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Preliminaries:

Module Title: INTRODUCTION TO TAXATION

Course Title: INCOME TAXATION
Course Number: AE 211
Course Description: THIS INTRODUCTORY TAXATION COURSE IS PRIMARILY CONCERNED
WITH INCOME TAXATION. TOPICS INCLUDE THE BASIC PRINCIPLES AND
RULES OF THE INCOME TAX SYSTEM AS THESE APPLY TO INDIVIDUALS,
PARTNERSHIP AND CORPORATIONS. LIKEWISE, TOPICS ALSO COVER
THE INCOME TAXATION OF EMPLOYEES AND UNINCORPORATED AND
CORPORATED BUSINESSES, CAPITAL GAINS TAX, FINAL TAX ON
CERTAIN PASSIVE INCOME AND THE YEAR-END TAX. THE COURSE ALSO
INCLUDES SPECIAL TOPICS LIKE THE MINIMUM CORPORATE INCOME
TAX, FRINGE BENEFITS TAX, IMPROPERLY ACCUMULATED EARNINGS
TAX AND WITHOLDING TAXES.

Total Learning Time: 54 HOURS

Overview: This course is an in-depth study of Income Taxation where students will have their
initial exposure to the Philippine tax system. This is divided into three parts: 1. The Introductory
Concepts. 2. Income Recognition, Measurement and Reporting, and Taxpayer Classifications. 3.
Special Income Taxation and 4. Regular income Taxation . This introductory taxation course is primarily
concerned with income taxation. The objective is to develop a working knowledge on basic principles
and rules of the income tax system in the Philippines as they apply to individuals, partnership and
corporations. It covers an overview of national tax system, and the income taxation of employees and
unincorporated business and unincorporated businesses. It provides the student with knowledge of
capital gains tax, final tax on certain passive income and the year-end tax including minimum corporate
income tax, improperly accumulated earnings tax and normal tax of corporations and withholding taxes.
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MODULE 1

(Week 1)

Overview: Discusses the fundamental principles of taxation

Total Learning time: 1 Week

Learning Outcomes:

After this module 1, students must be able to comprehend and demonstrate mastery of the following:

1. Concept of taxation and its necessity for every government.

2. Lifeblood doctrine and its implication to taxation.
3. Theories of government cost allocation.
4. Inherent power of the State.
5. Scope of the taxation power.
6. Limitations of the taxation power.
7. Stages of taxation.
8. Concept of situs in taxation.
9. Fundamental principles surrounding taxation.
10. Various escapes from taxation.
11. Concept of tax amnesty and condonation.

Indicative Content:

 Definition of taxation
 Theories of cost allocation
 The Lifeblood Doctine
 The inherent power of the state
 The scope of taxation
 Inherent limitations
 Stages of taxation
 Situs of taxation
 Other fundamental doctrines in taxation
 Double taxation
 Escape from taxation
 Tax amnesty and tax condonation

Discussion:
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What is Taxation?

Generally, Taxation may be defined as the process or means by which the sovereign, through its law
making body, raises income to defray the necessary expenses of the government . Further more,
taxation can be defined as…
1. As a state power – It is an inherent power of the state to enforce a proportional contribution
from its subjects for public purpose.
2. As a process – Of levying taxes by legislature of the state to enforce a proportional contribution
from its subjects for public purpose.
3. As a mode of cost distribution – A mode by which the state allocates its cost or burden to its
subjects who are benefited by its spending.
A state cannot exist without a system of funding and Taxation is a means of funding it.

The basis of Taxation

Every citizen benefitted directly or indirectly from the government such as the free usage of public
infrastructures, public health and others. It is also the people who has the capacity to pay finance
through taxation.

Theories of Cost Allocation

1. Benefit received theory- the more benefits one receives from the government, the more taxes
he should pay.
2. Ability to pay theory – it should consider the taxpayers ability to pay. In the Philippines, we use
the Progressive type of Taxation. Those who have more should be taxed more, and those who
have less should be taxed less, REGARDLESS of the benefit one derived from government.

Lifeblood Doctine

Taxes are essential and indispensable to the continued subsistence of the government. Without
taxes, the government would be paralyzed for lack of motive power to activate or operate it (CIR vs
Algue)

As such, tax can be imposed even in the absence of constitutional grant and court are not allowed to
interfere with the collection of taxes.

Inherent Power of the State

As defined, taxation is an inherent power of the state. There are three power of the state, these are:
a. Taxation power – power to enforce proportionately in order to sustain itself.
b. Police power – to enact laws to protect the well-being of the people.
c. Eminent domain – to take private property for the use of general public after just compens
ation.
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The significant different of the power of Taxation among them are a. Taxation are for the support of the
government. This affects the Community or class of Individuals. The amount of imposition is
UNLIMITED because tax is based on the government needs. The limitation is based on the constitutional
and inherent limitations.

Scope of Taxation power

It is widely regarded as comprehensive, plenary and supreme.

The limitation of the Taxation Power

A. Inherent limitations
B. Constitutional Limitations

Stages of the Exercise of Taxation Power

1. Levy or Imposition
This process involves the enactment of a tax law by Congress and is called impact of taxation. It is also
referred to as the Legislative act in taxation.

