CHAPTER I – SUMMARY OF GENERAL INFORMATION ABOUT TAXATION

TAXATION
 State Power – inherent power to enforce proportional contribution from its subjects for
public purpose.
 Legislative Process – a process of laying taxes by the legislature of the state to enforce
proportional contributions from its subjects for public purpose.
 Mode of Government Cost Distribution – a mode by which the state allocates its costs
or burden to its subjects who are benefited by its spending.
THE LIFE BLOOD DOCTRINE
 Taxes are the lifeblood of the government and their prompt and certain availability are an
imperious need.
THEORY OF TAXATION
 A government cannot exist without a system of funding. The government’s necessity for
funding is the theory of taxation.
THE BASIS OF TAXATION
 The government provides benefits to the people in the form of public services, and the
people provide the funds that finance the government.
THEORIES OF COST ALLOCATION
 Taxation is a mode of allocating government costs or burden to the people.
1. Benefit Received Theory – the more benefit he receives; the more taxes he should pay.
2. Ability to Pay Theory – based on their capacity to sacrifice for the support of the
government.
ASPECTS OF ABILITY TO PAY THEORY
1. Vertical Equity – directly proportional to the level of his tax base.
 Gross Concept
2. Horizontal Equity – requires consideration for the particular circumstance of the
taxpayer.
 Net Concept
INHERENT POWERS OF THE STATE
1. Taxation Power – the power of the state by which the sovereign raises revenue to defray
the necessary expenses of the government.
2. Eminent Domain – the power of the state to take private property for public use upon
payment of just compensation.
3. Police Power – the power of the state to enact laws to promote public health, public
morals, public safety and the general welfare of the people.

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  These rights dubbed as “powers” are natural, inseparable and inherent to every
government.
SIMILARITIES OF THE THREE POWERS OF THE STATE
1. Necessary attributes of sovereignty.
2. Inherent to the state.
3. Legislative in nature.
4. Ways in which the state interferes with private rights and properties.
5. Exist independently of the constitution and are exercisable by the government even
without constitutional grant.
6. Presuppose an equivalent form of compensation received by the persons affected by the
exercise of the power.
7. The exercise of these powers by the local government units may be limited by the
national legislature.
SCOPE OF TAXATION
 The scope of taxation is widely regarded as comprehensive, unlimited, plenary and
supreme (superior to all others).
ASPECTS OF TAXATION
 Levying of the tax. The imposition of tax requires legislative intervention.
 Collection of the tax levied. This is essentially an administrative function.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
 Fiscal Adequacy. Sources of revenue are sufficient to meet government expenditures;
 Equality or Theoretical Justice. The tax imposed must be proportionate to taxpayer’s
ability to pay; and
 Administrative Feasibility. The law must be capable of convenient, just and effective
administration.
LIMITATIONS ON THE POWER OF TAXATION
A. Constitutional Limitations are those provided for in the constitution or implied from its
provisions.
1. Due Process of Law – fair treatment through the normal judicial system, especially
as a citizen’s entitlement. Judicial System is the system of courts that interprets and
applies the law in a state or country.
ASPECTS OF DUE PROCESS
a. Substantive Due Process – tax must be imposed only for public purpose,
collected only under authority of a valid law and only by the taxing power
having jurisdiction.

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 b. Procedural Due Process – there should be no arbitrariness in assessment
and collection of taxes, and the government shall observe the taxpayer’s
right to notice and hearing.

