INCOME TAXATION
GENERAL PRINCIPLES OF TAXATION
Taxation
 It is the act of laying a tax, the process or
means by which the sovereign, through its
law-making body raises income to defray
the necessary expenses of government.
Taxes
 These are the enforced proportional and
pecuniary contributions from persons and
property levied by the law-making body of
the state having jurisdiction over the subject
of the burden for the support of the
government and all public needs.
Essential Characteristics of Tax
 It is an enforced contribution.
 It is proportionate in character.
 It is generally payable in money.
 It is levied on persons or property.
 It is levied by the state which has jurisdiction
over the persons or property.
 It is levied by the law-making body of the
state.
 It is levied for public purpose.
Theory and Basis of Taxation
 Existence of Government
 Reciprocal Duties of State and Inhabitants
(Benefits Received Principle)
 Public Purpose Requirement
Nature of the Power of Taxation
 It is inherent in sovereignty.
 It is legislative in character.
 It is subject to constitutional and inherent
limitations.
Aspects of Taxation
 Levying or imposition of the tax which is a
legislative act.
 Collection of the tax levied which is
essentially administrative in character.
Basic Principles of a Sound Tax System
 Fiscal Adequacy
 Equality or Theoretical Justice
 Administrative Feasibility
CLASSIFICATION OF TAXES
 As to Subject Matter or Object
o Personal, Poll, Capitation
o Property
o Excise (Privilege Tax)
 As to Who Bears the Burden
o Direct
o Indirect
 As to Determination of Amount
o Specific
o Ad Valorem
 As to Purpose
o General, Fiscal, or Revenue
o Special or Regulatory
 As to Scope
o National
 (NIRC) National Internal
Revenue Code
 BIR
o Municipal or Local
o (LGC) – Local Government Code
o Municipal Hall/ City Hall
 As to Graduation or Rate
o Proportional (Flat or Uniform Tax)
o Progressive or Graduated
o Regressive
TAX DISTINGUISHED FROM TOLL
 A toll is a demand of proprietorship while a
tax is a demand of sovereignty.
 A toll is paid for the use of another’s
property while tax is paid for the support of
the government.
 The amount of toll depends upon the cost of
construction or maintenance of the public
improvement used while there is generally
no limit on the amount of tax that may be
imposed.
 A toll may be imposed by the government or
private individuals or entities while a tax
may be imposed only by the government.
TAX DISTINGUISHED FROM PENALTY
 A penalty is designed to regulate conduct
while a tax is generally intended to raise
revenue.
 A penalty may be imposed by the
government or private individuals or entities
while a tax may be imposed only by the
government.
TAX DISTINGUISHED FROM SPECIAL
ASSESSMENT
 A special assessment is levied only on land.
 It is not a personal liability of the person
assessed. His liability is limited only to the
land involved.
 It is based wholly on benefits (not
necessity).
 It is exceptional both as to time and place. A
tax on the other hand has general
application.
TAX DISTINGUISHED FROM LICENSE OR
PERMIT FEE
 License fee is the legal compensation or
reward of an officer for specific services
while tax is an enforced contribution
assessed by sovereign authority to defray
public expenses.
 It is imposed for regulation while a tax is
levied for revenue.
 It involves an exercise of police power while
a tax involves the exercise of the taxing
power.
 Its amount should be limited to the
necessary expenses of inspection and
regulation while there is generally no limit
on the amount of tax that may be imposed.
 It is imposed on the right to exercise a
privilege while a tax is imposed also on
persons and property.
 Failure to pay license fee makes the act or
business illegal while failure to pay a tax
does not necessarily make the act or
business illegal.
TAX DISTINGUISHED FROM DEBT
 A debt is generally based on contract,
express or implied while a tax is based on
law.
 A debt is assignable while a tax cannot
generally be assigned.
 A debt may be paid in kind while a tax is
generally payable in money.
 A debt may be the subject of set-off or
compensation.
 A person cannot be imprisoned for non-
payment of debt while imprisonment is a
sanction for non-payment of tax.
 A debt is governed by the ordinary periods
of prescription while a tax is governed by
the special prescriptive periods provided for
in the Tax Code.
 A debt draws interest when it is so
stipulated or when there is default while a
tax does not draw interest except only when
delinquent.
