PHILIPPINE TAX SYSTEM AND INCOME TAXATION

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MODULE 2:PRINCIPLES OF TAXATION

Principles of Taxation
LEARNING OBJECTIVES
At the end of this module you are expected to:
1. Define what is taxation;
2. Identify the inherent powers of sovereign state;
3. Distinguish the similarities and differences among
taxation, eminent domain and police powers;
4. Describe the nature of taxation power;
5. Discuss the basis, purpose and scope of taxation;
6. Identify the constitutional and inherent limitations;
7. Enumerate the aspects of taxation;
8. Enumerate the objects of taxation;
9. Define what is situs of taxation;
10. Describethe principles of sound tax system

Inherent Powers of Sovereign State

Inherent Powers of the Sovereign State These are essential powers necessary
for the survival of the sovereign state.

Eminent This also serves as the central force in

Police Taxation order that a government can
Domain command, maintain peace and order,
Power Power
Power and survive, irrespective of any
constitutional provision.

Police Power
- It is the inherent power of the sovereign state to legislate for the protection of
health, welfare and morals of the community.
- It is exercised usually to guard against abuses of individual liberty.

Eminent Domain Power

- It is the inherent power of the sovereign state to take private property for a public
purpose with just compensation

Paying the owner of the private property the full monetary equivalent of
the property taken for public use

Taxation Power
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 - It is the inherent power of the sovereign state to exact an enforced contribution
upon persons, properties, or rights for the purpose of generating revenues for the
use of government.
- The act of levying taxes by which government through its law making body, raises
revenues to defray its necessary expenses.
 Taxes – enforced proportional contributions imposed by the government.

Similarities among Taxation, Eminent Domain and Police Powers

1. They are inherent powers of the State
2. They constitute the three ways by which the State interferes with the private rights and
property
3. They are legislative in nature and character
4. They presuppose an equivalent compensation
5. They all underlie and exist independently of the Constitution
6. They are all necessary attributes of the sovereignty
7. The provisions in the Constitution are just limitations on the exercise of these powers

Distinction between Taxation, Eminent Domain and Police Powers

Taxation Police Power Eminent Domain
1. As to concept Power to enforce Power to make and Power to take private
contribution to raise implement laws for the property for public use
government funds general welfare with just
compensation
2. As to scope Plenary, comprehensive Broader in application of Merely a power to take
and supreme general power to make private property for
and implement laws public use
3. As to Exercised only by Exercised only by May be granted to
authority government (both government (both public service or public
national and local national and local utility companies
government) government)
4. As to purpose Money is taken to support Money or Property is Private property is
the government taken or destroyed to taken for public use
promote general welfare
5. As to The power to make tax Can be expressly Can be expressly
necessity of laws cannot be delegated delegated to the local delegated to the local
delegation government units (LGU) government units
by the law making body (LGU) by the law
making body
6. As to persons Operates on a community Operates on a community Operates on the
affected or a class of individual or a class of individual particular private
property of an
individual
7. As to benefits Continuous protection and Maintenance of healthy Market value of the
organized society economic standard of property expropriated
society
8. As to Inseparable for existence Protection, safety and Common necessities
importance of a nation – it supports welfare of society and interest of the
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police power and eminent community transcend

domain (exceeds) individual
rights in property
9. As to amount Generally, no limit Sufficient to cover cost of No imposition. The
of imposition the license and the owner is paid the fair
necessary expenses of market value of his
police surveillance and property
regulation
10. As to Constraints by Limited by the demand Bounded by public
limitation Constitutional and for public interest purpose and just
Inherent limitations compensation
11. As to Subject to Constitutional Relatively free from Superior to and may
relationship and Inherent limitations Constitutional limitations override Constitutional
to impairment provision
Constitution Subject to constitutional Superior to impairment because the welfare of
prohibition against the provision of the the State is superior to
impairment of the Constitution any private contract
obligations and contract

Inferior to impairment
provision of the
Constitution

Nature of Taxation Power

- The power to tax is an attribute of sovereignty that is exercised by the government for the
betterment of the people within its jurisdiction whose interest should be served, enhanced
and protected.
- Taxes are imposed upon persons, properties or rights for the support of the government in
return for the benefit and protection which the government provides the taxpayers.

