INCOME TAX

GENERAL PRINCIPLES & CONCEPTS OF TAXATION

Inherent powers of sovereign state (PET)
1. Police power- protect citizens, provide safety and welfare
2. Eminent domain power- take private property with just compensation
3. Taxation power- enforced contribution to support govt
++ Police power is restricted by the due process clause of the constitution which
provides that no person may be deprived of life liberty or property without due
process of law
++ TAXATION as a process, it possess LEGISLATIVE UNDERTAKING, thru the
enactment of tax laws by the CONGRESS, which will be implemented by the
EXECUTIVE BRANCH thru its BIR.
Nature of Taxation Power (PETILSL)
1. For Public purpose
2. Tax Exemption of the govt inherent in its power to tax
3. Territorial in operation
4. Inherent Power of the Sovereignty
5. Legislative Function
6. Strongest among the inherent powers
7. Subject to constitutional and inherent Limitations
++ Tax exempt applies to govt immediately and directly exercise its government
functions
++ Proprietary functions are generally subject to tax.
++ Observe TAX SITUS, effective and enforceable only within its territorial units.
++ PRIVITY OF RELATIONSHIP, taxing state and object of tax.
++ State can exercise taxing power over citizens outside the territory.
++ International Comity, agreement of nations.
++ Only the NATIONAL GOVT has the INHERENT power to tax.
++ LGU do NOT possess the inherent power.
To have power
1. EXPRESSED constitutional provision
2. Valid delegation of tax power.
++ Congress, enact laws and ordinances
++ Non-delegation of legislative power to tax, EXCLUSIVELY legislative.
++ Taxation is INFERIOR to non-impairment clause of the constitution
++ Police power is SUPERIOR to non-impairment clause.

++ Without Taxation the other inherent powers would be paralyzed.

++ Police power if the govt may be exercised thru taxation power.
Basis of Taxation (NR)
1. Principle of Necessity
2. Reciprocal Duties
++ Necessity, taxation is the lifeblood or the bread and butter of the govt and
every citizen must pay his taxes.
++ Reciprocal Duties, benefits-received principle collect taxes to perform its
functions.
Purposes of Taxation (RRC)
1. Revenue Purpose primary purpose
2. Regulatory Purpose also known as SUMPTUARY, secondary objective
3. Compensatory Purpose
Revenue Purpose
++ Fiscal policy of the govt is based on the rule that receipts or revenue should e
equal to annual govt expenditures.
Regulatory Purpose
++ Regulatory purpose is accomplished to
a. Regulate inflation
b. achieve economic and social stability
c. key instrument for social control
++ The amount of taxes may be INCREASED to CURVE SPENDING POWER and
MINIMIZE INFLATION in times of PROSPERITY.
++ REDUCED to EXPAND BUSINESS and WARD OFF DEPRESSION in times of
DECLINING ECONOMIC CONDITIONS.
++ Tool to protect trade relations, special duties:
a. Discriminatory duty- offset any foreign discriminatory against local
commerce.
b. Countervailing duty- offset foreign subsidy granted to imported goods to
prejudice local industries.
c. Marking duty- additional duty tax on imported articles with IMPROPER
CLASSIFICATIONS.
d. Dumping duties- additional duty taxes imposed on imported with lower
prices to protect
LOCAL industries.
Compensatory Purpose
++ Equitable distribution of wealth and income.

