INCOME TAXATION

2019 EDITION
OVERVIEW OF CONTENTS
Introductory concepts to taxation
The concept of tax, tax laws and tax administration
The concept of gross income under taxation
Taxation schemes, accounting period, methods and
income reporting
Final income taxes
Capital gains taxes
Overview of the regular income tax
Exclusions and exempt income
Income subject to regular income tax
Compensation income
Fringe benefits and the fringe benefits tax
Dealings in properties subject to regular tax
Allowable deductions from gross income
Specific regular tax rules applicable individuals
Specific regular tax rules applicable to
corporations
THE CONCEPT MAP OF INCOME TAXATION
TABLE OF CONTENTS
Introductory concepts
(Chapters 1-2)
PARTI INTRODUCTORY CONCEPTS
GROSS INCOME
(Chapter 3)
CHAPTER
Final Income
Taxation
Capital Gains
Taxation
Regular Income
Taxation
1 Introduction to Taxation
Definition of taxation Theories of cost allocation The Lifeblood Doctrine The
inherent powers of the State The scope of taxation Inherent limitations
Constitutional limitations Stages of taxation Situs of taxation Other fundamental
doctrines in taxation Double taxation Escape from taxation Tax amnesty and tax
condonation Exercise Drills
---FIAT

Chapter 5
Chapter 6
Chapter 6-15B
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Gains on dealings in properties

21-34
Fringe benefits
Chapter 12
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Chapter 11
35

P XXX
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Chapter 13-13C
Gross income Less: --- Deductions
Personal exemptions Taxable income
XXX
P. XXX

44
CHAPTER 2 Taxes, Tax Laws, and Tax Administration
35-62 Taxation laws and tax exemption laws Sources of laws and administrative
issuances Nature of Philippine tax laws Elements of tax Classification of taxes Tax
distinguished with similar items Tax system Tax collection system Principles
of a sound tax system Tax administration Powers of the BIR and the CIR
44-45 Other agencies with tax related functions
48 Taxpayer classification for purposes of tax administration Exercise Drills
52-62 PART II INCOME RECOGNITION, MEASUREMENT AND
REPORTING, AND
TAXPAYER CLASSIFICATIONS CHAPTER 3 Introduction to Income Taxation
The concept of income
63-99 Elements of gross income Capital items deemed with infinite value
Recovery of loss capital vs. recovery of loss profits The concept of realized
benefit Complex transactions
Individual Taxpayers (Progressive Income Tax)
Corporate Income Taxpayers
(Corporate Income Tax)
50

Chapter 14
Chapter 15A-15B

Special individual tax rules: Taxable estates Taxable trusts

Special corporate tax rules: Gross income tax MCIT JAET Branch profit
remittance tax
167-220
167
CHAPTER
Mode of realization of benefits Types of income taxpayers Individual income
taxpayers Classification rule for individual taxpayers Taxable estates and trusts
Corporate taxpayers The general rules in income taxation Situs of income Exercise
Drills
168 168 171 171 171 171 172
173
82-99
CHAPTER
175

100-134
100 101 102
6 Capital Gains Taxation
Classification of taxpayer's properties Analysis of taxpayer's properties Asset
classification rules Types of gains on dealings in properties Scope of the capital
gains taxation Capital gains on the sale of stocks directly to buyer Meaning
of domestic stocks Meaning of other disposition Tax on sale of stocks through the
PSE Tax basis of stocks Costing procedures for stocks Capital gains tax rates for
domestic stocks Transactional compliance Annualized capital gains tax
Installment payment of the two-tiered capital gains tax Special rules on wash
sales and tax-free exchanges Capital gains tax on the sale of real property Nature
and scope of the 6% capital gains tax Exceptions to the 6% capital gains tax
Installment payment of the 6% capital gains tax Documentary ştamp tax on the sale
of capital assets Exercise Drills
175 178 179 180 182
103
184
4 Tax Schemes, Periods, and Methods and Reporting
Income taxation schemes Classification of gross income Accounting period Short
accounting period Accounting methods Tax reporting Information returns Mode of
filing income tax returns Taxpayers mandated to use the eFPS Groupings of eFPS
taxpayers Payment of taxes Penalties for filing of returns and late payment of taxes
Exercise Drills
105
117
194
195
196 200
118 118 118 119
120 120-123 124-134
202
204-220
 PART IV REGULAR INCOME TAXATION
PART III SPECIAL INCOME TAXATION
CHAPTER

135-166
135
135 136
‫لا ال الي‬

136
137
‫تم‬
‫ال‬

230
137 141 147 147 148
7 Introduction to Regular Income Taxation
221-248 The regular income tax model and its characteristics
221 Determination of taxable income
223 The classification and globalization rule
223 The classification rule
224 The globalization rule
225 Determination of gross income from business or profession 227 Income tax
reporting format for individual taxpayers
229 The concept of revenue and operating Non-operating income
230 Income tax reporting format for curporate taxpayers Types of regular income tax
233 Scope of the progressive income tax of individuals Computation of progressive
income tax for individuals 234 Determination of the corporate income tax
235 Income tax forms Required attachments in the annual income tax returns
236 Quarterly filing of income tax returns
237
237 Exercise Drills
239-248
CHAPTER 5 Final Income Taxation
Features of final income taxation The final withholding system Taxpayers subject to
final income tax Items of passive income subject to final tax Final tax to
individuals and corporations Final tax on interest from banks Final tax on
dividends Final tax on royalties Final ta> on prizes Final tax on winnings Final tax
on informer's reward Final tax on "tax free" covenant bonds Exceptions to the
final taxation of certain taxpayers The tax sparing rule Other applications of the
final income tax Final withholding tax return Entities exempt from final tax
Exercise Drills
232
‫الي‬

233
‫التي‬
149 150 150
152 152
153
154 155-166
UNIT 1 - GENERAL RULES ON GROSS INCOME
‫ية في‬

CHAPTER
‫ليبيا ليا نعيا نيا ت‬

319 319 320 323 324 325 325 326

NNNNNNN
‫ليبيا بيا ليا‬

327
8 Regular Income Taxation - Exclusions in Gross Income 249.90
List of inclusions from gross income Proceeds of life insurance and return of premium
Gifts, bequests and devises or descent Compensation for injuries and
sickness Income exempt under treatv Retirement benefits and termination benefits
253 Miscellaneous exempt benefits
256 Investment income of the government & foreign government
256 Prizes and awards
257 Mandatory contributions to SSS. GSIS, PhilHealth and HDMF 257 Contribution to
Personal Equity Retirement Account (PERA) Gain on sale of bonds with more than 5
vear maturity Gains on redemption of shares in mutual funds Other exempt
income under the NIRC and special laws
259 Minimum wage earners and BMBES Qualification of exemption on exempt
entities
262 Exercise Drills
264-275
The tax model on compensation income Non-taxable compensation income De
minimis benefits Exempt benefits under trcaty Necessity of the employer rule
Convenience of the employer rule Components of taxable compensation income
Regular compensation Non-compensation items Supplemental compensation
13th month pay and other benefits Tax treatment of taxable compensation income
Taxability of minimum wage earners Rules of change in minimum wage status The
withholding tax on compensation Benefits not subject to withholding tax on
compensation Deadline of the withholding tax on compensation Treatment of the
withholding tax on compensation Exercise Drills
328 330 333
339