Basis of Taxation
1. Based on the Principle of Necessity (Lifeblood Theory)
- This principlestates that no government can exist without taxation, thus, taxation is an
important necessity.

2. Based on Reciprocal Duties

- The basis of the power to tax is the reciprocal duties of protection and support between
the state and those that are subject to its authority.

Purpose of Taxation
Principal Purpose(Revenue Purpose)
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  To raise revenues for the use and support of the government to enable it to carry
out its functions.
Secondary Purpose (Regulatory Purpose)
 To serve as means to contend social, general welfare and economic development.

Scope of Taxation
The scope of the power of taxation is
 Unlimited,
 Complete (plenary),
 Wide extent of application (comprehensive)
 With highest degree (supreme)
 Subjectto the constitutional and inherent limitations.

Constitutional Limitations
These are provisions of the fundamental law that restrict the unlimited, plenary, comprehensive
and supreme exercise by the State of its inherent power to tax.
It should be noted further thata tax law is of no legal force when it violates the Constitution
1. Due process of law

Observance of due process of law and equal protection of the laws. (Section, 1, Article 3)
Any deprivation of life , liberty or property is with due process if it is done under the
authority of a valid law and after compliance with fair and reasonable methods or
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 in liabilities imposed.
Persons and properties to be taxed shall be group, and all the same class shall be subject to
the same rate and the tax shall be administered impartially upon them.

2. Equal protection of law

Rule of uniformity and equity in taxation (Section 28(1), Article 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 requires that the
apportionment of the tax burden be more or less just in the light of the taxpayer’ ability to
bear the tax burden.

3. No imprisonment for non-payment of a poll tax (example : community tax)

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No imprisonment for non-payment of poll tax (Section 20, Article III). A person cannot be
imprisoned for non-payment of community tax, but may be imprisoned for other violations
of the community tax law, such as falsification of the community tax certificate, or for
failure to pay other taxes.
4. Rule of taxation shall be uniform and equitable.

5. Exemption from property taxation (lands and buildings used) of religious, charitable or
educational institutions, non-profit cemeteries, churches and convents appurtenant thereto

Exemption of all revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes from income, property and
donor’s taxes and custom duties (Section 4 (3&4) Article XIV).

6. No public money and/or property shall be used for any religious and/or private purposes

Prohibition against appropriations for religious purposes, (Section 29 (2), Article 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 except when such priest,
preacher, is assigned to the armed forces or to any penal institutions, orphanage or
leprosarium.

7. The majority of all members of the National Congress shall pass the granting of tax
exemptions

8. The Congress may not be deprived the Supreme Court of its jurisdiction in all tax cases.

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, assessment or any penalty imposed in the
relation thereto.

9. The Philippine President has the power to veto any item in a tax bill approved by the
Congress.

10. Tax collection shall generally be treated as general funds of the government

Inherent Limitations
These are restrictions to the power to tax that are attached to its nature

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 1. Taxes may be levied only for public purpose

The sole purpose must be for the benefit of the citizens of the state and not merely as for
the benefit of a particular individual.

2. Non-delegation of the power to tax except to local government

The power to tax is purely legislative and it cannot be delegated by the legislative branch of
government to the executive or judicial department.

3. Tax laws are only confined within the territorial jurisdiction of the State

The tax laws are enforceable only within the territorial jurisdiction of the State. Tax laws
are not enforceable beyond the country’s territorial limits.

4. Tax laws must be subject to international comity, convention and agreements

The property of a foreign state may not be taxed by another foreign state. There should be
agreement between nations before taxes are to be imposed.

5. Government entities are generally tax-exempt.

Government agencies performing essential government functions are generally exempt

from tax. Those government agencies performing proprietary functions are subject to tax
unless expressly exempted. It should be noted further that the government cannot tax
itself.

6. Prohibition of double taxation

Aspects of Taxation
- Refers to processes or stagesof enforcement of power of taxation
1. Levying
 This process involves the imposition of the tax which is a legislative act or
function. In the Philippines, it is Congress that levies the tax

2. Assessment
 This involves the determination of the correct amount of applicable tax which is
an administrative function. The tax system should be capable of being properly
and efficiently administered by the government

3. Collection
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 This process involves the collection of tax payments from the taxpayers as well
as the collection of tax deficiencies as assessed by the BIR officials and BIR
examiners.

