CHAPTER 2 (Part 4)
GENERAL PRINCIPLES AND
CONCEPTS OF TAXATION
Ninia C. Pauig-Lumauan, MBA, CPA
2nd Semester SY 2021-2022
Lyceum of Aparri
Income Taxation
CERTAIN DOCTRINES IN TAXATION
• In the exercise of taxation power, some
underlying doctrines for its implementation
are as follows:
[Link] application of tax laws
[Link] of taxes
[Link] taxation
[Link] from taxation
[Link] from taxation
[Link] recoupment
INCOME TAXATION
CERTAIN DOCTRINES IN TAXATION
• In the exercise of taxation power, some
underlying doctrines for its
implementation are as follows:
7. Set-off taxes
8. Taxpayer suit
9. Compromises
[Link] to destroy
INCOME TAXATION
PROSPECTIVE APPLICATION OF TAX LAWS
• The principle of “prospective application
of tax laws” states that a tax bill must
only be applicable and operative after
becoming a law. Thus, the effectivity of
the tax law commences upon its approval
and its scope would only cover the
present and future transactions.
INCOME TAXATION
PROSPECTIVE APPLICATION OF TAX LAWS
• The retroactive application of tax laws
shall not be applied unless there is a
clear intent of the legislature that such
law shall also be imposed on past
transactions.
• Consequently, the rule of “ex post facto”
is not applicable for tax purposes
INCOME TAXATION
PROSPECTIVE APPLICATION OF TAX LAWS
• However, when it comes to civil penalties
like fines and forfeiture (not including
interest), tax laws may be applied
retroactively unless they produce harsh
and oppressive consequences that
violate the taxpayer’s constitutional
rights regarding equity and due process.
INCOME TAXATION
PROSPECTIVE APPLICATION OF TAX LAWS
• Black’s Law Dictionary explains that the
law is said to be ex-post facto if it
provides for the infliction of punishment
upon a person for an act done which,
when such act was committed, is not
subject to any punishment.
INCOME TAXATION
IMPRESCRIPTIBILITY OF TAXES
• The rule on “tax imprescriptibility” states
that unless otherwise provided by the tax
law itself, taxes in general are not
cancellable.
• Although the Tax Code provides for the
limitation in the assessment and
collection of taxes imposed, such
prescriptive period will only be applicable
to those taxes that were returnable.
INCOME TAXATION
IMPRESCRIPTIBILITY OF TAXES
• The prescriptive period shall start from the
time the taxpayer files the tax return and
declares his tax liability.
• The Court held that there is no time limit on
the right of the Bureau of Internal Revenue
(BIR) Commissioner to assess taxes on
unreasonable accumulated earnings of the
corporation.
• The prescriptive period shall start from the
time the taxpayer files the tax return and
declares his tax liability. INCOME TAXATION
DOUBLE TAXATION
• Double Taxation means an act of the
sovereign by taxing twice for the same
purpose in the same year upon the same
property or activity of the same person,
when it should be taxed once, for the
same purpose with the same kind of
character of tax.
INCOME TAXATION
DOUBLE TAXATION
• The Supreme Court held that there is no
constitutional prohibition against double
taxation in the Philippines, therefore, it is
not a valid defense against the validity of
a tax measure.
• This decision, however, springs valid
constitutional defenses against
oppression and inequality in the
implementation of tax power.
INCOME TAXATION
DOUBLE TAXATION
• To avoid injustice and unfairness, doubts
as to whether double taxation has been
imposed should be resolved in favor of the
taxpayer.
INDIRECT DUPLICATE TAXATION
• This is double taxation in its broad sense.
It extends to all cases in which there is a
burden of two or more pecuniary
impositions.
INCOME TAXATION
INDIRECT DUPLICATE TAXATION
• It is usually allowed as long as there is no
violation of the equal protection and
uniformity clauses of the Constitution.
