Week 1 Course Material For Income Taxation

Subject Code: BAINCTAX
Subject Title: Income Taxation
Subject Description: This course equips students with the profound knowledge of income
taxation in accordance with the National Internal Revenue Code
(NIRC) of the Philippines and recent statutes and issuances of taxing
authorities. It pertains to the basic principles and rules of the income
tax system as these apply to individuals, partnerships, estates and trusts,
and corporations. It covers overview of the national tax system, the
income taxation of employees, unincorporated and incorporated
businesses. It provides the students with constructs of capital gains tax,
final tax on certain passive income, and the annual regular income tax.
Included herein are other taxation constructs such as minimum
corporate income tax, normal tax and the improperly accumulated
profits tax of corporations and withholding taxes. This course develops
students’ competencies on the preparation of various income tax
returns arising from various taxable transactions.
No. of Units: 3
Class Schedule: Face-to-Face: Tuesday 1:00am – 7:00pm

Face-to-Face: Friday 1:00am – 5:00pm
Course Learning Outcomes:

At the end of the course, the student must be able to:
1. Describe the nature, scope, characteristics, principles and limitations of taxation.
2. Develop a basic understanding as to the powers and authority of the Commissioner of Internal
Revenue.
3. Classify taxpayers, identify their sources of income, and determine applicable income tax
liability for each taxpayer.
4. Develop a comprehensive understanding of gross income; deductions from gross income;
accounting periods; accounting methods; withholding taxes.
5. Prepare the relevant income tax returns.
About the Instructor:

He graduated from the Philippine School of Business Administration-Quezon City with the degree of
Bachelor of Science in Accountancy. He is a Licensed Professional Teacher-Major in Business
Technology. He completed his Master of Business Administration degree at Far Eastern University-
Manila.
Faculty member handling several accounting courses at the Baliwag Polytechnic College. He is an
accounting lecturer for more than a decade in several colleges around Baliwag. Before becoming part
of the academe, he worked in a variety of sectors, including banking and retail.
-Mr. Alfonso M. Cruz, Jr. CPA, LPT, MBA
SM Baliwag Complex, Dona Remedios Trinidad Highway, Brgy. Pagala, Baliwag, Bulacan
(+63) 927-533-0342 – (+63) 923-949-5265 admissions-nubaliwag@nu.edu.ph
Contact Information:
Facebook Account: Alfonso Jr Cruz
Email Address: amcruz@nu-baliwag.edu.ph
Contact Number: 0995-453-0368 (globe)
Topic: Module 1: General Principles of Taxation

a. Inherent Powers of the State
b. Definition and Purpose of Taxation
c. Theory and Basis of Taxation
d. Scope and Limitations of Taxation
e. Stages of Taxation
f. General Concepts in Taxation
DISLAIMER: The information content provided in this course material is designed to

provide helpful information on the subjects discussed. Some information’s are
compiled from different materials and summarized from different books. Some
information’s are based on contributors' perspective and understanding. References
are provided for informational purposes only and do not constitute endorsement of
websites or other sources. Readers should be aware that the websites/electronic
references listed in this course material may change. Hence, the contributors do not
claim any information presented in the materials and do not reflect their own work.
MODULE 1:
GENERAL PRINCIPLES OF TAXATION
I. Pre-test / Activity
1. Which of the following is not a fundamental power of the state that exists independently of
the constitution?
A. Power of eminent domain C. Police power
B. People power D. Power of taxation
2. Which of the following is not the nature of taxation?

A. Subject to approval by the people
B. Essentially legislative in character
C. Subject to inherent and constitutional limitations
D. Inherent in sovereignty
II. Learning Outcomes

At the end of the topic the students should be able to:
 Identify and differentiate the three inherent powers of the state.
 Explain the definition of taxation.
 Discuss the different fundamental theories and doctrines in taxation.
 Define the scope of taxation and classify the sources of its limitations.
 Explain the stages on the exercise of the power of taxation.
 Identify the situs of taxable events;
 Explain the characteristics of double taxation.
 Identify the different methods of escaping from taxation and explain the effects on
government revenue collections; and
 Differentiate tax amnesty from tax condonation.
III. Content
A. INHERENT POWERS OF THE STATE
1. Police Power. It is the power of the State for promoting public welfare by restraining and
regulating the use of liberty and property. It may be exercise only by the government. The
property taken in the exercise of this power is destroyed because it is noxious or intended
for a noxious purpose.
2. Power of Taxation. It is the power by which the State raises revenue to defray the necessary
expenses of the government.
3. Power of Eminent Domain. It is the power of the State to acquire private property for public
purpose upon payment of just compensation.
Similarities among the three (3) inherent powers of the state

