Taxation 1

CHAPTER I 3. Public Purpose – exercised absolutely for public

Taxation – an enforced contribution levied by the lawmaking purpose.
body of the State to raise revenue for public purpose. 4. Exemption of the Government – government does
 State power – inherent to a state and is present even it not tax itself except for its income from its properties
lacks expressed constitutional grant. and activities conducted for profits such as the
 A process – there is a step-by-step process before the government-owned and controlled corporations.
collection of taxes 5. Non-delegation of Taxing Power – the legislative
 As a mode of cost distribution – allocates the State’s taxing power is vested exclusively in Congress.
cost and burden to its subjects who are benefited by o LGU are allowed to exercise the power to
its spending. tax because of their fiscal autonomy.
The Basis of Taxation o Under Tariff and Customs Code, the
 The mutuality of support between the people and the president is empowered to fix the amount of
government. tariffs to be flexible to trade conditions.
 Receipt of benefits is conclusively presumed o Other cases
although most of the public services are received Constitutional Limitations:
indirectly. 1. Observance of Due Process Law – no one should be
Theories of Cost Allocation deprived of his life, liberty, or property without due
1. Benefit Received Theory – more benefit one process.
receives from the government, the more tax he should o Substantive Due Process – imposed only for
2. Ability to Pay Theory – those who have more even public purpose and collected only under
they receives less benefits should be taxed more. authority of a valid law and only by the
o Vertical Equity – gross concept taxing power having jurisdiction.
o Horizontal Equity – net concept (Philippine Taxation o Procedural Due Process – no arbitrariness
System). in assessment and collection of taxes, the
taxpayer has the right to notice and hearing.
The Lifeblood Doctrine – without taxes, the government will 2. Equal Protection of Law – taxpayers are treated
be paralyzed for lack of motive power to activate or operate it. equally both in terms of rights conferred and
1. Imposed even in the absence of constitutional grant. obligations imposed.
2. Claims for taxes are construed against taxpayers. 3. Uniformity Rule in Taxation – relative equality
3. Government reserves the right to choose the objects which means each class are tax differently and
of taxation. taxpayers on the same class are taxed the same.
4. The courts are not allowed to interfere with the 4. Progressive System of Taxation – as tax base
collection of taxes. increases, tax rate also increases. It aids equitable
5. In income taxation: distribution of wealth of society by taxing the rich
o Taxable upon receipt more than the poor.
o Deduction for capital expenditures and 5. Non-imprisonment for Non-payment of debt or
prepayments are not allowed as it defers the poll tax – tax is not a debt, hence punishable by law
collection. except basic community tax.
o A lower amount of deduction is preferred when a 6. Non-impairment of Obligation and Contract – tax
claimable expense is subject to limit. exemptions under contract should be honored and not
o A higher tax base is preferred when the tax cancelled by unilateral government action.
object has multiple tax bases. 7. Free Worship Rule – properties and revenues of
Scope of the Taxation Power – it is comprehensive, plenary, religious institutions are not subject to tax but does
unlimited and supreme. However, it is not absolutely not extend to income from properties or activities that
unlimited, it has inherent and constitutional limitations. are proprietary or commercial in nature.
8. Exemption of religious, charitable, or educational
THE LIMITATIONS OF TAXATION POWER entities, non-profit cemeteries from property tax -
Inherent Limitations (TIPEN) the doctrine of use is being followed in PH where
1. Territoriality of Taxation – can only demand tax only properties devoted for their primary operations
obligations upon its subjects or residents within its is exempted.
territorial jurisdiction. 9. Non-appropriation of public funds or property for
2. International Comity – government does not tax the the benefit of any churches, sect or system of
income and property of other governments, even the religion
foreign government-owned and controlled 10. Exemption from taxes of the revenues and assets
corporations. of non-profit, non-stock, educational institutions
including grants, endowments, donations, or
Taxation 1
contributions for educational purpose – applies  Non-compensation or set-off – exceptions are:
only o revenues and assets that are actually, directly taxpayer’s claim on government has become due and
and exclusively devoted for educational purposes. demandable, obvious overpayment of taxes, and local
11. Concurrence of majority of all Congress members taxes.
for the passage of law granting tax exemption –  Non-assignment of Taxes
absolute majority for bills reducing the tax obligation  Impressibility in Taxation
and relative majority for passing bills increasing tax  Judicial Non-interference
obligations.  Strict Construction of Tax Laws – “Taxation is the
12. Non-diversification of tax collection – tax should rule, exemption is the exception.” If vague tax laws,
only for public purpose. construed strictly against the government and
13. Non-delegation of power of taxation – taxation liberally in favor of taxpayer. If vague exemption
power as part of lawmaking be vested exclusively in laws, otherwise.
Congress.
14. Non-impairment of jurisdiction of the Supreme DOUBLE TAXATION
Court to review tax cases - - Court of Appeals must Elements of Double Taxation
not be bypassed. 1. Primary elements: same object
15. Appropriations, revenue, or tariffs bills shall 2. Secondary elements:
originate in the House of Representatives, but the a. Same type of tax
Senate may propose or concur with amendments b. Same purpose of tax
16. Each LGU shall have the power to create its own c. Same taxing jurisdiction
revenue and will have a just share in the national d. Same tax period
taxes Direct double taxation – all the elements are present.
Indirect double taxation – at least one of the secondary
STAGES OF THE EXERCISE OF TAXATION POWER elements is not common.
1. Levy or Imposition – also called the impact of How can taxation be minimized?
taxation or the legislative act. a. Provision of tax exemption – only one will apply.
2. Assessment and Collection – also called the b. Allowing foreign tax credit
incidence of taxation or the administrative act of c. Allowing reciprocal tax treatments
