CHAPTER 1:

Taxation is the inherent power of the State to demand compulsory contributions (taxes) from
people and properties within its jurisdiction, used to fund government services and promote the
general welfare.

Taxes are enforced proportional payments by people/property to support public needs.

Taxation has two main purposes: revenue and regulatory.

 The revenue purpose is the primary reason why the government collects taxes — to
raise funds that will be used to provide public services such as education, healthcare,
infrastructure, and national security. Simply put, taxes are what keep the government
running and able to serve its people.
 The second is the regulatory purpose, which means that taxes are also used to control
or influence behavior and help manage the economy. For example, the government may
impose tariffs on imported goods to protect local industries, or apply higher tax rates to
the wealthy to reduce income inequality. Taxes can also be increased or decreased to help
prevent inflation or stimulate the economy during slowdowns.

Theory and basis of taxation - is built on the idea that the government's existence is
necessary, and it cannot function without money to pay for its expenses. Because of this, the
government has the right to require all citizens and properties within its territory to
contribute through taxes. The basis of this power lies in a mutual relationship: the State
provides protection and services, and in return, the people give their support through taxes.
This is known as the “benefits received principle”—citizens pay taxes because they benefit
from what the government provides.

Lifeblood or necessity theory - reinforces this idea by stating that taxes are the lifeblood of the
government. Without taxes, the government would not survive or be able to operate, making
taxation essential for the country’s survival and development.

Inherent Limitations :
The lifeblood theory shows how essential taxation is to the government’s survival. Since taxes
are the main source of government funds, their collection cannot be stopped by injunction,
cannot be used for compensation or set-off, and even if a valid tax causes loss to a taxpayer,
it remains enforceable. This is because taxation is an unlimited and plenary power, meaning
the government must freely exercise it to function properly.
On the other hand, the benefit-received principle explains the mutual relationship between the
State and its citizens. The government provides protection and services, and in exchange,
citizens pay taxes. This is called a symbiotic relationship—support from the people in return for
government benefits. However, this doesn’t mean only taxpayers receive protection; all citizens
are entitled to government services, even if they are unable to pay taxes.
Tariffs and duties are often used interchangeably under the Tariff and Customs Code (PD No.
1464). Customs duties are taxes on goods that are imported or exported, while tariff can refer
to: (1) a book listing rates of duties on merchandise, (2) the actual duties imposed, or (3) the
general system of imposing those duties. Although both are taxes, the term “tax” is broader in
scope.

A license or regulatory fee, on the other hand, is a payment made for regulation, not revenue.
It is compensation for specific services and is based on the government’s police power, unlike
taxes which are based on the taxing power. License fees are limited to the cost of regulation
and inspection, while taxes have no fixed limit. Also, a license fee is charged only for exercising
a privilege, while taxes can apply to persons or property. Not paying a license fee makes the
act or business illegal, but not paying a tax does not automatically make it illegal.

A special assessment is a compulsory payment collected only from landowners whose

properties receive special benefits from a specific public improvement (like a new road or
drainage system). It applies only to land, not to people or personal property, and is not a
personal liability—meaning the charge is tied to the land itself. Unlike general taxes which are
based on necessity and apply broadly, special assessments are based solely on the benefit
received, and apply only in specific times and places.

A toll, on the other hand, is a fee paid for using public infrastructure like roads or bridges. It is
a payment for use, not a tax. A toll comes from proprietorship, while a tax comes from the
government’s sovereign power. The amount of toll is based on the cost of building or
maintaining the structure used, while taxes have no strict limit as long as they are not
excessive. Also, tolls can be collected by private entities or government, but only the
government can impose taxes.
A penalty is a punishment imposed for violating a law or committing a harmful act, while a tax
is a mandatory contribution collected by the government to fund public services. A penalty is
meant to regulate behavior, while taxes are primarily for raising revenue. Also, penalties may
be imposed by either the government or private entities, but only the government can
impose taxes.

Obligation to pay debt vs. Obligation to pay tax:

The obligation to pay a debt is different from the obligation to pay a tax. A debt is usually
based on a contract, while a tax is imposed by law. Debts can be assigned, paid in kind, or
offset, but taxes generally cannot be assigned, are paid in money, and cannot be offset. A
person cannot be jailed for failing to pay taxes—except for poll tax. Debts follow ordinary
prescriptive periods, while taxes follow special rules under the NIRC. Lastly, a debt may earn
interest by agreement or default, while taxes only earn interest when delinquent.

