Income Taxation

Prof. Jennifer I. Malabrigo, MBA

General
Principles
and
Concepts of
Taxation
PROF. JENNIFER MALABRIGO
ST. JOSEPH COLLEGE OF BULACAN

TAXATION

PROF. JENNIFER MALABRIGO

ST. JOSEPH COLLEGE OF BULACAN

Inherent Powers of the State

Police Power
The power to protect citizens
and provide for safety and
welfare of the society
Eminent Domain
The power to take private
property (with just compensation
for public use)

Taxation
The power to enforce contributions to support the
government and other inherent powers of the State

What is taxation?
Taxation is the process or
means by which the sovereign,
through its lawmaking body,
raises income to defray the
necessary expenses of the
government.
It is the most pervasive and the strongest
of all the powers of the government. Taxes
are the lifeblood of the government,
without which, it cannot subsist

Nature of Taxation Power

1.
2.
3.
4.
5.
6.

Inherent Power of Sovereignty

Essentially a legislative function
For Public Purposes
Territorial in Operation
Tax exemption of government
The Strongest of All the inherent
Powers of the Government
7. Subject to Constitutional and
inherent Limitations

Basis of Taxation
Taxation is based on the Principles of:
1) Necessity
Taxation is the life blood or the
bread & butter of the government
& every citizen must pay his taxes.
2) Reciprocal Duties
Benefits-received or benefitsprotection

Importance of Taxation
- Taxation is the indispensable &
inevitable price for civilized society-the
government would be paralyzed without
it.
- Without taxation, the State cannot
raise income to pay for the government
expenses"

Purposes of Taxation
1. Revenue Purposes

The fiscal policy of the government is

based on the rule that receipts or revenue
should be equal to annual government
expenditures. The significant portion of the
required receipts is raised from taxation.

2. Regulatory Purpose
To regulate inflation, achieve
economic and social stability and serve as
key instrument for social control

3. Compensatory Purpose
A tax may be used to make up for
the benefit received

Objects of Taxation
Persons (natural or juridical)
Properties (tangible or intangible,
real or personal)
Excise objects (transactions,
privilege, rights or interests)

Scope of the Power of Taxation

The power to tax is unlimited,
complete (plenary), with wide extent of
application (comprehensive) and of the
highest degree (supreme).
Taxation reaches every trade or
occupation, every object of industry,
and every species of possession. It
imposes a burden which, in case of
failure to discharge, may be followed by
seizure or confiscation of property.

Limitations on the power of taxation

Inherent limitations restrictions on
the power exists from the very nature
of the power of taxation itself.
Constitutional limitations
restrictions in the exercise of the power
of taxation as expressly provided in the
Philippine Constitution.

The 3 stages of Taxation

1.

Levy or imposition

Example of Tax Legislative Functions:

a) Prescribing general rules of taxation
b) Selecting of the object/subject to be
taxed
c) Determining of the purpose for which
taxes shall be imposed
d) Fixing the amount of the tax to be
imposed
e) Fixing the amount of tax rate

2.

Assessment and collection

Example
of
Tax
Administrative
Functions:
a)
Valuation of property for
taxation
b) Equalization of Assessment
c) Collection of Taxes

3. Payment of the Tax (Incidence of

Taxation)

Principles of a Sound Tax

System
1. Fiscal Adequacy
Revenue must be sufficient to
meet
the
demand
of
public
expenditures
2. Theoretical Justice
Based on ability to pay
3. Administrative Feasibility
Capable of convenient, just,
uniform and effective
administration free from
confusion and uncertainty.

Characteristics of a sound Tax

system

Fairness
Clarity and Certainty
Convenience
Efficiency

Life is hard work. There are no

shortcuts

Characteristics of Taxation
Taxes may Be Levied Only for Public Purposes
Being inherently legislative, taxation may Not
be Delegated
Exceptions To The General Rule That Taxation
is Inherently Legislative in Character
Tax power is limited to Territorial jurisdiction
of the State
Taxation is Subject to International Comity
Government Entities are Generally Tax
Exempt

Certain Doctrines in Taxation

Certain Doctrines in Taxation

In the exercise of taxation power, some
underlying doctrines for its implementations
are as follows:
1. Prospective application of tax laws
2. Imprescriptibility of taxes
3. Double taxation
4. Escape from taxation
5. Exemption from taxation
6. Equitable recoupment
7. Set-off taxes
8. Taxpayer suit
9. Compromises
10.Power to destroy
11.Situs of taxation

Prospectivity of Tax Laws

This principle 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.

