INCOME TAXATION

CHAPTER 1: INTRODUCTION OF TAXATION

TAXATION – is a State power, a legislative

process, and a mode of government cost ASPECTS OF ABILITY TO PAY THEORY
distribution. 1. Vertical Equity
 One’s ability to pay is directly
 State Power - inherent power to enforce a proportional to the level of his
proportional contribution from its subjects taxes
for public purpose.  Gross Concept
Example: A has P200, 000 income
 Process - process of levying taxes by the while B has P400, 000. In taxing
legislature of the state to enforce income, the government should tax B
proportional contributions from its more than A because B has a greater
subjects for public purpose. income; hence, a greater capacity to
contribute.
 Mode of cost distribution - mode by
which the State allocates its costs or 2. Horizontal Equity
burden to its subjects who are benefited  Requires consideration for the
by its spending. particular circumstance of the
taxpayer.
THE THEORY OF TAXATION  Net Concept
 A government cannot exist without a Example: A and B both have P300
system of funding. The government’s 000 income. A incurred P200 000 in
necessity for funding is the theory of business expenses while B incurred
taxation. only P50 000 business expenses. The
government should tax B more than A
THE BASIS OF TAXATION because he has lesser expenses and
 The government provides benefits to the thus greater capacity to contribute
people in the form of public services, and taxes.
the people provide the funds that finance
the government. This mutuality support THE LIFEBLOOD DOCTRINE
between the people and the government is  Without taxes the government would be
referred to as the basis of taxation. paralyzed for lack of motive power to
activate or operate it.
 Taxpayers cannot avoid payment of taxes
under the defense of absence of benefit  Taxes are the lifeblood of the government,
received. and their prompt and certain availability
are an imperious need.
 The direct receipt or actual availment of
government services is not a precondition IMPLICATION OF THE LIFEBLOOD DOCTRINE
to taxation. OFTAXATION
1. Tax is imposed even if the absence of
THEORIES OF COST ALLOCATION Constitutional grant
1. Benefit received theory - the more 2. Claims for tax exemption are construed
benefit one receives from the government; against taxpayers
the more taxes he should pay. 3. The government reserves the right to
2. Ability to pay theory - taxpayers should choose objects of taxation
be required to contribute based on their 4. The courts are not allowed to interfere with
relative capacity to sacrifice for the the collection of taxes.
support of the government. 5. In income taxation:
a. Income received in advance is
NOTE: Those who have more should be taxed taxable upon receipt.
more even if they benefit less from the b. Deduction for capital expenditures
government. Those who have less shall and prepayments is not allowed as
contribute less even if they receive more of the it effectively defers the collection of
benefits from the government. income tax.
c. A lower amount of deduction is
preferred when a claimable
expenses subject to limit
 d. A higher tax base is preferred
when the tax objects has multiple
tax bases.

INHERENT POWERS OF THE STATE

1. Taxation power - is the power of the state to enforce proportional contribution from its subjects to
sustain itself.

2. Police Power - is the general power of the State to enact laws to protect the well-being of the
people.

3. Eminent Domain - is the power of State to take private property for public use after paying just
compensation.

NOTE: These rights, dubbed as “powers” are natural, inseparable and inherent to every government. No
government can sustain or effectively operate without powers. Therefore, the exercise of these powers by
the government is presumed understood and acknowledged by the people from the very moment they
establish their government. These power are naturally exercise by the government even in the absence of
an express grant of the power in the Constitution.

