Chapter 1: General Principles of Taxation

Taxation-is the process or means by which the sovereign, through its lawmaking body, raises income to defray

the necessary expenses of the government.

Purpose of taxation:

To provide funds and property with which to promote general welfare and protection of its citizens

and to enable to finance its multifarious activities.

To strengthen anemic enterprises by giving tax exemptions

To protect local industries against foreign competition through the imposition of high custom duties on

imported goods.

To reduce inequalities in wealth and income by imposing progressively higher tax rates and

To prevent inflation by increasing taxes or ward off depression by decreasing them.

Theory and basis of taxation:

1. Theory- the power of taxation proceeds upon the theory that the existence of the government is a

necessity.

2. Basis-The basis of taxation is found on the reciprocal duties of protection and support between the

state and inhabitants.

Basic Principles of Sound tax System:

Fiscal adequacy-The sources of revenue should be sufficient to meet the demands of public

expenditures.

Equality or theoretical justice (ability to pay principle)-the tax burden should be proportionate to the

taxpayer ability to pay.

Administrative Feasibility-The tax laws should be capable of convenient, just and effective

administration.

Nature or characteristics of the state’s power to tax:

1.) It is inherent in sovereignty- the power of taxation may be exercised by the state although not

expressly granted by the constitution.

2.) Legislative in Character-it is only the legislature that can enact tax law.

3.) Subject to constitutional and inherent limitations- taxation is not an absolute power that can be

exercised by the legislature anyway it pleases.

Limitation on the power of taxation

1.) Constitutional limitation-those restriction found in the constitution or implied from its provisions.

Due Process- No person shall be deprive of liberty, or property without due process of law, nor

shall any person be denied the equal protection of law.

Equal protection of law-The constitutional provision on equal protection of laws means no

person or class of person shall be deprived of the same protection of laws enjoyed by other

persons or other classes in the same place and in like circumstances.

Rule of uniformity and equity in taxation-The rule of taxation shall be uniform and equitable.

(Uniformity in Taxation means all the taxable persons property of the same class shall be taxed

at a uniform or same rate.

Non imprisonment for non-payment of poll tax (community Tax)- no person shall be

imprisoned for debt or non-payment of a poll tax.

Non-impairment of all the obligations of contracts-no law impairing the obligation of contracts

shall be passed.

Non-infringement of religious freedom-No law shall be made respecting the establishment of

religion, or prohibiting the free exercise thereof.

No appropriation for religious purposes- No public money or property shall be appropriated,

applied paid or employed, directly or indirectly for the use, benefit or support of any sect.

Exemption of religious, charitable or educational entities, nonprofit cemeteries and churches

from taxation (property tax).

Exemption of revenues and assets of non-stock, non-profitable institutions and donation for

educational purposes of taxation.(income tax ,property tax, custom duties)

Concurrence by a majority of all members of the congress for the passage of law granting tax

exemption-no law granting tax exemption shall be passed without the concurrence of a

majority of all the members of the congress.

Power of the president to veto any particular item or items in a revenue or tariff bill.

Non-impairment of the jurisdiction of the Supreme Court in tax cases- the Supreme Court shall

have the power to review, reverse and modify or affirm.

2.) Inherent limitations -Those which restrict the power although they are not embodied in the

constitution.

Requirement that levy must be for a public purpose.

Non delegation of the legislative power to tax- “potestas delegata non delegare potest” what

has been delegated cannot be delegated.

Exemption from taxation of government entities.

International comity

Territorial jurisdiction

Aspects of Taxation:

1.) Levy- deals with the provision of law which determines the persons or property to be taxed, the sum or

sums of money to be raised and the rate thereof and the time and manner of levying, receiving and

collecting taxes.

2.) Collection-constituted of the provisions of law which prescribe the manner of enforcing the obligation

on the part of those taxed to pay demand thus created.

B. Taxes- the enforced proportional contributions from persons and property levied by the lawmaking body

on the state by virtue of its sovereignty for the support of the government and all public needs.

