INCOME TAXATION – MAR213

OVERVIEW

Constant

• Change
• Death
• God
• Taxation

Taxation

• Taxation in everything
• Tax is always there.
• We cannot escape tax
• Taxation is made by Humans
• Taxation itself is Good

✓ In our everyday living, taxation is there. We were able to have a comfortable sleep. Eat the foods that we crave because of
the government.

• Because we created a society where we can live better place.

• There is someone who paid for the kind oof life you are experiencing right now.
• We are living in a better place because there are a government and the people organized and that all became possible
because of TAXATION.
• Tax is something that we pay a civilized society.
• Government cannot Function well without funding.
• Imagine a country without taxation.

✓ Taxation is something that we pay for a civilized society, without taxation, we will not be civilized. And the world that we
know may not be like it.

HISTORY OF TAXATION

How did taxation start?

BEFORE
In order for the community to have a civilized society, taxation Government
is needed.

Each household must pay tax Government

There is an assigned collector to collect taxes in each Tax Collector

household.

The assigned collector will check your assets and source of Tax Collector
income. Then it will make an assessment how much tax should
you pay as a citizen
 NOW
People in the community now goes to the BIR to pay their Bureau of Internal
taxes. Revenue (BIR)

Which is better?

Under the point of view of the collector, the system that they used to before is better than today.

Because before, they can go house to house and assess properly how much tax should they impose to each person. They are the one
who makes the assessment. Unlike now where we follow self-assessment.

Self-Assessment

You have your own business

Sales XXX

Cost (XXX)

Income XXX - TAXABLE

Who made the Computation / You

Assessment?

Pwede mo bang dayain? Yes

Why do they have to change Because of population
the system? growth

It is not absolute

Because, the BIR has the power/authority to check your declaration of income tax if it is correct. And you cannot refuse.

Substituted filling

Instead of you, the taxpayer will go to the BIR and pay your tax, your employer will be the one to go to the BIR and pay for it. They
will just deduct from your salary the amount of money that you should have paid for your tax.

Withholding agent is called in the employer of one company

BASIC PRINCIPLES IN TAXATION

Taxation

- Is the process or means by which a sovereign, through its law-making body imposes burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenues to carry out the legitimate objects of Government. Taxation as a power of the state
is inherent in sovereignty.
The law-making body in the Philippines is the congress

BIR is an implementer only Collector

Subject and objects of Taxation

• Person
• Property
• Privilege

Aspects of Taxation

• Levying
• Assessment
• Collection

Purpose of Taxation

• Primary
• Secondary

Primary Purpose of Taxation

To provide funds or property with which to promote general welfare and protection of its citizens and to enable it to finance its
Multifarious Activities

Secondary Purpose of Taxation (Regulatory/ Sumptuary/ Compensatory)

• Promotion of General Welfare

• Reduction of Social Inequality
• Economic Growth

✓ Taxation has the power to destroy (Destroy the Non-essential Goods of a government to promote general welfare e.g.,
Cigarettes and alcohol)

✓ Taxation has the power to reduce social inequality

✓ They cannot eliminate it. What they can do is only to reduce it. (Giving Incentives)

What are some social and economic objectives of taxation?

The primary purpose of taxation is to raise revenue in order for the government to do its legitimate objects

Social and Economic Objectives

• Shifting of wealth from rich to poor

• Maintaining price stability
• Stimulating economic growth
• Encourage full employment
 FUNDAMENTALS OF DOCTRINES IN TAXATION

Doctrines in Taxation

A. The Lifeblood Doctrine

• Tas is the lifeblood of the country
• Emphasizes that taxation is indispensable to the existence of government such that the government needs the
contribution of its citizen in order to function and operate
• The government will not be able to do its multifarious activities without revenue. The government cannot exist without
taxation.

Theories of Cost Allocation

The taxation is made of allocating government cost or burdens to people. In distributing cost or burden, the government regards the
following general consideration in the exercise of its taxation power.

2 ways to allocate Cost/Burdens

B. Benefit Received Theory

• A concept of tax fairness that states that people should pay taxes in proportion to the benefits they receive from
government goods and services.
• States that the more benefits you receive from the government, The higher the tax you must pay.

