Taxation 1

Module I
Lesson 1. BASIC CONCEPTS AND CHARACTERISTICS OF TAXATION

Lesson Objectives:

After completion of Lesson 1, you should be able to:

1. identify and comprehend the principles behind the power to tax, the nature

of the power of taxation, the purpose of taxation;

2. recognize the similarities and distinctions on the power of taxation,

eminent domain and police power;

3. give the limitations on the power of taxation as provided under our

Constitution, forms of escape from taxation and kinds of tax exemption.

Definitions

A. Taxation is the act or means by which the state, through the leg islative

body, raises income to defray the necessary expenses of the government.

B. Taxation is a process or act of imposing a charge by governmental authority

on property, individuals or transactions to raise money for public purposes.

C. Taxation is a means by which the Sovereign (Independent State) through its

law-making body (legislative branch of the government) demands for

revenue in order to support its existence and carry out its legitimate

objectives.

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D. Taxes are the enforced proportional contributions from persons and

property levied by the law-making body of the state for the support of the

government and all public needs.

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Characteristics of Tax

1. It is an enforced contribution.

2. It is basically payable in money.

3. It is based on the ability to pay or proportionate in character.

4. It is levied on persons or property.

5. It is levied within the jurisdiction of the state.

6. It is levied by the law-making body of the state.

7. It is levied for public purpose.

Scope of the Power of Taxation

It is supreme, unlimited, plenary, and comprehensive, subject to constitutional and

inherent limitations.

Basis of Taxation

1) Necessity - the existence of the government is a necessity. The main source

of revenue of the government is taxes, the "lifeblood" or the “bread and butter”

of the nation. As such, the government may not be able to survive and continue

its vital public functions without taxes, thus every citizen must pay his taxes.

2) Benefits-received principle - In return for taxpayers' contribution (taxes) they

receive the protection and enjoyment of benefits which the government affords

the taxpayers and their property. It can be said that the basis of taxation is

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 found in the reciprocal duties of protection and support between the state

and its inhabitants. This does not mean, however, that those who are exempt

from paying taxes or pay less taxes are not entitled to protection or less

protection from the State. The reason is that protection, in the enjoyment

of citizens' rights, is an obligation of the State. However, the taxpayer should

not expect a definite, specific service or benefits in exchange for his contribution.

Nature of the Power of Taxation

1. Legislative - This power can only be exercised by the law-making body

(Congress), not by the executive or the judicial branch of the government, except

when delegated by the national legislative body to a local legislative body,

subject to limitations as may be provided by law.

2. Inherent in sovereignty - This power exists as an incident or attribute of

sovereignty, as it is essential to the existence of every government. The power

can therefore be exercised even without the Constitution or any law expressly

conferring such power.

3. Constitutional and inherent limitations - Most limitations are specifically

provided in the Constitution or implied.

Purpose of Taxation

1. Primary - to provide funds or property with which the government discharges its

appropriate functions for the protection and general welfare of its citizens.

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2. Non-revenue objectives

a. To strengthen anemic enterprises by granting them tax exemptions or other

conditions or incentives for growth.

b. To protect local industries against foreign competition by increasing import

taxes.

c. To serve as a bargaining tool in trade negotiations with other countries.

d. To counter the effects of inflation or depression.

e. To reduce inequalties in the distribution of wealth.

f. To promote science and invention, finance educational activities or maintain

and improve the efficiency of local police forces.

g. To implement police power and promote general welfare.

Aspects of Taxation

1. Levying or imposition of the tax - legislative act (Congress)

2. Collection of tax levied – administrative (Executive thru BIR)

Basic Principles of a Sound Tax System

1. Fiscal-adequacy - the sources of revenue should be sufficient and elastic to

meet the demands of public expenditure regardless of business condition.

2. Equality or theoretical justice - the tax burden must be in proportionate to the

taxpayer's ability to pay.

3. Administrative feasibility - tax laws must be convenient, just, uniform and

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 effective in their administration on the part of both the government and the

taxpayer. It is free from confusion and uncertainty. Their exercise should be

convenient as to the place, time and mode of payment, and not burdensome

or discouraging to business. Competent public officials must enforce them

uniformly.

Similarities and Distinctions Between the Power of Taxation, Eminent Domain and

Police Power.

Similarities

1. All rest upon necessity;

2. Exist independently of the Constitution;

3. Constitute the ways by which the State interferes with private rights and

property;

4. Legislative in nature and character;

5. Each presupposes an equivalent compensation.

Distinctions

1. As to purpose:

Taxation – the property is generally in the form of money which is taken for

the support of the government.

