Income Taxation

Treston International College

College Department
 General Principles
1. Power of Taxation vs. Eminent Domain vs. Police Power
2. Inherent and Constitutional Limitation
3. Requisites of a Valid Tax
4. Tax vs. Other forms of Exactions
5. Kinds of Taxes
6. Doctrines in Taxation
Power of Taxation vs. Eminent Domain vs. Police
Power

Taxation Power.

The power by which the sovereign, through its law-making body, raises
revenue to defray the necessary expenses of government. It is merely a way
of apportioning the costs of government among those who, in some
measure, are privileged to enjoy its benefits and must bear its burdens.
Power of Taxation vs. Eminent Domain vs. Police
Power

Eminent Domain.

The power of the nation or the sovereign state to take, or to authorize the
taking of private property for public use without the owner’s consent,
conditioned upon payment of just compensation.
Power of Taxation vs. Eminent Domain vs. Police
Power

Police Power.

The power of the state to promote public welfare by restraining and

regulating the use of liberty and property. It is the most pervasive, the least
limitable, and the most demanding of the three fundamental powers of the
State.
Inherent and Constitutional Limitation

Inherent Limitations
Constitutional Limitations
1. Public Purpose
1. Public Purpose
2. Inherently Legislative
2. Inherently Legislative
3. Territorial
3. Territorial
4. International Comity
4. International Comity
5. Exemption of Gov’t. Entities,
5. Exemption of Gov’t. Entities,
Agencies and Instrumentalities
Agencies and Instrumentalities
Inherent Limitations

PUBLIC PURPOSE:

The proceeds of tax must be used (a) for the support of the State or (b) for
some recognized objective of the government or to directly promote the
welfare of the community.
Inherent Limitations

PUBLIC PURPOSE:

Tax is considered for public purpose if:

1. It is for the welfare of the nation and/or for greater portion of the population;

2. It affects the area as a community rather than as individuals; and

3. It is designed to support the services of the government for some of its

recognized objects.
Inherent Limitations

Tests in determining public purpose

1. Duty test

Whether the thing to be furthered by the appropriation of public revenue is

something which is the duty of the State as a government to provide.
Inherent Limitations

Tests in determining public purpose

2. Promotion of general welfare test.

Whether the proceeds of the tax will directly promote the welfare of the
community in equal measure. When a tax law is only a mask to exact funds from
the public when its true intent is to give undue benefit and advantage to a
private enterprise, that law will not satisfy the requirement of "public purpose"
Inherent Limitations

INHERENTLY LEGISLATIVE:

Only the legislature has the full discretion as to the persons, property,
occupation or business to be axed provided these are all within the State’s
territorial jurisdiction. It can also fully determine the amount or rate of tax, the
kind of tax to be imposed and method of collection (1 Cooley 176-184).

GR:

The power to tax is exclusively vested in the legislative body, being inherent
in nature; hence, it may not be delegated (Delegata potestas non potest
delegari).
Inherent Limitations

Non-delegable legislative powers

1. Selection of subject to be taxed

2. Determination of purposes for which taxes shall be levied
3. Fixing of the rate/amount of taxation
4. Situs of tax
5. Kind of tax
Inherent Limitations

EXCEPTIONS:

1. Delegation to Local Government

Refers to the power of LGUs to create its own sources of revenue and to levy
taxes, fees and charges (Art. X, Sec. 5, 1987 Constitution)
Inherent Limitations

EXCEPTIONS:

2. Delegation to the President

The authority of the President to fix tariff rates, import or export quotas,
tonnage and wharfage dues or other duties and imposts (Art. VI, Sec. 28(2),
1987 Constitution).
Inherent Limitations

EXCEPTIONS:

3. Delegation to administrative agencies

When the delegation relates merely to administrative implementation that may

call for some degree of discretionary powers under sufficient standards
expressed by law (Cervantes v. Auditor General, G.R. No. L-4043, May 26,
1952) or implied from the policy and purpose of the act (Maceda v. Macaraig,
G.R. No. 88291, June 8, 1993).
Inherent Limitations

TERRITORIAL:

Taxation may be exercised only within the territorial

jurisdiction, the taxing authority (61 Am. Jur. 88). Within
the territorial jurisdiction, the taxing authority may
determine the “place of taxation” or “tax situs.”
Inherent Limitations

TERRITORIAL: GR: The taxing power of a country is limited to

persons and property within and subject to its jurisdiction.