2. Equal Protection of the Law – taxpayers should be treated equally both in terms or
rights conferred and obligations impose (same circumstances).
3. Uniformity Rule in Taxation – the rule of taxation shall be uniform and equitable.
4. Progressive System of Taxation – tax rate increases as the tax base increases.
5. Non-imprisonment for Non-payment of Debt or Poll Tax – applies only when the
debt is acquired by the debtor in good faith.
6. Non-impairment of Obligation and Contract – it should not set aside its
obligations from contacts by the exercise of its taxation power.
7. Free Worship Rule – does not extend to income from properties or activities of
religious institutions that are proprietary or commercial in nature.
8. Exemption of Religious or Charitable Entities, Non-profit Cemeteries,
Churches and Mosques, Lands, Buildings and Improvements from Property
Taxes – actually, directly and exclusively used for charitable, religious, and
educational purposes.
9. Non-appropriation of Public Funds or Property for the Benefit of any Church,
Sect or System of Religion – intended to highlight the separation of religion and the
state.
10. Exemption from Taxes of the Revenues and Assets of Non-profit, Non-stock
Educational Institutions Including Grants, Endowments, Donations, or
Contributions for Educational Purposes – applies only on revenues and assets
that are actually, directly and exclusively devoted for educational purposes.
11. Concurrence of a Majority of all Members of Congress for the Passage of a
Law Granting Tax Exemption – requires the vote of the majority of all members
of congress.
12. Non-diversification of Tax Collections – it should never be diversified for private
purposes.
13. Non-delegation of the Power of Taxation – requires that taxation power a part of
lawmaking be vested exclusively in congress.
14. Non-impairment of the Jurisdiction of the Supreme Court to Review Tax Cases
– not with standing the existence of the Court of Appeals, which is a special court,
all cases involving taxes can be raise to and be finally decided by the Supreme Court
of the Philippines.
15. The requirement that appropriations, revenue, or tariff bills shall originate
exclusively in the House of Representatives, but Senate may propose or concur
with amendments – laws that add income to the national treasury and those that
allows spending therein must originate from the House of Representatives while
senate may concur with amendments.
16. The delegation of taxing power to local government units shall exercise the
power to create its own sources of revenue and shall have a just share in

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 national taxes – this is a constitutional recognition of the local autonomy of local
government and an express delegation of the taxing power.
B. Inherent Limitations are restrictions to the power to tax attached to its nature.
1. Purpose. Taxes may be levied only for public purpose.
2. Territoriality. The State may tax persons and properties under its jurisdiction.
3. International Comity. The property of a foreign State may not be taxed by
another.
4. Exemption. Governmental agencies performing governmental functions are
exempt from taxation.
5. Non-delegation. The power to tax being legislative in nature may not be
delegated.
DOUBLE TAXATION
 Occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same
thing.
ELEMENTS OF DOUBLE TAXATION
1. Primary Element:
a. Same object
2. Secondary Elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
TYPES OF DOUBLE TAXATION
 Direct Double Taxation – all element of double taxation exists for both impositions.
(Discouraged because it is oppressive and burdensome to taxpayers)
 Indirect Double Taxation – at least one of the secondary elements of double taxation is
not common for both impositions. (Prevalent in practice)
THE USUAL METHODS AVOIDING THE OCCURRENCE OF DOUBLE TAXATION
1. Allowing reciprocal exemptions either by law or by treaty;
2. Allowance for tax credit for foreign taxes paid;
3. Allowance for deduction for foreign taxes paid; and
4. Reduction of the Philippines tax rate.
ESCAPES FROM TAXATION
 Available to the taxpayer to limit or even avoid the impact of taxation.
CATEGORIES OF ESCAPES FROM TAXATION
A. Those that result to loss of government revenue

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 1. Tax Evasion – also known as “tax dodging”, refers to any trick that tends to
illegally reduce or avoid the payment of tax.
2. Tax Avoidance – also known as “tax minimization”, refers to any act or
trick that reduces or totally escapes taxes by any legally permissible means.
3. Tax Exemption – also knowns as “tax holiday”, refers to the immunity,
privilege, or freedom from being subject to a tax, which others are subject to.
 All forms of tax exemptions can be revoked by Congress except those
granted by the Constitution and those granted under contracts.
B. Those that do not result to loss of government revenue
1. Shifting – transferring tax burden to other taxpayers.
 Common with business taxes where taxes imposed on business
revenue can be shifted or passed-on to customers.
a. Forward – normal flow of distribution (manufacturer to customers).
 Common with essential commodities and services such as foods and
fuel.
b. Backward – reverse of forward shifting.
 Common with non-essential commodities where buyers have
considerable market power and commodities with numerous
substitute products.
c. Onward – any tax shifting in the distribution channel that exhibits
forward or backward shifting.
2. Capitalization – adjustment of the value of an asset cause by changes in tax
rates.
 This is a form of backward shifting of tax.
3. Transformation – elimination of wastes or losses by the taxpayer to form
savings to compensate for the tax imposition or increase in taxes.
TAX AMNESTY
 General pardon granted by the government for erring taxpayer to give them a chance to
reform and enable them to have a fresh start to be part of a society with a clean slate.