Eminent Domain – private property is taken for public use.

Police Power – the property is taken or destroyed to promote general

welfare, public health, public morals, and public safety.

2. As to benefits received:

Taxation - protection and benefits received from the government

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Eminent domain - just compensation, market value declared by the owner or

administrator.

Police Power - the maintenance of a healthy economic standard of

society; thus, it is not compensable.

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3. As to persons affected:

Taxation and Police Power - operate upon a community or a class of

individuals

Eminent Domain – its power operates on the particular private property of an

individual.

4. As to the authority which exercises the power:

Taxation - exercised only by the government or

Police Power - its political subdivisions

Eminent Domain - may be exercised by public services corporations or public

utilities if granted by law.

5. As to amount of imposition:

Taxation - generally no limit to the amount of tax which may be

imposed.

Police Power - limited to the cost of inspection and regulation.

Eminent Domain - there is no imposition because the owner of the private

property taken is paid at its market value.

6. As to relationship to the Constitution:

Taxation - subject to certain constitutional limitations, including the

prohibition against impairment of the obligation of contracts.

Eminent Domain - relatively free from Police Power - constitutional limi-

tations and superior to the non-impairment provi-

sions thereof.

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Limitations on the Power of Taxation

1. Constitutional - those expressly provided by the Constitution or implied from its

provisions.

a) Observance of due process of law and equal protection of the law.

(Sec. 1, Art. III) - Any deprivation of life, liberty or property, is due process if it is

done under the authority of a valid law and after compliance with fair and reasonable

methods of procedure prescribed. The power to tax can be exercised only for a

constitutionally valid public purpose and the subject of taxation must be within the taxing

jurisdiction of the state. The government may not utilize any form of assessment or

review which is arbitrary, unjust and which denies the taxpayer a fair opportunity to

assert his rights before a competent tribunal.

All persons subject to legislation shall be treated alike under like circumstances

and conditions both in the privileges conferred and the liabilities imposed. Persons

and properties to be taxed shall be grouped, and all of the same class shall be subject

to the same rate, and the tax shall be administered impartially upon them.

b) Rule of uniformity and equity in taxation

(Sec. 28 (1), Art. VI) - All taxable articles or properties of the same class shall be taxed

at the same rate. Uniformity implies equality in burden, not in amount. Equity

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requires that the apportionment of the tax burden be more or less just in the light of

the taxpayer's ability to bear the tax burden.

c) No imprisonment for non-payment of poll tax

(Sec. 20, Art. III) - A person cannot be imprisoned for non-payment of residence

tax (now called Community Tax Certificate) but may be imprisoned for falsification or

perjury as the case may be, or for failure to pay other taxes.

d) Non-impairment of the obligation of contracts

(Sec. 10, Art. III) - The obligation of a contract is impaired when its terms and conditions

are changed by law or by a party without the consent of the other, thereby weakening

the position or the rights of the latter. If a tax exemption granted by law and of the

nature of a contract between the taxpayer and the government is 'revoked by a later

taxing statute,' the said law shall not be valid, because it will impair the obligation of

contract.

e) Prohibition against infringement of religious freedom

(Sec. 5, Art. III) - It has been held that the constitutional guarantee of the free exercise

and enjoyment of religious profession and worship, which carries the right to

disseminate religious beliefs and information, is violated by the imposition of a license

fee on the distribution and sale of bibles and other religious literature not for profit

by a non-stock, non-profit religious corporation.

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 f) Prohibition against appropriation for religious purposes

(Sec. 29 (2), Art. VI) - Congress cannot appropriate funds for a private purpose, or

for the benefit of any priest, preacher or minister, or for the support of any sect,

church, denomination, etc., except when such priest, preacher, minister or dignitary is

assigned to the armed forces or to any penal institution, orphanage or leprosarium.

g) Exemption of cemeteries, churches, parsonages or convents appurtenant

thereto, mosques and non-profit cemeteries and all lands, buildings and

improvements used exclusively, actually and directly for religious, charitable

and educational purposes from property taxes (Sec. 28 (3), Art. VI).

h) Exemption of all revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for educational purposes

from income, property, donor's taxes and custom duties (Sec. 4 (3 & 4), Art.

XIV).

i) Concurrence by a majority of all members of Congress in the passage of a law

granting tax exemption (Sec. 28 (4), Art. VI).

j) Veto of appropriation, revenues or tariff bills by the President, (Sec. 27 (2), Art.

