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PHILIPPINE LAWS ON INCOME TAXATION

GENERAL PRINCIPLES
OF TAXATION

Inherent Powers of the State
1. Power of Taxation
- Power of the state to exact an enforced
contribution upon persons, property or
rights for the purpose of generating
revenues for the use and support of the
government.
- Exercised only by the government or its
political subdivision.
- Generally no limit to the amount of tax
that may be imposed.
2. Power of Eminent Domain
- Power of the state to expropriate private
property for public purpose in return for a
just or reasonable compensation.
- May be granted by the government to
public service companies or public utilities.
3. Police Power
- Power of the state to promote the general
welfare of the people by limiting or
regulating the rights or properties of any
person.
- Relatively free from the constitutional
limitations and is superior to the non-
impairment clause provisions on obligations
of contracts.

Similarities among the Inherent Powers of
the Government
1. They all underlie and exist independently
with the constitution although the
conditions for their exercise maybe
prescribed by the constitution and by law
2. They are ways or means by which the
government interferes with private rights
and properties
3. They all rest upon necessity because there
can be no effective government without
them
4. They all presuppose an equivalent
compensation received, directly or
indirectly, by the persons affected by the
exercise of any of these governmental
powers

Distinctions between Power of Taxation and
Power of Eminent Domain

POWER OF
TAXATION
POWER OF
EMINENT DOMAIN
Directed against
persons, properties, or
rights
Directed against real
property
Purpose is to raise
revenues to support the
government
Purpose is to have real
property for public
purpose
(Taxpayer) gives money
representing his taxes in
consideration for
services and protections
presumed furnished by
the government.
(Taxpayer) gives away
his real property in
consideration for a just
or reasonable monetary
consideration.

Distinctions between Power of Taxation and
Police Power

POWER OF
TAXATION
POLICE POWER
To raise revenues to
support the government
To regulate or limit the
rights of persons for
public welfare
Directed against
persons, properties, or
rights
Directed against a
taxpayers rights or
property
The amount of tax
imposition may be
unlimited
The amount of
regulation fee must be
limited what is needed
to carry out the
regulation

Limitations on the Power of Taxation
1. Constitutional Limitations
a. Due process of the law
b. Equal protection of the law
c. Non-imprisonment for non-payment
of a debt or poll tax
d. Non-impairment of the provisions
on Obligations of Contracts
e. The rule of taxation shall be uniform
and equitable
- Progressive system of
Taxation
f. No public money shall be
appropriated for a religious or
private purpose
PHILIPPINE LAWS ON INCOME TAXATION
g. Exemption from Taxation of
Educational, Religious and
Charitable Organizations
- Basis is the use of
property, not ownership.
h. No law granting any tax exemption
shall be passed without the
concurrence of a majority of all the
members of congress.
i. Non-impairment of the Jurisdiction
of the Supreme Court on Tax Cases
j. The Philippine President has the
Power to approve or veto a Tax Bill
approved and passed by the
Congress.
- Veto may be overridden by
a 213 vote by Congress
2. Inherent Limitations
a. Taxes may be levied only for public
purpose
b. Non-delegation of the power to tax
except to local government
c. Exemptions from taxation of
government entities
d. Tax laws must be within the states
territorial jurisdiction
e. Tax laws must be subject to
international comity, convention, pr
agreements
f. Prohibition of double taxation

Definitions of Taxation
Taxation refers to the inherent power of the
state to exact an enforced contribution upon
persons, properties or rights for the
purpose of generating revenues for the use
of the government.
Taxation is a way or means of apportioning
the operational cost of the government and
all its public needs among those who, in
some measures, are privileged to enjoy its
benefits and therefore must bear the
burden.
Taxation is the act of levying a tax or the
process by which the government, through
its law-making body, raises revenues to
defray its necessary expenses.

Nature of Taxation
1. Authority
- Theory of Taxation / Lifeblood Theory
- Taxation rests upon necessity and is
inherent in every government or sovereignty
- Power is legislative in nature and essential
to the existence of any independent
government
- Government cannot exist without
taxation, thus taxation is an important
necessity.
2. Basis
- Benefits Received Principle
- Taxes are imposed upon persons,
properties or rights for the support of the
government in return for the general
advantages and protections which the
government affords the taxpayers, their
protections and rights.
- Where there is no benefit, there is no
power to tax.
- Reciprocal duties of protection and
support between the state and those that are
subject to its authority (symbiotic
relationship between the state and its
citizen).