Other Terms to be Distinguished with Tax
 Subsidy
 Revenue
 Customs Duties
 Tariff
 Power Of Eminent Domain
 Police Power
SIMILARITIES AMONG TAXATION, EMINENT
DOMAIN AND POLICE POWER
 They all rest upon necessity because there
can be no effective government without
them.
 They all underlie and exist independently of
the Constitution although the conditions for
their exercise may be prescribed by the
Constitution and by law.
 They are ways by which the state interferes
with private rights and property.
 They are legislative in nature and character
although the actual exercise of the powers
is given to the executive authorities, national
or local.
 They all presuppose an equivalent
compensation received, directly or indirectly
by the persons affected by the exercise of
these powers by the government.
DISTINCTIONS AMONG TAXATION, EMINENT
DOMAIN AND POLICE POWER
 Taxation and police power may be
exercised only by the government or its
political subdivisions.
 The exercise of the power of eminent
domain may be granted to public service
companies or public utilities.
 In taxation, the property (in form of money)
is taken for the support of the government.
 In eminent domain, the property is taken for
public use or benefit hence it must be
compensated.
 In police power, the use of property is
regulated for the purpose of promoting
general welfare hence it is not
compensable.
DISTINCTIONS AMONG TAXATION, EMINENT
DOMAIN AND POLICE POWER
 Taxation and police power operate upon a
community or a class of entities or
individuals.
 Eminent domain operates on an entity or
individuals as the owner of a particular
property.
 In taxation, the money contributed in the
concept of taxes becomes part of the public
funds.
 In eminent domain, there is a transfer of the
right to property whether it be of ownership
or a lesser right.
 In police power, there is no transfer of title;
at most there is restraint on the injurious
use of property.
DISTINCTIONS AMONG TAXATION, EMINENT
DOMAIN AND POLICE POWER
 In taxation, it is assumed that the person
affected receives the equivalent of the tax in
the form of protection and benefits he
receives from the government as such.
 In eminent domain, the person affected
receives the market value of the property
taken from him.
 In police power, the person affected
receives no direct and immediate benefit but
only such as may arise from the
maintenance of a healthy economic
standard of society and is often referred to
as damage without injury.
DISTINCTIONS AMONG TAXATION, EMINENT
DOMAIN AND POLICE POWER
 In taxation, there is generally no limit on the
amount of tax that may be imposed.
 In eminent domain, there is no amount
imposed but rather the owner is paid the
market value of the property taken.
 In police power, the amount imposed should
not be more sufficient to cover the cost of
the license and the necessary expenses of
police surveillance and inspection,
examination or regulation as nearly as the
same can be estimated.
DISTINCTIONS AMONG TAXATION, EMINENT
DOMAIN AND POLICE POWER
 The taxing power is subject to certain
constitutional limitations including the
prohibition against the impairment of the
obligation of contracts.
 Eminent domain is also inferior to the
impairment prohibition so that the
government cannot expropriate property
which under a contract it had previously
bound itself to purchase from other
contracting party.
 Police power is relatively free from
constitutional limitations and is superior to
the impairment provisions.
LIMITATIONS ON THE POWER OF TAXATION
CONSTITUTIONAL LIMITATIONS
REQUIREMENT OF DUE PROCESS OF LAW &
EQUAL PROTECTION OF LAWS
 Basis: “No person shall be deprived of life,
liberty, or property without due process of
law, nor shall any person be denied the
equal protection of the laws.”
REQUIREMENT OF UNIFORMITY AND EQUITY
IN TAXATION
 Basis: “The rule of taxation shall be uniform
and equitable. The Congress shall evolve a
progressive system of taxation.”
PROHIBITION AGAINST IMPRISONMENT FOR
NON-PAYMENT OF POLL TAX
 Basis: “No person shall be imprisoned for
debt or nonpayment of a poll tax.”
PROHIBITION AGAINST IMPAIRMENT OF
OBLIGATION OF CONTRACTS
 Basis: “No law impairing the obligation of
contracts shall be passed.”
PROHIBITION AGAINST INFRINGEMENT OF
RELIGIOUS FREEDOM
 Basis: “No law shall be made respecting an
establishment of religion or prohibiting the
free exercise thereof. The free exercise and
enjoyment of religious profession and
worship, without discrimination or
preference, shall forever be allowed.”