• Indirect double taxation may be
counteracted through the application of:
1. Tax exemptions
2. Reciprocity clause/tax treaty
3. Tax credit and
4. Allowance for deductions such as vanishing
deduction in Estate Tax INCOME TAXATION
DIRECT DUPLICATE TAXATION
• This is double taxation in its strict sense.
It is prohibited because it compromises
imposition of the same tax on the same
property for the same purpose by the
same state during the same taxing period.
• This kind of double taxation violates the
constitutional provision of uniformity and
equal protection, as well as the principle
that tax must not be excessive,
unreasonable and inequitable.
INCOME TAXATION
DIRECT DUPLICATE TAXATION
• Therefore, such taxation, whenever and
wherever possible, be avoided to prevent
injustice or unfairness.
• There is no double taxation in the following:
1. By taxing corporate income and
stockholder’s dividends from the same
corporation.
2. A tax imposed by the state and the local
government upon the same occupation,
calling or activity.
INCOME TAXATION
DIRECT DUPLICATE TAXATION
3. Real estate tax and income tax
collected on the same real estate
property leased for earning purposes.
4. Taxes are imposed on the taxpayer’s
final product and the storage of raw
materials used in the production of the
final product.
INCOME TAXATION
ESCAPE FROM TAXATION
• The ways by which a taxpayer could
escape tax burdens may be through tax
evasion and tax avoidance.
• “A tax evader breaks the law (tax evasion),
the tax avoider sidesteps it (tax
avoidance).”
• The “doctrine of escape from taxation
permits the taxpayer to minimize (if not to
escape) payment of tax by lawful means.
INCOME TAXATION
TAX EVASION
• Under this method, the taxpayer uses unlawful
means to evade or lessen the payment of tax.
• This form of tax dodging is prohibited and
therefore subject to civil and/or criminal
penalties.
• Examples:
1. Non inclusion of sales
2. Deliberate fabrication of expenses
3. Forming an artificial person to evade taxation
or to deliberately reduce taxable income.
INCOME TAXATION
TAX AVOIDANCE
• This is also called Tax Minimization. It is
reducing or totally escaping payment of
taxes through legally permissible means.
• Examples of tax avoidance are:
1. Selling shares of stock through a stock
exchange in order to avail of the lower tax
rates.
2. Estate planning within the means
sanctioned by the Tax Code has been held
to be one of permissible tax minimization.
INCOME TAXATION
TAX AVOIDANCE
• Tax avoidance is valid if used by the taxpayer in
good faith. The law does not forbid it and it
does not constitute tax fraud.
FORMS OF TAX AVOIDANCE
• Several forms to tax avoidance, which could be
legally used by the taxpayer, to minimize
income tax liability are:
1. Tax option
2. Shifting
INCOME TAXATION
FORMS OF TAX AVOIDANCE
3. Transformation
4. Exemption
TAX OPTION
• Taxpayers may choose to pay lower tax
rate in some transactions as permitted
by Tax Laws.
INCOME TAXATION
TAX OPTION
• For instance, a taxpayer who sells
investments in stocks directly to the
buyer may opt to pay 5% to 10% tax
based on capital gains, but if he opted to
sell the investments in stocks through
stock market, he is to pay a tax of ½ of
1% based on the selling price.
INCOME TAXATION
SHIFTING
SHIFTING
SHIFTING
• Shifting, basically, is the transfer of tax
burden to another, the imposition of tax
is transferred from the statutory taxpayer
to another without violating the law.
• This is best exemplified by indirect taxes
like the value added tax (VAT).
INCOME TAXATION
TRANSFORMATION
• The producer absorbs the payment of tax
to reduce prices and to maintain market
share. He recovers his additional tax
expense by improving the process of
production.
• The tax, therefore, is transformed into a
gain through the medium of production.
INCOME TAXATION
EXEMPTION FROM TAXATION
• Exemption from taxation denotes a grant
of immunity, expressed or implied, to a
particular person, corporation or to
persons or corporations of a particular
class, from a tax upon property or on
excise which persons and corporations
generally within the same taxing district
are obliged to pay.
