PART I

INTRODUCTORY CONCEPTS

After this lesson, students will be able to comprehend and demonstrate mastery of the following:
1. Introduction to taxation
2. Taxes, Tax Laws, and Tax Administration
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Every citizen and resident of State directly or indirectly benefits from the public services rendered by
the government. These benefits can be in the form of daily free usage of public infrastructures, access
to public health or educational services, the protection and security of person and property, or simply
the comfort of living in a civilized and peaceful society which is maintained by the government.

While most public services are received indirectly, their realization by every citizen and resident is
undeniable. In taxation, the receipt of these benefits by the people is conclusively presumed. Thus,
taxpayers cannot avoid payment of taxes under the defense of absence of benefit received. The direct
receipt or actual availment of government services is not a precondition to taxation.

WHAT IS TAXATION?
Taxation may be defined as a State power, a legislative process, and a mode of government cost
distribution.

1. As a state power
Taxation is an inherent power of the State to enforce a proportional contribution from its
subjects for public purpose.
2. As a process
Taxation is a process of levying taxes by the legislature of the State to enforce proportional
contributions from its subjects for public purpose.
3. As a mode of cost distribution
Taxation is a mode by which the State allocates its costs or burden to its subjects who are
benefited by its spending.

The Theory of Taxation

Every government provides a vast array of public services including defense, public order and safety,
health, education, and social protection among others.
A system of government is indispensable to every society. Without it, the people will not relish the
benefits of a civilized and orderly society. However, a government cannot exist without a system of
funding. The government’s necessity for funding is the theory of taxation.

The Basis of Taxation

The government provides benefits to the people in the form of public services, and the people provide
the funds that finance the government. This mutuality of support between the people and the
government is referred to as the basis of taxation.

This mutuality is illustrated as:

Public Services

Government People

Taxes

THEORIES OF COST ALLOCATION

Taxation is a mode of allocating government costs or burden to the people. In distributing the costs or
burden, the government regards the following general considerations in the exercise of its taxation
power:
1. Benefit received theory
It presupposes that the more benefit one receives from the government, the more
taxes he should pay.
2. Ability to pay theory
It presupposes that taxation should also consider the taxpayer’s ability to pay.

The Lifeblood Doctrine

Taxes are essential and indispensable to the continued subsistence of the government. Without taxes,
the government would be paralyzed for lack of motive power to activate or operate it. (CIR vs. Algue)
Taxes are the lifeblood of the government, and their prompt and certain availability are an imperious
need. Upon taxation depends the government’s ability to serve the people for whose benefit taxes are
collected. (Vera vs. Fernandez)
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 the State to take private property for public use after paying just
compensation

SCOPE OF TAXATION POWER

The scope of taxation is widely regarded as comprehensive, plenary, unlimited and supreme.

However, despite the seemingly unlimited nature of taxation, it is not absolutely unlimited. Taxation
has its own inherent limitations and limitations imposed by the Constitution.

THE LIMITATIONS OF THE TAXATION POWER

A. Inherent Limitation
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power
B. Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque
from property taxes
9. Non-appropriation of public funds or property for the benefit of any church, sect or system
of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational
institutions.
 11. Concurrence of a majority of all members of Congress for the passage of a law granting
tax exemption.
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. The requirement that appropriations, revenue, or tariff bills shall originate exclusively in
the House of Representatives.
16. The delegation of taxing power to local government units.

STAGES OF THE EXERCISE OF TAXATION POWER

1. Levy or imposition
It involves the enactment of a tax law by Congress and is called impact of taxation. It
is also referred to as the legislative act in taxation.

Congress is composed of two bodies:

1. The House of Representatives, and
2. The Senate
As mandated by the Constitution, tax bills must originate from the House of
Representatives. Each may, however, have their own versions of a proposed law
which is approved by both bodies, but tax bills cannot originate exclusively from the
Senate.

Matters of legislative discretion in the exercise of taxation

1. Determining the object of taxation
2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which must be public use
4. Kind of tax to be imposed
5. Appointment of the tax between the national and local government
6. Situs of taxation
7. Method of collection

2. Assessment and collection

The tax law is implemented by the administrative branch of the government.
Implementation involves assessment or the determination of the tax liabilities of
taxpayers and collection. This stage is referred to as incidence of taxation or the
administrative act of taxation.
SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the tax
object. Situs rules serve as frames of reference in gauging whether the tax object is within or outside
the tax jurisdiction of the taxing authority.