PROHIBITION AGAINST APPROPRIATION FOR
RELIGIOUS PURPOSES
 Basis: “No public money or property shall be
appropriated, applied, paid, or employed,
directly or indirectly, for the use, benefit, or
support of any sect, church, denomination,
sectarian institution, or system of religion, or
of any priest, preacher, minister or other
religious teacher or dignitary as such,
except when such priest, preacher, minister,
or dignitary, is assigned to the armed
forces, or to any penal institution, or
government orphanage or leprosarium.”
PROHIBITION AGAINST TAXATION (Property
Tax Only) OF RELIGIOUS, CHARITABLE, AND
EDUCATIONAL ENTITIES, ETC.
 Basis: “Charitable institutions, churches and
parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements
actually, directly, and exclusively used for
religious, charitable or educational purposes
shall be exempt from taxation.”
PROHIBITION AGAINST TAXATION OF NON-
STOCK, NON-PROFIT EDUCATIONAL
INSTITUTIONS
 Basis: “All revenues and assets of non-
stock, non-profit educational institutions
used actually, directly, and exclusively for
educational purposes shall be exempt from
taxes and duties.”
 “Subject to conditions prescribed by law, all
grants, endowments, donations or
contributions used actually, directly and
exclusively for educational purposes shall
be exempt from tax.”
GRANTING OF TAX EXEMPTION
 Basis: “No law granting any tax exemption
shall be passed without the concurrence of
a majority of all the members of the
Congress.”
VETO OF APPROPRIATION, REVENUE, OR
TARIFF BILLS BY THE PRESIDENT
 Basis: “The President shall have the power
to veto any particular item or items in an
appropriation, revenue or tariff bill, but the
veto shall not affect the item or items to
which he does not object.”
NON-IMPAIRMENT OF THE JURISDICTION OF
THE SUPREME COURT
 Basis: “The Congress shall have the power
to define, prescribe, and apportion the
jurisdiction of the various courts but may not
deprive the Supreme Court of its
jurisdiction.”
 “The Supreme Court shall have the
following powers: 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 toll, or any penalty
imposed in relation thereto.”
LIMITATIONS ON THE POWER OF TAXATION
INHERENT LIMITATIONS
REQUIREMENT OF PUBLIC PURPOSE
 Reason for the rule: A tax levied for a
private, not public purpose constitutes a
taking of property without due process of
law as it is beyond the power of the
government to impose.
PROHIBITION AGAINST DELEGATION OF
TAXING POWER
 Reason for the rule: The power of taxation
being purely legislative, Congress cannot
delegate the powers to others.
EXEMPTION OF GOVERNMENT AGENCIES OR
INSTRUMENTALITIES
 Reason for the rule: To levy a tax upon
public property would render necessary new
taxes on other public property for the
payment of the tax laid and thus, the
government would be taxing itself to raise
money to pay over to itself.
LIMITATION OF INTERNATIONAL COMITY
 Reasons for the rule:
A) The sovereign equality among states
under international law by virtue of which one state
cannot exercise its sovereign powers over another.
B) The usage among states that when one
enters the territory of another, there is an implied
understanding that the former does not intend to
degrade its dignity by placing itself under the
jurisdiction of the latter.
C) The rule of international law that a
foreign government may not be sued without its
consent so that it is useless to assess the tax since
anyway it cannot be collected.
LIMITATION OF TERRITORIAL JURISDICTION
 Reason for the rule: A state may not tax
property lying outside its borders or lay an
excise or privilege tax upon the exercise or
enjoyment of a right or privilege derived
from the laws of another state and therein
exercised and enjoyed.
SITUS of Taxation – Place of Taxation
 person
– poll tax may properly be levied upon
persons who are inhabitants or
residents of the state whether
citizens or not.
 real property
– subject to taxation in the state in
which it is located whether the owner
 is a resident or non-resident and is
taxable only there.
 tangible personal property
– where it is physically located
although the owner resides in
another jurisdiction.
 intangible personal property
– at the domicile of the owner.
 income
– from persons who are residents or
citizens in the taxing jurisdiction and
even from those who are neither
residents nor citizens provided the
income is derived from sources
within the taxing state.
 business, occupation, & transaction
– depends upon the place where the
business is done or the occupation
is engaged in or the transaction took
place.
 gratuitous transfer of property
– in the state where the transferor is a
citizen or resident or where the
property is located.