COMPARISON OF THE 3 POWERS OF THE STATE

Taxation Police Power Eminent Domain
Exercising Authority Government Government Government and private
utilities

Purpose For the support of the To protect the general For public use
government welfare of the people

Persons affected Community or class Community or class of Owner of the property

of individuals individuals

Amount of Imposition Unlimited Limited No amount imposed

(Tax is based on (Imposition is limited to (Government pay just
government needs) cover cost of regulations) compensation)

Importance Most important Most superior Important

Relationship with the Inferior to the “Non- Superior to the “Non- Superior to the “Non-
Constitution impairment Clause” impairment Clause” of the impairment Clause” of the
of the Constitution Constitution Constitution

Limitation Constitutional and Public interest and due Public purpose and just
inherent limitations process compensation

SIMILARITIES OF THE 3 POWERS OF THE STATE

1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and properties.
5. They all exist independently of the Constitution and are exercisable by the government even without
a Constitution grant. However, the Constitution may impose conditions or limits for their exercise.
6. They all presuppose an equivalent form of compensation received by the persons affected by the
exercise of the power.
7. The exercise of these powers by the local government units may be limited by the national
legislature.

SCOPE OF THE TAXATION POWER

The scope of taxation is widely regarded as
 Comprehensive
  Plenary
 Unlimited
 Supreme.

THE LIMITATION OF THE TAXATION POWER

A. INHERENT LIMITATIONS
1. Territoriality of taxation
 These obligations can only be
demanded and enforced by the 3. Public Purpose
Philippine government upon its  Tax is intended for the
citizens and residents. It cannot common good. Taxation must
enforce these upon subjects be exercised absolutely for
outside its territorial jurisdiction public purpose. It cannot be
as this would result in exercised to further any private
encroachment of foreign interest.
sovereignty.
4. Exemption of the Government
Two-fold obligations of taxpayers  The government normally does
1. Filing of returns and payments not tax itself this will not raise
of taxes additional funds but will only
2. Withholding of taxes on impute additional costs.
expenses and its remittance to  The income of the government
the government. from its properties and
activities conducted for profit,
Exception to the territoriality of including income from
taxation
government-owned and
 In income taxation, resident
controlled corporations is
citizens and domestic
subject to tax.
corporations are taxable on
income derived both within and
outside the Philippines. 5. Non-delegation of the taxing power
 The legislative taxing power is
 In transfer taxation, residents vested exclusively in Congress
or citizens such as resident and is non delegable, pursuant
citizens, non- resident citizens to the doctrine of separation of
and resident aliens are taxable the branches of the
on transfers of properties government to ensure a
located within or outside the system of checks and
Philippines balances.
 The power of lawmaking,
2. International Comity including taxation, is delegated
 No country is powerful than the by the people to the legislature.
other. Each country is So as not to spoil the purpose
observes international comity of delegation, it is held that
or mutual courtesy or what has been delegated
reciprocity between countries. cannot be further delegated.
Hence:
 Governments do not tax the Exceptions to the rule of non-
income and properties of delegation
other governments. 1. Under the Constitution, local
 Governments give primacy government units are allowed to
to their treaty obligations exercise the power to tax to
over their own domestic tax enable them to exercise their fiscal
laws autonomy.
 2. Under the Tariff and Customs 3. Other cases that require expedient
Code, the President is empowered and effective administration and
to fix the amount of tariffs to be implementation of assessment
flexible to trade conditions. and collection of taxes.

B. CONSTITUTIONAL LIMITATIONS  Each class is taxed differently,

1. Observe of due process of law but taxpayers falling under the
 No one should be deprived of same class are taxed the
his liberty, or property without same. Hence, uniformity is
due process law. Tax law relative equality.
should neither be harsh nor
oppressive.

