Taxation- is the power by which the sovereign raises revenue to defray the expenses of the
government
- enforced contribution imposed by the law making body in its sovereign capacity to augment
the expenses of the government
Purpose of taxation: to raise funds or property to enable the State to promote the general
welfare and protection of its citizens
Secondary Purpose: (PR-REP)
1. Promote General Welfare
2. Regulatory Measure
3. Reduction of social inequality/compensatory purpose
4. Encourage economic growth
5. Protectionism
Nature of taxing power
1. Inherent Attribute in Sovereignty- it does not need constitutional conferment. Constitutional
Provisions do not give rise to the power to tax but merely impose limitations on what would
otherwise be an invincible character.
2. Legislative in Character- the power to tax is inherent in the State, and the state is free to
select the object of taxation, such power being exclusively vested in the legislature, except
where the constitution provides otherwise.
Life Blood Theory- taxation is the indispensable and inevitable price for civilized society;
without taxes the government would be paralyzed for lack of motive power to activate and
operate it. Thus, collection of taxes must be made without hindrance if the State is to maintain
its orderly existence (CIR vs Algue)
Necessity Theory- Government is necessary; however it cannot continue without the means
of paying for its existence; hence it has the right to compel all its citizens and property within
its power to contribute for the same purpose. Without taxes, the government cannot ful ll its
mandate of promoting general welfare and well being of the people (National Power Corp vs
City of Cabanatuan)
Bene ts-Protection/Reciprocity Theory (Doctrine of Symbiotic Relationship)- Taxes are
paid for the enjoyment of the bene ts of organized society. Such enjoyment also extends to
those members of a State who do not pay taxes because they are not able to do so. The
government for its part, is expected to respond in the form of tangible and intangible bene ts
intended to improve lives of the people and enhance their material and moral values (CIR vs
Algue)
Characteristics of the power to tax: (CUPS)
1. Comprehensive- it covers all persons, businesses, activities, professions, rights, and
privileges
2. Unlimited- a tax does not cease to be valid merely because it regulates, discourages, or
even de nitely deters the activities tax.
3. Plenary- complete
4. Supreme- referred to as the strongest of all powers of the govt. it cannot be interpreted to
mean that it is superior to other inherent powers of the govt, only that it is supreme insofar
as the selection of the subject of taxation is concerned.
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Principles of a sound tax system: (FAT)
1) Fiscal adequacy - revenue raised must be su cient to meet government/public
expenditures and other public needs (Chavez v. Ongpin, G.R. No. 76778, June 6, 1990).
Neither an excess nor a de ciency of revenue vis- -vis the needs of government would be in
keeping with the principle (Vitug, 2006).
2) Administrative feasibility- the tax system should be capable of being e ectively
administered and enforced with the least inconvenience to the taxpayer (Diaz v. Secretary of
Finance, G.R. No. 193007, July 19, 2011).
3) Theoretical justice – the tax system must take into consideration the taxpayer’s ability to
pay (Ability to Pay Theory) and that the rule on taxation must be uniform and equitable and that
the State must evolve a progressive system of taxation.
Inherent Limitations of Taxation: (PL-GTI)
1. Taxes must be exacted for a public purpose
2. Non delegability of taxing power. The power to tax is inherently Legislative in Nature
3. Government entities, agencies, instrumentalities are generally exempt from taxation
4. Territoriality or Situs of Taxation
5. International Comity (International comity refers to the principle of mutual respect and
cooperation between nations, which involves recognizing and respecting the laws,
customs, and policies of other countries. It is a concept that emphasizes the importance of
promoting harmonious relations and avoiding con icts between nations.)