taxation. d. Entering into treaties or bilateral agreements
Note: It is believed it counters equal protection and
SITUS OF TAXATION uniformity.
1. Business Tax Situs – where is business is conducted
2. Situs on Services – where they are rendered ESCAPES FROM TAXATION
3. Situs on Sale of Goods – in the place of sale A. Those that result to loss of revenue
4. Property Tax Situs – in their location 1. Tax evasion – also known as tax dodging which
5. Personal Tax Situs – in their place of residence illegally reduce or avoid payment of tax
6. Interest Income – debtor’s residence 2. Tax avoidance – in legally permissible means
7. Royalties – where intangible is employed a. Selection and execution of transaction that would
8. Rent Income - location of the property expose to lower tax.
9. Personal Property – where the thing is sold b. Maximizing tax options, tax carry-over tax
10. Real Property - location of the property credits.
11. Dividend Income from Domestic Corporations – c. Careful tax planning.
presumed earned within B. Those that does not result to loss of revenue
12. Dividend Income from FC – test of dominance 1. Shifting – transferring tax burden to another
13. Merchandising Income – where the property is sold a. Forward shifting – normal flow of distribution.
14. Manufacturing – where the good are manufactured b. Backward shifting – reverse of forward shifting
and sold c. Onward shifting –
2. Capitalization – adjustment of value of an asset
OTHER FUNDAMENTAL DOCRTRINES IN caused by changes in tax rates
TAXATION 3. Transformation – elimination of waste or losses to
 Marshall Doctrine – “The power to tax involves the form savings for tax payment.
power to destroy,”
 Holme’s Doctrine – “Taxation is not the power to Tax Amnesty – the general pardon by the government to give
destroy while the court sits.” them chance to reform and have a fresh start to be part of
 Prospectivity of Tax Laws society with a clean state. It is the absolute forgiveness or
waiver to collect tax and is retrospective. It covers criminal
Taxation 1
and civil liability. It is also conditional by paying the taxpayer 2. Ad Valorem – fixed proportion
a portion of the tax. As to rate:
Tax Condonation – forgiveness of tax obligations under 1. Proportional Tax – also called as flat or fixed rate,
certain justifiable grounds. It requires no payment, and the same rate without regard to ability to pay.
portion already paid will not be refunded. 2. Progressive Tax – equitable taxation. It emphasizes
direct tax and cannot be shifted.
CHAPTER II 3. Regressive Tax – decreasing tax rates as tax base
Sources of Tax Laws – Administrative Issuances increases. It emphasizes indirect tax, but still
Revenue Regulations – issuances signed by Secretary of dominant in PH due to prevalence of business tax.
Finance, recommended by the CIR. 4. Mixed tax – any combination of the above.
Revenue Memorandum Orders – provide direct instructions, PRINCIPLES OF SOUND SYSTEM
prescribe guidelines in the implementation of policies, goals, 1. Fiscal Adequacy – taxes should increase in respond to
objectives of the Bureau in all areas except auditing. increase in government spending.
Revenue Memorandum Rulings – rulings, opinions and 2. Theoretical Justice – should consider taxpayer’s
interpretation of CIR of the tax codes and other tax laws. ability to pay. It should not be oppressive, unjust or
confiscatory.
Revenue Memorandum Circulars – publish pertinent and 3. Administrative Feasibility – should be capable of
applicable portions as well as amplification of laws, the efficient and effective administration to encourage
expounded interpretation. compliance such as:
Revenue Bulletins – periodic issuances, notices and official a. E-filing and e-payment
announcements of the CIR. b. Substituted filing system for employees
c. Final withholding tax on non-resident aliens or
 BIR Rulings are not binding as it is not an absolute corporations
opinion. It can be reversed anytime. d. Accreditation of authorized agent banks for the
 The nature of Philippine tax laws is civil, not penal. filing and payment of taxes.
 License fees emanates from police power.
Chief Officials of the Bureau of Internal Revenue
Elements of a Valid Tax 1. Commissioner – Romeo Lumague Jr.
 Levied by the taxing power having jurisdiction over 2. 4 Deputy Commissioner
the object of taxation (the legislative). a. Operations Group
 Does not violate Constitutional and inherent b. Legal Enforcement Group
limitations. c. IS Group
 Uniform and equitable d. Resource Management Group
 For public purpose
 Proportional in character CHAPTER III
 Generally payable in money Gross Income – the taxable item of income
Elements of Gross Income
Classification of Taxes 1. Return on capital that increases worth
As to purpose: 2. Realized benefit
1. Fiscal or revenue tax – for general purposes. 3. Not exempted by law, contract or treaty
2. Regulatory – to regulate business, conducts, acts or Return on Capital
transactions. Note: Return on capital means an increase in net worth.
3. Sumptuary – achieve some social pr economic Capital items with infinite value – they are not taxable as
objectives. they are treated as return of capital:
As to subject matter:  Life – proceeds from a life insurance, EXCEPT:
1. Poll/Capitation/Personal Tax – residents of a territory. o Excess of premiums paid upon surrender or
2. Property Tax – real or personal property. maturity of the policy.
3. Excise or Privilege Tax – enjoyment of a privilege or o Gain from assignment or sale of his
engagement in an occupation. insurance
As to incidence: o Interest income from the unpaid balance of
1. Direct tax – statutory and economic taxpayer is the the proceeds
same. o Excess of the proceeds received over the
2. Indirect tax – statutory and economic taxpayer is not acquisition cost and premium payments
the same. made by an assignee
As to amount:  Health – in consideration for the loss of health.
1. Specific tax – fixed amount  Human Reputation – impairment of one’s reputation
Taxation 1
Recovery of loss capital – not taxable. o An alien who lives in the PH without definite
Recovery of loss profits – taxable such as: purpose
 Proceeds of crop or livestock insurance o An alien with definite purpose which makes PH
 Guarantee payments his home although he has an intention to return
 Indemnity received from patent infringement suit home
Realized Benefit b. Non-resident alien includes:
Requisites of realized benefit: o Engaged in business – stays for aggregate period
1. Exchanged transaction – sale or barter of more than 180 days.
2. Involves another entity – juridical or natural person o Not engaged in business – not more than 180
3. Increase in net worth days