Aspects of Due Process

1. Substantive due process - tax
must be imposed only for public
purpose, collected only under
authority of a valid law and only by
the taxing power having 4. Progressive system of taxation
jurisdiction.  Tax rates increase as the tax
base increases.
2. Procedural due process - there
 Aids in an equitable distribution
should be no arbitrariness in
of wealth to society by taxing
assessment and collection of
the rich more than the poor.
taxes, and the government shall
observe the taxpayer’s right to
5. Non-imprisonment for non-payment
notice and hearing.
of debt or poll tax
 Applies only when the debt is
 Under the NIRC, assessments
acquired by the debtor in good
shall be made within three
faith. Debt is acquired by the
years from the due date of
debtor in bad faith constitutes
filing of the return or from the
estafa, a criminal offense
date of actual filing, whichever
punishable by imprisonment.
is later.
 Collection shall be made within
Is non-payment of tax equivalent
five years from the date of to non-payment of debt?
assessment. o Non-payment of tax
compromises public
2. Equal protection of law
interest while the non-
 Taxpayers should be treated
payment of debt
equally both in terms of rights
compromises private
conferred and obligations
interest. Non-payment of
imposed (same circumstances)
tax is similar to a crime.
 Congress cannot exempt o Non imprisonment for non-
sellers of “balot” while
payment of debt does not
subjecting sellers of “penoy” to
extend to non-payment of
tax since they are essentially
tax except poll tax. (Poll,
the same goods.
personal, community or
residency tax)
3. Uniformity rule in taxation
 The rule of taxation shall be Poll tax has two components
uniform and equitable. a. Basic community tax
 Taxpayers under dissimilar b. Additional community tax
circumstances should not be
taxed the same.
 NOTE: Non imprisonment for non-  Intended to highlight the
payment of poll tax applies only to the separation of religion and the
basic community tax. Non-payment of State.
the additional community tax is an act  To support freedom of religion,
of tax evasion punishable by the government should not
imprisonment. favor any particular system of
religion by appropriating public
6. Non-impairment of obligation funds or property in support
and contract thereof.
 It should no set aside its
obligations from contracts by NOTE: Compensation to priests,
the exercise of its taxation imams, or religious ministers
power. Contract should be working with the military, penal
honoured and should not institutions, orphanages or
cancelled by a unilateral leprosarium is not considered
government action. religious appropriation.

7. Free worship rule

 Does not extend to income 10. Exemption from taxes of the
from properties or activities of revenues and assets of non-
religious institutions that are profit, non-stock educational
proprietary or commercial in institutions including grants,
nature. endowments, donations, or
contributions for educational
8. Exemption of religious or charitable purposes
entities, non-profit cemeteries,  Applies only on revenues and
churches and mosques, lands, assets that are actually, directly
buildings and improvements from and exclusively devoted for
property taxes educational purposes.
 Actually, directly and
exclusively used for charitable, NOTE: The NIRC also exempts
religious, and educational government educational
purposes. institutions from income tax and
subjects private educational
 Doctrine of use - only institutions to a minimal 10%
properties actually devoted for income tax.
religious, charitable, or
educational activities are 11. Concurrence of a majority of all
exempt from real property tax. members of Congress for the
passage of a law granting tax
 Doctrine of ownership - exemption
properties of religious,  Requires the vote of the
charitable, or educational majority of all members of
entities whether or not used in Congress.
their primary operations are  In the approval of an
exempt from real property tax exemption law, an absolute
(not applied in Philippines) majority or the majority of all
members of Congress is
9. Non-appropriation of public required.
funds or property for the benefit of  In the withdrawal of tax
any church, sect or system of exemption, only a relative
religion majority or quorum majority is
required.
 taxation or legislative act in
12. Non-diversification of tax taxation.
collections
 Tax collection should be used only Congress is composed of two
for public purpose. It should never bodies:
be diversified or used in private 1. The House of Representative
purpose. 2. The Senate

13. Non-delegation of the power of NOTE: Tax bills cannot originate

taxation exclusively from the Senate.
 Requires that taxation powers as
part of law-making be vested Matters of legislative discretion in the
exclusively in Congress. exercise of taxation
1. Determining the object of taxation
14. Non-impairment of the jurisdiction 2. Setting the tax rate or amount to be
of the Supreme Court to review tax collected
cases 3. Determining the purpose for the levy
 Notwithstanding the existence of which must be public use
the Court of Tax Appeals, which is 4. Kind of tax to be imposed
a special court, all cases involving 5. Apportionment of the tax between the
taxes can be raise to and be national and local government
finally decided by the Supreme 6. Situs of taxation
Court of the Philippines. 7. Method of collection

