TAXATION

What is Taxation?
TAXATION
Taxation is a mode of raising revenue for public purpose.

It is a process inherent in every state to exercise the power to exact

enforced proportional contributions imposed upon persons, properties,
or rights to raise revenues in order to defray the necessary and
legitimate expense of the government.
Taxation
Taxation is a mode of raising revenue for public purpose.

It is a process inherent in every state to exercise the power to exact

enforced proportional contributions imposed upon persons,
properties, or rights to raise revenues in order to defray the necessary
and legitimate expense of the government.

TAX
PURPOSE OF TAXATION
1. Revenue-raising
2. Non-revenue/special or regulatory (a.k.a. Sumptuary Purpose)
Revenue-Raising
The primary purpose of taxation on the part of the government is to
provide funds or property with which to promote the general welfare
and the protection of its citizens and to enable it to finance its
multifarious activities.
Non-revenue/special or regulatory
Taxation is often employed as a device for regulation by means of
which certain effects or conditions envisioned by governments may be
achieved.

Taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is
affected with public interest as to be within the police power of the
state.
NATURE OF THE POWER OF TAXATION
• Inherent in sovereignty
• Legislative in character
• Subject to constitutional and inherent limitations
Inherent in sovereignty
Taxation is innate, inborn in very state.

What presupposes the power to tax is the sole existence of a state. A

state does not need a constitutional grant for it to possess the power to
tax.
Legislative in character
Only Congress can impose taxes. It cannot be exercised by the
executive or judicial branch of the government.

This is based on the principle that taxes are grant of the people who are
taxed, and the grant must be made by the immediate representative of
the people, and where the people have laid the power, there it must
remain and be exercised.
Subject to Limitations
The power of taxation is subject to constitutional and inherent
limitations.

These limitations are those provided in the fundamental law or implied

therefrom, while the rest spring from the nature of the taxing power
itself, although they may or may not be provided in the Constitution.
Tax and Other Forms
of Exactions
Tax
What we pay for civilized society.

Enforced proportional contributions imposed upon persons, properties,

or rights to raise revenues in order to defray the necessary and
legitimate expense of the government.
Requisites of a Valid Tax
Absence of any of the following, the tax imposition shall be void:

• For a public purpose;

• Rule of taxation should be uniform;
• The person or property taxed is within the jurisdiction of the taxing
authority;
• Assessment and collection is in consonance with the due process
clause; and
• The tax must not infringe on the inherent and constitutional
limitations of the power of taxation.
Essential Characteristics of Tax
• It is an enforced contribution.
• It is generally payable in money.
• It is proportionate in character.
• It is levied on persons, property, or the exercise of a right or
privilege.
• It is levied by the State which has jurisdiction over the subject or
object of taxation.
• It is levied by the law-making body of the State.
• It is levied for public purpose or purposes.
Tax vs. Tariff
Tax Tariff
All embracing term to include various kinds of A kind of tax imposed on articles which are traded
enforced contributions upon persons for the internationally
attainment of public purposes
Toll
A toll is a sum of money for the use of something, generally applied to
the consideration which is paid for the use of a road, bridge or the like,
of a public nature.
Tax vs. Toll
Tax Toll
Paid for the support of the government Paid for the use of another’s property

Demand of sovereignty Demand of proprietorship

Generally, no limit on the amount collected as long as Amount paid depends upon the cost of construction or
it is not excessive, unreasonable or confiscatory maintenance of the public improvement used

Imposed only by the government Imposed by the government or by private individuals

or entities.
Special Assessment
A province, city, or municipality, or the National Government, may
impose a special levy on lands especially benefited by public works or
improvements financed by it.
Tax vs. Special Assessment
Tax Special Assessment
Levied not only on land Levied only on land

Imposed regardless of public improvements Imposed because of an increase in value of land

benefited by public improvement

Contribution of a taxpayer for the support of the Contribution of a person for the construction of a
government public improvement

It has general application both as to time and place Exceptional both as to time and locality
Tax vs. Penalty
Tax Penalty
Violation of tax laws may give rise to imposition of Any sanction imposed as a punishment for violation of
penalty law or acts deemed injurious

Generally intended to raise revenue Designed to regulate conduct

May be imposed only by the government May be imposed by the government or private
individuals or entities
Tax vs. Penalty
Tax Penalty
Cannot be a subject of set off or compensation Can be a subject of set off or compensation

Violation of tax laws may give rise to imposition of Any sanction imposed as a punishment for violation of
penalty law or acts deemed injurious
License Fee
License or permit fee is a charge imposed under the police power for
purposes of regulation.

License is in the nature of a special privilege, of a permission or

authority to do what is within its terms. It makes lawful an act which
would otherwise be unlawful. A license granted by the State is always
revocable.
Tax vs. License Fee
Tax License fee
Imposed under the taxing power of the state for Levied under the police power of the state
purposes of revenue

Forced contributions for the purpose of maintaining Exacted primarily to regulate certain businesses or
government functions occupations

Generally unlimited as to amount Should not unreasonably exceed the expenses of

issuing the license and of supervision
Tax vs. License Fee
Tax License fee
Imposed on persons, property and the right to exercise Imposed only on the right to exercise a privilege
a privilege

Failure to pay does not necessarily make the act or Failure to pay makes the act or business illegal
business illegal.

Penalty for non-payment: Surcharges; or

Imprisonment (except poll tax).
Tax or Fee?
The imposition is a tax if its primary purpose is to generate revenue,
and regulation is merely incidental; but if regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not
make the imposition a tax.
When fees considered as taxes?
Fees may be properly regarded as taxes even though they also serve as
an instrument of regulation. If the purpose is primarily revenue, or if
revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax.

