INCOME TAXATION

CHAPTER 2
TAXES, TAX LAWS AND TAX ADMINISTRATION

Tax
An enforced proportionate contribution imposed upon persons, properties,
businesses, rights, interest, privileges, transactions and acts within the territorial
jurisdiction of the taxing authority exercise by the legislature for a public purpose
and generally payable in money.

Elements of a Valid Tax:

1. Must not violate the constitutional, inherent and or contractual limitation of the
power of taxation
2. Must be uniform and equitable, not unjust, excessive, oppressive, confiscatory or
discriminatory
3. Must be for a public purpose
4. Must be levied by the taxing power (legislative) having jurisdiction over the object
of taxation
5. Must be proportionate in character
6. Generally payable in money at regular interval (not regular in payment)

Classification of Taxes
A. As to Purpose
1. Fiscal - general, fiscal or revenue - tax imposed for the general purpose of the
government or to raise revenue for government needs. Example: Income Tax
2. Regulatory - special or sumptuary - tax imposed for s special purpose or to
achieve some social or economic ends. Example: Tariff or custom duties

B. As to Subject Matter
1. Personal, Poll or Capitation - tax of a fixed amount on individuals residing
within a specified territory without regard to their property or the occupation in
which they engaged in. Example: Community Tax Certificate
2. Property Tax - tax imposed in property, whether real or personal, in
proportion, either to its value or in accordance with some other reasonable
method of apportionment. Example: Real Estate Tax
3. Excise Tax or Privilege Tax - tax imposed upon the performance of an act, the
enjoyment of a privilege or engaging in an occupation. Example: Income Tax,
Value Added Tax, privilege tax on business or occupation.

C. As to Incidence
1. Direct - the tax is demanded from one person in who is intended to pay it.
Example: Income Tax and personal tax
2. Indirect - the tax is demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of another by shifting
 the tax to another tax payer. Example: Value Added Tax, Custom Duties and
Some other Percentage Taxes

D. As to Amount
1. Specific Tax - a tax of a fixed amount imposed by head or number. Example:
Tax on Distilled spirits, cigars and wines (PX/per piece)
2. Ad Valorem Tax - tax imposed for a fixed proportion of the amount or the
value of the property to which the tax is assessed. Example: Excises taxes on
cigarettes and gasoline, real property tax, and certain custom duties (X% of
Selling Price)

E. As to Rate
1. Proportional or Flat Rate - the tax is based on a fixed percentage of the
amount of the property, income or other basis to be taxed. Example: Real estate
Taxes, VAT and Percentage taxes.
2. Progressive or Graduated Tax - the tax rate increases as the tax base
increases. Progressive rate is preferred in achieving vertical equity. Example:
Income tax, estate tax and donor’s tax
3. Regressive Tax - the tax rate of which decreases as the tax base increases.
4. Mixed Tax

F. As to Imposing Authority
1. National Tax - imposed by the national Government
Examples: Income Taxes, Estate and Donors Tax, Value-Added Tax, Excise Tax,
Other percentage taxes, documentary stamp tax
2. Local Tax - imposed by the municipal or local government
Examples: Real Property Tax, Professional Tax, Business Taxes, Community Tax,
Tax on banks and other financial institutions
TAX vs. REVENUE
Tax Revenue
Refers to the amount imposed Refers to the amount collected
Only one of the sources of government The product of taxation. It refers to all
funds the funds derived by the government
whether from tax or from other sources

TAX vs. TOLL

Tax Toll
Demand of Sovereignty Demand of Ownership
One’s Support for the Government Compensation for the use of somebody
else’s property
Imposed only by the Government Maybe imposed by the Government or
by private individuals
Based on Government Needs Determined by the cost of the property
or improvements thereon
 TAX vs. LICENSES
Point of Distinction Tax License
Purpose For Revenue For Regulation
Amount No limit Limited
Subject of Imposition Person, Properties, Required for the
Business Rights, interests, commencement of a
privilege, acts and business or profession
transactions
Effect of non-compliance Does not necessarily make Makes the Business Illegal
the act, business or
professions illegal
Revocability Has a nature of Always Revocable
permanence
Scope The power to tax includes Power to license does not
the power to license include power to tax
When imposed Post-Activity Pre-Activity
Basis of Imposition Current Data Preceding year or quarter
date. If new business,
based on capitalization
Sources of power Taxing Power of the Police power of the
Government government

TAX vs. DEBT

Tax Debt
Basis Law Contract
Effect of non-compliance May involve No imprisonment
imprisonment, except for
poll tax
Assignable? No Yes
Mode of Settlement Generally in Money Cash or in kind
Set-Off? Generally not subject to Subject to set-off
set-off
Interest Does not earn interest Draws interest when
except when deliquent stipulated or when in
default

TAX vs. SPECIAL ASSESSMENT

Tax Special Assessment
Subject of the Imposition Business, Interests, Land
Transactions, rights,
persons, properties or
priveleges
Effect on the person May be a personal liability Cannot be made the
owning the subject of the person assessed personal liability of the
person assessed, because
it is the land that answers
 for the liability
Basis of Imposition Necessity with no hope of Entirely on the benefits
direct or immediate received
benefit to the taxpayer
Coverage of Application General Application Exceptional in Application

TAX vs. TARIFF

Tariff refers to a book of rates containing names of merchandises with
corresponding duties to be paid for the same. Tariff refers to the duties payable on
goods imported or exported. It is a system or principle of imposing duties on the
importation or exportation of goods.*Customs Duties and Tariffs are used
interchangeably.