Objects of Taxation
- Refers to the subject to which taxes are imposed
1. Persons, whether natural or juridical persons
a. Natural person – refers to individual taxpayers
b. Juridical person –includes corporations, partnerships, and any association
2. Properties, whether real, personal, tangible or intangible properties
a. Real properties – immovable properties such as land, building or house and lot
b. Personal properties –movable properties such as car
c. Tangible properties –properties that may be felt or touched and are necessarily
corporeal, either realtor personal properties
d. Intangible properties – properties that are “rights” rather than physical objects.
– Examples: Patents, stocks, bonds, goodwill, trademarks,
franchise and copyright
3. Excise objects, such as
a. Transaction – the act of conducting activities related to any business or
professionthat involves selling, servicing, leasing, borrowing, mortgaging or
lending
b. Privilege – a benefit derived through gratuitous transfer by circumstance of
death or donation
c. Right –a power inherent in one person and incidental to another
d. Interest –an advantage accruing from anything

Situs of Taxation
- Refers to the place of taxation

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 - It is the application of the “principle of territorial jurisdiction” which limits the exercise of
taxation power in defining the object of taxation through setting boundaries of the taxing
power whether or not it shall be subjected to tax
- Factors to consider in determining situs of taxation
1. Subject matter of the tax (person, property, or activity)
2. Nature, kind or classification of the tax being imposed
3. Source of income being taxed
4. Place of the excise, privilege, business or occupation being taxed
5. Citizenship of the taxpayer
6. Residence of the taxpayer

Summary of General Rules of Tax Situs

SUBJECT NATURE OF CITIZENSHIP RESIDENCY SOURCE OR LOCATION
MATTER TAX OF OBJECT (Taxable?)
Within the Outside
Philippines the
Philippines
Persons Income Tax Filipino Resident Yes Yes
Filipino Non-resident Yes No
Aliens Resident Yes No
Aliens Non-resident Yes No

Transfer Tax Filipino Resident Yes Yes

Filipino Non-resident Yes Yes
Aliens Resident Yes Yes
Aliens Non-resident Yes No

Business Tax Yes No

Real n/a n/a Yes No

Property

Personal n/a n/a Yes No

Property

Principles of Sound Tax System

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1. Fiscal Adequacy
- Sources of revenues must be sufficient to meet the expenditures of government regardless
of the business or economic conditions.
2. Equality or Theoretical Justice
- There must be an equitable (reasonable)and proportionate distribution of the tax burden,
which means that the tax burden shall be shouldered by those who have the ability to pay
- Concedes with the “ability-to-pay principle”which states that tax burden should be in
proportion to the taxpayer's ability to pay
3. Administrative Feasibility
- Tax laws must be capable of reasonable and convenient enforcement, just and effective
administration, meaning, must be capable of being administered and complied with.

Nature of Taxes
Taxes
 By authority of a sovereign state, these are forced burdens and compulsory financial
contribution upon the person, property, or rights exercised, within its
jurisdictionimposed by the government to raise public revenues for the support of
the government, the administration of the law, or the payment of public expenses.
 Nature of taxes:
1. Taxes are obligations created by law
2. Taxes are generally personal to the taxpayer

Essential Elements of Tax

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. Commonly required to be paid at regular intervals
8. Imposed by the sovereign state within its jurisdiction

Classification of Taxes
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1. As to scope
a. National
 imposed by National government (e.g. Income Tax, Estate Tax, Donor’s Tax,
Value Added Tax, Other Percentage Taxes, and Documentary Stamp Tax)
b. Local
 imposed by local government units

2. As to subject matter or object

a. Personal, poll or capitation
 tax of a fixed amount imposed upon individual, whether citizens or not,
residing within a specified territory without regard to their property or the
occupation in which he may be engaged (ex. Community Tax).
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 (e.g. Real Estate Tax).
c. Excise
 any tax which does not fall within the classification of a poll tax or a property
tax. This is a tax on the exercise of certain rights or privileges (e.g. Income
Tax, Estate Tax, Donor’s Tax, Value Added Tax and Other Percentage Taxes).