VI).

k) Congress may not deprive the Supreme Court of its jurisdiction to review,

revise, reverse, modify or affirm on appeal or certiorari, final judgments and

orders of lower courts in all cases involving the legality of any tax, impost,

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 assessment, or toll, or any penalty imposed in relation thereto (Sec. 5 (2-b), Art.

VII).

2. Inherent - those not provided in the Constitution.

a) Taxes may be levied only for public purposes, or a purpose affecting the

inhabitants of the state or taxing district as a community and not merely

as individuals. The tax must be used for the support of the government or

for the promotion of community welfare, such as promotion of science,

agriculture, industry, commerce, financing educational activities,

construction and maintenance of roads, bridges, piers, etc., aids for

victims of public calamities, etc.

b) Power to tax is limited to territorial jurisdiction of the state. The government

can impose taxes only on persons and properties within its territorial

jurisdiction, except when there is privity of relationship between the

government and the person subject to tax, wherein the jurisdiction of the

government follows wherever the taxpayer may be.

c) Prohibition against delegation of taxing power - legislative power cannot be

delegated, except in the following cases:

1. Delegation to the President - For purposes of practicality and expediency,

our Constitution expressly allows Congress to authorize the President

to fix within specified limits, and subject to such limitations and

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 restrictions as it may impose, tariff rates, import or export quotas,

tonnage, and wharfage dues and other duties or imposts.

2. Delegation to local governments - The power to create municipal

corporations for purposes of local self-government, carries with in the

power to confer the power to tax on such local governments. Republic

Act No. 7160, known as the Local Government Code of 1991; governs

the exercise of provinces, cities, municipalities and barangays of their

taxing and other revenue-raising powers.

3. Delegation to administrative agencies - Certain aspects of the taxing

process that are not legislative in character may be delegated to

administrative bodies, like the valuation of properties for tax purposes,

assessment and collection of taxes, etc.

d) Exemption from taxation of government entities - The state cannot be taxed

without its consent (state's immunity from taxation). It would be absurd for the

government to tax itself to raise money to pay for its governmental projects. The

exemption applies only to government entities through which the government

immediately and directly exercises its sovereign powers, which do not include

government-owned or controlled corporations performing proprietary functions like

the Philippine National Bank, Development. Bank of the Philippines and the

Philippine Light Railways Transit (LRT), Inc. The charter of the said

government-owned or controlled corporation will govern whether or not it is

exempt from tax.

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e) International Community - Certain representatives or personalities and properties

of foreign states found within our territory are exempt from taxation. Our

Constitution has adopted the generally accepted principles of international law

as part of the law of our land, and therefore recognizes sovereign equality

among states, immunity of foreign governments from suit, etc.

Situs of Taxation - literally means the place of taxation or the state that has jurisdiction

to levy and collect a particular tax on persons, property, privileges or business.

Situs of persons

1. Residence Tax - place where the person resides.

2. Inco me T ax

a) citizenship, or the country of which he is a citizen;

b) legal residence;

c) place where the income is derived.

3. Estate tax - residence of the decedent at the time of his death.

4. Donor's tax - residence of the donor at the time of donation.

5. Business/occupation tax - where the business is done, or the occupation is

engaged in.

Situs of taxation of property

1. Real property - location of the property.

2. Tangible personal property - residence of the owner.

3. Intangible personal property such as credits, bills/accounts receivables, bank

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 deposits, bonds, etc. - domicile or residence of the owner.

DOUBLE TAXATION

Kinds of double taxation:

1. Direct - Taxing twice by the same taxing authority for the same purpose, in the

same taxing period, within the same taxing district, taxing some of the property

in a given territory in which the tax is laid.

2. Indirect - All cases of double taxation in which there is a burden of two or more

pecuniary impositions. •

In its narrow sense, double taxation is unconstitutional. However, the general rule

is our Constitution does not prohibit double taxation, while indirect double taxation

(taken in its broad sense) is allowed, as in the case of a lessor who pays income tax

on his rental income, real property tax on the assessed value of the property being

leased, residence tax, and real estate dealer's tax on the same property, but by different

taxing authorities.

Escape from taxation

1) Those that do not result in loss of revenue to the government.

a. Shifting - transfer of tax burden by the taxpayer to another who bears it.

Impact of taxation - point on which a tax is originally imposed.

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Incidence of taxation - point on which the tax burden finally rests or settles

down.

Kinds of Shifting

1) Forward shifting - transfer of the tax burden from a factor of production

through the factors of distribution until it finally rests

on the consumer.

2) Backward shifting - transfer of the tax burden from the consumer

through the factors of distribution to the factor of

production.

