INTRODUCTION TO

TAXATION
(Taxes, Tax Laws andby
Tax Administration)
Daryl T. Evardone, CPA
credits to Rex B. Banggawan, CPA, MBA
Learning
Objectives
Concept of taxation and implications
Inherent power of the State
Scope and limitations of the taxation power
Stages and principles of taxation
Various escapes from taxation
Type of taxation laws
Classifications and elements of tax
Types of tax system
Principles of sound tax system
Powers of the Bureau of Internal Revenue (BIR)
Taxation defined…
as a State Power
– to enforce a proportional contribution for public purpose

as a Process
– in levying taxes by the legislature of the State

as a Mode of Cost Distribution

– the State allocates its cost or burden to its subjects (Public) who are also the
beneficiary
Receipt of benefits
it is conclusively presumed that every citizen and resident of the
State are directly or indirectly benefiting the public services
rendered by the government.

Theories of Cost Allocation

Benefit received theory
Ability to pay theory
Lifeblood doctrine defined…
taxes are the cause of the government, without taxes, no
government functions will be served.
Implications of the lifeblood doctrine
 Tax is imposed even no Constitutional grant.
 Claims for tax exemption are construed against taxpayers.
 The government has the right to choose for the objects of taxation.
 The courts are not allowed to interfere with the collection of taxes.
 In income taxation:
o Income is taxable upon receipt.
o Capital expenditures and prepayments as deduction is not allowed which can delay the collection of
taxes.
o Preferably, if a claimable expense is subject to limit, claim the lower amount of deduction.
o When the object of tax has multiple tax bases, the higher amount is preferred.
Inherent Powers of the State
 As to purpose
• As to limitation
• As to relationship to “Non-
impairment Clause” of the
Constitution
• As to subject
• As to importance
• As to persons affected
• As to exercising authority
Taxation Power Police Power Eminent Domain
To raise revenue for To protect the general To acquire private property
government expenses welfare of the people for public use
Generally unlimited
Public interest and due Public purpose and just
(Constitutional and
process compensation
Inherent limitations)
Inferior Superior Superior
Imposed upon persons, Imposed upon persons, Imposed upon private
property, rights or property, rights or properties with just
transactions transactions compensation
Most important Most superior Important
Community or class of Community or class of
individuals individuals
Owner of the property
Government and Private
Government Government
Utilities
Similarities of the State Powers
 They are all inherent to the state.
 They can exist independent of the Constitution but may be imposed with
conditions or limits for their exercise.
 They contemplate an equivalent compensation or benefit.
 They are generally exercised by the legislature.
 They are the means by which the State interferes with private rights and
properties.
 They are all necessary attributes of sovereignty.

Scope of the Taxation Power

As a rule, the state thru the Congress can tax any thing at any time and at any amount.
However it was limited by the Constitution and its inheritance.
Inherent Limitations of Taxation Power
 Territoriality of taxation
 International comity or no application of tax laws to properties in foreign government
 Exclusively for public purpose
 Exemption of the government and its instrumentalities
 Power to tax cannot be delegated to private persons and entities
 Double taxation should be avoided

Constitutional Limitations of Taxation Power

 Due process of law and equal protection of the laws in taxation
 Rule on uniformity and equity in taxation
 No imprisonment for non-payment of debt or poll tax
 Non-impairment of obligation and contract
 Progressive system of taxation
 No appropriation of public money for religious purposes
Constitutional Limitations of Taxation Power
 The power of the President to veto a revenue or tariff bill
 Exemption of religious, charitable, educational entities, non-profit cemeteries, churches
and mosque from property taxation
 Exemption from taxes of the revenues and assets of non-profit non-stock educational
institutions
 Concurrence by a majority of all members of the Congress for passage of a law granting
tax exemption
 Non-diversification of tax collections, it must be exclusive for public purpose
 Non-delegation of the power of taxation
 Non-impairment of the jurisdiction of the Supreme Court to review tax cases
 The delegation of taxing power to local government units
 The requirement that appropriation, revenue, or tariff bills shall originate exclusively in
the House of Representatives
 Free worship rule
Stages of the Exercise of Taxation Power
1. Levy or Imposition of Taxes
– tax laws must be originated from the Congress considering these matters:
• Object of taxation
• Tax rate setting or amount to be collected
• Purpose of the levy which the public benefited
• Kind of tax
• Apportionment of the tax between the national and local government
• Situs of taxation
• Method of collection

2. Assessment and Collection

– it involves computation and actual collection of taxes including penalties for
violation of tax laws
Other Doctrines in Taxation
Marshall Doctrine
– the power to destroy especially those undesirable activities or occupation.

Holme’s Doctrine
– the power to encourage beneficial activities or industries by granting tax
incentives.

Prospectivity of tax laws

– tax laws are generally prospective in application.