Taxes can be classified in several ways based on different factors. According to subject matter,
taxes may be: (1) a personal or poll tax, which is a fixed amount charged to individuals
regardless of income or property; (2) a property tax, imposed on real or personal property based
on its value; or (3) an excise tax, charged for performing an act, enjoying a privilege, or
engaging in a business.
According to purpose, a tax may be: (1) a general or revenue tax, meant to raise public funds
for government services; or (2) a special or regulatory tax, meant primarily to regulate
activities, with revenue generation as a secondary purpose.
According to who bears the burden, a direct tax is paid and shouldered by the same person
(e.g., income tax), while an indirect tax is passed on to another person, usually the final
consumer (e.g., VAT).
According to scope, taxes may be: (1) national, imposed by the central government; or (2)
local, imposed by LGUs or municipal authorities.
According to how the amount is determined, a specific tax is based on quantity, weight, or
measure (fixed amount), while an ad valorem tax is based on the value of the property and
needs valuation by assessors.
According to gradation or rate, taxes are classified into three types. A proportional tax has a
fixed rate regardless of the amount being taxed, such as real estate tax. A progressive or
graduated tax increases its rate as the tax base or income increases, like income tax. In some
cases, it may become digressive, where the rate stops increasing beyond a certain point. A
regressive tax, which is not applied in the Philippines, decreases in rate as the tax base
increases.

A digressive tax rate is a type of progressive tax where the tax rate increases only up to a
certain level, and then stops increasing beyond that point. In other words, the progression
halts at a specific stage, so even if the taxpayer’s income continues to rise, the tax rate remains
the same. It combines features of both progressive and proportional taxation, but the rate caps
at a certain bracket instead of continuing to increase.

The aspects of taxation refer to two main processes: the levy or imposition of tax, which is a
legislative act, and the collection of the tax, which is administrative. The first is called
taxation in the strict sense, while the second is tax administration. Together, they make up the
taxation system.
A sound tax system follows three basic principles. First is fiscal adequacy, which means tax
revenues must be sufficient to cover public expenses. Second is equality or theoretical justice,
where the tax burden must be based on the taxpayer’s ability to pay. Third is administrative
feasibility, which means tax laws must be easy to implement, fair, and effective in practice.

The power of taxation is a fundamental and inherent power of the State, meaning it exists by
virtue of sovereignty and does not need to be granted by the Constitution. It is legislative in
nature, which means that only Congress can impose taxes, although this power can be delegated
under certain conditions. However, this power is not absolute—it is limited by both
constitutional and inherent restrictions, to ensure it is used justly and fairly.

C. Power to Tax Involves the Power to Destroy

Chief Justice Marshall once said that the power to tax is the power to destroy, meaning it must
be used with caution to avoid harming the property rights of taxpayers. Taxes must be imposed
fairly, equally, and uniformly, or else the government risks losing public trust. However,
Justice Holmes argued that the power to tax does not automatically mean destruction,
especially while courts exist to check abuses implying that illegal taxes won’t be allowed to
destroy property. Domondon reconciled the two views by saying: Marshall spoke about valid
taxes that must be imposed wisely, while Holmes referred to invalid taxes that courts can strike
down to protect taxpayers.

D. Power to Tax is Exclusively Legislative in Nature

The power to tax belongs solely to the legislative branch, meaning only Congress can create
and impose taxes. This power includes deciding the subject or object to be taxed, the purpose
of the tax, the amount or rate, and the method and agency of collecting it. Neither the
executive nor the judiciary can exercise this power because it is purely legislative in
character.

E. Power to Tax Cannot Be Delegated (With Exceptions)

As a legislative power, Congress cannot normally delegate the power to tax due to the
principle of separation of powers. However, there are exceptions: it can be delegated to the
President (e.g., tariff adjustments), to local government units (under the Local Government
Code), and to administrative agencies (for technical functions like assessment or
implementation). These exceptions are allowed only if there are clear legal standards guiding
the delegation.