3) Onward shifting - transfer of the tax burden two or more times either

forward or backward.

a) Capitalization - reduction in the price of the taxed object equal to

the capitalized value of future taxes on the property sold. This is the

special form of backward shifting, where the burden of future

taxes which the buyer may have to pay is shifted back to the seller

in the form of reduction in the selling price.

b) Transformation - the manufacturer, in an effort to avoid losing

his customers, maintains the same selling price and margin of

profit, not by shifting the tax burden to his customers, but by

improving his methods of production and cutting down on other

production cost, thereby transforming the tax into a gain through the

medium of production.

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2) Those that result in loss of revenue to the government.

a) Tax evasion - also known as "tax dodging" is the use of illegal or fraudulent

means to defeat or lessen the payment of the tax. Examples are the

deliberate padding of expenses, understatement or non-declaration of

income, etc.

b) Tax avoidance - also known as "tax minimization" is the use of legally

permissible means to avoid or reduce tax liability. Example: In capital gains

transaction of sale of capital asset, except real property and shares of

stocks, postpone the sale of the capital assets until after twelve months

from date of acquisition to reduce the tax on the capital gain by 50%.

c) Tax exemption - grant of immunity to particular class, from a tax which

persons or corporation generally within the same state or taxing district

are obliged to pay.

Rationale of tax exemption - Being a waiver of its power to tax, the government, in

granting a tax exemption, should justify the grant that such exemption will benefit the

body of people, which is sufficient to offset the loss of revenue occasioned thereby.

Grounds for tax exemption:

1. Contract - the grant of tax exemption is usually contained in the charter of the

corporation to which the exemption is granted.

2. Some ground of public policy, such as to encourage new and necessary

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 industries, or to foster charitable and other benevolent institutions.

3. Reciprocity - to reduce the rigors of international double or multiple taxation,

tax exemptions may be provided in treaties.

A tax exemption is a personal privilege of the grantee and therefore not

assignable; it is generally revocable by the government, unless founded on contract; it

implies a waiver on the part of the Government and not necessarily discriminatory.

Kinds of tax exemption

1) As to manner of creation:

a) Express or affirmative - expressly provided by the Constitution, statutes,

treaties, ordinances, franchise or contract.

b) Implied or exemption by omission - the exemption applies to certain class of

persons, properties, or transactions not expressly or specifically mentioned in

the law as subject to tax.

2) As to scope of extent:

a) Total - exempt from all taxes.

b) Partial - exempt from certain taxes, but not all taxes.

3) As to object:

a) Personal - those granted in favor of persons.

b) Impersonal - those granted in favor of a certain class of property.

( SEE NO. 3 OF “INSTRUCTIONS TO THE STUDENT”)

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Taxation 1
Module I
Lesson 1
SELF-PROGRESS CHECK TEST

(Answer the following questions as best as you can from what you have understood of

Lesson 1. Be honest with yourself. Make this test a real measure of what you know

of the course.)

I. True or False. On the blank provided before each number, write True if the

statement is correct, and False if the statement is wrong.

___________ 1. A U.S. citizen who derives income from the Philippines is

subject to Philippine income tax on the said income.

___________ 2. A Filipino citizen working and earning a living in Hongkong is exempt

from Philippine income tax.

___________ 3. Double taxation is not prohibited by our Constitution but should

be avoided if possible.

___________ 4. Tax avoidance is punishable under our laws.

___________ 5. An example of tax evasion is the deliberate padding of the

payroll to enable the taxpayer to claim a bigger deduction from

his gross income.

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___________ 6. Equality in taxation can be attained by imposing the same rate of

tax on all taxpayers.

___________ 7. There is equal protection of the law where an ordinance imposed a

property tax on motor vehicles using the streets of Manila, and the

tax is payable only by owners residing in Manila.

___________ 8. A tax law denying the taxpayer a fair opportunity to question the

legality of any tax, impost, assessment, etc. before a competent

tribunal is void.

___________ 9. Tax exemption statutes must be construed in favor of the

Government and strictly against the taxpayer.

___________ 10. Tax exemption granted to a corporation is also applicable to

its stockholders.

___________11. There is no government revenue in both tax avoidance and

tax evasion.

___________12. Local governments are absolutely devoid of the power to grant

tax exemption.

___________13. In the exercise of police power where damages caused to the

property of the taxpayer are done, there should be just compensation

to be paid by the Government.

___________ 14. The revolutionary taxes imposed by the New People's Army

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 are for a public purpose, and are therefore legal.

___________15. The government and its political subdivisions and instrumentalities are

exempt from taxation.

___________16. A person cannot be imprisoned for non-payment of income

tax.