Double Taxation
 In strict sense (direct duplicate taxation or
direct double taxation) and in broad sense
(indirect duplicate taxation or indirect double
taxation)
 Taxing twice
 By the same taxing authority
 Within the same jurisdiction or taxing district
 For the same purpose
 In the same year (or taxing period)
 Some of the property in the territory
 INSTANCES OF DOUBLE TAXATION IN
ITS BROAD SENSE
A tax on a mortgage as personal property
when the mortgaged property is also taxed
at its full value as real state.
 A tax upon a corporation for its property and
upon its shareholders for their shares.
 A tax upon a corporation for its capital stock
as a whole and upon the shareholders for
their shares.
 A tax upon depositors in a bank for their
deposits and a tax upon the bank for the
property in which such deposits are
invested.
 An excise tax upon certain use of property
and a property tax upon the same property.
 A tax upon the same property imposed by
two different states.
FORMS OF ESCAPE FROM TAXATION
 Shifting
o It is the transfer of the burden of a
tax by the original payer or the one
whom the tax was assessed or
imposed to another or someone
else.
 Kinds of Shifting
o Forward shifting – takes place when
the burden of the tax is transferred
from a factor of production through
the factors of distribution until it
finally settles on the ultimate
purchaser or consumer.
o Backward shifting – is effected when
the burden of the tax is transferred
from the consumer or purchaser
through the factors of distribution to
the factor of production.
o Onward shifting – occurs when the
tax is shifted two or more times
either forward or backward.
Tax Capitalization
 It means the reduction in the price of the
taxed object equal to the capitalized value
of future taxes which the purchaser expects
to be called upon to pay.
Transformation
 It is a method of escape from taxation
whereby the manufacturer or producer upon
whom the tax has been imposed fearing the
loss of his market if he should add the tax to
the price, pays the tax and endeavors to
recoup himself by improving his process of
production thereby turning out his units of
products at a lower cost.
Tax Evasion (Tax Dodging)
 It is the use by the taxpayer of illegal or
fraudulent means to defeat or lessen the
payment of a tax.
Factors in Tax Evasion
 The payment of less than that known by the
taxpayer to be legally due or in paying no
tax when it is shown that a tax is due.
 An accompanying state of mind which is
described as being evil, in bad faith, willful,
deliberate and not accidental.
 A course of action which is unlawful.
EVIDENCE TO PROVE TAX EVASION
 The failure of the taxpayer to declare for
taxation purposes his true and actual
 income derived from his business for two
consecutive years has been held as an
indication of his fraudulent intent to cheat
the government of its due taxes.
 The substantial under-declaration of income
in the income tax returns of the taxpayer for
four consecutive years coupled with his
intentional overstatement of deductions
justifies the finding of fraud.
Tax Avoidance (Tax Planning/Tax Minimization)
 It is the use by the taxpayer of legally
permissible alternative tax rates or methods
of assessing taxable property or income in
order to avoid or reduce tax liability.
Exemption from Taxation
 It is the grant of immunity to particular
persons or corporations or to persons or
corporations of a particular class from a tax
which persons and corporations generally
within the same state or taxing district are
obliged to pay.
KINDS OF TAX EXEMPTION
 As to Manner of Creation
o Express or affirmative exemption
– when certain persons, property, or
transactions are by express
provision, exempted from all or
certain taxes, either entirely or in
part. This exemption may be made
by provisions of the Constitution,
statutes, treaties, ordinances,
franchises or contracts.
o Implied exemption or exemption by
omission
– this occurs when a tax is levied on
certain classes of persons,
properties, or transactions without
mentioning the other classes.
 As to Scope or Extent
o Total exemption
– when certain persons, property, or
transactions are exempted,
expressly or impliedly from all taxes.
o Partial exemption
– when certain persons, property or
transactions are exempted,
expressly or impliedly from certain
taxes either entirely or in part.
