VERITAS COLLEGE OF IROSIN

San Julian, Irosin, Sorsogon

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BACHELOR OF SCIENCE AND BUSINESS ADMINISTRATION (BSBA)
TAX-1
AY: 2021-2022, First Semester

Subject: INCOME TAXATION (Module No. 1)

A. TAXATION

Definition

Taxation is the process or means by which the sovereign, through its lawmaking body, raises
income to defray the necessary expenses of the government.

Purposes of taxation

The purposes of taxation maybe classified into primary and secondary, to wit:

1. Primary purpose

To provide funds or property with which to promote the general welfare and protection of its citizens
and to enable it to finance its multifarious activities.

2. Secondary purposes

a. To strengthen anemic enterprises by giving tax exemptions;

b. To protect local industries against foreign competition through imposition of high customs duties
on imported goods;
c. To reduce inequalities in wealth and income by imposing progressively higher tax rates; and
d. To prevent inflation by increasing taxes or ward off depression by decreasing them

Scope of taxation

In the absence of constitutional restrictions and subject to the will of the legislative bodies with
whom it is entrusted and the discretion of the authorities which exercise it, the power of taxation is
unlimited, comprehensive, plenary and supreme, the principal check upon its abuse resting in the
responsibility of the members of the legislature to their constituents.

Since the power to tax is the strongest of all the powers of the government, the legislature is free
to select the subjects or objects to be taxed. They may be persons, whether natural or juridical; property,
whether real or personal, tangible or intangible, businesses, transactions, rights, or privileges.

Theory and basis of taxation

1. Theory. The power of taxation proceeds upon the theory that the existence of the government is
a necessity; that it cannot continue without means to pay its expenses; and that it has a right to
compel all its citizens and property within its limits to contribute.

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 2. Basis. The basis of taxation is found on the reciprocal duties of protection and support between
the State and its inhabitants. The state receives taxes that it may be enabled to carry out its
mandates into effect and perform functions of government and the citizen pays the portion of
taxes demanded in order that he may, by means thereof, be secured in the enjoyment of benefits
of an organized society. This is known as “benefit-received principle”

Basic principles of a sound tax system

1. Fiscal adequacy. The sources of revenue should be sufficient to meet the demands of public
expenditures.

This can be obtained by creating new taxes or new taxes machinery, or by merely changing the
rates applicable to existing taxes so that the revenue would substantially respond to the
expanding needs of public expenditures.

2. Equality or Theoretical Justice. The tax burden should be proportionate to the taxpayer’s ability to
pay (this is the so-called Ability-To-Pay Principles); and

3. Administrative Feasibility. The tax laws should be capable of convenient, just, and effective
administration.

Each tax should be clear and plain to the taxpayer, capable of uniform enforcement by
government officials, convenient as to time, place, and manner of payment, and not
unduly burdensome upon or discouraging to business activity

Nature or characteristics of the state’s power to tax

1. It is inherent in sovereignty. The power of taxation may be exercised by the State although not
expressly granted by the constitution.

2. Legislative in character. It is only the legislature that can enact tax laws.

3. Subject to constitutional and inherent limitations. Taxation is not an absolute power that can be
exercised by the legislature it pleases.

Limitations on the power of taxation

1. Constitutional limitations. Those restrictions found in the constitutions or implied from its
provisions.

2. Inherent limitations. Those which restrict the power although they are not embodied in the
constitutions.

Constitutional limitations

1. Due process. No person shall be deprived of life, liberty or property without due process of law,
nor shall any person be denied the equal protection of the law.

2. Equal protection of the laws. The constitutional provision on equal protection of laws means that
“no person or class of persons shall be deprived of the same protection of laws enjoyed by other
persons or other classes in the same place and in the circumstances.

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 3. Rule of uniformity and equity in taxation. The rule of taxation shall be uniform and equitable. The
congress shall evolve a progressive system of taxation.

4. Non-imprisonment for non-payment of poll tax. No person shall be imprisoned for debt or non-
payment of a poll tax.

5. Non-impairment of the obligations of contract. No law impairing the obligations of contracts shall
be passed.

There is “impairment” when a law substantially invalidates, releases, or extinguishes the

obligations of a contract, or that derogates substantial contractual rights.

6. Non-infringement of religious freedom. No law shall be made respecting the establishment of

religion, or prohibiting the free exercise thereof. The free exercise of religious profession and
worship, without discrimination or preference shall forever be allowed. No religious test shall be
required for the exercise of civil or political rights.