1. They are inherent in the State.
2. They exist independently of the Constitution although the conditions for their exercise may
be prescribed by the Constitution.
3. Ways by which the State Interfere with private rights and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received, directly or indirectly, by the persons
affected.
Distinctions among the three (3) inherent powers

Taxation Police Power Eminent Domain
Power to enforce Power to make and Power to take private
Nature
contribution to raise implement laws for the property for public use
government funds general welfare with just compensation
Government or Government or political Maybe granted to public
Exercising
political subdivisions subdivisions service companies or
Authority
public utilities
Raise revenue in Promotion of general To facilitate the taking of
Purpose
support of the welfare through regulation private property for
government public purpose
Persons Upon the community Upon the community or On an individual as the
Affected or class of individuals class of individuals owner of a particular
property
Plenary, Broader in application. Merely a power to take
Scope comprehensive, General power to make private property for
supreme and implement law public use
Contribution becomes No transfer of title. There There is a transfer of title
part of public fund may just be a restraint on to property
Effect
the injurious use of
property
Protection and general No direct or immediate Market Value of the
benefits from the benefit but only such as property
Benefits
government may arise from the
Received
maintenance of a healthy
economic standard of
society
Amount of Limited to the cost No imposition, the owner
Imposition No ceiling except regulation, issuance of is paid the fair market
inherent limitations license, or surveillance value of his property
B. DEFINITION AND PURPOSE OF TAXATION

Taxation is the power by which the sovereign, through its law-making body, raises revenue to
defray the necessary expenses of government. It is merely a way of apportioning the costs of
government among those who, in some measure, are privileged to enjoy its benefits and must
bear its burdens. (Aban, 2001)
In other words, taxation is:
1. The inherent power of the sovereign exercised through legislature
2. To impose burdens
3. Upon subjects and objects
4. Within its jurisdiction
5. For the purpose of raising revenues
6. To carry out the legitimate objects of government
Purpose of Taxation
1. Primary or revenue purpose
The primary purpose of taxation on the part of the government is to provide funds or property
with which to promote the general welfare and the protection of its citizens and to enable it
to finance its multifarious activities. A government can run its administrative set up only
through public funding which is collected in the form of tax.
2. Secondary or non-revenue purpose

a. Promotion of general welfare - Taxation may be used as an implement of police
power to promote the general welfare of the people.
In the case of Lutz v. Araneta (G.R. No. L- 7859, December 22, 1955), the Supreme
Court upheld the validity of the Sugar Adjustment Act, which imposed a tax on
milled sugar since the purpose of the law was to strengthen an industry that is so
undeniably vital to the economy the sugar industry. (Aban, 2001)
b. Regulation of activities/industries - Taxes may also be imposed for a regulatory
purpose as, for instance, in the rehabilitation and stabilization of a threatened industry
which is affected with public interest, like the oil industry. (Caltex Philippines, Inc.
v. Commission on Audit, et al., GR. No. 92585, May 8, 1992)
Taxation also has a regulatory purpose as in the case of taxes levied on excises or
privileges like those imposed on tobacco and alcoholic products, or amusement
places like night clubs, cabarets, cockpits, etc. (Aban, 2001)
c. Reduction of social inequality - A progressive system of taxation prevents the
undue concentration of wealth in the hands of few individuals. Progressivity is based
on the principle that those who are able to pay more should shoulder the bigger
portion of the tax burden.
d. Encourage economic growth - The grant of incentives or exemptions encourage
investment thereby stimulating economic activity.
e. Protectionism - Protective tariffs and customs duties are imposed as taxes in order
to protect important sectors of the economy or local industries, as in the case of
foreign importations.
C. THEORY AND BASIS OF TAXATION

