Chapter 1 ➢ Secondary: Regulatory

Taxation - process or means by which the sovereign Device for regulation or control
through its law-making body imposes burdens upon
Theory of Taxation
subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the legitimate ➢ Necessity Theory
objects of the government.
Preserve the state’s sovereignty
Three Inherent Powers of the State
To give protection and facilities
➢ Police Power - promoting public welfare by
restraining and regulating the use of liberty and ➢ Lifeblood Theory
property. Government’s basic function
➢ Power of Taxation - the State raises revenue to
defray the necessary expenses of the government. Basis of Taxation
➢ Power of Eminent Domain - power of the state to
• Reciprocal duties of protection and support between
acquire private property for the public purpose
upon payment of just compensation. the state and its inhabitants.
Similarities among the Three Inherent Powers of Manifestation of Lifeblood Theory
the State
• No estoppel against the government
• Inherent in the state
• Collection of taxes cannot be stopped by injunction
• Exist independently in the constitution – conditions
for their exercise may be prescribed by the constitution • Taxes could not be the subject of compensation or
set-off
• State interferes with private rights and properties
• Right to select objects (subjects) of taxation
• Legislative in nature and character
• A valid tax may result in the destruction of the
• Presuppose an equivalent compensation received, taxpayer’s property.
directly or indirectly, by the persons affected.
Scope of the Power of Taxation
➢ Comprehensive
➢ Unlimited
➢ Plenary
➢ Supreme

Essential Elements of Tax

• Enforced contribution
• Payable in money
• Proportionate
• Levied on persons, property, rights
• Levied by the law-making body
• Levied for public purpose

Nature/ Characteristics of the State’s Power to Tax

• Inherent in sovereignty
• Legislative
• Exemptions of government entities, agencies and
instrumentalities
• International Comity
• Limitation of Territorial Jurisdiction
• Strongest among the inherent powers
Purposes of Taxation
➢ Primary: Revenue
Provide funds of property to promote general welfare
Exceptions to Non-Delegation Rule Factors in Determining Situs of Taxation
• President a. Subject matter (person, property, or activity)
• Local government b. Nature of tax
• Administrative agencies c. Citizenship
• Constitutional and inherent limitations d. Residence of the taxpayer
• Exception of government entities, agencies and e. Source of Income
instrumentalities f. Place of excise, business or occupation being taxed
– Agencies performing governmental functions
– Agencies performing propriety functions Tax Distinguished From Other Terms Or Imposts
– GOCCs • Toll - sum of money for the use of something
– GSIS • Penalty - a sanction imposed as a punishment
– SSS • Special Assessment – proportional contribution from
– PHIC owners of lands for special benefits
– PCSO • Revenue - all funds or income derived by the
– Local water District government
• Subsidy - pecuniary aid directly granted the
Classification of Taxes government to an individual or private commercial
➢ Scope enterprise
– National • Permit/license fee - charge imposed under the police
– Local power
➢ Subject matter • Custom duties - taxes imposed exported from or
– Personal imported into a country.
– Property • Tariff - book of rates containing kinds of
– Excise merchandise with corresponding duties to pay.
➢ Who bears the burden
– Direct Tax Distinguished From Other Terms Or Imposts
– Indirect
➢ Determination of fixed amount
– Specific Tax
– Ad valorem