INCOME TAXATION
EXEMPTION FROM TAXATION
• Tax exemptions are generally granted in the
basis of (a) reciprocity, (b) public policy and
(c) contracts.
• Tax exemptions, including the equivalent
provisions such as deductions, tax amnesty,
and tax condonations shall be governed by
the following principles:
1. They are not presumed.
2. When granted, they are strictly
construed against the taxpayer. INCOME TAXATION
EXEMPTION FROM TAXATION
3. They are highly disfavored and may almost
be said “to be directly contrary to the
intention of tax laws.”
• Hence, he who claims tax exemptions
must be able to justify his claim or right.
• In the exercise of its inherent power to tax,
the state through its law-making body has
full power to exempt any person,
corporation or class of property from
taxation. INCOME TAXATION
EXEMPTION FROM TAXATION
• Tax exemption as a privilege is personal and
in any way cannot be transferred or assigned
to the person to whom it is given without
the consent of the state.
CLASSIFICATION OF TAX EXEMPTIONS
• Tax exemption may be classified as:
1. Expressed exemption
2. Implied exemption or by omission
3. Contractual exemption
INCOME TAXATION
CLASSIFICATION OF TAX EXEMPTIONS
• Expressed tax exemptions are statutory
laws in nature as provided by the
constitution, statute, treaties,
ordinances, franchises or similar
legislative acts.
• Examples of statutory tax exemptions
are:
1. Inter-corporate dividends by a domestic
corporation from another domestic
corporation. INCOME TAXATION
EXPRESSED TAX EXEMPTIONS
2. Section 105 of the Tariff and Customs
Code
3. Section 234 of the Local Government
Code
4. Other special laws such as Omnibus
Investment Code of 1987, Philippine
Overseas Shipping Act, etc.
INCOME TAXATION
IMPLIED EXEMPTION OR BY OMISSION
• These exemptions are either intentional
or accidental.
• These occur when tax is imposed on a
certain class of persons, properties or
transaction without mentioning other
classes; and those not mentioned are
deemed exempted by omission.
INCOME TAXATION
CONTRACTUAL EXEMPTION
• Contractual tax exemptions are those
lawfully entered into by the government
in contracts under existing laws. These
exemptions must not be confused with
the tax exemptions granted under
franchises, which are not contracts
within the context of the non-
impairment clause of the Constitution.
INCOME TAXATION
CONTRACTUAL EXEMPTION
• Contractual tax exemptions covering
matters that are not essentially
government in nature, such as those
contained in government bods or
debenture (unlike in franchises) may not
be revoked without impairing the
obligations of contracts.
INCOME TAXATION
EQUITABLE RECOUPMENT
• This doctrine of law states that a tax claim
for refund, which is prevented by
prescription, may be allowed to be used as
payment for unsettled tax liabilities if both
taxes arise from the same transaction in
which overpayment is made and
underpayment is due.
• This doctrine is not applicable to cases
where the taxes involved are totally
unrelated.
INCOME TAXATION
SET-OFF TAXES
• This doctrine states that taxes are not
subject to set-off or legal compensation
because the government and the
taxpayer are not mutual creditor and
debtor of each other.
• A person cannot refuse to pay tax on the
basis that the government owes him an
amount equal to or greater than the tax
being collected.
INCOME TAXATION
SET-OFF TAXES
• The collection of a tax cannot await the
results of a lawsuit against the government.
• Exceptions:
1. When both the claims of the government
and the taxpayer against each other have
already become due, demandable and
fully liquidated.
2. When there is an actual compromise
between the taxpayer and the tax officer.
INCOME TAXATION
TAXPAYER SUIT
• A “taxpayer suit” effected through court
proceedings could only be allowed if the
act involves a direct and illegal
disbursement of public funds derived
from taxation.
• Therefore, the following legal questions
would be improper to be classified as
taxpayer suit:
INCOME TAXATION
TAXPAYER SUIT
1. Where the disbursement does not
involve funds raised by taxation.
