Taxation Chapter 1:
INCOME AND BUSINESS TAXATION
BIR – the premier tax agency of the Philippines.
- Established in 1904; has assumed
the task of computing the tax
liabilities of the taxpayers when its
population is still few.
- At 1959, BIR started adopting self-
assessment system because of
taxpayer’s population growth after
WW2
- At 1990’s it faced challenges due to
the advent of IT and electronic
communication thus having the
need for computerized
environment.
TAXATION
- is the process or means by which
the sovereign, through its law
making body, raises income to
defray the necessary expenses of
the government.
- It is inherent in sovereignty / as a
power of the state
- Inherent power gives the
government the right to tax citizens
and properties within its jurisdiction
- Life blood of the government
- Is indispensable and inevitable
price for civil society
- Without taxes, government will be
paralyzed
- The ultimate beneficiaries in the
process are both the government
and the citizens
OBJECTIVES OF TAXATION
- Objectives include shifting wealth
from the rich to the poor,
maintaining price stability,
stimulating economic growth, and
encouraging full employment.
Congress tends to use tax in 2 different ways:
1. One tax rules are enacted for the purpose of
mitigating certain undesirable economic and
social conditions already exists.
2. Other tax rules provide incentives for certain
desirable activities.
STATE POWERS
1. Taxation – the power of the state by which
the sovereign raises revenue to defray the
necessary expenses of the government.
2. Eminent domain – the power of the state to
take private property for public use upon
payment of just compensation.
3. 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.
ASPECTS OF TAXATION
1. Levying of the tax – the imposition of the tax
requires legislative intervention. In the
Philippines, it is Congress that levies tax.
2. Collection of the tax levied – this is
essentially an administrative function.
BASIC PRINCIPLES OF SOUND TAXATION
1. Fiscal Adequacy – sources of revenue are
sufficient to meet government expenditures
2. Equality or theoretical justice – the tax
imposed must be proportionate to taxpayer’s
ability to pay.
3. Administrative feasibility – the law must be
capable of convenient, just and effective
administration.
LIMITATIONS ON THE POWER OF TAXATION
Subject to:
A. Constitutional limitations – those provided
for in the constitution or implied from its
provisions.
B. Inherent Limitation – are restrictions to the
power to tax attached to its nature.
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
delegated.
SOME DOCTRINES IN TAXATION
PROSPECTIVITY OF TAX LAWS – taxes must be
imposed prospectively. If otherwise
(retroactively), then such statute must state so
explicitly and clearly.
DOUBLE TAXATION
Direct duplicate taxation – the same
subject is taxed twice when it should be taxed
once. When both taxes are imposed for the
same purpose by the same taxing authority,
within the same jurisdiction, for the same
period and for the same kind of tax, then it
becomes illegal.
Indirect double taxation – not legally
prohibited because the taxes are imposed by
different taxing authorities.
Methods of avoiding the occurrence of double
taxation:
1. Allowing reciprocal exemption either by law
or by treaty.
2. Allowance of tax credit for foreign taxes paid.
3. Allowance of the deduction for the foreign
taxes paid.
4. Reduction of the Philippine tax rate.
SET-OFF TAXES – taxes are not subject to set-off
or legal compensation. A person cannot refuse
to pay a tax on the ground that the government
owes him an amount equal to or greater than
the tax being collected.
ESCAPE FROM TAXATION
Tax Avoidance – known as tax
minimization or tax planning. It is the process of
controlling one’s actions so as to avoid
undesirable tax consequences. It is the legal
process or not conducting taxable transactions.
Tax Evasion – occurs when the taxpayer
resorts to unlawful means to lessen or to get
away with his tax liability. It is the illegal process
of not complying the applicable provisions of
the law once the transactions already exist.
tax evasion connotes the integration of three
factors:
- The end to be achieved
- State of mind being in bad faith, wilful,
or accidental
- A course of action or failure of action
that is unlawful
*Both seek the same objective: saving taxes.
SITUS OF TAXATION
Situs – the place of taxation. The state rule is to
collect the tax where the subject being taxed
has a situs under its jurisdiction.
Factors:
Subject Matter – what is being taxed
Nature of the tax – which tax to impose
Citizenship of the tax payer
Residence of the tax payer
The following situs of taxation apply:
Persons – residence of the tax payer
Real property or tangible personal
property – location of the property
Intangible personal property – situs is
the domicile of the owner unless he has
acquired a situs elsewhere.
Income – tax payer’s residence or
citizenship, or place where the income
was earned.
Business, occupation and transaction –
place where business is being operated,
occupation being practiced and
transaction completed.
Gratuitous transfer of property –
Taxpayer’s residence or citizenship, or
location of the property.
Taxes – are enforced proportional contributions
from persons and property levied by the law-
making body of the state by virtue of its
sovereignty for the support of the government
and all public needs. Tax is not a debt.