 As to Object
o Personal
– those granted directly in favor of such
persons as are within the contemplation
of the law granting the exemption.
o Impersonal
– those granted directly in favor of a
certain class of property.
Exemptions provided for in the Constitution
 From property tax “charitable institutions,
churches and parsonages or covenants
appurtenant thereto, mosques and non-
profit cemeteries and all lands, buildings
and improvements actually, directly, and
exclusively used for religious, charitable or
educational purposes
 From taxes and duties “all revenues and
assets of non-stock, non-profit educational
institutions used actually, directly and
exclusively for educational purposes and
subject to conditions prescribed by law, all
grants, endowments, donations or
contributions used actually, directly and
exclusively for educational purposes
Exemptions Provided for in the Tax Code
 From Income Tax
o labor, agricultural or horticultural
organization not organized
principally for profit
o cemetery company-owned and
operated exclusively for the benefit
of its members
o non-stock corporation or association
organized and operated exclusively
for religious, charitable, scientific,
athletic or cultural purposes
o business league, chamber of
commerce or board of trade not
organized for profit
o civic league or organization not
organized for profit
o non-stock and non-profit educational
institution and government
educational institution
o mutual savings bank not having a
capital stock represented by shares
and cooperative banks without
capital stock organized and operated
for mutual purposes and without
profit and development banks.
Exemptions Provided for Under Special Laws
 From Income Tax
o benefit payments to members made
by GSIS
o benefits received from the U.S.
government through the U.S
Veterans Administration
o Income from bonds and securities
for sale in the international market
o Exemption of pioneer and registered
enterprises under the Investment
Incentives
o exemption for a limited period of new
and necessary industries
o prizes received by winners in charity
horse races sweepstakes from the
Philippine Charity Sweepstakes
Office
o annual taxable incomes of senior
citizens or those at least 60 years
old and have an income of not more
than P60000 per annum subject to
review by the NEDA
Tax Amnesty
 It is a general pardon or intentional
overlooking by the State of its authority to
impose penalties on persons otherwise
guilty of tax evasion or violation of a
revenue or tax law.
Sources of Tax Laws
 Legislation or statutes including Presidential
Decrees and Executive Orders on taxation
and tax ordinances
 Administrative rules and regulations and
rulings or opinions of tax officials particularly
the Commissioner of Internal Revenue
including the opinions of the Secretary of
Finance
 Judicial Decisions
Nature of Internal Revenue Law
 Internal revenue laws are not political in
nature. They are deemed to be the laws of
the occupied territory and not of the
occupying economy.
 Tax laws are civil and not penal in nature
although there are penalties provided for
their violation.
Construction of Tax Laws
 Legislative intent must be considered – tax
statutes are to receive a reasonable
construction or interpretation with a view to
carrying out their purpose and intent. They
should not be construed as to permit the
taxpayer easily the payment of tax.
 When there is doubt – In every case of
doubt, tax statutes are construed strictly
against the government and liberally in favor
of the taxpayer.
 Where language is plain – the words
employed are to be given their ordinary
meaning.
 Where taxpayer claims exemption –
exemption provisions are construed strictly
not against the government but against the
one who asserts the claim of exemption.
Mandatory Provisions of Tax Laws
 Those provisions intended for the security
of the citizen or which are designed to
insure equality of taxation or certainty as to
the nature and amount of each person’s tax.
Directory Provisions of Tax Laws
 Those provisions designed merely for the
information or direction of officers or to
secure methodical and systematic modes of
proceedings.
Presidential Decrees
 Issued by the President during martial law
and under Amendment No.6 to the 1973
 Executive Orders
 Issued by the President under the
Provisional Government and pursuant to the
legislative power possessed by the
President after the ratification of the 1987
Constitution but before the convening of
Congress on July 27, 1987
EXISTING TAX LAWS
NATIONAL AND LOCAL
 National Tax Laws
o Those imposed by the national
government under the National
Internal Revenue Code and other
laws, particularly the Tariff and
Customs Code.