This is true in the case of car registration fees which may be regarded
as taxes even as they also serve as an instrument of regulation.
Tax vs. Debt
Tax Debt
Based on laws Generally based on contract, express or implied

Generally cannot be assigned Assignable

Cannot be a subject of set off or compensation Can be a subject of set off or compensation

Imprisonment is a sanction for non-payment of tax, A person cannot be imprisoned for non-payment of
except poll tax debt (except when it arises from a crime)
Tax vs. Debt
Tax Debt
Does not draw interest except only when delinquent Draws interest when it is so stipulated or where there
is default
Imposed only by public authority Can be imposed by private individual

Governed by the special prescriptive periods provided Governed by the ordinary periods of prescription
for in the NIRC

A tax is not a debt in the ordinary sense of the word.

When set-off is allowed?
Taxes can only be subject of set-off or compensation if the
following requisites concur:

1. Both the obligations from the government and the

taxpayer are due and demandable

2. It is fully liquidated.
Principle of Solutio Indebiti
When the BIR received something when there was no right to demand
it, it has the obligation to return it.

If a taxpayer suffered a net loss in a subsequent year, incurring no tax

liability to which a previous year’s tax credit could be applied, there is
no reason for the BIR to withhold the tax refund which rightfully
belongs to the taxpayer.
Theory and Basis
of Taxation
Why Government Can Impose Tax?
• Lifeblood theory
• Necessity theory
• Benefits-protection Theory (Symbiotic Relationship)
• Jurisdiction over subject and objects
Lifeblood Theory
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance.
Lifeblood Theory
Because of lifeblood theory

1. Collection of taxes cannot be enjoined by injunction.

2. Taxes could not be the subject of compensation or set off.
3. A valid tax may result in the destruction of the taxpayer’s property.
4. Taxation is an unlimited and plenary power.
Necessity Theory
The power of taxation proceeds upon theory that the existence of
government is a necessity; that it cannot continue without means to
pay its expenses; and that for those means it has the right to compel all
citizens and property within its limits to contribute.
Necessity Theory
The power to tax is an attribute of sovereignty.

It is a necessary burden to preserve the State's sovereignty and a means to

give the citizenry:

• an army to resist an aggression;

• a navy to defend its shores from invasion;
• a corps of civil servants to serve;
• public improvement designed for the enjoyment of the citizenry and
those which come within the State's territory; and
• facilities and protection which a government is supposed to provide.
Necessity Theory
The obligation to pay taxes rests upon the necessity of money for the
support of the state. For this reason, no one is allowed to object to or
resist the payment of taxes solely because no personal benefit to him
can be pointed out.
Benefits-Protection Theory
Taxation is founded on the reciprocal duties of protection and support
between the State and its inhabitants.
Taxpayer Government

Despite the natural reluctance to surrender part of The Government should respond in the form of tangible and
one's hard earned income to the taxing authorities, intangible benefits to improve the lives of the people and
every person who is able to must contribute his enhance their moral and material values
share in the running of the government.
Principles of Sound
Tax System
Principles of Sound Tax System
• Fiscal Adequacy
• Administrative Feasibility
• Theoretical Justice
Fiscal Adequacy
Collection of the government must be adequate to sustain its
legitimate expenses. This requires that sources of revenues must be
adequate to meet government expenditures and their variations.
Administrative Feasibility
Tax laws should be capable of just and effective administration that
even an ordinary taxpayer may comprehend. Each tax should be:

• capable of uniform enforcement by government officials,

• convenient as to the time, place, and manner of payment, and
• not unduly burdensome upon, or discouraging to business activity.
Theoretical Justice or Equality
The rule of taxation shall be uniform and equitable.
Uniform Equitable

All subjects and objects similarly situated shall be Tax imposition must be fair, just, reasonable and proportionate to the
treated alike both in privileges and liabilities. taxpayer’s ability to pay.
Non-Observance of the Principles
The non-observance of the above principles will not necessarily render
the tax imposed invalid except to the extent those specific
constitutional limitations are violated.
 Taxation and
other Inherent Powers
Inherent Powers of the State
STATE = People + Territory + Government + Sovereignty

• Taxation
• Police Power
• Eminent Domain
Taxation
Taxation is the power of the State to demand from the members of
society their proportionate share or contribution in the maintenance of
the government.
Police Power
Police Power is the power of the State to regulate liberty and property
for the promotion of general welfare.
Eminent Domain
Eminent Domain is the power of the State to forcibly acquire private
property, upon payment of just compensation, for some intended
public use.
Similarities
1. Inherent in the State and need not be conferred by the
Constitution;
2. Indispensable in that the State cannot continue or be effective
unless it is able to exercise the same;
3. Methods whereby the State interferes with private rights;
4. Presuppose an equivalent compensation, tangible or otherwise, for
the private rights interfered with; and
5. Primarily exercised by the legislature.
Differences
Taxation Police Power Eminent Domain

Purpose Raise revenue General welfare Social justice

Concept Enforced contribution Regulation Public use

National Government or
National Government or National Government or Political Subdivision; may be
Authority
Political Subdivision Political Subdivision granted to public service
companies or public utilities
Inherent Powers of the State
Taxation Police Power Eminent Domain

Protection and benefits

Benefits Indirect Benefits Market Value of the Property
from the government

Commensurate to cover No amount imposed; the

Amount No limit cost of license and owner is paid just
necessary expenses compensation

All persons, property, and All persons, property, and

Scope Only a particular property
rights rights
Stages or Aspects
of Taxation
Aspects of Taxation

Taxpayer’s Act
Legislative Act Executive Act Taxpayer’s Act and Executive
Act
Levy
It refers to the enactment of tax laws or statutes. The tax laws shall
determine:

• Those to be taxed (person, property or rights);

• How much is to be collected (the rate and the base of tax); and
• How taxes are to be implemented (the manner of imposing and
collecting tax).

