Taxation a. Income received in advance is taxable upon receipt.

b. Deduction for capital expenditures and pre-payment is not allowed as it effectively

 State Power- inherent power to enforce a proportional contribution from its subjects for public defers the collection of income tax.
purpose. c. A lower amount of deductions is preferred when a Claimable expense is subject to
 Process- process of levying taxes by the legislature of the state to enforce proportional limit.
contributions from its subjects for public purposes. d. A higher tax base is preferred when the tax objects have multiple tax bases.
 Mode of government cost distribution- the state allocates its costs or burden to its subjects who
are benefited by its spending. Inherent Power of the State

The Theory of Taxation 1) Taxation Power- to enforce proportional contribution from its subjects to sustain itself.
2) Police Power- to enact laws to protect the well-being of the people.
“A government cannot exist without a system funding. The government’s necessity for funding is the 3) Eminent Domain- to take private property for public use after paying just compensation.
theory of taxation.”
**These rights, dubbed as “powers” are natural, inseparable and inherent to every government.
The basis of Taxation
Similarities of the Three Powers of the State
The government provides benefits to the people in the form of public services, and the people
provide the funds that finance the government. **Taxpayers cannot avoid payment of taxes under the 1. Necessity attributes of sovereignty.
defense of absence of benefit received. 2. Inherent to the State.
3. Legislative in Nature.
**The direct receipt or actual availability of government services is not a precondition. 4. Ways in which the State interferes with private rights and
properties.
Theories of Cost Allocation
5. Exist independently of the Constitution/ and are exercisable by
1. Benefit received theory - the more benefit he receives; the more of the government. the government even without Constitutional grant.
2. Ability to pay theory - based on their capacity to sacrifice for the support of the 6. Pre-suppose an equivalent form of compensation received by
government. the persons affected by the exercise of the power.
Aspects of ability to pay Theory 7. The exercise of these powers by the local government units
 Vertical Equity- directly proportional to the level of his tax base. *Gross Concept may be limited by the national legislature.
 Horizontal Equity- requires consideration for the particular circumstance of the
Scope of the Taxation Power
taxpayer. *Net Concept
 Comprehensive
The Lifeblood Doctrine
 Plenary
“Without taxes the government would be paralyzed for lack of motive power to activate or operate. “  Unlimited
 Supreme
*Taxes are the lifeblood of the government, and their prompt and certain availability are an imperious
need. The Limitation of the Taxation Power

