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Topic 1 - Income Taxation
Topic 1 - Income Taxation
Topic 1 - Income Taxation
Principles
Income Taxation by Enrico D. Tabag and Earl Jimson R. Garcia
Taxation Defined
• Is the process or means by which the sovereign (independent state),
through its law-making body (legislature), imposes burdens upon
subjects and objects within its jurisdiction for the purpose of raising
revenues to carry out the legitimate objects of government.
• It is the act of levying a tax to apportion the cost of government
among those who, in some measure, are privileged to enjoy its
benefits and must therefore bear its burdens.
• It is a power inherent in every sovereign state being essential to the
existence of every government.
Taxes Defined
• Are the enforced proportional contributions or charges from persons
and property levied by the law-making body of the state by virtue of
its sovereignty for the support of the government and all public
needs.
The Three (3) 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.
• 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.
Purposes of Taxation
• 1. Primary: Revenue or Fiscal Purpose
The power of taxation proceeds upon the theory that the existence of
government is a necessity (“Necessity Theory”).
• 2. It is legislative in character.
• The power to tax (levying or imposition) is peculiarly and exclusively legislative in nature.
It cannot be exercised by the executive or judicial branches of the government.
• A. Personal, poll or capitation – tax of a fixed amount imposed upon individual, whether citizens or
not, residing within a specified territory without regard to their property or the occupation in
which he may be engaged. (e.g. community tax).
• 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 (e.g. real estate tax).
• C. Excise – any tax which does not fall within the classification of a poll tax or a property tax. This is
a tax on the exercise of certain rights and privileges (income tax, estate tax, donor’s tax). Excise tax
may also refer to the tax levied or imposed on sin products and non-essential goods such as cigars
and liquors. Excise taxes of this nature are taxes applicable to certain specified articles or products
manufactured in the Philippines for domestic sale or consumption or any other disposition and to
specified things or goods imported into the Philippines. It may be specific or ad valorem.
Classification of Taxes cont.
• As to who bears the burden:
• A. Direct – tax which is demanded from the person who also shoulders the
burden of tax or tax which the taxpayer cannot shift to another. Bothe the
incidence (liability for the payment of the tax) as well as the impact or burden
of the tax falls on the same person (e.g. income tax, estate tax, donor’s tax).
• B. Indirect – tax which is demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of another. These are
taxes wherein the incidence of or the liability for the payment of the tax falls
on one person but the burden thereof can be shifted or passed on to another
person (e.g. VAT, percentage tax, excise tax on exciseable articles).
Classification of Taxes cont.
• As to determination of amount:
• B. Progressive or graduated – tax the rate of which increases as the tax base
or bracket increases (e.g. income tax on individual taxpayers)
• C. Regressive – tax the rate of which decreases as the tax base or bracket
increases.
Classification of Taxes cont.
• As to taxing authority:
• A. National – taxes imposed under the National Internal Revenue Code (commonly
known as the Tax Code) collected by the national government through the Bureau of
Internal Revenue (BIR) and other government agencies. Other national taxes other
than those collected by the BIR as provided for under special laws include but not
limited to:
• Customs duties
• Taxes on narcotic drugs
• Special education fund taxes
• Energy taxes on aircraft, motorized watercraft, and electric power consumption
• Sugar adjustment taxes
• Travel tax
• Private motor vehicle tax
Classification of Taxes cont.
• As to taxing authority:
• A. Purpose must be public in nature – A tax must always be imposed for a public
purpose, otherwise, it will be declared as invalid.
• C. Territorial limitation
Limitations on the State’s Power to Tax cont.
• 2. Constitutional Limitations
• A. Due process of law – The power to tax should not be harsh, oppressive or
confiscatory. This limitation is also known as the right to notice and hearing.
• B. Equal protection of laws – All persons subject to legislation shall be treated alike
under similar circumstances and conditions both in the privileges conferred and
liabilities imposed. The doctrine does not require that persons or properties different
in fact be treated as though they were the same. What it prohibits is class legislation
which discriminates against some and favors others.
• C. Rule of uniformity and equity in taxation – “The rule of taxation shall be uniform
and equitable”. It requires the uniform application and operation, without
discrimination, of the tax in every place where the subject of the tax is found.
Limitations on the State’s Power to Tax cont.
• 2. Constitutional Limitations cont.
•
Limitations on the State’s Power to Tax cont.
• 2. Constitutional Limitations cont.
• J. Others
• 1. Grant of tax exemption – no law granting any tax exemption (i.e., amnesties,
condonations and refunds) shall be passed without the concurrence of a
majority of all Members of Congress (voting separately).
• 2. Veto of appropriation, revenue, tariff bill by the President – 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 to which
he does not object.
Limitations on the State’s Power to Tax cont.
• Others cont.
• In its strict sense, double taxation referred to is direct duplicate taxation. In its
broad sense, double taxation is referred to as indirect double taxation. It extends
to all cases in which there is a burden of two or more impositions.
3. Evasion – Tax evasion is the use by the taxpayer of illegal or fraudulent means to
defeat or lessen the payment of a tax. It is also known as “tax dodging”. Example:
Deliberate failure to report a taxable income or property; deliberate reduction.
Means of Avoiding or Minimizing the Burden of Taxation cont.
• 7. Avoidance – tax avoidance is the tax saving device within the means sanctioned by
law.
Sources of Tax Laws
• 1. Constitution
• 2. National Internal Revenue Code
• 3. Tariff and Customs Code
• 4. Local Government Code
• 5. Local tax ordinances/City or municipal tax codes
• 6. Tax treaties and international agreements
• 7. Special laws
• 8. Decisions of the Supreme Court and the Court of Tax Appeals
• 9. Revenue rules and regulations and administrative rulings and opinions
Construction of Tax Laws
• Public purpose is always presumed.
• If the law is clear, apply the law in accordance to its plain and simple tenor.
• A Statute will not be construed as imposing a tax unless it does so clearly,
expressly and unambiguously.
• In case of doubt, it is construed most strongly against the Government, and
liberally in favor of the taxpayer.
• Provisions of a taxing act are not to be extended by implication.
• Tax laws operate prospectively unless the purpose of the legislature to give
retrospective effect is expressly declared or may be implied from the language
used.
• Tax laws are special laws and prevail over a general law.
Rule When there is Doubt in Statute or Law
• No person or property is subject to taxation unless within the terms
or plain import of a taxing statute.
• In every case of doubt, tax statutes are construed strictly against the
government and liberally in favor of the taxpayer.
• Taxes, being burdens, are not to be presumed beyond what the
statute expressly and clearly declares.
Provisions Granting Tax Exemptions
• Such provisions are construed strictly against the taxpayer claiming
tax exemption.
• When a tax is unquestionably imposed, a claim of exemption from tax
payments must be clearly shown and based on language in the law
too plain to be mistaken.
Application of Tax Laws
• General Rule :
• Tax laws are prospective in operation because the nature and amount of the
tax could not be foreseen and understood by the taxpayer at the time the
transactions which the law seeks to tax was completed.
• Exception:
• While it is not favored, a statute may nevertheless operate retroactively
provided it is expressly declared or is clearly the legislative intent. But a tax law
should not be given retroactive application when it would be harsh and
oppressive which violate the taxpayer’s constitutional rights regarding equity
and due process.
Taxpayer’s Suit
• It is one brought or filed by a taxpayer arguing the validity of a tax
statute and its enactment or the constitutionality of its alleged public
purpose.
• It is a case where the act complained of directly involves the illegal
disbursement of public funds derived from taxation.
End of Chapter 1