Imprescriptibility of Taxes
This rule states that otherwise
provided by the law itself, taxes in
general are not cancellable

Double Taxation
This means a sovereign act of
taxing twice for the same purpose
in the same year upon the same
property or activity for the same
person, when should it be taxed
once for the same purpose and
with same kind character of tax.
This may be classified as (a)
Indirect Duplicate Taxation, and (b)
Direct Duplicate Taxation.

Indirect Duplicate Taxation

Double Taxation in its broad sense. It
extends to all cases in which there is a burden of
two or more pecuniary impositions. It is usually
allowed as long as there is no violation on the
Constitution.

Direct Duplicate Taxation

Double Taxation in its strict sense. It
is prohibited because it comprises an
imposition of the same tax on the same
property for the same purpose by the same
state during the same taxing period.

Counteracting Indirect Double

Taxation

The measures that are normally

adopted
by
sovereign
taxing
authorities
to
avoid
resulting
inequalities of double taxation are the
following:

1. Tax Treaty
2. Application of Tax Credit
3. Application of Tax Exemptions
4. Application of Allowance for
Deductions such as vanishing deduction
in Estate tax

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 payment of tax by
lawful means.

Tax Evasion
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 or criminal
penalties.
Examples:
Under-declaration of income
Non-declaration of income and other
items subject to tax
Under-appraisal of goods subject to
tariff
Over-declaration of deductions

Tax Avoidance
The act of totally reducing or
escaping payment of taxes through
legally permissible means. Example:
1. Selling shares of stock through a
stock exchange 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

Forms of Tax Avoidance

Shifting
Capitalization
Transformation; and
Exemption

Shifting
This is the transfer of tax burden to
another .
Tax Avoidance
1. Forward Shifting
- the transfer of tax burden from the
producer to distributor until it finally
reaches the ultimate purchasers or
consumers. Example:

(Tax is included in the final price of the

product to be paid by the customer, leading
to price increase)

2. Backward Shifting
- the reverse of forward shifting. For
example, the manufacturer has agreed
to buy the suppliers product only if the
price is reduced by the amount of the
tax, thus allowing the price increase.
3. Onward Shifting
-tax burden is shifted twice or more
either forward or backward.

Capitalization
-This is backward shifting of tax
burden whereby the tax on the selling
price of the property, which is supposed
to be paid by the buyer, is capitalized
on the seller at the time of purchase by
deducting the same by the total selling
price. The taxes are shifted to the seller,
thus reducing the actual sales price by
the amount of the related tax.

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 a
medium of production.

Exemption from Taxation

This denotes a grant of express or
implied immunity, to a particular
person, corporations or to persons,
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.
Tax
exemptions
are
generally
granted
on
the
basis
of
(a)
reciprocity, (b) public policy and, (c)
contracts

Tax exemptions are governed by the

following principles:
1. They are not presumed
2. When granted, they are strictly
construed against taxpayer.
3. They are highly disfavored and may
almost be said to be directly contrary
to the intention of tax laws.

Classification of Tax Exemption

Tax exemption may be classified as
follows:
1. Expressed Exemption
- This tax exemptions are statutory
laws in nature as provided by the
constitution, statute, treaties,
ordinances, franchises or similar
legislative acts.

Example of tax statutory tax

exemptions are:
a) Inter-corporate dividends by a
domestic corporation from another
domestic corporation;
b) Section 105 of the Tariff and
Customs Code
c) Section 234 of the Local Government
Code, and;
d) Other special Laws such as Omnibus
Investment Code of 1987, Philippine
Overseas Shipping Act

2. Implied Exemption by Omissions

- This occur when tax is imposed on a
certain class of persons, properties or
transactions without mentioning other
classes; those not mentioned are
considered exempted by omission.