Implication of the Lifeblood Doctrine of Taxation A. Inherent Limitations

1. Taxis imposed even if the absence of Constitutional grant. 1) Territoriality of Taxation- it cannot enforce upon subjects outside its territorial jurisdiction. Two-
2. Claims for tax exemption are construed against taxpayers. fold Obligations of Taxpayers
3. The government reserve the right to choose objects of taxation.  Filling of returns and payments of taxes.
4. The court are not allowed to interfere with the collection of taxes.  Withholding of taxes on expenses and its remittance to the government.
5. In income taxation;
2) International Comity- mutual courtesy or reciprocity between countries (no country is powerful  Debt acquired by the debtor in bad faith constitutes a estafa, a criminal offense
than the other) punishable by imprisonment.
 Governments do not tax the income and properties of other government.  Applies only to the basis community tax.
 Governments give primacy to their treaty obligations over their own domestic tax-  Non-payment of the additional tax is an act of tax evasion punishable by
laws. imprisonment.
3) Public Purpose- For public use  Non-impairment of obligation and contract- it should no set aside its obligations from
4) Exemption of the Government- this will not raise additional fund but will only impute additional contracts by the exercise of its taxation power.
costs.  Free worship rule- does not extend to income from properties
or activities of religious institution that are proprietary or commercial in nature.
**Income of the government from its properties and activities conducted for profit including income  Exemption of religious or charitable entities, non-profit cemeteries, churches and
from government owned and controlled corporations is subject to tax. mosques, lands, buildings and improvements from property taxes
o Doctrine of use- properties actually devoted for religious, charitable, or
5) Non-delegation of the Taxing Power- legislative taxing power is vested exclusively in Congress.
educational activities are exempt from real property tax.
**What has been delegated cannot further be delegated o Doctrine of Ownership- properties of religious, charitable, or educational
entities whether or not used in their primary operations are exempt from real
Exceptions to the rule of non-delegation property tax. (Not applied in Philippines).
 Non-appropriations of public fund or property for the benefits of any church sector or
1. Under the Constitution, local government units are allowed to exercise the power to tax to system of religion.
enable them to exercise their fiscal autonomy. **Compensation to priests, imams, or religious ministers working with the military, penal
2. Under the Tariffs and Customs Code, the President is empowered to fix the amount of tariffs to institutions, orphanages, or leprosarium is not considered religious appropriation.
be flexible to trade conditions.  Exemption from taxes of the revenues and assets of non- profit, non-stock educational
3. Other cases that require expedient and effective administration and implementation of institutions including grants, endowments, donations or contributions for educational
assessment and collection of taxes. purposes.
**Exempts government educational institutions from income
B. Constitutional Limitations
tax and subject private educational institutions to a minimal 10% income tax.
 Due process of Law  Concurrence of a majority of all members of Congress for the passage of a law granting tax
Aspect of due process exemption. **In the approval of an exemption law, an absolute majority or the majority of
 Substantive due process- tax must be imposed only for public purpose, collected only all members of congress is required.
under authority of a valid law and only by the taxing power having jurisdiction. **In the withdrawal of tax exemption, only a relative majority or quorum majority is
 Procedural due process- there should be no arbitrariness in assessment and collection of required.
taxes, and the government shall observe the taxpayer’s right to notice and hearing.  Non-diversification of tax collections- it should never be diversified for private purposes.
**Under the NIRC, assessment shall be made within three years from the due date of filing  Non-delegation of the power of taxation- requires that taxation power as part of
of the return or from the date of actual filing, whichever is later. lawmaking be vested exclusively in Congress.
**Collection shall be made within five years from the date of assessment.  Non-impairment of the jurisdiction of the Supreme Court to review tax cases-
 Equal protection of the Law- treated equally both in terms of right conferred and notwithstanding the existence of the Court of Tax Appeals, which is special court, all cases
obligations imposed. (Same circumstances) involving taxes can be raise to and be finally decided by the Supreme Court of the
 Uniformity Rule in taxation- shall be uniform and equitable. Philippines.
**taxpayers under dissimilar circumstances should not be  The requirement that appropriations, revenue, or tariff bills shall originate exclusively in
taxed the same. the House of Representatives, but the Senate may propose or concur with amendments.
 Progressive system of Taxation- tax rates increase as the tax base increases.  The delegation of taxing power to local government units shall exercise the power to
 Non-imprisonment for non-payment if debtor poll tax create its own sources of revenue and shall have a just share in the national taxes - this is
 Applies only when the debt is acquired by the debtor in good faith.
 the constitutional recognition of the local autonomy of local government and an express its assessment.
delegation of the taxing power. - In the absences of assessment, tax prescribes if not collected
by judicial action within 3 years from the date the return is
Stages of the Exercise of Taxation Power required to be filed.
- Taxes due from taxpayers who did not file a return or those
1.) Levy or Imposition- enactment of a tax law by Congress and is called impact of taxation or
who filed fraudulent returns do not prescribe.
legislative act in taxation. Congress is composed of two buddies: The House of
7. Doctrine of Estoppel- any misrepresentation made by one party towards another who
Representatives and The Senate.
relied therein in good faith will be held true and binding against that person who made the
**Tax bills cannot originate exclusively from the Senate.
misrepresentation.
2.) Assessment and Collection- referred to as incidence of taxation or the administrative act of
- The error of any government employee does not bind the government.
taxation.
8. Judicial Non-interference- courts are not allowed to issue injunction against the
Situs of Taxation - the place of the taxation. government pursuit to collect tax as this would unnecessarily defer tax collection.
(Lifeblood Doctrine).
**Situs rules serve as frames of reference in gauging whether the tax object is within or outside the 9. Strict Construction of Tax Laws- “taxation is the rule; exemption is the exemption”
tax jurisdiction of the taxing authority. - There is no room for interpretation, there is only room for application.
