Income Taxation Joe Pokaran

MODULE 1 - TAXATION: GENERAL PRINCIPLES AND CONCEPTS

I. Module Overview

This module introduces the general principles of taxation and statutory provisions on income
taxation including pertinent revenue regulations. The main topics were divided into several
learning packets that include among others: The general principles and concepts of taxation,
limitations to the power of taxation, forms of escape in taxation, tax laws and some doctrines in
taxation, and taxes, its nature and concepts, with their respective topic outlines. The module also
provides in the Learning Management System (LMS) activities designed in order for you to
better understand and comprehend the basic concepts appertaining thereto.

II. Learning Objectives:

After successfully completing this module, you must have:

1. Explained the nature, purpose and importance of taxation;

2. Applied the basic principles and policies of Philippine Income Tax Law;

3. Appraised and elaborated the importance of taxation from the taxpayer’s point of view and on
the government’s perspective; and

4. Explained and contrasted the different kinds of taxes and the manner in which different
entities are taxed.

III. Integration of Faith and Learning/Values

The Bible teaches us to “Let every person be subject to the governing authorities. For there is no
authority except from God, and those that exist have been instituted by God” (Rom 13:1), which
means, “one must be in subjection, not only to avoid God’s wrath but also for the sake of
conscience” (Rom 13:5), so “you also pay taxes, for the authorities are ministers of God,
attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed,
revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is
owed” (Rom 13:6-7). https://faithinthenews.com/are-taxes-worse-today-than-in-biblical-times/

IV. Readings

Tabag, E. D & Garcia E. R. (2018). Income taxation with special topics in taxation. Pp. 1-42.
(1.1 – 1.3)

Reyes, Virgilio D. (2019). Income tax law and accounting under the TRAIN law. Pp. 1-1 to 1-5.
(1.1-1.3)
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Valencia, Edwin & Roxas, Gregorio. Income taxation. Principles and laws with accounting
application. (6th Edition)

LEARNING PACKET #1: TAXATION: GENERAL PRINCIPLES AND CONCEPTS

Taxes are levied in almost every country of the world, primarily to raise revenue for government
expenditures. While taxes are presumably collected for the welfare of taxpayers as a whole, the
individual taxpayer’s liability is proportionate to their respective abilities to earn the revenue
which they respectively enjoy under the protection of the state.

The imposition of the power of taxation can only be successfully implemented through a more
sophisticated systems and processes for defining who is taxed, what is taxed, how much is taxed
and which personal conditions of the taxpayers should be taken into account. Hence, principles
that should underpin taxation and how these impact on the citizen’s daily lives should carefully
be studied.

In studying the general principles of taxation, one must not lose sight of the fact that taxes must
be administered by an accountable authority, that focuses on the general principles of clarity,
stability, cost-effectiveness, and convenience that will best ensure an effective tax system.

LEARNING PACKET #2: LIMITATIONS TO THE POWER OF TAXATION

 While power of taxation is supreme, its exercise is not absolute since it is subject to Inherent and
Constitutional restrictions. A violation of this inherent restrictions is equivalent to taking a
property without due process of law. http://antslegal.blogspot.com/2012/07/pepsi-cola-vs-
municipality-of-tanauan.html. On the other hand, a violation of the constitutional limitations on
the power of taxation will render the tax law null and
void. http://digestyourlaw.blogspot.com/2010/01/sison-vs-ancheta.html

LEARNING PACKET #3: FORMS OF ESCAPE IN TAXATION

Tax Evasion and Tax Avoidance are ways by which a taxpayer could escape tax burdens.

“A tax evader breaks the law (tax evasion), the tax avoider sidesteps it (tax avoidance)”

The “doctrine of escape from taxation” permits the taxpayer to minimize (if not to escape)
payment of tax by lawful means.

TAX EVASION is the use of illegal means to defeat or lessen the payment of a tax. It is also
known as “TAX DODGING” and it is also punishable by law.
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Example: Underpricing in your Deed of Sale is tax evasion; deliberate failure to report taxable
income.

TAX AVOIDANCE is the use of legally permissible method to reduce tax payment or what we
call “TAX MINIMIZATION”.

Forms of Tax Avoidance:

1. SHIFTING is the transfer of the tax burden by the person on whom it is imposed by law to
another person.

Shifting is peculiar only to certain forms of taxes and this is peculiar only in indirect taxes. There
is no shifting in the case of direct taxes.

Ex: VAT, Percentage Tax, Business Tax

Forms of Shifting:

1. Forward Shifting - is a form of transfer of the tax from the factors of production through the
factors of distribution until the burden finally rests to the consumer

2. Backward Shifting - s the transfer of the burden of the tax from the point of consumption to
the factors of distribution to the factors of production.