Inherent Limitations of Taxation:

1. Purpose must be public in nature – Taxes can only be imposed for public purposes, such as
funding government services or infrastructure, not for private benefit.
2. Prohibition against delegation of the taxing power – Only the legislative branch has the
authority to impose taxes. This power cannot be delegated to others unless the Constitution or
law allows it.
3. Exemption of government entities, agencies, and instrumentalities – The government
cannot tax itself, so its own departments or agencies are exempt from taxation, as they serve
public functions.
4. International comity – As a sign of respect between nations, foreign governments and their
properties or officials are generally not subject to local taxation.
5. Limitation of territorial jurisdiction – A government can only impose taxes within its own
territory; it cannot tax persons, properties, or activities outside its national boundaries.
Public purpose in taxation:
Is one of the inherent limitations of taxation, meaning taxes must only be collected and spent
for purposes that serve the general welfare or governmental functions. A tax is invalid if used
for private benefit alone.
The term “public purpose” doesn’t have a strict definition, but it generally means the whole
community is affected or benefited—not just specific individuals. Taxes must be used to:
 Support the government,
 Fund legitimate government activities, or
 Promote the welfare of the public.
If private individuals benefit, the tax can still be valid if the benefit is only incidental. What
matters is not who directly receives the money, but whether the goal of the spending is for
public welfare.
For example, building a road on private property using tax funds is not for a public purpose—
because it directly benefits only the private owner, not the general public (as held in Pascual v.
Secretary of Public Works).

Exceptions to the non-delegation rule in taxation:

1. Delegation to the President – Congress may authorize the President, through law, to
adjust tariff rates, import/export quotas, and other duties under certain limits. This is
allowed under Section 401 of the Tariff and Customs Code, also known as the flexible
tariff clause.
2. Delegation to Local Government Units (LGUs) – LGUs can impose taxes and fees
only because Congress allows it, since they have no inherent power to tax. Congress
can also limit or revoke this power. This is based on the idea that LGUs are creations of
Congress, as stated in Basco v. PAGCOR.
3. Delegation to Administrative Agencies – Due to the technical and complex nature of
modern governance, Congress may delegate the implementation of tax laws (such as
granting exemptions) to agencies like the Fiscal Incentives Review Board (FIRB), as
long as the law:
o Is complete in itself, and
 o Provides sufficient standards to guide the agency.

Some functions, like property valuation, tax assessment and collection, or technical
computations, are not considered delegation because they are administrative, not legislative.
Reasons for exempting government entities:
Government entities are exempt from taxation because taxing them would mean the
government is taxing itself to raise money it already owns. This would be illogical and
unnecessary, and could also interfere with essential government functions. The exemption
ensures that public services continue without burden. Among those exempt from income tax are
the GSIS, SSS, PHIC, Local Water Districts, and HDMF, as they perform vital roles for the
public.

International comity:
Refers to the mutual respect and courtesy between nations. Under international law, one State
cannot tax the property of another State, based on the idea of sovereign equality. This means
when a foreign State is present within another country, it is understood that it is not submitting
to that country's authority, preserving its dignity and independence. This also aligns with the
principle of State immunity from suit.

Limitation of a territorial jurisdiction:

Tax laws only apply within the territorial boundaries of a state. A government cannot impose
taxes on persons or properties outside its jurisdiction because such properties do not receive
protection or benefit from it.