7. No appropriation for religious purposes. No public money or property shall be appropriated,

applied paid or employed, directly or indirectly, for the use, benefit, or support of any sect,
church, denomination, sectarian institution, or system of religion or of any priest, preacher,
minister, or other religious teacher, or dignitary as such, except when such priest, preacher,
minister or dignitary is assigned to the armed forces, or to any penal institution or government
orphanage or leprosarium.

8. Exemption of religious, charitable or educational entities, non-profit cemeteries, and churches

from taxation. Charitable institutions, churches, and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings and improvements, actually, directly, and
exclusively used for religious, charitable or educational purposes shall be exempt from taxation.

9. Exemptions of revenues and assets of non-stock, non-profit educational institutions and

donations for educational purposes from taxation. All revenues and assets of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned my likewise be

entitled to such exemptions, subject to the limitations provided by law, including restrictions on
dividends and provisions for reinvestments.

Subject to the conditions prescribed by law, all grants, endowments, donations or

contributions used actually, directly and exclusively for educational purposes shall be exempt
from tax.

Limitation Compared:

Limitation No. 8 Limitation No. 9

Charitable, educational and religious Non-stock, non-profit educational
Who are exempt
institutions institutions
Income tax, property tax, custom
What taxes are exempt Property tax
duties

Inherent limitations on the power of taxation

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 1. Requirement that levy must be for a public purpose
2. Non-delegation of the legislative power to tax
3. Exemption from taxation of government entities
4. International comity

Aspects of taxation

1. Levy. Deals with the provisions of law which determines the person or property to be taxed, the
sum or sums to be raised, the rate thereof, and the time and manner of levying, receiving and
collecting the taxes.
2. Collection. Constituted of the provisions of law which prescribed the manner of enforcing the
obligation on the part of those taxed to pay the demand thus created.

TAXES

Definition

The enforced proportional contributions from persons and property levied by the
lawmaking body of the State by virtue of its sovereignty for the support of the government and all
public needs.

Essentials elements of a tax

1. Enforced contribution
2. General payable in money
3. Proportionate in character
4. Levied on persons, property, or the exercise of a right or privilege
5. Levied by the state which has jurisdiction over the subject or object of taxation
6. Levied by the lawmaking body
7. Levied for public purpose or purposes

The term “public purpose” includes the following:

1. Construction of roads and bridges
2. Pensions to retired government employees and their widows and children
3. Assistance to victims of calamities, and
4. Social welfare and health care projects

Classification of taxes

1. As to subject matter or object

a. Personal, poll or capitation. Tax of a fixed amount imposed on individuals, whether citizens or
not, residing within a specific territory without regard to their property or the occupation in which
they may be engaged. (Example: Community Tax or Cedula)
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. (Example: Real Property Tax)
c. Excise (Privilege Tax). A tax imposed upon the performance of an act, the enjoyment of a
privilege, or the engaging in an occupation; any tax which does not fail within the classification of
a poll tax or a property tax. (Example: income tax, donor’s tax, estate tax)

2. As to who bears the burden

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 a. Direct. A tax that demanded from the person who also shoulders the burden of the tax. (Example:
income tax, estate tax, donor’s tax)
b. Indirect. A tax demanded from one person in the expectation and intention that he shall indemnity
himself at the expense of another. (Example: Value-added tax and percentage tax)

3. As to determination of amount

a. Specific. Tax of fixed amount imposed by the head or number, or by some standard of weight or
measurement; it requires no assessment other than a listing of classification of the subject to be
taxed. (Example: Excise tax on distilled spirits, cigars, cigarettes)
b. Ad valorem. Tax of a fixed portion of the value of the property with respect to which the tax is
assessed; it requires the intervention of assessors or appraisers to estimate the value of such
property before the amount due from each taxpayer can be determined. (Example: Real property
tax)

4. As to purpose

a. General, fiscal or revenue. Tax that is imposed solely to raise revenue for government
expenditures. (Example: income tax, value-added tax)
b. Special or regulatory. Tax imposed for a special purpose, i.e, to achieve some social or economic
ends irrespective of whether revenue is actually raised or not. (Example: Sugar adjustment taxes,
Oil price stabilization fund (OPSF)

5. As to authority imposing the same

a. National. Tax imposed by the national government. (Example: internal revenue taxes, customs
duties)
b. Municipal or local. Tax imposed b municipal corporations. (Example: Sand and gravel tax,
occupation tax

6. As to graduation or rate

a. Proportional. Tax based on a fixed percentage of the amount of the property, receipts, or other
basis to be taxed. (Example: Value-added tax)
b. Progressive. Tax the rate of which increases as the tax base or bracket increases. (Example:
income tax, estate tax, donor’s tax)
c. Regressive. Tax rate of which decreases as the tax base increases.