C. Ability to pay theory

• Presupposes that taxation should also consider the taxpayer’s ability to pay. Tax payers should be required to
contribute based on their relative capacity to sacrifice for the support of the government.
• States that the more capable you are to pay tax, The higher the tax you must pay.

Example:

A earns P500,000 Annually

B earns P300,000 Annually

✓ Therefore, A must pay higher tax than B since he has the ability to pay more tax.

These doctrines were both named after this author

D. Marshall Doctrine
• Secretary George C. Marshall
• The power to tax involves the power to destroy. Taxation Power can be used as an instrument of police power.
• It can be used to discourage or prohibit undesirable activities or occupation.
• This is to protect general welfare of the citizens by destroying certain activities in the industry through imposition of
higher taxes.

E. Holme’s Doctrine
• Oliver Wendell Holmes Jr.
• It states that the taxation power is not power to destroy while the court sits.
• Taxation power may be used to build/encourage beneficial activities/industries by the grant of tax incentives.

✓ Marshall Doctrine and Holmes Doctrine are both Discussed in the regulatory purpose taxation.
F. Prospectively of Tax Laws
• The effectivity of tax law is prospective, Moving Forward.
• The tax laws are generally prospective in operation. An ex post facto law or a law that retroacts is prohibited by the
constitutions.
• The tax law should take effect in the period when it is implemented

Example: Train Law

The train Law was implemented January 01,2018 meaning the changes between the old tax and train law should take effect on January
01,2018 also. It cannot affect the tax ruling before January 01,2018 especially if it is detrimental.

G. Non – Compensation or Set off

• Off setting is not allowed in tax
• Tax is not a debt; hence it is not subject to set off. It is the responsibility to pay tax
• The word compensation here does not mean salary
• Under the general rule, off setting in tax not allowed because as a citizen. It is your responsibility to pay. Unless
otherwise it is clearly stated by the government that it is allowed.

H. Non-Assignment of Taxes
• Your responsibility to pay tax cannot be transferred
• Tax Obligation cannot be transferred to another entity by contract

I. Imprescriptibly in Taxation
• Taxes are Imprescriptible as they are the lifeblood of the country.
• The principle of imperceptibility of taxes provides that taxes will not prescribe against the government because of the
principle that taxes are lifeblood of the government and their prompt and certain availability is an imperious need.

Example: Squatters

If someone lives in an unused property and they were able to live them peacefully for many years. Let say 50 Years, without anyone
claiming the property, the owner of the property losses their right to the property due to passage of time.

- The owner cannot force the tenant to live the place because the owner’s right to the property has been prescribed due to passage
of time.
- If you have right, enforce it otherwise it will be prescribed.
- As a general Rule, Prescription is not allowed in taxation.
- No matter how long you did not pay your tax, your obligation to pay for it does not prescribe.
- If you do not pay your tax on time, it will not prescribe, it will just accumulate penalties.

Example: Mr. An Intentionally forget to pay his tax in 2015

After 5 years or even 10 years Mr. A cannot claim the right not to pay his 2015 Tax just because it has been a long time already
because he intentionally avoids to pay t. He cannot insist that he paid for his tax in 2016, 2017 and so on and so on to escape his tax in
2015. Mr. A cannot claim his obligation to pay his 2015 tax has been prescribed and the government cannot collect the tax he should
have paid year 2015 because his tax did not prescribed. As a general rule the Right to collect and to assess is imprescriptible

Exemptions:

• Tax prescribes if not collect within 5 Years from the date of its assessment.
• In the absence of assessment, tax prescribes if not collected by judicial action w/ 3 years from the date return is required to be
filled
• Taxes due from taxpayer’s wo did not file a return or those who filled fraudulent returns do not prescribe
J. Doctrine of Estoppel
• The error of any government employees does not bind the government
• Any misrepresentation made by one party toward another who relied therein in good faith will be held true and binding
against that person who made the misrepresentation.
• Estoppel is not applicable because again, the error made by a public official does not bind the government meaning the
government will not be held liable for that error.