Constitutional Limitations
1. Due processs of law - in taxation means there must be a valid law, and tax measures must not
be unjust or excessive to the point of confiscating property. A tax law must not be arbitrary
and should always have constitutional support.
2. Equal protection of laws - The principle of equal protection means that people in similar
situations must be treated equally by tax laws—receiving the same privileges and bearing the
same burdens. It does not require treating different persons or properties as if they are the same.
Congress can validly classify taxpayers for taxation as long as the classification:
 Substantial distinctions – The classification must be based on real and meaningful
differences between groups, not superficial or arbitrary ones.
  Germane to the purpose – The classification must be relevant and connected to the goal
or objective of the law.
 Not limited to present conditions only – The classification must also apply to future
situations that are substantially the same, not just current ones.
 Equal application within the class – Everyone in the same group must be treated
equally under the law, with no favoritism or discrimination.
3. Uniformity and equity in taxation - Uniformity means that all items or persons in the
same class must be taxed at the same rate, with no discrimination in its application across
places. Equity, on the other hand, means taxes must be justly distributed based on a taxpayer’s
ability to pay and, when applicable, the benefits received from government services.
4. Imprisonment for non-payment of poll tax - a fixed tax on residents, regardless of
profession or income. While non-payment results only in a surcharge, imprisonment is allowed
for related offenses like falsification or non-payment of other taxes.
5. Prohibition against impairment of contracts - means that no law can change the terms of a
valid contract without the consent of the parties involved, as this would weaken their legal
obligations. This applies especially when a tax exemption is part of a contract supported by
valid consideration. However, tax exemptions under franchises may still be revoked, since the
Constitution allows amendment, alteration, or repeal of franchises.
6. Prohibition against infringement of religious freedom - ensures that the government cannot
pass laws that interfere with religious belief or worship. All people must be free to practice
their religion without discrimination. For example, requiring license fees for selling Bibles
violates this right, as ruled in American Bible Society v. Manila.
7. Prohibits the use of tax money to support any religion - No public funds can be used to
benefit any church, sect, or religious leader—except in specific cases, such as when a priest is
assigned to the military or a government facility. Furthermore, taxes collected for a special
purpose must be used only for that purpose, and any remaining balance should go to the
general fund once the purpose is fulfilled.
8. Real properties that are actually, directly, and exclusively used for religious, charitable,
or educational purposes - are exempt from real property tax. This includes churches,
mosques, non-profit cemeteries, and related buildings or lands. The exemption also covers
facilities that are incidental and necessary to achieving their purpose, not just those strictly
essential.
9. Non-stock, non-profit educational institutions - are exempt from taxes and duties on their
revenues and assets, but only if these are used exclusively for educational purposes. However,
if they earn income from profit-oriented activities or properties, even if they are a non-profit,
such income is taxable under the NIRC regardless of how they use the earnings.
10. Other Constitutional Limitations
a. Grant of Tax Exemption - No tax exemption law can be passed without the approval of a
majority of all members of Congress, ensuring that such exemptions are carefully deliberated
and not granted arbitrarily.
b. Veto of Appropriation, Revenue, or Tariff Bills by the President - The President has the
power to veto specific items in revenue, appropriation, or tariff bills without rejecting the entire
bill. This allows the President to control specific provisions without discarding the whole law. An
"item" means a separate amount allocated for a specific purpose.
c. Non-Impairment of the Jurisdiction of the Supreme Court - Congress cannot remove the
power of the Supreme Court to decide tax-related cases. The Constitution specifically gives the
Court the authority to review and rule on the legality of taxes, assessments, or penalties imposed.
d. Revenue Bills Must Originate in the House of Representatives - The Constitution requires
that revenue bills must originate exclusively in the House of Representatives, because its
members are directly elected by the people and are presumed to be more attuned to local
concerns. However, the Senate can propose or make changes to these bills. Even if the Senate
rewrites or substitutes the bill extensively, it is still valid as long as the process started in the
House. The Senate may also prepare a substitute bill ahead of time, but it cannot act on it until
the original bill from the House is officially received. This ensures that the House initiates tax-
related legislation, while still allowing full legislative participation by the Senate.
e. Infringement of Press Freedom - The press is not exempt from taxation, but taxation
becomes unconstitutional when it acts as a prior restraint—meaning it hinders or prevents the
press from exercising its freedom before publication. However, taxes on income or receipts of
media entities are valid as long as they are not used to suppress press freedom, but are part of
f. Grant of Franchise
A franchise is a special privilege granted by law, which may include tax exemptions. When the
government grants a franchise, any tax exemptions included in it are not permanent and may
be withdrawn through new laws. Congress can amend, alter, or revoke these exemptions if
necessary for the common good, as stated in the Constitution.

Situs of taxation:
Refers to the place or jurisdiction where a tax may be legally imposed. It depends on several
factors such as the type of tax, the subject being taxed (person, property, or activity), the
benefits provided by the taxing authority, the residence or citizenship of the taxpayer, and
the source of the income.
Situs of tax of persons:
A poll tax is imposed on individuals based on their residency in a state, regardless of
citizenship. If a person resides in the state, the government can levy this tax because it provides
them protection and public services.

Situs of tax on real property:

taxation follows the principle of lex rei sitae, meaning the tax is imposed in the place where the
property is physically located, regardless of the owner’s residence, since the property is fixed
and receives protection from that local government.

Situs of tangible personal property:

The same principle applies to tangible personal property, which is taxed in the place of its
actual location, not the residence of the owner.

Situs of taxation of intangible personal property :

For intangible personal property, the general rule follows mobilia sequuntur personam,
meaning it is taxed in the owner’s place of residence, since the property itself has no physical
location. However, this rule does not apply if the law expressly provides otherwise or if the
property has gained a business situs in another jurisdiction.

Situs of income tax in the Philippines:

Income is taxed where it is earned or derived. The source refers to the activity, property, or
service that produced the income. If income-generating activities occur in the Philippines, the
income is taxable here—even if the service or good goes abroad. For example in BOAC case,
where the sale of airline tickets in the Philippines was taxed even if the flights were international.
Similarly, interest income is sourced in the residence of the borrower—if the borrower lives in
the Philippines, the interest is taxable here.