Three Inherent powers of the government

1. Eminent domain. The power of the state or those to whom the power has been delegated to take
private property for public use upon paying to the owner a just compensation.
2. Police power. The power of the state to enact such laws in relation to person/s and property as
ma promote public health, morals, public safety, and the general welfare of the people.
3. Taxation. The power by which the sovereign, thru its legislature

Distinctions- eminent domain, police power and taxation

1. The police power regulates both liberty and property. The power of eminent domain and the
power of taxation affect only property rights.
2. The police power and the power of taxation may be exercised only by the government. The
power of eminent domain may be exercised by some public utilities or public service companies.
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 3. The property taken in the exercise of the police power is destroyed because it is noxious or
intended for a noxious purpose. The property taken under the power of eminent domain and
power of taxation is intended for a public use or purpose and is therefore wholesome.
4. The compensation of the person subjected to police power is the intangible altruistic feeling that
he has contributed to the general welfare. The compensation involved in the other powers is
more concrete to wit, a full and fair equivalent of the property expropriated or protection and
public improvements for the taxes paid.
5. There is generally no limit on the amount of tax that may be imposed in police power, the amount
is limited to cover the cost of the license and the necessary expenses of police surveillance and
regulation, whereas, in eminent domain, there is no imposition, rather the owner of the property
taken is paid its market value.

Tax distinguished form license fee

Permit or license fee is charge imposed under the police power for purpose of regulation

1. Taxes are levied by virtue of the taxing power, license fees are imposed by virtue of the police
power
2. Taxes are levied for revenue, license fees are imposed for regulation
3. There is generally no limit on the amount of tax that may be imposed, license fees may not
exceed the amount necessary to defray the cost of regulation
4. Taxes are imposed on persons, property, business, occupation, or the exercise of any privilege,
whether legal or illegal, license fees may be imposed only on legitimate businesses and
occupation
5. Failure to pay a tax does not render the business or occupation illegal, non-payment of a license
fee render the business or occupation illegal

Tax distinguished from toll

Toll is a sum of money for the use of something, generally applied to the consideration which is
paid for the use of a road, bridge or the like, of a public nature

1. Toll is a demand of proprietorship, tax is a demand of sovereignty

2. Toll is a compensation of the use of another’s property, or of improvements made by him, taxes
are levied for the support of the government, and their amount is regulated by necessities
3. A toll may be imposed by the government or private individuals or entities, a tax may be imposed
only by the state

Tax distinguished from special assessment

Special assessment is an enforced proportional contribution form owners of lands for special
benefits resulting from public improvements

1. Tax has general application, special assessment has special application only as to a particular
time and place
2. Tax can be levied on land, persons, property, income, business, etc; special assessment is levied
only on land
3. Tax is based on necessity and partially on benefits; special assessment is based wholly on
benefits

Tax distinguished from debt

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 1. Debt generally arises from contract, express or implied, tax is created by law
2. Debt is assignable, tax cannot generally be assigned
3. Debt may be paid in kind, tax is generally payable in money
4. A person cannot be imprisoned for non-payment of debt, imprisonment is a sanction for non-
payment of tax (except poll tax)

Tax distinguished from customs duties

A tax includes various kinds of imposition on persons or property for supplying the treasury as
tribute, subsidy, excise, imposts, or customs, customs duties are taxes levied upon commodities,
imported into or exported across national boundaries. It follows that taxes include customs duties, and
an act granting exemption from all taxes of any kind and nature carries with it exemptions from customs
duties.

Double Taxation

In its strict sense, it means taxing twice for the same purpose, by the same taxing authority, in the
same jurisdiction, in the same period, some of the property in the territory.

In its broad sense, which is taxation other than direct duplicate, it extends to all cases in which
there is a burden of two or more pecuniary impositions.

