Introduction to TAXATION

Basic Concepts & Principles based on Simplified Income

Taxation by Gloria and Pantaleon
CONTENTS
• Nature of Taxation
• Process of Taxation
• Inherent Powers of the State
• Power of Taxation
• Basic Principles of a Sound Tax System
• Situs or Place of Taxation
• Exemptions
• Forms of Escape from Taxation
• Double Taxation
• Definition, Characteristics & Kinds of Tax
• Tax Laws

Nature of Taxation
Taxation
• is the power by which the sovereign state raises revenue to defray the necessary expenses of
government.
• it imposes a levy upon persons, properties, rights, and transactions.
• the inherent power of the state to raise from its territorial jurisdiction income or revenue to defray the
necessary governmental or public expenses.

Inherent - the power of taxation can be exercised by the state even if the power is not provided in the
constitution.

Lifeblood Theory
• Taxation is the life and strength of the government.

Necessity Theory
• Existence of the Government is a necessity.
Benefits-Received Theory
• Reciprocal duties of protection & support between the State & its inhabitants.
PROCESS OF TAXATION
1st: Imposition
• or the legislation or enactment of law
• led by the Legislatives
• known as the initiative steps
2nd: Implementation
• or the administration or enforcement
• led by the Executives
3rd: Interpretation
• led by the Judiciary (Supreme Court)
Decision of the courts only base on 2 categories: (1) Constitutionality, and (2) Legality.

SCOPE OF LEGISLATIVE PROCESS

● Introduce a law.
● Approval of the Congress and House of Representatives.
● Imposition

SCOPE OF ADMINISTRATIVE PROCESS

● Assessment (Voluntary)
● Collection (POV of the Government)
● Assessment (Mandatory)*
● Payment (POV of the Taxpayer)
● Penalty/ Punishment
*Mandatory assessment is enforceable when taxpayer is delinquent.
Delinquent - did not file or late filing of tax return.
Deficient - insufficient.
INHERENT POWERS OF THE STATE
Police Power - the power of the state to enact laws to promote public health, public morals, safety and the
general welfare of the people.
 Power of Eminent Domain - the power of the state to take private property for public use upon payment of
just compensation. It is also known as expropriation.
Power of Taxation - the authority of the government to impose taxes, charges, and fees from its taxpayers
under its sovereignty and/or territorial jurisdiction, to support its necessary expenses.

Similarities of the 3 Inherent Powers of the State

● inherent
● exist independently of the constitution
● constitute the three ways by which the state interferes with private rights and properties
● legislative in nature and character
● each presupposes an equivalent compensation
as to Compensation
● Taxation: protection and benefits received from the government.
● Eminent Domain: payment received for the property taken.
● Police Power: protection and other benefits received from the government.
Differences of the Inherent Powers of the State
as to Purpose
● Taxation: to raise revenue & share in the public burden.
● Eminent Domain: the citizen’s contribution is primarily for public purposes.
● Police Power: to promote public welfare.
as to Person
● Taxation: operates on classes of persons, according to some principle of apportionment.
● Eminent Domain: it operates on a case-to-case basis depending on the owner(s) of the property.
Differences of the Inherent Powers of the State
as to the Authority Exercising the Power
● Taxation: may be exercised only by the government.
● Eminent Domain: may be exercised by private person performing public functions if the power is granted by
law.

as to Amount of Imposition or Paid

● Taxation: generally no limit on the amount of tax that may be imposed.
● Eminent Domain: there is no imposition, but rather, the owner of the property is the one paid
just compensation for the property taken.
● Police Power: the amount collected is just sufficient for the maintenance of regulation.
Differences of the Inherent Powers of the State
as to Relation to the Non-Impairment Clause of the Constitution
● Taxation: inferior to the non impairment clause of the constitution
● Police Power: superior to the non impairment clause.