1. Theory: Lifeblood Theory and/or Necessity Theory
The power of taxation proceeds upon the theory that the existence of government is a
necessity (necessity theory). As stated in the case of Phil. Guaranty Co., Inc. V.
Commissioner [13 SCRA 775], is a power predicated upon necessity. It is a necessary burden
to preserve the State's sovereignty and a means to give the citizenry an army to resist
aggression, a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvements for the enjoyment of the citizenry, and those which come within the
state's territory and facilities and protection which a government is supposed to provide.
The power of taxation is essential because the government can neither exist nor endure
without taxation. "Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need" (lifeblood doctrine). The government cannot continue to
perform its basic functions of serving and protecting its people without means to pay its
expenses. Consequently, the state has the right to compel all its citizens and property within
its limits to contribute.
2. Basis of taxation: Benefits Received or Reciprocity Theory

The basis is the reciprocal duties of protection and support between the state and its
inhabitants. The state collects taxes from the subjects of taxation in order that it may be able
to perform the functions of government. The citizens, on the other hand, pay taxes in order
that they may be secured in the enjoyment of the benefits of organized society. This theory
spawned the Doctrine of Symbiotic Relationship which means, taxes are what we pay for
a civilized society (Commissioner v. Algue).
Taxpayers receive benefits from taxes through the protection the state affords to them. For
the protection they get arises their obligation to support the government through payment of
taxes. (CIR v. Algue, Inc., G.R. No. L- 28896 February 17, 1988, 158 SCRA 9)
D. SCOPE AND LIMITATIONS OF TAXATION

1. Scope of the power to tax
In the case of Sison v. Ancheta (130 SCRA 654), the Supreme Court held that the power of
taxation is the most absolute of all powers of the government. It has the broadest scope of
all the powers of the government because in the absence of limitations, it is considered as
comprehensive, unlimited, plenary and supreme.
a. Comprehensive - As it covers persons, businesses, activities, professions, rights and
privileges.
b. Unlimited - In the absence of limitations prescribed by law or the constitution, the
power to tax is unlimited and comprehensive. Its force is so searching to the extent
that the courts scarcely venture to declare that it is subject to restrictions.
c. Plenary - As it is complete; the BIR may avail of certain remedies to ensure collection
of taxes.
d. Supreme - In so far as the selection of the subject of taxation.
2. Inherent and constitutional limitations on taxation

Inherent limitations
a. Public purpose
The proceeds of tax must be used (a) for the support of the State; or (b) for some
recognized objective of the government or to directly promote the welfare of the
community. Tax is considered for public purpose if:
1) It is for the welfare of the nation and/or for greater portion of the population;
2) It affects the area as a community rather than as individuals; and
3) It is designed to support the services of the government for some of its
recognized objects.
b. Inherently legislative
Only the legislature has the full discretion as to the persons, property, occupation or
business to be axed provided these are all within the State's territorial jurisdiction. It
can also fully determine the amount or rate of tax, the kind of tax to be imposed and
method of collection. (1 Cooley 176-184)
General rule: The power to tax is exclusively vested in the legislative body, being
inherent in nature. Hence, it may not be delegated. (Delegata potestas non potest
delegari)
Non-delegable legislative powers
1) Selection of subject to be taxed
2) Determination of purposes for which taxes shall be levied
3) Fixing of the rate/amount of taxation
4) Situs of tax
5) Kind of tax
Exemptions
1) Delegation to Local Government - Refers to the power of LGUS to create its
own sources of revenue and to levy taxes, fees, and charges. (Art X, Sec. 5,
1987 Constitution)
2) Delegation to the President - The authority of the President to fix tariff rates,
import or export quotas, tonnage and wharfage dues or other duties and
imposts. (Art VI, Sec 28(2), 1987 Constitution)
c. Territorial
Taxation may be exercised only within the territorial jurisdiction, the taxing authority
(61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may
determine the "place of taxation" or "tax situs."
General rule: The taxing power of a country is limited to persons and property within
and subject to its jurisdiction.
Exemptions
1) Where tax laws operate outside territorial jurisdiction – e.g., Taxation of
resident citizens on their incomes derived abroad.
2) Where tax laws do not operate within the territorial jurisdiction of the State.
a. When exempted by treaty obligations; or
b. When exempted by international comity.
d. International comity
It refers to the respect accorded by nations to each other because they are sovereign
equals. Thus, the property or income of a foreign state may not be the subject of
taxation by another State. This is a limitation founded on reciprocity designed to
maintain productive relationships among the various state.
e. Exemption of government entities, agencies and instrumentalities