Unrealized Gains/Holding Gains – they are not taxable in as Taxable Estates and Trusts:
income tax such as land appreciation, equity or debt securities, 1. Estate – income from the estate is taxable on the
foreign currency, decrease in value of foreign currency income of the decedent if settled judicially. If not, to
denominated debt by virtue of favorable fluctuation in the heir.
exchange rate. 2. Trust – income of the property held in trust is taxable
Note: However, this does not mean that an income received to the trust if it is irrevocably designated. If
from non-cash consideration are exempted from income tax, revocable, to the grantor.
they are, measured at fair value. B. CORPORATION
Rendering of services – the entire consideration is considered 1. Domestic Corporation – organized in accordance
as the return on capital. with Philippine laws
Mode of Receipt/Realization Benefits 2. Foreign Corporation – organized under foreign law
1. Actual Receipt – actual physical taking of the a. Resident Foreign Corporation – operates and
income in the form of cash or properties. conduct business in the Philippines through
2. Constructive Receipt – no actual physical taking but permanent branch.
the taxpayer is effectively benefited such as: b. Non-Resident FC – does not operate or conduct
a. Offset of debt due to sale of goods or operate business in the PH.
b. Deposit of the income to taxpayer’s checking Exempted from income tax:
account 1. GPP
c. Matured detachable interest coupons not yet 2. Joint venture engaging in geothermal, petroleum,
uncashed coal, and other energy operations.
d. Increased in partner’s capital from the profit in Co-ownership – exempted from tax if the purpose is
partnership preserving the property or dividing its income. If the income is
Swindling/Embezzlement – taking money without an original reinvested to other income-producing properties or ventures
intention to return is considered as income. will be taxed as corporation.

Not Exempted by Law, Contract or Treaty

The following are exempted by law from taxation:
1. Income of qualified employee trust fund
2. SSS, GSIS, Pag-IBIG, PhilHealth benefits
3. Salaries of minimum wage earners or qualified senior
citizens
4. BMBEs income
5. Income of foreign GCCOs
6. Income of international missions and organizations
with income tax immunity such as Red Cross

TYPES OF INCOME TAXPAYERS

A. INDIVIDUALS
1.1. Citizens
a. Resident citizen – Filipino citizen residing in the
Philippines.
b. Non-resident citizen has at least 183 days of stay in
abroad
1.2. Aliens
a. Resident alien has more than one year of stay