3. As to who bears the burden

a. Direct
 tax which is demanded from the person who also shoulders the burden of tax
or tax which the taxpayer cannot shift to another (ex. Income Tax, Estate Tax
and Donor’s Tax)

b. Indirect
 tax which is demanded from one in the expectation and intention that he
shall indemnify himself at the expense of another
 tax wherein the incidence of or liability for the payment of the tax falls on
one person but the burden thereof can be shifted to another person (ex.
Value Added Tax and Other Percentage Taxes)

4. As to determination of amount
a. Specific
 tax of fixed amount imposed by the head or number, or by some standard of
weight or measurement(ex. Excise Tax on cigarettes and liquors)
b. Ad valorem
 tax of fixed proportion of the value of the property with respect to which the
tax is assessed(ex. Value Added Tax, Income Tax, Donor’s Tax and Estate Tax)

5. As to purpose
a. General, fiscal, or revenue
 tax imposed solely for the general purpose of the government, i.e., to raise
revenue for government expenditures (ex. Income Tax, Donor’s Tax and
Estate Tax)
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b. Special or regulatory
 tax imposed for a specific purpose, i.e., to achieve some social or economic
ends irrespective of whether revenue is actually raised or not (ex. Tariff and
Certain duties on Imports)

6. As to graduation or rate
a. Proportional
 tax based on a fixed percentage of amounts of the property, receipts, or other
basis to be taxed (ex. Value Added Tax and Other Percentage Taxes)
b. Progressive or graduated
 tax the rate of which increases as the tax base or bracket increases (ex.
Income Tax)
c. Regressive
 tax the rate of which decreases as the tax base or bracket increases. This is
not practiced in the Philippines.

Overview of the Philippine Taxes

 TAX LAW
- Body of laws which codifies all national tax laws including:
 Income
 Estate
 Gift (Donation)
 Excise
 Stamp
 Other taxes
- Comprises of the Republic Act 8424 (RA 8424) entitled:
“The Comprehensive Tax Reform of the Philippines”
 also known as
 National Internal Revenue Code of 1997 (NIRC)
 Tax Code
 Also includes RA 9337 – “The VAT Reform Law”

- Internal Revenue Law

– includes all laws legislated pertaining to the national government taxes embodied in
the NIRC
– such legislation is commonly known as revenue measures

- Internal Revenue Taxes

– taxes imposed by the legislative body other than custom duties on imports
– the following national taxes are classified as Internal Revenue Taxes under the
administration of the BIR
1. Income tax
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  tax imposed on the income earned of a taxpayer
2. Transfer tax (Estate tax and Donor’s tax)
 tax imposed on any mode of transferring the ownership of a real
property, either through sale, donation, barter, or any other mode
3. Business taxes (VAT, Percentage tax and Excise tax)
 tax imposed and collected from the seller in the course of trade or
business on every sale of properties (real or personal) lease of goods
or properties (real or personal) or vendors of services.
4. Documentary Stamps Tax (DST)
 an excise tax levied on documents, instruments, loan agreements and
papers evidencing the acceptance, assignment, sale or transfer of an
obligation, rights, or property incident thereto
5. Such other taxes as may be imposed and collected by the BIR

 NATURE OF TAX LAWS

- The Philippine Internal Revenue laws are generally
 civil in nature
 neither political nor penal in nature
o Note: Although, there are penalties provided for their violation,
the purpose of tax laws in imposing penalties for delinquencies is
to:
 compel the timely payment of taxes
 punish evasion or neglect of duty in respect thereof

 SOURCES OF TAX LAWS

1. Constitution of the Philippines
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code
5. Local tax ordinances (e.g. city or municipal tax codes)
6. Tax Treaties and International Agreements
 Tax treaty
- the Philippine government usually enters into tax treaties in order to avoid or
minimize the effects of double taxation. It has the force and effect of law
7. Judicial decisions (i.e. decisions of the Supreme Court and the Court of Tax Appeals)
8. Special laws (e.g. Statutes, Executive Orders)