___________17. Mr. A asked the Government to construct a public road passing

through his private subdivision land to be used by all the subdivision

owners and any third person. This is for public purpose.

___________18. Manila Central University is exempt from property tax on a parcel of

land leased to a cooperative at a monthly rental of P25,000.00.

___________19. The income of a non-profit, non-stock educational institution,

used actually, directly and exclusively for educational purposes is

exempt from income tax.

___________20. The decision of the Commissioner of Internal Revenue on all

tax cases is final and executory if no appeal is taken.

II. Identification - On the blanks provided, write the word or group of words

referred to in the following statements:

___________ 1. The point at which the tax is originally imposed.

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___________ 2.

The two aspects of taxation.

___________ 3.

___________ 4. The point at which the tax burden finally rests or settles down.

___________ 5. The principle in taxation that states that the taxpayer receives

protection and benefits in return for the taxes paid to the government.

___________ 6. A form of escape from taxation which involves a reduction in the

price of the taxed object equal to the capitalized value of future taxes

which the taxpayer expects to pay.

___________ 7. The transfer of the burden of the tax by the original taxpayer to

another.

___________ 8. Another term for tax-dodging.

___________ 9. Another term for tax-minimization.

__________ 10. Grant of immunity to a particular person or corporation from tax

which persons/corporations generally within the same taxing district

are obliged to pay.

__________ 11. The place of taxation.

__________ 12. Same income being subjected to taxation in several taxing jurisdictions.

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__________ 13. Taxing twice by the same authority within the same taxing district

for the same purpose in the same taxing period.

_________ 14. All persons subject to legislation shall be treated alike under like

circumstances and conditions both in privilege and liabilities.

__________ 15. Requires that the act must be done under authority of a valid law, and

compliance with fair and reasonable methods of procedure prescribed.

__________ 16. Power of the state to take private property for public use upon payment

of just compensation.

__________ 17. Implies that all taxable articles or property of the same class shall be

taxed at the same rate.

__________ 18. Power of the state to enact laws that will promote public

morals, public safety and general prosperity and welfare of the

inhabitants.

__________ 19. An escape from taxation whereby the manufacturer-taxpayer

endeavors to improve his production to cut down on production cost,

instead of adding the tax paid to the selling price.

__________ 20. When the terms and conditions of the contract are changed by

laws or by a party without the consent of the other.

(SEE NOS. 4 AND 5 OF “INSTRUCTIONS TO THE STUDENT”)

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Taxation 1
Module I
Lesson 2. TAXES IN GENERAL: NATIONAL AND LOCAL TAXATION

Lesson Objectives:

At the end of Lesson 2, you should be able to:

1. determine what the essential characteristics of tax are; and

2. recognize and classify the kinds of taxes in the Philippines as Well as

distinguishing tax from other terms.

Definition

Taxes are the enforced proportional contributions from persons and property

levied by the law-making body of the state by virtue of its sovereignty for the support of

the government and all public needs.

Essential Characteristics of Tax

1. It is an enforced contribution. The imposition shall not be dependent

upon the will of the taxpayer.

2. It is imposed by legislative body. The Congress makes tax laws.

3. It is proportionate in character. The “ability to pay principle” is the basic

rule in collecting taxes. Those who earn more contributes more than those

who earn lesser.

4. It is payable in the form of money. Money is the preferred payment of

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 taxes. Thus, if property is taken to satisfy tax liability, the property is sold

through public auction to satisfy the tax obligation.

5. It is imposed for the purpose of raising revenue. Taxes are the primary

source of government funds to finance its expenditures and projects.

6. It is used for a public purpose. Money is taken from the public so it can

be returned to them in the form of public benefits.

7. It is enforced on some persons, properties or rights. Objects of

taxation are either tangible or intangible properties, including business

transactions.

8. It is commonly required to be paid at regular intervals. The dates for

paying of taxes are fixed by the law to comply with the principle of

administrative feasibility; and

9. It is imposed by the sovereign state within its jurisdiction. The

enforcement of tax is subject to territorial jurisdiction and international

comity.

Classification of Taxes

1. A s to su b j ect m att er o r o b j ect

a) Personal, poll or capitation - tax of a fixed , amount on individuals

residing within a specified territory, without regard to their property,

occupation or business.

Example: Residence Tax (now Community Tax Certificate).

b) Property - imposed on property, real or personal, in proportion to its value,

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 or in accordance with some other reasonable method of apportionment.

Example: Real Property Tax.

c) Excise - imposed upon the performance of an act, the enjoyment of a

privilege, or the engaging in an occupation, profession or business.