Example:

Instead of 100,000 the BIR erroneously recorded your tax as 10,000.

✓ Therefore, what you did is you paid 10,000. Time passed and they discovered the error made in the computation and recording of
your tax.

➢ Can you refuse to pay the remaining balance of 90,000

➢ Can you just tell the officer that you will not pay for the remaining balance since their made an error in the computation and
recording of your tax.

➢ No, you cannot refuse to pay the remaining balance of your actual tax due because from the pointy of view of the republic
Interest, it is your duty and responsibility to pay tax as a citizen of the state.
➢ In the moment of discovery of the error, it can be corrected immediately.

K. Judicial Non- Interference

• Court cannot make a law stating tax will be removed
• Courts are not allowed to issue injunction against the government’s pursuit to collect tax as this would unnecessarily
defer tax collection (The Lifeblood Doctrines)

Note:

Taxation is an inherent power of the state. Therefore, it is wrong to make a law contradicting it. Taxation, even if not written in the
constitution will exist because it is an inherent power of the state.

L. Strict Construction of Tax Laws

• Taxation Ruling must be clearly Interpreted according to what is actually written in the constitution.
• Taxation is the rule, Exemption is Exemption

➢ There is no room for interpretation there is only room for application.

➢ When taxation laws are vague, the doctrine of strict legal construction is observed.

Tax laws are not open for Interpretation. It must be clear not vogue.

I. Vague Tax Laws

• In favor of the taxpayer
• If the tax laws are vague, meaning it is unclear and open for debate, then the favor will be given to the taxpayer.

II. Vague Exemptions Laws

• In favor of the Government
• If the exemption is clearly stated the favor will be given to the tax payer.
BUT, If its is vague, the favor will be given to the government. Because it is not dear how the exemption happened and how much
should the exemption be. If the exemption is vague, it is as if there is no exemption therefore the taxpayer cannot benefit because there
is no exemption.

M. Double Taxation
• Double taxation is not allowed
• Refers to the imposition of taxes on the same income, assets or financial transaction at two different points of time.
Double taxation can be economic, which refers to the taxing of shareholder dividends after taxation as corporate
earnings.

➢ Until now, there is no Law stating that double taxation is not allowed.
➢ But if it is Direct Duplicate Taxation, then it is not allowed because it is oppressive.
➢ The two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the
same jurisdiction, during some taxing period; and the taxes must be of the same kind of character.

Subject – Business

N. Escape from taxation

No Collection at All

A. Tax Avoidance
➢ any legal method used by a taxpayer to minimize the amount of income tax owed
➢ Inaaral Mabuti yung batas para makahanap ka ng lusot para di ka magbabayad ng tax

B. Tax Evasion
➢ Illegal and subject to imprisonment
➢ Tax evasion happens when a person intentionally avoids paying any tax under the Tax Code of the Philippines

C. Tax Exemption
➢ Is a part of scape of taxation
➢ You are exempted from paying tax

Tax Under the train Law

➢ Those with annual taxable income below PHP 250,000 are now exempt from paying personal income tax
➢ 13th Month Pay, Bonuses, and other cash benefit not exceeding 92,000 is also exempted from tax

Collecting is done other than the usual way of collection

D. Shifting
➢ shifting the burden of tax by the taxpayer to another person. An example could be a producer increasing the
price of goods so that consumers end up paying more.

E. Capitalization
➢ Example is Land Appreciation
➢ any method used to convert an income stream into value

F. Transformation
➢ Transform the manufacturing / Procedure of a product
New Beginnings

G. Tax Amnesty
➢ imposed on the decedent's total net taxable estate at the time of death without penalties at every stage of transfer
of property
➢ The implementation before 20% + penalty but the government revise this to to 6% without penalties

I Forgive You

H. Tax Condonation
➢ to remit or to desist or refrain from exacting or imposing a tax. It cannot extend to refund of taxes already paid
when obtaining condonation.