2. Assessment and Collection

Tax is implemented by the administrative branch of the government. Implementation involves
assessment or the determination of the tax liabilities of taxpayers and collection. Referred to as
incidence of taxation or the administrative act of taxation.

Situs

Situs is the place of taxation.

Examples of Situs Rules:

1. Business tax situs: Businesses are subject to tax in the place where the business is conducted.
Illustration:
A taxpayer is involved in car dealership aborad and restaurant operation in the Philippines.
The restaurant is subject to tax since it is conducted here in the Philippines while the car dealing is
exempt because the business is conducted outside of the Philippines.

2. Income Tax Situs on Services: Service fees are subject to tax where they are rendered.
Illustration:
A foreign corporation leases a residential space to a non-resident Filipino citizen abroad.

The rent income will be exempt since the leasing service is outside the Philippines.

3. Income tax situs on sale of services: The gain on sale is subject to tax in place of the sale.
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Illustration:
Sonia, a non resident OFW who works in Japan agreed to buy jewelries to be delivered to the
Philippines.

The sale is exempt from taxation since the contract of sale was perfected in Japan.

4. Property tax situs: Properties are taxable in their location.

Illustration:

Miel, an OFW in Korea has a residential lot in Banica, Roxas City.

Miel is still subject to real property tax inspite being absent here in the Philippines since her property is
within the Philippines.

5. Personal Tax Situs: Persons are taxable in their place of residence.

Illustration:

Ahmed Lofti is a Sudanese studying medicine in the Philippines.

Ahmed will pay personal tax in the Philippines even if he is an alience because he resides in the
Philippines.

Other Fundamental Doctrines in Taxation

Please refer to Income Taxation by Rex Banggawan, CPA, MBA pages 14 to 17.

Double Taxation

Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same
thing.

Types of Double Taxation

1. Direct double taxation, the same subject is taxed twice when it should be taxed once, in a
fashion that both taxes are imposed for the same purpose by the same taxing authority.

2. Indirect double taxation, is one other than direct double taxation. Example, When a business
tax is imposed by the municipal government prior to the issuance of a business license to a
taxpayer for engaging in an advertising business. His income from his advertising business shall
be later be imposed income tax by the national government.
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How can Double Taxation be minimized?

a. Provision of tax exemption

b. Allowing Tax credit
c. Allowing reciprocal tax treatment
d. Entering into treaties or bilateral agreements

Escapes from Taxation

Escapes from taxation are the means available to the taxpayer to limit or even a avoid the impact of
taxation.

Categories of Escapes from Taxations:

A. Those that result to loss of government revenue

1. Tax Evasion, also known as tax dodging, refer to any act or trick that tends to illegally reduce or
avoid the payment of tax.
Example:
o Gross understatement of income, non declaration of income, overstatement of
expenses or tax credit.
o Misrepresenting the nature of transactions or a amount of transaction to take
advantage of lower taxes.
2. Tax Avoidance, also known as tax minimization, refer to any act or trick that reduces or totally
escpares taxes by any legally permissible means.
Example:

o Selection and execution of transanction that would expose taxpayer to lower taxes.
o Maximising tax options, tax carry-overs or tax credits.
o Careful planning.
3. Tax exemptions. Also known as tax holiday, refers to the immunity, priviledge or freedom from
being subject to a tax which others are subject to. Tax exemptions may be granted by the
constitution and those granted under contract.

B. Those that do not result to loss of government revenue

1. Shifting – this is the process of transferring tax burden to other taxpayers.

Forms of Shifting
a. Forward shifting
b. Backward shifting
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c. Onward shifting
2. Capitalization – This pertains to the adjustment of the value of an asset caused by changes in
tax rates
Example, the value of mining property will correspondingly decrease when mining output is
subjected to higher taxes. This is a form of backward shifting tax.

3. Transformation – This pertains to the elimination of wastes or losses by the taxpayer to form
savings to compensate for the tax imposition or increase in taxes.
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Exercises/Drills:

Name: Subject:
Course and Year: Score:

!. True or False
1. Regulatory tax is intended to achieve some social or economic end.
2. There are two kinds of double taxation – evasion and avoidance
3. Progressive tax is not imposed in the Philippines.
4. The constitution is a source of tax laws.
5. Tax evasion is known as tax minimization while tax avoidance is known as tax dodging.
6. In determining the situs of taxation, the nature of tax is not to be considered at all.
7. Taxation is inherent in sovereignty.
8. Taxation is a mode of apportionment of government cost to the people.
9. No one shall be imprisoned for non-payment of tax.
10. The government should tax itself.

II. Solve exercise drill on page 21.

III. Answer Multiple Choice – Theory part 1 (page 25) and Part 2 (page 27)

Evaluation

Additional reading

 www.course.hereo.com Income Taxation.pptx – income taxation Rex B. Banggawan, CPA

 www.bir.gov.ph income Tax


References

a. Books

1. INCOME TAXATION , 2019 OBE Edition by Rex B. Banggawan, CPA, MBA

2. INCOME TAXATION, 2019 Issue-17th Edition by Win Ballada, CPA, MBA and Susan Ballada, CPA
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