Examples: Income tax, value-added tax, estate tax, donor's tax.

2. As to who bears the b u rd en of the tax

a) Direct - the tax is imposed on the person who bears the burden

thereof.

Examples: Income tax, Community Tax Certificate (formerly

residence tax), estate tax and donor's tax.

b) Indirect - imposed on the taxpayer who shifts the burden of the tax to

another.

Examples: value-added tax (VAT), specific tax and custom

duties.

3. As to determination of amount

a) Specifics - imposed and based on a physical unit of measurement, as

head, number, weight, length or volume.

Examples: real property tax, tax on distilled spirits, fermented

liquors, cigars, etc.

b) Ad Valorem - of a fixed proportion of the value of property with respect to

which the tax is assessed.

Examples: real estate tax, excise tax on cigarettes, gasoline, etc.

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 4. As to purpose

a) General, fiscal or revenue - imposed for the general purpose of

supporting the government.

Examples: Income tax, value-added tax.

b) Special or regulatory - imposed for a special purpose, to achieve some

social or economic objective.

Example: Protective tariffs or customs duties on imported goods

intended to protect local industries or compete with

imported goods.

5. As to scope or authority imposing the tax

a) National - imposed b y t h e n a t i o n a l g o v e r n m e n t .

Examples: national internal revenue taxes, customs duties, and

those imposed by special laws.

b) Municipal or local - imposed by municipal corporations, or local

governments.

Examples: Real property tax, occupation tax.

6. As to graduation or rate

a) Proportional - based on a fixed percentage of the amount of the property,

receipts, or other basis to be taxed.

Examples: Real property tax, value -added tax, and other

percentage tax.

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 b) Progressive or graduated - the rate of tax increases as the tax base or

bracket increases.

Examples: Income tax, estate tax, donor's tax.

c) Regressive - the rate of tax decreases as the tax base or bracket

increases. We have no regressive taxes in the Philippines.

d) Digressive - increase of rates is not proportionate to the increase of

tax base.

e) Mixed Tax – a system that uses all or a combination of the different taxes

based on rates.

Tax distinguished from other terms

1. F rom t oll

a) Tax is a demand of sovereignty while toll is a demand of

proprietorship.

b) Tax is for the support of the government while toll is a compensation

for the use of another's property.

c) The amount of tax is regulated by necessities of government, while

the amount of toll is determined by the cost of the property.

d) Tax is imposed only by the government, while toll is collected by the

government or individuals.

2. From penalt y

a) Tax is aimed at raising revenue while penalty is imposed to regulate

conduct or activities.
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 b) Tax is imposed only by the government, while penalty is imposed

either by the government or by private individuals.

3. From license or permit fee

a) Tax is imposed to raise revenue while license is imposed for regulatory

purpose.

b) Tax has no maximum limit, whereas license is limited to the cost of

regulation.

c) Tax is imposed on person, property, and rights to exercise privileges,

whereas license is imposed on the right to exercise a privilege.

d) Non-payment of tax does not make the act or business illegal, while

non-payment of license makes the act or business illegal.

e) Tax is an enforced contribution to defray public expenses, while a

license fee is the legal compensation for specific purposes.

4. From special assessment

a) Tax is levied on persons, property or exercise of a privilege, while

special assessment is levied only on land.

b) No special benefit accrues to the taxpayer, while special ben efits

result to the property assessed in special assessment.

c) Tax is of general application, whereas special assessment is

exceptional as to time and place and not of general application.

5. From custom duties - Tax has a broader scope than custom duties as the

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 latter refers to commodities imported into or exported out of the country.

6. F rom debt

a) Tax is imposed by law while debt arises from contract.

b) Tax cannot be assigned while debt is assignable.

c) Tax is generally payable in money, while debt may be paid in kind.

d) Tax is not subject to set-off while debt is subject to set-off.

e) Tax is governed by special prescriptive periods under the Tax Code

while debt is governed by the Civil Code and other special laws as

to prescriptive period.

f) Failure to pay tax, except poll tax, may be punishable by

imprisonment, while a person cannot be imprisoned for nonpayment

of debt.

7. From revenue

a) Revenue refers to the amount collected while tax refers to the amount

imposed.

b) Taxes are only one of the many sources of revenue. Other

sources of revenue include grants or financial assistance from

another government, dona tions from private individuals,

toll, postage and other commercial revenues, fines, penalties and

forfeitures.

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(SEE NO. 3 OF “INSTRUCTIONS TO THE STUDENT”)

31
Taxation 1
Module I
Lesson 2
SELF- PROGRESS CHECK TEST

(Answer the following questions as best as you can from what you have understood

from Lesson 2. Be fair with yourself. Make this test a real gauge of what you know of

the course.)