INHERENT POWER OF THE STATES

Powers of a state or branch of government that are not expressly written in a constitution. For a state, these powers are the Power of
Taxation, Police Power, and the Power of Eminent domain

Inherent Power

A. Taxation
• The process whereby charges are imposed on individuals or property by the legislative branch of the federal
government and by many state governments to raise funds for public purposes.
• Enforced Contribution – Hindi mo pwedeng takas an kailangan mong bayaran.
• It is your payment for having a civilized society

B. Police Power
• Is the power of the state to enact legislation that may interfere with personal liberty of property in order to promote the
general welfare
• PNP is a part of police power
• Police Power is More on Regulation to promote the general welfare

C. Eminent Domain
• also called “condemnation” – is the power of local, state or federal government agencies to take private property for
“public use” so long as the government pays “just compensation.” The government can exercise its power of eminent
domain even if the owner does not wish to sell his or her property
• Example Road Widening
• Its for Public Purpose

Limitations of Taxation Power

• A common limitation on the taxing power is the requirement that all citizens be treated alike.
• We need limitation in taxation kasi pwede maabuso ito.
• Absolute power corrupts absolutely

2 Types of Limitation of Taxation Power

A. Inherent Limitations
• These are limitations or restrictions that spring from its very own power. While the power of taxation is inherent in
sovereignty, there are also limitations or safeguards which spring from its own inherent power.
• Likas na yung Limitation sa taxation
5 Inherent Limitations

1. Territoriality of Taxation
• Under a territorial tax system, international businesses pay taxes to the countries in which they are located and earn
their income
• Ang pwede mo lang I tax as government or states yung nasasakupan mo lanng ang pwede mong itax.
2. International Comity
• the power of taxation is imposed only within the state. The state could not tax another sovereign, under the principles of
international law of which we adhere.
3. Public Purpose
• Purpose affecting the inhabitants of the state as a community and not merely as individuals
4. Exemption of the government
• Government agencies performing essential government functions are exempt from tax unless expressly taxed while
those performing proprietary functions are subject to tax unless expressly exempted. Government cannot tax itself.
• As long as the activity of the government is the main activity of a government it is not taxable.
• But the GOOC - Government-owned and controlled corporation are Taxable
5. Non-Delegation of the taxing power
• The power of tax is purely legislative and it cannot be delegated by the legislature to the executive or judicial
department of the government.

B. Constitutional Limitation
• The constitution of a country should contain provision to limit the authority of the government so that they don’t
override the Constitution and act in an arbitrary manner

16 Constitutional Limitations

1. Due Process of Law

➢ Substantive
• tax must be imposed only for public purpose, collected only under authority of a valid law and only taxing
power of jurisdiction.
• Firm Basis
• Impose only for Public Purpose

➢ Procedural
• there should be no arbitrariness in assessment and collection of taxes and the government shall observe that taxpayer’s
right to notice and hearing.

2. Equal Protection of the Law

➢ No person shall be denied the equal protection of law. (See, Article III, Sec 1 of the 1987 Philippine Constitution)

Example:

The Congress cannot exempt “balot” vendors to tax while subjecting “penoy” vendors to tax since they are essentially the same goods

3. Uniformity rule in tax

• The rule of taxation shall be uniform and equitable. (Article VI, Section 28 of the 1987 Philippine Constitution)

Tax payers under dissimilar circumstances should not be taxed the same.

➢ Uniformity - same class should be tax same kind of rate

➢ Equality - same means and method be applied impartially to all the members of the class

4. Progressive system of taxation

• the tax rates should be based on the taxpayer's ability to pay.
5. Non-imprisonment for non-payment of debt or poll tax
• No one shall be imprisoned because of his poverty and no one shall be imprisoned for mere inability to pay debts. (Article III,
Section 20)
• The constitution agrees when it is in good faith, but if it is in bad faith it constitutes Estafa.
• “Non-payment of tax compromises public interest while non-payment of debt compromises private interest.” Non-payment
of tax is a crime except of poll tax (basic community tax)

6. Non-impairment of obligations and contracts

• No law impairing the obligation of contracts shall be passed
• the state should set an example of good faith among its constituents. It should not set aside its obligations from contracts by
the exercise of its taxation power.

7. Free worship rule

• The Philippine government adopts free exercise of religion and does not subject its exercise to taxation. (Article III, Section
5)
• Donations to religious organizations are not subject to donor's tax.