Constitutional Limitations of power to tax: (DUNN-PT-PP-VJ)
1. Due Process and Equal Protection Clause
2. Uniformity and Equitable
3. Non Impairment of Contracts
4. Non Imprisonment for non payment of poll tax
5. Property tax exemptions for religious, charitable or educational use
6. Tax Exemptions of Educational Institution
7. Procedure for the Passage of tax bills
8. Procedure for grant of tax exemptions
9. Veto Powers of the President
10. Judicial Power to review legality of tax
Requisites of a valid tax: (JIP-UI)
1. Person or property taxed be within the Jurisdiction of the taxing authority
2. Assessment and collection of certain kinds of taxes guarantee against injustice to
individuals, especially by providing notice and opportunity for hearing
3. Should be for public purpose
4. The rule of taxation shall be uniform
5. Tax must not impinge on the inherent and constitutional limitations on the power of
taxation
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Double Taxation in its Strict Sense:
- It is referred to as obnoxious or direct duplicate taxation which is a double taxation within
the following elements:
- taxing twice
- by the same taxing authority
- within the same jurisdiction
- for the same purpose
- in the same taxing year
- of the same kind
Double Taxation in its broad sense:
- referred to as indirect duplicate taxation, a double taxation other than direct duplicate
taxation. It extends to all cases in which there is a burden of two or more impositions
How Taxes are instituted:
- Generally speaking, taxes are instituted by governments to raise revenue to fund public
services and programs, such as education, healthcare, infrastructure, and social welfare.
Tax Avoidance- is the tax saving device within the means sanctioned by law. Is is the
legitimate right of a taxpayer to avoid tax as long as he adopts legal means
Tax Evasion- is a scheme used outside lawful means and which when availed of, usually
subjects the taxpayer to further or additional civil or criminal liabilities.
Stages or Aspects of Taxation: (LAC)
1. Levy (Tax Legislation)
2. Assessment and Collection (Tax Administration)
3. Collection of payment
Income tax- a tax on all yearly pro ts arising from property, profession, trade or business or a
tax on a person’s income, emoluments, pro ts and the like.
Income- refers to all wealth which ows into the taxpayer other than a mere return of capital
Gross Income- all income, gain or pro t subject to income tax
Taxable Income- items of gross income, less deductions
Net Income- Gross income less statutory deductions
Exclusions under the tax code:
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Taxable income vs Net Income:
Taxable income refers to the portion of an individual or business's income that is subject to
taxation by the government. It is calculated by subtracting allowable deductions and
exemptions from the total income earned during a tax year. Taxable income is used to
determine the amount of income tax that an individual or business owes to the government.
Net income, on the other hand, refers to the total income earned by an individual or business
during a certain period of time, after deducting all allowable expenses and taxes. It is a
measure of the pro tability or nancial performance of an individual or business.
The main di erence between taxable income and net income is that taxable income is used to
determine the tax liability of an individual or business, while net income is used to determine
their pro tability or nancial performance.
Ordinary Asset vs Capital Asset:
An ordinary asset is an asset that is held for sale or use in the ordinary course of business.
Examples of ordinary assets include inventory, accounts receivable, and equipment that is
used to generate revenue.
A capital asset, on the other hand, is an asset that is held for investment purposes or for long-
term use in the business. Examples of capital assets include land, buildings, machinery, and
vehicles that are used for transportation or delivery.
The main di erence between ordinary assets and capital assets is how they are treated for tax
purposes. Ordinary assets are typically subject to ordinary income tax rates and are subject to
recapture provisions upon disposition. This means that any gain on the sale of an ordinary
asset may be taxed as ordinary income, and any deductions taken for depreciation or other
expenses may need to be recaptured and included as income.
In summary, the main di erence between ordinary assets and capital assets is their intended
use and the tax treatment they receive. Ordinary assets are used in the ordinary course of
business and are subject to ordinary income tax rates, while capital assets are held for
investment purposes or long-term use and are subject to capital gains tax rates when sold.
Value Added Tax (VAT)- indirect tax
Value Added Tax (VAT) is a business tax imposed and collected from the seller or vendor of
services in the course of trade or business on every importation, sale of properties (real or
personal), or lease of goods and other properties (real or personal). It is an indirect tax, thus, it
can be passed on to the buyer in the Philippines.
