INCOME TAXATION

CHAPTER 1 – INTRODUCTION TO TAXATION

 CHAPTER OVERVIEW AND OBJECTIVES

After this chapter, readers and must be able to comprehend and

demonstrate mastery of the following:
 Concept of taxation and its necessity for every government
 Lifeblood doctrine and its implication to taxation
 Theories of government cost allocation
 Inherent power of the State
 Stages of Taxation
 Principle of Sound Tax System
 Situs of Taxation
 Definition and classification of taxes
 Philippine taxes
 Taxation Law
 WHAT IS TAXATION?
Taxation may be defined as a State power, a legislative process, and a mode
of government cost distribution.

 As a state power
Taxation is an inherent power of the State to enforce a proportional
contribution from its subjects for public

 As a process
Taxation is a process of levying taxes by the legislature of the
State to enforce proportional contributions from its subjects for public
purpose

 As a mode of cost distribution

Taxation is a mode by which the State allocates its costs or burden
to its subjects who are benefited by its spending
 THE THEORY OF TAXATION

- Every government provides a vast array of public services

including defense, public order and safety, health, education
and social protection among others. A system of government is
indispensable to every society. Without it, the people will not
relish the benefits of a civilized and orderly society. However, a
government cannot exist without a system of funding. The
government for funding is the theory of taxation
 THE BASIS OF TAXATION
 Mutuality is illustrated as:

Public Services

Government People

Taxes
 THEORIES OF COST ALLOCATION
 Taxation is a mode of allocating government costs or burden
to the people. In distributing the costs or burden, the
government regards the following general considerations in
the exercise of its taxation power:

1. Benefit received theory – presupposes that the more benefit

one receives from the government, the more taxes he
should pay.
2. Ability to pay theory – presupposes that taxation should
also consider the taxpayer’s ability to pay. Taxpayers should
be required to contribute based on their relative capacity to
sacrifice for the support
 THEORIES OF COST ALLOCATION
 Aspects of the Ability to Pay Theory

1. Vertical equity – proposes that the extent of one’s ability to pay is

directly proportional to the level of his tax base.

2. Horizontal Equity – requires consideration of the particular

circumstance of the taxpayer.

For example, Businessmen A & B both have P 300,000 income. A

incurred P 200,000 in business expense while B incurred only P 50,000
business expenses. The government should tax B more than A because
he has lesser expenses and thus greater capacity to contribute taxes.
 THE LIFEBLOOD DOCTRINE

 Taxes are essential and indispensable to the continued

subsistence of the government. Without taxes, the
government would be paralyzed for lack of motive power to
activate or operate it.
 Taxes are the lifeblood of the government, and their prompt
and certain availability are an imperious need. Upon taxation
depends the government’s ability to serve the people for
whose benefit taxes are collected.
 THE LIFEBLOOD DOCTRINE
 Implication of the lifeblood doctrine in taxation:

1. Tax is imposed even in the absence of a Constitutional grant.

2. Claims for tax exemption are construed against taxpayers
3. The government reserves the right to choose the objects of taxation
4. The courts are not allowed to interfere with the collection of taxes
5. Income taxation:
a. Income received in advance is taxable upon receipt
b. Deduction for capital expenditures and prepayments is not allowed as it
effectively defers the collection of income tax
c. A lower amount of deduction is preferred when a claimable expense is
subject to limit
d. A higher tax base is preferred when the tax object has multiple tax bases.
 INHERENT POWER OF THE STATE

 Taxation power is the power of the State to enforce

proportional contribution from its subject to sustain itself

 Police power is the general power of the State to enact laws

to protect the well-being of the people

 Eminent domain is the power of the State to take private

property for public use after paying just compensation
COMPARISON OF THE THREE POWERS OF THE STATE

Point of Taxation Police Power Eminent

Difference Domain
Exercising Government Government Government and
Authority private utilities
Purpose For the support of To protect the For public use
the government general welfare of
the people
Persons affected Community or Community or Owner of the
class of individuals class of individuals property
Amount of Unlimited Limited No amount imposed.
Imposition (Tax is based on (Imposition is limited (The government
government needs.) to cover cost of pays just
regulation.) compensation
Importance Most important Most superior Important
Relationship with the Inferior to the “Non- Superior to the “Non- Superior to the “Non-
Constitution impairment Clause” impairment Clause” impairment Clause”
of the Constitution of the Constitution of the Constitution

Limitation Constitutional and Public interest and Public purpose

inherent due process and just
 SIMILARITIES OF THE THREE POWERS
OF THE STATE
 They are all necessary attributes of sovereignty
 They are all inherent to the State
 They are all legislative in nature
 They are all ways in which the State interferes with private rights
and properties
 They all exist independently of the Constitution and are
exercisable by the government even without Constitutional
grant. However, the Constitution may impose conditions or limits
for their exercise.
 They all presuppose an equivalent form of compensation
received by the persons affected by the exercise of the power
 The exercise of these power by the local government units may
be limited by the national legislature
 STAGES OF TAXATION
 Levy – refers to the enactment of a law by Congress,
imposing a tax

 Assessment – the act of administration and

implementation of the tax law by the executive
department through the administrative agencies.