General rule: The government is exempt from tax.
Rationale: Otherwise, we would be "taking money from one pocket and putting it in
another." (Board of Assessment Appeals of Laguna v. CTA, G.R. No. L-18125, May
31, 1963)
Exemption: When it chooses to tax itself. Nothing prevents Congress from decreeing
that even instrumentalities or agencies of the government performing government
functions may be subject to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom. (MCIAA v. Marcos, G.R.
No. 120082, September 11, 1996)
Constitutional limitations
Provisions directly affecting taxation
a. Prohibition against imprisonment for non-payment of poll tax
Basis: No person shall be imprisoned for debt or non-payment of a poll tax. (Art III,
Sec. 20)
In other words, while a person may not be imprisoned for non-payment of a cedula
or poll tax, he may be imprisoned for non-payment of other kinds of taxes where the
law so expressly provides. (Dimaampao, 2015)
b. Uniformity and equality of taxation
Basis: The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation. (Art VI, Sec. 28(1))
1) Uniformity - It means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate.
A tax is considered uniform when it operates with the same force and effect
in every place where the subject is found. Different articles may be taxed at
different amounts provided that the rate is uniform on the same class
everywhere, with all people at all times.
2) Equitability - Taxation is said to be equitable when its burden falls on those
better able to pay.
3) Equality - It is accomplished when the burden of the tax falls equally and
impartially upon all the persons and property subject to it.
c. Grant by Congress of authority to the president to impose tariff rates
Basis: The Congress may, by law, authorize the President to fix within specified
limits and subject to such limitations and restrictions at it may impose, tariff rates,
import and export quotas, tonnage and wharfage dues and other duties or imposts
within the framework of the national development program of the Government. (Art.
VI, Sec. 28 (2))
Flexible tariff clause
This clause provides the authority given to the President to adjust tariff rates under
Sec. 1608 of RA. 10863, known as Customs Modernization and Tariff Act (CMTA)
of 2016. This authority, however, is subject to limitations and restrictions indicated
within the law itself.
d. Prohibition against taxation of religious, charitable entities, and educational
entities
Basis: Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation. (Art. IV, Sec. 28 (3))
Coverage of tax exemption
It covers real property taxes only. Accordingly, a conveyance of such exempt
property can be subject to transfer taxes.
Requisite to avail of this exemption
Property must be "actually, directly, and exclusively used" by religious, charitable,
and educational institutions.
Test for the grant of this exemption
Use of the property for such purposes, not the ownership thereof.
e. Prohibition against taxation of non-stock, non-profit educational institutions
Basis: All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties.
Subject to conditions prescribed by law, all grants, endowments, donations, or
contributions used actually, directly, and exclusively for educational purposes shall
be exempt from tax. (Sec 4 (3) and (4), Art XIV)
f. Majority vote of Congress for grant of tax exemption
Basis: No law granting any tax exemption shall be passed without the concurrence
of a majority of all the members of Congress. (Section 28 (4), Art. VI)
The inherent power of the State to impose taxes carries with it the power to grant tax
exemptions.
Granting of exemptions
Exemptions may be created (1) by the Constitution; or (2) by statute, subject to
limitations as the Constitution may provide.
Required vote for withdrawal of such grant of tax exemption
A relative majority or plurality of votes is sufficient, that is, majority of a quorum.
g. Prohibition on use of tax levied for special purpose
Basis: All money collected on any tax levied for a special purpose shall be treated as
a special fund and paid out for such purpose only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the government. (Sec. 29(3), Art. VI)
h. President's veto power on appropriation, revenue, tariff bills