3. Contractual Exemption
-Contractual Exemption are those
lawfully entered into by the government
contracts under existing laws.

Tax exemption by the

Government

The state in its exercise of

sovereignty, does not tax itself or any
of its political subdivisions. However,
the state may tax any of its
government-owned
or
controlled
corporations exercising proprietary
functions.

Therefore,
agencies
performing
governmental functions are exempt
from tax unless expressly taxed, while
those performing proprietary functions
are subject to tax unless expressly
exempted.

Equitable Recoupment
This doctrine of law states that a
tax claimed 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 and underpayment
is due.

The Supreme Court, however,

rejected the doctrine because such
doctrine may lead to the nonobservance of the prescriptive periods
set by the law.

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 to 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. The
collection of a tax cannot await the
results of a lawsuit against the
government.

Exemptions to this rule are the ff.:

1. Where 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

Tax Payer Suit

A taxpayer suit is effected through
court proceedings and could only be
allowed if the act involves a direct
illegal disbursement of public funds
derived from 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 compromise in behalf of the
government:
1. Only the BIR Commissioner 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 where
legitimate authority is specifically
granted, such as in the remission of
duties;
3. The Customs Commissioner, subject
to approval by the Secretary for
Finance, has the power to compromise
cases involving the imposition of fines,
surcharges and forfeitures;

4. The Local government Code has no

provision
regarding
compromise;
however, tax liability (no criminal
liability) is not prohibited from being
compromised.
Even so, there is no
specific authority given to any public
official to execute the compromise so as
to render it effective.

Power to Destroy
A Power To Destroy
-The Power of Taxation is sometimes
viewed as the power to destroy in the
sense that a lawful tax cannot be
defeated just because its exercise
would be destructive or would bring
about insolvency to a taxpayer.

-The Principle implies that an

imposition of a lawful regulatory
taxes and would be destructive to
the
taxpayers
and
business
establishments
because
the
government can compel payment
of tax and forfeiture of property
through the exercise police power.

A Power To Build
- On the final analysis of the tax
power, it is said that it creates, builds
and sustains the upliftment of the social
condition of the people in general as it
continuously
supports
the
other
inherent powers (police power and
eminent domain) of the state which
preserve the fundamental rights of the
people.

-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.

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. It
defines boundaries of the taxing power
over the objects of taxation in terms of
location whether or not they shall be

The following factors are

determinants to the situs of taxation:
Nature, kind or classification of the
tax being imposed;
Subject matter of the tax (person,
property rights or activity);
Source of the income being taxed;
Place of the exercise, privilege,
business or occupation being taxed;
Citizenship of the Taxpayer; and
Residence of the Taxpayer

TAXES

PROF. JENNIFER MALABRIGO

ST. JOSEPH COLLEGE OF BULACAN

TAX
It is an enforced contribution
levied by the State by virtue of
the sovereignty on persons
and
property
within
its
jurisdiction for the support of
the government and all public
needs

Essential Characteristics of
Taxes
It is an enforced contribution;
It is levied pursuant to legislative
authority;
It is proportionate in character;
It is payable in money
It is levied on persons and property
within the jurisdiction of the State;
It is levied and collected for the purpose
of raising revenue to be used for public
purpose;
It is commonly required to be paid at
regular intervals (not all taxes).

Classification of
Taxes
As to scope
National (Documentary Stamp
Tax)
Local or Municipal (Real Estate
Tax)
As to who bears the burden
Direct (Income Tax)
Indirect (VAT)
As to determination of amount
Specific (Excise Tax on liquors)
Ad Valorem (VAT)

Classification of
taxes
As to purpose
Genera/Fiscal (Income Tax)
Special/Regulatory (Tariff)
As to object or subject matter
Personal/ Poll/ Capitation (CTC)
Property (Real Estate)
Excise (VAT)
As to rates or graduation
Proportional (VAT)
Progressive (Income Tax)
Regressive (NA in the Phils)

OTHER CHARGES/FEES

Distinction of Taxes from Other

Related Items
1. Revenue
- refers to all funds or income derived
from the government, whether it comes
from tax or from other sources.
amount collected ---- amount
imposed

2. Revenue
-all funds or income derived by the
government whether from tax or from
other sources.
3. Custom Duties (Duties)
- taxes imposed on imported goods
brought into the country to protect local
industry.