Examples of Situs Rules:

1. Business tax situs: Businesses are subject to tax in the place where the business is conducted.
2. Income tax situs on services: Service fees are subject to tax where they are rendered.
3. Income tax situs on sale of goods: The gain on sale is subject to tax in the place of sale.
4. Property tax situs: Properties are taxable in their location
5. Personal tax situs: Persons are taxable in their place of residence.

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

1. Marshall Doctrine
2. Holme’s Doctrine
3. Prospectivity of Tax Laws
4. Non-compensation or set-off
5. Non-assignment of taxes
6. Imprescriptibility in taxation
7. Doctrine of estoppel
8. Judicial Non-interference
9. Strict Construction of Tax Laws

DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the
same thing.

Elements of double taxation

1. Primary element: Same object
2. Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
Types of Double Taxation
1. Direct double taxation
This occurs when all the element of double taxation exists for both impositions.
2. Indirect double taxation
This occurs when at least one of the secondary elements of double taxation is not
common for both impositions.

Nothing in our law expressly prohibits double taxation. In fact, indirect double taxation is prevalent in
practice. However, direct double taxation is discourage because it is oppressive and burdensome to
taxpayers. It is also believed to counter the rule of equal protection and uniformity in the Constitution.

How can double taxation be minimized?

a. Provision of tax exemption
b. Allowing foreign tax credit
c. Allowing reciprocal tax treatment
d. Entering into treaties or bilateral agreements

ESCAPES FROM TAXATION

Escapes from taxation are the means available to the taxpayer to limit or even avoid the impact of
taxation.

Categories of Escapes from Taxation

A. Those that result to loss of government revenue
1. Tax Evasion, also known as tax dodging, refers to any act or trick that tends to illegally
reduce or avoid the payment of tax.
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.
3. Tax Exemption, also known as tax holiday, refers to the immunity, privilege or freedom
from being subject to a tax which others are subject to. Tax exemptions may be granted by the
Constitution, law, or contract.
B. Those that do not result to loss of government revenue
1. Shifting- This is the process of transferring tax burden to other taxpayers.
Forms of shifting
a. Forward shifting
This is the shifting of tax which follows the normal flow of distribution. It is
common with essential commodities and services such as food and fuel.
b. Backward shifting
This is the reverse of forward shifting. It is common with non-essentials
commodities where buyers have considerable market power and commodities
with numerous substitute products.
c. Onward shifting
This refers to any tax shifting in the distribution channel that exhibits forward
shifting or backward shifting.

Shifting is common with business taxes where taxes imposed on business revenue can
be shifted or passed-on to customers.

2. Capitalization- This pertains to the adjustment of the value of an asset caused by changes
in tax rates.

3. Transformation- This pertains to the elimination of wastes or losses by the taxpayers to

form savings to compensate for the tax imposition or increase in taxes.

Tax Amnesty
Amnesty is a general pardon granted by the government for erring taxpayers to give them a chance to
reform and enable them to have a fresh start to be a part of a society with a clean slate. It is an
absolute forgiveness or waiver by the government on its right to collect and its retrospective in
application.

Tax Condonation
Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain justifiable
grounds. This is also referred to as tax remission.

Because they deprive the government of revenues, tax exemption, tax refund, tax amnesty and tax
condonation are construed against the taxpayer and in favor of the government.
Tax Amnesty vs. Tax Condonation
Amnesty covers both civil and criminal liabilities, but condonation covers only civil liabilities of the
taxpayer.

Amnesty operates retrospectively by forgiving past violations. Condonation applies prospectively to

any unpaid balance of the tax; hence, the portion already paid by the taxpayer will not be refunded.

Amnesty is also conditional upon the taxpayer paying the government a portion of the tax whereas
condonation requires no payment.

TAXATION LAW
Taxation law refers to any law that arises from the exercise of the taxation power of the State.

