ST.

ANTHONY’S COLLEGE
Business Education Department
San Jose de Buenavista, 5700 Antique
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196
Website: www.sac.edu.ph Email: info@sac.edu.ph; bused@sac.edu.ph

In SAC, we
care!

AEC 209
INCOME TAXATION
(WEEK 1 HANDOUT)

Student Name: ___________________________________________

Student No: _____________________________________________

Program and Section: _____________________________________

 ST. ANTHONY’S COLLEGE
Business Education Department
San Jose de Buenavista, 5700 Antique
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196
Website: www.sac.edu.ph Email: info@sac.edu.ph; bused@sac.edu.ph

In SAC, we
AEC 209 – INCOME TAXATION care!
PRELIM

WEEK 1: FUNDAMENTAL PRINCIPLES OF TAXATION

Three basic points to keep in mind in studying tax:

1. DO NOT GET LOST IN THE DETAIL OF TAX RULES. It is the ability to apply the rules of tax law to real-life situations that is important ----
not just having the talent to recite such rule. You should be alert for possible decision-making implications.
2. KEEP IN MIND THAT TAX RULES ARE A MATTER OF LAW. Hence, only legal authority (statute, regulation, court case) can ever be a
tax authority. If the “correct application” of law to a given set of facts results in a solution at odds with some accounting, economic, social,
or moral theory, it is still the law that controls.
3. GIVE CLOSE ATTENTION TO THE USE OF LANGUAGE. Terms having similar meanings in everyday speech may have been defined
differently in tax law.

State powers
1. Taxation – the power of the state by which the sovereign raises revenue to defray the necessary expenses of the government
2. Eminent Domain – The power of the state to take private property for public use upon payment of just compensation
3. Police Power – The power of the state to enact laws to promote public health, public morals, public safety and the general welfare of the
people

Taxation
– is the act of laying a tax, the process or means by which the sovereign, through its law making body, raises income to defray the necessary
expenses of the government
-are the enforced proportional contributions from persons and property levied by the law making body of the state by virtue of its sovereign for the
support of the government and all public needs.
-taxation as a power of the state, is inherent in sovereignty
-Taxes are the lifeblood of the government

Objectives of Taxation
1. To raise revenue for the government
2. Shift wealth from rich to poor
3. Maintaining price stability
4. Stimulating economic growth
5. Encouraging full employment

Essential Characteristics of tax

1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied of persons or property.
5. It is levied by the state which has jurisdiction over the person or property.
6. It is levied by the law making body of the state.
7. It is levied for public purpose or purposes.

Theory of Taxation
1. Necessity Theory — The existence of government is a necessity. The government cannot continue to perform of serving and protecting its
people without means to pay its expenses. For this reason, the state has the right to compel all its citizens and property within its limits to
contribute.
2. Lifeblood Doctrine - Taxes are the lifeblood of the government without which it can neither exist nor endure

MANIFESTATION OF THE LIFEBLOOD THEORY:

 No Estoppel against the Government.
 Collection of taxes cannot be enjoined (stopped) by injunction.
 Taxes could not be the subject of compensation or set-off.
 A valid tax may result in the destruction of the taxpayer's property. Right to select objects (subjects) of taxation.

Basis of Taxation

The Benefits-Protection Theory - The basis of taxation is 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.

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 ST. ANTHONY’S COLLEGE
Business Education Department
San Jose de Buenavista, 5700 Antique
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196
Website: www.sac.edu.ph Email: info@sac.edu.ph; bused@sac.edu.ph

In SAC, we
AEC 209 – INCOME TAXATION care!
PRELIM

Stages/Aspects of Taxation
1. Levying or Imposition - This process involves the passage of tax laws or ordinances through the legislature.
2. Assessment and Collection - This process involves the act of administration and implementation of tax laws by the executive through its
administrative agencies such as the Bureau of Internal Revenue or Bureau of Customs.
3. Payment of Tax - This process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the
government.

Basic principles of a sound tax system

1. Fiscal adequacy – It means that the sources of revenue taken as a whole should be sufficient to meet the demands of public expenditure
2. Equality or theoretical justice – It means that the tax burden should be in proportion to the taxpayer’s ability to pay (ability to pay principle)
3. Administrative feasibility – It means that tax laws should be capable of convenient, just and effective administration