POWER OF TAXATION
Basis of the Power of Taxation - originates from the theory that the existence of a government is a necessity
for public welfare.
Scope of the Power of Taxation
● Supreme
● Comprehensive
● Unlimited
● Plenary
Inherent Limitations - those restrictions which are not found in the constitutional.
● for public purpose
● applied within its territorial jurisdiction;
● legislative in character and may not be delegated
● subjected to international comity
● provides safeguards on double taxation
● allows exemption to government agencies & instrumentalities

LIMITATIONS OF THE POWER OF TAXATION

CONSTITUTIONAL LIMITATIONS
Contractual Limitations - restrictions on the taxing power imposed by previously existing contracts.
● No person shall be deprived of his life, property, or liberty, without due process of law, nor shall any person
be denied the equal protection of the law.
● The rule of taxation shall be uniform and equitable.
● No law impairing the obligation of contracts shall be passed.
● No person shall be imprisoned for nonpayment of a poll tax.
● Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,
nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly and
exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.
● No law granting tax exemption may be passed without the concurrence of a majority of all the members of
the legislature.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

Fiscal Adequacy - requires that the sources of revenue as a whole must be sufficient to meet the different
governmental expenses.
Administrative Feasibility - demands that the tax system must be clear to the taxpayers, rules are
reasonably enforceable, and is convenient and not burdensome to the taxpayers.
Consistency or compatibility with economic goals - necessitates that tax laws should be consistent with
the economic goals of the state.
Equality & Theoretical Justice - the equality of the application of tax laws and the imposition of taxes based
on the relative ability of taxpayers to shoulder the burden and the proportionate benefits they receive from an
orderly society.

SITUS OR PLACE OF TAXATION

Situs of Taxation - the place of taxation where the state has the jurisdiction to impose a particular tax upon
persons, property, rights or transactions.
- it depends upon various factors including the:
(1) nature or kind of tax, and the subject matter thereof which may be person, property, act or
activity (rights);
(2) the protection and benefits received by the taxpaying population and the government;
(3) the domicile or residence;
(4) the citizenship; and
(5) sources of income of the taxpayers.

for personal tax - the domicile or residence of the person being taxed.
for property tax - the situs of real property is the place where it is situated.
● for tangible personal property, the place or residence of the owner.
● for intangible personal property, the situs of taxation is the domicile of the owner.
for transfer taxes- the situs is the country where the decedent is a resident or a citizen or where the property
is actually located.
for business and occupation - the place where the act is performed or the occupation is engaged in.
for sales transactions - the situs is the place where the contract is perfected.
for income taxes - the citizenship or residence of the recipient or by the place where the income is derived.

Exemptions to the rule against delegation of taxing power

❖ delegated to a political subdivision; and
❖ delegation to certain administrative bodies
● The power to create a political subdivision or local government carries with it the power to tax.
● The local government under our Constitution is now empowered to create its own sources of revenue.
● Certain administrative bodies like the Department of Finance can also issue revenue regulations that form
part of our tax laws.
● The legislature, however, cannot delegate to the administrative bodies the power to select the persons,
properties, and rights to be taxed, the amount or measure of the tax, and the intention of the tax law.

Requisites for a Valid Classification

Uniformity in taxation is essential for a tax law to be valid. However, the effectivity of such laws as to the
objects and subjects must meet the following requirements:
● the classification must be based on substantial distinctions;
● it must be germane to the purpose of the legislature;
● it must apply not only to present conditions but also to future conditions substantially identical to those of the
present; and
● it must apply to all those who belong to the same class.

Exemption from Taxation

Exemptions - grants of immunity, express or implied, to particular persons, corporations, or to persons or
corporations of a particular class, from a tax upon property or an exercise which persons and corporations
generally within the same taxing district, are obliged to pay.
- the privilege of not being imposed a financial burden to which others are subject.

Generally exempted from the payment of income taxes:

• Those person(s) exempted under international agreement.
• Those person(s) exempted under the Constitution.
• Those person(s) granted exemptions by law.
• Those person(s) exempted under special laws.
• Those person(s) exempted by virtue of a contract entered with the government.
• Those person(s) exempted under an ordinance.
Statutory Exemptions
Generally granted on the grounds of public policy.
● No law granting exemptions may be passed without the concurrence of a majority of allmembers of
Congress.
● An exemption is a personal privilege which may be enjoyed only by the grantee.
● Tax exemptions are construed strictly against the person claiming it and liberally in favor of thegovernment.
● The claims for refund are construed strictly against the claimants because a claim for refund is in the nature
of an exemption from taxation.