3. Onward Shifting - is a series of shifts. So The series of shifts will be either two or more
forward shifting or two or more backward shifting or a combination of forward or backward
shifting, an you have what you call an onward shifting. This occurs when the tax is shifted two or
more times either forward or backward.

TAX CAPITALIZATION is a form of backward shifting whereby real taxes on property sold
are capitalized at the time of purchase and deducted in lump sum from the selling price.

Example: Sale of real properties where you have savings – acquiring the property at a lesser
price. From that savings you have, the savings will be capitalized to pay your future tax
obligations when you would now own that property. The future taxes on the property sold are
capitalized at the time of purchase and deducted lump sum from the selling price.

2. TRANSFORMATION is effected through the process of production. The producer on whom

the tax is imposed, fearing the loss of his market if he adds the tax to the price, takes the tax and
recovers

his additional expense by improving his method of production thereby turning out units at lesser
costs. This is peculiar only in the production process – when you are a manufacturer or producer.

When one improves his means, methods or manner of production, this would turn out more units
at a lesser cost. The tax is transformed into a gain through the medium of production.
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3. TAX EXEMPTIONS – This is a grant of immunity to particular persons or corporations or to

persons of a particular class from a tax which persons are generally within the same state or
taxing district who are obliged to pay for the tax. It is an immunity or the non-payment of a tax.

The power to tax carries with it the power to grant tax exemptions. The principles of the power
of taxation are the same principles to be applied in the grant of tax exemptions – legislative in
character, public purpose, subject to territorial restriction, constitutional limitations, due process,
equality, uniformity.

The more important basis for granting tax exemption is public interest. The consequence of such
exemption is that the state will incur monetary loss. By reason of public i4.nterest, the state is
willing to incur a monetary loss provided that public interest will be served by the grant of the
exemption. The public interest must be sufficient to offset the monetary loss entailed in the grant
of the exemption.

Grounds for the grant of tax exemption

1. Exemptions may be granted on the basis of contracts.

2. The exemption may be contained in the charter or in the law creating the corporation or entity
to which the exemption is granted.

3. The exemption may be based on some ground of public policy. For purposes of encouraging
and promoting industries, we grant tax benefits or tax exemptions for a certain period of time so
that they would encourage and develop their industries.

4. Tax exemption may be created on the basis of tax treaties or agreements between two states on
the basis of reciprocity.

4. TAX AMNESTY - operates as a condonation of your tax liability. It is also construed strictly
against the taxpayer.

When you avail of a tax amnesty, the government cannot run after you for other deficiency tax.
Once you avail of the tax amnesty for a certain tax period, then, you are released from any
liability or deficiency. The state has granted you condonation. Tax amnesty partakes of an
absolute forgiveness or waiver on the part of the government to collect what otherwise would be
due it. And in a sense, prejudicial thereto, particularly to give tax evaders who wish to relent and
are willing to reform a chance to do so, thereby become part of the new society with a clean
slate. This is a full immunity.

LEARNING PACKET #4: TAX LAWS AND SOME DOCTRINES IN TAXATION

Tax law is a body of rules under which a public authority has a claim on taxpayers, requiring
them to transfer to the authority part of their income or property. The power to impose taxes is
generally recognized as a right of governments. The basic source of Philippine Tax Law is the
Income Taxation Joe Pokaran

National Internal Revenue Law, the latest version of which is the National Internal Revenue
Code of 1997. It is also known as the Tax Reform Act of 1997, approved on December 11, 1997.
Just recently, some provisions of the Tax Reform Act of 1997 were amended through the passage
of RA 10963 otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN Law)
which took effect on January 1, 2018.

Nature of Tax Laws-

The Philippine Internal Revenue laws are generally civil in nature; they are neither political nor
penal in nature (Republic vs. Oasan vda. De Fernandez, 99 Phil. 935)

They are not political in nature since they remain effective even if foreign invaders occupy our
country. They are deemed to be the laws of the occupied territory and not of the occupying
enemy.

Even if there are penalties provided for violation of tax laws, they are not penal in nature. The
internal revenue law provides for some penalties for tax delinquencies only to effect timely
payments of taxes or punishes tax evasion for neglect of duty by those subjects of taxation.

Interpretation of Tax laws

The well-settled doctrine of “strict interpretation in the imposition of taxes and other burdens”
shall be followed in the application of tax laws which are:

1. Tax statutes must be enforced as written.

When there is ambiguity of tax laws, the rules of statutory construction may be used to search for
the legislative intent. However, when the meaning of the law is clear, the statute must be
enforced as written.