TAX vs. PENALTY

Tax Penalty
Purpose To raise revenue To regulate conduct
through punishment and
suppression of injurious
act
Exercising Authority The Government The government or by th
private individuals
Source Law Law or Contract
Mode of Settlement In money In money or in kind

Note:
1. Payment of tax is compulsory to those who are covered by imposition
2. Taxes are important because they are lifeblood of the government
3. Taxes are personal. The burden of taxation cannot be transfer from one person to
the other by private agreement as this is determined by law
4. While the power of taxation includes the power to destroy, it is not absolute. It is
subject to limitations or restrictions

TAX LAW
Any law that provides for the assessment and collection of taxes for the support of
the government and other public purposes.
Examples:
1. Constitution
2. Statutes and Presidential Decree
3. Executive Orders and Batas Pambansa
4. Tax Treaties and conventions with foreign countries
5. Administrative Issuances or BIR Rulings
6. Judicial decisions
7. Local Ordinances
8. Revenue Regulations of by the DOF

Revenue Regulation
Formal pronouncement intended to clarify or explain the tax law and carry into
effect its general provisions by providing details of administration and procedure.
They have the force and effect of the law.

Administrative Issuance's or BIR Rulings

These are the less general interpretations of the tax laws at the administrative levels,
being issued from time to time by the CIR, to clarify certain provisions of the tax laws.
They are merely advisory or sort of an information service to the taxpayer such that,
none of them are binding except to the addressee and may be reversed by the BIR at
anytime.

Nature of Philippine Tax Laws

Philippine Tax Laws are civil and nature and character. They remain effective even in
times of war. The are not penal in nature although penalties are provided for their
violation because they do not define crimes and provide for their punishment.

Fundamental Doctrines in Taxation

A. Marshall Doctrine - “The power to tax includes the power to destroy”
- Constitutional if taxation power is used validly as an implement of the police power
in discouraging certain acts and enterprises inimical to public welfare
- Unconstitutional if in raising revenue, taxation is allowed to confiscate or destroy
properties
B. Holmes Doctrine - “Taxation is the power to build”
- The power to tax should not be the power to destroy. The power to destroy is
merely a consequence of taxation.
C. Doctrine of Judicial Non-Interference
- The courts cannot inquire into the wisdom of a taxing act or the advisability or
expediency of a tax. The impracticability and absurd consequences of a tax law
should be addressed to the legislature and administrative authorities and not the
courts.
D. Prospectivity of Tax Laws - tax laws are prospective in character and application
Exceptions:
1. The retroactive application is necessarily implied from the provisions of the tax
law
2. It involves income tax
3. The retroactive application is clearly the intent of the Congress
E. Imprescriptibility in Taxation - Taxes are imprescriptible unless the law itself
provides for such prescription
F. Principle of Strictissimi Juris - “Taxation is the rule and exemption is the
exception”
- Tax exemptions must be strictly construed against the tax payer and liberally in
favor of the government.
G. Doctrine of Equitable Recoupment
- Where the refund of taxes are barred by prescriptions which can no longer be
claimed by a tax payer but there is a present tax being assessed against the said
taxpayer, such present tax may be recouped or set-off against the tax, the refund of
which has been barred.
- Basis: The Government cannot enrich itself at the expense of the taxpayer
*This doctrine is not applicable in the Philippines as it conflicts with prescription
laws.
H. Non-Compensation or Set-Off Rule
- The Government and the taxpayer are not creditor and debtor to each other. Taxes
are not in the nature of of contracts between the parties but grew out of a duty
arising from Law; hence they cannot be set-off.
I. Doctrine of Estoppel
- The state cannot be estopped by the neglect, errors or mistakes of its agents or
officers. Thus the erroneous application and enforcement of law by public officials
do not block the subsequent correct application of the statutes. *The doctrine of
estoppel operates only against the taxpayer

Tax Administration

The Bureau of Internal Revenue

The BIR is tasked with tax administration function of the Government. Together with
the Bureau of Customs, they are under the supervision and control of the
Department of Finance.

Chief Officials of the Bureau

1. 1 chief officer: The CIR
2. 4 assistant chief: Deputy Commissioner
Powers of the CIR that cannot be delegated
1. The power to recommend the promulgation of rules and regulations to the
Secretary of Finance
2. The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau
3. The power to compromise or abate any tax liability. (Tax remedies)
Exceptions: Compromise by Regional Evaluation Boards under the following
requisites:
A. Assessments are issued by the regional offices involving basic deficiency tax of
Php500,000 and
B. Involves minor criminal violations as may be determined by rules and regulations
to be promulgated by the Secretary of Finance, upon recommendation of the CIR,
discovered by regional and district officials
4. The power to assign and reassign internal revenue officers to establishment
where articles subject to excise tax are produced or kept. Revenue Officers assigned
to any such establishment shall in no case stay in his assignment for more than 2
years.