Income Taxation
CHAPTER 1
INTRODUCTION TO TAXATION
WHAT IS A TAXATION? Taxes are the lifeblood of the government, and their
DEFINITION prompt and certain availability are an imperious need.
(Vera vs. Fernandez)
Taxation may be defined as a State power, and a mode
of government cost distribution. Implication of the lifeblood doctrine in taxation
1. Tax is imposed even in the absence of
1. As a state power Constitutional Grant
Taxation is an inherent power of the State to enforce a 2. Claims for tax exemption are constructed
proportional contribution from its subjects for public against taxpayers.
purpose. 3. The government reserves the right to choose the
2. As a process objects of taxation.
Taxation is a process of levying taxes by the legislature 4. The courts are not allowed to interfere with the
of the State to enforce proportional contributions from collection of taxes.
its subjects for public purpose. 5. In income taxation:
3. As a mode of cost distribution a. Income received in advance is taxable upon
Taxation is a mode by which the State allocates its costs receipt.
or burden to its subjects who are benefited by its b. Deduction for capital expenditures and
spending. prepayments is not allowed as it effectively
defers the collection of income tax.
The government's necessity for funding is the theory of c. A lower amount of deduction is preferred
taxation. when a claimable expense is subject to limit.
d. A higher tax base is preferred when the tax
The mutuality of support between the people and the object has multiple tax bases.
government is referred to as the basis of taxation.
INHERENT POWERS OF THE STATE
THEORIES OF COST ALLOCATION DEFINITION
BENEFIT RECEIVED THEORY, ABILITY TO PAY THEORY
Taxation power - is the power of the State to enforce
Benefit Received Theory proportional contributions from its subjects to sustain
more benefits = more taxes itself
Ability to Pay Theory Police power - is the general power of the State to enact
➔ presupposes that taxation should also consider laws to protect the well-being of the people
the taxpayer’s ability to pay.
Eminent domain - is the power of the State to take
a. Vertical Equity private property for public use after paying just
- directly proportional to the level of his tax base compensation
- gross concept
b. Horizontal Equity
- requires consideration of the particular
circumstance of the taxpayer
- net concept
THE LIFEBLOOD DOCTRINE
DEFINITION
Without the taxes, the government would be paralyzed
for lack of motive power to activate or operate it (CIR vs.
Algue)
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INCOME TAXATION
Similarities of the three powers of the State 16. Delegation of taxing power to LGU
1. They are all necessary attributes of the
sovereignty INHERENT LIMITATIONS OF TAXATION
2. They are all inherent to the State DEFINITION
3. They are all legislative in nature
4. They are all ways in which the State interferes A. Territoriality of Taxation
with private rights and properties ➔ Taxable only within territorial jurisdiction
5. They all exist independently of the Constitution
and are exercisable by the government even Two-fold obligations of taxpayers:
without a Constitutional grant. However, the 1. Filing of returns and payments of taxes
Constitution may impose conditions or limits for 2. Withholding of taxes on expenses and its
their exercise. remittance to the government
6. They all presuppose an equivalent form of Exception to Territoriality Principle:
compensation received by the persons affected 1. In income taxation, resident citizens and
by the exercise of the power domestic corporations are taxable on income
7. The exercise of these powers by the local derived both within and outside the Philippines
government units may be limited by the national 2. In transfer taxation, residents or citizens such as
legislature resident citizens and resident aliens are taxable
on transfers of properties located within or
outside the Philippines
THE LIMITATIONS OF THE TAXATION POWER
INHERENT LIMITATIONS, CONSTITUTIONAL LIMITATIONS [Link] Comity
➔ No country is more powerful than the other.
A. Inherent Limitations [TIPEN]
1. Territoriality of Taxation 1. Governments do not tax the income and
2. International Comity properties of other governments
3. Public Purpose 2. Governments give primacy to their treaty
4. Exemption of the Government obligations over their own domestic tax laws
5. Non-delegation of the Taxing Power
Under the National Internal Revenue Code (NIRC), the
B. Constitutional Limitations income of foreign government and foreign-government
[DEUPN] owned and controlled corporations are not subject to
1. Due process of law income tax.
2. Equal protection of law
3. Uniformity rule in taxation C. Public Purpose
4. Progressive system of taxation ➔ For common good, never for public interest
5. Non-imprisonment for non-payment of debt or
poll tax D. Exemption of the Government
[NFENE] Under the NIRC, government properties and income from
6. Non-imparment of obligation and contract essential functions are not subject to taxation. However,
7. Free worship rule the income of the government from its properties and
8. Exemption of religious/charitable entities, non activities conducted for profit, including income from
profit cemeteries, churches and mosque from government-owned and controlled corporations is
property tax subject to tax.
