INCOME TAXATION

Τaxation is the process or means by which the sovereign, through its lawmaking body, raises
income to defray the necessary expenses of the government. Taxation, as a power of the State, is
inherent in sovereignty. In the Philippines, the premier tax agency is the Bureau of
Internal Revenue (BIR)

Objectives of Taxation ~taxation is much more than just a means of raising revenue for the
government. It is also one of the major means by which the national government attempts to
achieve various economic and social objectives.

This objective includes:

• Shifting wealth from the rich to the poor

• Maintaining price stability

• Stimulating economic growth

• Encouraging full employment

State of Powers

Taxation ~the power of the state by which the sovereign raises revenue to defray the necessary
expenses of the government.

Eminent Domain ~the power of the state to take private property for public use upon
payment of just compensation.

Police Power ~the power of the state to enact laws to promote public health, public morals,
public safety and the general welfare of the people.

Aspect of Taxation

Levying of the tax ~the imposition of tax requires legislative intervention. In the Philippines,
it is congress that levies taxes; and

Collection of the tax levied ~this is essentially an administrative function.

Basic Principles of Sound Tax

Fiscal adequacy ~sources of revenue are sufficient to meet government expenditures;

Equality or theoretical justice ~the tax imposed must be proportionate to taxpayer's ability
to pay; and
Administrative feasibility ~the law must be capable of convenient, just and effective
administration.

Limitation on the Power of Taxation

The power of taxation is, however subject to constitutional and inheritent limitations.

Constitutional limitations ~are those provided for in the constitution or implied from its
provisions.

Inherent limitations ~are restrictions to the power to tax attached to its nature.

The following are the inherent limitations.

Purpose ~taxes may be levied only for public purpose.

Territoriality ~the state may tax persons and properties under its jurisdiction.

International comity ~the property of a foreign state may not be taxed by another.

Exemption ~governmental agencies performing governmental functions are exempt from

taxation.

Non-delegation ~the power to tax being legislative in nature may not be dele gated

FUNDAMENTALS DOCTRINE IN TAXATION

1. The Life Blood Doctrine

2. Benefits Received Theory

3. Ability to pay theory

4. Marshall Doctrine ~"The power to tax involves the power to destroy."

5. Holme’s Doctrine ~"Taxation power is not the power to destroy while the court sits."

6. Prospectivity of Tax Laws ~taxes must be imposed prospectively. In the words of the
Supreme Court: "Taxes may be imposed retroactively by the law but, unless so expressed by
such law, these taxes must only be imposed prospectively." (Hydro Resources vs. Court of
appeals).

7. Double Taxation
Direct duplicate taxation ~the same subject is taxed twice when it should be taxed but once,
in a fashion that both of taxes are imposed for the same purpose by the same taxing authority,
within the same jurisdiction or taxing district, for the same taxable period and for the, same
kind or character of a tax.

Indirect double taxation ~is one other than the direct double taxation. Though this type
may not prove unconstitutional, it is being avoided so as not to bring injustice to the taxpayer.

8. Set-off of Taxes

TAXES ARE NOT SUBJECT TO SET-OFF OR LEGAL COMPENSATION UNDER

ARTICLE 1279 OF THE CIVIL CODE.

Supreme Court echoed the Mambulao lumber doctrine: "We have consistency ruled that there
can be no offsetting of taxes against the claims that the taxpayer may have against the
government.

9. Escape from Taxation

Tax avoidance ~happens when the taxpayer minimizes his tax liability by taking advantage of
legally available tax planning opportunities. This is otherwise known as tax minimization; others
call it tax planning.

Tax evasion ~occurs when the taxpayers resorts to unlawful means to lessen or to get away
with his tax liability. This is also known as tax dodging.

10. Situs of Taxation ~the situs of taxation is the place of taxation. The rule is that the State
may rightfully levy and collect the tax where the subject being taxed has a situs under its
jurisdiction.

Factors in determination of situs of taxation:

•Subject matter

•Nature of tax

•Citizenship of the taxpayers; and

•Residence of the taxpayer.