8. Exemptions of religious or charitable entities, non -profit cemeteries, churches and mosques from property taxes.

9. Non-appropriation of public funds or property for the benefit of any churches, sect, or system of religion.
• the separation of religion to state

10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions.
• The Constitution grants tax exemption on revenues and assets of non-profit educational institutions. However, it
only applies on revenues and assets that are actually, directly, and exclusively devoted for educational purposes.

11. Concurrence of the majority of all members of the congress for the passage of law granting tax exemptions.
• Tax exemption contradicts the lifeblood doctrine as it deprives the government of revenues. Tax exemption must be valid
and requires the vote of all the majority members of the Congress in the grant.

12. Non-diversification of tax collection

• Tax collections should be used only for public purpose, it should never be diversified for private purpose.

13. Non-delegation of the taxing power

14. Non-impairment of the jurisdiction of the supreme court to review tax cases.
15. The requirement that appropriations, revenue of tariff bills, shall originate exclusively in the house of representative
16. The delegation of taxing power to local government writs

SITUS OF TAXATION

Taxes

are enforced proportional contribution from persons and property levied by the lawmaking body of the state by virtue of its
sovereignty for the support of the government and all public needs

Essential characteristics of a tax

I. It is an enforced contribution
II. It is levied by the law-making body
III. It is generally payable in money
IV. It is imposed for the purpose of revenue
V. it is used for public purpose
Situs of Taxation = Place of taxation

Why is it important to study situs of taxation?

Place of taxation is critical in determining whether or not a state has the power to tax,

Factors in determination of Situs of Taxation

A. Subject Matter
B. Nature of Tax
C. Citizenship of taxpayer
D. Residence of taxpayer

Subject Matter

A. Place
B. Person
C. Privilege

APPLICATION OF SITUS OF TAXATION

A. Person
• Person

Example:

Pedro living in Tarlac should pay his cedula in Tarlac. He cannot pay his cedula in Quezon City because he is living in Tarlac.

B. Real Property or Tangible Personal Property

• Location of the property
• Real Property - is a parcel of land and everything that is permanently attached to the land.
• Personal Property - Movable properties
• Tangible - has physical existence

Example:

I have a property in Caloocan but I live in Quezon City. Where should I pay the tax for the property?

Caloocan City

C. Intangible Personal Property

• Domicile of the owner unless he/she acquired a situs elsewhere.
• Intangible - There is no physical existence. ex. Copyright, Patent

Question:

Can the location of the property be the Situs?

No. Because, the property is intangible. It does not have a physical existence therefore it cannot be seen. The location of the property
cannot be identified.
D. Income
• Taxpayers’ residence, or citizenship, or place where the income was earned.

Example:

Park Junjun, Korean who has a business in Canada lives in the Philippines

Citizenship - Korea

Residence - Philippines

Income - Canada

Questions Answer
Who can impose tax on that income? Korea, Philippines, or All.
Canada?

Isn't too oppressive? No. Because, they are different taxing authority. Therefore, it
cannot be considered as Direct Duplicate Taxation. Then it is
not oppressive,

You are earning within and outside the Philippines, Can the
Philippine government impose tax on your income that is earned
within and outside the Philippines?

E. Business, occupation, and Transactions

• Business - Place where business is operated
• Occupation - Place where you practice your profession
• Transaction - Place where the transaction is completed

F. Gratuitous transfer of property

• Taxpayer's residence or citizenship or location of the property.

Sources of Tax Laws - Philippine Tax Laws

Branches of Government

A. LEGISLATIVE = LAW MAKING BODY

B. EXECUTIVE = LAW-ENFORCING BODY
C. JUDICIARY = LAW-INTERPRETING BODY

SOURCES OF TAX LAWS

• Constitution
• Statues and Presidential Decrees
• Revenue Regulations by the Dept. of Finance.
• Rulings issued by the commissioner of Internal Revenue and Opinions by the Secretary of Justice
• Decisions of the Supreme Court and Court of Tax Appeal
• Provincial, City, Municipality, and Barangay ordinances subject to limitations set forth in the Local Government Code.
• Treaties or international agreements and the purpose of which is to avoid or minimize double taxation
Tax

In general sense, is any contribution imposed by the government upon individuals, for the use and service of the state, whether
under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. Tax is not a debt.