As to purpose
a. Primary, Fiscal, or Revenue Purpose
b. Secondary, Regulatory, Special or Sumptuary
Purpose
As to Graduation /rate
a. Proportional
Double Taxation
b. Progressive
• There is a burden of two or more impositions
c. Regressive
DIRECT DOUBLE TAXATION means taxing twice:
As to Taxing authority
1. By the same taxing authority, jurisdiction or taxing
National
district
Local
2. For the same purpose
3. In the same year or taxing period
Elements of Sound Tax System
4. Same subject or object
• Fiscal adequacy
5. Same kind or character of the tax
• Theoretical justice or equity
• Administrative feasibility
Avoiding/Minimizing the Burden of Tax
• Shifting - transfer of tax burden
Limitations on the State Power to Tax
• Transformation - producer pays the tax and
• Inherent limitations
endeavor to recoup himself by improving his process
• Constitutional limitations
of production
• Evasion - use of illegal means
Situs of Taxation
• Tax avoidance – exploitation of legally permissible
• Place of taxation
alternative
• the state or political unit which has jurisdiction to
• Exemption – grant of immunity
impose a particular tax.
• Capitalization – reduction in the selling price
Sources of Tax Laws Illustration 1
1. Constitution Pedro an OFW returned in the Philippines for good
2. National Internal Revenue Code on May 2023. He shall be classified for 2023 taxable
3. Tariff and Customs Code year as follows:
4. Local Government Code (Book II) January - April 2023 - non-resident citizen
5. Local tax ordinances/ City or municipal tax codes From May 2023 onwards - resident citizen
6. Tax treaties and international agreements
7. Special Laws Illustration 2
8. Decision of the Supreme Court and the Court of Tax Ana, a resident citizen, left the Philippines on July 1,
Appeals 2023 to reside permanently in US together with her
9. Revenue rules and regulations and administrative family. She shall be classified for 2023 taxable year as
ruling and opinion follows:
January-June 2023 - resident citizen
Chapter 2.1 From July 2023 onwards - non-resident citizen
Individual Taxpayers
• are natural persons with income derived from within • Filipino citizens who are physically present in a
the territorial jurisdiction of taxing authority. foreign country as a consequence of their employment.
Their salaries and wages are paid by an employer
Citizens Of the Philippines abroad.
1. Born with father and/or mother as Filipino citizens
2. Born before Jan. 17,1973 of Filipino mother who Resident Alien
elects Philippine citizenship upon reaching the age of • Individual whose residence is within the Philippines
maturity and who is not a citizen thereof.
3. Acquired Philippine citizenship after birth
(naturalized) in accordance with Philippine Laws Non-Resident Alien
• Individual whose residence is not within the
Classification Of Individual Taxpayers Philippines and who is not a citizen thereof.
1. Resident Citizens (RC) • Non-resident alien engage in trade or business
2. Nonresident Citizens (NRC) – Alien is carrying on a business in the Philippines
3. Resident Aliens (RA) – Has stayed in the Philippines for more than 180 days
4. Nonresident Aliens (NRA) • Non-resident alien not engage in trade or business
– Engaged in trade/business (NRA-ETB) – has stayed in the Philippines for 180 days or less
– Non-resident alien not engaged in trade or business
(NRA-NETB Importance Of Classification
They differ as to:
Resident Citizens • Situs of income
• A Filipino citizen who permanently resides in the • Manner of computing tax
Philippines • Treatment of certain passive incomes
• Allowable deductions
Nonresident Citizens • References in the tax choice
• A citizen of the Philippines who:
– Establishes to the satisfaction of the Commissioner Case 1:
the fact of his physical presence abroad with a definite Allan is a natural born Filipino citizen. His family
intention to reside therein. migrated to the U.S. fifteen years ago. For personal
– Leaves the Philippines during the taxable year to reasons, he decided to return and reside permanently
reside abroad in the Philippines on March 1, 2023.
– Works and derive income from abroad and his
employment requires him to be physically present Case 2:
abroad most of the time (at least 183 days) during the G.I. Joe is an American information technology expert.
taxable year He was signed by Doon Telecom (a local
– Have been previously considered as non-resident telecommunication company) from January to March
citizen and who arrives in the Philippines at any time 2023 to improve its internet services. Due to the
during taxable year to reside permanently anticipated entry of competitors from other
countries, Doon decided to extend indefinitely the
services of G.I .Joe.
Case 3: Case B: The taxpayer is a non-resident citizen
Greg Popovich, head coach of San Antonio Spurs in Gross income, Philippines ₱5,000,000
the NBA is in the Philippines for a month-long NBA Business expenses Philippines (3,000,000)
promotional tour. He also expressed his intention to Taxable income ₱2,000,000
regularly visit the Philippines.
Case C: The taxpayer is an alien
Applicable Taxes and Tax Rates Gross income, Philippines ₱5,000,000
– The applicable taxes for individuals depend on Business expenses Philippines (3,000,000)
several factors such as but not limited to: Taxable income ₱2,000,000
❖ Classification of taxpayer
❖ Source of income Case D: The taxpayer is a non-resident alien
engaged in trade or business
❖ Type of income
Gross income, Philippines ₱5,000,000
Business expenses Philippines (3,000,000)
Classification Of Taxpayer
Taxable income ₱2,000,000
Resident citizens
- taxable on their income derived from sources within
Case E: The taxpayer is a non-resident alien not
and without the
engaged in trade or business.
Philippines while other taxpayers are taxable only on
Answer: ₱5,000,000
their income derived from the Philippine sources.
- NRA-NETB are taxable on their gross income
Non-resident aliens not engaged in trade and business
(NRA-NETB)
TYPES OF INCOME (APPLICABLE TAX)
- are taxable based on the gross income while others
Ordinary or regular income (GRADUATED RATE)
are taxable based on their net income.
– refers to income such as compensation income,
business income, and income from practice of
Sources of Income
profession
• Resident citizens are taxable based on their
Passive income (FINAL WITHHOLDING TAX)
worldwide income while others are taxable only on
– subject to final withholding taxes are certain passive
their income derived from sources within the
incomes from sources within the Philippines such as:
Philippines.
– Interest income
– Dividend Income
– Royalties
– Prizes
– Other winnings
Capital gains subject to gains tax (CAPITAL GAIN
TAX)
- Capital gains from sale of shares of stocks of a
domestic corporation
An individual taxpayer provided the following - Capital gains from sale of real property in the
information Philippines
Gross business income, Philippines P5,000,000
Gross business income, Canada 2,000,000 TABLE 2-1 GRADUATED TAX RATE
Gross business income, Singapore 1,000,000
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

