LM 316 Law on Income

Taxation
FIRST SEMESTER SCHOOL YEAR 2021-2022
SCHOOL OF ARTS AND SCIENCE
ISABELA STATE UNIVERSITY-CAUAYAN CAMPUS
The best things in life are free
but sooner or later the
government will find a way to
tax them.
UNKNOWN
General Principles; Concept,
Nature, and Characteristics of
Taxation and Taxes
LM 316 LAW ON INCOME TAXATION
 Taxes
 Enforced proportional and
pecuniary contributions from person
and property levied by the law-
making body of the state having
jurisdiction over the subject of the
burden for the support of the
government and all public needs.
 Essential Characteristics of Tax

1. An Enforced Contribution

2. It is Proportionate in Character
3. It is Generally Payable in Money
 Essential Characteristics of Tax

4. It is Levied on Persons or Property

5. It is Levied by the State which has
jurisdiction over the Person or Property
 Essential Characteristics of Tax

6. It is Levied by the law-making body of

the state
7. It is Levied for Public Purpose or Purposes
 Nature of the Power of Taxation

1. It is Inherent in Sovereignty

2. It is Legislative in Character
3. It is subject to Constitutional
and Inherent limitations
 Aspects of Taxation

1. Levying or imposition of the tax

which is a legislative act; and
2. Collection of the tax levied which
is essentially administrative in
character.
 Extent of the Legislative Power
to Tax

 1. The subjects or objects to be taxed.

 2.The Purpose or object of the tax so long as it is a
public purpose.
 3. The amount or rate of the tax.
 4.The manner, means and agencies of collection of
the tax.
 Non-revenue objectives of
taxation.

Strengthen anemic enterprises or

provide to greater production
Protection of local industries
Bargaining tool
 Non-revenue objectives of
taxation.

Haltinflation; ward off depression

Reduce inequalities
Promote science and invention
Implement of the police power
 Basic Principles of a Sound Tax System

FiscalAdequacy
Equality; or Theoretical Justice
Administrative Feasibility
General Principles;
Classifications and Distinctions
LM 316 LAW ON INCOME TAXATION
 Classifications of Taxes

1. As to subject matter or object:

a. Personal, Poll or Capitation
b. Property
c. Excise
 Classifications of Taxes

2. As to who bears the burden:

a. Direct
b. Indirect
 Classifications of Taxes

3. As to determination of amount
a. Specific
b. Ad valorem
 Classifications of Taxes

4. As to purpose
a. General, fiscal, or revenue
b. Special or Regulatory
 Classifications of Taxes

5. As to Scope
a. National
b. Municipal or Local
 Classifications of Taxes

6. As to graduation or rate
a. Proportional
b. Progressive or graduated
c. Regressive
 Tax Distinguished from other terms

Toll-a sum of money for the use of

something, generally applied to
consideration which is paid for the
use of road, bridge or the like, of a
public nature.
 Tax Distinguished from other terms

1. A toll is a demand of proprietorship,

while a tax is a demand of sovereignty.
2. A toll is paid for the use of another’s
property, while tax is paid for the
support of government.
 Tax Distinguished from other terms

3. The amount of toll depends upon the cost of

construction or maintenance of the public
improvement used, while there is generally no
limit of the amount of tax that may be imposed.
4. A toll may be imposed by the government or
private individuals, while tax may be imposed
only by the government.
 Tax Distinguished from other terms

Penalty-any sanction imposed as

a punishment for violation or acts
deemed injurious. Thus, the violation
of tax laws may give rise to
imposition of penalty.
 Tax Distinguished from other terms

1. A penalty is designed to regulate conduct,

while a tax is generally intended to raise
revenue; and
2. A penalty may be imposed by the
government or private individuals or entities,
while tax may be imposed only by the
government.
 Tax Distinguished from other terms

Special Assessment-an
enforced proportional contribution
from owners of lands especially or
peculiarly benefited by public
improvements.
 Tax Distinguished from other terms