Power of Taxation
Limitations: Constitutional and Inherent
1. Constitutional limitations
a. Due process of law
b. Equal protection of laws
c. Rule of uniformity and equity in taxation
d. No imprisonment for non-payment of poll tax
e. Non-impairment of the obligation of contracts
f. Non-impairment of religious freedom
g. No appropriation for religious purposes
h. Exemption of religious, charitable and educational entities, non-profit cemeteries and churches from property taxation
i. Exemption of non-stock, non-profit educational institutions from taxation
j. Concurrence by a majority of all members of Congress for the passage of a law granting tax exemption
k. Power of the President to veto any particular item or items in a revenue or tariff bill
l. Non-impairment of the jurisdiction of the Supreme Court in tax cases
2. Inherent limitations
a. Requirement that levy must be for public purpose
b. Non-delegation of legislative power to tax
c. Exemption from taxation of government entities
d. International comity
e. Territorial jurisdiction

Doctrines in Taxation
1. Prospectivity of Tax Laws – taxes may be imposed retroactively by law but, unless so expressed by such law, these taxes must only be
imposed prospectively
2. Equitable Recoupment — 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.
3. 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 taxable period

*Both taxes must be imposed on the same property or subject matter

4. Set-off of taxes – there should be no offsetting of taxes against claims that the taxpayer may have against the government. Taxes are not
subject to set-off or legal compensation because the government and the taxpayer are not mutual creditors and debtors of each other.
5. Taxpayer Suit- This provides that a taxpayer suit can only be allowed if the act involves a direct and illegal disbursement of public funds
derived from taxation. A case where the act complained of directly involves the illegal disbursement of public funds derived from taxation.
Taxpayers have locus standi to question the validity of tax measures or illegal expenditures of public money. In such cases, they are
parties in interest who will be prejudiced or benefited by the avails of the suit. The genera/ rule is that not only persons individually affected
but also taxpayers have sufficient interest of preventing the illegal expenditures of money raised by taxation. They may, therefore, question
in the proper court the constitutionality of statutes requiring the expenditure of public funds. But a taxpayer is not relieved from the
obligation of paying a tax because of his belief that it is being misappropriated by certain officials, for otherwise, collection of taxes would
be hampered and this may result in the paralyzation of important governmental functions.

Situs of taxation
-place of taxation

Rule: The state may rightfully levy and collect the tax where the subject being taxed has a situs under its jurisdiction.
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 ST. ANTHONY’S COLLEGE
Business Education Department
San Jose de Buenavista, 5700 Antique
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196
Website: www.sac.edu.ph Email: info@sac.edu.ph; bused@sac.edu.ph

In SAC, we
AEC 209 – INCOME TAXATION care!
PRELIM

Factors in determining situs:

1. Subject matter – what is being taxed; may be a person, property, act or activity
2. Nature of tax – which tax to impose; may be an income tax, import duty or real property tax
3. Citizenship of the taxpayer
4. Residence of taxpayer

The following situs of taxation apply:

1. Persons – residence of the taxpayer
2. Real property or tangible personal property – location of the property
3. Intangible personal property - domicile of the owner unless he acquired situs elsewhere
4. Income – taxpayer’s residence or citizenship, or place where the income was earned
5. Business, occupation and transaction – place where business is being operated, occupation being practiced and transaction completed
6. Gratuitous transfer of property – taxpayer’s residence or citizenship, or location of property

Classification of taxes
1. As to subject matter
a. Personal, poll or capitation – Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not,
without regard to their property or the occupation or business in which they may be engaged
b. Property – Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other
reasonable method of apportionment
c. Excise – Any tax which does not fall within the classification of a poll tax or a property tax
2. As to who bears the burden
a. Direct – Tax which demanded from the person who also shoulders the burden of the tax; or tax for which the taxpayer is directly liable
for which he cannot shift to another
b. Indirect – Tax which is demanded from one person in the expectation and the intention that he shall indemnify himself at the expense
of another, falling finally upon the ultimate purchaser or consumer; or tax imposed upon goods before they reach the consumer who
ultimately pays for it not as tax but as part of purchase price
3. As to determination of amount
a. Specific – Tax of a fixed amount imposed by the head or number, or some standard of weight or measurement
b. Ad valorem – Tax of fixed proportion of the value of the property with respect to which the tax assessed

4. As to purpose
a. General or fiscal – Tax imposed for the general purposes of the government, to raise revenue for government needs
b. Special or regulatory – Tax imposed for special purpose like to achieve some social or economic ends irrespective of whether
revenue is actually raised or not
5. As to scope
a. National – Tax imposed by the national government
b. Municipal or local – Tax imposed by the local government units
6. As to graduation or rate
a. Proportional – Tax based on affixed percentage of the amount of the property, receipts or other basis to be taxed
b. Progressive or graduated – Tax rate of which increases as the tax base or bracket increases
c. Regressive – Tax rate of which decreases as the tax base or bracket decreases (tax rate and tax base move in opposite direction)

Tax as distinguished from other terms

1. Toll – sum of money for the use of something generally applied to the consideration which is paid for the use of the road, bridge or the like,
of a public nature