CASE A: The taxpayer is a resident citizen:

Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines (3,000,000)
Business expenses, Canada (1,000,000)
Business expenses, Singapore (500,000)
Taxable income ₱3,500,000
Illustration FUNCTIONS/PURPOSES OF TAXATION
Purely Compensation Income Earner 1. Primary: Revenue of Fiscal Purpose (raising
1. Determine the income tax due assuming the taxable revenue)
compensation income for 2023 is ₱240,000. – to provide funds or property
– to promote general welfare and protection of it's
Answer: ₱0, tax exempt citizen
2. Secondary: Regulatory Purpose
2. Determine the income tax due assuming the taxable – Effects: Promotion of general welfare
compensation income for 2023 is ₱300,000. – Reduction of Social Inequality
– Economic Growth
Solution:
Tax on first ₱250,000 ₱0 *(ang example dito ni tabag sa regulatory yung sa
In excess of ₱250,000 7,500 sigarilyo‚ nilalagyan daw ng tax para pag isipan ng
50,000 x 15% mga tao kung bibili pa sila or hindi na for general
Tax due ₱7,500 welfare ganern hehe)

3. Determine the income tax due assuming the net

taxable compensation income for 2023 is ₱1,850,000.

Solution:
Tax on first ₱800,000 ₱102,500
In excess of ₱800,000 262,500
1,050,000 x 25%
Tax due ₱365,000

FUNDAMENTAL PRINCIPLES OF TAXATION

Taxation - process or means by which the sovereign

(government) through its law making body (congress
and senate - the legislature) imposes burdens upon
subjects and objects.

SUBJECTS
- persons
- properties
- privileges (rights)
- transactions/interest

ASPECTS OF TAXATION
1. Levying (imposition of tax)
* Legislative Function (congress and senate - kapag
national government)
* kapag sa LGU naman mga sanggunian
2. Assessment
* Executive Function
( BIR, BOC )
3. Collection
* Executive Function
( BIR, BOC)

* NOTE:
Legislative - taga gawa ng batas
Executive - taga implement