It also involves the granting of tax exemptions, tax amnesties or tax

condonation.
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.
Payment
This process involves the act of compliance by the taxpayer in
contributing his share to pay the expenses of the government. Payment
of tax also includes the options, schemes or remedies as may be legally
open or available to the taxpayer.
Refund
A claim for refund must first be filed with the Commissioner of Internal
Revenue. But a suit or proceeding must be filed within two years from
the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment.
Kinds of Taxes
Kinds of Taxes
According to

Object Person, Property, Excise

Burden Direct taxes, Indirect taxes

Amount Specific, Ad Valorem, Mixed

Purpose General, Special

Authority National, Local

Graduation Progressive, Proportional, Regressive

As to Object
Personal, Poll or Capitation Tax

Tax of a fixed amount imposed on persons residing within a specified

territory, whether citizens or not, without regard to their property or
the occupation or business in which they may be engaged (e.g.
community (formerly residence) tax).
As to Object
Property Tax

Tax imposed on property, real or personal, in proportion to its value or

in accordance with some other reasonable method of apportionment
(e.g., real estate tax).
As to Object
Privilege/Excise Tax

Imposed upon performance of an act, enjoyment or privilege, or

engaging in an occupation, profession, or business.
As to Burden
Direct Taxes

Taxes which are demanded from persons who also shoulder them;
taxes for which the taxpayer is directly or primarily liable, or which he
cannot shift to another (e.g., income tax, estate tax, donor’s tax,
community tax)
As to Burden
Indirect Taxes

Taxes which are demanded from one person in the expectation and
intention that he can shift the burden to someone else (e.g., VAT,
percentage tax, excise taxes on specified goods, customs duties).
As to Amount
Specific Tax

A tax of a fixed amount imposed by the head or number or by some

other standard of weight or measurement.
As to Amount
Ad Valorem Tax

A tax of a fixed proportion of the value of the property with respect to

which the tax is assessed.
As to Purpose
General or Fiscal Tax

Levied for the general or ordinary purposes of the Government, i.e., to

raise revenue for governmental needs (e.g., income tax, VAT, and
almost all taxes).
As to Purpose
Special/Regulatory/Sumptuary Tax

Levied for special purposes, i.e., to achieve some social or economic

ends irrespective of whether revenue is actually raised or not (e.g.,
protective tariffs or customs duties on imported goods to enable
similar products manufactured locally to compete with such imports in
the domestic market).
As to Authority
National

Taxes imposed by the national government.

• Income Tax
• Estate and Donor’s Taxes
• Value-Added Tax
• Other Percentage Taxes
• Excise Taxes
• Documentary Stamp Taxes
• Such other taxes that may be imposed and collected by the BIR
As to Authority
Municipal or Local

Taxes imposed by local governments.

• Business Tax
• Professional Tax
• Amusement Tax
• Community Tax
• Franchise Tax
• Real Property Tax
• Other taxes, fees, and charges
As to Graduation
Progressive

The rate of tax increases as

the tax base or bracket
increases, e.g., income tax,
(estate tax, donor’s tax before TRAIN Law).
As to Graduation
Regressive

The rate of tax decreases as the tax base or bracket increases. There is
no regressive tax in the Philippines.
As to Graduation
Proportionate

The rate of tax is based on a fixed percentage of the amount of the

property, receipts or other basis to be taxed, e.g., real estate tax, VAT,
and other percentage taxes.
As to Graduation
Digressive

A fixed rate is imposed on a certain amount and diminishes gradually

on sums below it. The tax rate in this case is arbitrary because the
increase in tax rate is not proportionate to the increase of tax base.
Inherent Limitations
Inherent Limitations
• Public purpose
• Inherently Legislative
• Territorial
• International comity
• Tax exemption of government entities, agencies, and
instrumentalities
Public Purpose
To raise revenues in order to defray the necessary and legitimate
expenses of the government. The proceeds of the tax must be used for

• the support of the State or

• some recognized objects of government
• directly to promote the welfare of the community.
Tests for determining Public Purpose
Duty Test Is the tax in furtherance of the duty of the State as a government to
provide?

Promotion of General Will the tax directly promote the welfare of the community in equal
Welfare Test measure?

Character of the Is the public welfare ultimately benefited by the promotion of the direct
Direct Object of the object of the expenditure?
Expenditure
Inherently Legislative (Non-Delegability)
General rule:

Potestas delegatas non potesst delegari, literally means, what has been
delegated can no longer be delegated. As a rule, only the Congress (to
whom the legislative power has been delegated by the people) can
exercise the power of taxation.
Inherently Legislative (Non-Delegability)
Legislature has the power to determine the:

• Nature (kind),
• Object (purpose),
• Extent (rate),
• Coverage (subjects) and
• Situs (place) of taxation.
Inherently Legislative (Non-Delegability)
Exception:

• Delegation to the President

• Delegation to local government units
• Delegation to administrative agencies
Delegation to the President
Art. 6, Sec. 28(2), 1987 Constitution

The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose,

• tariff rates,
• import and export quotas,
• tonnage and wharfage dues, and
• other duties or imposts within the framework of the national
development program of the Government.
Delegation to Local Government Units
Art. X, Sec 5, 1987 Constitution

LGUs are expressly given the power to create its own sources of
revenue and to levy taxes, fees and charges, subject to such guidelines
and limitations as the Congress may provide which must be consistent
with the basic policy of local autonomy.
Delegation to Administrative Agencies
There are certain aspects of the taxing process that are not legislative
and they may, therefore, be vested in an administrative body.

For delegation to be constitutionally valid, the law must be complete in

itself and must set forth sufficient standards.
Delegation to Administrative Agencies
The powers which are not legislative include:

• the power to value property for purposes of taxation pursuant to

fixed rules;
• the power to assess and collect the taxes; and
• the power to perform any of the innumerable details of
computation, appraisement, and adjustment, and the delegation of
such details.
Delegation to Administrative Agencies
The powers which cannot be delegated include:

• the determination of the subjects to be taxed;

• the purpose of the tax, the amount or rate of the tax;
• the manner, means, and agencies of collection; and
• the prescribing of the necessary rules with respect thereto.
Territorial
A state may not tax property lying outside its borders or lay an excise or
privilege tax upon the exercise or enjoyment of a right or privilege
derived from the laws of another state and therein exercise and
enjoyed.