1. A special assessment is levied only on land.

2. It is not a personal liability of the person
assessed; his liability is limited only to the land
involved;
3. It is based wholly on benefits (not
necessity);and
4. It is exceptional both as to time and place. A
tax, on the other hand has general application.
 Tax Distinguished from other terms

License or Permit Fee-a

charge imposed under the
police power for purposes of
regulation.
 Tax Distinguished from other terms

1. License fee is the legal compensation or reward of

an officer for specific services, while tax is an
enforced contribution assessed by sovereign
authority to defray public expenses.
2. It is imposed for regulation, while tax is levied for
revenue.
3. It involves an exercise of police power, while tax
involves the exercise of the taxing power.
 Tax Distinguished from other terms

4. Its amount should be limited to the necessary expenses

of inspection and regulation, while there is generally no
limit on the amount of tax that may be imposed.
5. It is imposed on the right to exercise a privilege, while
tax is imposed also on person and property; and
6. Failure to pay license fee makes the act or business
illegal while failure to pay a tax does not necessarily make
the act or business illegal.
 Tax distinguished from Debt

1. A debt is generally based on contract, express or implied,

while a tax is based on law;
2. A debt is assignable, while a tax cannot generally be
assigned;
3. A debt may be paid in kind, while a tax is generally payable
in money;
4. A debt may be the subject of set-off or compensation, while
a tax is generally not;
 Tax distinguished from Debt

5. A person cannot be imprisoned for non-payment of debt

(except when it arises from a crime), while imprisonment is a
sanction for non-payment of tax (except poll tax);
6. A debt is governed by the ordinary periods of prescription,
while a tax is governed by the special prescriptive periods
provided in the Tax Code;
7. A debt draws interest when it is so stipulated or when there is
default, while a tax does not draw interest except only when
delinquent.
 Taxes not generally subject to set-off

Taxes cannot be the subject to compensation or

set-off for the simple reason that the government and
the taxpayer are not creditors and debtors of each
other. Obligations in the nature of debts are due to
the government in its corporate capacity, while taxes
are due to the government in its sovereign capacity.
(Philex Mining v. CIR 294 SCRA 687)
 Tax Distinguished from other terms

Subsidy – is a pecuniary aid

directly granted by the government to
an individual or private commercial
enterprise deemed beneficial to the
public .
 Tax Distinguished from other terms

Revenue-all funds or income

derived by the government, whether
from tax or from whatever source and
whatever manner.
 Tax Distinguished from other terms

Internal Revenue-taxes imposed

by the legislature other than duties on
imports and exports.
 Tax Distinguished from other terms

Customs duties-taxes imposed on

goods exported from or imported into a
country.
 Tax Distinguished from other terms

Tariff-may be used in one of three senses:

a. As a book of rates drawn usually in alphabetical order
containing names of several kinds of merchandise with
the corresponding duties to be paid for the same;
b. As the duties payable on goods imported or exported;
c. As the system or principle of imposing duties on the
importation (or exportation) of goods.
General Principles; Situs of
Taxation and Double Taxation
LM 316 LAW ON INCOME TAXATION
 Situs of Taxation, defined

Place of taxation. The basic rule is that the

state where the subject to be taxed has a situs
may rightfully levy and collect tax; and the situs
is necessarily in the state which has jurisdiction
or which exercises dominion over the subject in
question. A person may be subject to taxation
in several taxing jurisdictions.
 Situs of Taxation

1. Persons- poll tax may be properly levied

upon persons who are inhabitants or residents
of the state.
2. Real Property- with respect to property taxes,
real estate is the subject to taxation in the state
in which it is located whether the owner is a
resident or non-resident, and it is taxable only
there.
 Situs of Taxation

3. Tangible Personal Property- lex rei sitae,

“Real property as well as personal property is
subject to the law of the country where it is
situated.” Article 16
4. Intangible Personal Property-mobilia
sequuntur personam-the situs of personal
property is the domicile of the owner.
 Situs of Taxation