Basis: The President shall have the power to veto any particular item or items in an
appropriation, revenue or tariff bill but the veto shall not affect the item or items
which he does not object. (Art. VI, Se 27(2))
The item or items vetoed shall be returned to the Lower House of Congress together
with the objections of the President. If after consideration 2/3 of all the members of
such House shall agree to pass the bill, it shall be sent, together with the objection,
to the other House by which it shall likewise be considered and if approved by 2/3
of all the members of that House, it shall become a law (Dimaampao, 2015)
Note: The President can only veto particular item or items for ART Bills. The
President cannot veto particular item or items with regard to non-ART Bills; he can
only veto them as a whole.
i. Non-impairment of jurisdiction of the Supreme Court
Basis: The Supreme Court shall have the power to review, revise, reverse, modify,
or affirm on appeal on certiorari as the laws or the Rules of Court may provide, final
judgments or orders of lower courts in all cases involving the legality of any tax,
impost, assessment, or toll or any penalty imposed in relation thereto. (Art VII, Sec.
5(2)(b))
j. Grant of power to the LGUS to create its own sources of revenue
Basis: Each LGU shall have the power to create its own sources of revenues and to
levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local governments. (Art. X,
Sec. 5)
k. Origin of Revenue and Tariff Bills
Basis: All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate exclusively in
the House Representatives, but the Senate may propose or concur with amendments.
(Art VI, Sec. 24)
l. No appropriation or use of public money for religious purposes
Basis: No public money or property shall be appropriated, applied, paid, or employed
directly or indirectly for the use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of religion or of any priest, preacher,
minister, or other religious teacher or dignitary as such, except when such priest,
preacher, minister or dignitary is assigned to the armed forces or to any penal
institution or government orphanage or leprosarium. (Art VI, Sec 29(2))
This is in consonance with the inviolable principle of separation of the Church and
State.
Provisions indirectly affecting taxation (Art. II, 1987 Constitution)
a. Due process
Basis: No person shall be deprived of life, liberty, or property without due process
of law. (Art. III, Sec.1)
Requirements of due process in taxation
1) Substantive due process
a. Tax must be for public purpose; and
b. It must be imposed within territorial jurisdiction.
2) Procedural due process
No arbitrariness or oppression either in the assessment or collection.
b. Equal protection
Basis: No person shall be denied the equal protection of the laws. (Art. III, Sec. 1)
Definition: It means that all persons subjected to such legislation shall be treated
alike, under like circumstances and conditions, both in the privileges conferred and
in the liabilities imposed. (1 Cooley 824-825; Sison Jr. v. Ancheta, GR. No. 59431,
July 25, 1984)
c. Religious freedom
Basis: No law shall be made respecting an establishment of religion or prohibiting
the free exercise thereof. The free exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall forever be allowed. No religious
test shall be required for the exercise of civil or political rights. (Art l, Sec. 5)
d. Non-impairment of obligations of contracts
Basis: No law impairing the obligation of contracts shall be passed. (Art III, Sec. 10)
Rationale for the non-impairment clause in relation to contractual tax exemption
When the State grants an exemption on the basis of a contract, consideration is
presumed to be paid to the State and the public is supposed to receive the whole
equivalent thereof.
Note: This applies only where one party is the government and the other party, a
private person.
E. STAGES OR ASPECTS OF TAXATION

1. Levy or imposition (tax legislation)
This refers to the enactment of a law by Congress authorizing the imposition of tax. It further
contemplates the determination of the subject of taxation, purpose for which the tax shall be
levied, fixing the rate of taxation, and the rules of taxation in general.
2. Assessment and collection (tax administration)
This is the act of administration and implementation of the tax law by executive through its
administrative agencies. The act of assessing and collecting taxes is administrative in
character, and therefore can be delegated. (Dimaampao, 2015)
Note: The term "assessment" which here means notice and demand for payment of a tax
liability.
3. Payment
The act of compliance by the taxpayer, including such options, schemes, or remedies as may
be legally available.
General rule: Tax shall be paid by the person subject thereto at the time the return is filed.
(Sec. 56(A)(1), NIRC)
Exception: When the tax due is in excess of ₱2,000, the taxpayer other than a corporation
may elect to pay the tax in two (2) equal installments in which case, the first installment shall
be paid at the time the return is filed and the second installment, on or before October 15
following the close of the calendar year. (Sec. 56(4)(2), NIRC)
Note: If any installment is not paid on or before the date fixed for its payment, the whole
amount of the tax unpaid becomes due and payable, together with delinquency penalties.
4. Refund
The recovery of any alleged to have been erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected without authority, or of any sum alleged to
have been excessively, or in any manner wrongfully collected.
F. GENERAL CONCEPTS IN TAXATION