PHILIPPINE TAX LAWS AND TAXES

A. National Internal Revenue Code of 1997 / NIRC 1997 (Presidential Decree No. 1158, as amended

• Income taxes

• Estate and Donor's Taxes

• Value Added Tax

• Other Percentage Tax

• Excise Tax

• Documentary Stamp Tax

B. Tariff and Custom Code of 1978 (Presidential Decree No. 1464, as amended)

• Import Duties

• Export Duties

C. Local Government Code of 1991 (Republic Act of 7160 )

• Real Property Tax

• Business Taxes, fees and charges

• Professional tax

• Community Tax

• Tax on banks and other Financial Institutions

D. Special Laws

• Motor Vehicle Law- Motor Vehicle Fees

• Private Motor Vehicle Tax Law - Private Motor Vehicle Tax

• Phil. Immigration Act of 1940 -Immigration Tax

• Travel Tax Law - Travel Tax

 Classification of Tax Laws

BASIC PRINCIPLES OF SOUND TAX SYSTEM

F - Fiscal adequacy

means the sources of revenue must be sufficient to meet government expenditures. and other public needs.

A -Administrative feasibility

means that tax laws and regulations must be effectively administered and enforced with the least inconvenience to the
taxpayer.

T -Theoretical justice

means the power of taxation should be based on one's ability to pay. So, one who earns more has the capacity to pay more.

Classification of Taxes

A. As to subject matter or object

• Person

• Property

• Privilege

B. As to who bears the burden

• Direct

• Indirect

C. As to determination of amount

• Specific

• Ad Valorem

D. As to purpose

• General, Fiscal, or Revenue

• Special or Regulatory

E. As to authority imposing the tax or escape

• National

• Municipal or Local

F. As to graduation or rate

• Proportionate

• Progressive or graduated

• Regressive
 Classification of Individual taxpayers - Citizen & Alien

Taxpayer Tax Base Tax Rate Taxable Source

Resident Citizen Net Income Graduated W/in & W/out PH
Non-Resident Citizen Net Income Graduated within only
Resident Alien Net Income Graduated within only
Non-Resident Alien- ETB Net Income Graduated within only
Non-Resident Alien-NETB Gross Income Final tax (25%) within only
Special Employees Net Income Graduated W/in & W/out PH
Resident Citizen

Why do we have to study the classification of Individual Income Taxpayers?

- Because, each classification of individual income taxpayer’s taxes differently.

TAXPAYERS

A. ARTIFICIAL BEING
B. NATURAL BEING

INDIVIDUAL INCOME TAXPAYERS

A. CITIZEN
- Filipino

B. ALIEN
- Foreigner

CITIZEN

A. RESIDENT
B. NON-RESIDENT

HOW TO BECOME A FILIPINO CITIZEN?

The following are citizens of the Philippines:

A. Those who are citizens of the Philippines at the time of the adoption of this Constitution;
B. Those whose fathers or mothers are citizens of the Philippines;
C. Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority;
D. Those who are naturalized in accordance with law.

NON-RESIDENT CITIZEN

a. A citizen of the PH who establishes to the satisfaction of the commissioner the fact of his/her physical presence abroad with a
definite intention to resides their in.

b. A citizen of the PH who leaves PH during the taxable year to reside abroad either, as an immigrant or for employment on a
permanent basis
c. A citizen of the PH who works and derived income from abroad and whose employment there act requires him/her to be
physically present abroad most of the time during the taxable year.

d. A citizen who has been previously considered as non-resident citizen and who arrives in the PH at any time during the
taxable year to reside permanently in the PH shall likewise be treated as non-resident citizen for the taxable year in which
he/she arrives in the PH with respect to his/her income derived from sources abroad until the date of his/her arrival in the PH

e. The taxpayer shall submit proof to the commissioner to show his/her intention of leaving the PH to reside permanently
abroad or to return and reside in the PH as the case may be.