Reasons:

1. Taxation is an act of sovereignty which could only be exercised

within a country’s territorial limits.
2. This is based on the theory that taxes are paid for the protection
and services provided by the taxing authority which could not be
provided outside the territorial boundaries of the taxing State.
Inherent Limitations

TERRITORIAL: EXCEPTIONS:
1. Where tax laws operate outside territorial jurisdiction – i.e.
Taxation of resident citizens on their incomes derived abroad.
2. Where tax laws do not operate within the territorial jurisdiction of
the State.

a. When exempted by treaty obligations; or

b. When exempted by international comity.

Inherent Limitations

INTERNATIONAL COMITY:

It refers to the respect accorded by nations to each other

because they are sovereign equals. Thus, the property or
income of a foreign state may not be the subject of taxation
by another State.
Inherent Limitations

International comity as a limitation on the power to tax

The Constitution expressly adopted the generally accepted principles
of international law as part of the law of the land (Art. II, Sec. 2, 1987
Constitution). Thus, a State must recognize such generally accepted
tenets of international law that limit the authority of the government to
effectively impose taxes upon a sovereign State and its
instrumentalities.
Inherent Limitations

Principle of Pacta Sunt Servanda in Taxation:

Pacta sunt servanda is a fundamental international law

principle that requires agreeing parties to comply with their
treaty obligations in good faith. Hence, the application of
the provisions of the NIRC must be subject to the
provisions of tax treaties entered into by the Philippines
with foreign countries.
Inherent Limitations

EXEMPTION FROM TAXATION OF GOVERNMENT

ENTITIES

GR: The government is exempt from tax.

Reason: Otherwise, we would be “taking money from one

pocket and putting it in another”
Inherent Limitations

EXEMPTION FROM TAXATION OF GOVERNMENT

ENTITIES
EXCEPTION: When it chooses to tax itself. Nothing prevents Congress
from decreeing that even instrumentalities or agencies of the
government performing government functions may be subject to tax.
Where it is done precisely to fulfill a constitutional mandate and
national policy, no one can doubt its wisdom
CONSTITUTIONAL LIMITATIONS:

Taxation, being inherent in sovereignty, need not be

clothed with any constitutional authority for it to be
exercised by the sovereign state. Instead, constitutional
provisions are meant and intended more to regulate and
define, rather than to grant, the power emanating
therefrom.
CONSTITUTIONAL LIMITATIONS:

PROVISIONS DIRECTLY AFFECTING TAXATION

CONSTITUTIONAL LIMITATIONS:

1. Prohibition against imprisonment for non-payment of

poll tax

Basis: No person shall be imprisoned for debt or non-

payment of a poll tax (Art. III, Sec. 20).
CONSTITUTIONAL LIMITATIONS:

2. Uniformity and equality of taxation

Basis:The rule of taxation shall be uniform and equitable.

The Congress shall evolve a progressive system of taxation
(Art. VI, Sec. 28[1]).
CONSTITUTIONAL LIMITATIONS:

3. Grant by Congress of authority to the president to

impose tariff rates

Basis: The Congress may, by law, authorize the President to

fix within specified limits and subject to such limitations
and restrictions at it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues and other duties
or imposts within the framework of the national
development program of the Government (Art. VI, Sec. 28
CONSTITUTIONAL LIMITATIONS:

4. Prohibition against taxation of religious, charitable

entities, and educational entities

Basis: 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 (Art. IV, Sec. 28 [3]).
CONSTITUTIONAL LIMITATIONS:
5. Prohibition against taxation of non-stock, non-profit
educational institutions
Basis: 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.

Subject to conditions prescribed by law, all grants, endowments,

donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax (Sec 4 (3] and [4], Art
XIV).
CONSTITUTIONAL LIMITATIONS:
6. Majority vote of Congress for grant of tax exemption

Basis: No law granting any tax exemption shall be passed

without the concurrence of a majority of all the members of
Congress (Section 28 [4], Art. VI).
CONSTITUTIONAL LIMITATIONS:
7. Prohibition on use of tax levied for special purpose

Basis: All money collected on any tax levied for a special

purpose shall be treated as a special fund and paid out for
such purpose only. If the purpose for which a special fund
was created has been fulfilled or abandoned, the balance, if
any, shall be transferred to the general funds of the
government (Sec. 29[3], Art. VI).
CONSTITUTIONAL LIMITATIONS:
8. President’s veto power on (1) appropriation, (2)
revenue, (3) tariff bills (ART bill)

Basis:The President shall have the power to veto any

particular item or items in an appropriation, revenue or
tariff bill but the veto shall not affect the item or items
which he does not object (Art. VI, Sec. 27[2]).
CONSTITUTIONAL LIMITATIONS:
9. Non-impairment of jurisdiction of the Supreme Court