1. Prospectivity of tax laws
General rule: Tax laws must only be imposed prospectively.
Exception: If the law expressly provides for retroactive application. Retroactive application
of revenue laws may be allowed if it will not amount to denial of due process. There is a
violation of due process when the tax law imposes harsh and oppressive tax. (CIR V. Acosta,
GR. No. 154068 August 3, 2007)
2. Imprescriptibility
General rule: Taxes are imprescriptible by reason that it is the lifeblood of the government.
Exception: Tax laws may provide for statute of limitations. In particular, the NIRC and LGC
provide for the prescriptive periods for assessment and collection.
Tax laws provide for statute of limitations in the collection of taxes for the purpose of
safeguarding taxpayers from any unreasonable examination, investigation or assessment
(CIR v. B.F. Goodrich Phils., G.R. No. 104171, February 24, 1999)
NOTE: Although the NIRC provides for the limitation in the assessment and collection of
taxes imposed, such prescriptive period will only be applicable to those taxes that were
returnable. The prescriptive period shall start from the time the taxpayer files the tax return
and declares his liability. (Collector of Internal Revenue v. Bisaya Land Transportation Co,
Inc, GR Nos. L-12100 & L-11812, May 29, 1959)
3. Situs of taxation
It is the place or authority that has the right to impose and collect taxes. (Commissioner of
Internal Revenue v. Marubeni Corporation, GR. No. 137377, December 18, 2001)
Factors that determine the situs of taxation
a. Residence of the taxpayer
b. Citizenship of the taxpayer
c. Nature of the tax
d. Subject matter of the tax
e. Source of income
Rules observed in fixing tax situs
Person Residence
Real Property Location
Tangible Personal Property Location
Intangible Personal Property Domicile of the owner
Income Source of income
Occupation – where the occupation is engaged in
Transaction – where the transaction took place
Business Place of the business
Gratuitous Transfer of property Residence or citizenship of the taxpayer; or
location of property
4. Double taxation
There is no constitutional prohibition against double taxation in the Philippines. It is
something not favored, but is permissible, provided some other constitutional requirement
is not thereby violated, such as the requirement that taxes must be uniform. (Villanueva v.
City of iloilo, 1968)
Direct (strict sense)
Double taxation in the objectionable or prohibited sense since it violates the equal protection
clause of the Constitution.
Elements of direct double taxation
a. The same property is taxed twice when it should be taxed only once; and
b. Both taxes are imposed:
1) on the same subject matter,
2) for the same purpose,
3) by the same taxing authority,
4) within the same jurisdiction,
5) during the same taxing period; and
6) the taxes must be of the same kind or character. (City of Manila v. Coca Cola
Bottlers Philippines, GR. No. 181845, August 4, 2009)
All the elements must be present in order to apply double taxation in its strict sense.
Indirect (broad) sense
It is a permissible double taxation. It is indirect when some elements of direct double taxation
are absent.
Modes of eliminating double taxation
a. Provide for exemptions or allowance of deduction or tax credit for foreign taxes.
b. Enter into tax treaties with other states (like the former Phil-Am Military Bases
Agreements as to income tax).
Tax treaties - the purpose is to reconcile the national fiscal legislation of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions (international double taxation). This is to encourage the free
flow of goods and services and the movement of capital, technology, and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
5. Escape from taxation
a. Shifting of tax burden
Shifting is the transfer of the burden of tax by the original payer or the one on whom
the tax was assessed or imposed to another or someone else without violating the
law.
Examples of taxes when shifting may apply are VAT, percentage tax, excise tax on
excisable articles, ad valorem tax that oil companies pay to BIR upon removal of
petroleum products from its refinery.
Ways of shifting the tax burden

1) Forward shifting - When the burden of tax is transferred from a factor of
production through the factors of distribution until it finally settles on the
ultimate purchaser or consumer.
2) Backward shifting- When the burden is transferred from the consumer
through the factors of distribution to the factors of production.
3) Onward shifting - When the tax is shifted two or more times either forward
or backward.
Meaning of impact and incidence of taxation