258
259
342 343 345 346
259
347
260
348-361

CHAPTER
362-392
362 363
276-316
276 278 279
365

279
366 367 368 369
280 281
CHAPTER 11 Fringe Benefits Taxation
Tax treatments of fringe benefits Scope of the fringe benefit tax Exempt fringe
benefits to the fringe benefits tax The fringe benefits tax and its
characteristics Procedural computations of the fringe benefits tax Rules on
valuation of fringe benefits Special guidelines on monetary value determination
Fringe benefits tax rates Grossed-up rates Computation of the fringe benefits tax
Accounting entries Exercise Drills
377
9 Regular Income Taxation - Inclusions in Gross Income
List of inclusions in gross income subject to regular tax Interest income Rent
income Royalties Dividends Annuities Prizes and winnings Partner's distributive
share in GPP net income General criteria for inclusion in gross income Other
sources of gross income subject to regular tax Recoveries of past deductions
Reimbursements of expenses Special considerations in reporting gross
income The effect of accounting methods The effect of situs The effect of VAT The
effect of creditable withholding tax The power of the CIR to redistribute income
and expense The transfer pricing regu ation Exercise Drills
281 282
283 283 284
377 378
379 382-392
288 288
289 289
291
292 294
295 300-316
CHAPTER 12 Dealings in Properties
Dealings in properties subject to regular income tax Determination and
treatment of gain or loss The holding period rule Presentation of gains or losses in
the income tax return The effect of situs rules on dealings in properties Net capital
loss carry-over Special rules in tax basis determination Tax free exchanges Merger or
consolidation Initial acquisition of control Exchanges not plainly for stocks Wash
sales Transactions considered exchanges Exercise Drills
393-432
393 394 395 396 398 399 401 404 404
UNIT 2 - SPECIAL RULES ON GROSS INCOME
406
317-361
CHAPTER 10 Compensation income
Employer-employee relationship Elements of an employer employee
relationship Types of employees as to function and taxability
317 318
407 413
417 419-432
318
UNIT 3 - DEDUCTIONS ON GROSS INCOME

433-475
+
433 434 434 436
‫د نية لبنانية‬
ON AAU

436
440 442 445 446
556
541 Rules in carry-over of NOLCO
543 NOLCO for individual taxpayers
544 NOLCO and merger and consolidation
545-552 Exercise Drills
553-578 CHAPTER 13-C Optional Standard Deduction
553 The Optional Standard Deduction (OSD)
553 Taxpayers mandatorily required to use itemized deductions
554 OSD percentages and bases Rules on determination of OSD for individuals
556 Other taxable income from operations
557 Non-operating income
560 OSD for corporate taxpayers
563 Cost of services OSD for general professional partnership including
partners
565

Exercise Drills
570-578
CHAPTER 13 Principles of Deductions
Business expense vs. personal expense Allocation of common expenses Business
expense vs. capital expenditures Rules on deducting capital expenditures
Depreciation methods Special considerations with deductions Asset related
acquisition costs The effects of accounting methods on deductions The effect of
VAT on deductions The general principles of deductions The LOAN Principle
The Matching Rule The Related Party Rule The Withholding Rule and rules of
withholding Summary of expanded withholding tax rates Penalties for late
withholding and remittances Periods in which deductions or credits are taken Non-deductible
expenses Tax reporting classification of deductions Modes of claiming deductions
Exercise Drills
446

449 450 452 453 455

UNIT 4 - SPECIFIC REGULAR TAX RULES PER TAXPAYER CLASS
456
456 456
457 458-475

581
476-517
476 476 480 482 484 487
CHAPTER 13-A Regular Allowable Itemized Deductions
List of itemized deductions Interest expense Taxes Foreign income tax credit Losses
Bad debts Depreciation expense Amortization expense on intangible assets
Depletion expense Charitable contributions Contributions to pension Research
and Development and general expenses Entertainment and amusement
expenses Exercise Drills
Sub-Unit 1 Special Regular Tax Rules for Individual taxpayers
579-617 CHAPTER 14 Individual Income Taxation
579 Income tax table for individual taxpayers
580 Taxpayers subject to percentage tax Pure compensation income earners
580 Conditions for substituted filing system Pure business and or
professional income earner
584
Mixed income earner
586 The 8% optional income tax
587 Interim transition to the Value Added Tax
593 Taxable estates and trusts
596 Consolidation of two or more trusts
598 Employee trust fund Return of married taxpayers
600 Individuals with PERA accounts
601 Where to file Income Tax Returns Installment payment of regular income tax
603 Amendment of income tax return
605 Exercise Drills
606-617
489
491
599
492 495 499
602
503
503 506-517

518-552
518
Sub-Unit 2 Special Regular Tax Rules for Corporate taxpayers
519
CHAPTER 13-B Special Allowable itemized Deductions and
Net Operating Loss Carry-over List of special deductions Special expenses
under the NIRC and special laws Deduction incentives under special laws
Net Operating Loss Carry-over NOL VS. NOLCO Requisites for the
deductibility of NOLCO
525 537
618-660
618
537
CHAPTER 15-A Corporate Income Taxation - Special Corporations
General classification and tax rules for corporations Sub-classification of
corporate taxpayers Exempt corporations The classification rule
619
539
620 621

622 623 624

NM

Chapter 1 - Introduction to Taxation

Requisites of exemption of non-profit corporations Exception to the
classification rule Taxation of cooperatives Allocation of common expenses of
exempt corporations Reporting requirements for exempt corporations Special
domestic corporations The Pre-dominance test Taxation of FCDUS, EFCDUS Tax on
PEZA or BOI-registered enterprises Special resident foreign corporations Tax on
OBUS Taxation of RHQs and ROHQs of multinational companies Tax on
international carriers Tax on special non-resident foreign corporations
Exercise Drills
628 628 629 629 631
CHAPTER 1 INTRODUCTION TO TAXATION

Chapter Overview and Objectives

635
637
638
639
639
645
647-660

661-703
This chapter discusses the fundamental principles of taxation. After
this chapter, readers must be able to comprehend and demonstrate
mastery of the following: 1. Concept of taxation and its necessity for every
government 2. Lifeblood doctrine and its implication to taxation 3. Theories of
government cost allocation 4. Inherent power of the State 5. Scope of the taxation power 6.
Limitations of the taxation power 7. Stages of taxation 8. Concept of situs in
taxation 9. Fundamental principles surrounding taxation 10. Various
escapes from taxation 11. Concept of tax amnesty and condonation
661 661 662 663
CHAPTER 15-B Corporate Income Taxation - Regular Corporations
The regular corporate income tax The corporate gross income tax The minimum
corporate income tax Timing of MCIT imposition The MCIT concept of "Gross
income" MCIT basic application MCIT Integrative application Excess MCIT carry-
over rules Quarterly MCIT Relief from the imposition of the MCIT The
improperly accumulated earnings tax MCIT under the regulations IEAT
exempt entities The branch proñt remittance tax Exercise Drills
663
667
-

668 670 673 674 675 679 681

682 687-703
WHAT IS TAXATION? Taxation may be defined as a State power, a
legislative process, and a mode of government cost distribution.