2. Imposition of tax burdens is not presumed.

Tax burdens shall neither be imposed nor presumed beyond what the statutes expressly and
clearly state because tax statutes should be construed strictly against the government.

3. Doubts should be resolved liberally in favor of the taxpayer.

When the primary consideration is the legislative intent but doubts existing determining such
intent, the doubts must be resolved liberally in favor of taxpayers, and strictly against the taxing
authority.

4. Tax exemptions are strictly construed against the taxpayer.

Exemptions are highly disfavored in law and therefore, he who claims tax exemption must be
able to justify his claim or right.
Income Taxation Joe Pokaran

5. Tax laws are applied prospectively

A tax statute must be applicable and operative only upon becoming a law. Tax laws are given
retroactive effect only if there is a clear legislative intent in that regard. Hence, our tax laws are
generally prospective in operation except when it is clearly provided by the legislative intent that
a tax statute shall operate retrospectively.

Exceptions where we apply retroactivity:

1. When retroactivity is not harsh and oppressive and it does not violate due process.

2. When retroactive operation is expressly declared by law or clearly by the legislative intent.

Tax laws, however, should not be given retroactive application when it would be harsh and
oppressive against the taxpayer so as not to violate the constitutional limitation of due process.

6. Tax laws prevail over civil laws

The Tax Code is a special law in relation to the Civil Code. Whenever there is a conflict between
the Tax Code and the Civil Code, the former (Tax Code) shall prevail over the latter (Civil Code)

7. Sources of Tax Laws

The basic source of Philippine tax law is the National Internal Revenue Law, which codifies all
tax provisions, the latest of which is embodied in Republic Act No. 8424 (“The Tax Reform Act
of 1997”). It amended previous national internal revenue codes, which was approved on
December 11, 1997. Some provisions of RA 8424 were amended under RA 10963 (TRAIN
Law).

The following are the sources of Philippine Tax Laws:

1. Constitution of the Philippines

2. Statutes are laws enacted and established by the will of the legislative department. (RA 9337-
VAT Reform Law, RA 10963 -TRAIN Law)

3. Judicial Decisions – decisions made by the Court of Tax Appeals or Supreme Court.

4. Executive Orders – regulations issued by the President or some administrative bodies

5. Tax Treaties and Conventions with foreign countries agreements with foreign countries
regarding tax enforcement and exemptions.

6. Revenue Regulations promulgated by the Department of Finance

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7. BIR Revenue Memorandum Circulars and Bureau of Custom Memorandum Orders

8. BIR Rulings; and

9. Local Tax Code or ordinance issued by the Province, City, Municipality and Barangay

SOME DOCTRINES IN TAXATION

1. Taxpayer’s suit

It is an action of the nature of a class representative suit filed to secure relief on actions of public
officers or officials involving the disposal of public funds adversely affecting the common
interest of a class of taxpayers or taxpayers in general within the jurisdiction of a taxing
authority.

The general rule is that the validity of statute will be contested only by one who will sustain a
direct injury as a result of the enforcement of the law.

2. Set-off taxes

This doctrine states that taxes are not subject to set-off or legal compensation because the
government and the taxpayer are not mutual creditor and debtor of each other. (Republic vs.
Mambulao Lumber Co., 6 SCRA 622)

A person cannot refuse to pay tax on the basis that the government owes whom an amount equal
to or greater than the tax being collected. The collection of a tax cannot await the results of a
lawsuit against the government.

Exceptions:

1. Where both the claims of the government and the taxpayer against each other have already
become due, demandable and fully liquidated. (Domingo vs. Garlitos, 8 SCRA 443), and

2. When there is an actual compromise between the taxpayer and the tax officer.

3. Equitable Recoupment

This doctrine of law states that a tax claim for refund, which is prevented by prescription, may be
allowed to be used as payment for unsettled tax liabilities if both taxes arise from the same
transaction in which overpayment is made and underpayment is due. This doctrine is not
applicable to cases where the taxes involved are totally unrelated.