Impact of Taxation Incidence of Taxation
It refers to the statutory liability to pay It is the economic cost of tax. It is also
the tax. It falls on the person originally known as burden of taxation.
assessed with a particular tax.
It is the imposition of tax (Liability) It is the payment of tax (Burden)
It is on the seller upon whom the tax has It is on the final consumer, the place at
been imposed which the tax comes to rest.
b. Tax avoidance
A scheme where the taxpayer uses legally permissible alternative method of
assessing taxable property or income, in order to avoid or reduce tax liability. It is a
tax saving device within the means sanctioned by law. This method should be used
by the taxpayer in good faith and at arm's length. (CIR v. The Estate of Benigno Toda
Jr, G.R. No. 30554, February 28, 2004)
c. Tax evasion
A scheme where the taxpayer uses illegal or fraudulent means to defeat or lessen
payment of a tax. It is a scheme used outside of those lawful means and when availed
of. It usually subjects the taxpayer to further or additional civil or criminal liabilities.
(CIR v. The Estate of Benigno Toda Jr, GR No. 30554, February 28, 2004)
Tax avoidance distinguished from tax evasion
Tax Avoidance Tax Evasion
Other Name Tax Minimization Tax Dodging
Validity Legal and not subject to Illegal and subject to criminal
criminal penalty penalty
Effect Minimization of taxes Almost always results in
absence of tax payment
d. Exemption
It is the grant of immunity, express or implied, to particular persons or corporations,
from a tax upon property or an excise tax which persons or corporations generally
within the same taxing districts are obliged to pay.
It is the legislature, unless limited by a provision of the state constitution, which has
full power to exempt any person, corporation, or class of property from taxation; its
power to exempt being as broad as its power to tax. Other than Congress, the
Constitution may itself provide for specific tax exemptions, or local governments
may pass ordinances on exemption only from local taxes. (John Hay Peoples
Alternative Coalition et al v. Lim et. al, G. R No. 119775, October 24, 2003)
Nature of tax exemption
1) Personal in nature and covers only taxes for which the grantee is directly
liable.
Note: It cannot be transferred or assigned by the person to whom it is given
without the consent of the State.
2) Strictly construed against the taxpayer.
3) Implies a waiver on the part of the government of its right to collect what
otherwise would be due.
4) Exemptions are not presumed. The burden is upon the claimant to establish
right to exemption beyond reasonable doubt.
Kinds of tax exemption

As to basis
1) Constitutional - immunities from taxation which originate from the
Constitution
2) Statutory - Those which emanate from legislation
3) Contractual - Agreed to by the taxing authority in contracts lawfully entered
into by them under enabling laws
4) Implied - When particular persons, properties or excises are deemed exempt
as they all outside the scope of the taxing provision.
Note: The law looks with disfavor on tax exemptions and he who would seek
to be thus privileged must justify it by words too plain to be mistaken and too
categorical to be misinterpreted. (Western Minolco Corporation CIR GR Na
L-61632, August 16 1983)
5) Treaty
6) Licensing ordinance
As to extent
1) Total - Connotes absolute immunity
2) Partial - One where a collection of a part of the tax is dispensed with
As to object
1) Personal - Granted directly in favor of certain persons.
2) Impersonal - Granted directly in favor of a certain class of property.
e. Capitalization – is the 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. An example as the reduction made by the seller on the price of the real estate,
anticipation of future tax to be shouldered by the future buyer.
f. Transformation – the manufacturer absorbs the additional taxes imposed by the
government without passing it to the buyers for fear of loss of his/its market. Instead,
he/it increases quantity of production, thereby turning their units of production at a
lower cost resulting to the transformation of the tax into a gain through the medium
of production.
6. Prohibition on compensation and set-off