Multiplicity of situs:
Arises when more than one jurisdiction taxes the same income or property, especially in the
case of intangible assets. This can happen due to differing definitions of domicile, multiple
legal relationships, or overlapping legal protections. To avoid double taxation, solutions include
granting exemptions, deductions, tax credits, or entering into international tax treaties.

Double taxation:
Occurs when the same subject is taxed twice, but it can happen in two ways.
 In its strict sense (direct duplicate taxation), it means the same taxing authority imposes
two taxes on the same subject, within the same jurisdiction, for the same purpose,
and within the same period.
 In its broad sense (indirect double taxation), it refers to any situation where a taxpayer
faces multiple tax burdens, even if imposed by different authorities or for different
purposes.

Constitutionality of double taxation:

While the Philippine Constitution does not prohibit double taxation, since it is generally
discouraged because it may violate the principles of equal protection and uniformity in
taxation. However, if one tax is from the national government and the other from a local
government, and both apply equally to all similar persons, it is not unconstitutional, as ruled
in City of Baguio v. De Leon

Six basic forms of escape from taxation:

To minimize or escape the burden of taxation, there are six recognized methods: shifting,
capitalization, evasion, exemption, transformation, and avoidance. All of these are legal,
except for evasion, which is illegal and punishable.

1. Shifting - is the act of passing the burden of the tax to another person. It doesn’t transfer the
obligation to pay the tax, but the economic impact of the tax is transferred. Only indirect taxes,
like VAT or excise taxes, can be shifted; direct taxes like income tax cannot be shifted.

Ways of shifting the tax burden:

 Forward shifting happens when the tax burden moves from the producer to the final
consumer, like a manufacturer passing the tax to the wholesaler, then to the retailer, and
finally to the buyer.
  Backward shifting is when the burden moves in reverse, such as a buyer pressuring
sellers to lower prices, pushing the burden back to the producer.
 Onward shifting occurs when the tax is shifted multiple times, whether forward or
backward, across different levels of production and distribution.

Impact and incidence of taxation:

 The impact of taxation is the point where the tax is first imposed, and the person legally
required to pay is called the statutory taxpayer.
 The incidence of taxation is where the final burden settles, especially after shifting
occurs.

Statutory taxpayer:
Is the person who is legally required to pay the tax or the one on whom the tax is formally
assessed. The one recognized by law as the subject of the tax. In the case of direct taxes, the
statutory taxpayer is also the one who bears the burden, such as in income tax. However, in
indirect taxes, like VAT, the statutory taxpayer is the one who remits the tax to the
government, but the economic burden can be shifted to someone else, usually the final
consumer.

Relationship between impact, shifting, and incidence of a tax:

In this relationship, impact is the starting point, shifting is the process of transfer, and
incidence is the final resting place of the tax burden. For example, in VAT, the impact is on the
seller, but through shifting, the incidence ends up with the buyer who actually bears the cost.

Tax evasion:
Is the illegal and fraudulent act of a taxpayer who deliberately tries to avoid paying taxes that
are legally due. This is also called tax dodging, and it is punishable by law. It involves actions
done in bad faith, such as not declaring income, understating earnings, or using false
pretenses to reduce tax liability.

Elements of tax evasion:

(1) the goal of paying less tax than what is legally due or avoiding tax entirely;
(2) a willful and deliberate mindset, showing bad faith or intent to deceive; and
(3) an unlawful act or omission, such as falsifying records or failing to report income.
All three must be present for an act to be considered tax evasion

Tax avoidance:
Is the use of legal methods to reduce tax liability, like using lower tax rates or claiming
allowable deductions. It is also known as tax minimization and is not punishable, as it stays
within the limits of the law.

Tax exemption:
Is a privilege granted by law that frees a person, company, or class from paying taxes that
others are required to pay. It is only valid when clearly stated by law, and while it may seem
unequal, it is not discriminatory if based on a reasonable and lawful basis.

Rationale for granting tax exemption:

Tax exemptions are granted for public benefit—not to favor private interests. The idea is that the
benefit to society outweighs the government’s revenue loss. The theory behind the grant of tax
exemption is to benefit the body of the people not to lessen the burden of the individual owners
of the property.