5. Income-income tax may be properly exacted from

persons who are residents or citizens in the taxing
jurisdiction and even from those who are neither resident
nor citizens provided the income is derived from sources
within the taxing state.
6. Business, Occupation, and Transaction-the power to
levy an excise tax depends upon the place where the
business is done, or the occupation is engaged in, or the
transaction took place.
 Situs of Taxation

7. Gratuitous transfer of property-the

transmission of property from a donor to a
done or from a decedent to his heirs may
be subject to taxation in the state where the
transferor is (was) a citizen or resident, or
where the property is located.
 Double Taxation, defined

1. In its strict sense (Direct Duplicate Taxation, or Direct Double Taxation), double taxation
means-
a. Taxing twice,
b. By the same taxing authority,
c. Within the same jurisdiction or taxing district,
d. For the same purpose,
e. In the same year (or taxing period),
f. Some of the property in the territory.
Both property must be imposed on the same property or subject matter.
2. In its broad sense (Indirect Duplicate Taxation, or Indirect Double Taxation), double
taxation is taxation other than direct duplicate.
General Principles; Forms of
Escape from Taxation
LM 316 LAW ON INCOME TAXATION
Forms of Escape from Taxation

1. Shifting
2. Capitalization
3. Transformation
4. Evasion
5. Avoidance; and
6. Exemption
 Forms of Escape from Taxation

Shifting – transfer of burden of tax by the

original player or the one on whom the tax
was assessed or imposed to another or
someone else.
 Forms of Escape from Taxation

Impact of taxation – point in which a tax is

originally imposed. In so far as the law is
concerned, the taxpayer is the person who
must pay the tax to the government, also
termed as statutory taxpayer-the one to whom
the tax is formally assessed. He is the subject of
the tax.
 Forms of Escape from Taxation

Incidence of Taxation-point in which the tax

burden finally rests or settles down. It takes
place when shifting has been effected from
the statutory taxpayer to another or
someone else who cannot pass on the
burden further.
 Forms of Escape from Taxation

Kinds of Shifting
1. Forward Shifting
2. Backward Shifting
3. Onward Shifting
 Forms of Escape from Taxation

Tax Capitalization-reduction in the price of

the taxed object equal to the capitalized
value of future taxes which the purchaser
expects to be called upon to pay.
 Forms of Escape from Taxation

Transformation-method of escape from taxation

whereby the manufacturer or producer upon
whom the tax has been imposed, fearing the
loss of his market if he should add the tax to the
price, 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.
 Forms of Escape from Taxation

Tax Evasion- the use by the taxpayer of

illegal or fraudulent means to defeat or
lessen the payment of a tax. “Tax dodging,”
punishable by law.
 Forms of Escape from Taxation

Factors in Tax Evasion:

a. The end to be achieved, i.e., the
payment of less than that known by the
taxpayer to be legally due, or in paying no
tax when it is shown that a tax is due;
 Forms of Escape from Taxation

Factors in Tax Evasion:

b. An accompanying state of mind which is
described as being “evil,” “in bad faith,”
“willful,” or “deliberate and not accidental;”
and
 Forms of Escape from Taxation

Factors in Tax Evasion:

c. A course of action (or failure of action)
which is unlawful.
 Forms of Escape from Taxation

No proceeds in tax evasion

Evasion of the tax takes place only when
there are no proceeds. If the tax is evaded in
part, there are no proceeds as to the part which
is evaded. Evasion of taxation is tantamount,
fiscally speaking, to the absence of taxation. In
all other forms of escape from taxation, the
government still receives its due.
 Forms of Escape from Taxation

Tax Avoidance-use 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.
 Forms of Escape from Taxation

Tax Evasion vs. Tax Avoidance

Evasion should be applied to the escape
from taxation accomplished by breaking
the letter of the tax law – deliberate
omission to report a taxable item, for
example.
 Forms of Escape from Taxation