Compensation or set-off shall take place when two persons, in their own right, are creditors
and debtors of each other. (Article 1278, Civil Code)
Rules governing compensation or set-off as applied in taxation
No set-off is admissible against the demands for taxes levied for general or local
governmental purposes. Taxes cannot be subject to compensation because the government
and the taxpayer are not creditors and debtors of each other. (Philex Mining Corporation v.
CIR, 356 Phil. 189, 198; 294 SCRA 687, 695 (1998), cited in CIR v. Toledo Power
Company, G.R. No. 196415. December 2, 2015)
7. Compromise
A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to
one already commenced. It implies the mutual agreement by the parties in regard to the thing
or subject matter which is to be compromised.
Compromises are generally allowed and enforceable when the subject matter thereof is not
prohibited from being compromised and the person entering such compromise is duly
authorized to do so.
Persons allowed to enter into compromise of tax obligations
g. BIR Commissioner, as expressly authorized by the NIRC,
h. Collector of Customs, with respect to customs duties limited to cases where the
legitimate authority is specifically granted such as in the remission of duties. (Sec.
709, TCC)
i. Customs Commissioner, subject to the approval of the Secretary of Finance, in cases
involving the imposition of fines, surcharges, and forfeitures. (Sec. 2316, TCC)
8. Tax amnesty
A general pardon or intentional overlooking by the State of its authority to impose penalties
on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an
absolute 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. (Asia International Auctioneers, Inc.
v. CIR, G.R. No. 179115, September 26, 2012)
A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant
of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer
and liberally in favor of the taxing authority. (Asia International Auctioneers, Inc. v. CIR,
GR. No. 179115, September 26, 2012)
Tax amnesty distinguished from tax exemption
Tax Amnesty Tax Exemption
Scope of Immunity from all criminal, civil Immunity from civil liability
immunity and administrative liabilities only
from non-payment of taxes
Grantee General pardon given to all A freedom from a charge or
erring taxpayers burden to which others are
subjected
How applied Applied retroactively Applied prospectively
Presence of There is revenue loss since there None, because there was no
actual was actually taxes due, but actual taxes due as the person or
revenue loss collection was waived by the transaction is protected by tax
government exemption
IV. Activity
Review Questions
1. What is taxation and how is this differentiated from the power of eminent domain and police
power?
2. Why is taxation considered the strongest among the three inherent powers of the state?
3. Distinguish between tax evasion and tax avoidance.
4. May taxes be subject to set off or compensation claims that individuals may have against the
government?
5. Differentiate between tax amnesty, tax compromise, and tax exemption.
6. Give the reason why a state can still exercise its taxing powers over its citizens who reside
outside its territory.
7. What are the usual methods of avoiding the occurrence of double taxation?
Multiple Choice Questions

Encircle letter of the best answer
1. One of the following is not among the basic justification for taxation.
a. Taxation is the lifeblood of the government
b. Taxation is a voluntary contribution for the benefits received
c. Taxation is based on necessity
d. Taxation is the bread and butter of the government
2. Which of the following is not an inherent restriction on the exercise of taxation power?
a. For public purposes
b. International comity
c. Rule of uniformity
d. Territorial jurisdiction
3. Which of the following tax escape is permissible under the Tax Code?
a. Tax evasion
b. Overstatement of expenses
c. Tax dodging
d. Tax avoidance
4. A tax must be imposed for public purpose. Which of the following is not a public purpose?
a. Improvement of a subdivision road
b. National defense
c. Public education
d. Improvement of the sugar and coconut industries
5. Which of the following is not a determinant of the place of taxation?

a. Amount of tax to be imposed
b. Citizenship of the taxpayer
c. Residence of the taxpayer
d. Source of the income
VI. References
Tabag, Enrico D., Income taxation, 2022
Ampongan, Omar Erasmo G., Income Taxation 16/e, 2020

Week 1 Course Material For Income Taxation

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Week 1 Course Material For Income Taxation

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Subject Code: BAINCTAX

Subject Title: Income Taxation

Class Schedule: Face-to-Face: Tuesday 1:00am – 7:00pm

Course Learning Outcomes:

About the Instructor:

-Mr. Alfonso M. Cruz, Jr. CPA, LPT, MBA

Topic: Module 1: General Principles of Taxation

DISLAIMER: The information content provided in this course material is designed to

2. Which of the following is not the nature of taxation?

II. Learning Outcomes

Similarities among the three (3) inherent powers of the state

Distinctions among the three (3) inherent powers

B. DEFINITION AND PURPOSE OF TAXATION

2. Secondary or non-revenue purpose

C. THEORY AND BASIS OF TAXATION

2. Basis of taxation: Benefits Received or Reciprocity Theory

D. SCOPE AND LIMITATIONS OF TAXATION

2. Inherent and constitutional limitations on taxation

e. Exemption of government entities, agencies and instrumentalities

h. President's veto power on appropriation, revenue, tariff bills

E. STAGES OR ASPECTS OF TAXATION

F. GENERAL CONCEPTS IN TAXATION

Ways of shifting the tax burden

Meaning of impact and incidence of taxation

Kinds of tax exemption

6. Prohibition on compensation and set-off

Multiple Choice Questions

5. Which of the following is not a determinant of the place of taxation?

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