Basis: The Supreme Court shall have the power to review,

revise, reverse, modify or affirm on appeal on certiorari as
the laws or the Rules of Court may provide, final judgments
or orders of lower courts in xxx all cases involving the
legality of any tax, impost, assessment, or toll or any
penalty imposed in relation thereto (Art. VIII, Sec. 5[2][b]).
CONSTITUTIONAL LIMITATIONS:
10. Grant of power to the LGUs to create its own sources
of revenue

Basis: Each LGU shall have the power to create its own
sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments (Art. X, Sec. 5).
CONSTITUTIONAL LIMITATIONS:
11. Origin of Revenue and Tariff Bills

Basis: All appropriation, revenue or tariff bills, bills

authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in
the House of Representatives, but the Senate may propose
or concur with amendments (Art VI, Sec. 24).
CONSTITUTIONAL LIMITATIONS:
13. No appropriation or use of public money for religious
purposes

Basis: 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, sectaraian 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 (Art. VI, Sec. 29[2]).
CONSTITUTIONAL LIMITATIONS:

CONSTITUTIONAL PROVISIONS INDIRECTLY

AFFECTING TAXATION
CONSTITUTIONAL LIMITATIONS:
1. Due Process

Basis: No person shall be deprived of life, liberty, or

property without due process of law xxx (Art. III, Sec. 1).
CONSTITUTIONAL LIMITATIONS:
2. Equal Protection

Basis: No person shall be denied the equal protection of

the laws (Art. III, Sec. 1).
CONSTITUTIONAL LIMITATIONS:
3. Religious Freedom

Basis: No law shall be made respecting an establishment of

religion, or prohibiting the free exercise thereof. The free
exercise and enjoyment 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 (Art. III, Sec. 5).
CONSTITUTIONAL LIMITATIONS:
4. Non-impairment clause

Basis: No law impairing the obligation of contracts shall be

passed (Art. III, Sec. 10)
Requisite of a Valid Tax

1. It should be for a public purpose.

2. It should be uniform.
3. The person or property being taxed should be within the jurisdiction
of the taxing authority.
4. The tax must not impinge on the inherent and constitutional
limitations on the power of taxation.
 Tax vs. Other forms of Exactions
TAX TARIFF/CUSTOM DUTIES

COVERAGE An all-embracing term to include Only a kind of tax therefore

various kinds of enforced limited coverage
contributions imposed upon
persons for the attainment of public
purpose
OBJECT Persons, property, etc. Goods imported or exported
 Tax vs. Other forms of Exactions

TAX TOLL

DEFINITION An enforced proportional contribution A consideration paid for the use of a road,
from persons and property for public bridge or the like, of a public nature
purpose/s
BASIS Demand of sovereignty Demand of proprietorship

AMOUNT Generally, the amount is unlimited Amount is limited to the cost and maintenance
of public improvement

PURPOSE For the support of the government For the use of another’s property

AUTHORITY May be imposed by the State only May be imposed by private individuals or
entities
 Tax vs. Other forms of Exactions
TAX LICENSE FEE
PURPOSE Imposed to raise revenue For regulation and control
BASIS Collected under the power of Collected under police power
taxation
AMOUNT Generally, amount is unlimited Limited to the necessary expenses of
regulation and control
SUBJECT Imposed on persons, property, Imposed on the exercise of a right or
rights or transaction privilege
EFFECT OF NON- Non-payment does not make the Non-payment makes the business illegal.
PAYMENT business illegal.
TIME OF PAYMENT Normally paid after the start of Normally paid before the commencement
business of the business
 Tax vs. Other forms of Exactions
TAX SPECIAL ASSESSMENT

NATURE An enforced proportional An enforced proportional contribution from

contribution from persons and owners of lands especially those who are
property for public purpose/s peculiarly benefited by public improvements

SUBJECT Imposed on persons, property Levied only on land

rights or transactions

PERSON A personal liability of the taxpayer Not a personal liability of the person
LIABLE assessed

PURPOSE For the support of the government Contribution to the cost of public improvement

SCOPE Regular exaction Exceptional as to time and locality

 Tax vs. Other forms of Exactions
TAX DEBT
BASIS Obligation created by law Obligation based on contract,
express or implied
ASSIGNABILITY Not assignable Assignable
MODE OF Payable in money Payable in money or in kind
PAYMENT
SET-OFF Not subject to set-off Subject to set-off
EFFECT OF NON- May result in imprisonment NO imprisonment (except when debt
PAYMENT arises from crime)
INTEREST Bears interest only if delinquent Interest depends upon the written
stipulation of the parties
PRESCRIPTION Governed by the special prescriptive Governed by the ordinary periods of
periods provided for in the NIRC prescription
Kinds of Taxes
 As to object:

1. Personal/poll or capitation tax – A fixed amount imposed upon all persons, or

upon all persons of a certain class, residents within a specified territory, without
regard to their property or occupation. (e.g. community tax)

1. Property tax – Tax imposed on property, whether real or personal, in proportion

either to its value, or in accordance with some other reasonable method of
apportionment.(e.g. real property tax)

1. Privilege/excise tax – A charge upon the performance of an act, the enjoyment

of a privilege, or the engaging in an occupation. An excise tax is a tax that does
not fall as property tax. (e.g. income tax, estate tax, donor’s tax, VAT)
As to burden or incidence::

(1) Direct taxes are demanded from the very person who, as
intended, should pay the tax which he cannot shift to another

(2)Indirect taxes are demanded in the first instance from one

person with the expectation that he can shift the burden to
someone else, not as a tax but as a part of the purchase price.
 As to tax rates:
1. Specific – tax of a fixed amount imposed by the head or number, or by
some standard of weight or measurement. (e.g. excise tax on cigar,
cigarettes and liquors)

1. Ad valorem – tax based on 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
can be determined. (e.g. real estate tax, income tax, donor’s tax and
estate tax)

1. Mixed – a choice between ad valorem and/or specific depending on the

condition attached.
As to purposes:
1. General/fiscal or revenue – tax imposed solely for the
general purpose of the government. (e.g. income tax and
donor’s tax)

2. Special/regulatory or sumptuary – tax levied for specific

purpose, i.e. to achieve some social or economic ends. (e.g.
tariff and certain duties on imports)
As to scope or authority to impose:
1. National tax – Tax levied by the National Government. (e.g.
income tax, estate tax, donor’s tax, VAT, other percentage taxes
and documentary stamp taxes)

2. Local or municipal – Tax levied by a local government. (e.g.

real estate tax and community tax)
 As to graduation:
1. Progressive – A tax rate which increases as the tax base or
bracket increases. (e.g. income tax, estate tax and donor’s tax)

2. Regressive – The tax rate decreases as the tax base or bracket

increases.

3. Proportionate – A tax of a fixed percentage of amounts of the

base (value of the property, or amount of gross receipts etc.). (e.g.
VAT and other percentage taxes)
Doctrines in Taxation
Construction and Interpretation of Tax Laws,
Rules and Regulations
GR: Tax statutes must be construed strictly against the government
and liberally in favor of the taxpayer (MCIAA v. Marcos, G.R. No.
120082 September 11, 1996).

The imposition of a tax cannot be presumed.

 Construction and Interpretation of Tax Laws,
Rules and Regulations

XPN: Unless a statute imposes a tax clearly, expressly and unambiguously,

what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.
TAX EXEMPTION AND EXCLUSION

GR:

Statutes granting tax exemptions are construed in strictissimi

juris against the taxpayers and liberally in favor of the taxing
authority
TAX RULES AND REGULATIONS

The construction placed by the office charged with

implementing and enforcing the provisions of a Code should be
given controlling weight unless such interpretation is clearly
erroneous. It is of course axioma that a rule or regulation must
bear upon, and be consistent with, the provisions of the enabling
statute if such rule or regulation is to be valid.
Prospectivity of Tax Laws

GR: Tax laws must only be imposed prospectively

XPN: If the law expressly provides for retroactive application.

Imprescriptibility of Taxes

GR: Taxes are imprescriptible by reason that it is the lifeblood of

the government.

XPN: Tax laws may provide for statute of limitations. In

particular, the NIRC and LGC provide for the prescriptive
periods for assessment and collection.
Double Taxation

Double taxation (duplicate taxation)

There is no constitutional prohibition against double taxation in

the Philippines. It is something not favored, but is permissible,
provided some other constitutional requirement is not thereby
violated, such as the requirement that taxes must be uniform
Double Taxation

Two Types:

1. As to validity

A. Direct (strict sense) - Double taxation in the objectionable or

prohibited sense since it violates the equal protection clause of
the Constitution
Double Taxation

Elements of Direct Double Taxation

i. The same property is taxed twice when it should be taxed only once; and

ii. Both taxes are imposed

on the same subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same taxing period; and the
taxes must be of the same kind or character
Double Taxation

B. Indirect (broad sense) - It is a permissible double taxation. It is indirect

when some elements of direct double taxation are absent.
Double Taxation

2. As to scope

A. Domestic Double Taxation - When the taxes are imposed by the local and
national government within the same State.

B. International Double Taxation – Refers to the imposition of comparable

taxes in two or more States on the same taxpayer in respect of the same
subject matter and for identical periods
Modes of eliminating double taxation

