REVIEWER IN TAXATION

Nature of the Power of Taxation

1. It is an attribute of sovereignty. The power of taxation is an essential and inherent

attribute of sovereignty, belonging as a matter of right to every independent government,
without being expressly conferred by the people.
2. It is legislative in character. The power to taxation is essentially a legislative function.
3. It is generally not delegated to executive or judicial department. The power to tax is
purely legislative, and which the central legislative body cannot delegate either to the
executive or judicial department of the government without infringing upon the theory of
separation of powers.
4. It is subject to inherent and constitutional limitations. The power to tax is unlimited,
plenary, comprehensive and supreme, however, it is subject to inherent and constitutional
limitations.

Aspects of Taxation
1. Levy- refers to the enactment of a law by Congress imposing a tax. The act of the
legislature in choosing the persons, properties, rights or privileges to be subject of
taxation.
2. Assessment- the act of administration and implementation of the tax law by the executive
department
3. Collection- the actual effort exerted by the government to effect the exaction of what is
due from the taxpayer
4. Payment- the act of the taxpayer in settling his tax obligations.

Theory or Underlying Basis of Taxation

1. Lifeblood theory- without revenue raised from taxation, the government will not survive,
resulting in the detriment to society. Without taxes, the government will be paralyzed for
lack of motive power to activate and operate it.
2. Necessity theory- the exercise of the power to tax emanates from necessity, because
without taxes, government cannot fulfill its mandate of promoting the general welfare
and well-being of the people.
3. Benefits-received principle- taxpayers receive benefits from taxes through the protection
the State affords to them.

Attributes or Characteristics of Taxes

1. It is a forced charged, imposition or contribution. It is not contractual, either expressed or
implied, but positive acts of government. It is based on law.
2. It is assessed in accordance with some reasonable rule of apportionment- taxes must be
based on taxpayer’s ability to pay
3. It is pecuniary burden- the tax liability of a taxpayer cannot be settled by conveying his
property to pay its taxes
4. It is imposed by the state on persons, property, or exercises within its jurisdiction- the
state may exercise its power of taxation only within its territorial jurisdiction.
5. It is levied by the legislative body of the State. Creation of tax laws are legislative in
nature.
 6. It is levied for a public purpose
7. It is personal to the taxpayer

Principles of a Sound Tax System

1. Fiscal adequacy which means that the sources of revenue should be sufficient to meet the
demands of public expenditures
2. Theoretical Justice which means that the tax burden should be proportionate to the
taxpayer’s ability to pay.
3. Administrative feasibility which means that the tax law should be capable of convenient,
just and effective administration as well as easy compliance by taxpayer.

Purposes and Objectives of Taxation

1. Revenue purposes- to raise revenue to promote the general welfare and protection of its
citizens.
2. Regulatory- taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state.
3. Promotion of the general welfare-
4. Reduction of social inequality- the more income realized/earned, the more taxes you pay.
5. Encourage economic growth by granting incentives and exemptions
6. Protectionism- to protect local industries from foreign competition

TAX V. DEBT
Taxes are based on law, while debt is based on contract or judgment. Taxpayer may be
imprisoned for his failure to pay tax except poll tax while debt no imprisonment for
failure to pay a debt. Taxes are generally payable in money while debt may be payable in
money, property or services. Taxes are imposed by public authority while debt can be
imposed by private individuals.

TAX V. TOLL
Taxes are demand of sovereignty while toll is a demand of ownership. In taxation, there
is no limit ad to the amount of tax, while in toll, the amount depends upon the cost of
construction or maintenance of the public improvement used. Taxes may be imposed
only by the government, while toll may be imposed by the government or private entities.