- When taxation laws are vague, the doctrine of strict legal construction is observed.
Examples:
 Vague Tax Laws- construed against the government and in favor of the taxpayers. o It
a. Business Tax Situs- where the business is conducted.
means no tax law. o Obligation arising from law is not pressured.
b. Income Tax Situs on service- where they are rendered.
 Vague Exemption Law- construed against the taxpayer and in favor of the government.
c. Income Tax Situs on sale of goods- place of sale.
o It means no exemption law.
d. Property Tax Situs- location.
o Construed strictly against the taxpayer in accordance with the lifeblood
e. Personal tax Situs- place of residence.
doctrine.
Other Fundamental Doctrines in Taxation
Tax exemption cannot arise from vague inference.
1. Marshall Doctrine- “the power to tax involves the power to destroy”
DOUBLE TAXATION - occurs when the same taxpayer is taxed twice by the same tax jurisdiction for
- Does not include the power to destroy if it is used solely for the purpose of raising
the same thing.
revenue.
- Imposition of excessive tax on cigarettes. Elements of Double Taxation
2. Holme’s Doctrine- “taxation power is not the power to destroy while the court sits”
- Includes the creation of Ecozones with tax holidays and provision of incentives 1. Primary Elements
3. Prospectivity of Tax Law- tax laws are generally prospective in operation. - Same Object
- An ex post facto law or a law that retroacts is prohibited by the Constitution. 2. Secondary Elements
4. Non-compensation or set-off- tax is not a debt; hence, it is not subject to set-off. - Same type of tax
Exceptions; - Same purpose of tax
- Taxpayer’s claim is already become due or demandable - Same Taxing jurisdiction
- Cases of obvious overpayment of taxes. - Same tax period
- Local taxes. Types of Double Taxation
5. Non-assignment of taxes- tax obligations cannot be transferred to another entity by I. Direct Double Taxation - all element of double taxation exists for both impositions.
contract.  Discourage because it is oppressive and burdensome to taxpayers.
6. Imprescribility in taxation- prescription is the lapsing of a right due to the passage of time. II. Indirect Double Taxation- at least one of the secondary elements of double taxation is not
- Tax prescribe if not collected within 5 years from the date of common for both impositions.
 Prevalent in Practice.  Capitalization- adjustments of the value of an asset cause by changes in tax
rates.
How can double taxation be minimized?  This is form of backward shifting of tax.
 Transformation- elimination of wastes or losses by the taxpayer to form saving
a) Provision of tax exemption- only one tax law is allowed to apply to the tax object while
to compensate for the tax imposition or increase in taxes.
other tax law exempts the same tax object.
b) Allowing foreign tax credit- tax payment in the foreign tax law is deductible against the tax
Tax Amnesty
due of the domestic tax law.
- general pardon granted by the government for erring taxpayer to give them a chance
c) Allowing reciprocal tax treatment- provisions in tax laws imposing a reduced tax rates or
to reform and enable them to have a fresh start to be part of a society with a clean
even exemption if the country of the foreign taxpayer also give the same treatment to
slate.
Filipino non-residents therein.
o Absolute forgiveness or waiver by the government on its right to collect
d) Entering into treaties or bilateral agreements- countries may stipulate for a lower tax rate
and retrospective in application.
for their residents if they engage in transactions that are taxable by both of them
o Covers both civil and criminal liabilities,
Escape from Taxation - available to the taxpayer to limit or even avoid the impact of taxation. o Conditional upon the taxpayer paying the government of a portion of the
tax.
Categories of Escapes from Taxation:
Tax Condonation
a. Those that result to loss of Government Revenue
- forgiveness of the tax obligation of a certain taxpayer under certain justifiable
 Tax evasion- also as tax dodging, refers to any ack or trick that tends to illegally grounds.
reduce or avoid the payment of tax. o Also referred to as tax remission.
 Tax Avoidance- also known as tax minimization. Refers to any act or trick that reduces o Construed against the taxpayer and in favor of the government.
or totally escapes taxes by any legally permissible means. o Covers civil liabilities of the taxpayer.
 Tax Exemption- also known as tax holiday, refers to the immunity, privilege or o Applies prospectively to any unpaid balance of the tax; hence, the porting
freedom from being subject to a tax which are subject to. already paid by the taxpayer will not be refunded.
 All forms of tax exemptions can be revoked by Congress except those o Requires no payment.
granted by the Constitution and those granted under contract. Income Taxation
- tax levied on the income property or an occupation.
b. Those that do not result to loss of Government Revenue
DIRECT TAX UPON THE THING CALLED INCOME.
1. Shifting- transferring tax burden to another taxpayer.
**Tax- money that people have to pay to the government.
 Common with business taxes where taxes imposed on business revenue
can be shifted or passed-on to customers. a. Forward- normal flow of **Income- all wealth which flows into the taxpayer other than a mere return of capital.
distribution (manufacturer to customer)
a. Common with essential commodities and services such Elements of Taxable Income:
as foods and fuel.
b. Backward- reverse of forward shifting.  Common with 1) There must be a gain or profit whether in cash or equivalent.
non-essential commodities where buyers have 2) The gain must be realized or received, either actually or constructively.
considerable market power and commodities with 3) The gain must not be exempted by law, contractor treaty.
numerous substitute products.
Taxpayer Classification
c. Onward- any tax shifting in the distribution channel that
exhibits forward or backward shifting. a. Individual Taxpayers a.
 - Resident Citizen
- Non-Resident Citizen
- Resident Alien Taxability of Individuals
- Non-resident engaged in Trade or Business
Taxpayer Income earned within the Income earned outside
- Non- resident not engaged Trade or Business
Philippines the Philippines
b. Corporate Taxpayers
Resident Citizen Taxable Taxable
- Domestic Corporation
Non-resident Citizen Taxable Non-taxable
- Resident Foreign Corporation
Resident Alien Taxable Non-taxable
- Non-resident Foreign Corporation
Non-resident alien Taxable Non-taxable
engaged in Trade or
Who are those considered citizens of the Philippines? [Section 1, Article IV of the 1987 Constitution)
Business
 Those who are citizens of the Philippines at the time of adoption of this constitution. Non-resident Alien not Taxable Non-taxable
 Those whose fathers or mothers are citizens of the Philippines. engage in Trade or Busines
Domestic Corporation Taxable Taxable
 Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship
Resident Foreign Taxable Non-taxable
upon reaching the age majority.
Corporation
 Those who are naturalized in accordance with law.
Non-resident Foreign Taxable Non-taxable
Classification of Citizens Corporation

