGES AND FEES
 TAX VS. TOLL



TAX
it is a demand of sovereignty
it is one’s support for the
government
it is imposed only by the
government



TOLL
it is a demand of proprietorship
it is a compensation for the use of
somebody else’s property
it maybe imposed by the
government or private individuals
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
it is based on governmental
needs

it is determined by the cost of
property or improvement thereon
 TAX VS. PENALTY

TAX
it is imposed to raise revenue

it is imposed
government


it arises form law
generally, payable in money
 TAX VS. ASSESSMENT




only
by


PENALTY
it is imposed to regulate conduct
through
punishment
and
suppression of injurious act
may be imposed by the
government
or
by
private
individuals
it may arise from law or contract
may be paid in money or in kind

SPECIAL ASSESSMENT
levied on land

the

TAX
levied on business, interests,
transactions, rights, persons,
properties or privileges
may be made a personal liability
of the person assessed

based on necessity with no hope
of direct or immediate benefit to
the taxpayer
Is of general application


cannot be made the personal
liability of the person assessed,
because it is the land that
answers for the liability
based wholly on benefits received
It is exceptional in application for
the recovery of cost and/or
maintenance of improvement
 TAX VS. LICENSE FEE





TAX
tax is levied in the exercise of the
taxing power
the purpose of it is to generate
revenue
generally amount is unlimited



imposed on person, property,
rights or transaction
non-payment does not make the
business illegal


LICENSE FEE
license fee emanate from the
police power of the state
the purpose of it is regulatory
limited
to
the
necessary
expenses of regulation and
control
imposed on the exercise of a right
or privileges
non-payment makes the business
illegal
 TAX VS. CUSTOMS DUTIES

TAX
imposed on person, property,
rights or transaction

CUSTOMS DUTIES
imposed on imported or exported
goods
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
It comprehends more than the
term custom duties

It is also a tax
 TAX VS. DEBT






TAX
based on law
not assignable
payable in money
not subject to set-off
non-payment may result to
imprisonment
bears interest only if delinquent






DEBT
based on contract
assignable
payable in kind or in money
subject to set-off
no imprisonment (except when
debt arises from crime)
interest
depend
upon
the
stipulation of the parties
 SUBSIDY
 Refers to a pecuniary aid directly granted by the government to an
individual or private commercial enterprise deemed beneficial to the
public.
 NOT A TAX although tax may have to be imposed to pay it.
 REVENUE
 Refers to all the funds or income derived by the government, whether
from tax or any other source.
 Amount collected.
 INTERNAL REVENUE
Internal Revenue means taxes imposed by the legislature other than duties on
imports and exports.
 TARIFF
May be used in one of three (3) senses:
1. A book of rates drawn usually in alphabetical order containing the names
of several kinds of merchandise with the corresponding duties to be paid
for the same, or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation (or
exportation) of goods.
*The term tariff and customs duties are used interchangeably in the Tariff and
Customs Code.
SYSTEMS OF "INCOME TAXATION
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a. Global System - All items of gross income, deductions are reported in one income tax
return and the applicable tax rate is applied on the tax base.
b. Schedular System - Different types of income are subject to different sets of
graduated or flat income tax rates.
OTHER DOCTRINES/RULES IN TAXATION
Equitable Recoupment - 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.
Set-off taxes - Taxes are not subject to set-off or legal compensation because the
government and the taxpayer are not mutual creditors and debtors of each other.
Taxpayer Suit- This provides that a taxpayer suit can only be allowed if the act involves a
direct and illegal disbursement of public funds derived from taxation.
Exemptions from Taxation
It is a grant of immunity, express or implied, to particular persons, or corporations of a
particular class, from a tax upon property or an excise tax which persons and corporations
generally within the same taxing district, are obliged to pay.
CLASSIFICATION OF EXEMPTION:
a. Express or affirmative - these are express provisions in the Constitution, statues,
treaties, ordinances, franchises or contracts
b. Implied or exemption by omission - this occurs when a tax is levied on certain
classes of persons, properties or transactions without mentioning other classes.
Those not mentioned are deemed exempted by omission
INTERPRETATION OF EXEMPTION GRANT
Exemption grants are strictly construed against the person or entity claiming
exemption. One must justify such claim by clear and positive grant.
ESCAPE FROM TAXATION
1. Evasion or Dodging, the taxpayer uses unlawful means to evade or lessen the payment
of tax.
2. Avoidance, also called tax minimization, it is the reduction or totally escaping payment of
tax through legally permissible means.
3. Shifting, basically, it is the transfer of tax burden to another. The imposition of tax is
transferred from the statutory taxpayer to another without violating the law.
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

Impact is the point at which a tax is originally imposed.
Incidence is the point at which the tax burden finally rests or settles down.
THREE (3) KINDS SHIFTING
a. Forward shifting
b. Backward shifting
c. Onward shifting
4. Capitalization, the seller is willing to lower the price of the commodity provided the taxes
will be shouldered by the buyer.
5. Transformation, the manufacturer absorbs the additional taxes imposed by the
government without passing it to the buyers for fear of lost of his/its market. Instead, he/it
increases quantity of production, thereby turning their units of production at a lower cost
resulting to the transformation of the tax into a gain through the medium of production.
6. Exemption, it is an immunity, privilege or freedom from payment of a charge or burden to
which others are obliged to pay.
Taxpayer's suit
A case where the act complained of directly involves the illegal disbursement of
public funds derived from taxation. Taxpayers have locus standi to question the validity of tax
measures or illegal expenditures of public money. In such cases, they are parties in interest
who will be prejudiced or benefited by the avails of the suit. The general rule is that not only
persons individually affected but also taxpayers have sufficient interest of preventing the
illegal expenditures of money raised by taxation. They may, therefore, question in the proper
court the constitutionality of statutes requiring the expenditure of public funds. But a taxpayer
is not relieved from the obligation of paying a tax because of his belief that it is being
misappropriated by certain officials, for otherwise, collection of taxes would be hampered
and this may result in the paralyzation of important governmental functions.
END
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