Appendices
Appendix 1 Appendix 2 Appendix 3 Appendix 4
Table summary for final income tax rates Withholding tax tables on
compensation Income tax table for individual taxpayers List of
compromise penalties relevant to income tax
1. As a state power
Taxation is an inherent power of the State to enforce a proportional
contribution from its subjects for public purpose. 2. 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. 3. 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 putic
services including defense, public order and safety, health, education, and
social protection among others.
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
A system of government is indispensable to every society. Without it, the nenni will not
relish the benefits of a civilized and orderly society. Howe government cannot exist without
a system of funding. The government's nece for funding is the theory of taxation.
ricty. However, a
Benefit received theory The benefit received theory presupposes that the more
benefit one receives from the government, the more taxes he should pay.

The Basis of Taxation The government provides benefits to the people in the form of
public services, and the people provide the funds that finance the government. This
mutuality of support between the people and the government is referred to as the basis of
taxation
Ability to pay theory The 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 of the government.
In short, those who have more should be taxed more even if they benefit
less from the government. Those who have less shall contribute less even
if they receive more of the benefits from the government.
This mutuality is illustrated as:
Public services

Government
People
Aspects of the Ability to Pay Theory 1. Vertical equity
Vertical equity proposes that the extent of one's ability to pay is directly
proportional to the level of his tax base. For example, A has P200,000 income while B
has P400.000. In taxing income, the government should tax B more than A because B
has greater income; hence, a greater capacity to contribute.
Taxes

Receipt of benefits is conclusively presumed Every citizen and resident of

the State directly or indirectly benefits from the public services rendered by the
government. These benefits can be in the form of daily free usage of public
infrastructures, access to public health or educational services, the
protection and security of person and property, or simply the comfort of
living in a civilized and peaceful society which is maintained by the
government.
2. Horizontal equity
Horizontal equity requires consideration of the particular circumstance of
the taxpayer. For example, Businessinen A and B both have P300,000 income. A
incurred P200.000 in business expenses while B incurred only P50,000 business
expenses. The government should tax B more than A because he has lesser
expenses and thus greater capacity to contribute taxes.
While most public services are received indirectly, their realization by every citizen
and resident is undeniable. In taxation, the receipt of these benefits by the people
is conclusively presumed. Thus, taxpayers cannot avoid payment of taxes under
the defense of absence of benefit received. The direct receipt or
actual availment of government services is not a precondition to taxation.
Vertical equity is a gross concept while horizontal equity is a net concept.

The Lifebiood 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 (CIR vs.
Algue)
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
taxa.ion power: 1. Benefit received theory 2. Ability to pay theory
Taxes are the lifeblood of the government, and their prompt and certain
availabihty are an imperious need. Upon taxation depends the
government's abıhty to serve the people for whose benefit taxes are
collected. (Vera vs. Fernandez)

Chapter 1 - Introduction to Taxation

Chapter 1 - Introduction to Taxation
Eminent
Domain Government and private utilities For public use
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. In 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.
Comparison of the three powers of the State
Point of
Police Power Taxation Difference
Government Government Exercising Authority Purpose
For the support of To protect the the government general welfare of
the people
Community or Community or Persons
class of
class of individuals
individuals

Amount of
Limited
Imposition
(Tax is based on (Imposition is
government
limited to cover needs.)
cost of regulation.)
Owner of the
property

affected
Unlimited

INHERENT POWERS OF THE STATE A government has its basic needs and
rights which co-exist with its creation. It has rights to sustenance, protection, and
properties. The government sustains itself by the power of taxation, secures itself and
the well-being of its people by police power, and secures its own properties to
carry out its public services by the power of eminent domain.
Importance Relationship with the Constitution
Most important Most superior
Inferior to the Superior to the "Non-impairment "Non-impairment
Clause" of the Clause" of the Constitution
Constitution Constitutional Public interest
and inherent and due process
limitations
No amount
imposed. (The government
pays just conipensation.)
Important Superior to the "Non-impairment Clause" of the
Constitution Public purpose
and just compensation
Limitation
These rights, dubbed as "powers" are natural, inseparable, and inherent to
every government. No government can sustain or effectively operate
without these powers. Therefore, the exercise of these powers by the
government is presumed understood and acknowledged by the people from the
very moment they establish their government. These powers are naturally
exercisable by the government even in the absence of an express grant of
power in the Constitution.
The Inherent Powers of the State 1. Taxation power is the power of the
State to enforce proportional contribution
from its subjects to sustain itself. 2. Police power is the general power of
the State to enact laws to protect the
well-being of the people. 3. Eminent domain is the power of the State to
take private property for public
use after paying just compensation.
Similarities of the three powers of the State 1. They are all necessary
attributes of sovereignty. 2. They are all inherent to the State. 3. They
are all legislative in nature. 4. They are all ways in which the State
interferes with private rights and
properties. 5. 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. 7. The exercise of these powers
by the local government units may be limited by
the national legislature.
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
SCOPE OF THE TAXATION POWER The scope of taxation is widely regarded as
comprehensive, plenary, unlimited and supreme.
INHERENT LIMITATION OF TAXATION
However, despite the seemingly unlimited nature of taxation, it is not absolutely
unlimited Taxation has its own inherent limitations and limitations impose the
Constitution.
Territoriality of taxation Public services are normally provided within the
boundaries of the State. Thus, the government can only demand tax obligations
upon its subjects or residents within its territorial jurisdiction. There is no basis in
taxing foreign subjects abroad since they do not derive benefits from our
government. Furthermore, extraterritorial taxation will amount to encroachment
of foreign sovereignty.
Two-fold obligations of taxpayers: 1. Filing of returns and payment of taxes 2.
Withholding of taxes on expenses and its remittance to the government
These obligations can only be demanded and enforced by the Philippine
government upon its citizens and residents. It cannot enforce these upon
subjects outside its territorial jurisdiction as this would result in encroachment of
foreign sovereignty. Exception to the territoriality principle 1. In income taxation,
resident citizens and domestic corporations are taxable on
income derived within and outside the Philippines.
2. in transfer taxation, residents or citizens such as resident citizens, non
resident citizens and resident aliens are taxable on transfers of properties located
within or outside the Philippines.
THE LIMITATIONS OF THE TAXATION POWER A. Inherent limitations
1. Territoriality of taxation 2. International comity 3. Public purpose 4.
Exemption of the government
5. Non-delegation of the taxing power B. Constitutional Limitations
1. Due process of law 2. Equal protection of the law 3. Uniformity rule in taxation 4.
Progressive system of taxation 5. Non-imprisonment for non-payment of debt or
poll tax 6. Non-impairment of obligation and contract 7. Free worship rule 8.
Exemption of religious or charitable entities, non-profit cemeteries,
churches and mosque from property taxes 9. Non-appropriation of
public funds or property for the benefit of any
church, sect or system of religion 10. Exemption from taxes of the revenues and
assets of non-profit, non-stock
educational institutions 11. Concurrence of a majority of all members of Congress
for the passage of a
law granting tax exemption 12. Non-diversification of tax collections 13. Non-
delegation of the power of taxation 14. Non-impairment of the jurisdiction of the
Supreme Court to review tax
cases 15. The requirement that appropriations, revenue, or tariff bills shall
originate exclusively in the House of Representatives 16. The delegation of
taxing power to local government units
International comity In the UN Convention, countries of the world agreed to one
fundamental concept of co-equal sovereignty wherein all nations are deemed
equal with one another regardless of race, religion, culture, economic condition
or military power.