Grounds for granting tax exemption:

(1) through a contract where the government receives something in return;
(2) as public policy, such as to support charities or new industries; or
(3) for reciprocity, especially in avoiding international double taxation. However, equity
alone is not a valid ground for granting tax exemptions—there must be clear legal authority
for it.
To avoid double taxation, countries may grant exemptions to each other.

Nature of tax exemption:

 1. It is a mere personal privilege of the grantee
– Tax exemption is not a right, but a special favor or privilege given by the government to
a person or entity. It can’t be claimed unless clearly granted by law.
2. It is generally revocable by the government unless the exemption is founded on a
contract which is protected from impairment
– The government can take back the exemption anytime unless it’s part of a contract (like
a franchise or charter) that is legally protected from being altered.

3. It implies a waiver on the part of the government of its right to collect what
otherwise would be due to it, and so is prejudicial thereto
– Granting a tax exemption means the government gives up its right to collect taxes.
Since this reduces public funds, it is considered harmful to the government’s interest.

4. It is not necessarily discriminatory so long as the exemption has a reasonable

foundation or rational basis
– Giving an exemption is not unfair as long as there’s a valid reason for it, like supporting
education, charities, or public welfare programs.

Kinds of tax exemption according to manner of creation:

1. Express or affirmative - when certain persons, property orransactions are exempted
from all or certain taxes, either entirely or in part if it is clearly stated by law.
2. Implied or by omission - when the law taxes certain classes but excludes others
without stating so directly.

Kinds of tax exemption according to scope or extent:

1. Total - When certain persons, property or transactions are exempted, expressly or
implied, from all taxes.
2. Partial - when exemption is limited to certain taxes only, either entirely or in part.

Nature of power to grant tax exemption:

1. National government - The power to grant tax exemptions belongs to the national
government as part of its sovereign taxing power. It may choose who or what to tax or exempt
unless limited by the Constitution.
2. Local governments - on the other hand, do not have inherent power to grant exemptions,
but if they are given authority to tax by law, they may also grant exemptions, unless specifically
prohibited by law or the Constitution.
Interpretation of laws granting tax exemption:
 General Rule: Tax exemptions are strictly interpreted against the taxpayer. This means if
there is any doubt, the exemption will not be granted unless clearly stated in the law. The
reason is that every taxpayer should contribute fairly to government funds.
 "Taxation is the rule, exemption is the exception":
A person claiming tax exemption must present clear and specific legal authority. If the
law is vague or unclear, the exemption will not apply.
 Exceptions to the Rule:
1. If the law expressly allows a liberal (broad) interpretation of the exemption.
2. If the exemption is for religious, charitable, educational institutions, government
agencies, or public property, which are normally not taxed.
3.
Tax remission or condonation:
- Refers to the government’s decision to cancel a tax liability that is already due but not yet
collected. It is treated like a tax exemption and is valid only if clearly stated by law. It is
not unfair even if only certain unpaid taxes are remitted, as long as taxpayers in the same
class are treated equally.

- Definition of “Remit”:
To remit means to forgive or cancel the collection of taxes that are still due but not yet
collected. It also includes returning what was already taken, though this is rare.
- Not Unfair Discrimination:
Canceling unpaid taxes doesn't automatically mean unfair treatment. It’s allowed if all
taxpayers in the same situation are treated the same.
- Condonation = Tax Exemption:
Forgiving tax liability is treated like granting an exemption, so it must be clearly
provided in the law to be valid.

Tax amnesty:
On the other hand, is a general pardon by the State that forgives tax violators or evaders,
allowing them to settle their obligations without penalties. Like tax exemption and condonation,
amnesty must be granted by law, and it is never presumed. Its terms are strictly
interpreted/construed against the taxpayer and liberally in favor of the government.

Tax amnesty vs. tax condonation vs. tax exemption

 Tax amnesty - is a general pardon given by the government to tax violators or evaders,
allowing them to settle their obligations without penalties. It offers a clean slate but
applies only to a specific period or transaction. It is not favored nor presumed and
must be clearly granted by law, with its terms strictly interpreted against the
taxpayer.
 Tax condonation (or remission) - happens when the government voluntarily cancels a
tax liability that is already due but not yet collected. It is considered similar to a tax
exemption and must also be clearly expressed in the law to be valid.
 Tax exemption - is the grant of immunity from paying taxes to certain persons,
corporations, or classes, even though others in the same area are required to pay. Like
amnesty and condonation, it is not presumed, must be expressly granted by law, and is
strictly construed against the taxpayer.