15. Appropriations, revenue, or tariff

bills shall originate exclusively in
the House of Representatives, but 2. Assessment and Collection
the Senate may propose or concur  referred to as incidence of taxation
with amendments or the administrative act of
 Laws that add income to the taxation
national treasury and those that
allows spending therein must SITUS OF TAXATION
originate from the House of Situs – place of taxation. It is a tax jurisdiction
Representatives while Senate that has the power to levy taxes upon the tax
may concur with amendments. object. Situs rules serve as frames of reference in
The origination of a bill by gauging whether the tax object is within or outside
Congress does not necessarily the tax jurisdiction of the taxing authority.
mean that the House bill must
become the final law. It was held Examples of Situs Rules:
constitutional by the Supreme 1. Business tax situs – businesses are
Court when Senate changed the subject to tax in the place where the
entire house version of a tax bill. business is conducted.
2. Income tax situs on service – service
16. Each local government units shall fees are subject to tax where they are
exercise the power to create its own rendered.
sources of revenue and shall have a 3. Income tax situs on sale of goods – the
just share in the national taxes gain on sale is subject to tax in the place
 This is constitutional recognition of of sale.
the local autonomy of local 4. Property tax situs – properties are
government and an express taxable in their location
5. Personal Tax situs – persons are taxable
delegation of the taxing power.
in their place of residence.

STAGES OF THE EXERCISE OF TAXATION

POWER OTHER FUNDAMENTAL DOCTRINES IN
1. Levy or imposition TAXATION
 Enactment of a tax law by 1. Marshall Doctrine
Congress and is called impact of  “The power to tax involves the
power to destroy”
  Does not include the power to 7. Doctrine of estoppel
destroy if it is used solely for the  Any misrepresentation made by
purpose of raising revenue. one party toward another who
 Imposition of excessive tax on relied therein in good faith will be
cigarettes held true and binding against that
person who made the
2. Holme’s Doctrine misrepresentation.
 “Taxation power is not the power to  The error of any government
destroy while the court sits” employee does not bind the
 Include the creation of Ecozones government.
with tax holidays and provision of
incentives 8. Judicial Non-interference
 Courts are not allowed to issue
3. Prospectivity of tax laws injunction against the
 Tax laws are generally prospective government’s pursuit to collect tax
in operation. An ex post facto law as this would unnecessarily defer
or a law that retroacts is tax collection (Lifeblood Doctrine)
prohibited by the Constitution.
9. Strict Construction of Tax Laws
NOTE: Exceptionally, income tax laws  “Taxation is the rule; exemption is
may operate retrospectively if so the exemption”
intended by Congress under certain  There is no room for interpretation,
justifiable conditions. For example, there is only room for application.
Congress can levy tax on income  When taxation laws are vague, the
earned during periods of foreign doctrine of strict legal construction
occupation even after the war. is observed

4. Non-compensation or set-off
 Tax is not a debt; hence, it is not Vague tax laws – construed against the
subject to set-off. government and in favor of the taxpayers.
 It means no tax law
EXCEPTION  Obligation arising from law is
 Taxpayer’s claim has already not presumed
become due and demandable
 Cases of obvious overpayment of Vague exemption laws – construed
taxes against the taxpayer and in favor of the
 Local taxes government
 It means no exemption law
5. Non-assignment of taxes  Construed strictly against the
 Tax obligations cannot be taxpayer in accordance with the
assigned transferred to another lifeblood doctrine
entity by contract.
NOTE: Tax exemption cannot arise from vague
6. Imprescriptibility in taxation inference.
 Prescription is the lapsing of a right
due to the passage of time DOUBLE TAXATION
 Tax prescribes if not collected  Occurs when the same taxpayer is taxed
within 5 years from the date of its twice by the same tax jurisdiction for the
assessment. same thing
 In the absence of assessment, tax
prescribes if not collected by Elements of double taxation
judicial action within 3 years from 1. Primary elements
the date the return is required to be a. same object
filed. 2. Secondary elements
 Taxes due from taxpayers who did a. Same type of tax
not file a return or those who filed b. Same purpose of tax
fraudulent returns do not prescribe. c. Same taxing jurisdiction
d. Same tax period
Types of double taxation A. Those that result to loss of government
1. Direct double taxation - occurs when all revenue
the element of double taxation exists for 1. Tax evasion – also known as tax
both impositions. dodging, refers to any act or trick that
 Discouraged because it is tends to illegally reduce or avoid the
oppressive and burdensome to payment of tax.
taxpayers. It is also believed to
counter the rule of equal protection Examples
and uniformity in the Constitution.  This can be achieved by gross
understatement of income,
2. Indirect double taxation - at least one of non- declaration of income,
the secondary elements of double taxation overstatement of expenses or
is not common for both impositions. tax credit.
 Prevalent in practice  Misrepresenting the nature or
amount of transaction to take
advantage of lower taxes.