Objects of Taxation
1. Persons
a. Natural individual taxpayer
b. Juridical corporation, partnerships, any associations
2. Properties
a. Real properties immovable
b. Personal property movable
c. Tangible properties felt or touched, either real or personal
d. Intangible properties rights rather than physical objects
3. Excise Objects (TRIP)
a. Transaction
b. Privilege benefits derived thru gratuitous transfer by death or donation
c. Right power, faculty or demand inherent in one person, and incidental to
another
d. Interest advantage accruing from anything
Limitation of Taxation Power
1. Inherent Limitations natural restrictions (PETIL), **mentioned in nature
a. Levied only for Public Purpose
b. Tax Exemption of the Govt
c. Limited to Territorial jurisdiction of the state
d. Subject to International Comity
e. Inherently Legislative, taxation cannot be delegated
2. Constitutional Limitations (DENVER SUMIG)
++ Tax laws if of NO legal force when it violates the constitution.
a. Due process of law
b. Equal protection of law treated alike
c. Non-impairment of contracts
d. Presidents power to Veto
e. Exemption from property taxation of Religious, charitable/educational
entities, nonprofit cemeteries, churches and convents REAL property taxes
only, and not to transfer taxes
f. No public money shall be appropriated for Religious purposes separation
of church & state
g. Congress may not deprive the Supreme court of its jurisdiction (legality
of tax)
h. Rule of Uniformity and equity congress shall evolve progressive system
of taxation
i. Majority of all the members of the congress required to grant tax
exemptions
j. No Imprisonment for nonpayment of poll tax.
k. Tax collection treated as General funds of the govt.
++ Progressive system of taxation, give emphasis on the ability-to-pay principle of
taxation whereby more direct rather than indirect taxes are imposed.

Exemption
++ Real property must be exclusively used for its purpose.
++ Issue of ownership is NOT relevant as long as the real property is used
exclusively for its purpose
Veto Power
a. Item Veto Power veto items without affecting other provisions
b. Pocket Veto Power disapproval of the bill by inaction so of the president
(no pocket
veto under the constitution)
++Poll tax- tax imposed on a person as a resident within a territory of the taxing
authority WITHOUT regard to his property, business or occupation. (Community tax)
States of Taxation
a. Levy

Cannot be
Impact of
delegated; legislative in nature
taxation
b. Assessment
Can be delegated; administrative in
c. Tax payment/ collection Incidence of taxation
nature
A TAX POLICY
BC TAX ADMINISTRATION
Levy/ Imposition
++ Passage of laws or ordinances thru legislature
++ Involves granting tax exemptions, tax amnesties, and tax remedies.
Assessment
++ Act of administration and implementation of the tax laws by the EXECUTIVE thru
BIR or BOC
++ Generally, taxes are self-assessing
Tax payment
++ Act of compliance
Principles of a Sound Tax System (FAT)
1. Fiscal Adequacy
Tax Policy
2. Equality or Theoretical Justice
3. Administrative Feasibility

Tax Administration
Doctrines of Taxation
1. Prospective Tax Application
2. Imprescriptibility of taxes

3. Double taxation
4. Escape from Taxation

5. Exemption from taxation

6. Equitable recoupment related tax

7. Set-off taxes

8. Taxpayer Suit
9. Compromises
10. Power to destroy

Prospective Tax Application

++ Tax bill must only be applicable and operative after becoming a law. Cover
present and future transactions.
++ Retroactively (Ex post facto) not be applied unless there is a clear intent that it
is imposed on past transactions.
Double Taxation
++ Same PURPOSE, YEAR, PROPERTY/ACTIVITY
++ No Constitutional prohibition against double taxation
++ In cases of doubts, it should be resolved in favor of the taxpayer.
a. Indirect duplicate taxation allowed as long as no violation of equal
protection & uniformity
b. Direct duplicate taxation prohibited, violates constitutional provision
Escape from Taxation
a. Tax evasion breaks the law, Tax dodging
b. Tax avoidance sidesteps, Tax Minimization
b.1. Tax options choose to pay lower tax rate, permitted by tax law
b.2. Shifting transfer of tax burden to another, e.g. indirect taxes like
VAT
b.3. Transformation absorbs payment of tax to reduce prices to
maintain market share
b.4. Exemption
Exemption from Taxation
a. Expressed exemption
b. Implied exemption or by omission intentional/ accidental; not mentioned
deemed exempt
c. Contractual lawfully entered into by the govt
Set-off taxes
++ Taxes are not subject to set-off or legal compensation because the govt and the
taxpayer are NOT mutual creditor and debtor to each other.
EXP:
a. Both are already due, demandable and fully liquidated.
b. Actual compromise between the taxpayer and the tax officer.
Taxpayer suit
++ Act involves a direct and illegal disbursement of public funds derived from
taxation.
Compromises
++ Generally allowed
++ Only the BIR Commissioner is expressly authorized by the Tax Code, civil and
criminal liabilities
++ Collector of Customs, given the power to compromise with respect to custom
duties