Purposes of Taxation
1. To raise revenues for the use and support of
the government to enable it to carry out its
appropriate functions
2. It is a means to contend or promote the
general welfare, social and economic
development of a country and its people

Scope of Taxation (CUPS)
1. Comprehensive
2. Unlimited without restrictions, except
constitutional
3. Plenary whole power
4. Supreme strongest inherent power

Nature of Tax Laws/Internal Revenue Laws
Civil in nature
Not political or penal (although there are
penalties for violations)
Tax laws remain even if the government
changes.
National Internal Revenue Code (a
special law) prevails over a general law.

Construction of Tax Laws
PHILIPPINE LAWS ON INCOME TAXATION
Construed strictly against the government
and liberally in favor of the taxpayer
Tax Exemptions & Deductions construed
strictly against the taxpayer asserting the
claims for exemptions/deductions (there is
loss of revenue against the government)
Construed as to include the power to
destroy (imposing higher taxes on sin
products and on imported goods)

Applications of Tax Laws
Prospective in operation
May operate retroactively, if expressly
declared or it is the legislative intent.

Basic Principles of a Sound Tax System
(FAT)
1. Fiscal Adequacy
- Sources of revenues must be adequate to
meet the expenditures of the government
regardless of business or economic
conditions.
2. Administrative Feasibility
- Capable of reasonable and convenient
enforcement, just and effective
administration.
3. Theoretical Justice / Equality
- Tax burden shall be shouldered by those
who have the ability to pay.
- There must be an equitable or
proportionate distribution of tax burden

Tax
Enforced burden or mandatory
contribution imposed by the government
based on its power of taxation, upon
persons, properties, or rights.
Tax is the bread and butter or the lifeblood
of the government hence, no court shall be
empowered to interfere with or restrain the
collections of taxes.

Essential Characteristics of Tax
1. Enforced contribution
2. Legislative in nature
3. In accordance with/based on law
4. For public purpose
5. Proportionate in character
6. Pecuniary in character/payment in kind
7. Paid at regular intervals
8. Imposed upon persons, properties, or rights
9. To raise government revenues

Classifications of Taxes
1. As to Subject Matter
a. Personal ax / Capitation Tax /
Poll Tax
- Fixed amount of taxes, regardless
of property, professions, or
occupations.
- e.g., Community Tax
b. Property Tax
- Imposed on taxpayers property
(real or personal), situated within
the territorial jurisdiction of the
state
- e.g., Real Property/Estate Tax
c. Excise Tax / Privilege Tax
- Imposed on taxpayers exercising
of rights and privileges of
performing an act or engaging in an
occupation
- e.g., Donors Tax, Income Tax
2. As to Scope or Authority
a. National Tax
- Imposed by the national
government, enforced by the BIR, or
Bureau of Customs, under the Dept.
of Finance
- e.g., Corporate Income Tax,
Customs duties, Tariffs
b. Local Tax
- Imposed by the local government
(barangays, cities, municipalities, or
provinces)
- e.g., Real Estate Tax, Community
Tax
3. As to Purpose
a. General Tax
- For general purposes, which go to
the national/general funds
- e.g., Estate Tax
b. Special Tax
- Imposed for a special purpose,
which go to certain special funds
- e.g., Gasoline Tax, Flood Tax
4. As to Liabilities
a. Direct Tax
- Cannot be passed on or shifted to
other persons for payment
- e.g., Income Taxes
PHILIPPINE LAWS ON INCOME TAXATION
b. Indirect Tax
- Permitted by law to be shifted or
passed on to other persons for
payment
- e.g., Value Added Tax
5. As to Determination of Amounts
a. Specific Tax
- Determined based on weight or
volume capacity or any physical unit
of measurements
- e.g., Excise Tax on liquors and
cigarettes
b. Ad Valorem Tax
- According to Value
- Amounts are determined based on
the sales price or other specified
values of the property
- e.g., Value Added Tax (12%)
6. As to Graduation or Rates
a. Progressive/Graduated Tax
- Amount of taxes increase as the
bracket/layer increases
- e.g., Gift Tax, Estate Tax
b. Regressive Tax
- Amount of tax decreases as the
bracket/layer increases
- NO REGRESSIVE TAX in the
Philippines
c. Proportionate Tax / Flat Tax
- Amount of tax may be higher or
lower depending upon the bracket

Distinctions between Tax and License Fee
License - payment require to exercise a
certain right, e.g., Drivers License