Characteristics of a Tax
-It is an enforced contribution
-It is levied by the law-making body
-It is proportionate in character
-It is generally payable with money
-It is imposed for the purpose of raising
revenues
-It is to be used for public purpose
TYPES OF TAX RATE STRUCTURES
Regressive Tax – a tax is said to be regressive if
the average rate decreases as the tax base
increases. Ex. VAT
Proportional Tax – for proportional taxes (aka
flat or uniform taxes), the average rate of tax
remains constant for all levels of the tax base.
Progressive Tax – the average rate increases as
the amount of the tax bases increases.
Constitutional Provision on Progressive System
of Taxation
-The Supreme Court declared R.A. 9337 or the
VAT Reform Act constitutional.
- The increase in corporate income tax rate and
the removal of certain exemptions are meant to
distribute the burden of taxation.
CLASSIFICTAION OF TAXES
1. As to subject matter or object
a. Personal, poll or capitation
b, Property
c. Excise
2. As to who bears the burden
a. Direct (tax is demanded from persons
intended to pay)
b. Indirect (tax which the taxpayer can
shift to another)
3. As to Determination of the amount
a. Specific
b. Ad Valorem (needs an independent
appraiser to determine its value)
4. As to purpose
a. General, fiscal or revenue
b. Special or regulatory
5. As to authority imposing the tax or scope
a. National
b. Municipal or local
6. As to graduation or rate
a. Proportional
b. Progressive or graduated
c. Regressive
TAX DISTINGUISHED FROM OTHER FEES
1. Toll – is the sum of money for the use of
something. It is also a demand of
proprietorship, is paid for the use of another’s
property and may be imposed by the
government or private individuals or entities.
2. Penalty – is any sanction imposed as the
punishment for violation of law or acts deemed
injurious.
3. Special Assessment – is an enforced
proportional contribution from the owners of
the lands for special benefits resulting from
public improvements.
4. Permit or license fee – is a charge imposed
under the police power for purposes of
regulation.
5. Debt – is generally based on contract, is
assignable and may be paid in kind. A person
cannot be imprisoned for non-payment of debt.
6. Revenue – is broader than tax since it refers
to all funds or income derived by the
government taxes included.
7. Customs duties – are taxes imposed on
goods exported from or imported to a country.
TAX LAWS
Sources of Tax Authority
-Congress creates statutory law.
-Two commonly encountered types of
administrative tax authorities are revenue
regulations and Revenue rulings
Tax laws is composed of three elements:
1. The Code,
2. Regulations and rulings
3. Decisions of the various courts that hear tax
cases.
Sources of Taxes
1. Constitution
2. Statutes and presidential decrees
3. Revenue regulations by the department of
finance
4. Rulings issued by the commissioner of
Internal Revenues and Opinions by the
Secretary of Justice
5. Decisions of the Supreme Court of Tax
Appeals
6. Provincial, city, municipality, and barangay
ordinances subject to limitations set forth in the
Local Government Code.
7. Treaties or international agreements
Rational Basis Test – is applied to gauge the
constitutionality of an assailed law in the face of
an equal protection challenge.
REPUBLIC ACT 9286
INTERPRETATION AND CONSTRUCTION
*Philippine Track
PHILIPPINE TAX LAWS AND TAXES
1. National Internal Revenue Code
a. Income taxes
b. Estate and donor’s taxes
c. Value added tax
d. Other percentage taxes
e. Excise tax
f. Documentary stamp tax
2. Tariff and customs code 1978
a. imported duties
b. Export Duties
3. Local government Code of 1991
a. Real property tax
b. Business taxes, fees and charges
c. professional tax
d. community tax
e. tax on banks and not for a minute
4. Special Laws
a. Motor Vehicles Law
b. private Motor vehicles tax laws
c. Philippine Immigration Act of 1940
d. Travel Tax Law
TAX LAWS VERSUS GAAP AND GAAS
-all returns required to be filed by the tax code
shall be prepared always in conformity with the
provisions of the tax code, and the rules and
regulations used implementing said tax code.
INTERNAL REVENUE LAWS
- Revenue law is a law passed for the
purpose of levying and collection of
taxes in some form to raise
revenue.
*HISTORY OF THE PHILIPPINE INTERNAL
REVENUE LAW
BIR – Bureau of Internal Revenue
DOF – Department of finance
Tax collection System. – Self-assessment
systems.
BIR ISSUANCES AND RULING DEFINED
- Revenue regulations
- Revenue Memorandum circulars
- Revenue Memorandum order
- Revenue memorandum r
- BIR ruling
Revenue bulletin – refer to periodic issuances,
notices and official announcements of the
Commissioner of internal Revenue.
POWERS OF THE COMMISSIONER:
1. Interpret tax laws, decide tax cases
2. Obtain information
3. Make assessments and prescribe
additional requirement for the tax
administration and enforcements.
4. Delegates powers vested in him by
the code to any subordinate officer with
rank equal to a division chief or higher.
5. Suspend business operations of a
taxpayer.
6. Compromise, abate, and refund or
credit taxes.
TAX INCENTIVES
- Deduction from gross income of the
amount of contribution that were
actually, directly and exclusively
incurred for the program, listen to
limitations, plus an additional
amount equivalent to 50% of such
contribution.