 The National Internal Revenue Code of
1997 (PD No. 1158, as amended
particularly by RA No.8424), which is the
main statutory law on internal revenue taxes
 The Tariff and Customs Code of 1978
 Special laws such as:
 o The Sugar Adjustment Act
o The Narcotics Drugs Law
o The law imposing travel tax
o The law imposing a motor vehicle
user’s charge
o The law imposing energy taxes
 Local Tax Laws
o Those which local governments may
impose for particular needs such as
the taxes imposed under the Local
Government Code
 The Local Government Code
 The respective tax ordinances of provinces,
cities, municipalities, and barangays subject
to the limitations provided in the Local
Government Code
Authority of Secretary of Finance to Promulgate
Rules and Regulations
 Under Section 244 of the Tax Code, it is
provided that the Secretary of Finance,
upon the recommendation of the
Commissioner of Internal Revenue shall
promulgate all needful rules and regulations
for the effective enforcement of the
provisions of the Tax Code.
 The most formal pronouncements of the
Department of Finance are “Revenue
Regulations”. They prescribe or define rules
for the effective enforcement of the Tax
Code and related statutes. They are to be
distinguished from BIR rulings which state
the official position of the BIR to queries
raised by a taxpayer on certain specific
issues of law or administration in relation to
the provision of the Tax Code, relevant laws
and other issuances of the BIR, clarifying or
interpreting them.
 The power to recommend the promulgation
of internal revenue rules and regulations by
the Secretary of Finance is given only to the
Commissioner. He is not allowed by law to
delegate such power to any of his
subordinates.
 The Commissioner has the sole authority to
issue rulings but he also has the power to
delegate said authority to his subordinates.
He cannot, however, delegate to any of his
subordinate officials the power to issue
rulings of first impression or to reverse,
revoke or modify any existing ruling of the
Bureau of Internal Revenue
General Principles of Philippine Income
Taxation
 Income
 It means the gain derived from capital, from
labor or from both combined including
profits gained from dealings in property or
as well as any asset clearly realized
whether earned or not.
 Income Tax
 It is a tax on the net income or the entire
income received or realized in one taxable
year. It is levied upon corporate and
individual incomes in excess of specified
amounts less certain deductions and/or
specified exemptions in case permitted by
law.
Coverage of Philippine Income Taxation
1)A citizen of the Philippines residing
therein is taxable on all income derived from
sources within and without the Philippines.
2) A non-resident citizen is taxable only on
income derived from sources within the Philippines.
3) An individual citizen of the Philippines
who is working and deriving income from abroad as
an overseas contract worker is taxable only on
income from sources within the Philippines.
4) An alien individual whether a resident or
not of the Philippines is taxable only on income
derived from sources within the Philippines.
5) A domestic corporation is taxable on all
income derived from sources within and without the
Philippines.
6) A foreign corporation whether engaged or
not in trade or business in the Philippines is taxable
only on income derived from sources within the
Philippines.
Classification of Taxpayers
1) Individuals
a. citizens who are divided into:
1) resident citizens – those citizens
whose residence is within the Philippines
2) non-resident citizens – those
citizens whose residence is not within the
Philippines
b. aliens who are divided into:
1) resident aliens – those individuals
whose residence is within the Philippines
and are not citizens thereof
2) non-resident aliens – those individuals
whose residence is not within the
Philippines but temporarily in the country
and are not citizens
thereof:
 a. those engaged in trade or
business within the Philippines
b. those who are not so engaged
2) Corporation
a. domestic – those incorporated under our
laws
b. foreign – those incorporated under the
laws of their respective countries and they
are in turn divided into
1) resident – those engaged in trade or
business within the Philippines
2) non-resident – those who are not so
engaged
3) General partnerships
a. general professional partnership
b. general co-partnership
Rates of Individual Income Tax Code of
1997(Only applicable for 2017)
Rates of Individual Income Tax TRAIN Law
(New)
Example
 The taxable income is equal to Gross
Income less Allowable Deductions.
IMPORTANT REMINDER
 Minimum wage earners are exempt from the
payment of income tax on their taxable
income.
Global and Schedular Systems of Taxation
1) Schedular treatment – is a system
employed where the income tax treatment varies
and made to depend on the kind or category of
taxable income of the taxpayer.
2) Global treatment – is a system where the
tax treatment views indifferently the tax base and
generally treats in common all categories of taxable
income of the taxpayer without any distinction as to
their type or nature and subjects them to a single
set of graduated or fixed tax rates.