2. To stop the Commission on Election
from holding an exercise of suffrage or
question its action to call a special
election.
INCOME TAXATION
COMPROMISES
• This doctrine provides that compromises
are generally allowed and enforceable
when the subject matter thereof is not
prohibited from being compromised and
the person entering such compromise is
duly authorized to do so.
• The law allows the following persons to
do compromise in behalf of the
government:
INCOME TAXATION
COMPROMISES
1. Only the Bureau of Internal Revenue (BIR)
is expressly authorized by the Tax Code to
enter into compromise for both civil and
criminal liabilities subject to certain
conditions.
2. The Collector of Customs is given the
power to compromise with respect to
customs duties limited to cases when the
legitimate authority is specifically granted,
such as in the remission of duties.
INCOME TAXATION
COMPROMISES
3. The Customs Commissioner, subject to
approval by the Secretary for Finance,
has the power to compromise cases
involving imposition of fines, surcharges
and forfeitures.
4. The Local Government Code has no
provision regarding compromise;
however, tax liability (not criminal
liability) is not prohibited from being
compromised. INCOME TAXATION
COMPROMISES
• Even so, there is no specific authority
given to any public official to execute the
compromise so as to render it effective.
INCOME TAXATION
POWER TO DESTROY
• This tax doctrine is based on the
Marshall Dictum which states that the
power to tax includes the power to
destroy because the taxpayer has no
option but to pay the tax imposed to
him.
• The government can compel payment of
tax and forfeiture of property through
the exercise of police power.
INCOME TAXATION
POWER TO DESTROY
• A lawful tax cannot be defeated just
because its exercise would be destructive or
would bring about insolvency to a taxpayer.
POWER TO BUILD
• Under the Holmes Doctrine, the tax power
should not be viewed as a power to
destroy. The burden to pay tax is only a
means to nation building and a
consequence of taxation
INCOME TAXATION
POWER TO BUILD
• While tax power is so extensive that it
seems it can destroy, it is primarily a tool
that creates, builds and sustains the
upliftment of social condition of the
people in general as it continuously
supports the other inherent powers of
the State that preserve the fundamental
rights of the people.
INCOME TAXATION
POWER TO BUILD
• Therefore, so long as the tax is exercised
with caution to minimize injury to the
proprietary rights of a taxpayer and does
not violate any constitutional and
inherent limitations, it is valid and cannot
be judicially restrained merely because of
its prejudicial effects to a particular
taxpayer.
INCOME TAXATION
SITUS OF TAXATION
• Situs of taxation refers to the place of
taxation, or the state or political unit
which has jurisdiction to impose tax over
its inhabitants.
• It is the application of the principle of
territorial jurisdiction which limits the
exercise of tax power in defining the
objects of taxation.
INCOME TAXATION
SITUS OF TAXATION
• It defines boundaries of the taxing power
over the objects of taxation in terms of
location whether or not they shall be
subject to tax. Protection is the basic
consideration that justifies the tax situs.
• The following factors are determinants to
the situs of taxation:
1. Nature, kind or classification of the tax
being imposed.
INCOME TAXATION
SITUS OF TAXATION
2. Subject matter of the tax (person,
property, rights or activity).
3. Source of the income being taxed.
4. Place of the excise, privilege, business or
occupation being taxed.
5. Citizenship of the taxpayer.
6. Residence of the taxpayer
INCOME TAXATION
GENERAL RULES OF TAX SITUS
SOURCE OR LOCATION OF
OBJECT (TAXABLE?)
Nature of Tax Citizenship Residency Within the Outside the
Philippines Philippines
1 Income Tax Filipino Resident Yes Yes
Filipino Non Resident Yes No
Aliens Resident Yes No
Aliens Non Resident Yes No
2 Transfer Tax Filipino Resident Yes Yes
Filipino Non Resident Yes Yes
Aliens Resident Yes Yes
Aliens Non Resident Yes No
3 Business Tax Yes No
INCOME TAXATION