9. Non-appropriation of public fund or property for
benefit of any church, sect, system or religion E. Non-delegation of the taxing power
10. Exemption from taxes of revenue and assets of ➔ LGU are allowed to tax as exercise to exercise
non-profit, non-stock educational institutions the power to tax to enable them to exercise their
[CNNNED] fiscal autonomy. (Constitution)
11. Concurrence of majority of all Congress ➔ The President is empowered to fix the amount of
members for law granting tax exemption tariffs to be flexible to trade conditions. (Tariff
passage and Customs Code)
12. Non-diversification of tax collections ➔ Other cases requiring fast and effective
13. Non-delegation of taxation power administration and implementation of taxes
14. Non-impairment of Supreme Court jurisdiction to assessment and collection
review tax cases
15. Exclusive origin of appropriations, revenue or
tariff bills in the House of Representatives
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INCOME TAXATION
CONSTITUTIONAL LIMITATIONS OF TAXATION J. Exemption from taxes of the revenue and assets of
DEFINITION non-profit, non-stock educational institutions
➔ Tax exemption on revenues and assets of
A. Observance of due process of law non-profit educational institutions
➔ Tax laws should never be harsh nor oppressive. ➔ Exempts government educational institutions
from income tax and subjects private
1. Substantive Due Process educational institutions to a minimal income tax.
2. Procedural Due Process
- Assessments should be made within three years K. Concurrence of majority of all Congress members for
from the due date of filing of the return or from law granting tax exemption passage
the date of actual filing
- Collections shall be made within five years from Absolute majority : approval of exemption law
the date of assessment Relative majority : withdrawal of exemption law
B. Equal Protection of Law L. Non-diversification of tax collections
➔ No person shall be denied the equal protection ➔ Collections should be used for public purpose
of the law. only
C. Uniformity rule in Taxation M. Non-delegation of the power of taxation
➔ Taxpayers under dissimilar circumstances
should not be taxed the same. N. Non-impairment of the jurisdiction of the Supreme
Court to review tax cases
D. Progressive System of Taxation Court of Tax Appeals is a special court that deals
➔ Tax rates increases as the tax base increases specifically with tax related matters. Nevertheless, all
tax-related cases can be elevated and finally decided by
E. Non-imprisonment for non-payment of debt or poll the Supreme Court.
tax
➔ Inability to pay debt (from private contract) O. Appropriations, Revenue or Tariff Bills shall originate
acquired in good faith and poll tax (basic exclusively in the House of Representatives, but the
community tax) is not punishable by Senate may propose or agree with amendments
imprisonment.
➔ Non-payment of taxes other than basic P. Delegation of taxing power to Local Government Units
community tax is punishable by imprisonment
since it compromises public interest (Tax
Evasion) STAGES OF THE EXERCISE OF TAXATION
LEVY OR IMPOSITION & ASSESSMENT AND COLLECTION
F. Non-impairment of obligation and contract
➔ Tax exemptions granted under contract should a. Levy or imposition
be honored and should not be cancelled by a b. Assessment and Collection
unilateral government action
Levy or imposition
G. Free Worship Rule ➔ Involves the enactment of a tax law by Congress
➔ Free exercise of religion. No tax on tithes and and is called impact of taxation
offerings. ➔ referred to as the legislative act in taxation
H. Exemption of religious/charitable entities, non-profit 2 Bodies of Congress:
cemeteries, churches and mosques, lands, buildings, a. The House of Representatives
and improvements from property tax b. The Senate
➔ Properties actually devoted for religious,
charitable, or educational activities are exempt ● Tax bills must originate from the House of
from real property tax. doctrine of use) Representatives. Each may, however, have their own
versions of a proposed law which is approved by
I. Non-appropriation of public fund or property for both bodies, but tax bills cannot originate exclusively
benefit of any church, sect, or religion from the Senate.
➔ Government should not favor any system or
religion by appropriating funds
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INCOME TAXATION
Matters of legislative direction in the exercise of 3. Prospectivity of tax laws
taxation: 4. Non-compensation or set-off
Exceptions:
1. Determining the object of taxation a. Where the taxpayer’s claim has already become
2. Setting the tax rate or amount to be collected due and demandable such as when the
3. Determining the purpose for the levy which must government already recognized the same and an
be public use appropriation for refund was made
4. Kind of tax to be imposed b. Cases of obvious overpayment of taxes
5. Apportionment of the tax between the national c. Local taxes
and local government
6. Situs of taxation 5. Non-assignment of taxes
7. Method of collection Tax obligations cannot be assigned or transferred to
another entity by contract.