Essential elements of a tax

Enforced contribution

Generally payable in money

Proportionate in character

Levied on person, property or the exercise of a right or privilege.

Levied by the state which jurisdiction over the subject or object of taxation

Levied by the lawmaking body of the state.

Levied for public purposes

Classification of taxes:

As to subject matter or object:

a. Personal, poll or capitation-tax of a fixed amount imposed of individuals whether citizen of not

residing within a specified territory without regard to their property or the occupation in which they

may be engaged. (community tax)

b. Property Tax- tax imposed on property whether real or personal (real property tax)

c. Excise (privileged tax)-a tax imposed upon performance of an act the enjoyment of a privileged or the

engaging in an occupation.

As to who bears the burden:

a. Direct-A tax that is demanded from the person who also shoulders the burden of the tax.(Income,

donor’s tax)

b. Indirect-A tax demanded from one person in expectation and intention that he shall indemnity himself

at the expense of other. (Value added tax, percentage tax)

As to the amount:

a. Specific- tax of fixed amount imposed y the head or number, or by some standard of weight or

measurement it requires no assessment other than a listing of classification on the subjects to be

taxed. (excise tax on cigars)

b. Ad Valorem- tax of fixed proportion of the value of the property with respect to which tax is assessed.

(Real Estate Tax)

As to purpose:

a. General, fiscal or revenue- tax that is imposed solely to raise revenue for the government

expenditures. (Income Tax)

b. Special or regulatory- Tax imposed for special purpose ( Sugar adjustment taxes)

As to authority imposing the same

a. National- Tax imposed by the national government.(custom duties, internal revenue tax)

b. Municipal or local tax- tax imposed by municipal corporations. (occupation tax)

As to graduation or rate

a. Proportional-tax based on fixed percentage of the amount of the property, receipts or other basis to

be tax.

b. Progressive-Tax rate of which increases as the tax base or bracket increases.

c. Regressive- tax rate of which decreases as the tax base increases.

Three inherent power of the government:

1. Eminent Domain

2. Police power

3. Power of taxation

Permit or license fee- is a charge imposed under the police power for purpose of regulation

Toll-is a sum of money for the use of something.

Special Assessment- is enforced proportional contribution from owners of lands for special benefits resulting

from the public improvements.

Custom duties –are tax levied upon commodities, imported into or exported across national boundaries.

Double taxation-Taxing twice for the same purpose, by the same taxing authority, in the same jurisdiction, in

the same period.

Estate tax-property or obligations that are not extinguish by death.

Revenue- refers to all funds or income derived by the government, whether from tax or any other source.

Situs of Taxation-means place of taxation.

Situs of taxation shall be followed:

1. Business, occupation or transaction- place where the business is conducted, place where occupation is

practiced, place where transaction took place.

2. Real and tangible personal property- Location of the property.

3. Intangible personal property-domicile of the owner unless the property has acquired a business situs

in another jurisdiction.

4. Income-place where the same is earned, or citizenship or domicile of the owner.

5. Gratuitous transfer of property- residence or citizenship of the taxpayer or the location of the

property.

*Forms of Escape from taxation- are means or methods by which the taxpayer saves the tax or escapes the

burden of tax payment.

Basic forms:

Those that reduce the revenue collection of the government:

1. Shifting-this is a transfer of tax burden by one on whom the tax is assessed to another.(VAT)

2. Capitalization-It is a reduction in the selling price of income producing property by an amount equal to

the capitalized value of future taxes that may be paid by the purchaser.

3. Transformation-It is a method by which the manufacturer or producer upon whom the tax is imposed

pays the tax and strives to recover such expenses through lower production cost without sacrificing the

quality of the product.(cost cutting)

Those that result loss of revenue to the government:

1. Tax evasion- it refers to the fraudulent or forbidden schemes or devices designed to lessen or defeat

taxes.