Types of Taxation Laws

1. Tax laws – These are laws that provide for the assessment and collection of taxes.
2. Tax exemption laws – These are laws that grant certain immunity from taxation.

Sources of Taxation Laws

1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax Treaties and conventions with foreign countries
8. Revenue Regulations

Types of Administrative Issuances

1. Revenue regulations
These are issuances signed by the Secretary of Finance upon recommendation of the
Commisioner of Internal Revenue (CIR) that specify, prescribe, or define rules and
regulations for the effective enforcement of provisions of the National Internal Revenue Code
(NIRC) and related statutes.
2. Revenue memorandum orders
These are issuances that provide directives or instructions; prescribe guideline; and outline
processes, operations, activities, workflows, methods, and procedures necessary in the
 implementation of stated policies, goals, objectives,plans, and programs of the Bureau in all
areas of operations except auditing.
3. Revenue memorandum rulings
These are rulings, opinions and interpretations of CIR with respect to the provisions of the tax
code and other tax laws as applied to a specific set of facts, with or without established
precedents, and which the CIR may issue from time to time for the purpose of providing
taxpayers guidance on the tax consequences in specific situations.
4. Revenue memorandum circulars
These are issuances that publish pertinent and applicable portions as well as amplications of
laws, rules, regulations, and precedents issued by the BIR and other agencies/offices
5. Revenue bulletins
These are periodic issuances, notices, and official announcements of the Commissioner of
Internal Revenue that consolidate the Bureau of Internal Revenue’s portion on certain specific
issues of law or administration in relation to the provisions of the Tax Code, relevant tax
laws, and other issuances for the guidance of the public.
6. BIR Rulings
These are official positions of the Bureau to queries raised by taxpayers and other
stakeholders and other stakeholders relative to clarification and interpretation of tax laws.
Generally accepted accounting principles (GAAP) vs. Tax Laws.
GAAP are not laws, but are mere conventions of financial reporting. GAAP accounting reports are
intended to meet the common needs of a vast number of users in the general public.

Tax laws including rules, regulations, and rulings prescribe the criteria for tax reporting, a special
form of financial reporting which is intended to meet specific needs of tax authorities.

Taxpayers normally follow GAAP in recording transactions in their books. However, in the
preparation and filing of tax returns, taxpayers are mandated to follow the tax law in cases of conflict
with GAAP.

NATURE OF PHILIPPINE TAX LAWS

Philippine tax laws are civil and not political in nature. They are effective even during periods of
enemy occupation. They are laws of the occupied territory and not by the occupying enemy. Tax
payments made during occupations of foreign enemies are valid.

Our internal revenue laws are not penal in nature because they do not define crime. Their penalty
provisions are merely intended to secure taxpayers’ compliance.
TAX
Tax is an enforced proportional contribution levied by the lawmaking body of the State to raise
revenue for public purpose.

Elements of a Valid Tax

1. Tax must be levied by the taxpaying power having jurisdictions over the object of taxation.
2. Tax must not violate constitutional and inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.

Classification of Taxes
A. As to purpose
1. Fiscal or revenue tax- a tax imposed for general purpose
2. Regulatory- a tax imposed to regulate business, conduct, acts or transactions
3. Sumptuary- a tax levied to achieve some social or economic objectives
B. As to subject matter
1. Personal, poll or capitation- a tax on persons who are residents of a particular territory
2. Property tax- a tax on properties, real or personal
3. Excise or privilege tax- a tax imposed upon the performance of an act, enjoyment of
privilege or engagement in an occupation.
C. As to incidence
1. Direct tax- When both the impact and incidence of taxation rest upon the same taxpayer,
the tax is said to be direct. The tax is collected from the person who is intended to pay the
same. The statutory taxpayer is the economic taxpayer.

2. Indirect tax- When the tax is paid by any person other than the one who is intended to pay
the same, the tax is said to be indirect. This occurs in the case of business taxes where the
statutory taxpayer is not the economic taxpayer.
D. As to amount
1. Specific tax- a tax of a fixed amount imposed on a per unit basis such as per kilo, liter or
meter, etc.
2. Ad valorem- a tax of a fixed proportion imposed upon the value of the tax object.
E. As to rate
1. Proportional tax- This is a flat or fixed rate tax. The use of proportional tax emphasizes
equality as it subjects all taxpayers with the same rate without regard to their ability to pay.