However, double taxation may give rise to certain defences that would render the tax void, such
as:

1. The two taxes which are of the same kind, nature, and from the same taxing authority make
taxation inequitable, excessive, oppressive and unreasonable
2. Uniformity in taxation is violated as when the first measure applies to all the members of a certain
class, while the second measure applies only to limited members of the same class

Revenue

Revenue refers to all funds or income derived by the government, whether from tax or any other
source, it may be derived from the following sources

1. Grants received from another government

2. Donations from non-governmental sources
3. Loans from private entities or another government entity
4. Commercial revenues such as those received by government-owned or controlled enterprises
5. Administrative revenues such as fines, penalties and forfeitures
6. Taxes such as internal revenues and custom duties

Situs of taxation

Situs of taxation means place of taxation. The rule is that the state which has jurisdiction to tax
the person, property or transactions may rightfully levy and collect the tax

Situs of taxation shall be as follows:

1. Business, occupation or transaction. Place where the business is conducted, the place where the
occupation is practiced, or the place where the transaction took place
2. Real and tangible personal property. Location of property
3. Intangible personal property. Domicile of the owner unless the property has acquired a business
situs in another jurisdiction
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 4. Income. Place where the same is earned, or citizenship or domicile of the owner
5. Gratuitous transfer of property. Residence or citizenship of the taxpayer, or location of the
property

Interpretation of tax laws

In case of doubt as to whether a taxpayer is covered by the tax or not, the doubt shall be
resolved in favour of the taxpayer and strictly against the government

However, doubts as to the validity of tax exemptions are resolved liberally in favour of the
government and strictly against the taxpayer, except:

1. When the statue granting exemption provides for liberal constructions thereof
2. Exemptions in favour of the government, political subdivisions or instrumentalities
3. Exemptions in favour of exemptees traditionally exempt such as churches and educational
institutions
4. Special circumstances to special classes of persons such as the granting of exemptions to
victims of the eruption of Mount Pinatubo

The basic forms of escape from taxation are:

A. Those that do not reduce the revenue collection of the government

1. Shifting. This is a transfer of tax burden by one on whom the tax is assessed to another. This
is exemplified by the different taxes on business.
2. Capitalization. It is the reduction in the selling price of income producing property by an
amount equal to the capitalized value of future taxes that may be paid by the purchaser.
3. Transformation. It is a method by which the manufacturer or producer upon whom the tax is
imposed pays the tax and strives to recover such expense through lower production cost
without sacrificing the quality of his product. This is resorted to because of his fear to loss his
market if he will add tax to the selling price.

Shifting and capitalization are means of escape through process of exchange, while
transformation is means through process of production

B. Those that result in loss of revenue to the government

1. Tax evasion. It refers to fraudulent or forbidden schemes or devices designed to lessen or

defeat taxes. This is also known as tax dodging.
2. Tax avoidance. The exploitation by the taxpayer of legally permissible alternative tax rates or
methods of assessing taxable property or income, in order to reduce tax liability. Also knows
as tax minimization)
3. Exemption from taxation. It is the grant of immunity to particular persons or corporations or to
persons or corporations of a particular class from a tax which persons and corporations
generally within the same taxing district are obliged to pay.

Tax amnesty

This is immunity from all criminal and civil obligations arising from non-payment of taxes.
It is a general pardon given to all taxpayers; it applies only to past periods, hence of retroactive
application. It is distinguished from tax exemption in the sense that while tax amnesty is immunity from
civil and criminal obligations, tax exemption is immunity from civil liability only. Moreover, tax exemption
is prospective in application, while tax amnesty is retroactive.
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Taxpayer’s suit

A taxpayer has sufficient personality and interest to seek judicial assistance with a view of
restraining what he believes to be an attempt to unlawfully disburse public funds.

Sources of tax laws

Taxation is derived from:

1. The Constitution. The provisions of the Constitution dealing on taxation merely regulate the
exercise of the power of taxation. They are not actually grants of the power, because taxation can
be exercised by the government, as stated earlier, the power of taxation is not a mere
constitutional grant.
2. Statutory enactments. This refers to the tax laws passed by the Congress.
3. Administrative rulings and regulations. Administrative rulings are the less general interpretation of
tax laws which are issued from time to time by the Commissioner of Internal Revenue. They are
usually rendered on request of taxpayers to clarify certain provision of a tax law. They are
commonly known as “BIR Rulings.”
Regulations issued by the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue, are known as “Revenue Regulations.”
4. Judicial decisions. This refers to decisions of the Curt of Tax Appeals and the Supreme Court
applying or interpreting the laws. They constitute major part of the jurisprudence on taxation and
form part of the legal system of the Philippines.

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