2. Tax avoidance/tax minimization-the exploitation by the tax payer of legally permissible alternative tax

rates or methods of assessing taxable property or income, in order to reduce tax liability.

3. Exemption –It is grant for immunity to a particular persons or corporation of a particular class from a

tax.

Tax amnesty-this is immunity from all civil and criminal obligations arising from nonpayment of taxes.

Doctrine of equitable recoupment- states where the refund of a tax illegally or erroneously collected or

overpaid by the tax payer is barred by prescription a tax presently being assessed against the tax payer may be

recouped or set off against the tax whose refund is now barred by prescription.

Rule on set off or compensation-a claim for taxes is not such a debt, demand, contract or judgment as is

allowed to be set off neither are they a proper subject of recoupment since they do not arise out of contact or

transaction.

Taxpayer’s suit- a taxpayer has sufficient personality and interest to seek juridical assistance with a view of

restraining what he believes to be an attempt to unlawfully disburse of public funds.

Sources of tax law:

1. Constitution

2. Statutory enactments-tax law passed by congress.

3. Administrative rulings and regulations-(BIR RULINGS)

4. Judicial Decisions- this refers to decisions of the court of tax appeals and the supreme court applying or

interpreting tax laws.

Chapter 2: The bureau of Internal Revenue

The Bureau of Internal Revenue- is an administrative agency which is involved in the administration and

collection of national taxes. It is under the supervision and control of the Department of finance.

Revenue operation of the department of Finance:

1. Bureau of customs

2. Revenue service

3. Legal service

Power and duties and the BIR are the following:

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

2. Enforcements of all forfeitures, penalties and fines connected therewith.

3. Execution of Judgments in all cases decided in its favor by the court of tax appeals and the ordinary

court.

4. Give effect to and administer the supervisory and police powers conferred to it by the national internal

revenue code (NIRC) or the other laws.

Power and Duties of a commissioner:

The bureau shall have a chief to be known as the commissioner of internal revenue, hereinafter referred to as

the commissioner and the four assistant chiefs to be known as deputy commissioner.

Each deputy shall supervise one:

Operations Group

Information system group

Research management group

Legal and enforcement group

Powers of the commissioner:

1. To interpret tax laws and to decide tax cases.

2. To obtain information and to summon, examine, and take testimony of persons.

3. To make assessments and prescribe additional requirements for tax administration and enforcements.

Power to interpret tax laws and decide on tax cases-is under the exclusive and original jurisdiction of the

commissioner subject to review by the secretary of finance and court of tax appeals.

Appellate jurisdiction- is the power and authority conferred upon superior court to rehear and re determine

cases which have tried in inferior courts.

R.A 1405 Bank Secrecy Law- banks and banking institution shall be considered as absolutely confidential in

nature.

Despite such prohibition, however, the commissioner is authorized to inquire bank deposits in the following

instances:

To determine gross estate of the decedent

When the tax payer applies compromise of his tax liability by reason of financial incapacity.

Compromise-is a contract whereby the parties by reciprocal concessions avoid litigation or put an end to one

already commenced.

Grounds for compromise

Reasonable doubt as to the validity of the claim against the taxpayer exists.

The financial position of the taxpayer demonstrates clear inability to pay assessed tax.

*For cases of financial incapacity-10% of the basic assessed tax.

*For other cases-40% of the basic assessed tax.

*Exceeds one million or where settlement offered is less than the prescribed minimum rates, the approval of

the commissioner shall be required.

All criminal violations may be compromised except:

Those already filed in the court

Those involving fraud

*Commissioner is the only official vested with the power and discretion into compromise of criminal and civil

cases and it cannot be delegated by the commissioner except the following cases:

Assessment issued by the regional offices involving basic deficiency taxes of 500,000 or less

Minor criminal violations

Abatement or cancellation

Commissioner may abate or cancel tax liability when:

The tax or any portion thereof appears to be unjustly or excessively assessed.

The administration and collection costs involved do not justify the collection amount due.