Reason:
• Tax laws cannot operate beyond a state’s territorial limits.
• Property outside one’s jurisdiction does not receive any protection
from the state.
Privity of Relationship
A person may be taxed where there is between him and the taxing
state, a privity of the relationship justifying the levy.

Thus, the citizen’s income may be taxed even if he resides abroad as

the personal (as distinguished from territorial) jurisdiction of his
government over him remains.
International Comity
Comity means the respect accorded by nations to each other because
they are sovereign equals. Thus, the property or income of a foreign
state or government may not be the subject of taxation by another
state.
International Comity
Reasons of limitations:

• In par in parem non habet imperium (Sovereign Equality among

states)
• Immunity from suit
• Usage among states
In par in parem non habet imperium
As between equals there is no sovereign (Doctrine of Sovereign
Equality among states under international law). One state cannot
exercise its sovereign powers over another.)
Immunity from Suit
In international law, a foreign government may not be sued without its
consent. Therefore, it is useless to impose a tax which could not be
collected.
Usage among States
Usage among states that when a foreign sovereign enters the territorial
jurisdiction of another, there is an implied understanding that the
former does not intend to degrade its dignity by placing itself under the
jurisdiction of the other.
Exemption of Government Entities
General Rule Agencies and instrumentalities of the government are
exempt from tax.

Exception There is no constitutional prohibition against the

government taxing itself.
Reason for Exemption
Reasons for the exemption:

• Government will be taxing itself to raise money for itself.

• Immunity is necessary in order that governmental functions will not
be impeded.
Application of Exemption
Unless otherwise provided by law, the exemption applies only to
government entities through which the government immediately and
directly exercises its sovereign powers.

With respect to government-owned or controlled corporations

performing proprietary (not governmental) functions, they are
generally subject to tax unless expressly exempted by law.
Exempt GOCCs
The following GOCCs are exempt from income tax:

• Government Service Insurance System (GSIS)

• Social Security System (SSS)
• Philippine Health Insurance Corporation (PHIC)
• Local Water District (LWD)

For the list above, there is no requirement that its income must be
derived from the exercise of its essential function.
Constitutional Limitations
DUE PROCESS CLAUSE
Art. III, Sec. 1, 1987 Constitution

No person shall be deprived of life, liberty, or property without due

process of law, nor shall any person be denied the equal protection of
the laws.
Aspects of Due Process
• Substantive Due Process. An act is done under the authority of a
valid law or the Constitution itself.

• Procedural Due Process. An act is done after compliance with fair

and reasonable methods or procedure prescribed by law.
Elements of Due Process for Taxation
• The tax is for a public purpose
• The rule on uniformity of taxation is observed
• Either the person or property taxes is within the jurisdiction of the
government levying the tax; and
• In the assessment and collection of certain kinds of taxes, notice
and opportunity for hearing are provided.
Instances of Violations of Due Process Clause
• If the tax amounts to confiscation of property;
• If the subject of confiscation is outside the jurisdiction of the taxing
authority;
• If the tax is imposed for a purpose other than a public purpose;
• If the law which is applied retroactively imposes just and oppressive
taxes.
• If the law violates the inherent limitations on taxation.
EQUAL PROTECTION
All persons subject to legislation shall be treated alike under similar
circumstances and conditions both in the privileges conferred and
liabilities imposed.

The equal protection clause is subject to reasonable classification.

Requisites for Valid Classification
1. It must be based on substantial distinctions which make real
differences.
2. The classification must be germane to the purpose of the law.
3. The classification must not be limited to existing conditions only but
must also apply to future conditions substantially identical to those
of the present.
4. The classification must apply equally to all members of the same
class.
Uniformity and Equity
The rule of taxation shall be uniform and equitable. Congress shall
evolve a progressive system of taxation.
Uniform Equitable

All subjects and objects similarly situated shall be Tax imposition must be fair, just, reasonable and proportionate to the
treated alike both in privileges and liabilities. taxpayer’s ability to pay. The higher the income, the higher the tax
(progressive tax).
Uniformity
All taxable articles or properties of the same class shall be taxed at the
same rate. It consists of

• Uniformity of operation throughout tax unit

• Equality in Burden
Uniformity of Operation
This means, for example, that a tax for a national purpose must be
uniform and equal throughout the country and a tax for a province,
city, municipality, or barangay must be uniform and equal throughout
the province, city, municipality or barangay.
Equality in Burden
Uniformity implies equality in burden, not equality in amount or
equality in its strict and literal meaning.

If legislation imposes a single tax upon all persons, properties, or

transactions, an inequality would obviously result considering that not
all persons, properties, and transactions are identical or similarly
situated.
Equity
“Equitable” means fair, just, reasonable and proportionate to the
taxpayer’s ability to pay. Taxation may be uniform but inequitable
where the amount of the tax imposed is excessive or unreasonable.
Uniformity, Equity, Equality
Uniformity Equity Equality
All taxable property shall be The burden of taxation falls to When the burden of the tax falls
alike to be subject to tax. those better able to pay. equally and impartially upon all
persons and property subject to it.
Progressive Tax System
The progressive system of taxation would place stress on direct rather
than indirect taxes, on non-essentiality rather than essentiality to the
taxpayer of the object of taxation, or on the taxpayer’s ability to pay.
NON-IMPAIRMENT CLAUSE
No law impairing the obligation of contracts shall be passed.

A law which changes the terms of the contract by making new

conditions, or changing those in the contract, or dispenses with those
expressed, impairs the obligation.
Rules Applicable to
Revocation of Tax Exemption

1. When the exemption is unilaterally granted by law and the same is

withdrawn by virtue of another law, there is no violation.

2. When the exemption is bilaterally agreed upon between the government

and the taxpayer, it cannot be withdrawn without impairing the contract.