TAX CONDONATION
 Also referred to as “tax remission” – forgiveness of the tax obligation of a certain
taxpayer under certain justifiable grounds.
SITUS OF TAXATION
 The place of the taxation.
 Situs rules serve as frames of reference in gauging whether the tax object is within or
outside the tax jurisdiction of the taxing authority.

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 THE SITUS OF TAXATION IS DETERMINED BY THE NUMBER OF FACTORS:
1. Subject Matter – or what is being taxed.
2. Nature of Tax – or which tax to impose.
3. Citizenship of the Taxpayer
4. Residence of the Taxpayer
THE FOLLOWING SITUS OF TAXATION APPLY:
1. Persons – residence of the taxpayer;
2. Real Property or Tangible Personal Property – location of the property;
3. Intangible Personal Property – as a rule, situs domicile of the owner unless he
has acquired a situs elsewhere;
4. Income – taxpayer’s residence or citizenship, or place where the income was
earned;
5. Business, Occupation and Transaction – place where business is being
operated, occupation being practice and transaction completed;
6. Gratuitous Transfer of Property – taxpayer’s residence or citizenship, or
location of the property.
TAXES
 Are enforced proportional contributions from persons and property levied by the
lawmaking body of the State by virtue of its sovereignty for the support of the
government and all public needs.
 Tax, in general sense, is any contribution imposed by the government upon individuals,
for the use and service of the state, whether under the name of toll, tribute, tallage, gabel,
impost, duty, custom, excise, subsidy, aid, supply or other name.
ESSENTIAL CHARACTERISTICS OF A TAX
1. It is an enforced contribution;
2. It is levied by the lawmaking body;
3. It is proportionate in character;
4. It is generally payable in money;
5. It is imposed for the purpose of raising revenue; and
6. It is to be used for public purpose.
TAX SYSTEMS
 Are often described as either regressive, proportional, or progressive.
CONSTITUTIONAL PROVISION ON PROGRESSIVE SYSTEM OF TAXATION
 The Supreme Court declared Republic Act (R.A.) 9337 or the VAT Reform Act
constitutional. In the same decision, it clarified the constitutional provision on
progressive system of taxation.
CLASSIFICATION OF TAXES

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 1. As to subject matter or object
a. Personal, poll or capitation – tax of a fixed amount imposed on individuals,
whether citizens or not, residing with a specified territory without regard to their
property or the occupation in which they may be engaged.
b. Property – tax imposed on property, whether real or personal, in proportion either
to its value or in accordance with some other reasonable method of
apportionment.
c. Excise – tax imposed upon the performance of an act, the enjoyment of a privilege
or the engaging in an occupation.
2. As to who bears the burden
a. Direct – tax demanded from persons who are intended or bound by law to pay the
tax.
b. Indirect – tax which the taxpayer can shift to another.
3. As to determination of amount
a. Specific – tax imposed base on a physical unit of measurement, as by head or
number, weight, or length or volume.
b. Ad valorem – tax of a fixed proportion of the value of the property; needs an
independent appraiser to determine its value.
4. As to purpose
a. General, fiscal or revenue – tax with no particular purpose or object for which the
revenue is raised, but is simply raised for whatever need may arise.
b. Special or regulatory – tax imposed for a special purpose regardless of whether
raised or not, and is intended to achieve some social or economic end.
5. As to authority
a. National – tax imposed by the national government.
b. Municipal or local – tax imposed by municipal governments for specific needs.
6. As to graduation or rate
a. Proportional – tax based on a fixed percentage of the amount of property income
or other basis to be taxed.
b. Progressive or graduated – tax rate increases as the tax base increases.
c. Regressive – tax rate decreases as the tax base increases.
TAX DISTINGUISHED FROM OTHER FEES
1. Toll is a sum of money for the use of something, generally applied to the consideration
which is paid for the use of a road, bridge or the like, of a public nature.
2. Penalty is any sanction imposed as a punishment for violation of law or acts deemed
injurious.
3. Special assessment is an enforced proportional contribution from owners of lands for
special benefits resulting from public improvements.
4. Permit or license fee is a charge imposed under the police power for purposes of
regulation.
5. Debt is generally based on a contract, is assignable and may be paid in kind while a tax is
based on law, cannot be generally assigned and is generally payable in money.

