INCOME

TAXATION

By: Edwin G. Valencia

Gregorio F. Roxas
What is taxation?
Is the process by which the sovereign (independent state), through its law
making body (the legislature), imposes buden upon subjects and objects
within its jurisdiction for the purpose of raising revenues to carry out the
legitimate objects of the goverment.
General Principles and Concepts of
Taxation
INHERENT POWERS OF SOVEREIGN STATE

Police Power Eminent Taxation Power

Domain Power
The power to The power to enforce
protect citizens The power to take contributions to
and provide for private property support the
safety and (with just government, and
welfare of compensation) for other inherent powers
society. public use. of the State.
 Distinction of Taxation, Police Power and Eminent Domain
TAXATION Police Power Eminent Domain
1. As to concept Power to enforce contribution Power to make and implement Power to take private
to raise government funds. laws for the general welfare. property for public use
with just compensation.
2. As to scope Plenary, comprehensive and Broader in application – General Merely a power to take
supreme. power to make and implement private property for public
laws. use.
3. As to authority Exercised only by government Exercised only by government or May be granted to public
or its political subdivisions. its political subdivisions. service or public utility
companies.
4. As to purpose Money is taken to support the Property is taken or destroyed to Private property is taken
government. promote general welfare. for public use.
5. As to necessity The power to make laws cannot Can be expressly delegated to the Can be expressly
of delegation be delegated. government units by the law delegated to the local
making body. government units by the
law making body.
6. As to the person Operates on a community or a Operates on a community or a Operates on the particular
affected class of individual. class of individual. private property of
individual.
 Distinction of Taxation, Police Power and Eminent Domain
TAXATION Police Power Eminent Domain
7. As to benefits Continuous protection and Healthy economic standard of Market value of the
organized society. society. property expropriated.
8. As to amount of Generally no limit. Cost of regulation, license and No imposition.
imposition other necessary expenses.
9. As to Inseparable for the existence of Protection, safety and welfare of Common necessities and
importance a nation – it supports police society. interest of the community
power and eminent domain. transcend individual rights
in property.
10. As to Subject to Constitutional and Relatively free from Constitutional Superior to and may
relationship to Inherent limitations. limitations. override Constitutional
Constitution impairment because the
Inferior to non-impairment Superior to non-impairment welfare of the State is
clause. clause. superior to any private
contract.
11. As to limitation Constraints by Constitutional Limited by the demand for public Bounded by public
and Inherent limitations. interest and due process. purpose and just
compensation.
Nature of Taxation Power
o Inherent power of sovereignty
o Essentially a legislative function
o Non-delegation of legislative power to tax
o For public purposes
o Territorial in operation
o Tax exemption of the government
o Strongest among inherent power
Importance of Taxation
o It is essential for the existence of government.
o Primary source of government revenue.
o It may used as an implement of police power in order to promote the general welfare of
people.
o It is exercised to raise revenue to serve the people for whose benefit taxes are collected.
o Without it, inherent powers would be paralyzed.
o Without revenue, there can be no continuing government and without government,
there can be no civilization.
Basis of taxation
1. Principle of Necessity – taxation is a power emanating from necessity to
preserve the State’s sovereignty
2. Principle of benefits-received or benefits-protection theory – based on the
reciprocal duties, the government collects taxes from the subjects of taxation
in order that it may be able to perform its functions and provide services to
them.
a. It does not mean that only those who are able to pay taxes can enjoy
the privileges and protection given to a citizen by the government.
b. The government renders no special or commensurate benefit to any
particular property or person.
Purpose of taxation
1. Revenue – to raise revenue by collecting funds or property for support of
government in promoting general welfare and protecting its inhabitants.
2. Regulatory – to regulate inflation, achieve economic and social stability and
serve as key instrument for social control.
3. Compensatory – a tax may be used to make up for the benefit received, may
be giving back the expected economic and social benefits, may be imposed for
equitable distribution of wealth and income and may be progressive.
Object of taxation
1. Person – whether natural or juridical persons.
2. Properties – whether real, personal, tangible or intangible properties.
3. Excise objects – such as transaction, privilege, right and interest.