Local legislation and tax treaties may provide for:

1. Tax credit – an amount subtracted from taxpayer’s tax liability in order

to arrive at the net tax due.
2. Tax deduction – an amount subtracted from the gross amount on which
a tax is calculated.
3. Tax exemption – a grant of immunity to particular persons or entities
from the obligation to pay taxes.
Modes of eliminating double taxation

Local legislation and tax treaties may provide for:

4. Imposition of a rate lower than the normal domestic rate

5. Tax treaty - The purpose is to reconcile the national fiscal legislation

of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions (international double
taxation). This is to encourage the free flow of goods and services and
the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies.
Escape from Taxation

1. Shifting the Burden.

Shifting is the transfer of the burden of tax by the original payer or the one
on whom the tax was assessed or imposed to another or someone else
without violating the law.
Escape from Taxation

Ways of shifting the tax burden

1. Forward shifting – When the burden of tax is transferred from a factor

of production through the factors of distribution until it finally settles on
the ultimate purchaser or consumer.
2. Backward shifting – When the burden is transferred from the consumer
through the factors of distribution to the factors of production.
3. Onward shifting – When the tax is shifted two or more times either
forward or backward.
Escape from Taxation

IMPACT OF TAXATION

It refers to the statutory liability to pay the tax. It falls on the person
originally assessed with a particular tax. It is the imposition of tax.
(Liability)
Escape from Taxation

INCIDENCE OF TAXATION

It is the economic cost of tax. It is also known as burden of taxation. It is the

payment of tax. (Burden)

It is on the final consumer, the place at which the tax comes to rest.
Escape from Taxation

2. Tax Avoidance (Tax Minimization)

A scheme where the taxpayer uses legally permissible alternative method of

assessing taxable property or income, in order to avoid or reduce tax liability.

It is a tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arm’s length
Escape from Taxation

3. Tax Evasion.

A scheme where the taxpayer uses illegal or fraudulent means to defeat or

lessen payment of a tax. It is a scheme used outside of those lawful means
and when availed of, it usually subjects the taxpayer to further or additional
civil or criminal liabilities
Escape from Taxation

Elements to be considered in determining that there is tax evasion [USE]

1. Course of action is unlawful;

2. Accompanying state of mind which is described as being evil, in bad faith,
willful or deliberate and not accidental; and
3. End to be achieved, i.e., payment of less than that known by the taxpayer
to be legally due, or non-payment of tax when it is shown that the tax is
due.
Exemption from Tax

It is the grant of immunity, express or implied, to particular persons or

corporations, from a tax upon property or an excise tax which persons or
corporations generally within the same taxing districts are obliged to pay.

NOTE: Taxation is the rule and exemption is the exception.

Exemption from Tax

NATURE OF TAX EXEMPTION

1. Personal in nature and covers only taxes for which the grantee is directly liable.

NOTE: It cannot be transferred or assigned by the person to whom it is given without

the consent of the State.

2. Strictly construed against the taxpayer.

3. Implies a waiver on the part of the government of its right to collect what otherwise
would be due.
G. Equitable Recoupment

It is a principle which allows a taxpayer, whose claim for refund has been
barred due to prescription, to recover said tax by setting off the prescribed
refund against a tax that may be due and collectible from him. Under this
doctrine, the taxpayer is allowed to credit such refund to his existing tax
liability.

NOTE: Equitabe recoupment is allowed only in common countries, not in

the Philippines.
H. Prohibition on Compensation and Set-Off

Rules governing compensation or set-off as applied in taxation

GR: No set-off is admissible against the demands for taxes levied for general
or local governmental purposes.

Taxes cannot be subject to compensation because the government and the

taxpayer are not creditors and debtors of each other
I. Compromise and Tax Amnesty

Compromise is a contract whereby the parties, by reciprocal concessions,

avoid litigation or put an end to one already commenced.

It implies the mutual agreement by the parties in regard to the thing or

subject matter which is to be compromised.

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.
I. Compromise and Tax Amnesty

Persons allowed to enter into compromise of tax obligations. The law allows
the following persons to do compromise in behalf of the government:

1. BIR Commissioner,
2. Collector of Customs,
3. Customs Commissioner,
I. Compromise and Tax Amnesty

Tax amnesty, being a general pardon or intentional overlooking by the State

of its authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law.

It partakes of an absolute waiver by the government of its right to collect

what is due it and to give tax evaders who wish to relent a chance to start
with a clean slate.
J. Lifeblood Theory

The Government chiefly relies on taxation to obtain the means to carry on its
obligations.

Taxes are essential to its very existence.