2. Progressive or graduated tax- This is a tax which imposes increasing rates as the tax base
increase. The use of progressive tax rates results in equitable taxation because it gets more tax
to those who are more capable. It aids in lessening the gap between the rich and the poor.

3. Regressive tax- This tax imposes decreasing tax rates as the tax base increase. This is the
total reverse of progressive tax. Regressive tax is regarded as anti-poor. It directly violates the
Constitutional guarantee of progressive taxation.

4. Mixed tax- This tax manifest tax rates which is a combination of any of the above types of
tax.

F. As to imposing authority
1. National tax- a tax imposed by the national government
2. Local tax- tax imposed by the municipal or local government

DISTINCTION OF TAXES WITH SIMILAR ITEMS

Tax vs. Revenue

Tax refers to the amount imposed by the government for public purpose. Revenue refers to all income
collections of the government which includes taxes, tariff, licenses, toll, penalties and others. The
amount imposed is tax but the amount collected is revenue.

Tax vs. License Fee

Tax has a broader subject than license. Tax emanates from taxation power and imposed upon any
object such as persons, properties, or privileges to raise revenue.

License fee emanates from police power and is imposed to regulate the exercise of a privilege such as
the commencement of a business or a profession.

Taxes are imposed after the commencement of a business or profession whereas license fee is
imposed before engagement in those activities. In other words, tax is a post-activity imposition
whereas license is a pre-activity imposition.
Tax vs. Toll
Tax is a levy of government; hence, it is a demand of sovereignty. Toll is a charge for the use of
other’s property; hence it is a demand of ownership.

The amount of tax depends upon the needs of the government, but the amount of toll is dependent
upon the value of the property leased.

Both the government and private entities impose toll, but private entities cannot impose taxes.

Tax vs. Debt

Tax arises from law while debt arises from private contracts. Non-payment of tax leads to
imprisonment, but non-payment of debt does not lead to imprisonment. Debt can be subject to set-off
but tax is not. Debt can be paid in kind (dacion en pago) but tax is generally payable in money.

Tax draws interest only when the taxpayer is delinquent. Debt draws interest when it is so stipulated
by the contracting parties or when the debtor incurs legal delay.

Tax vs. Special Assessment

Tax is an amount imposed upon persons, properties, or privileges. Special assessment is levied by the
government on lands adjacent to a public improvement. It is imposed on land only and is intended to
compensate the government for a part of the cost of the improvement.

The basis of special assessment is the benefit in terms of the appreciation in land value caused by the
public improvement. On the other hand, tax is levied without expectation of a direct proximate
benefit.

Unlike taxes, special assessment attaches to the land. It will not become a personal obligation of the
land owner. Therefore, the non-payment of special assessment will not result to imprisonment of the
owner (unlike in non-payment of taxes).

Tax vs. Tariff

Tax is broader than tariff. Tax is an amount imposed upon persons, privilege, transactions, or
properties. Tariff is the amount imposed on imported or exported commodities.
Tax vs. Penalty
Tax is an amount imposed for the support of the government. Penalty is an amount imposed to
discourage an act. Penalty may be imposed by both the government and private individuals. It may
arise both from law or contract whereas tax arises from law.

TAX SYSTEM
The tax system refers to the methods or schemes of imposing, assessing, and collecting taxes. It
includes all the tax laws and regulations, the means of their enforcement, and the government offices,
bureaus and withholding agents which are part of the machineries of the government in tax collection.
The Philippine tax system is divided into two: the national tax system and the local tax system.

Types of Tax Systems According to Imposition

1. Progressive- employed in the taxation of income of individuals, and transfers of properties by
individuals
2. Proportional- employed in taxation of corporate income and business
3. Regressive- not employed in the Philippines

Types of Tax Systems According to Impact

1. Progressive system
A progressive tax system is one that emphasizes direct taxes. A direct tax cannot be shifted.
Hence, it encourages economic efficiency as it leaves no other resort to taxpayers than to be
efficient. This type of tax system impacts more upon the rich.
2. Regressive system
A regressive tax system is one that emphasizes indirect taxes. Indirect taxes are shifted by
businesses to consumers; hence, the impact of taxation rests upon the bottom end of society.
In effect, a regressive tax system is anti-poor.