Percentage Tax
Percentage Tax is a business tax imposed on persons or entities who sell or lease goods,
properties, or services in the course of trade or business whose gross annual sales or receipts
do not exceed P3M and are not VAT-registered in the Philippines. (1% Train Law, after train law
June 30, 2023- 3%)
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Excise Tax
Excise Tax is a tax on the production, sale or consumption of a commodity in a country. On
goods manufactured or produced in the Philippines for domestic sale or consumption or for
any other disposition; and On goods imported.
Estate Tax- are taxes levied on the transmission of properties from a decedent to his heirs. It is
a tax on the privilege to transmit property at death and on certain transfers which are made the
equivalent of testamentary dispositions by the statute. (6% from net estate) Gross estate-
deductions = net estate
Items that should be included as part of gross estate: (DTR-PPP-TC)- depends on the
decedent whether resident or non resident, alien etc.
1. Decedents Interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Property passing under general power of appointment
5. Proceeds of life insurance
6. Prior interest
7. Transfer of insu cient consideration
8. Capital of the surviving spouse
Composition of Gross Estate:
- the gross estate of the decedent shall be comprised of the following:
- at the time of his death
- including revocable transfers, and transfers for insu cient consideration etc
Resident Citizens: all properties
- real or personal
- tangible and intangible (wherever situated)
Non Resident Aliens:
-only properties situated in the Philippines
Valuation for Gross Estate:
- the properties comprising the gross estate shall be valued according their FMV at the time of
decedent’s death. For real properties, appraised value at the time of death whichever is
higher of the FMV of the BIR or FMV of the assessors.
Allowable Deductions from Gross estate: (5-CC-UP-T10-AN)
1. Standard Deduction of 5M
2. Claims agains the estate
3. Claims agains insolvent persons
4. Unpaid mortgages, taxes and casualty losses
5. Property perviously taxed
6. Transfer for public use
7. Family home for 10M
8. Amount received by heirs from the retirement bene ts of employees of private rms
9. Net Share of surviving spouse
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Exclusions from Gross Estate: (CGA-PPW-TT-MPA)
1. Capital of the surviving spouse
2. GSIS bene ts
3. Accrual from SSS
4. Proceeds of life insurance where the bene ciary is irrevocable appointed
5. Proceeds of life insurance under a group insurance taken by employer
6. War damages payments
7. Transfer by way of bona de sale
8. Transfer of property to government
9. Merger of usufruct
10. Property held in trust by the decedent
11. Acquisition or transfer expressly declared not taxable
Donors Tax- is an excise tax imposed on the privilege to transfer property/interest by way of
gift inter vivos based on a pure act of liberality without any or less than adequate consideration
and without any legal compulsion to give
Donation- an act of liberality whereby a person disposes a thing or right gratuitously in favor of
another who accepts it.
Rate of Donor’s tax- 6% in excess of 250K.
Requisites of a valid donation: (CD-DAF)
1. Capacity of the Donor
2. Donative Intent
3. Delivery whether actual or constructive
4. Acceptance
5. Form prescribed by law
Fringe Bene ts- refer to any goods, services or other bene ts furnished or granted in cash or
in kind by an employer to an individual employee (xpn: rank and le)
Vanishing deductions- is a term used to describe a tax policy that reduces or eliminates
certain tax deductions as income increases. The idea behind vanishing deductions is to limit
the tax bene ts for high-income individuals while still allowing lower-income individuals to
bene t from deductions.
Zero Rated vs VAT Exempt
Zero-rated transactions are those that are subject to VAT, but at a 0% rate. This means that
VAT is still charged on the transaction, but the rate is set at 0%, e ectively making it a tax-free
transaction. Businesses engaged in zero-rated transactions are still required to register for VAT,
keep VAT records, and le VAT returns, but they can also claim back the VAT paid on any
purchases related to the zero-rated transaction. Examples of zero-rated transactions include
the export of goods and services, and the supply of goods and services to registered VAT
taxpayers.