No country is powerful than the other. It is by this principle that each country
observes international comity or mutual courtesy or reciprocity between them.
Hence, 1. Governments do not tax the income and properties of other governments. 2.
Governments give primacy to their treaty obligations over their own domestic
tax laws.

Embassies or consular offices of foreign governments in the Philippines

including international organizations and their non-Filipino staff are not subject to
income taxes or property taxes. Under the National Internal Revenue Code
(NIRC), the income of foreign government and foreign government-owned and
controlled corporations are not subject to income tax.
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
When a state enters into treaties with other states, it is bound to hone agreements as a matter
of mutual courtesy with the treaty partners even same conflicts with its local tax laws.

Public purpose Tax is intended for the common good. Taxation must be cxercised absolutel
public purpose. It cannot be exercised to further any private interest.
Aspects of Due Process 1. Substantive due process Tax must be imposed only
for public purpose, collected only under authority of a valid law and only by the
taxing power having jurisdiction. An assessment without a legal basis violates
the requirement of due process.

Exemption of the government The taxation power is broad. The government can
exercise the power to anything including itself. However, the government normally does
not tax itself this will not raise additional funds but will only impute additional costs.
2. Procedural due process There should be no arbitrariness in assessment and
collection of taxes, and the government shall observe the taxpayer's right to notice
and hearing. The law established procedures which must be adhered to in making
assessments and in enforcing collections. Under the NIRC, assessments shall be
made within three years from the due date of filing of the return or from the date of
actual filing, whichever is later. Collection shall be made within five years from
the date of assessment. The failure of the government to observe these rules
violates the requirement of due process.
Under the NIRC, government properties and income from essential public functions
are not subject to taxation. However, income of the government from ite properties and
activities conducted for profit including income from government owned and controlled
corporations is subject to tax.
Equal protection of the law No person shall be denied the equal protection of the
law. Taxpayers should be treated equally both in terms of rights conferred and
obligations imposed.
Non-delegation of the taxing power The legislative taxing power is vested
exclusively in Congress and is non-delegable pursuant to the doctrine of separation of
the branches of the government to ensure a system of checks and balances.
This rule applies where taxpayers are under the same circumstances and
conditions. This requirement would mean Congress cannot exempt sellers of
"balot" while subjecting sellers of "penoy to tax since they are essentially the
same goods.
The power of lawmaking, including taxation, is delegated by the people to
the legislature. So as not to spoil the purpose of delegation, it is held that what has
been delegated cannot be further delegated.

Exceptions to the rule of non-delegation 1. Under the Constitution, local

government units are allowed to exercise the
power to tax to enable them to exercise their fiscal autonomy. 2. Under the Tariff and
Customs Code, the President is empowered to fix the
amount of tariffs to be flexible to trade conditions. 3. Other cases that require
expedient and effective administration and
implementation of assessment and collection of taxes.
Uniformity rule in taxation The rule of taxation shall be uniform and equitable.
Taxpayers under dissimilar circumstances should not be taxed the same.
Taxpayers should be classified according to commonality in attributes, and the tax
classification to be adopted should be based on substantial distinction. Each
class is taxed differently, but taxpayers falling under the same class are taxed the
same. Hence, uniformity is relative equality.

CONSTITUTIONAL LIMITATIONS OF TAXATION

Progressive system of taxation Congress shall evolve a progressive system of
taxation. Under the progressive system, tax rates increase as the tax base increases.
The Constitution favors progressive tax as it is consistent with the taxpayer's ability
to pay. Moreover, the progressive system aids in an equitable distribution of
wealth to society by taxing the rich more than the poor.
Observance of due process of law No one should be deprived of his life, liberty, or
property without due process of law. Tax laws should neither be harsh nor
oppressive.
Chapter 1 - Introduction to Taxation

Non-imprisonment for non-payment of debt or poll tax As a policy, no one shall

be imprisoned because of his poverty, and no one imprisoned for mere inability to pay
debt.
Chapter 1 - Introduction to Taxation
In observing this Constitutional limitation, the Philippines follows the doctrine of
use wherein only properties actually devoted for religious, charitable, or
educational activities are exempt from real property tax.
bad faith constitutes estafa, a criminal
Under the doctrine of ownership, the properties of religious, charitable, or
educational entities whether or not used in their primary operations are exempt
from real property tax. This, however, is not applied in the Philippines.
However, this Constitutional guarantee applies only when the debt is acou
lebt is acquired by the debtor in good faith. Debt acquired in bad faith constitutes
estafa offense punishable by imprisonment. Is non-payment of tax
equivalent to non-payment of debt? Tay arises from law and is a demand of
sovereignty. It is distinguished from dati which arises from private contracts. Non-payment
of tax compromises nuk interest while the non-paynient of debt compromises private
interest. The man payment of tax is similar to a crime. The Constitutional guarantee on
imprisonment for non-payment of debt does not extend to non-payment of to except poli
tax.
Non-appropriation of public funds or property for the benefit of any church,
sect, or system of religion This constitutional limitation is intended to highlight the
separation of religion and the State. To support freedom of religion, the government
should not favor any particular system of religion by appropriating public funds
or property in support thereof.
Poll, personal, community or residency tax Poll tax has two components: a.
Basic community tax b. Additional community tax
It should be noted, however, that compensation to priests, imams, or religious
ministers working with the military, penal institutions, orphanages, or leprosarium
is not considered religious appropriation.

The constitutional guarantee of non-imprisonment for non-payment of poll tax

applies only to the basic community tax. Non-payment of the additional
community tax is an act of tax evasion punishable by imprisonment.

Non-impairment of obligation and contract The State should set an example

of good faith among its constituents. It should not set aside its obligations from
contracts by the exercise of its taxation power. Tax exemptions granted under
contract should be honored and should not be cancelled by a unilateral
government action.
Exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions including grants, endowments, donations, or contributions
for educational purposes The Constitution recognizes the necessity of education in
state building by granting tax exemption on revenues and assets of non-profit
educational institutions. This exemption, however, applies only on revenues and
assets that are actually, directly, and exclusively devoted for educational
purposes. Consistent with this constitutional recognition of education as a
necessity, the NIRC also exempts government educational institutions from
income tax and subjects private educational institutions to a minimal 10% income tax.