Power that cannot be delegated:

1. The power to recommend the promulgation of rules and regulations by the secretary of finance.

2. The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the

bureau

3. The power to compromise or abate any tax liability.(abatement or cancellation)

4. The power to assign or reassign internal revenue officers to establishments where articles subject to

excise tax are produced or kept.

Refund or credit taxes:

Tax credit- is a claim for issuance of a tax credit certificate showing an amount owing from the government to

the taxpayer whom later is legally authorized to credit or offset against national internal taxes payable by him

except withholding tax.

Refund- is a claim of payment of cash or refund on taxes erroneously or illegally paid by the taxpayer to the

government.

The following guidelines are applicable on tax credit or refund:

1. Taxpayer shall file in writing with the commissioner a claim for credit or refund

2. A return filed showing an overpayment shall be considered as a written claim for credit or refund

3. No tax refund is resulting from availment of incentives granted pursuant to special laws for which no

actual payment was made.

4. The claim must be filed two years after payment of tax or penalty.

Must be observed:

Fila a claim for refund with the commissioner of internal revenue within two years from the date of

payment.

o If paid on Installments or only in part, the period counted from the date of the last or final

installment until whole and entire tax is fully paid.

o For corporation who paid quarterly in any of the first three quarters during the taxable year or

date of the filing of the annual corporate income tax return.

Within the 30 days from receipt of the commissioner decision denying the claim, and 2 years from the

date of paying the tax, the taxpayer can appeal the decision to the court of tax appeals.

Within 15 days from receipt of the decision of the court of tax appeals, he can file an appeal with the

Supreme Court.

Chapter 3: Items and concept of Income

Income -means all wealth which flows into the taxpayer other than mere return of capital. It also includes

gains.

-is defined as the amount of money coming to a person or corporation within a specified time, whether

as payment for service, interest, profits from investment.

Gross income-is income reduced by exclusions. In other words, it is income form taxable sources.

Gross income

Less: Exemptions

Taxable Income

Income Tax-is referred to as tax on all yearly profits arising from property, professions, trades or offices or as a

tax on a person’s income emoluments and profits and the like.

Income Tax Classified:

a. A national tax

b. A excise tax

c. A direct tax

d. A general tax

Classification of income taxpayers:

a. Individual- refers to natural persons, whether Filipino citizens or not and whether resident or not

resident of the Philippines.

b. Corporation- includes partnership, no matter how created or organized, joint stock company, joint

accounts, associations or insurance companies but does not include general professional partnership

and company under a service contract with the government

c. Estate- property or obligations that are not extinguish by death.

d. Trust-arrangement created by will and agreement under which property is passed to another.

“Income from whatever source derived”

Self Help Income-no tax is imposed when economic benefit is derived from self-help.

Compensation Paid in Kind-payment made in cash the whole amount is subject to tax. If the compensation is

paid in kind, the following rules shall apply:

The fair market value of the thing taken in payment is the amount to be included as compensation

income.

If the services are rendered at a stipulated price, FMV of the remuneration received.

If the corporation transfer transfers to its own stock as remuneration for service rendered, the

amount of such remuneration is the FMV of the stock at the time the services were rendered.

Compensation paid in Promissory Note-Promissory note received in payment of services constitutes income

to the extent of their FMV at the time of receipt.

Tips and Gratuities-paid directly to the employee by a customer of the employer which is not accounted for by

the employee to the employer are considered taxable income of the employee but not subject to withholding

tax.

Transportation, representation and other allowances-In general it is taxable as compensation income but

expenses which are reasonably expected to be incurred by the employee in the performance of his duties are

not compensation. The excess advances made over actual expenses shall constitute taxable income if such is

not returned to the employer.

Vacation and sick leave allowances-the monetized value of unutilized vacation leave credits of ten days or

less which are paid to the employee during the year are not subject to income tax. Thus, the salaries of an

employee on vacation or on sick leave which are paid notwithstanding his absence from work constitute

compensation.

