Taxation REVIEWER Theory and Basis of Taxation

MODULE 1. CONCEPTS AND

Theory: The Lifeblood Theory or
PRINCIPLES OF TAXATION
Necessity theory posits that taxation is
Taxation is a fundamental process essential for the government's
through which a sovereign state existence. Without the means to fund
imposes financial obligations on its operations, the government cannot
individuals and entities within its effectively serve and protect its
jurisdiction. This mechanism is citizens.
essential for raising revenues that
Basis: The Benefit Received or
enable the government to fulfill its
Reciprocity Theory suggests that the
legitimate objectives and
state collects taxes to perform its
responsibilities.
governance functions, while citizens
Taxation is an inherent power of every pay taxes to enjoy the benefits of an
sovereign state, crucial for its organized society.
existence. The Lifeblood of the
Three Inherent Powers of the State
Government
1.​ Taxation power - for raising
Defined as a method by which
revenue to cover government
governments collect revenue to support
expenses.
their operations and achieve their
2.​ Police power - for promoting
legitimate goals. It is considered the
public welfare by regulating the
most pervasive and powerful tool of
use of liberty and property.
government, as taxes are vital for its
3.​ Eminent domain - to acquire
survival.
private property for public use.
Purposes of Taxation
Similarities Among Inherent Powers
●​ Primary Purpose: Revenue or
●​ All are necessary attributes of
Fiscal Purpose - To provide funds
sovereignty.
necessary for promoting the
●​ All are inherent to the state.
general welfare and protecting
●​ All are legislative.
citizens, as well as financing
●​ All involve interference with
various government activities.
private rights and properties.
●​ Secondary Purpose: Regulatory
●​ All exist independently of the
- Taxation can also serve as a
constitution and can be
means for regulation or control,
exercised without a
influencing certain behaviors or
constitutional grant.
conditions as envisioned by the
government.
 ●​ All presume compensation for ○​ Due process of law
those affected by the exercise of ○​ Equal protection of laws
power. ○​ Rule of uniformity and
●​ The exercise of these powers equality
may be limited by national ○​ Progressive system of
legislation. taxation
○​ Non-imprisonment for
Scope of the Power of Taxation non-payment of debt or
"poll tax"
●​ Comprehensive: Covers
○​ Non-impairment of
individuals, businesses,
obligations and contracts
activities, professions, rights,
○​ Free worship rule
and privileges.
○​ Non-appropriation of
●​ Unlimited: In the absence of
public funds for religious
legal or constitutional
benefits
limitations, the power of
○​ Exemption of non-profit
taxation is both unlimited and
educational institutions
comprehensive.
from taxes
●​ Plenary: The Bureau of Internal
○​ Majority concurrence in
Revenue (BIR) can utilize
Congress for tax
various remedies to ensure tax
exemption laws
collection.
○​ Non-diversification of tax
●​ Supreme: The government has
collections
the authority to select subjects
for taxation. Aspects of Taxation

Limitations on the State’s Power to 1.​ Levying: The legislative function

Tax involves the enactment of tax
laws by Congress.
1.​ Inherent Limitations:
2.​ Assessment: The executive
○​ Territorial limitations
function determines the tax
○​ International comity -
liabilities of taxpayers.
Agreement among
3.​ Collection: The executive
nations
function is the actual collection
○​ Public purpose
of assessed taxes.
○​ Exemption of the
government Both assessment and collection are
○​ Non-delegation of the considered the incidence of taxation or
taxing power the administrative act of taxation.
○​
2.​ Constitutional Limitations: Essential Elements of a Tax
 ●​ Enforced contribution ○​ Property
●​ Generally payable in money ○​ Excise
●​ Proportionate in character 4.​ As to Who Bears the Burden
●​ Levied on persons, property, or ○​ Direct
the exercise of a right or ○​ Indirect
privilege 5.​ As to the Determination of the
●​ Levied by the law-making body Amount
of the state ○​ Specific
●​ Levied for a public purpose ○​ Ad valorem
6.​ As to Purpose
Classifications of Taxes ○​ Primary, fiscal, or revenue
purpose
1.​ As to Taxing Authority:
○​ Secondary, regulatory,
○​ National
special,l or sumptuary
○​ Income tax
7.​ As to Graduation or Rate
○​ Estate tax
○​ Proportional
○​ Donors’ tax
○​ Progressive or graduated
○​ Value-added tax
○​ Regressive
○​ Other percentage tax
○​ Mixed
○​ Excise tax
○​ Documentary stamp tax Tax Collection System