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VAT exempt transactions, on the other hand, are those that are not subject to VAT at all. This
means that no VAT is charged on the transaction, and businesses engaged in VAT exempt
transactions are not required to register for VAT, keep VAT records, or le VAT returns. However,
they also cannot claim back the VAT paid on any purchases related to the exempt transaction.
Examples of VAT exempt transactions include certain nancial services, healthcare services,
and educational services.
Di erences between the old (NIRC) and the new amendment introduced by Train Law:
- The National Internal Revenue Code (NIRC) is the primary tax law in the Philippines, and it
has undergone several amendments over the years. One of the most signi cant amendments
introduced in recent years is the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which
took e ect on January 1, 2018. Here are some key di erences between the old NIRC and the
amendments introduced by the TRAIN Law:
1. Lower income tax rates: Under the old NIRC, income tax rates ranged from 5% to 32%.
The TRAIN Law introduced lower income tax rates and a simpli ed tax bracket system, with
rates ranging from 0% to 35%.
2. Higher excise taxes on fuel, sugary drinks, and tobacco products: The TRAIN Law
increased the excise taxes on petroleum products, sugary drinks, and tobacco products, which
generated additional revenue for the government.
3. Expanded value-added tax (VAT) base: The TRAIN Law expanded the VAT base by
removing some exemptions and reducing the threshold for VAT registration. This increased the
number of businesses and individuals who are required to pay VAT.
4. Increased tax exemptions: The TRAIN Law increased the tax exemption for 13th month
pay and other bonuses to PHP 90,000, which means that employees can receive this amount
tax-free.
5. Estate tax amnesty: The TRAIN Law introduced a one-time estate tax amnesty program,
which allowed taxpayers to settle their outstanding estate tax liabilities at a reduced rate.
6. Simpli ed tax compliance procedures: The TRAIN Law introduced several measures to
simplify tax compliance procedures, such as the use of electronic ling and payment systems
and the adoption of a simpli ed tax system for small businesses.
Overall, the TRAIN Law introduced signi cant changes to the NIRC, with the aim of generating
more revenue for the government, promoting economic growth, and providing tax relief to low-
and middle-income earners.
Destination Principle:
- The destination principle is a concept in international taxation that determines the jurisdiction
in which value-added tax (VAT) should be paid on cross-border transactions. Under the
destination principle, the VAT is levied and collected by the country in which the nal consumer
of the goods or services is located, rather than the country in which the goods or services are
produced or supplied.
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For example, if a company in Country A sells goods to a company in Country B, and the goods
are ultimately sold to consumers in Country C, the VAT on the transaction would be paid in
Country C, where the nal consumption occurs. This is based on the principle that the VAT is
ultimately a tax on consumption, and should therefore be paid in the jurisdiction where the nal
consumption takes place.
Zero Rated vs VAT Exempt transactions:
Zero-rated transactions are those that are subject to VAT, but at a 0% rate. This means that
VAT is still charged on the transaction, but the rate is set at 0%, e ectively making it a tax-free
transaction. Businesses engaged in zero-rated transactions are still required to register for VAT,
keep VAT records, and le VAT returns, but they can also claim back the VAT paid on any
purchases related to the zero-rated transaction. Examples of zero-rated transactions include
the export of goods and services, and the supply of goods and services to registered VAT
taxpayers.
VAT exempt transactions, on the other hand, are those that are not subject to VAT at all. This
means that no VAT is charged on the transaction, and businesses engaged in VAT exempt
transactions are not required to register for VAT, keep VAT records, or le VAT returns. However,
they also cannot claim back the VAT paid on any purchases related to the exempt transaction.
Examples of VAT exempt transactions include certain nancial services, healthcare
services, and educational services.
The main di erence between zero-rated and VAT exempt transactions is that zero-rated
transactions are still subject to VAT, but at a 0% rate, while VAT exempt transactions are not
subject to VAT at all. Businesses engaged in zero-rated transactions can claim back the VAT
paid on purchases, while those engaged in VAT exempt transactions cannot.