Identification: On the blanks provided, write the word or group of words referred

to in the following statements:

__________ 1. Enforced proportional contribution from persons and property levied by

the law-making body of the state by virtue of its sovereignty for the

support of the government and all public needs.

__________ 2. Consideration for the use of a road, bridge, etc. collec ted by

private individual or government.

__________ 3. Enforced proportional contribution from owners of land especially

benefited by a public improvement.

__________ 4. A kind of tax the rate of which decreases as the tax based or bracket

increases.

__________ 5. A tax imposed on the performance of an act, enjoyment of a privilege

__________ 6. A tax or a fixed amount imposed on individuals residing within a

specified territory regardless of occupation, income or property.

__________ 7. Tax imposed on the person who bears the burden of the tax.

__________ 8. Tax based on a fixed proportion of the value of property with respect to

which the tax is assessed.

__________ 9. Imposed by the government or private individuals to regular conduct or

activities.

_________ 10. Non-payment thereof makes an act or business illegal.

(SEE NOS. 4 AND 5 OF “INSTRUCTIONS TO THE STUDENT”)

33
Taxation 1
Module I
Lesson 3. TAX LAWS: NATURE, CONSTRUCTION, APPLICATION AND
SOURCES

Lesson Objectives:

At the end of Lesson 3, you should be able to:

1. identify the natural sources of tax laws, their interpretation or construction

and application; and

2. determine the existing taxes collected by National Government through BIR

and Local Government.

Definition

Tax law is that body of laws which codifies all national tax laws including income,

estate, gift, excise, stamp and other taxes. Such law comprises of the Republic Act

8424 entitled “The Comprehensive Tax Reform of the Philippines.” Otherwise known as

the “National Internal Revenue Code of 1997” or the “Tax Code.” It also includes local

tax ordinances issued by the local government.

The Tax Code is an example of a special law which prevails over a general law

such as the Civil Code or the Rules of Court.

Nature of tax laws

1. Non political in nature - They are deemed to be the laws of the occupied

territory. During the Japanese occupation of the Philippines, the tax laws
34
 of the Philippines continued to be enforced, and not those of Japan, or the

occupying enemy.

2. Civil and not penal - Penalties imposed for violation of the tax law or for

delinquencies are intended to compel the timely payment of taxes, or to

punish tax evasion.

Sources of Philippine Tax Laws

1. Constitution of the Philippines

2. Statutes

3. Executive Orders

4. Tax Treaties and Conventions with foreign countries

5. Revenue Regulations promulgated by the Department of Finance

6. BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum

Orders

7. BIR Rulings

8. Judicial Decisions; and

9. Local Tax Ordinances

Interpretation and construction of tax laws

Tax statutes must be given a reasonable interpretation consistent with the

purpose and intent of the legislature; however, they should not be construed as to

35
make evasion possible. When the language of tax statute is plain, the words employed

must be given their ordinary meaning. In case of doubt, tax laws must be construed

liberally in favor of the taxpayer and against the government.

Tax exemptions, on the other hand, being a surrender of the state's power to

impose taxes, are to be construed strictly against the person, entity or property

claiming the exemption, and in favor of the government.

Application of tax laws

In general, tax statutes should be given a prospective application. Al though

not favored, tax statutes may nevertheless be given retroactive application, if it is

expressly so declared, or it is clearly the legislative intent, except when it would be

harsh or oppressive to the taxpayers. Any revocation, modification, or reversal of the

rules and regulations or the rulings of the Commissioner of Internal Revenue cannot be

given retroactive application if the same will be prejudicial to the taxpayers.

This will be applied retroactively in the following cases:

1. Where the taxpayer deliberately misstates or omits material facts on his

return or in any document required of him by the Bureau of Internal

Revenue;

2. Where the facts subsequently gathered by the Bureau of Internal Revenue

are materially different from the facts on which the ruling is based; and

3. Where the taxpayer acted in bad faith.

36
Existing tax laws in the Philippines National

1. The National Internal Revenue Code or CA No. 466 as amended:

a) Income tax

b) Estate and donor's tax

c) Value-added tax

d) Other percentages taxes

e) Excise taxes on certain goods

f) Documentary stamp tax

g) Other miscellaneous taxes as are or hereafter may be imposed and

collected by the Bureau of Internal Revenue

2. The Tariff and Customs Code as amended

3. Special laws

a) Residence Tax Law

b) Special Science Fund Law

c) Narcotic Drug Law

d) Special Education Fund Law

e) Sugar Adjustment Act

f) Peace and Order Fund Law

g) Energy Taxes

Local

1. The Local Government Code of 1991

2. Barrio Charter

37
 3. Assessment Law

4. Charter of Cities

5. Local Tax Code

Under NIRC Executive Order No. 273, the following National Inter nal Revenue

taxes are under the administration of the Bureau of Internal Revenue:

1. Income tax

2. Transfer taxes (Estate tax and donor's (gift) tax)

3. Value-added tax

4. Other Percentage taxes

a) Proprietors or operators of hotel, motel and others;

b) Caterers;

c) Carriers and keepers of garages;

d) Dealers in securities and lending investors;

e) Franchise holders;

f) Operators of communication services for overseas transmission

originating from the Philippines such as telephone, telegraph,

wireless, fax or other communications.

g) Banks and non-bank financial intermediaries;

h) Finance companies;

i) Insurance companies;

j) Agents of foreign insurance companies;

k) Proprietor, lessee, user or operator of services subject to

amusement taxes;

38
 l) Winners in horse races;

m) Sellers of goods or services who are exempt under Section 103

(W) who have not opted to be VAT-registered.

5. Excise taxes (Specific and Ad Valorem on certain goods)

6. Documentary stamp taxes

The power to levy and collect the following taxes and fees has been

transferred to the provinces and cities:

a) Occupation tax on all persons engaged in the exercise or

practice of their profession or calling;

b) Amusement tax on admission fees to be collected from the

proprietors, lessees, operators of theaters, cinematographers,

concert halls, circuses and other places of amusement;

c) Fees and sealing and licensing of weights and measures.

The power to levy the residence tax (now Community tax) remains with the

National Government, but collection is undertaken by the Bureau of Internal

Revenue through the City and Municipal treasurers.

( SEE NO. 3 OF “ INSTRUCTIONS TO THE STUDENT”)

39
Taxation 1
Module I
Lesson 3
SELF - PROGRESS CHECK TEST

(Answer the following questions as best as you can from what you have understood of

Lesson 3. Be fair with yourself. Make this test a real gauge of what you know of

the course.)

Answer the following questions briefly:

1. What are the sources of tax laws?

2. How should the tax laws be applied?

(SEE NOS. 4 AND 5 OF “INSTRUCTIONS TO THE STUDENT”)

40
Taxation 1

Module I

ANSWER KEYS TO SELF-PROGRESS CHECK TESTS

Lesson 1 (40 points)

I. True or False

1. True 6. False 11. False 16. False

2. False 7. False 12. False 17. False

3. True 8. True 13. False 18. False

4. False 9. True 14. False 19. True

5. True 10. False 15. True 20. True

II. Identification

1. Impact of taxation 11. Situs of tax

2. Imposition or levying 12. Multiplicity of situs

3. Collection of tax 13. Direct double taxation

4. Incidence of taxation 14. Equal protection of the law

5. "Benefits received" principle 15. Due process of law

6. Capitalization 16. Eminent domain

7. Shifting 17. Uniformity in taxation

8. Tax Evasion 18. Police power

41
9. Tax Avoidance 19. Transformation

10. Tax Exemption 20. Impairment of obligation of contract

Lesson 2 (10 points)

Identification

1. Tax 6. Poll of capitation or personal tax

2. Toll 7. Direct tax

3. Special assessment 8. Ad Valore m

4. Regressive 9. Penalty

5. Excise 10. Licens e

Lesson 3 (20 points)

1. Sources of Philippine Tax Laws:

1.1 Constitution of the Philippines

1.2 Statutes

1.3 Executive Orders

1.4 Tax Treaties and Conventions with foreign countries

1.5 Revenue Regulations promulgated by the Department of Finance

1.6 BIR Revenue Memorandum Circulars and Bureau of Customs

Memorandum Orders

42
 1.7 BIR Rulings

1.8 Judicial Decisions; and

1.9 Local Tax Ordinances

2. Tax laws should be applied prospectively. They may, however, be given retroactive

application if it is expressly so provided, and it is clearly the legislative intent, except

when it would be harsh or oppressive to the taxpayer. Revocation, modification or

reversal or rules and regulations or rulings of the Bureau of Internal Revenue shall

not be given retroactive effect if it is prejudicial to the taxpayer, except in the following

cases:

a) Where the taxpayer deliberately misstates or omits material facts on his

return or in any document required of him by the BIR:

b) Where the facts subsequently gathered by the BIR are materially different

from the facts on which the ruling is based; and

c) Where the taxpayer acted in bad faith.

43