3. When the exemption is granted under a franchise, it may be revoked

because a franchise is subject to amendment, alteration, or repeal by
Congress.
ACTUALLY, DIRECTLY, AND EXCLUSIVELY
• Real Property Tax Exemption
• Income Tax Exemption
• Exemptions on Donations
Real Property Tax Exemption
Charitable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from
taxation.
Income Tax Exemption
All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties.
Exemptions on Donations
Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax.
OTHER LIMITATIONS
• No imprisonment for payment of poll tax
• Grant of exemption requires majority vote of congress
• Prohibition on tax levied for special purpose
• Veto power of the president
• Revenue or tariff bill must exclusively originate from the lower house
• Local government’s power to tax
• No appropriation for religious purposes
• Religious freedom
• Non-impairment of the jurisdiction of the Supreme Court
General Concepts
in Taxation
Prospectivity of Tax Laws
Tax laws are prospective in operation, unless the contrary is provided.

Tax laws may be applied retroactively provided it is expressly declared

or it is clearly the legislative intent (e.g., increase taxes on income
already earned) except when retroactive application would be so harsh
and oppressive.
Imprescriptibility
Unless otherwise provided by law, taxes are imprescriptible.

Prescription of assessment and collection from the: prescribed last day of filing of returns (even if
3 years return was filed earlier than the deadline); OR the day when the return was actually filed if filed
later than the last day of filing [Sec. 203, NIRC] whichever comes earlier.

Prescription of assessment in cases of: false or fraudulent return with intent to evade tax; OR
10 years
failure to file a return [Sec. 222, NIRC] From the discovery of the fraud, falsity, or omission.

Prescription of collection of tax if: assessed within the 3-year and 10-year prescriptive periods
5 years assessed within the extended period agreed upon by the Commissioner and taxpayer (waiver of
the prescriptive period) Collected by distraint, levy or by a proceeding in court. [Sec. 222, NIRC]
Situs of Taxation
Literally means the place of taxation

The state where the subject to be taxed has a situs may rightfully levy
and collect the tax; and the situs is necessarily in the state which has
jurisdiction or which exercises dominion over the subject in question.

Within the territorial jurisdiction, the taxing authority may determine

the situs.
Factors that Determine Situs
• Nature of the tax;
• Subject matter of the tax (person, property, act or activity);
• Possible protection and benefit that may accrue both to the
government and the taxpayer;
• Citizenship of the taxpayer;
• Residence of the taxpayer;
• Source of income.
Situs of Income Tax
Taxpayer Sources of Income
Citizenship Residency Within Without
Filipino Resident Taxable Taxable
Filipino Non-Resident Taxable Non-Taxable
Alien Resident Taxable Non-Taxable
Alien Non-Resident Taxable Non-Taxable
Situs of Property Tax
Kind of Property Situs
Real Property Where it is located (lex rei sitae)

Tangible Personal Property Where property is physically located although the

owner resides in another jurisdiction.

Intangible personal property (e.g., credits, bills General Rule: Domicile of the owner. Mobilia
receivable, bank deposits, bonds, promissory notes, sequuntur personam (movables follow the person)
mortgage loans, judgments, and corporate stocks)
Exception: When property has acquired a business
situs in another jurisdiction or when the law provides
for the situs of the subject of tax.
Situs of Excise Tax
Kind of Excise Tax Situs
Income Tax Sources of the income nationality or residence of taxpayer.

Donor’s Tax Location of property, nationality or residence of taxpayer.

Estate Tax Location of property, nationality or residence of taxpayer.

Situs of Business Tax
Kind of Business Tax Situs
VAT Where transaction is made

Sale of Real Property Where the real property is located

Sale of Personal Property Where the personal property was sold

Double Taxation
Means taxing twice the same taxpayer for the same tax period upon
the same thing or activity, when it should be taxed once, for the same
purpose and with the same kind of character of tax.

• Direct Double Taxation

• Indirect Double Taxation
Direct Double Taxation
There is direct double taxation when all of the following requisites are
present:

• Both taxes must be imposed on the same property or subject matter;

• For the same purpose;
• By the same State, Government, or taxing authority;
• Within the same territory, jurisdiction or taxing district;
• During the same taxing period; and
• Of the same kind or character of tax.
Indirect Double Taxation
There is double taxation in the broad sense or there is indirect
duplicate taxation if any of the elements for direct duplicate taxation is
absent.
Constitutionality of Double Taxation
Double taxation in its stricter sense is undoubtedly unconstitutional but
that in the broader sense is not necessarily so.

Our Constitution does not prohibit double taxation. However, double

taxation will not be allowed if it results in a violation of the equal
protection clause.
Modes of Eliminating Double Taxation
1. Allowing reciprocal exemption either by law or by treaty;
2. Allowance of tax credit for foreign taxes paid;
3. Allowance of deductions such as for foreign taxes paid, and
vanishing deductions in estate tax; OR
4. Reduction of Philippine tax rate.
Escape from Taxation
1. Capitalization
2. Transformation
3. Shifting
4. Avoidance
5. Evasion
6. Exemption

With the exception of evasion, all are legal means of escape.

Doctrine of Equitable Recoupment
A claim for refund barred by prescription may be allowed to offset
unsettled tax liabilities. The doctrine finds NO application in this
jurisdiction.
Tax Amnesty
A tax amnesty partakes of an absolute forgiveness or waiver by the
Government of its right to collect what otherwise would be due it, and
in this sense, prejudicial thereto, particularly to give tax evaders, who
wish to relent and are willing to reform a chance to do so and become
a part of the new society with a clean slate
Tax Amnesty vs. Tax Exemption
Tax Amnesty Tax Exemption
Benefit Immunity from civil, criminal, Immunity from civil liability (relief from
administrative liability arising from paying taxes)
non-payment of taxes

Coverage Past tax liability Future tax liability

Actual Revenue Loss Yes None

Taxpayer’s Suit
Refers to a case where the act complained of directly involves the
illegal disbursement of public funds derived from taxation. Requisites
are

• Locus standi
• Doctrine of transcendental importance
• Ripeness for judicial determination
Escape from Taxation
Capitalization
The reduction in the price of the taxed object equal to the capitalized
value of future taxes the purchaser is expected to be called upon to
pay.
Transformation
Method of escape in taxation whereby the manufacturer or producer
upon whom the tax has been imposed pays the tax and endeavors to
recoup himself by improving his process of production thereby turning
out his units of products at a lower cost. The taxpayer escapes by a
transformation of the tax into a gain through the medium of
production.
Shifting
Shifting is the transfer of the burden of a tax by the original payer or
the one on whom the tax was assessed or imposed to someone else.