4. Tariff
- Schedule or list of rates, duties or taxes
imposed on imported goods
5. Debt
- Obligation to pay or render service for
a definite future period of time based
on contact
Assignable
---- cannot be assigned
Based on contract
---- based on laws
Maybe paid in kind ---- money only

6. Toll
- it is a sum of money for the use of
something,
generally
applied
to
consideration that is paid for the use of
roads, bridges or of public purposes.
based on ownership ---- based on the
sovereignty
Imposed by all
---- imposed only by
state

7. License or permit fee

- it is a charge imposed under the
police power for the purpose of
imposed for regulation ---- levied for
regulation.
revenue
Limited
---- generally no
limit
8. Penalty
-any
sanction
imposed
as
a
punishment for violation of law or acts
Toinjurious.
regulate conduct ---- aimed to raise
revenue
Private or government ---- only by the
government

TAX LAWS

PROF. JENNIFER MALABRIGO

ST. JOSEPH COLLEGE OF BULACAN

Tax Laws
The body of laws governing taxation

Objective of enacting tax

law
The primary objective of the
government in enacting a tax
law is to raise revenues for
government operations.

Nature of Tax Laws

1. Not political in nature
They are deemed to be the laws of the
occupied territory and not of the
occupying enemy.
2. Civil and not penal in nature
There are also penalties provided for
violation. Purpose in imposing
penalties:
a. for delinquencies is to compel the
timely payment of taxes or;
b. to punish evasion or;
c. neglect of duty in respect thereof

Interpretation of tax laws

1. Tax statute must be enforced as written
2. Imposition of tax burdens is not
presumed
3. Doubts should be resolved liberally in
favor of the taxpayer
4. Tax exemptions are strictly construed
against the taxpayer
5. Tax laws are applied prospectively
6. Tax laws prevail over civil laws

1.
2.
3.
4.
5.
6.

Sources of Philippine Tax

Law
Constitution

Judicial Decisions
Executive Orders
Special Laws
Tax Treaties
Revenue regulations promulgated by the
Department of Finance
7. BIR Memorandum Circulars and Bureau of
Customs Memo Orders
8. BIR Rulings
9. Local Government Code (Book II)

Constitution
The power of taxation is merely
regulated by the Constitution.
Taxation can be exercised even
without the Constitution.

Statutory enactments
Tax laws passed by the Congress.
National Internal Revenue Code
(NIRC).

Judicial decisions
These refers to the decisions of the
Court of Tax appeals and the Supreme
Court applying or interpreting tax laws.
Part of the jurisprudence on taxation
and the legal system of the Philippines.
Appealable to the Supreme Court.

Executive Orders
Regulations issued by the President or
some administrative authority under
his direction.
Purpose of interpreting, implementing
or giving administrative effect to a
provision of the Constitution or of
some law or treaty

Tax Treaties and Conventions

Refer to the treaties or international
agreement s with foreign countries
regarding tax enforcement and
exemptions
Example of Tax Treaty agreement:
Philippine-United States Military
Bases Agreement (PUSMBA)

Revenue Regulations by the

Department of Finance
Revenue Regulations (RR)
Rules or orders having force of
law issued by executive authority
of the government to ensure
uniform application of the tax law

BIR Rulings
Expressed official interpretations of the
tax laws as applied to specific
transactions
Limited in application compared to RR
Published in an Internal Revenue
Bulletin and later transferred to the
appropriate Cumulative Bulletin.

Local Tax Ordinances

Tax ordinances issued by the
Province, City, Municipality and Bario
Subject to such limitations as
provided by the Local Government
Code and the Real Property Tax Code

TAX
ADMINISTRATION
PROF. JENNIFER MALABRIGO
ST. JOSEPH COLLEGE OF BULACAN

Tax Administration
System of collecting taxes in
accordance with the countrys tax
policies.
Involves enforcement of taxed
through the following aspects of
taxation:
a) Assessment
b) Collection

Tax Administrative Agencies

Department of Finance (DOF)
Responsible for the fiscal
policies and general management
of the Philippine Governments
financial resources.