4. Compromises

This doctrine provides that compromises are generally allowed and enforceable when the subject
matter thereof is not prohibited from being compromised and the person entering such
Income Taxation Joe Pokaran

compromise is duly authorized to do so. The law allows the following persons to do compromise
in behalf of the government:

1. Only the BIR Commissioner is expressly authorized by the Tax Code to enter into
compromise for both civil and criminal liabilities subject to certain conditions. (Sec. 204, NITC)

2. The Collector of customs is given the power to compromise with respect to customs duties
limited to cases where legitimate authority is specifically granted, such as in the remission of
duties, (Sec. 709, TCC)

3. The Customs Commissioner, subject to approval by the Secretary of Finance, has the power to
compromise in cases involving the imposition of fines, surcharges and forfeitures (Sec. 2316,
TCC) and

4. The Local government Code has no provision regarding compromise; however, tax liability

(not criminal liability) is not prohibited from being compromised. (Arts. 2034 & 2035, NCC)

5. Power to destroy/Power to build

A government or state cannot survive without revenue from taxes. ... The power to tax is the
power to destroy (Marshall Dictum) but taxation power is also the power to build (Holmes
Doctrine).

1. Power to Destroy

This tax doctrine is based on the Marshall Dictum which states that the power to tax includes
the power to destroy because the taxpayer has no option but to pay the tax imposed to him. The
government can compel payment of tax and forfeiture of property through the exercise of police
power. A lawful tax cannot be defeated just because its exercise would destructively bring
insolvency to a taxpayer.

2. Power to Build

Under this doctrine, tax power should not be viewed as a power to destroy. The burden to pay tax
is only a means to nation building and a consequence of taxation. It is primarily a tool that
creates, builds and sustains the upliftment of social condition of the people in general as it
continuously supports the other inherent powers of the state that preserve the fundamental rights
of the people.

LEARNING PACKET #5: TAXES

Nature of Taxes

Taxes are forced burdens, charges, exactions, impositions or contributions assessed in

accordance with some reasonable rule of apportionment, by authority of a sovereign state, upon
Income Taxation Joe Pokaran

the person, property, or rights exercised, within its jurisdiction, to provide public revenues for the
support of the government, the administration of the law, or the payment of public expenses.
Taxes are therefore personal obligations of the taxpayer created by law.

Essential Characteristics of Taxes:

1. Enforced contributions – not dependent upon the will of the taxpayer.

2. Imposed by legislative body- Congress makes tax laws.

3. Proportionate in character – The ability to pay principle is the basic rule in collecting taxes.
Those who earn more contribute to the government’s coffer more than those with lesser earnings.

4. Payable in the form of money – money is the preferred payment of taxes. If property is taken
to satisfy tax liability, it is sold through public auction to satisfy the tax obligation.

5. Imposed for the purpose of raising revenue – taxes are the primary source of government
revenue.

6. Used for public purpose – money is taken from the public and returned to them in the form
of public benefits.

7. Enforced on some persons, properties or rights – objects of taxation are either tangible or
intangible properties, including business transactions.

8. Commonly required to be paid at regular intervals – the dates of payment of taxes are
fixed by the law to comply with the principle of administrative feasibility.

9. Imposed by the sovereign state within its jurisdiction – imposition of tax is subject to
territorial jurisdiction and international comity.

Classification of taxes:

a. As to the subject matter:

1. Personal tax – Poll tax. Tax on the person, like the poll tax or the cedula or community tax
certificate. It is a tax imposed on the person, including natural as well as juridical persons, who
establish residency in a particular locality and made to pay this personal tax.

2. Property tax – Tax imposed on the property

3. Excise tax – Tax imposed for the exercise of a privilege - of transferring property, entering
into a business, of exercising an occupation.

b. As to who bears the burden:

Income Taxation Joe Pokaran

1. Direct – is one where the statutory taxpayer is the person who is required by law to pay the
tax. The statutory taxpayer shoulders the burden as well as the liability of the tax. Example:
income tax, estate tax, donor’s tax

2. Indirect – is one where the law provides that this is the statutory taxpayer but this statutory
taxpayer is allowed to pass on or to shift, not the liability, but the burden of the tax to another
person.

Example:

i. business taxes like VAT – The VAT is passed on to the buyer of that item or merchandise.

ii. percentage tax – another form of business tax;

iii. excise tax

c. As to the determination of amount:

1. Specific – based on a certain or a manner of measurement; on the basis of weight. This type of
tax is peculiar to those products which are produced or manufactured like gasoline, alcohol
products, cigars and cigarettes.

2. Ad valorem – amount is determined on the value; means “based on the value of the article”.

d. As to purpose:

1. General – also known as fiscal or revenue. The purpose is principally to raise revenue.

2. Special – also known as regulatory. While the purpose is to raise revenue, it carries an
incidental or special or regulatory purpose like for regulatory power or as basis for just
compensation.