9. Revenue rules and regulations and administrative rulings and opinions

a. Revenue Regulations promulgated by the Department of Finance
b. BIR Revenue Memorandum Circulars
c. Bureau of Customs Memorandum Orders
d. BIR Rulings
 Purpose of rules and regulations
i. To properly enforce and execute the tax laws
ii. To clarify and explain the law
iii. To carry into effect the laws’ general provisions by providing details of
administration and procedure
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 Requisites for validity of rules and regulations

i. They must not be contrary to law and the Constitution
ii. They must be published in the Official Gazette or a newspaper of general
circulation
 Effectivity of revenue rules and regulations
Except when the law otherwise expressly provides, the aforesaid revenue tax
issuances shall not begin to be operative until after due notice thereof may be
fairly assumed

Tax Distinguished From Other Terms

1. TAX vs TOLL

TOLL TAX
Demand of sovereignty
Demand of proprietorship
Paid for the support of government
Paid for the use of another’s property
Amount is based on cost of construction or Amount is based on the necessities of the
state
maintenance of the public improvement
Imposed only by the state
May be imposed by the government or
private individuals or entities

2. TAX vs PENALTY

PENALTY TAX
Primarily aimed at raising revenue
Designed to regulate conduct
May be imposed only by the government
May be imposed by the government or
private individuals or entities

3. TAX vs SPECIAL ASSESSMENT

Special assessment is an enforced proportional contribution from owners of lands for special
benefits resulting from public improvements.

Characteristics of Special Assessment

a. Levied only on land
b. Not a person liability of the person assessed
c. Based wholly on benefits (not necessary)
d. Exceptional both as to time and place

4. TAX vs REVENUE

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 REVENUE TAX
Amount imposed
Amount collected

5. TAX vs PERMIT or LICENSE FEE

PERMIT OR LICENSE FEE TAX

For revenue
For regulation
Exercise of taxation power
Exercise of police power
Generally no limit
Amount is limited to the necessary expenses
of regulation
Imposed also on persons property
Imposed on the right of reward of an officer
for specific services
An enforced contribution assesses by
Legal compensation or reward of an officer
sovereign authority to defray public
for specific services
expenses
An enforced contribution assesses by
Failure to pay license fee makes the act or
business illegal sovereign authority to defray public
expenses

6. TAX vs DEBT

DEBT TAX
Based on law
Based on contract
Generally payable in money
May be paid in kind
Cannot generally assignable
assignable
Cannot generally be the subject of the set-off
or compensation
Imprisonment is a sanction for non-payment
May be the subject of set-of or compensation
of tax (except poll tax)
Governed by the special prescriptive
A person cannot be imprisoned for non-
periods provided for in the Tax Code
payment of debt (except when it arise from
a crime)
Does Not draw interest except only when
Draw interest when stipulated or when
delinquent
prescription default

7. TAX vs SUBSIDY
Subsidy is a monetary aid directly granted by the government to an individual or private
commercial enterprises deemed beneficial to the public. Subsidy is not a tax although tax may
have to be imposed to pay it.

8. TAX vs CUSTOMS DUTIES

Custom duties are taxes imposed on goods exported into a country.

9. TAX vs TARIFF
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Tariff may be used in one of the following:

a. A book of rates drawn usually in alphabetical order containing the names of several kinds
of merchandise with the corresponding duties to be paid for the same; or
b. The duties payable on goods imported or exported; or
c. The systems or principle of imposing duties on the important (or exportation) of goods

It should be noted further thatthe term tariff and customs duties are used interchangeably in
the tariff and customs code.

End of Module 2

Links to Supplemental Readings

1. http://www.chanrobles.com/legal6nircmain.htm#.WW14qRUrLIU
2. https://www.bir.gov.ph/index.php/tax-code.html#title1
3. https://www.bir.gov.ph/index.php/tax-code.html#title2

Links to Other Video Lectures

1. https://www.youtube.com/watch?v=761YpyZh1C8
2. https://www.youtube.com/watch?v=8nMHLRSZKqw
3. https://www.youtube.com/watch?v=6FV_GQ58G1g

References
National Internal Revenue Code of 1997 . (n.d.). Retrieved from https://www.bir.gov.ph/index.php/tax-
code.html.
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition ed.). Quezon
City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good Dreams
Publishing .
Valencia, E. G. (2016). Income Taxation (7th Edition ed.). Baguio City: Valencia Educational Supply .

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