Exemption statutes are liberally construed when

● the law expressly provides for liberal constructions
● if the exemptions favor religious, charitable, or educational institutions
● if the exemption will favor the government

Principles of “strictissimi juris”

● applies with peculiar force to a claim of exemption from taxation.
● taxation is the rule and exemption is the exception
● the rule of exemption from taxation is never presumed. For tax exemption to be recognized, the grant must
be cleared and expressed; it cannot be made to rest on vague implications.

An exemption granted by contact cannot be assigned.

● However, the legislature may authorize a transfer of the exemptions either by an original act or by a
subsequent legislation.
● Therefore, an exemption from taxation which is not revocable must be based on contract.
● An exemption from taxation is a personal privilege which cannot be assigned or transferred by the person to
whom it is granted unless the consent of the legislature is given in clear and unmistakable terms.

Forms of Escape from Taxation

Shifting - transfer of the tax burden by the person on whom it is imposed by law to another who bears it.
● Forward shifting - transfer of the tax from a factor of production (manufacturer) through the factors of
distribution (wholesaler or retailer) until the burden finally rests with the consumer. This results to an increase in
selling price.
● Backward shifting - transfer of the tax from the point of consumption through the factors of distribution to
the factors of production. This results in a decrease in the selling price.
● Onward shifting - tax is shifted two or more times either forward or backward. Onward shifting involves two
or more shifts.

Capitalization - is a form of backward shifting whereby future taxes on property sold are capitalized at the
time of purchase and deducted in lump from the selling price.
- taxes are shifted backward from the buyer to the seller, and the result is a reduction in price.
Transformation
- a form of tax escape affected through the process of production.
- producer on whom the tax is imposed, fearing the loss of his market if he adds the tax to the price, pays the
tax and recovers his additional expense by improving his method of production thereby turning out units of
lesser cost.
- tax is transformed into a gain through the medium of production.

Evasion
- a form of escape from taxation which is accomplished by violating tax laws
- illegal and punishable by law
- also known as tax dodging
- the tax evader breaks the law

Avoidance
- the legal means to lessen or avoid tax by taking advantage of the loopholes of law.
- legal and permissible by law
- known as tax minimization
- tax avoider uses the law to avoid taxes like when he maximizes the allowable deductions.
Exemption (to be discussed on the next lessons).

DOUBLE TAXATION
Direct double taxation
- is double taxation in its strict legal sense
- taxing twice some of property within the territorial jurisdiction without taxing all of them for the second time
- prohibited by the Constitution as it violates the rule of uniformity in taxation.
Indirect double taxation
- double taxation excluding direct duplicate taxation
DEFINITION, CHARACTERISTICS & KINDS OF TAX
Definition of Tax
Tax
- an enforced contribution upon persons and properties levied by the state by virtue of its
sovereignty for the support of the government.
- an exaction of revenue for the support of the government.
- forced burden, charge, exaction, imposition, or contribution assesses in accordance with some reasonable
rule of apportionment by authority of the sovereign state upon persons, properties, or property rights within its
jurisdiction for purposes of raising revenue to support governmental expenses.
- protection money.