The following situs of taxation apply:

1. Persons ~residence of taxpayers.

2. Real property or Tangible personal property ~location of the property

3. Intangible personal property ~as a rule, situs is the domicile of the owner unless he has
acquired a situs elsewhere.

4. Income ~taxpayer's residence or citizenship, or a place where the income was earned.

5. Business, occupation and transaction ~place where business is being operated,

occupation being practiced and transaction completed.

6. Gratuitous transfer of property ~taxpayer's residence or citizenship, or location of the

property.

TAX

Taxes ~are enforced proportional contributions from persons and property levied by the
lawmaking body of the State by virtue of its sovereignty for the support of the government and
all public needs.

Tax, in a general sense, is any contribution imposed by the government upon individuals, for
the use and service of the state, whether under the name of toll, tribute, tallage, gabel, impost,
duty, custom, excise, subsidy, aid, supply, or other name. Tax, in its essential characteristics, is
not a debt (Black's Law Dictionary).

Essential Characteristics of a Tax

1. It is an enforced contribution

2. It is levied by the lawmaking body

3. It is proportionate in character

4. It is generally payable in money

5. It is imposed for the purpose of raising revenues; and

6. It is to be used for public purpose.

Types of Tax Rate Structures

Tax systems are often described as either regressive, proportional, or progressive. A tax is said
to be regressive if the average rate decreases as the tax base increases. For proportional taxes
(also called fiat or uniform taxes), the average rate of tax remains constant for all levels of the
tax base, whereas a progressive tax is one for which the average rate increases as the amount
of the tax bases increases.
Notice that the definitions of regressive, proportional, and progressive are based on the
direction of change in tax rates with respect to an increase in the tax base. The widely held
political view that the rich should pay a larger amount of tax than the poor could be upheld
under any of the three rate structures-even a regressive one.

Before a tax system can be classified as either regressive or progressive, taxes must be
expressed as a percentage of some base amount. In the previous technical definitions, the base
used for this purpose is the base on which the tax is computed.

Constitutional Provision on Progressive System of Taxation

The Supreme Court declared Republic Act (R.A.) 9337 or the VAT Reform Act constitutional. In
the same decision, it clarified the constitutional provision on progressive system of taxation.
The increase in corporate income tax rate and the removal of certain exemptions are meant to
distribute the burden of taxation. Although indirect taxes, e.g. VAT, are regressive by nature,
the constitution does not prohibit the imposition of indirect taxes. When the Constitution
mandated Congress to evolve a progressive system of taxation, it simply meant that direct
taxes should be preferred and that the regressive indirect taxes can be minimized with
exemptions and differentiated rates (G.R. 168056, G.R. 168207, G.R. 168461, G.R. 168463, and
G.R. 168730, Sept. 1, 2005)

Classification of Taxes

1. As to subject matter or object

a. Personal, poll or capitation ~tax of a fixed amount imposed on individuals, whether

citizens or not, residing within a specified territory without regard to their property or the
occupation in which they may be engaged. Example: 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.
Example: real estate tax.

c. Excise ~tax imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in an occupation. Examples: estates tax, donor's tax, income tax, value
added tax.

2. As to who bears the burden

a. Direct ~tax demanded from persons who are intended or bound by law to pay the tax.
Examples: community tax, income tax, estate tax, donor's tax.

b. Indirect ~tax which the taxpayer, can shift to another. Examples: customs duties,
value added tax, some percentage taxes.
3. As to determination of amount

a. Specific ~tax imposed based on a physical unit of measurement, as by head of number,

weight or length or volume. Examples: tax on distilled spirits, fermented liquors,
cigars, wines, fireworks, etc.

b. Ad valorem ~tax of a fixed proportion of the value of property, needs an independent

appraiser to determine its value. Examples: real estate tax, certain customs duties,
excise taxes on cigarettes, gasoline and others.