Concurrence of a majority of all members of Congress for the passage

of a law granting tax exemption Tax exemption law counters against the
lifeblood doctrine as it deprives the government of revenues. Hence, the grant of
tax exemption must proceed only upon a valid basis. As a safety net, the Constitution
requires the vote of the majority of all members of Congress in the grant of tax
exemption.
Free worship rule The Philippine government adc pts free exercise of
religion and does not subject its exercise to taxation. Consequently, the
properties and revenues of religious institutions such as tithes or offerings are not
subject to tax. This exemption, however, does not extend to income from properties
or activities of religious institutions that are proprietary or commercial in nature.
Exemption of religious, charitable or educational entides, non-profit cemeteries,
churches and mosques, lands, buildings, and improvements from property
taxes The Constitutional exemption from property tax applies for properties
actually, directly, and exclusively (i.e primarily) used for charitable, religious,
and educational purposes.
10
In the approval of an exemption law, an absolute majority or the majority of
all members of Congress, not a relative majority or quorum majority, is required.
However, in the withdrawal of tax exemption, only a relative majority is required.
Non-diversification of tax collections Tax collections should be used only for public
purpose. It should never be diversified or used for private purpose.
11
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
Non-delegation of the power of taxation The principle of checks and balances
in a republican state requires that taxation power as part of lawmaking be vested
exclusively in Congress.
However, delegation may be made on matters involving the expedient and
effective administration and implementation of assessment and collection of taxes Also,
certain aspects of the taxing process that are non-legislative in character are
delegated.
Levy or imposition This process involves the enactment of a tax law by Congress
and is called impact of taxation. It is also referred to as the legislative act in
taxation. Congress is composed of two bodies: 1. The House of Representatives,
and 2. The Senate

Hence, implementing administrative agencies such as the Department of Finance

and the Bureau of Internal Revenue (BIR) issues revenue regulations, rulings.
orders, or circulars to interpret and clarify the application of the law. But even sa their
functions are merely intended to interpret or clarify the proper application of the law.
They are not allowed to introduce new legislations within their quasi legislative
authority.
As mandated by the Constitution, tax bills must originate from the House of
Representatives. Each may, however, have their own versions of a proposed law
which is approved by both bodies, but tax bills cannot originate exclusively from
the Senate.

Non-impairment of the jurisdiction of the Supreme Court to review tax cases

Notwithstanding the existence of the Court of Tax Appeals, which is a special court,
all cases involving taxes can be raised to and be finally decided by the Supreme
Court of the Philippines.
Matters of legislative discretion in the exercise of taxation 1. Determining the
object of taxation 2. Setting the tax rate or amount to be collected 3. Determining
the purpose for the levy which must be public use 4. Kind of tax to be imposed 5.
Apportionment of the tax between the national and local government 6. Situs of
taxation 7. Method of collection Assessment and Collection The tax law is
implemented by the administrative branch of the government. Implementation
involves assessment or the determination of the tax liabilities of taxpayers and
collection. This stage is referred to as incidence of taxation or the administrative
act of taxation,
Appropriations, revenue, or tariff bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments. Laws
that add income to the national treasury and those that allows spending therein
must originate from the House of Representatives while Senate may concur
with amendments. The origination of a bill by Congress does not necessarily mean
that the House bill must become the final law. It was held constitutional by the
Supreme Court when Senate changed the entire house version of a tax bill.
SITUS OF TAXATION Situs is the place of taxation. It is the tax jurisdiction that has
the power to levy taxes upon the tax object. Situs rules serve as frames of
reference in gauging whether the tax object is within or outside the tax jurisdiction of
the taxing authority.
Each local government unit shall exercise the power to create its own sources of
revenue and shall have a just share in the national taxes This is a
constitutional recognition of the local autonomy of local governments and an express
delegation of the taxing power
Examples of Situs Rules: 1. Business tax situs: Businesses are subject to tax
in the place where the business
is conducted.
STAGES OF THE EXERCISE OF TAXATICN POWER 1. Levy or imposition 2.
Assessment and collection
Illustration A taxpayer is involved in car dealership abroad and restaurant operation
in the Philippines. The restaurant business will be subject to business tax in the
Philippines since the business is conducted herein, but the car dealing business
is exempt because the business is conducted abroad.
13
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation

2. Income tax situs on services: Service fees are subject to tax where they are
rendered
2. Holme's Doctrine - "Taxation power is not the power to destroy while the
court sits." Taxation power may be used to build or encourage beneficial activities
or industries by the grant of tax incentives.
Illustration A foreign corporation leases a residential space to a non-resident
Filipino citizen abroad. The rent income will be exempt from Philippine taxation as
the leasing service is rendered abroad.
While the Marshall Doctrine and the Holme's Doctrine appear to contradict each
other, both are actually employed in practice. A good manifestation of the Marshall
Doctrine is the imposition of excessive tax on cigarettes while applications of the Holme's
Doctrine include the creation of Ecozones with tax holidays and provision of
incentives, such as the Ominibus Investment Codee
(E.0.226) and the Barangay Micro-Business Enterprise (BMBE) Law. 3.
Prospectivity of tax laws
Tax laws are generally prospective in operation. An ex post facto law or a law that
retroacts is prohibited by the Constitution.
3. Income tax situs on sale of goods: The gain on sale is subject to tax in the
place of sale Hlustration While in China, a non-resident OFW citizen agreed with a
Chinese friend to sell his diamond necklace to the latter. They stipulated that the delivery
of the item and the payment will be made a week later in the Philippines. The sale was
consummated as agreed. The contract of sale is consensual and is perfected by the meeting
of the minds of the contracting parties. The perfection of the contract of sale is in
China. The situs of taxation is China. The gain on the sale of the necklace will be
taxable abroad and exempt in the Philippines.
Exceptionally, income tax laws may operate retrospectively if so intended by
Congress under certain justifiable conditions. For example, Congress can levy tax
on income earned during periods of foreign occupation even after the war.