A. Resident Citizen – a citizen residing in the Philippines.

B. Non-resident Citizen - a citizen of the Philippines whose physical presence abroad is with Determining Income within and outside the Philippines
line a definite intention to reside therein.
Income Test Source of Income
- a citizen of the Philippines who leaves the Philippines during the taxable year to
Interest Income Residence of the debtor
reside abroad, either as an immigrant or for employment on a permanent basis.
Income from Service Place where service is rendered
Rent Location of property
Royalty Place of use of intangible
Classifying Citizens when their intention in going abroad is not clear (Draw) Gain on Sale of Real Property Location of Property
Gain on Sale personal property, Place of Sale
Classification of Aliens excluding share of stock
Dividend form a domestic corporati Income within the Philippines
o Resident Alien – an individual taxpayer who is not a citizen but resides within the Dividend from a foreign corporation Partly income within and outside of the
Philippines. Philippines if 50% or more of the gross
o Non-resident Alien (draw) income of the foreign corporation for the
preceding 3 years prior to the declaration
Classification of Corporate Taxpayers of dividend or for such part of such
period as the corporation has been
o Domestic Corporation – a corporation incorporated in the Philippines. inexistence, was derived from sources
o Foreign Corporation – a corporation in corporate outside the Philippines within the Philippines. If less than50%,
- Two-type; Resident Foreign Corporation and Non-resident Foreign Corporation. income outside the Philippines.
Sale of Domestic Shares Income within the Philippines
Sale of Foreign Share Income outside the Philippines