Other Agencies controlled by

DOF
1. Bureau of Internal Revenue (BIR)
in charge to assess and collect all taxes and
charges imposed by the NIRC, other tax laws
and regulations
Responsible for raising total government
revenues
2. Bureau of Customs (BC) and Tariff
Commission (TC)
tasked to enforce the Tariff and Customs

Other Agencies controlled by

DOF
3. Land Transportation Office (LTO)

responsible to collect registration fees

and motor vehicle tax
4. Duly and lawfully authorized
collectors
These are persons, agencies or duly
accredited banks authorized by the

Other Agencies controlled by

DOF
5. Local offices in charge to enforce local
taxation
. Provincial, City, Minicipal and Barangay
Treasurers;
. Provincial and City Assessors;
. Provincial and City Board of Assessment
Appeals; and
. Central Board of Assessment Appeals

The Bureau of Internal Revenue

(BIR)
The BIR is principally tasked with
the enforcement of the NIRC.

Powers and Duties of the BIR

The chief officials of the Bureau are the
Commissioner and four (4) Deputy
Commissioners. Its powers and duties follows:
1. Assessment and collection of all national
internal revenue taxes, fees and charges;
2. Enforcement of all forfeitures, penalties, and
fines;
3. Execution of judgments in all cases decided in
its favor by the Court of Tax Appeals and
ordinary courts; and
4. Administration of supervisory and police
powers conferred to it.
Life is hard work. There are no
shortcuts

Powers of the Commissioner

KIM JACINTO-HENARES
1. Power to interpret tax laws and decide tax
cases;
2. Power to obtain information, and to
summon, examine, and take testimony of
persons;
3. Power to make assessments and prescribe
additional requriement for tax
administration and enforcement.
4. Athority to compromise, abate and refund or
credit taxes
4. Power to suspend
Life is hard business
work. There are no operations
shortcuts

Powers of the Commissioner

KIM JACINTO-HENARES
1. Power to interpret tax laws and decide tax
cases;
2. Power to obtain information, and to
summon, examine, and take testimony of
persons;
3. Power to make assessments and prescribe
additional requriement for tax
administration and enforcement.
4. Athority to compromise, abate and refund or
credit taxes
4. Power to suspend
Life is hard business
work. There are no operations
shortcuts

Administrative Provisions
Requirements for compliance by the
taxpayer:
1. Registration
2. Printing of receipts or sales or commercial
invoices
3. Issuance of receipts or sales or commercial
invoices
4. Exhibition of certificate of payment at place
of business
5. Requirements for continuance of business of
Life is hard work. There are no
deceased persons
shortcuts

Registration
Who?
A person subject to any internal revenue tax
Tax Identification Number shall assigned
after registration.
Registration Period
Within 10 days from date of employment
On or before the commencement of
business
Before payment of any tax due
Upon filing of a return, statement or
declaration asLiferequired
the Tax Code
is hard work. Therein
are no
shortcuts

Registration
Annual Registration fee Php. 500.00

Paid upon registration and every year after

on or before January 31.
Exemption (No RF)
Cooperatives
individuals earning purely compensation
income
Overseas contract workers
Life is hard work. There are no
shortcuts

BIR Forms
BIR Form 1901 self-employed, mixed
income individuals, estates and trusts
BIR Form 1902 Individuals earning
purely compensation income
BIR Form 1903 Corporations and
partnership
BIR Form 1904 one-time taxpayer and
persons securing TIN to be able to
transact with any government agencies
BIR Form 1905 updating/cancellation of
registration, TIN, new copy of COR
Life is hard work. There are no
shortcuts

Annual Income Tax Returns form

examples
BIR Forms 1700 and 1701 for Individual
BIR Form 1702 Corporations and
partnerships
BIR Form 1800 Donors Tax Return
BIR Form 1801 Estate Tax Return
Life is hard work. There are no
shortcuts