Essential Elements and Characteristics of Tax

● enforced contribution
● extracted pursuant to legislative authority
● generally payable in money
● levied upon a person, property, rights, and transactions
● the purpose of raising revenue
● for public purpose
● to be paid at regular intervals
● proportionate in character
● levied within the jurisdiction of the state.
According to Purpose
● Fiscal or General – its sole purpose is to raise revenue, e.g, percentage taxes, VAT
● Regulatory or Special Tax – its purpose is to achieve certain economic or social ends, e.g., protective tariffs
or customs duties.
Classification of Kinds of Taxes
According to subject matter or subject
● Personal, Capitation or Poll Tax – it is imposed on individuals domicile in a certain territory regardless of
their occupation and properties, e.g., residence tax.
● Property Tax – it is a tax on all assessed properties of a certain class in proportion to its value, andthe duty
to pay it is absolute, e.g., real estate taxes.
● Excise Tax – a tax that is imposed on a right or privilege to exercise, practice or engage in a business,
occupation or profession, e.g., estate tax, donor’s, income tax.
According to who bears the burden
● Direct Tax – any person liable to pay tax must pay it without transferring the burden to someone, e.g.,
income, estate, residence and donor’s taxes.
● Indirect Tax – a tax that is normally imposed on goods which is assumed by the buyer not as a tax but as
part of the purchase price, e.g., specific tax, percentage taxes, privilege tax, and import duties.
According to subject matter or subject
● Specific Tax – a tax that has no valuation or assessment and requires the classification of the objects to be
taxed as to weight, head or number or some other form or measurements;
● Ad Valorem Tax – a tax that is imposed on the value of the taxable item. It requires the intervention of an
independent assessor to determine proper valuation for tax purposes.
According to Scope
● National Tax – imposed and collected by the national government, e.g., income, estate, donor’s and other
under the NIRC.
● Local or Municipal Tax – imposed and collected by the local government, e.g., real estate tax, poll and
measurement taxes.
According to graduation or rate of the tax
● Proportional Tax – the tax rate is fixed based on the value of the property being assessed, whether big or
small.
● Progressive Tax – those where the tax rate increase as the tax base (income or value of the property
increase), e.g., income tax.
● Regressive Taxes – those where the tax rate decreases as the income or value of the property increases.
COMPARED WITH OTHER IMPOSITIONS
Taxes Vs. Debts
TAXES DEBTS
not the result of a contract result of a contract
not generally governed by the ordinary period of the ordinary period or prescription is applicable
prescription
imprisonment may be sanctioned imprisonment is not allowed as a rule.
cannot be assigned to others their payment may be assigned to others.
can be imposed only by the government can be imposed by private individuals so long as a
just cause exists.
payable only in money may be paid in kind.
cannot be the subject of a set-off either on behalf of may be subject of a set-off
the state or its authority
Taxes vs. Penalties
TAXES PENALTIES
imposed for revenue that is paying for the privilege imposed for punishment and/or suppression of any
of living in civilized society act deemed injurious.
imposed only by the government government may be imposed both by the
 government and private entities
not the result of a contract may be the result of a contract

Taxes Vs. Liscenses Fee

TAXES LISCENSES FEE
for revenue for regulation
consequence of the exercise of the power of result of the exercise of the police power of the state
taxation
for public purpose for regulatory purposes
amount that may be imposed is unlimited amount is limited to the cost of implementing a
regulation
imposed upon persons, properties and property required for a commencement of a business
rights profession
failure to pay does not necessarily make the act failure to pay may make an act illegal
being taxed illegal

Taxes VS. Special Assessments

TAXES SPECICAL ASSESSMENTS
levied for the purposes of raising revenue levied for special purposes
imposed upon all persons or properties of the same can be levied only on land
class
the taxpayer who is liable to pay it is the owner, and not the person assessed who
is liable
basis is income or wealth the basis is improvement or benefits
TAXES TOLL
a demand of sovereignty demand of ownership
imposed only by the government government imposed both by the government and
private persons or entities
amount of tax is based on the income or valuation of toll amount is determined by the property or of the
wealth improvement
Taxes vs. Poll
TAX LAWS

Tax Laws - are any law which provides for the assessment and collection of taxes to defray the expenses of
government.
Sources of Tax Laws
(a) constitution; (b) revenue regulations; (c) statutes (d) administrative rulings, opinions, and
circulars; (e) court decisions; (f) legislative materials; (g) local ordinances; and (h) treaties.

SPECTRABLT: Statues (Law); Presidential Decree; Executive Order; Constitution; Tax Code;
Revenue Regulation; Administrative Order; B.I.R. Ruling / Memorandum Order / Revenue
Regulation; Local Ordinances; Tax Treaty.
Nature of Tax Laws
● Tax laws are generally prospective.
● Tax exemptions to be construed strictly.
● Revenue laws are civil in nature, not political nor criminal.

Taxes Imposed under the National Internal Code

● Income Tax – a tax imposed on the gains or profits arising from property, professions, trades and
offices.
● Donor’s Tax – It is an excise tax imposed on the transfer of property by way of gift inter vivos.
● Estate Tax – It is a tax levied upon the transfer of the net estate of a decedent to his heirs.
● Value Added Tax (VAT) – It is a transaction tax imposed on the sale of certain goods or services,
importation, practice of profession, entertainment and transactions deemed sale.
● Percentage Tax – it is a tax imposed based on a fixed percentage of gross sales or receipts of certain
business transactions.
● Excise Taxes on certain goods – it is a transaction tax imposed on the sale of certain goods e.g. liquors,
wines, cigarettes etc.
● Documentary stamp tax – Is an excise tax imposed upon certain documents executed by the parties.