TAX LICENSE
For the purpose of
raising revenues
For the purpose of
regulation
Based on the Power of
Taxation
Based on the Police
Power
Direct authority from
Congress levies a tax
License fee is imposed
under a delegated power
to the local government
Generally no limit to the
amount collectible
Enough only to cover
the cost of services or
regulation
Failure to pay does not
render the business /
occupation illegal (Taxes
cannot be collected
Failure to pay renders
the business /
occupation illegal
unless business is legally
registered)

Distinction between Tax and Toll
Toll - the compensation charged by the
owner for the use of his property and
improvements, e.g., Toll Fee

TAX TOLL
Demand of sovereignty
(pursuant to political
authority)
Demand of
proprietorship
(pursuant to right of
ownership)
Government-imposed Imposed by the
government or private
persons
To raise revenues for the
support and use of the
government
To recover the cost of
property and its
improvements

Distinction between Tax and Special
Assessment
Special Assessment (BELL) - local
imposition upon property in the immediate
vicinity of municipal improvements,
predicated upon the theory of benefits from
such improvements, e.g., drainage system
- Benefits
- Exceptional as to time &
place
- Levied on Land only
- Liability of a person
assessed (not)

TAX
SPECIAL
ASSESSMENT
Imposed upon persons,
properties, or rights
Imposed only on land
and its improvements
Imposed by national or
local government
Imposed only by local
government
Enforced contribution
for the use and support
of the government
Enforced contribution to
recover the cost of the
public improvements
Ordinary and general Extra-ordinary and
situational as to time
and locality

Distinction between Tax and Customs
Duties

PHILIPPINE LAWS ON INCOME TAXATION
TAX CUSTOMS DUTIES
Not all taxes are
customs duties
All customs duties are
taxes
Imposed upon persons,
properties, or rights
Imposed only upon
articles imported to or
exported from the
country

Distinction between Tax and Debt

TAX DEBT
Based on law Based on contract
Non-assignable Assignable
Generally payable in
terms of money
Payment is in terms of
money or property
(Dacion en Pago -
payment of movable or
immovable property)
In case of non-payment,
there is a possibility of
imprisonment
In case of non-payment,
there is no possibility of
imprisonment (unless
criminal or fraudulent)
May not be subject to
the right of offset
May be subject to offset
(Compensatio Morae)

Tax Situs / Place of Taxation
1. Persons
- Inhabitants or residents of the state,
whether citizens or not
2. Real Property
- State in which it is located, whether owner
is a resident or non-resident
3. Tangible Personal Property
- Wherever property is located (?)
4. Intangible Personal Property
- Domicile of the owner
5. Income
- From persons who are residents or citizens
in the taxing jurisdiction
6. Business, Occupation, and
Transaction
- Place where business was conducted
7. Gratuitous Transfer of Property
- based on citizenship, residency, location

Phases or Aspects of Taxation
1. Levying / Imposition of Tax
- Legislative process
- determining the persons, properties,
transactions, or rights to be taxed
- determining the purpose of said tax (as
long as for public purpose)
- sum to be raise
- Tax rate to be implied
2. Assessment and Collections of Tax
- Administrative process
- vested in Department of Finance, thru
BIR, Bureau of Customs, and LGUs

International Comity
Fundamental rule of taxation that no law
shall be passed to impose taxation on the
property owned by a foreign government
or sovereignty.

Categories of Double Taxation
Double Taxation - act of taxing the same
taxpayer twice by the same kind and
character of tax, by the same taxing
authority, for the same purpose and during
the same taxable period
1. Direct Double Taxation
- direct act of taxing the same taxpayer twice
during the same period
- NOT ALLOWED
2. Indirect Double Taxation
- A burden of two or more pecuniary
impositions

There is no constitutional limitation on
double taxation. It is merely subject to the
inherent limitation, hence it is not
prohibited legally speaking

Classification of Tax Escapes
1. Tax Credit
- payments made directly by the taxpayer
through withholding agents
2. Tax Exemption
- grant of immunity (express or implied)
3. Tax Evasion / Tax Dodging
- fraudulent act of using pretenses or
forbidden devices to lessen the tax liability
- understate income, overstate expenses
4. Tax Avoidance
- Legitimate means [permitted by laws to
minimize / avoid ones tax liability
5. Tax Shifting
- Legitimately passing ones tax liability for
payment to other persons in accordance
with provisions on tax laws