Non-compensation or set-off taxes

– generally, no automatic set-off or compensation of taxes allowed as tax is not a
debt.
Other Doctrines in Taxation
Non-assignment of taxes
– tax obligations cannot be assigned or transferred to another entity by contract.

Imprescriptibility in taxation
– the government’s right to collect taxes has no prescription period unless the law
itself provides.

Doctrine of estoppel
– any erroneous applications of the tax law made by public officials does not bind the
government. Thus, do not block the subsequent correct application of the tax laws.
Other Doctrines in Taxation
Judicial non-interference
– generally, courts are not allowed to issue injunction against the government’s
pursue to collect tax as this would unnecessarily defer tax collction.

Strict construction of tax laws

– tax burdens shall neither be imposed nor presumed to be imposed beyond what the
statute expressly and clearly states because tax statutes should be construed against
the government.
– tax exemptions, tax amnesty, tax condonations and their equivalent provisions are
not presumed and, when granted, are strictly construed against the taxpayer because
such provisions are highly disfavored by the government and he who claims tax
exemptions must be able to justify his claim or right.
Double Taxation defined…
occurs when the same taxpayer is taxed twice by the same tax
jurisdiction for the same thing.

Elements of Double Taxation

 Primary element – same object
 Secondary elements – same type, purpose, taxing jurisdiction and tax period

Types of Double Taxation

 Direct (discouraged)
 Indirect (in practice)
Escapes from Taxation
Result to loss of government revenue

 Tax evasion (Tax dodging) – illegal

e.g. Understatement or overstatement of accounts.

 Tax avoidance (Tax minimization) – legal

e.g. Careful tax planning, tax carry-over or tax credits and selection and
execution of transaction to minimize taxes.

 Tax exemption (Tax holiday) - legal

Escapes from Taxation
Not result to loss of government revenue

 Shifting

• Forward shifting
• Backward shifting
• Onward shifting

 Capitalization (same with backward shifting)

 Transformation
Types of Taxation Laws
 Tax laws

e.g. National Internal Revenue Code (NIRC)of 1997 as amended, Tariff and
Customs Code, Local Tax Code, Real Property Tax Code and Tax Reform for
Acceleration and Inclusion (TRAIN) Law (R.A. 10963)

 Tax exemption laws

e.g. Minimum Wage Law, Omnibus Investment Code of 1992 (E.O. 226), Barangay
Micro-Business Enterprise (BMBE) Law, Cooperative Development Act
(CDA)
Sources of Taxation Laws
 Constitution
 Statutes and Presidential Decrees
 Judicial Decisions or case laws
 Executive Orders and Batas Pambansa
 Administrative Issuances
 Local Ordinances
 Tax Treaties and conventions with foreign countries
 Revenue Regulations from Secretary of Finance
Types of Administrative Issuances
• Revenue regulations (RRs)
– clarifies and explains a certain tax law

• Revenue memorandum orders (RMOs)

– directives, guidelines and outline processes of the BIR

• Revenue memorandum rulings (RMRs)

– rulings, opinions and interpretations of the CIR on a certain provisions of the tax laws

• Revenue memorandum circulars (RMCs)

– issuances that publish pertinent and application portions issued by the BIR and other
agencies/offices

• Revenue bulletins (RB)

– periodic issuances, notices and official announcements of the CIR

• BIR Rulings
– positions of the BIR to queries raised by the taxpayers and others
GAAP vs. Tax Laws
Taxpayers are mandated to follow tax law in cases of conflict
with GAAP even though they normally follow GAAP in recording
transactions in their books of accounts.

Tax defined…
as an enforced proportional contribution levied by the
lawmaking body of the State to raise revenue for public purpose.
Elements of a Valid Tax
 Must be levied by the taxing power having jurisdiction
over the object of taxation.
 Must not violate constitutional and inherent limitations.
 Must be uniform and equitable.
 Must be for public purpose.
 Must be proportional in character.
 Generally payable in money.
 Classification of Taxes
 As to purpose
• Fiscal or revenue tax  As to amount
• Regulatory • Specific
• Sumptuary • Ad valorem

 As to subject matter  As to rate

• Personal, poll or capitation • Proportional tax
• Property tax • Progressive or graduated tax
• Excise or privilege tax • Regressive tax
• Mixed tax
 As to incidence
• Direct tax  As to imposing authority
• Indirect tax • National tax
• Local tax
Taxes vs. Similar Items
Tax
Demand of sovereignty
Generally amount is unlimited
For the support of the government
May be imposed by the State only
Tax
Imposed to raise revenue
Collected under the power of government
Generally amount is unlimited
Imposed on persons, property, rights or transactions
Non-payment does not make the business illegal
vs. Toll
Demand of proprietorship
Amount is limited to the cost and maintenance of public
improvement
For the use of another’s property
May be imposed by private individuals or entities
vs. License Fee
For regulation and control
Collected under the police power
Limited to the necessary expenses of regulation and
control
Imposed on the exercise of a right or privilege
Non-payment makes the business illegal
Taxes vs. Similar Items
Tax vs. Special assessment
Imposed on persons, property, rights or transactions Levied only on lands
For the support of the government Contribution to the cost of public improvement
Regular exaction Exceptional as to time and place