3. Compensatory – imposed for the equitable distribution of wealth and income in the society.

e. As to scope or authority imposing the tax:

1. National – collected by the national government

a. Estate and Donor’s tax

b. Income tax

c. VAT

d. Excise Tax
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e. Customs Duties

f. Documentary Stamp Taxes

2. Municipal or Local – taxes authorized to local government units and found under the Local
Government Code; either by the province, city or municipality:

a. Community Tax

b. Municipal licenses tax

c. Professional tax

d. Real estate tax

f. As to graduation or rate:

1. Proportional – tax rate is based on a fixed percentage of the amount of the property, receipt
or other basis to be taxed.

a. Real Estate Tax

b. Value-Added Tax

c. Percentage Tax

2. Progressive or Graduated Tax – tax rate increases as tax base or bracket increases

a. Income taxes.

3. Regressive – tax rate decreases as tax base or bracket increases. There is no regressive tax in
the Philippines.

4. Mixed Tax – tax system that uses a combination of the different tax rates.

PROGRESSIVE SYSTEM OF TAXATION

This is different from a progressive tax rate. In the case of progressive or graduated tax rate, this
is where the rate increases as the tax base increases. In the case of income, the more income you
have, the higher will be the tax rate.

Progressive System of Taxation means that the state has more direct taxes than indirect taxes.

REGRESSIVE SYSTEM OF TAXATION

Income Taxation Joe Pokaran

The regressive rate is different from the regressive system of taxation.

Regressive System of Taxation means that there are more indirect taxes than direct
taxes. Example: VAT – regardless of your economic status as a taxpayer, the purchase of an item
or commodity, regardless of who the buyer is, they are made to pay the same tax. Whether you
are rich or poor and you buy the same item, you pay the same tax.

TAX AS DISTINGUISHED FROM OTHER TERMS:

PENALTY does not operate as a tax. It is a sanction imposed for a violation, whether you will
be made to pay a fine or subject yourself to imprisonment for such violation. But when you are
made to pay a tax, that enforced contribution does not operate as a penalty.

DEBT:

1. A debt arises from a contract, express or implied, while a tax is created by law.

2. As to effect of non-payment, no person can be imprisoned for non-payment of a debt. In case

of non-payment of a tax, you will be made to pay a fine or imprisonment or both, in addition to
the payment of the basic tax plus other surcharges such as interest. 3. As to set-off or
compensation (bar question), taxes are not subject to set-off or compensation. Taxes are not
debts. Taxes arise from compulsory obligation imposed upon citizens or inhabitants of the state.

If a taxpayer owes something to the government by way of taxes, and the government has a debt
which it has to pay to the taxpayer, set-off or compensation is not allowed. Taxpayers and the
government do not have a debtor and creditor relationship. Taxes cannot operate like a debt or
indebtedness of a taxpayer. It is not subject to set-off or compensation.

LICENSE FEE operates for purposes of police power, for regulation, while tax operates to raise
revenue. This is the basic distinction between a tax and a license fee.

a. Taxes arise from the exercise of taxing power while license fees arise from police power.

b. Taxes are for revenue while license fees are for regulation.

c. License fees cannot exceed the reasonable cost for regulation while taxes are not so limited

d. License fees can be imposed only on legal businesses and activities while taxes can be
imposed on legal and illegal businesses.

e. Failure to pay license fees makes the business illegal while failure to pay a tax does not
necessarily make the act or business illegal.

3 Kinds of License Fees:

1. License Tax – this is purely a tax. The purpose is to raise revenue.

Income Taxation Joe Pokaran

2. License Fee to regulate a useful occupation – police power. The purpose is to regulate.

License Fee to regulate a useful occupation - The amount of fees that is to be imposed for
purposes of regulation should be reasonable amount to cover the cost of inspection, surveillance
or regulation.

License Fee to regulate a non-useful occupation – police power. The purpose is to regulate. It
could go over and above the requirement of reasonableness because the purpose of a license fee
to regulate a non-useful occupation is to discourage people from going into a non-useful
occupation.

TOLL is not a tax. It is paid when you use or pass through a private property.

Toll – consideration for the use of a property.

Tax – enforced contribution, the purpose of which is to raise revenue.

SPECIAL ASSESSMENT/SPECIAL LEVY is different from a tax. An example is the special

levy found in the Local Government Code. Its purpose is to recover that cost of improvement or
infrastructure introduced by the LGU. Such that, only real property owners who were benefited
by that improvement are subject to tax. When the government has already recovered the cost, the
collection stops. Collection is limited, unlike in tax, where it will continue unless Congress will
repeal.

This special levy is imposed on the land. If you have an area not accessible to commercial
activity because there are no roads or bridges, the local government will build roads or bridges to
have an access to that remote area.

CUSTOMS DUTIES are imposition on imported goods brought into the country to protect local
industry.

TARIFF is a schedule or list of rates, duties or taxes imposed on imported goods.