4. As to purpose

a. General, fiscal or revenue ~tax with no particular purpose or object for which the
revenue is raised, but is simply raised for whatever need may arise. Examples: Income tax,
Value Added-tax.

b. Special or regulatory ~tax imposed for a special purpose regardless of whether revenue is
raised or not, and is intended to achieve some social or economic end. Examples: protective
tariffs or customs duties on certain imported goods to protect local industries
against foreign competition.

5. As to authority imposing the tax or scope

a. National ~tax imposed by the national government. Examples: internal revenue

taxes, tariff and customs duties.

b. Municipal or local ~tax imposed by municipal governments for specific needs.

Examples: real estates taxes, municipal licenses.

6. As to graduation or rate

a. Proportional ~tax based on a fixed percentage of the amount of property income or other
basis to be taxed. Examples: percentage taxes, real estate taxes.

b. Progressive or graduated ~tax rate increases as the tax base increases. Examples:
income tax, estate tax, donor's tax.

c. Regressive ~tax rate decreases as the tax base increases. Example: Value Added-tax.

Tax Distinguished from other fee tax

1. From toll. Toll is a sum of money for the use of something, generally applied to the
consideration which is paid for the use of a road, bridge or the like, of a public nature.
2. From penalty. Penalty is any sanction imposed as a punishment for violation of law or acts
deemed injurious. Violation of tax laws may give rise to imposition of penalty

3. From special assessment. Special assessment is an enforced proportional contribution

from owners of lands for special benefits resulting from public improvements.

4. From permit or license fee. Permit or license fee is a charge imposed under the police
power for purposes of regulation.

5. From debt. A debt is generally based on contract, is assignable and may be paid in-kind
while a tax is based on law, cannot generally be assigned and is general payable in money. A
person cannot be imprisoned for non-payment of debt while he can be for non-payment of tax.

6. From revenue. Revenue is broader than tax since it refers to all funds or income derived by
the government taxes included. Other sources of revenues are government services, income
from public enterprises and foreign loans.

7. From customs duties. Customs duties are taxes imposed on goods exported from or
imported to a Country. Customs duties are actually taxes but the latter is broader inscape.

TAX LAWS

Sources of Tax Authority ~the national government consists of three branches: the
executive (President and administration), the legislative (Congress), and the judicial (Courts).
Congress creates statutory law, such as the National Internal Revenue Code (NIRC) of 1997,
which is the primary law governing taxation.

Congress ~creates tax laws like the National Internal Revenue Code (NIRC) of 1997.

Administrative Branch

• Bureau of Internal Revenue (BIR) - Enforces tax laws.

• Revenue Regulations ~guidelines for tax compliance.

• Revenue Rulings ~specific explanations for tax situations.

Courts - Settle disagreements on tax law application between BIR and taxpayers.

Sources of Tax Laws

1. Constitution;

2. Statutes and Presidential Decrees;

3. Revenue Regulation by the department of Finance

4. Rulings issued by the Commissioner of Internal Revenue and Opinions by the

Secretary of Justice

5. Decisions of the Supreme Court and the Court of Tax Appeals;

6. Provincial, city, municipal, and barangay ordinances subject to limitations set

forth in the Local Government Code; and

7. Treaties or international agreements the purpose of which is to avoid or

minimize double taxation

Philippine Tax Laws and Taxes

1. National Internal Revenue Code of 1997 (P.D. 1158, as amended);

a. income taxes (individual and corporate);

b. estate and donor's taxes;

c. value-added tax;

d. other percentage taxes;

e. excise tax; and

f. documentary stamp tax.

2. Tariff and Customs Code of 1978 (P.D. 1464, as amended);

a. import duties; and

b. export duties.

3. Local Government Code of 1991 (R.A. 7160);

a. real property tax;

b. business taxes, fees and charges;

c. professional tax;

d. community tax; and

e. tax on banks and other financial institutions.

4. Special Laws

a. Motor Vehicle Law (R.A. 4136) - motor vehicle fees;

b. Private Motor Vehicle Tax Law (P.D. 1958) - private motor vehicle tax;

C. Philippine Immigration Act of 1940 (C.A. 613, as amended) - immigration tax; and

d. Travel Tax Law (P.D. 1183, as amended) - travel tax.