Toll: demand of proprietorship; paid for the use of another’s property; and may be imposed by the government or private individuals or
entities
Tax: demand on sovereignty; paid for the support of the government; and may be imposed by the state
2. Penalty – sanction imposed as a punishment for violation of law or acts deemed injurious

Penalty: regulate conduct; and may be imposed by the government or private individuals or entities
Tax: raise revenue; and may be imposed only by the government
3. Special assessment – enforced proportional contribution from owners of land specially and peculiarly benefited by public improvements

Special Assessment: levied only on land; not a personal liability of the person assessed; based on benefits; and is exceptional both as to
time and place
Tax: levied on persons, property, or exercise of privilege; may be made a personal liability of the person assessed; based on necessity;
and of general application
4. License or permit fee – charge imposed under the police power for the purposes of regulation
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 ST. ANTHONY’S COLLEGE
Business Education Department
San Jose de Buenavista, 5700 Antique
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196
Website: www.sac.edu.ph Email: info@sac.edu.ph; bused@sac.edu.ph

In SAC, we
AEC 209 – INCOME TAXATION care!
PRELIM

License: for regulation; involves exercise of police power; failure to pay makes an act or a business illegal
Tax: levied for revenue; involves the exercise of the taxing power; failure to pay does not necessarily make an act or a business illegal
5. Debt – generally based on contract; is assignable; may be paid in kind; nonpayment of debt cannot imprison a person
Tax: based on law; cannot generally be assigned; generally payable in money; nonpayment of tax can imprison a person (except poll tax)
6. Subsidy – pecuniary aid directly granted by the government to an individual or private commercial enterprise deemed beneficial to the
public
7. Revenue – refers to all funds derived by the government, whether from tax or whatever sources and whatever manner
8. Internal revenue – taxes imposed by the legislature other than duties on imports and exports
9. Custom duties – imposed on goods exported from or imported into the country

Forms of escape from taxation

1. Shifting – is the transfer of the burden of the tax by the original payer or the one on whom the tax was assessed or imposed to another or
someone else.

THREE (3) KINDS SHIFTING

 Forward shifting
 Backward shifting
 Onward shifting
2. Capitalization – means 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. The seller is willing to lower the price of the commodity provided the taxes will be shouldered by the
buyer.
3. Transformation – is the 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. The manufacturer absorbs the additional taxes imposed by the
government without passing it to the buyers for fear of lost 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.
4. Evasion or Dodging – is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax.
5. Avoidance – is the exploitation 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. It is also known as tax minimization/tax planning
6. Exemption – is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class form a tax
which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity, privilege or freedom
from payment of a charge or burden to which others are obliged to pay.

INTERNAL REVENUE
-Internal Revenue means taxes imposed by the legislature other than duties on imports and exports.

TARIFF
-May be used in one of three (3) senses:
1. A book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to
be paid for the same; or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation (or exportation) of goods.

*The term tariff and customs duties are used interchangeably in the Tariff and Customs Code.

SYSTEMS OF "INCOME" TAXATION

1. Global System — All items of gross income, deductions are reported in one income tax return and the applicable tax rate is applied on the
tax base.
2. Schedular System — Different types of income are subject to different sets of graduated or flat income tax rates.

Exemptions from Taxation

-It is a grant of immunity, express or implied, to particular persons, or corporations of a particular class, from a tax upon property or an excise tax
which persons and corporations generally within the same taxing district, are obliged to pay.

CLASSIFICATION OF EXEMPTION:
1. Express or affirmative --- these are express provisions in the Constitution, statues, treaties, ordinances, franchises or contracts
2. Implied or exemption by omission this occurs when a tax is levied on certain classes of persons, properties or transactions without
mentioning other classes. Those not mentioned are deemed exempted by omission

INTERPRETATION OF EXEMPTION GRANT

-Exemption grants are strictly construed against the person or entity claiming exemption. One must justify such claim by clear and positive grant.
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 ST. ANTHONY’S COLLEGE
Business Education Department
San Jose de Buenavista, 5700 Antique
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196
Website: www.sac.edu.ph Email: info@sac.edu.ph; bused@sac.edu.ph

In SAC, we
AEC 209 – INCOME TAXATION care!
PRELIM

Tax exemptions
1. Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, building,
and improvements, actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempt from taxation
(Sec. 28, Art. 6, Constitution) {Exempt from property tax}
2. 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. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall
be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the
limitations provided by law including restrictions on dividends and provisions for reinvestment.

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, Art. 14, Constitution) {exempt from taxes and duties}
3. General professional partnership shall not be subject to the income tax imposed under the NIRC (Sec. 26, NIRC)
4. Transfers exempt from estate tax under Sec 87, NIRC.
5. Gifts exempt from donor’s tax under Sec. 101, NIRC.