Compromise- is an agreement between two or more persons who amicably settle their
di erences on such terms and conditions as they may agree on to avoid any lawsuit between
them
Tax Amnesty- is a general pardon or the intentional overlooking by the State or its authority to
impose penalties on persons otherwise guilty of violation of a tax law.
Power of the BIR Commissioner:
1. Interpret Tax Laws and decide on tax cases
2. Obtain Information, and to summon, examine and take testimony of persons
3. Make Assessments and prescribe additional requirements for tax administration and
enforcement
4. Delegate Power
5. Suspend Business Operations
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Power to tax is power to destroy:
The power to tax is an essential component of government revenue generation and is used to
fund various public goods and services. However, taxes can also have a signi cant impact on
economic behavior, in uencing how individuals and businesses make decisions about
consumption, investment, and production.
In some cases, the imposition of high or unfair taxes can harm certain industries or groups,
leading to decreased economic activity and potentially even the destruction of businesses or
livelihoods. For example, high taxes on certain products can discourage consumers from
purchasing those products, leading to reduced demand and potentially causing businesses to
fail.
Main purpose of Withholding Tax:
- There are several Supreme Court (SC) decisions wherein it was explained that the main
purpose of withholding tax is for the e cient collection of taxes which reduces e ort on the
part of the government to collect taxes. It is essentially a method or mode of collecting tax in
advance to facilitate the collection of income tax. Under the Tax Code, the withholding agent
or income payor is mandated to withhold the tax due and remit the said taxes to the BIR.
Final Withholding tax vs Creditable Withholding tax:
Under the FWT system, the amount of income tax withheld by the withholding agent is
considered the full and nal payment of income tax due on the income. The FWT applies only
to certain categories of income, such as royalties, interest, cash and property dividends, and
capital gains on the sale of real property, among others.
For CWT, sometimes called expanded withholding tax or EWT, the withholding agent or income
payor will withhold tax that approximates the tax due on the payment. The income payee will
report the income and pay any income tax still due after deducting the CWT withheld as tax
credits. Simply put, CWT is an advance income tax due to the payee.
Incidence and Burden of taxation:
The incidence of taxation refers to who ultimately bears the economic burden of a tax, while
the burden of taxation refers to the actual amount of tax paid by a taxpayer.
Incidence- liability
Burden- actual payment of tax
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Notes from last class discussion:
collection of taxes as GR: cannot con scate, but XPN: if non payment, it may be other
remedy.
political law and taxation, why?
can the state function without taxation?
Government can exist without the power to tax- example govt owns everything, it can a ord
not to tax its people
LGU can have the power to tax basis: LGU code and Consti
why is tax legislative in nature- can only be exercised by an enactment of laws
can it be delegated being inherently legislative- no - non delegability
Proper remedy if tax is imposed by the executive branch- declaratory relief. go to court and
le an action for declaratory relief.
LGU can enact tax laws as long as it is from the legislative body of the govt.
power of taxation is subject to judicial review- in principle it is not subject to judicial review.
as a co-equal of the executive branch of the govt, judiciary cannot interfere.
when can the judiciary interfere? - via checks and balances, they cannot interfere during the
formulation of tax laws, it is not within their ambit to do so. they can examine only after its
enactment and e ectivity that counts can look into the wisdom that tax laws can be subject to
judicial review.
are revenue regulations subject to judicial review?-
yes, courts can take cognizance of the validity of revenue regulation if it infringe the rights of
tax payers if unconsti and if in excess in the powers granted by the consti.
what are the characteristics of the power to tax
CUPS
-The power to tax is comprehensive, unlimited, plenary and supreme. It is comprehensive
because it covers all persons, activities, businesses, professions, rights and privileges. It is
unlimited because the only limitation is the responsibility of the legislature which imposes tax
to the the constituents who pay it.
although taxes are the lifeblood of the state, it still emanates from the taxpayers ability to pay
Individual tax vs business tax
reason why individuals are easier to tax- for administrative reasons
Di erentiate taxable and non taxable income- sec 32 of NIRC
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