++ Customs Commissioner, subject to approval by the Sec. of Finance, cases

involving the imposition of fines, surcharges, and forfeitures.
++ Local Govt Code has no provision regarding compromise; tax liability (not
criminal liability) is not prohibited. No specific authority given.
Power to destroy (Marshall Dictum)
++ The govt can compel payment of tax and forfeiture of property through the
exercise of police power.
++ A lawful tax cannot be defeated just because its exercise would be destructive
or would bring about insolvency to a taxpayer.
Power to Build
++ Holmes Doctrine, tax is only a means to nation building and a consequence of
taxation.
Situs of Taxation
++ Place of Taxation

NATURE OF
TAX
Income Tax

Transfer Tax

GENERAL RULES OF TAX SITUS

Sources or Location of
Objects (Taxable?)
CITIZENSHIP
RESIDENCY
WITHIN PH
OUTSIDE PH
Filipino
Filipino
Alien
Alien

Resident
Nonresident
Resident
Nonresident

Yes
Yes
Yes
Yes

Yes
No
No
No

Filipino
Filipino
Alien
Alien

Resident
Nonresident
Resident
Nonresident

Yes
Yes
Yes
Yes

Yes
Yes
Yes
No

Yes

No

Business Tax

Nature of Taxes
++ Taxes are obligations created by law.
++ It is ones civil liability to pay taxes that gives rise to criminal liability. CIVIL
CRIMINAL
++ Taxes are personal to the taxpayer.
Stockholders may be liable for unpaid taxes of a dissolved corporation if it
appears that the corporate assets have been transferred in favor of the said
stockholders.
Essential Characteristics of Taxes
a. Enforced contribution
b. Imposed by the legislative Body
c. Proportionate in character

d. Payable in form of money

e. Imposed for the purpose of raising revenue
f. Used for public purpose
g. Enforced on some person, property, or rights.
h. Commonly required to be paid at regular intervals.
i. Imposed by the sovereign state within its jurisdiction.
SUMMARY OF TAXES
OBJECT

MAJOR
CLASSIFICATION

DESCRIPTION

PERSON

Personal Tax

Community Tax

PROPERT
Y

Property Tax

Real Property
Tax

RIGHTS

Business Taxes
(normal course of
business)

INCOME CLASSIFICATION

a. VAT
b. OPT
c. Excise Tax

Transfer Taxes
(gratuitous
transfer)
Income Taxes

a. Estate Tax
b. Donors Tax
a. Final
Withholding Tax

+Passive Income within

+Sale of Real Property
(Capital Asset)
+Capital gain on SOS
outside SE

b. Creditable
withholding tax

+Compensation Income
+Professional Fee
+Rent, broker, agent fee

c. Annual
income tax

+Compensation Income
+Business Income
+Gain on sale of other
capital assets
+Passive income earned
outside

CLASSIFICATION OF TAXES
1. As to Purpose
a. Revenue or Fiscal solely for the purpose of raising revenue

b. Regulatory, Special or Sumptuary achieve social or economic goals

having NO relation to the raising of revenue e.g. custom duties, protective
tariff
c. Compensatory equitable distribution of wealth and income
2. Object or subject matter
a. Personal, Poll or Capitation fixed in amount and imposed on persons
residing within a specified territory regardless of their property, occupation
b. Property on personal or real properties based on proportionate value
or other reasonable method
c. Excise upon performance of a right or act, enjoyment of privilege or
engagement in occupation