Assessment and Collection
●The tax law is implemented by the administrative 6. Imprescribability in taxation
branch of the government. Prescription is the lapsing of a right due to the passage
➔ Implementation involves assessment or the of time.
determination of the tax liabilities of taxpayers
and collection. ● Tax prescribes if not collected within 5 years
➔ incidence of taxation or the administrative act of from the date of assessment.
taxation ● In the absence of assessment, tax prescribes if
not collected by judicial action within 3 years
SITUS OF TAXATION from the date the return is required to be filed.
DEFINITION ● Taxes due from taxpayers who did not file a
return or those who filed fraudulent returns do
Situs is the place of taxation not prescribe.
➔ It is the tax jurisdiction that has the power to
levy taxes upon the tax object 7. Doctrine of Estoppel
➔ Situs rules serve as frames of reference in 8. Judicial Non-Interference
gauging whether the tax object is within or outside 9. Strict Construction of Tax Laws
the tax jurisdiction of the taxing authority. a. Vague tax laws - construed against government
b. Vague exemption laws - construed against the
Examples of Situs Rules: taxpayer
a. Business tax situs - businesses are subject to
tax in the place where the business is conducted Tax exemption cannot arise from vague interference.
b. Income tax situs on services - service fees are
subject to tax where they are rendered DOUBLE TAXATION
c. Income tax situs on sale of goods - the gain on DEFINITION
sale is subject to tax in the place of sale
d. Property tax situs - properties are taxable in Double Taxation occurs when the same taxpayer is taxed
their location twice by the same tax jurisdiction for the same thing
e. Personal tax situs - persons are taxable in their
place of residence Elements of Double Taxation
1. Primary element: Same Object
OTHER FUNDAMENTAL DOCTRINES IN TAXATION 2. Secondary elements:
DEFINITION a. Same type of tax
b. Same purpose of tax
1. Marshall Doctrine c. Same taxing jurisdiction
“The power to tax involves the power to destroy.” d. Same tax period
➔ Taxation power can be used as an instrument of
police power. Types of Double Taxation
a. Direct Double Taxation - all elements are present
2. Holme’s Doctrine b. Indirect Double Taxation - at least one
“Taxation power is not the power to destroy while the secondary elements is not common for both
court sits.” impositions
➔ Taxation power may be used to build or encourage
beneficial activities or industries by the grant of tax
incentives.
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INCOME TAXATION
How can double taxation be minimized? c. Onward shifting - this refers to and tax shifting
1. Provision of Tax Exemption in the distribution channel that exhibits forward
2. Allowing of Foreign Tax Credit shifting or backward shifting
3. Allowing reciprocal Tax Treatment
4. Entering into treaties or bilateral agreements Capitalization - this pertains to the adjustment of the
value of an asset caused by changes in tax rates.
ESCAPES FROM TAXATION
DEFINITION Transformation - this pertains to the elimination of
wastes or losses by the taxpayer to form savings to
Categories of Escapes from Taxation compensate for the tax imposition or increase in taxes
A. Those that result to loss of government revenue
1. Tax Evasion TAX AMNESTY VS TAX CONDONATION
2. Tax Avoidance DEFINITION
3. Tax Exemption
Tax Amnesty
B. Those that do not result to loss of government ➔ absolute forgiveness or waiver by the
revenue government on its right to collect and is
1. Shifting (Forward Shifting, Backward Shifting, and retrospective in application
Onward Shifting) ➔ Civil and criminal liabilities
2. Capitalization
3. Transformation Tax Condonation
➔ forgiveness of the tax obligation under certain
justifiable grounds. (Tax remission)
THOSE THAT RESULT TO LOSS OF GOVERNMENT REVENUE ➔ Civil liabilities
TAX EVASION, TAX AVOIDANCE, TAX EXEMPTION
Tax Evasion
➔ Tax dodging
➔ refers to any act or trick that tends to illegally
reduce or avoid the payment of tax
Tax Avoidance
➔ Tax minimization
➔ refers to any act or trick that reduces or totally
escapes taxes by any legally permissible means.
Tax Exemption
➔ Tax holiday
➔ refers to the immunity, privilege or freedom from
being subject to a tax which others are subject
to.
THOSE THAT DON’T RESULT TO LOSS OF GOVERNMENT REVENUE
SHIFTING, CAPITALIZATION, TRANSFORMATION
Shifting - is the process of transferring tax burden to
other taxpayers
a. Forward shifting - shifting of tax which follows
the normal flow of distribution
- Is common with essential commodities and
services such as food and fuel.
b. Backward shifting - is common with
non-essential commodities where buyers have
considerable market power and commodities
with numerous substitute products