What is transferred is not the payment of the tax but the burden of the
tax. All indirect taxes may be shifted (Value-added Tax, Percentage Tax,
Excise Tax); direct taxes cannot be shifted.
Ways of Shifting
Forward shifting When the burden of the tax is transferred from a factor of production through
the factors of distribution until it finally settles on the ultimate purchaser or
consumer.

Backward shifting When the burden of the tax is transferred from the consumer or purchaser
through the factors of distribution to the factor of production.

Onward shifting When the tax is shifted two or more times either forward or backward.
Ways of Shifting

a.k.a. Transformation
Impact and Incidence of Taxation
Impact of taxation is the point on which a tax is originally imposed. In
so far as the law is concerned, the statutory taxpayer, the subject of
tax, is the person who must pay the tax to the government.

Incidence of taxation is that point on which the tax burden finally rests
or settles down.
Impact Incidence
Initial burden of tax Ultimate burden of the tax
At the point of imposition At the point of settlement
Fall upon the person from whom the tax is collected Rests on the person who pays it eventually
May be shifted Cannot be shifted
Impact, Shifting, Incidence
Impact Shifting Incidence

Initial phenomenon Intermediate process Result

Imposition of the tax Transfer of the tax Settling or coming to rest of the tax

Impact in VAT is on the producer who shifts the burden to the customer who finally bears the
incidence of the tax
Tax Avoidance (Tax Minimization)
Tax avoidance is the exploitation by the taxpayer of legally permissible
alternative tax rates or methods of assessing taxable property or
income in order to avoid or reduce tax liability. It is politely called “tax
minimization” and is not punishable by law.
Tax Evasion (Dodging)
Tax evasion is the use by the taxpayer of illegal or fraudulent means to
defeat or lessen the payment of a tax. It is also known as “tax dodging.”
It is punishable by law.
Elements of Tax Evasion
1. The end to be achieved, that is the payment of less than that known
by the taxpayer to be legally due, or in paying no tax when such is
due.

2. An accompanying state of mind described as being “evil,” “in bad

faith,” “willful” or “deliberate and not accidental.”

3. A course of action (or failure of action) which is unlawful.

Evidence to Prove Evasion
Since fraud is a state of mind, it need not be proved by direct evidence but
may be inferred from the circumstances of the case. Thus:

• The failure of the taxpayer to declare for taxation purposes his true and
actual income derived from his business for two consecutive years has
been held as an indication of his fraudulent intent to cheat the
government of its due taxes.

• The substantial underdeclaration of income in the income tax returns of

the taxpayer for four (4) consecutive years coupled with his intentional
overstatement of deductions justifies the finding of fraud.
Tax Avoidance vs. Tax Evasion
Tax Avoidance Tax Evasion
Also Called Tax Minimization Tax Dodging
Means Legal Illegal
Outcome of tax planning Outcome of tax fraud
Punishable? No Yes
Purpose Merely minimize payment of Entirely escape payment of taxes
taxes (tax savings)
Tax Exemption
It is the grant of immunity to particular persons or corporations or to
persons or corporations of a particular class from a tax which persons
and corporations generally within the same state or taxing district are
obliged to pay. It is an immunity or privilege; it is freedom from a
financial charge or burden to which others are subjected.
Rationale for Granting Tax Exemption
• Its avowed purpose is some public benefit or interest which the
lawmaking body considers sufficient to offset the monetary loss
entailed in the grant of the exemption.

• The theory behind the grant of tax exemptions is that such act will
benefit the body of the people. It is not based on the idea of
lessening the burden of the individual owners of property.
Grounds for Tax Exemption
Contract The grant of tax exemption is usually contained in the charter of the corporation to
which the exemption is granted.

Public policy To encourage new and necessary industries, or to foster charitable institutions.

Reciprocity To reduce the rigors of international double or multiple taxation, tax exemptions
maybe granted in treaties.

Equity is not a ground for tax exemption, but it could be a ground for tax condonation.
Revocation of Tax Exemption
General Rule: Revocable by the government.

Exception: Contractual tax exemptions may not be unilaterally so

revoked by the taxing authority without thereby violating the non-
impairment clause of the Constitution.
Nature of Exemption
• Merely personal privilege. Cannot be assigned or transferred
without the consent of the legislature.
• Generally revocable. Contractual tax exemptions may not be
unilaterally so revoked.
• Implies a waiver on the part of the government. Hence, it exists only
by virtue of an express grant and must be strictly construed.
• Not necessarily discriminatory. Otherwise, it may be challenged as
violative of the equal protection guarantee or the uniformity rule.
Kinds of Tax Exemption
Express Expressly granted by the Constitution, statutes, treaties, franchises or similar
legislative acts.

Implied When particular persons, properties, or exercise are deemed exempt as they fall
outside the scope of the taxing provision itself.

Contractual Are those agreed to by the taxing authority in contract lawfully entered into by them
under enabling laws.
Interpretation of Tax Law
As a rule, if the tax law is clear and free of ambiguity, it will be applied
in its literal import.