Non-compensation or set-off Taxes are not subject to automatic set-off or

compensation. The taxpayer cannot delay payment of tax to wait for the
resolution of a lawsuit involving his pending claim against the government.
Tax is not a debt; hence, it is not subject to set-off. This rule is important to allow
the government sufficient period
to evaluate the validity of the claim. (See
Philex Mining Corporation vs. CIR, GR 125704)
Property tax situs: Properties are taxable in their location. Illustration
An overseas Filipino worker has a residential lot in the Philippines. He will still pay
real property tax despite his absence in the Philippines because his property is
located herein.
Exceptions: a. Where the taxpayer's claim has already become due and
demandable such
as when the government already recognized the same and an
appropriation for refund was made b. Cases of obvious overpayment of taxes c.
Local taxes
5. Personal tax situs: Persons are taxable in their place of residence
Illustration Ahmed Lofti is a Sudanese studying medicine in the Philippines. Ahmed
will pay personal tax in the Philippines even if he is an alien because he is residing
in the Philippines.
5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to another entity by contract.
Contracts executed by the taxpayer to such effect shall not prejudice the right of
the government to collect
OTHER FUNDAMENTAL DOCTRINES IN TAXATION 1. Marshall Doctrine
- "The power to tax involves the power to destroy." Taxation
power can be used as an instrument of police power. It can be used to discourage
or prohibit undesirable activities or occupation. As such, taxation power carries with it
the power to destroy.
6. Imprescriptibility in taxation
Prescription is the lapsing of a right due to the passage of time. When one
sleep on his right over an unreasonable period of time, he is presumed to be waiving
his right. The government's right to collect taxes does not prescribe unless the law
itself provides for such prescription.
However, the taxation power does not include the power to destroy if it is used
solely for the purpose of raising revenue. (Roxas vs. CTA)
15
14
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
years from the date of
bes if not collected
Under the NIRC, tax prescribes if not collected within 5 years from the its assessment. In
the absence of an assessment, tax prescribes if not by judicial action within 3 years from
the date the return is required filed. However, taxes due from taxpayers who did not
file a return who filed fraudulent returns do not prescribe.
file a return or those
The night of taxation is inherent to the State. It is a prerogative essential to the
perpetuity of the government. He who claims exemption from the common
burden must justify his claim by the clearest grant of organic or statute law.
(Iloilo, et al. vs. Smart Communications, Inc., G.R. No. 167260, February 27, 2009)
When exemption is claimed, it must be shown indubitably to exist. At the outset,
every presumption is against it. A well-founded doubt is fatal to the claim; it is only
when the terms of the concession are too explicit to admit fairly of any other
construction that the proposition can be supported. (Ibid)
7.
Doctrine of estoppel Under the doctrine of estoppel, any misrepresentation made by
one not toward another who relied therein in good faith will be held true and bin
against that person who made the misrepresentation. The government is
not subject to estoppel. The error of any governme employee does not bind the
government. It is held that the neglect or omission of government officials
entrusted with the collection of taxes should not ha allowed to bring harm or
detriment to the interest of the people. Also erroneous applications of the law
by public officers do not block the subsequent correct application of the
same.
Tax exemption cannot arise from vague inference. Tax exemption must be clear
and unequivocal. A taxpayer claiming a tax exemption must point to a specific
provision of law conferring on the taxpayer, in clear and plain terms, exemption
from a common burden. Any doubt whether a tax exemption exists is resolved
against the taxpayer. (see Digital Telecommunications, Inc. vs. City Government
of Batangas, et al)

8.
Judicial Non-interference Generally, courts are not allowed to issue injunction
against the government's pursuit to collect tax as this would unnecessarily defer
tax collection. This rule is anchored on the Lifeblood Doctrine.
DOUBLE TAXATION Double taxation occurs when the same taxpayer is taxed twice
by the same tax jurisdiction for the same thing

9. Strict Construction of Tax Laws

When the law clearly provides for taxation, taxation is the general rule unless
there is a clear exemption. Hence the maxim, "Taxation is the rule, exemption is
the exception. When the language of the law is clear and categorical, there is no
room for interpretation. There is only room for application. However, when taxation
laws are vague, the doctrine of strict legal construction is observed.
Elements of double taxation 1. Primary element: Same object 2. Secondary
elements:
a. Same type of tax b. Same purpose of tax C. Same taxing jurisdiction d. Same tax
period

Vague tax laws Vague tax laws are construed against the government and in favor
of the taxpayers. A vague tax law means no tax law. Obligation arising from law is
not presumed. The Constitutional requirement of due process requires laws to be
sufficiently clear and expressed in their provisions.
Types of Double Taxation 1. Direct double taxation
This occurs when all the element of double taxation exists for both
impositions. Examples: a. An income tax of 10% on monthly sales and a 2%
income tax on the annual
sales (total of monthly sales) b. A 5% tax on bank reserve deficiency and another 1%
penalty per day as a
consequence of such reserve deficiency 2. Indirect double taxation
Vague exemption laws Vague tax exemption laws are construed against
the taxpayer and in favor of the government. A vague tax exemption law
means no exemption law. The claim for exemption is construed strictly
against the taxpayer in accordance with the lifeblood doctrine.
This occurs when at least one of the secondary elements of double taxation is not
common for both impositions.
17
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
Examples:
The national government levies business tax on the sales or gross receipt business while
the local government levies business tax upon the same con
or receipts. b. The national government collects income tax from a taxpayer on his incon
while the local government collects community tax upon the same income c. The
Philippine government taxes foreign incomes of domestic corporatione
and resident citizens while a foreign government also taxes the same inco (international
double taxation).
Examples: a. This can be achieved by gross understatement of income, non
declaration of income, overstatement of expenses or tax credit. b. Misrepresenting
the nature or amount of transaction to take
advantage of lower taxes.
come

LOTS

corne
2. Tax avoidance, also known as tax minimization, refers to any act or trick
that reduces or totally escapes taxes by any legally permissible means.

Nothing in our law expressly prohibits double taxation. In fact, indirect

double taxation is prevalent in practice. However, direct double taxation is
discouraged because it is oppressive and burdensome to taxpayers. It is also
believed to counter the rule of equal protection and uniformity in the Constitution.
Examples: a. Selection and execution of transaction that would expose taxpayer
to
lower taxes. b. Maximizing tax options, tax carry-overs or tax credits C. Careful
tax planning
Tax exemption, also known as tax holiday, refers to the immunity, privilege or
freedom from being subject to a tax which others are subject to. Tax exemptions
may be granted by the Constitution, law, or contract.
All forms of tax exemptions can be revoked by Congress except those granted by
the Constitution and those granted under contracts.
How can double taxation be minimized? The impact of double taxation can be
minimized by any one or a combination of the following: a. Provision
of tax exemption - only one tax law is allowed to apply to the tax
object while the other tax law exempts the same tax object b.
Allowing foreign tax credit - both tax laws of the domestic country and a
foreign country tax the tax object but the tax payments made in the foreign
tax
law is deductible against the tax due of the domestic tax law c.
Allowing reciprocal tax treatment - provisions in tax laws imposing a
reduced
tax rates or even exemption if the country of the foreign taxpayer also give the
same treatment to Filipino non-residents therein d. Entering into treaties or bilateral
agreements - countries may stipulate for a
lower tax rates for their residents if they engage in transactions that are
taxable by both of them
B. Those that do not result to loss of government revenue
1. Shifting - This is the process of transferring tax burden to other
taxpayers. Forms of shifting a. Forward shifting - This is the shifting of tax which
follows the normal
flow of distribution (i.e. from manufacturer to wholesalers, retailers to consumers).
Forward shifting is common with essential commodities and services such as food
and fuel. Backward shifting - This is the reverse of forward shifting.
Backward shifting is common with non-essential commodities where
buyers have considerable market power and commodities with numerous
substitute products.
b.

ESCAPES FROM TAXATION Escapes from taxation are the means

available to the taxpayer to limit or even avoid the impact of taxation.

Categories of Escapes from Taxation A Those that result to loss of

government revenue
1. Tax evasion, also known as tax dodging, refers to any act or trick that
tends to illegally reduce or avoid the payment of tax.
c. Onward shifting - This refers to any tax shifting in the distribution
channel that exhibits forward shifting or backward shifting. Shifting is common
with business taxes where taxes imposed on business revenue can be shifted or
passed-on to customers.
Capitalization - This pertains to the adjustment of the value of an asset caused by
changes in tax rates.

19
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
CHAPTER 1: SELF-TEST EXERCISES
For instance, the value of a mining property will correspondingly decy when
mining output is subjected to higher taxes. This is a for backward shifting of tax.
3. Transformation - This pertains to the elimination of wastes or lossee
the taxpayer to form savings to compensate for the tax imposition increase in
taxes.