Classifications of Taxes ●​ Withholding system

○​ Withholding tax on
1.​ As to the Taxing Authority
compensation
○​ Local - taxes imposed by
○​ Expanded withholding tax
local government units
○​ Final withholding tax
■​ Real property tax
○​ Withholding tax on
■​ Professional tax
government payments
■​ Business taxes, fees
●​ Voluntary Compliance
& charges
●​ Assessment or enforcement
■​ Community Tax
system
■​ Tax on banks &
other financial Principles of Sound Tax System
institutions
2.​ As to Scope 1.​ Fiscal Adequacy – Revenue
○​ National raised must be adequate to
○​ Local meet government expenditures.
3.​ As to Subject Matter or Object 2.​ Theoretical Justice or Equity –
○​ Personal, poll, or The tax burden should be
capitation proportionate to the taxpayer’s
ability to pay.
 3.​ Administrative Feasibility – Tax ●​ Tax Evasion – Use of illegal or
laws must be capable of fraudulent means to defeat or
effective and efficient lessen tax payment.
enforcement. A good tax system ●​ Tax Avoidance – Exploitation of
requires informed stakeholders legally permissible alternatives
who understand how taxes are to reduce tax liability.
assessed. ●​ Capitalization – Reduction in
the selling price of
Situs of Taxation – means “place” of income-producing property by
taxation. the capitalized value of future
taxes.
Factors to Consider
●​ Tax Exemption – Immunity,
●​ Subject matter privilege, or freedom from being
●​ Nature of tax subjected to a tax.
●​ Citizenship
Kinds of Tax Exemptions
●​ Residence
●​ Sources of income ●​ As to the basis:
●​ Place of excise, business, or ○​ Constitutional –
occupation originates from the
constitution
Examples of Situs Rules
○​ Statutory – emanates
●​ Business tax situs from legislation
●​ Income tax situs on services ●​ As to form:
●​ Income tax situs on sales of ○​ Express – expressly
goods granted by statute
●​ Property tax situs ○​ Implied – persons,
●​ Personal tax situs property, or rights are
deemed exempt.
Means of Avoiding or Minimizing the ●​ As to extent:
Burden of Taxation ○​ Total – absolute immunity
○​ Partial – collection of a
●​ Shifting – Transfer of the burden part of the tax is
of a tax by the original payer to dispensed with.
someone else.
●​ Transformation – An escape
from taxation where the
producer recoups the tax by
improving production efficiency.
MODULE 2. CLASSIFICATIONS OF but more than 180
INDIVIDUAL TAXPAYERS days are deemed
non-resident aliens
General Classification Rule for engaged in
Individuals business.
■​ Aliens who stayed
1.​ Intention in the Philippines
➢​ The intention of the for not more than
taxpayer regarding the 180 days are
nature of his stay within considered
or outside the Philippines non-resident aliens
shall determine his not engaged in
appropriate residency trade or business
classification.
➢​ The taxpayer shall submit Classifications of Individual
to the CIR the BIR Taxpayers (based on Residency)
documentary proofs such 1.​ Resident Citizen (RC)\
as visas, work contracts, 2.​ Non-Resident Citizen (NRC)
and other documents 3.​ Resident Alien (RA)
indicating such intentions. 4.​ Non-Resident Alien (NRA)
2.​ Length of Stay a.​ Engaged in Trade
➢​ In default of such /Business (NRA-ETB)
documentary proof, the b.​ Not Engaged in Trade
length of stay of the /Business (NRA-NETB)
taxpayer is considered:
■​ Citizens staying ★​ Citizen – under the Constitution:
abroad for at least ○​ Citizens of the Philippines
183 days are at the time of the
considered adoption of the
non-residents. Constitution on February
■​ Aliens who stayed 2, 1987
in the Philippines ○​ Born with father and
for more than 1 mother as Filipino citizens
year as of the end ○​ Born before January 17,
of the taxable year 1973, of Filipino mother
are considered who elects Philippine
residents. citizenship upon reaching
■​ Aliens who are the age of majority
staying in the ○​ Acquired Philippine
Philippines for not citizenship after birth
more than 1 year
 following Philippine laws. nature of which requires
(Naturalized) an extended stay for the
★​ Resident Citizen (RC) – Filipino accomplishment of such
citizen residing in the Philippines purpose.
★​ A Non-Resident Citizen (NRC) – ★​ Non-Resident Alien (NRA)
is a citizen who: ○​ Individuals whose
○​ Establishes the fact of his residence is NOT in the
physical presence abroad Philippines and who are
with the definite intention NOT citizens thereof.
to reside therein; ○​ Comes to the Philippines
○​ Leaves the Philippines for a definite purpose,
during the taxable year to which in its nature may be
reside abroad: promptly accomplished.
■​ As immigrant ○​ Are they mere transients
■​ For employment or non-residents?
permanently ○​ Sub-classification
■​ For work (derives ■​ Engage in trade or
income) whose business
employment ■​ Not engage in
requires him to be trade or business
physically abroad ★​ Non-Resident Alien
most of the time (sub-classification)
during the taxable ○​ Engage in trade or
year. business (NRA-ETB)
○​ Those who shall have ■​ Stayed for an
stayed outside the aggregate period
country for 183 or more of more than 180
by the end of the year. days during the
★​ Resident Alien (RA) taxable year
○​ Individual whose ■​ Have business
residence is WITHIN the income in the
Philippines but is NOT Philippines
citizen thereof. ○​ Not engage in trade or
○​ Present in the Philippines business (NRA-NETB)
and who is not mere ■​ Comes to the
transients or sojourners. Philippines for a
○​ Live in the Philippines definite purpose
with no definite intention which purpose can
as to his stay. be promptly
○​ Comes to the Philippines accomplished
for a definite purpose the
 ■​ Stayed for an
aggregate period
of 180 days or less
(NOT more than)
Summary
during the taxable
year
■​ Not deriving
business income
:
SUMMARY:
●​ RC - FILIPINO CITIZENS
●​ NRC - FILIPINO CITIZENS NOT
Summar
IN THE PH. FOR MORE THAN 183
DAYS AND MORE
●​ RA - FOREIGNER RESIDES IN
THE PH. FOR MORE THAN ONE
y:Summa
YEAR
●​ NRA-NETB - FOREIGNER 181
DAYS TO 1 YR.
●​ NRA-NETB - FOREIGNER 1-180
ry:
DAYS

Summary
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