If there is doubt as to its validity or if it is ambiguous, the law will be

construed strictly against the Government and liberally in favor of the
taxpayer.
Interpretation of Tax Exemption
General Rule:

In the construction of tax statutes, exemptions are not favored and are
construed strictissimi juris against the taxpayer. Taxation is the rule;
exemption is the exception.
Interpretation of Tax Exemption
Exception:

1. When the law itself expressly provides for a liberal construction

thereof.
2. In cases of exemptions granted to religious, charitable and
educational institutions or to the government or its agencies or to
public property because the general rule is that they are exempt
from tax.
Sources of Tax Laws
Sources of Tax Laws
1. Constitution of the Philippines
2. Statutes
3. Judicial Decisions
4. Executive Orders
5. Tax Treaties and Conventions
6. Revenue Regulations by the Department of Finance
7. BIR Revenue Memorandum Circulars and Bureau of Customs
Memorandum Orders
8. BIR Rulings
9. Local Tax Ordinances
Constitution
A constitutional provision regarding taxation is primarily intended to
limit and regulate the exercise of taxation power. The State can exercise
the power to tax even if the Constitution is completely silent about
taxation.
Statutes
The present tax statutes of the Philippines are embodied in R.A. 8424,
which is the prevailing National Internal Revenue Code (NIRC) effective
January 1, 1998, which was amended per R.A. 9337 (The VAT Reform
Law) and R.A. 10963 (TRAIN Law), among others.
Judicial Decisions
These refer to the decisions for application made concerning tax issues
by the proper courts exercising judicial authority of competent
jurisdiction. These courts may be the Supreme Court and the Court of
Tax Appeals.

Their decisions on tax laws comprise the greater portion of tax

jurisprudence. They form part of the legal system of the Philippines.
Executive Orders
Executive Orders are regulations issued by the President or some
administrative authority under his direction for the purpose of
interpreting, implementing, or giving administrative effect to a
provision of the Constitution or of some law or treaty.
Tax Treaties and Conventions
These refer to the treaties or international agreements with foreign
countries regarding tax enforcement and exemptions. They have the
force and effect of law.
Revenue Regulations by the Department of Finance
The Secretary of Finance, upon recommendation of the Commissioner
of Internal Revenue, shall promulgate needful rules and regulations for
the effective enforcement of the provisions of the NIRC.

The Secretary of Finance is vested with authority to revoke, repeal or

abrogate acts or previous rulings of his predecessors in office because
these are not binding on their successors.
Revenue Regulations by the Department of Finance
In order that administrative regulations may be considered valid, all of
the following requisites must be complied with:

• The regulations must be useful, practical and necessary for the

enforcement of the law;
• They must be reasonable in their provisions;
• They must not be contrary to law; and
• They must be duly published in the Official Gazette. [Interprovincial
Auto Bus Co. v. Collector, G.R. No. L-6741 (1956); Lim Hoa Ting v.
Central Bank, G.R. No. L-10666 (1958)]
BIR Revenue Memorandum Circulars and
Bureau of Customs Memorandum Orders
These are administrative rulings or opinions which are less general
interpretations of tax laws being issued from time to time by the
Commissioner of the Internal Revenue or Commissioner of the Bureau
of Customs, as the case may be.

They are primarily intended to maintain uniform application of tax laws

within the department or area of authority.
BIR Rulings
BIR Rulings are expressed official interpretations of the tax laws as
applied to specific transactions. Unlike a Revenue Regulation, it is more
limited in application.

BIR Rulings are not the final interpretations of the tax laws. They are
considered the best opinion or advisory at the moment and are
considered sound law until changed by the court.
Local Tax Ordinances
These are tax ordinances issued by the province, city, municipality and
barangay subject to such limitations as provided by the Local
Government Code.
 Organization and
Functions of the BIR
Organization of BIR
The Bureau of Internal Revenue shall be under the supervision and
control of the Department of Finance.

The Bureau of Internal Revenue shall have a chief to be known as

Commissioner of Internal Revenue and four (4) assistant chiefs to be
known as Deputy Commissioners.
Powers and Duties of the Bureau of Internal
Revenue

• To assess and collect national internal taxes, fees, and charges;

• To enforce all forfeitures, penalties, and fines connected therewith;
• To execute judgment in all cases decided in its favor by the CTA and
the ordinary courts; and
• To effect and administer the supervisory and police powers
conferred upon it by the Tax Code or other special laws.
Powers of the BIR Commissioner
• Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases (Sec. 4)
• Power of the Commissioner to Obtain Information, and to Summon,
Examine, and Take Testimony of Persons (Sec. 5)
• Power of the Commissioner to Make Assessments and Prescribe
Additional Requirements for Tax Administration and Enforcement
(Sec. 6)
• Authority of the Commissioner to Delegate Power (Sec. 7)
Powers of the BIR Commissioner
• Assignment of Internal Revenue Officers and Other Employees to
Other Duties. (Sec. 17)
• Power to apply accounting period (Sec. 43)
• Allocation of Income and Deductions. (Sec. 50)
• Power of the Commissioner to Suspend the Business Operations of
a Taxpayer. (Sec.115)
• Authority of the Commissioner to Compromise, Abate and Refund
or Credit Taxes (Sec. 204)
• Power to file civil and criminal actions. (Sec. 220, 221)
Power of the Commissioner to Obtain Information, and
to Summon, Examine, and Take Testimony of Persons
(Sec. 5)
• To examine any book, paper, record, or other data which may be relevant
or material to such inquiry;
• To obtain on a regular basis from any person other than the person
whose internal revenue tax liability is subject to audit or investigation any
information;
• To summon the person liable for tax
• To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry
• To cause revenue officers and employees to make a canvass from time to
time
Power of the Commissioner to Make Assessments and
Prescribe Additional Requirements for Tax Administration
and Enforcement (Sec. 6)

• Examination of Return and Determination of Tax Due

• Failure to Submit Required Returns, Statements, Reports and other
Documents
• Authority to Conduct Inventory-taking, Surveillance and to Prescribe
Presumptive Gross Sales and Receipts
• Authority to Terminate Taxable Period
• Authority of the Commissioner to Prescribe Real Property Values
Power of the Commissioner to Make Assessments and
Prescribe Additional Requirements for Tax Administration
and Enforcement (Sec. 6)