TAX V. LICENSE FEE

Taxes are imposed for revenue purposes while license fee are imposed for regulatory
purposes. Taxes are imposed under the power of taxation while license fee is imposed
under the police power of the State. In taxation, there is no limit as to the amount of tax
while in license fee is limited to the cost of the license and the expenses of police
surveillance and regulation. In taxation, failure to pay tax does not take the business
illegal while failure to pay a license fee makes the business illegal

DISTINGUISH TAX EVASION FROM TAX AVOIDANCE

TAX EVASION is a scheme used outside of those lawful means to escape tax liability
and when availed of it usually subjects the taxpayer to further or additional civil or
 criminal liabilities while Tax Avoidance, on the other hand, is a tax saving device within
the means sanctioned by law, hence, it is legal.

Inherent Limitations on the Power of Taxation

1. The levy must be for public purpose. Taxes are levied only for public purpose they
cannot be used for purely private purposes or for the exclusive benefit of private
persons.

2. Taxation is inherently legislative- Only the legislature has the full discretion as to the
persons, property, occupation or business to be axed provided these are all within the
State’s territorial jurisdiction.

3. Exemption from taxation of government entities.

4. International comity-This is a limitation which is founded on reciprocity designed to

maintain harmonious and productive relationships among the various state.

5. Territorial jurisdiction.- taxation may be exercised only within the territorial

jurisdiction, the taxing authority.

Constitutional Limitations
1. No person shall be deprived of life, liberty or property without due process of law.
2. Nor shall any person be denied the equal protection of the laws.
3. The rule on taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
4. No law impairing the obligation of contracts shall be passed.
5. The free exercise and enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed.
6. Freedom of the press.
7. Tax exemption of properties for religious, charitable, and educational purposes.
8. All appropriation, revenue or tariff bills shall originate from the House of
Representatives, but the Senate may propose or concur with amendments.

DIRECT TAX V. INDIRECT TAX

Direct tax is one which the taxpayer who pays the tax is directly liable therefor, the burden of
paying the tax falls directly on the person paying the tax while indirect tax is one paid by a
person who is not directly liable therefor, and who may therefore shift or pass on the tax to
another person or entity, which ultimately assumes the tax burden.

SCHEDULAR V. GLOBAL TREATMENT OF TAXATION

Schedular system, when the various types/items of income are classified accordingly and are
accorded different tax treatments, in accordance with schedules characterized by the
graduated tax rates while under the global system, all income received by the taxpayer are
 group together, without any distinction as to the type or nature of the income, in which they
are subjected to tax at a graduated or fixed rate.

CAPITAL ASSET V. ORDINARY ASSET

Capital assets-The term 'capital assets' means property held by the taxpayer whether or not
connected with his trade or business, but does not include, stock in trade of the taxpayer or
other property of a kind which would properly be included, in the inventory of the taxpayer if
on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in the trade or
business of a character which is subject to the allowance for depreciation provided in
subsection [f] of section thirty; or real property used in the trade or business of the taxpayer.

The statutory definition of capital assets is negative in nature. If the asset is not among the
exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary
assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital
gain or an ordinary gain depending on the kind of asset involved in the transaction.

Double Taxation

There is double taxation when the same taxpayer is taxed twice when he should be taxed only
once for the same purpose by the same taxing authority within the same jurisdiction during
the same taxing period, and the taxes are of the same kind or character.

Fringe benefits

Fringe benefits furnished to managerial and supervisory-level employees by the employer are
subject to FBT (see the Taxes on personal income section). Benefits subjected to FBT are no
longer included in the employees’ taxable income.

‘Fringe benefits’ are defined as any goods, services, or other benefits furnished or granted in
cash or in kind by an employer to an individual employee, except rank and file employees, such
as, but not limited to, the following:

 Housing.
 Expense account.
 Vehicles of any kind.
 Household personnel (e.g. maid, driver).
 Interest on a loan at less than the market rate (currently set at 12%) to the extent of the
difference between the market rate and the actual rate granted.
 Membership fees, dues, and other expenses borne by the employer for the employee in
social and athletic clubs and similar organisations.
 Expenses for foreign travel.
 Holiday and vacation expenses.
 Educational assistance to the employee and dependants.
  Premiums for life insurance, health and other non-life insurance, and similar amounts in
excess of what the law allows.