Internal Revenue Laws ~revenue law is a law passed for the purpose of authorizing the levy
and collection of

taxes in some form to raise revenue. A revenue law is said to be a national revenue law when it is
applicable all over the country.

Internal revenue laws are neither political nor penal in nature although there are penalties in
case of violations. Tax laws are civil in nature.

BIR ISSUANCE AND RULINGS DEFINED

Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, that specify, prescribe or define
rules and regulations for the effective enforcement of the provisions of the National Internal
Revenue Code (NIRC) and related statutes.

Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and
applicable portions, as well as amplifications, of laws, rules, regulations and precedents issued
by the BIR and other agencies/offices.

Revenue Memorandum Orders (RMOs) are issuances that provide directives or

instructions; prescribe guidelines; and outline processes, operations, activities, workflows,
methods and procedures necessary in the implementation of stated policies, goals, objectives,
plans and programs of the Bureau in all areas of operations, except auditing.

Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax
laws, as applied to a specific set of facts, with or without established precedents, and which the
Commissioner may issue from time to time for the purpose of providing taxpayers guidance on
the tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly
issued RMRs; otherwise, the Rulings are null and void ab initio.

BIR Rulings
The Law and Legislative Division will not issue a ruling in response to a request in the following
instances:

1. The taxpayer has directed a similar inquiry to another office of the BIR:

2. The same issue involving the same taxpayer or a related taxpayer is pending in a case in
litigation.

3. The same issue involving the same taxpayer is the subject of a pending investigation ongoing
audit. administrative protest, claim for refund or issuance of tax credit certificate, or collection
proceeding.

Revenue Bulletins (RBs)

The BIR also issues Revenue Audit Memorandum Orders (RAMOS)

Revenue Regulations 5-2012 was published on April 4. 2012. Then the Commissioner, thru RMC
22-2012, Clarified that

1. All BIR Ruling issued prior to Jan. 1,1998 (the effectivity date of R.A. 8424)

2. BIR rulings issued prior to Jan. 1, 1998 remain valid but only:

a. To the taxpayer who was issued the rulling, and

b. Covering the specific transactions which the subject of the same ruling 1. BIR ruling issud
prior to Jan. 1.1998 shall remain valid as mention above. unless expressly notified of its
revocation or unless the legal basis in law for such issuance has already been repealed/amended
in the current Tax Code

Powers and Duties of the Bureau of Internal Revenue

The Deputy Commissioners are tasked to handle particular group within the Bureau such as
information systems, legal and inspection, operations. resource management, tax reforms
administration, special concerns and large taxpayers. Its powers and duties follow.

1. Assessment and collection of all national internal revenue taxes, fess and charges

2. Enforcement of all forfeitures, penalties and fines

3. Execution of judgment in all cases decidend in its favor by the Court of Tax Appeals and
ordinary courts; and

4. Admimaration of supervisory and police powers conferred to it.

Powers of the Commissioner

1. Interpret tax laws and decide tax cases;

2. Obtain information, and to summon, examine, and take testimony of persons;

3. Make assestments and prescribe additional requirement for tax administration and
enforcement.

4. Delegate powers vested in him by the Code to any subordinate officer with rank equivalent to
division chief or higher.

5. Suspend business operations of a taxpayer.

6. Compromise, abate and refund or credit taxes.

In Mar. 5,2010, the President signed Republic Act 10021. "The Exchange of the
Information on Tax Matters Act of 2009."