 Payment – act of compliance by the taxpayer including

such options, schemes or remedies as may be legally
available to him
PRINCIPLES OF A SOUND TAX SYSTEM
 Fiscal adequacy – the sources of tax revenue should coincide with
and approximate the needs of the government expenditures.

 Administrative feasibility – the tax system should be capable of

being properly and efficiently administered by the government
and enforced with the least inconvenience to the taxpayer.
- Application of administrative feasibility
1. E-filing and e- payment of taxes
2. Substituted filing system for employees
3. Final withholding tax on non-resident aliens or Corporation
4. Accreditation of authorized agent bank in the filing and
payment of taxes
PRINCIPLES OF A SOUND TAX SYSTEM

 Theoretical Justice – the tax system should be fair to the

average taxpayer and based upon the ability to pay
 SITUS OF TAXATION
- Means place of taxation: the country that has power to
levy and collect tax.
Object Situs Rule
Person Residence, Domicile, Citizenship

Real Property Location of the property

Tangible Personal Property Physical location although the owner
resides in another jurisdiction

Intangible Personal Property Domicile

Income Citizenship, Residence, Source of

Income
Transfers of property Citizenship, Residence, Location of
Property
Business or Occupation Where the act/business/occupation is
performed/exercised
 DEFINITION OF TAX
Tax – is a burden, charge, exaction, imposition or contribution assessed in
accordance with some reasonable rule of apportionment by authority of
the sovereign state upon the persons or property within its jurisdiction, to
provide public revenue for the support of the government, the
administration of the law, or the payment of public expenses.

Characteristics of Tax
 Enforced
 Proportional and
 Pecuniary contribution from person, property and privilege
 Levied by law making body
 The state having jurisdiction over the subject of the burden
 For the support of the government and all public needs
 CLASSIFICATION OF TAXES
 As to subject matter or object
 Personal, poll, capitation tax – fixed amount imposed on
individuals residing within specified territory without regard to
their property, business or business.
(Example: Community Tax/Cedula)
 Property Tax – imposed on property, real or personal in
proportion to its vale or other reasonable method of
apportionment.
(Example: Real Estate Tax)
 Excise/Privilege tax – imposed upon performance of an act,
the enjoyment of a privilege or the engaging in an occupation,
profession or business.
(Example: Income Tax, VAT, Estate tax , Donor Tax)
 CLASSIFICATION OF TAXES
 As to who bears the burden or incidence
 Direct – the tax is imposed on the person who also bears
the burden thereof
(Example: Income Tax, Community Tax, and estate Tax)
 Indirect – imposed on the taxpayer who shifts the burden
of the tax to another
(Example: VAT, Custom duties, percentage Tax)
 CLASSIFICATION OF TAXES
 As to tax rates or determination of amount
 Specific – tax imposed and based on physical unit of measurement, as by
head, number, weight, length or volume.
(Example: tax on distilled spirits or fermented liquors)
 Ad Valorem – tax of a fixed proportion of the value of the property with
respect to which the tax is assessed: requires the intervention of assessor.
(Example: Real estate tax, excise tax on cars)

 As to purpose
 General, fiscal or revenue – imposed for the general purpose of supporting
the government
(Example: IT, VAT, PT)
 Special or regulatory - imposed for a special purpose, to achieve some
social or economic objectives
(Example: protective tariffs or custom duties on imported goods intended to
protect local industries
 CLASSIFICATION OF TAXES
 As to scope or authority impose
 National – imposed by national government
(example: National Internal revenue taxes, custom duties)
 Municipal or Local – imposed by the municipal corporations or government.
(Example: real estate tax, professional tax and community tax)

 As to graduation rate
 Proportionate – based on a fixed percentage of the amount of the property,
income or other basis to be taxed.
(Example: RET, VAT, PT)
 Progressive or graduated – tax rate increases as the tax base or bracket
increases
(Example: IT, ET, DT)
 Regressive – tax rate decreases as the tax base increases.
 PHILIPPINE TAXES
 National Internal Revenue Taxes
 Income Tax
 Estate Tax
 Donor’s Tax
 Value-added Tax
 Other percentage tax
 Excise tax
 Documentary Taxes
 Local/Municipal Taxes
 Tariff and custom duties
 Taxes/ Tax incentives under special laws
 TAXATION LAW
 Refers to any law that arises from the exercise of the taxation power of the
State.

Types of taxation laws

1. Tax Laws – these are the laws that provide for the assessment and
collection of taxes
A. The national internal revenue code
B. The tariff and Customs code
C. The local tax code
D. The real property tax code
2. Tax Exemption laws – these are the laws that grant certain immunity from
taxation
A. The minimum wage law
B. The omnibus investment code of 1987
C. Barangay Micro-business Enterprise Law
D. Cooperative Development Act