Tax treaty:
Is an agreement between the Philippines and another country that aims to avoid or reduce
double taxation. It has the force and effect of law and is one of the recognized sources of our
law on taxation.

Revenue rules and regulations and administrative rulings and opinions:

Authority to Promulgate Rules and Rulings
 The Secretary of Finance, with recommendation from the Commissioner of Internal
Revenue, has the power to issue rules and regulations needed to enforce the National
Internal Revenue Code (NIRC).
 Separately, the BIR Commissioner may issue rulings or opinions, especially for
interpreting tax laws, such as how specific items should be taxed (e.g., in sales tax
classifications).
Purpose of Revenue Rules and Regulations
 1. To properly enforce and execute the law – They make sure the tax laws are applied
consistently and fairly.
2. To clarify and explain the law – They provide clear interpretations to avoid confusion and
disputes.
3. To carry into effect the general provisions of the law – They translate broad legal rules
into specific administrative procedures and steps for implementation.
Requisites for Validity
For these rules to be legally valid, they must:
 Not conflict with the Constitution or any existing law.
 Be published in the Official Gazette or a newspaper of general circulation, so the public
is informed.

Effectivity of Revenue Rules and Regulations

 Under Revenue Memorandum Circular (RMC) No. 20-86, the Bureau of Internal
Revenue (BIR) has formal guidelines on how to issue and implement tax-related rules.
These include:
1. Revenue Regulations (RRs) – general rules implementing the tax code.
2. Revenue Audit Memorandum Orders (RAMOs) – used in tax investigation and
audit processes.
3. Revenue Memorandum Circulars (RMCs) and Revenue Memorandum Orders
(RMOs) – to explain or announce new policies or procedures.

BIR rulings:
Are official interpretations of tax laws made by the Commissioner of Internal Revenue, usually
upon the request of taxpayers seeking clarification. These rulings are not permanent and can be
revoked or modified by the Commissioner or the Secretary of Finance if found inconsistent
with the law. Additionally, legal opinions on tax matters may also be issued by the Secretary
of Justice, who serves as the government's chief legal officer.

Interpretation and application of laws:

Nature of internal revenue law
 1. Not Political in Nature
o Tax laws are not affected by changes in political power. Even during foreign
occupation, like in the Japanese occupation of the Philippines, our tax laws
continued in force because they are for public administration, not political control.
2. Civil, Not Penal in Nature
o Tax laws are primarily civil in nature. Although they impose penalties (like fines or
surcharges), these are meant to encourage timely payment of taxes and discourage
neglect or evasion.
Construction (Interpretation) of Tax Laws
1. When Legislative Intent is Clear
o Tax laws should be interpreted reasonably and in a way that fulfills their purpose.
If the intent is clear, they should be applied as written to prevent people from
avoiding taxes through technicalities.
2. When There Is Doubt
o If the law is unclear, the rule is to favor the taxpayer and construed strictly against
the government, since taxes are considered burdens and must be clearly imposed
by law.
3. Tax Exemptions
o Any law that gives a tax exemption must be interpreted strictly. The taxpayer
must clearly prove the exemption applies, as exemptions are exceptions to the
general rule that everyone pays taxes.

Application of Tax Laws

 General Rule: Prospective Application
o Tax laws apply only going forward, because taxpayers need to know the rules
before they engage in taxable activities.
 Exception: Retroactive Application
o A tax law can apply retroactively only if clearly intended by law. However, it
must not be harsh or unfair to the taxpayer, or it could be challenged as unjust.
LESSON 2:
Gross income:
Refers to all wealth or gains received by a taxpayer, excluding returns of capital, and is taxed
because it best reflects a person’s ability to pay.

Why is income taxed?

Because income best reflects a person’s ability to pay. The more you earn, the more you’re
expected to contribute to public fund

Taxable income:
Is the portion of gross income that is subject to tax after deductions

Tax base:
Is the value on which tax is computed.

Allocation methods:
In taxation ensure that income between related or affiliated businesses is measured based on
arm’s length pricing, meaning transactions must reflect fair market value, as if between
unrelated parties. This is governed by transfer pricing rules to prevent tax avoidance.

Tax payments:
Must be made on or before the 15th day of the fourth month after the end of the taxpayer’s
taxable year.