TAX COLLECTION SYSTEMS

A. Withholding system on income tax- Under this collection system, the payor of the income
withholds or deducts the tax on the income before releasing the same to the payee and remits the same
to the government. The following are the withholding taxes collected under this system:
1. Creditable withholding tax on compensation
a. Withholding tax on compensation- an estimated tax required by the government to
be withheld by employers against the compensation income to their employees.
b. Expanded withholding tax- an estimated tax required by the government to be
deducted on certain income payments made by taxpayers engaged in business.
 2. Final withholding tax- a system of tax collection wherein payors are required to deduct the
full tax on certain income payments. The final withholding tax is intended for the collection
of taxes from income with high risk of non-compliance.

B. Withholding system on business tax

C. Voluntary compliance system
D. Assessment or enforcement system

PRINCIPLES OF A SOUND TAX SYSTEM

According to Adam Smith, governments should adhere to the following principles or canons to evolve
a sound tax system:
1. Fiscal adequacy
It requires that the sources of government funds must be sufficient to cover
government costs.
2. Theoretical justice
It suggests that taxation should consider the taxpayer’s ability to pay.
3. Administrative feasibility
It suggests that tax laws should be capable of efficient and effective administration to
encourage compliance.

TAX ADMINISTRATION
Tax administration refers to the management of the tax system. Tax administration of the national tax
system in the Philippines is entrusted to the Bureau of Internal Revenue which is under the
supervision and administration of the Department of Finance.

Chief officials of the Bureau of Internal Revenue

1. 1 Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
a. Operations group
b. Legal Enforcement Group
c. Information Systems Group
d. Resource Management Group

POWERS OF THE BUREAU OF INTERNAL REVENUE

1. Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties and fines, and judgements in all cases decided in its favor
by the courts.
3.Giving effect to, and administering the supervisory and police powers conferred to it by the Code
and other laws.
4. Assignment of internal revenue officers and other employees to other duties.
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials.
6. Issuance of receipts and clearances
7. Submission of annual report, pertinent information to Congress and reports to the Congressional
Oversight Committee in matters of taxation

TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION

For purposes of effective and efficient tax administration, taxpayers are classified into:
1. Large taxpayers- under the supervision of the Large Taxpayer Service (LTS) of the BIR National
Office.
2. Non-large Taxpayers- under the supervision of the respective Revenue District Offices (RDOs)
where the business, trade or profession of the taxpayer is situated.

Criteria for Large Taxpayers: https://scp-ph.com/blogsite/large-taxpayers-in-the-philippines/

A. As to payment
1. Value Added Tax – Any taxpayer with net VAT paid or payable of at least P200,000 per
quarter for the preceding year;
2. Excise Tax – Any taxpayer with an annual excise tax paid or payable of at least P1 million for
the preceding year;
3. Income Tax – Any taxpayer with annual income tax paid or payable for at least P1 million for
the preceding year;
4. Withholding Tax – Any taxpayer with annual withholding tax payment/remittance from all
types of withholding taxes (i.e., on compensation, expanded, final and government money
payments) of at least P1 million (For taxpayers, business establishments and government
offices with branches/units, the basis is the total annual taxes withheld by the Head Office and
all the branches/units);
5. Percentage Tax – Any taxpayer with percentage taxes paid or payable of at least P200,000
per quarter for the preceding year;
6. Documentary Stamp Taxes – Any taxpayer with aggregate annual documentary stamp taxes
of at least P1 million; or

B. As to financial condition and results of operation:

1. Gross Sales/Receipts – Any taxpayer with total annual gross sales/receipts of at least P1
billion for the preceding year;
2. Net Worth – Any taxpayer with a total Net Worth at the close of each calendar or fiscal year
of at least P300 million;
3. Gross Purchases – Any taxpayer with total annual gross purchases of at least P800 million for
the preceding year;
4. Top corporate taxpayers listed and published by the Securities and Exchange Commission
(SEC).