Tax Evasion vs. Tax Avoidance

Avoidance, on the other hand, covers
escape accomplished by legal procedures or
means which may be contrary to the intent of
the sponsors of the tax law but nevertheless do
not violate the letter of the tax law. Whereas the
tax evader breaks the law, the tax avoider
sidesteps it.
General Principles; Exemption
from Taxation
LM 316 LAW ON INCOME TAXATION
 Exemption from Taxation

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.
 Exemption from Taxation

It is an immunity or privilege; it is freedom

from a financial charge or burden to which
others are subjected.
 Rationale of Tax Exemption

1. Public interest will be subserved by the

exemption allowed.
2. Some public benefit or interest, which the
law-making body considers sufficient to
offset the monetary loss entailed in the
grant of exemption.
 Grounds for Tax Exemption

1. Tax Exemption may be based on contract in

which case the public represented by the
government is supposed to receive a full
equivalent therefor.
2. It may be based on some ground of public
policy.
 Grounds for Tax Exemption

3. It may be created in a treaty on grounds

of reciprocity, or to lessen the rigors of
international double or multiple taxation
which occurs where there are many taxing
jurisdictions, as in the taxation of income
and intangible personal property.
 Nature of Tax Exemption

1. A mere personal privilege of the grantee.

2. Generally revocable by the government.
3. It implies a waiver on the part of the
Government of its right to collect what otherwise
would be due it.
4. It is not necessarily discriminatory so long as the
exemption has a reasonable foundation or
rational basis.
 Kinds of Taxation

1. As to manner of creation:
a. Express or Affirmative Exemption
b. Implied exemption or exemption by
omission
 Kinds of Taxation

2. As to scope or extent:
a. Total exemption
b. Partial exemption
 Kinds of Taxation

3. As to object:
a. Personal
b. Impersonal
 Exemptions provided for in the
Constitution

Article VI, Section 28, paragraphs 3 & 4

 Construction of Tax Exemption Statutes

In the construction of tax statutes,

exemptions are not favored and are
construed strictissimi juris (by the most strict
right or law). An exemption from the
common burden cannot be permitted to
exist upon vague implication or inference.
 Tax Amnesty

A general pardon is a general pardon or

intentional overlooking by the State of its
authority to impose penalties on persons
otherwise guilty of tax evasion or violation of
a revenue or tax law.
 Tax Amnesty

It partakes of an absolute forgiveness or

waiver by the government of its right to
collect what is due it and to give tax
evaders who wish to relent a chance to start
with a clean slate.
 Tax Amnesty

It is never favored nor presumed in law. If

granted by statute, the terms of the amnesty
must be construed strictly against taxpayer
and liberally in favor of the government
General Principles; Nature,
Construction, Application,
and Sources of Tax Laws
LM 316 LAW ON INCOME TAXATION
 Nature of Internal Revenue Law

1. Not political in nature.

2. Tax laws are civil and not penal in nature.
 Construction of Tax Laws

1. Legislative Intention must be Considered-

the good faith of the taxpayer is not a
sufficient justification for exemption from the
payment of surcharges imposed by the law
for failing to pay tax within the period
required by law.
 Construction of Tax Laws

2. Where there is doubt-tax statutes are

construed strictly against the government
and liberally in favor of the taxpayer. Taxes
being burdens, they are not to be presumed
beyond what the statute expressly and
clearly declares.
 Construction of Tax Laws

3. Where language is plain.

4. Where taxpayer claims exemption.
 Sources of Tax Laws

The sources, aside from the pertinent

provisions of the Constitution, are:
1. Legislation or statutes, including
Presidential Decrees and Executive Orders
on taxation and tax ordinances;
 Sources of Tax Laws

2. Administrative rules and regulations and

ruling or opinions of tax officials particularly
the Commissioner of Internal Revenue,
including opinions of the Secretary of
Justice; and
3. Judicial Decisions.
End of topic for Preliminary
Term.
LM 316 LAW ON INCOME TAXATION