Tax vs. Penalty

Imposed to raise revenue Imposed to regulate conduct
May be imposed by the State only May be imposed by the private entity

Tax vs. Custom’s duty or tariffs

Imposed on persons, property, rights or transactions Imposed on imported or exported goods
It comprehends more than the term custom’s duty It is also a tax
Taxes vs. Similar Items
Tax
Based on law
Not assignable
Payable in money
Not subject to set-off
Non-payment may result to imprisonment
Bears interest only if delinquent
vs. Debt
Based on contract
Assignable
Payable in kind or in money
Subject to set-off
No imprisonment (except when debt arises from crime)
Interest depend upon the stipulation of the parties

Tax vs. Tithe

Based on law Based on religious obligation
Rates vary Fixed at 10% of one’s earning

Tax vs. Revenue

Imposed by the government for public purpose General collections of the government
Types of Tax Systems
Progressive Tax
Employed in the taxation of
As to imposition income of individuals
Emphasizes direct taxes, hence,
As to impact
it impacts more on the rich
Proportional Tax Regressive Tax
Employed in taxation of Not employed in the
corporate income and business Philippines
Emphasizes indirect taxes,
N/A hence, it impacts more on
the poor

Tax Collection Systems

• Withholding system on income tax

a. Creditable withholding tax

i. Withholding tax on compensation

ii. Expanded Withholding tax

b. Final withholding tax

Tax Collection Systems
• Withholding system on business tax

- when the national government agencies and instrumentalities including government-owned

and controlled corporations (GOCCs) purchase goods or services from private suppliers, the law requires
withholding of the relevant business tax like VAT or OPT.

• Voluntary compliance system

- also known as “self-assessment method”, taxpayers compute, report and pay their taxes to the
government.

• Assessment or enforcement system

- a collection system for those non-compliant taxpayers as the government agencies and
instrumentalities assesses taxpayer’s tax dues including penalties, demands for taxpayer’s voluntary
compliance or enforces collections by coercive means like summary proceedings or judicial proceedings
when necessary.
Withholding system on income tax

Creditable Withholding Tax Net Pay

Taxable Compensation
Bureau of
income
Internal Revenue Employee
(net of non-taxable
(BIR)
benefits and income)

Tax Withheld

Illustration on
Withholding Tax on Compensation
Withholding system on income tax

Creditable Withholding Tax Net rent (95%)

Bureau of
Rent expense paid by
Internal Revenue Lessor
the Lessee
(BIR)

Tax Withheld (5%)

Illustration on
Expanded Withholding Tax
Withholding system on income tax

Final Withholding Tax Net rent (80%)

Bureau of
Royalty paid by the
Internal Revenue Franchisor
Franchisee
(BIR)

Tax Withheld
(20%)
Principles of a Sound Tax System
 Fiscal adequacy
- sources of government funds must be
sufficient to cover government costs.

 Theoretical justice
- also known as an “ability to pay
theory”.

 Administrative feasibility
- an effective and efficient
Tax Administration
Department of
Finance

Bureau of Internal
Revenue (BIR)

Commissioner

Deputy Commissioner Deputy Commissioner Deputy Commissioner

(Legal Enforcement Deputy Commissioner
(Information Systems (Resource
Group) (Operations Group)
Group) Management Group)
Powers of the Bureau of Internal Revenue
 Assessment and collection of taxes.
 Enforcement of all forfeitures, penalties and fines, and judgments in all cases
decided in its favor by the courts.
 Giving effect to, and administering the supervisory and police powers
conferred to it by the NIRC and other laws.
 Assignment of internal revenue officers and other employees to other duties.
 Issuance of receipts and clearances.
 Provision and distribution of forms, receipts certificates, stamps, etc. to
proper officials.
 Submission of annual report, pertinent information to Congress Oversight
Committee in matter of taxation.
Powers of the Bureau of Internal Revenue
 Assessment and collection of taxes.
 Enforcement of all forfeitures, penalties and fines, and judgments in all cases
decided in its favor by the courts.
 Giving effect to, and administering the supervisory and police powers
conferred to it by the NIRC and other laws.
 Assignment of internal revenue officers and other employees to other duties.
 Issuance of receipts and clearances.
 Provision and distribution of forms, receipts certificates, stamps, etc. to
proper officials.
 Submission of annual report, pertinent information to Congress Oversight
Committee in matter of taxation.
End of discussions…

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