3. Determination of amount
a. Ad Valorem fixed amount in proportion to the value of the property
b. Specific fixed amount imposed based on some standard of weight or
measurement, head or number, length or volume
4. Who bears the burden
a. Direct non-transferable
b. Indirect transferable
5. Scope or Authority collecting the tax
a. National (DEVICE)
1. Documentary Stamp Tax
2. Estate and Donors Tax
3. VAT
4. Income Tax
5. Custom Duties
6. Excise Tax
b. Local or Municipal
1. Community Tax
2. Municipal licenses taxes
3. Professional Tax
4. Real Estate Tax
6. Rate or Graduation
a. Proportional or Flat Rate fixed percentage e.g. real estate tax, VAT
b. Progressive or Graduated tax rate increases as the tax base or bracket
increases e.g income
c. Regressive tax rate decreases as the tax base increases (NO regressive
in PH)
d. Digressive fixed rate imposed on certain amount but diminishes gradually
on sums below it

e. Mixed combination of different tax rates.

Other Charges/Fees
1. Penalty sanction imposed, punishment for violation of law; arises from law or
contracts
2. Revenue all funds or income derived by the govt whether from tax or from
other sources
3. Debt obligation to pay
4. Toll compensation for use of somebody elses property
5. License fee to restrain and regulate business or occupation
6. Custom duties on imported goods (all custom duties are taxes but not all taxes
are custom duties)
7. Subsidy monetary aid directly given, deemed beneficial to the public
8. Tariff list of rates, duties, taxes imposed on imported goods
9. Margin fee tax on foreign exchange designed to curb the excessive demands
upon out international reserves
10. Special Assessment reimbursing govt for extended benefits regarding
construction of public works. Levied only on LAND, and not a personal liability of
the person assessed.
++RA 8424 The Comprehensive Tax Reform of the Philippines or NIRC Code
of 1997 or Tax Code
++RA 9337 The VAT Reform Law
National Taxes classified as Internal Revenue Taxes under BIR
1. Income
2. Transfer Taxes (Estate & Donor)
3. Business Tax (VAT, Percentage, Excise)
4. Documentary Stamps Tax (DST)
5. Other taxes
++Tax Laws remain effective even foreign invaders occupy our country
++ Supreme Court has the exclusive power of constructing and interpreting tax
laws.
++Rules followed for interpretation and application of tax laws
1. Tax statute must be enforced as written
++ Ambiguity of tax laws, the rule of statutory construction may be used for
the legislative intent
++ Pari Materia, tax laws should be interpreted with reference to other tax
legislations and their effect as a whole may be given consideration
2. Imposition of Tax Burden is not presumed
++ Tax burdens shall be imposed nor presumed beyond what the statutes
expressly and clearly state because tax statutes should be construed strictly
against the govt
++ Tax cannot be imposed without clear and express words
3. Doubts should be resolved liberally in favor of the taxpayer

4. Tax exemptions are strictly construed against the taxpayer

++ Exemptions therefrom are highly disfavored in law and he who claims tax
exemption must be able to justify his claim or right.
5. Tax laws are applied prospectively
++ Operative only upon becoming a law; given retroactive effect only if there
is a clear legislative intent
6. Tax laws prevails over civil laws
Sources of PH Tax Laws
1.
2.
3.
4.
5.
6.
7.
8.
9.

Constitution of the Philippines

Statutes
Judicial Decisions
Executive Orders
Tax Treaties and Convention with foreign countries
Revenue Regulations promulgated by the Dept. of Finance
BIR Revenue Memorandum Circulars and Bureau of Customs Memo Orders
BIR Rulings
Local Tax Ordinances

Statues
++ Tax Legislative Process DOFPRESCONGRESS (Ways &Means Com. Finance
Com.)HOUSE & SENATEPRES.