Tax Amnesty Amnesty is a general pardon granted by the government for erring
taxpayers to give them a chance to reform and enable them to have a fresh start to
be part of a society with a clean slate. It is an absolute forgiveness or waiver by
the government on its right to collect and is retrospective in application.

Tax Condonation Tax condonation is forgiveness of the tax obligation of a

certain taxpayer under certain justifiable grounds. This is also referred to as tax
remission.
Discussion Questions 1. Define taxation. 2. Distinguish the theory and the basis of
taxation. 3. What are the theories of government cost allocation? Explain each. 4.
Differentiate vertical and horizontal equity. 5. Discuss the Lifeblood Doctrine. 6.
Enumerate and explain the inherent powers of the State. 7. Distinguish the three
powers of the State and enumerate their similarities. 8. Describe the scope of the
power of taxation. 9. Distinguish substantive due process from procedural due
process. 10. Distinguish the concept of equality from the concept of uniformity in
taxation. 11. Distinguish non-payment of debt versus non-payment of tax in
terms of
consequences. 12. What institutions are exempt from real property tax in the
Constitution? 13. Which of the constitutional limitations are also classified as
inherent limitations? 14. Explain the stages of the exercise of taxation power. 15.
Explain the concept of situs. 16. Distinguish the Marshall Doctrine from the
Holme's Doctrine. 17. Discuss the doctrine of strict construction of tax laws. 18.
Explain double taxation, its elements, and its types. 19. What are the categories of
escapes from taxation? Enumerate and explain each
means of escape under each category. 20. Distinguish tax amnesty from tax
condonation.
Because they deprive the government of revenues, tax exemption, tax refund, tax
amnesty and tax condonation are construed against the taxpayer and in favor of
the government

Tax Amnesty vs. Tax Condonation Amnesty covers both civil and criminal
liabilities, but condonation covers only civil Habilities of the taxpayer.
Amnesty operates retrospectively by forgiving past violations.
Condonation applies prospectively to any unpaid balance of the tax; hence, the
portion already paid by the taxpayer will not be refunded. Amnesty is
also conditional upon the taxpayer paying the government a portion
of the tax whereas condonation requires no payment.
Exercise Drills In the space provided for, indicate whether the statement relates
to a Constitutional limitation (C) or inherent limitation (I). If it is not a
limitation to the taxing power, indicate (N).

2.
Non-assignment of taxes Territoriality of taxation Taxes must be for public use
Exemption of the property of religious institutions from income tax Exemption of the
revenues and assets of non-profit, non stock educational institutions Non-
delegation of the taxing power Non-appropriation for religious purpose The
requirement of absolute majority in the passage of a tax exemption Jaw. Non-
imprisonment for non-payment of tax or debt
| 9.
-

21
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation

10.
8. The lifeblood doctrine requires the government to override its obligations and
contracts when necessary. 9. 2/3 of all members of Congress is required to pass a
tax exemption law. 10. The government should tax itself.

13
Taxpayers under the same circumstance should be treated equal both in terms
of privileges and obligations. Exemption from property taxes of religious,
educational and charitable entities. Government income and properties are
not objects of taxation. Each local government shall have the power to
create its own sources of revenue. Imprescriptibility in taxation Non-impairment of
obligation and contracts. Guarantec of proportional system of taxation.
International courtesy Non-impairment of the jurisdiction of the Supreme Court
to review tax cases. The government is not subject to estoppel. Imprisonment for
non-payment of poll tax.
Multiple Choice - Theory: Part 1 1. The point at which tax is levied is also called
a. Impact of taxation c. Incidence of taxation b. Situs of taxation d. Assessment

15.
16. | 17.
18.

19. 20.

True or False 1 1. Eminent domain involves confiscation of prohibited

commodities to protect the
well-being of the people. 2. Horizontal equity requires consideration of the
circumstance of the taxpayer. 3. Taxes are the lifeblood of the government.
4. Taxation is a mode of apportionment of government costs to the people. 5. There
should be direct receipt of benefit before one could be compelled to pay
taxes.
The exercise of taxation power requires Constitutional grant. 7. Taxation is
inherent in sovereignty. 8. Police power is the most superior power of the
government. Its exercise needs to
be sanctioned by the Constitution. 9. All inherent powers presuppose an equivalent
form of compensation. 10. The reciprocal duty of support between the government
and the people
underscores the basis of taxation.
Which of the following inappropriately describes the nature of taxation? a.
Inherent in sovereignty b. Essentially a legislative function C. Subject to inherent
and constitutional limitation d. Generally for public purpose Which is
correct? a. Tax condonation is a general pardon granted by the government. b.
The BIR has five deputy commissioners. c. The government can still collect tax in
disregard of a constitutional limitation
because taxes are the lifeblood of the government. d. The President of the
Philippines can change tariff or imposts without
necessity of calling Congress to pass a law for that purpose. 4. A. The
power to tax includes the power to exempt.
B. The power to license includes the power to tax. Which is true? a. A
only
c. A and B b. B only
d. Neither A nor B
International double taxation can be mitigated by any of the following except a.
Providing allowance for tax credit b. Provision of reciprocity provisions in tax
laws C. Provision of tax exemptions d. Entering into treaties to form regional trade
blockage against the rest of the
world 6. Which is not an object of taxation?
a. Persons
c. Transactions b. Business
d. Public properties
True or False 2 1 The Constitutional exemption of religious, charitable, and non-
profit cemeteries,
churches and mosques refers to income tax and real property tax. 2. Taxpayers
under the same circumstance should be taxed differently. 3. Taxation is subject
to inherent and Constitutional limitations. 4. International comity connotes
courtesy between nations. 5. Collection of taxes in the absence of a law is
violative of the Constitutional
requirement for due process. 6. The scope of taxation is regarded as
comprehensive, plenary, unlimited, and
supreme 7. No one shall be imprisoned for non-payment of tax.
7. That courts cannot issue injunction against the government's effort to collect
taxes
is justified by a. the lifeblood doctrine. c. the ability to pay theory. b.
imprescriptibility of taxes. d. the doctrine of estoppel.