2. Tax avoidance – also known as tax

minimization, refers to any act or trick
that reduces or totally escapes taxes
by any legally permissible means.

Examples
 Selection and execution of
transaction that would expose
taxpayer to lower taxes.
 Maximizing tax options, tax
carry-overs or tax credits
 Careful tax planning
How can double taxation be minimized?
a. Provision of tax exemption - only one 3. Tax exemption – also known as tax
tax law is allowed to apply to the tax object holiday, refers to the immunity,
while other tax law exempts the same tax privilege or freedom from being
object. subject to a tax which others are
subject to.
b. Allowing foreign tax credit - both tax
laws of the domestic country and a foreign  All forms of tax exemptions can be
country tax the tax object, but the tax revoked by Congress except those
payments made in the foreign tax law is granted by the Constitution and
deductible against the tax due of the those granted under contracts
domestic tax law.
B. Those that do not result to loss of
c. Allowing reciprocal tax treatment - government revenue
provisions in tax laws imposing reduced 1. Shifting – process of transferring tax
tax rates or even exemption if the country burden to other taxpayers.
of the foreign taxpayer also give the same
treatment to Filipino non-residents therein. Forms of shifting
a. Forward shifting – follows the
d. Entering into treaties or bilateral normal flow of distribution.
agreements - countries may stipulate for (manufacturer to wholesaler,
a lower tax rates for their residents if they retailers to customer).
engage in transactions that are taxable by  Common with essential
both of them. commodities and services
such as food and fuel.
ESCAPES FROM TAXATION
 Are the means available to the taxpayer to b. Backward Shifting – reverse of
limit or even avoid the impact of taxation. forward shifting.
 Common with non-essential
Categories of Escapes from Taxation commodities where buyers
have considerable market
 power and commodities  Example: The value of a
with numerous substitute mining property will
products. correspondingly decrease
when mining output is
c. Onward Shifting – any tax subjected to higher taxes. This
shifting in the distribution is a form of backward shifting
channel that exhibits forward or tax.
backward shifting.
3. Transformation - elimination of
wastes or losses by the taxpayer to
NOTE: Shifting is common with
form savings to compensate for the
business taxes where taxes imposed
tax imposition or increase in taxes.
on business revenue can be shifted
or passed-on to customers.

2. Capitalization – adjustment of the

value of an asset cause by changes in
tax rate
TAX AMNESTY
 General pardon granted by the government for erring taxpayer to give them a chance to reform and
enable them to have a fresh start to be part of a society with a clean slate. Absolute forgiveness or
waiver by the government on its right to collect and is retrospective in application

TAX CONDONATION
 Forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. Also
referred to as tax remission.

TAX AMNESTY TAX CONDONATION

Covers both civil and criminal liabilities
Covers only civil liabilities of the
taxpayer
Operates retrospectively by forgiving Applies prospectively to any unpaid
past violations balance of the tax; hence, the portion
already paid by the taxpayer will not be
refunded

Conditional upon the taxpayer paying Requires no payment

the government a portion of the tax