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 6. Revenue is broader than tax since it refers to all funds or income derived by the
government taxes included.
7. Custom duties are taxes imposed on goods exported from or imported to a country.
SOURCES OF TAX AUTHORITY
Three Branches of the National Government
1. President and his administration (executive)
2. Congress (legislative)
3. Courts (judicial)

 Republic Act 8424, The National Internal Revenue Code (NIRC) of 1997, is a statutory
law.
REVENUE REGULATIONS
 Are administrative interpretations of statutes enacted by Congress and tend to be
somewhat more detailed than the Code itself.
REVENUE RULINGS
 Are much more detailed, as they are issued in order to explain the tax results of very
specific transactions.
TAX LAW
 In general, is composed of all three elements:
1. The Code
2. Regulations and Rulings
3. Decision of various courts that hear tax cases
SOURCES OF TAX LAWS
1. Constitution;
2. Statutes and Presidential Decree;
3. Revenue Regulations by the Department of Finance;
4. Rulings issued by the Commissioner of Internal Revenue and Opinions by the Secretary
of Justice;
5. Decisions of the Supreme Court and the Court of Tax Appeals;
 Rational Basis Test is applied to gauge the constitutionality of an assailed law in
the face of an equal protection challenge.
6. Provincial, city, municipal, and barangay ordinances subject to limitations and set forth
in the Local Government Code; and
7. Treaties or international agreements the purpose of which is to avoid or minimize double
taxation.
REPUBLIC ACT 9282 (R.A. 9282)

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  Expanded the jurisdiction of the Court of Tax Appeals (CTA). This law took effect on
April 22, 2004. It amended R.A. 1125 – the law creating the CTA.
PHILIPPINE TAX LAWS AND TAXES
1. National Internal Revenue Code of 1997 (P.D. 1158, as amended)
a. Income taxes (individual and corporate);
b. Estate and donor’s taxes;
c.Value-added tax;
d. Other percentage taxes;
e.Excise tax; and
f. Documentary stamp tax
2. Tariff and Customs Code of 1978 (P.D. 1464, as amended)
a. Import duties; and
b. Export duties
3. Local Government Code of 1991 (R.A. 7160)
a. Real property tax;
b. Business taxes, fees and charges;
c.Professional tax;
d. Community tax; and
e.Tax on banks and other financial institutions
4. Special Laws
a. Motor Vehicle Law (R.A. 4163) – motor vehicle fees;
b. Private Motor Vehicle Tax Law (P.D. 1958) – private motor vehicle tax
c.Philippine Immigration Act of 1940 (C.A. 613, as amended) – immigration; and
d. Travel Tax Law (P.D. 1183, as amended) – travel tax

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CHAPTER II – INDIVIDUAL TAXATION
INCOME TAX RATES

I. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and
Individuals Engaged in Business and Practice of Profession

A. Graduated Income Tax Rates under Section 24(A)(2) of the Tax Code of 1997, as
amended by Republic Act No. 10963 

Amount of Net Taxable Income Rate

Over But Not Over
- P250,000 0%
P250,000 P400,000 20% of the excess over P250,000

P400,000 P800,000 P30,000 + 25% of the excess over

P400,000
P800,000 P2,000,000 P130,000 + 30% of the excess over
P800,000
P2,000,000 P8,000,000 P490,000 + 32% of the excess over
P2,000,000
P8,000,000 P2,410,000 + 35% of the excess over
P8,000,000

B. For Purely Self-Employed Individuals and/or Professionals Whose Gross Sales/Receipts

and Other Non-Operating Income Do Not Exceed the VAT Threshold of P3,000,000, the
tax shall be, at the taxpayer’s option:

1. 8% Income Tax on Gross Sales or Gross Receipts in Excess of P250,000 in Lieu

of the Graduated Income Tax Rates and the Percentage Tax; Or
2. Income Tax Based on the Graduated Income Tax Rates

C. For Individuals Earning Both Compensation Income and Income from Business and/or
Practice of Profession, their income taxes shall be:

1. For Income from Compensation: Based on Graduated Income Tax Rates; and
2. For Income from Business and/or Practice of Profession:
A. If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of
P3,000,000, the Individual Taxpayer May Opt to Avail:
i. 8% Income Tax on Gross Sales/Receipts and Other Non-Operating
Income in Lieu of the Graduated Income Tax Rates and the
Percentage Tax; Or
ii. Income Tax Based on Graduated Income Tax Rates
B. If the total Gross Sales/Receipts Exceed VAT Threshold of P3,000,000
i. Income Tax Based on Graduated Income Tax Rates

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