• Authority of the Commissioner to Inquire into Bank Deposit

Accounts and Other Related information held by Financial
Institutions
• Authority to Accredit and Register Tax Agents
• Authority of the Commissioner to Prescribe Additional Procedural or
Documentary Requirements
Authority of the Commissioner to Delegate
Power (Sec. 7)

The Commissioner may delegate the powers vested in him under the
pertinent provisions of this Code to any or such subordinate officials
with the rank equivalent to a division chief or higher, subject to such
limitations and restrictions as may be imposed under rules and
regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
Authority of the Commissioner to Delegate
Power (Sec. 7)
The following powers of the Commissioner shall not be delegated:

• The power to recommend the promulgation of rules and regulations by

the Secretary of Finance;
• The power to issue rulings of first impression or to reverse, revoke or
modify any existing ruling of the Bureau;
• The power to compromise or abate, under Sec. 204 (A) and (B) of this
Code, any tax liability (except those under the authority of regional
evaluation board)
• The power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are produced or kept.
Tax Remedies
Taxpayer’s Remedies
• Protesting the Assessment
• Compromise and Abatement of Taxes
• Recovery of Tax Erroneously or Illegally Collected
Procedural Due Process in Tax Assessments
• Letter of authority and tax audit
• Informal conference
• Preliminary assessment notice
• Formal letter of demand and final assessment notice
• Disputed assessment
• Administrative decision on a disputed assessment
• Appeal from an administrative decision on disputed assessment
Protesting an Assessment

Protest (30 Decision by

PAN (15 days) FAN (30 days)
days) CIR (180 days)

Appeal to CTA MR to CTA Appeal to CTA

Petition for
En Banc (15 Division (15 Division (15
Review to SC
days) days) days)
Requisites of a valid assessment
1. The taxpayer shall be informed in writing of the law and the facts
on which the assessment is made.
2. An assessment contains not only a computation of tax liabilities, but
also a demand for payment within a prescribed period
3. An assessment must be served on and received by the taxpayer.
Types of Protest
The taxpayer may protest the FLD/FAN administratively within 30 days
from date of receipt thereof; otherwise, the said FLD/FAN will become
final, executory, and demandable.
Request for Refers to a plea of re-evaluation of an assessment on the basis of existing
reconsideration records without need of additional evidence.

Request for Refers to a plea of re-evaluation of an assessment on the basis of newly

reinvestigation discovered or additional evidence that a taxpayer intends to present in the
reinvestigation. The taxpayer shall submit the relevant documents within 60
days from filing of his letter of protest.
Remedies in Case of Denial of Protest
In case of denial of If the protest is denied, in whole or in part, by the CIR’s duly authorized
protest representative, the taxpayer may either:

• Appeal to the CTA within 30 days from the date of receipt of the decision
• Elevate his protest through request for reconsideration to the CIR (the only case
where an administrative appeal is possible)

In case of inaction by If the protest is not acted upon by the CIR’s duly authorized representative within 180
CIR within 180 days days from filing of the protest or from submission of required documents, the
from submission of taxpayer may either:
documents
• Appeal to the CTA within 30 days after the expiration of the 180 days,
• Await the final decision of the CIR’s duly authorized representative.
Prescriptive Periods
Assessment Collection
Normal return 3 years 5 years
Period agreed
In case of valid waiver 5 years
upon
Fraudulent or false return/failure or omission
to file return
• Collection with assessment 10 year 5 years
• Collection without assessment No prescription 10 years
Compromise of Taxes
Compromise means reduction of the amount of tax payable. The CIR
may compromise the payment of any internal revenue tax in the
following cases:

1. A reasonable doubt as to the validity of the claim against the

taxpayer exists; or
2. The financial position of the taxpayer demonstrates a clear inability
to pay the assessed tax.
Cases which may be compromised
• Delinquent accounts
• Cases under administrative protest after issuance of the Final
Assessment Notice to the taxpayer which are still pending in the
Regional Offices, Revenue District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service, Enforcement Service and
other offices in the National Office
• Civil tax cases being disputed before the courts
• Collection cases filed in courts
• Criminal violations, other than those already filed in court or those
involving criminal tax fraud
Cases which cannot be compromised
• Withholding tax cases, unless the applicant-taxpayer invokes
provisions of law that cast doubt on the taxpayer's obligation to
withhold
• Criminal tax fraud cases confirmed as such by the CIR or his duly
authorized representative
• Criminal violations already filed in court
• Delinquent accounts with duly approved schedule of installment
payments
Cases which cannot be compromised
• Cases where final reports of reinvestigation ore reconsideration have
been issued resulting to reduction in the original assessment and the
taxpayer is agreeable to such decision by signing the required agreement
form for the purpose. On the other hand, other protested cases shall be
handled by the Regional Evaluation Board (REB) or the National
Evaluation Board (NEB) on a case to case basis
• Cases which become final and executory after final judgment of a court,
where compromise is requested on the ground of doubtful validity of the
assessment; and
• Estate tax cases where compromise is requested on the ground of
financial incapacity of the taxpayer
Limit of the CIR’s Power to Compromise
1. For cases of financial incapacity: a minimum compromise rate
equivalent to ten percent (10%) of the basic assessed tax

2. For other cases: a minimum compromise rate equivalent to forty

percent (40%) of the basic assessed tax
Abatement of Taxes
Abatement means to cancel the entire amount of tax payable. CIR may
abate or cancel a tax liability:

• The tax or any portion thereof appears to be unjustly or excessively

assessed; or
• The administration and collection costs do not justify the collection
of the amount due. (e.g., when the costs of collection are greater
than the amount of tax due)
Recovery of Tax Erroneously or Illegally Collected
1. Necessity of written claim for refund
2. Claim containing a categorical demand for reimbursement
3. Filing of administrative claim for refund and the suit/proceeding
before the CTA within 2 years from date of payment regardless of
any supervening cause