The monetary value of benefits in the form of housing and motor vehicles used for both personal
and business purposes is equal to 50% of the lease payment or the depreciation value of the
property, whichever is applicable. However, if the housing unit is situated in or adjacent (within
50 metres) to the business premises, the benefit is not taxable. Likewise, a motor vehicle used
normally for business purposes is not taxable.

The following fringe benefits are not taxable:

 Fringe benefits required by the nature of or necessary to the trade, business, or

profession or for the convenience or advantage of the employer.
 Benefits authorised by and exempted from tax under special laws.
 Employer contributions for the benefit of the employee to retirement, insurance, and
hospitalisation benefit plans.
 Benefits given to rank and file employees, whether or not granted under a collective
bargaining agreement. However, these are subject to WHT on compensation, unless
otherwise tax exempt.
 De minimis (small value) benefits as defined and enumerated in the rules and regulations.

In general, if a fringe benefit is granted in money or directly paid for by the employer, the value
of the fringe benefit is the amount granted or paid for. If furnished in property and ownership
thereof is transferred to the employee, the value of the fringe benefit is the fair market value of
the property as determined by the Commissioner of Internal Revenue, pursuant to the
Commissioner’s power to prescribe real property values. If the fringe benefit is granted or
furnished by the employer in the form of a property but ownership is not transferred to the
employee, the value of the fringe benefit is equal to the depreciation value of the property.

KINDS OF TAXPAYERS
1. A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines.
2. A non-resident citizen is taxable only on income derived from sources within the Philippines.
3. An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income from sources within the Philippines;
Provided, that a seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker;
4. An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within and without the
Philippines.
6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.
When is income taxable

The following requisites must be present: (1) there is income, gain or profit; (2) the income, gain
or profit is received or realized during the taxable year; and, (3) The income, gain or profit is not
exempt from income tax.

Definition of gross income

Gross income refers to all income derived from whatever source, including, but not
limited to, the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of the general professional
partnership.

What are the exclusions from gross income

A: The following items shall not be included in gross income and shall be exempt from
income taxation:
1. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death
of the insured;
2. Amount received by the insured as return of premiums paid by him;
3. Value of property acquired by gift, bequest, devise, or descent;
4. Compensation for injuries or sickness;
5. Income exempt under treaty;
6. Retirement benefits, pensions, gratuities, etc.;
7. Miscellaneous items – a. Income derived by foreign government;
b. Income derived by the government or its political subdivisions;
c. Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement;
d. Prizes and awards in sports competition;
e. 13th month pay and other benefits;
f. GSIS, SSS, Medicare and other contributions
g. Gains from the sale of bonds, debentures or other certificate of indebtedness;
h. Gains from redemption of shares in mutual fund; and
i. Income Derived from the Sale of Gold Pursuant to R.A. No. 7076.
Broad powers of the CIR under the Tax Code
1. Power to interpret tax laws and decide tax cases.
2. Power to decide disputed assessments, refunds of taxes, fees or other charges,
penalties
3. Power to examine books and other accounting records and obtain information
4. Power to inquire into bank deposits of taxpayers
a. For the purpose of determining gross estate of a decedent;
b. Where the taxpayer has filed an application for compromise of his tax
liability by reason of financial incapacity to pay such tax liability; and
c. Where the taxpayer has signed a waiver authorizing the Commissioner or
his duly authorized representatives to inquire into the bank deposits.

5. Power to assess and collect the correct amount of tax

6. Power not to allow withdrawal of any return, statement, or declaration,
although the same may be amended.
7. Power to delegate powers to subordinate officials, except a. The power to
recommend the promulgation of rules and regulations by the Secretary of
Finance, b. The Power to issue rulings of first impression or to reverse, revoke,
or modify any existing ruling of the BIR, c. The power to compromise or abate
any tax liability and the power to assign or reassign revenue officials to
establishments where articles subject to excise tax are stored or kept.