Powers and Duties of the Bureau of Internal Revenue

● Assessment and collection of all national internal revenue taxes, fees and charges.
● Enforcement of all forfeitures, penalties, and fines connected therewith including the
execution of judgments in all cases decided in its favor by the Court of Tax Appeals and
the ordinary courts
● Giving effect to and administering the supervisory and police powers conferred by the
National Internal Revenue Code or other laws.
● Assignment of internal revenue officers involved in excise tax functions to establishments where articles
subjects to excise tax are produced or kept.
● Assignment of internal revenue officers and other employee to others duties.
● Provision and distribution to proper officials of forms, receipts, certificates, stamps, and appliances, etc.
● Issuance of receipts for payments made.
● Submission of annual report, pertinent information to Congress and report to the Congressional Oversight
Committee.
Powers of the Commissioner of Internal Revenue (CIR)
● Interpret tax laws
● Obtains information, summons, examines, and take testimony of persons
● Makes assessments and prescribes additional requirements for tax administration and
enforcement.

Power to Interpret the Provision of the NIRC

It shall be under the original jurisdiction of the Commissioner of Internal Revenue, subject to the review by the
Secretary of Finance. The power of the Commissioner to decide tax cases includes the power to decide to
dispute assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the NIRC or other laws or portions thereof administered by the Bureau of
Internal Revenue, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

Power of the Commissioner

The power of the Commissioner to obtain information, and to summon, examine, and take testimony of a
person include the power:
● To ascertain correctness of any return
● To make a return where none has been made
● To determine the liability of any person for any internal revenue tax
● To collect from any person liability for any internal revenue tax
● To evaluate tax compliance.

Real property values to be used for computing any Internal Revenue Tax
The value to be used is the fair market value as determined by the Commissioner; or the fair market value as
shown in the schedule of values of the Provincial and City Assessors, whichever is higher.

Authority of the Commissioner to accredit and register tax agents

The Commissioner shall accredit and register, based on professional competence, integrity, and moral fitness,
individuals and general professionals partnerships and their representatives who prepare and file tax returns,
statements, reports protests and other papers with, or who appear before the Bureau of Internal Revenue for
taxpayers.

Authority of the Commissioner to delegate powers

The Commissioner of Internal Revenue may delegate powers vested in him under the pertinent provisions of
the NIRC, to any or such subordinate officials with rank equivalent to a division chief or higher, subject to such
limitations, and restrictions as may be imposed under rules and regulations to be promulgated by the secretary
of finance, upon recommendation of the Commissioner.

Powers of the Commissioner that cannot be delegated

● The power to recommend the promulgation of rules and regulations by the Secretary of Finance.
● The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling
of the bureau
● The power to compromise or abate any tax liability. Except assessment issued by the regional offices
involving basic deficiency taxes of Five hundred thousand pesos or less and minor criminal violations, as may
be determined by rules and regulations to be promulgated by the Commissioner.
● The power to assign or reassign internal revenue officers to establishments where articles subject to excise
tax are produced or kept.

Primary Powers of the Commissioner

The powers of the Commissioner which are directly related to the assessment and collection functions of the
BIR. These powers include the following:
● Power to assess and collect the amount of tax.
● Power to examine books of accounts and other accounting records and to obtain information from third
parties.
● Power to inquire into bank deposits of taxpayers.
● Power interpret tax laws.
● Power to decide disputed assessments.
● Power not to allow withdrawal of any return, statement or declaration.
● Power to conduct inventory-taking, surveillance, and to prescribe presumptive gross sales and receipts.
● Power to terminate taxable periods
● Power to prescribe real property values and create revenue district offices.
● Power to accredit and register tax agents or practitioners.

Secondary Powers of the Commissioner

The powers of the Commissioner that are necessary, ancillary, or incident to the exercise of his primary powers
relative to assessment and collection of taxes.
These secondary powers include the following:
● Administer oaths and take testimony
● Make arrests and seizures
● Authority to assign internal revenue officers
● Authority to delegate certain powers