Forgiveness of indebtedness-if the creditor condones the indebtedness of the debtor the following rules shall

apply:

On account of the debtor’s services to the creditor, the same is taxable income to the debtor.

If no service was rendered but creditors simply condone the debt, it is taxable gift not income.

If the creditor is a corporation and the debtor is a stockholder the forgiveness of indebtedness has

effect of payment of dividend.

If the creditor is the stockholder and the debtor is the corporation the forgiveness of indebtedness

shall be considered as an additional investment.

Remuneratory Donations- are those remunerate past services which do not constitute demandable debts

(source of gratitude, utang na loob) is a taxable income.

Recovery of bad debts previously deducted- bad debts ascertained to be worthless and charged off

during the year are allowed deductions in gross income. “Tax Benefit Rule” in case of recovery of bad

debts previously allowed as deduction in the preceding year shall be included as part of the gross

income in the year of recovery to the extent of the income tax benefit of the said deduction.

Refund of tax- is taxable if tax was previously deducted as an expense in computing the tax during the

previous year.

Taxes that is not deductible:

Donor’s tax

Income tax

Special Assessments

Estate tax

Refund on Indirect Tax-the proper party to question, or seek a refund of an indirect tax is the statutory

taxpayer---the person on whom the tax is imposed by law and who paid the same even if he shifts the burden

thereof to another.

Receipt of Dividends- the term dividends means any distribution made by a corporation to its shareholders

out of its earnings or profits and payable to its shareholders, whether in money or in property.

Common Forms of Dividends:

Cash Dividends- form of dividends which paid in cash to shareholders. Income is measured on the

amount of cash received.

Stock Dividends- It is a distribution by a corporation to its shareholders of the corporation’s own

stock.(generally not taxable)

- These shares are later redeemed for a consideration by a corporation

- The recipient is other than stockholders

- A change in the stockholders equity results by virtue of the stock dividends issuance.

*A stock dividend that is taxable is measured by FMV of the stocks received.

Property Dividend- it is a dividend paid in shares of common stock of another corporation or other

property of the corporation.(FMV)

*A distribution of treasury stock is taxable as a distribution of property dividend.

Intercorporate Dividend

Dividends received by a domestic corporation from another domestic corporation shall not be subject

to tax.

Dividends received by a resident foreign corporation from a domestic corporation shall not be subject

to tax.

A domestic corporation to non-resident foreign corporation shall be subject to 15% final withholding

tax.

Tax informer’s reward:

An amount equivalent to ten percent, but not exceeding 1,000,000.

The giving of reward does not apply to an external revenue official or employee or other public official

or employee or his relative within sixth degree of consanguinity.

Leasehold Improvements:

A lease contract is a consensual, bilateral, onerous and commutative contract by which one person binds

himself to grants temporarily the use of the thing or rendering some service to another who undertakes to pay

some rent, compensation or price.

When lessee makes useful improvements to the leased premises following rules shall apply if the said

improvements are relinquished to the lessor without demanding reimbursement of its value:

1. The consideration for the use of property paid by the lessee is taxable income to the lessor.

2. Taxes paid by the lessee in behalf of the lessor for a business property are additional rent and

constitute income taxable to the lessor.

3. When a lessee makes improvements on leased premises and said improvements will belong to the

lessor upon the termination of the lease the lessor may at his option report income as follows.

Outright Method-report as income the fair market value of the improvements in the year of

completion.

Spread out Method-spread over the remaining term of the lease the book value of such

improvements at the termination of the lease computed as follows:

Cost of leased improvements

Less: accumulated Depreciation

Book value, end of the lease

Divide by the remaining term of the lease

Annual income

4. Deduction of lessee-the lessee may claim depreciation of the improvements over the remaining term

of the lease or the life of improvements whichever is shorter.

5. Premature termination of lease- Income shall be reported by the lessor as follows.

Book value upon termination

Less: amount already reported as income

Income in the year of completion