Section 3 of R.A. 10021, amending Section 6(F) of R.A 8424 or the tax Reform Act
of 1997. provides the Commissioner with the authority to inquire into bank
deposit accounts and other related information held by financial institutions of:

1. A decedent to determine his gross estate.

2. Any Taxpayer who has filed an application for compromise of his tax liability under Sec. 204
(A)(2) of this code by reason of financial incapacity to pay his tax liability

3. A specific taxpayer or taxpayers subject of a request for the supply of tax information from a
foreign tax authority pursuant to an international convention or agreement on tax matters to
which the Philippines is a signatory or a party of: Provided. That the information obtained from
the banks and other financial institutions may be used by the Bureau of internal Revenue for tax
assessment. verification, audit and enforcement purposes

a. The identity of the person under examination or investigation:

b.A statement of the information being sought including its nature and the form in which the
sald foreign tax authority prefers to receive the information from the Commissioner

c. The tax purpose for which the information is being sought

d. Grounds for believing that the information requested is held in the Philippines or is in the
possession or control of a person within the jurisdiction of the Philippines.
e To the extent known, the name and address of any person believed to be in possession of the
requested information:

f. A statement that the request is in conformity with the law and administrative practices of the
said foreign tax authority, such that if the requested information was within the jurisdiction of
the said foreign tax authority then it would be able to obtain the information under its laws or in
the normal course of administrative practice and that it is in conformity with a convention or
international agreement.

g. A statement that the requesting foreign tax authority is also allowed under its domestic laws
to exchange or furnish the information subject of the request (RR 10-2010, Oct 6, 2010), and h.
A statement that the requesting foreign tax authority has exhausted all means available in its
own territory to obtain the information, except those that would give rise to disproportionate
difficulties.

Revenue Regulations 3-2014, Issued Feb, 11, 2014, amended Sec. 10 of RR 10-2010, to read as
follows: "A taxpayer shall be duly notified in writing by the Commissioner that a foreign tax
authority is requesting for exchange of information held by financial institutions pursuant to an
international convention or agreement on tax matters within 60 days from receipt of the said
request

Tax Incentives

Adopt-a-School Act of 1998 (RA. 8525) Revenue Regulations 10-2003 implements the tax
incentive provisions of said law A pre-qualified adopting private entity which enters into an
agreement with a public school shall be entitled to the following tax incentives:

Deduction from gross income of the amount of contribution/donation that were actually,
directly and exclusively incurred for the Program, subject to limitations, plus an additional
amount equivalent to 50% of such contribution/donation.

Exemption of the Assistance made by the donor from payment of donor's tax. Donation and
donor's tax are covered in another text, Transfer and Business Taxation by the same book team.

INCOME AND INCOME TAXES

Income in its broad sense, means all wealth, which flows into the taxpayer other than a mere
return of capital.

Capital is a fund or property existing at one distinct point of time. Income on the other hand,
denotes a flow of wealth during a definite period of time.

Income Tax is a tax on all yearly profits arising from property, profession, trade or business, or
a tax on a person's income, emoluments, profits and and the like.
Income tax is generally regarded as an excise (privilege) tax. It is not levied upon person,
property, funds, or profits as such but upon the right of a person to receive income or profits.

3 Elements on the Imposition of Income Tax

I. There must be gain or profit

2. The gain or profit is realized or received, actually or constructively

3. It is not exempted by the law or treaty.

General Procedures in Determining Income Tax

STEP 1:

Step I is to identity the taxpaying party or "entity" to which the tax computation formula applies.

STEP 2:

Step 2 is to determine the taxpayer's "gross income." Appreciation in market value is not
generally regarded as income for tax purposes poses unless realized through a sale or exchange.
Even if income is realized, the Code provides for several specific types of income to be
"excluded," that is, not counted for purposes of measuring gross income.

STEP 3:

Step 3 is to determine the expenses and certain other items that can be "deducted" in computing
the taxpayer's "taxable income."

STEP 4:

Step 4 is to apply the appropriate "tax rate" to the taxpayer's taxable income to find the "tax
due." For any particular taxpayer, the applicable rate depends on the type of taxpaying entity,
level of income, and in the case of an individual, his or her marital status and certain other
aspects.

STEP 5:

Step 5 is to subtract any applicable "tax credits/payments" from the taxpayer's tax due in finding
the "tax payable." Unlike deductions that reduce taxable income, tax credits/payments are a
direct offset to the tax itself. These credits are specified for various situations in numerous
sections of the Code.

STEP 6:
Step 6 is to increase the tax by "penalties and interests" to obtain the "total amount payable.”