Initial payment:
Refers to the total payments received by the seller at the time of executing the sale and those
scheduled to be received within the year of sale, excluding any evidence of indebtedness
from the buyer like promissory notes. ,.k

Deferred payment basis:

Is used when the buyer issues a promissory note or other evidence of obligation instead of
paying cash. The note is valued at its market value when received, and any difference between
its face value and fair value is treated as interest income, which is taxed in future periods.
This method serves as an alternative to the installment method when the latter does not apply

Leasehold Improvement:
Refers to the changes or additions made by a tenant (lessee) or sometimes by the landlord
(lessor) to a leased property to make it more useful or attractive.

Two Methods of Reporting Leasehold Improvements for Tax Purposes:

a. Outright Method
 The full value of the leasehold improvement is reported as income by the lessor
immediately once the improvement is completed.
 This means the entire amount is taxed in one tax period, right when the improvement is
finished.
b. Spread-Out Method
 The value of the leasehold improvement is spread out and recognized gradually as
income by the lessor over the entire lease term.
 The lessor reports part of the income each year, spreading the tax burden evenly through
the lease period.
 Outright method = full income reported immediately upon completion.
 Spread-out method = income reported gradually over the lease duration.

Reminders on Tax Accounting:

1. Absence of accounting method or use of one that does not clearly reflect the income
If a taxpayer does not adopt any accounting method, or if the method used fails to
 properly reflect their true income, the BIR Commissioner may require a different method
that more clearly reflects the income for proper taxation.
2. Consolidation of gross income from two or more methods
When a taxpayer uses different accounting methods for separate lines of business—like
cash basis for one and accrual for another—they may consolidate the incomes from these
methods to arrive at a total taxable income, provided it gives a fair representation of
actual income.
3. Change of Tax Method
a. A taxpayer who wishes to change their accounting method (e.g., from accrual to
installment) must first obtain prior approval from the BIR.
b. Once approved, any receivables from prior years must still be included in gross income
in the future periods when they are collected, ensuring no income is missed during the
transition.
4. Expenditures benefiting future periods
If an expense benefits more than one taxable year—like prepayments or long-term
investments—it must be allocated or deferred over those years rather than being fully
deducted in the year it was incurred.
5. Advanced receipt of items of gross income
Any income received in advance—such as rental income or prepaid services—is taxable
in the year it is received, even if the service or use occurs in a future period.

Two-fold Tax Obligations:

1. Payment of tax under the self-assessment method – Taxpayers are responsible for
computing their own tax due and paying it directly to the BIR.
2. Remittance of withholding taxes – Businesses and employers must withhold taxes from
certain payments (like salaries) and remit them to the BIR on behalf of the payee.

Types of Tax Returns for Income Taxation:

1. Income tax returns – These are filed to reprt the taxpayer’s total income, deductions,
and the tax due or overpaid.
2. Withholding tax returns – Filed by withholding agents to report and remit taxes they
withheld from others’ income (e.g., employees or suppliers).
Types of Withholding Tax Returns:
1. Withholding tax on compensation – Applies to salaries and wages of employees,
withheld by employers every payroll.
2. Final withholding tax – The tax withheld is the full and final tax (e.g., for passive
income like royalties or dividends).
3. Expanded withholding tax – Partial tax thheld from payments to professionals or
suppliers, credited to their final income tax.

Classifications of Taxpayers for Administration:

1. Large taxpayers – Big companies that pay significant taxes; they file and pay through
the BIR’s eFPS and are handled by the Large Taxpayer Division.
2. Non-large taxpayers – All other taxpayers who don’t meet the large taxpayer criteria;
they follow regular filing procedures.

Criteria for Large Taxpayers:

1. Tax payments – If the taxpayer consistently pays large amounts of tax.
2. Financials – Based on high gross sales, revenue, or assets.
3. Other factors – Includes industry type, number of branches, or volume of transactions.

Determining Non-Compliance with Tax Obligations:

1. Lifestyle check – BIR compares a person’s lifestyle and spending habits with their
declared income.
2. Inventory surveillance – BIR monitors stock levels versus reported sales.
3. Mystery shopping – BIR checks if businesses issue receipts by acting as a regular
customer.
4. Net worth method – BIR checks changes in a taxpayer’s total assets and liabilities to
detect unreported income.

Net Worth Method:

This method checks a taxpayer’s increase in assets and compares it to declared income; if the
increase is too high, it may suggest undeclared earnings.

Penalties for Non-Compliance:

1. Surcharge – A 25% penalty is added if the taxpayer fails to file or pay on time.
2. Interest – 12% interest per year is charged on unpaid taxes, computed daily beyond the
due date.
3. Compromise – A reduced payment may be allowed to settle tax violations, based on a
schedule set by the BIR.