Scope of taxation
Absence of limitations provided by the Constitution, the power to tax is unlimited in its
range, complete (plenary), with wide extent of application (comprehensive) and with
highest degree (supreme). If there is any limitation at all, it is the sense of responsibility
by the members of the law-making body to the people that restricts its exercise.
Inherent limitations
o Taxes may be levied only for public purposes
o Being inherently legislative, taxation may not be delegated
o Tax power is limited to territorial jurisdiction of the State
o Taxation is subject to international comity
o Government entities are generally tax-exempt
Constitutional limitations
o Due process of law
o Equal protection of laws
o Rule of uniformity and equity
o Non-impairment of contracts
o Origination of appropriation, revenue and tariff bills
o President’s power to veto separate items in revenue or tariff bills
o Congress granting tax exemption
o Exemption from taxation of properties actually, directly and exclusively used for religious,
charitable or educational purposes.
o NO public money shall be appropriated for religious purposes
o The power of judicial reviews
o NO imprisonment for nonpayment of poll tax
o Tax collection shall generally be treated as general funds of government.
 Stages, aspects or processes of taxation

Passage of Tax Law (Levy)

o Define object of tax
Legislative function o Fix tax rates Tax Policy
(Congress) o Prescribe filing/payment date
o Penalty for violations
o Tax exemptions

Administrative
function Tax Assessment
(Executive thru BIR) Computation (tax base x rate = tax)
Tax Administration
Note: in case there is a
question as to the
interpretation of tax laws , the
Collection of taxes
Judicial Branch of Government
(Supreme Court) shall give the
final resolution.
Principle of a Sound Tax System
1. Fiscal Adequacy – the sources of revenue should be sufficient to meet the
demand of public expenditures regardless of business condition.
2. Equality or Theoretical Justice – the tax burden must be proportionate to the
taxpayer’s ability to pay.
3. Administrative Feasibility – tax laws must be convenient, just, uniform and
effective in their administration – free from confusion and uncertainty.
Application of administrative feasibility:
a. collection of taxes at source (withholding taxes)
b. assigning of duly authorized banks to collect taxes
c. quarterly filing and payment of income taxes
d. electronic filing of tax returns
Certain doctrines in taxation
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
Nature of taxes
Essential Characteristics of Taxes:
1. Enforced contribution
2. Imposed by the legislative body
3. Proportionate in character
4. Payable in the form of money
5. Imposed for the purpose of raising revenue
6. Used for a public purpose
7. Enforced on some persons, properties or rights
8. Commonly required to be paid at regular intervals
9. Imposed by the sovereign state within its jurisdiction
 SUMMARY OF TAXES
OBJECT MAJOR CLASSIFICATION DESCRIPTION INCOME CLASSIFICATION
1. Person Personal Tax Community Tax
2. Property Property Tax Real Property Tax
3. Rights: Business Taxes: a. VAT
(Normal course of b. Other Percentage tax
business)
c. Excise Tax

Transfer taxes: a. Estate Tax

(gratuitous transfer) b. Donor’s Tax

Income Taxes a. Final Withholding Passive inc. within, Sales of real property (capital
Taxes asset), Capital gain on sale of share of stock outside
stock exchange

b. Creditable With. Tax Compensation, Prof. fee, Rent, brokers, agent

c. Annual Income Tax Compensation, Business, Gain, sale of other capital

assets, passive income earned outside
Classification of Taxes
1. As to purpose:
a. Revenue or Fiscal
b. Regulatory, Special or Sumptuary
c. Compensatory
2. As to Object or Subject Matter:
a. Personal, Poll or Capitation
b. Property
c. Excise
3. As to Determination of Amount:
a. Ad Valorem
b. Specific
Classification of Taxes
4. As to who bears the burden:
a. Direct
b. Indirect
5. As to scope or authority:
a. National – Estate and Donor, Income, VAT, Excise, Customs Duties and
Documentary Stamp
b. Local or Municipality – Community, Municipal licenses, Professional, Real Estate
3. As to rate or graduation:
a. Proportional or flat rate
b. Progressive or graduated rate
c. Regressive rate
d. Digressive rate
e. Mixed tax
Other Charges
1. Penalty
2. Revenue
3. Debt
4. Toll
5. License Fee
6. Special Assessment
7. Customs Duties
8. Subsidy
9. Tariff
10. Margin Fee
Tax Law Defined
Tax law is that body of laws which codifies all national tax laws including income,
estate, gift, excise, stamp and other taxes.

INTERPRETATION AND APPLICATION 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.
Sources of Philippine Tax Laws
1. Constitution of the Philippines
2. Judicial Decisions
3. Executive Orders
4. Special Laws
5. Tax Treaties and Conventions with Foreign countries
6. Revenue Regulations promulgated by Department of Finance
7. BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum
Orders
8. BIR Rulings
9. Local Government Code