23
22
Chapter 1 - Introduction to Taxation

ple for the support

Chapter 1 - Introducton to Taxation
8. The power to enforce proportional contribution from the people for the
of the government is a. Taxation
c. Eminent domain b. Police power
d. Exploitation
This theory underscores that taxes are indispensable to the existence of
the stor a. Doctrine of equitable recoupment b. The Lifeblood Doctrine c. The
benefit received theory d. The Holmes Doctrine
Which is true? a. A only
c. A and B

b. B only
d. Neither A nor B 17. Which provision of the Constitution is double taxation
believed to violate?
a. Equal protection guarantee b. Progressive scheme of taxation C. Uniformity rule
d. Either A or C 18. Which limitation of taxation is the concept of "situs of
taxation based?
a. Territoriality
c. International comity b. Public purpose
d. Exemption of the government 19. Which tax exemption is irrevocable?
d. Tax exemption based on contract b. Tax exemption based on the Constitution C. Tax
exemption based on law d. Both A and B
10. A. Taxation is the rule, exception is the exemption.
B. Vague taxation laws are interpreted liberally in favor of the government Which
is false? a. A only
c. Both A and B b. B only
d. Neither A nor B

11. Select the incorrect statement.

a. The power to tax includes the power to exempt. b. Exemption is construed
against the taxpayer and in favor of the government C. Tax statutes are construed
against the government in case of doubt. d. Taxes should be collected only for
public improvements.
20. Which statement is incorrect?
a. Every person must contribute his share in government costs. b. The existence
of a government is expected to improve the lives of the people. C. The
government provides protection and other benefits while the people
provide support. Only those who are able to pay tax can enjoy the privileges and
protection of the government
12. Which is not a public purpose?
a. Public education c. Transportation b. National defense
d. None of these 13. Which does not properly describe the scope of taxation?
a. Comprehensive c. Discretionary b. Supreme
d. Unlimited
21. Which is the most incorrect statement regarding taxes?
a. Taxes are necessary for the continued existence of the government. b. The
obligation to pay tax does not rest upon the privilege enjoyed by or the
protection afforded to the citizen of the government but upon the necessity of
money for the support of the State. There should be personal benefit enjoyed
from the government before one is
required to pay tax. d. Taxes should be collected without unnecessary delay but
its collection should
not be tainted with arbitrariness.
14. All of these are secondary purposes of taxation except
a. To reduce social inequality b. To protect local industries c. To raise revenue for
the support of the government
d. To encourage growth of local industries 15. What is the theory of taxation?
a Reciprocal duties of support and protection b. Necessity c.
Constitutionality d. Public purpose
22. Statement 1: In the selection of the objects of taxation, the courts have no power to
inquire into the wisdom, objectivity, motive, expediency, or necessity of a tax law.
Statement 2: An imposition can be both a tax and a regulation. Taxes may be
levied to provide means for rehabilitation and stabilization of threatened industry. Which is
correct? a. Statement 1 only c. Both statements b. Statement 2 only d. Neither
statement
16. A. Taxes should not operate retrospectively.
B. Tax is generally for public purpose.
25
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
d. Exemption applies since obligation arising from law cannot be
presumed and
hence construed against the government.
23. Which of the following acts in taxation is administrative by nature?
a. Determination of the amount to be imposed b. Fixing the allocation of the
amount to be collected between the local
government and the national government c. Levy or distraint of taxpayers'
property for tax delinquency d. Determining the purpose of the tax to impose
24. This refers to the privilege or immunity from a tax burden which others
are
subject to: a. Exclusion
c. Tax holiday b. Deduction
d. Reciprocity 25. Statement 1: The benefit received theory presupposes
 that some taxpayers within
the territorial jurisdiction of the Philippines will be exempted from paying
tax so long as they do not receive benefits from the government Statement
2: The ability to pay theory suggests that some taxpayers may be exempted
from tax provided they do not have the ability to pay the same. Which statement
is true? a. Only statement 1
c. Both statements 1 and 2 b. Only statement 2 d. Neither statement 1 nor 2
30. What is the basis of taxation?
a. Reciprocal duties of support and protection b. Constitutionality c.
Public purpose
d. Necessity 31. When the provisions of tax laws are silent as to the
taxability of an item, which is
true? a. Taxation applies since taxation is the rule, exemption is the exception. b.
Exemption applies since vague tax laws are construed against the
government. C. Taxation applies due to the Lifeblood doctrine d. Exemption
applies since obligation arising from law is presumed; ignorance
of the law is not an excuse.

26. Which is not a legislative act?

a. Determination of the subject of the tax b. Setting the amount of the tax
c. Assessment of the tax
d. Determining the purpose of the tax 27. Statement 1: Taxation is the rule;
exemption is the exception.
Statement 2: Taxation may be used to implement the police power of the
state. a. I is true
c. I and II are true b. 11 is true
d. I and Il are not true
32. Which of the following statements does not support the principle that tax
is not
subject to compensation or set-off? a. The government and the taxpayer are not
creditors and debtors of each other. b. Tax is not in the nature of contract
but it grows out of a duty wherein
taxpayers are bound to obey even without the personal consent of the
taxpayer.
Taxes arise from law, not from contracts. d. Both tax and debt partake the
nature of an obligation. 33. Which is not legally tenable in refusing to pay
tax?
a. Absence of benefit from the government b. Lack of jurisdiction of the taxing authority
C. Prescription of the tax authority's right to collect d. All of these

28. Which of the following powers of the Commissioner of Internal Revenue

cannot be
delegated? a. The examination of tax return and the determination of tax due
thereon b. To refund or credit tax liabilities in certain cases C. The power to
compromise or abate any tax liability involving basic deficiency
tax of P500,000 and minor criminal violations d. The power to reverse a ruling of the
Bureau of Internal Revenue
34. What is the primary purpose of taxation?
a. To enforce contribution from its subjects for public purpose b. To raise
revenue C. To achieve economic and social stability d. To regulate the
conduct of business or profession

Multiple Choice - Theory: Part 2

1. The Constitutional exemption of religious or charitable institutions refers
only to
a. Real property tax c. Property tax and income tax b. Income tax
d. Business tax
29. When exemption from a tax imposition is silent or not clearly
stated, which is
true? a. Taxation applies since exemptions are construed against the government. b.
Exemption still applies since this is an instance of exemption by omission. c.
Taxation applies since exemptions are construed against the taxpayer.
26
Chapter 1 - Introduction to Taxation

2. The agreement among nations to lessen tax burden of their respective sı

called a. Reciprocity
c. Territoriality b. International comity d. Tax minimization
Chapter 1 - Introduction to Taxation
Which of these are classified as both constitutional and inherent limitations? a. A
and B
c. Cand E
b. Band C
d. D and E

3. An educational institution operated by a religious organization was

required by a local government to pay real property tax. Is the assessment valid a. Yes,
with respect to all properties held by such educational institution b. Yes, with respect to
properties not actually devoted to educational purpose C. No, with respect to any
properties held by such educational institution. d. No, with respect to properties not
actually devoted to educational purposee

Which is not a Constitutional limitation? a. No tax law shall be passed without the
concurrence of a majority of
members of Congress. b. Non-appropriation for religious purpose C. No law
impairing government obligations on contracts shall be passed. d. Non-
impairment of religious freedom
The provisions in the Constitution regarding taxation are a. Grants of the power
to tax b. Limitations to the power to tax c. Grants and limitations to the power to
tax
d. Limitations against double taxation 10. The Constitutional exemption of non-
stock, non-profit educational institutions
refers to a Real property tax c. Property tax and income tax b. Income tax
d. Business tax 11. Which of the following is violative of the principle of non-
delegation?
a. Requiring that legislative enactment must exclusively pertain to Congress b.
Authorizing the President to fix the amount of impost on imported and
exported commodities C. Authorizing certain private corporation to collect taxes d.
Allowing the Secretary of Finance and the BIR to issue regulation or rulings
which go beyond the scope of a tax law
Which of the following is not an inherent limitation of the power to tax? a. Tax should
be levied for public purpose. b. Taxation is limited to its territorial jurisdiction. C. Tax
laws shall be uniform and equitable. d. Exemption of government agencies
and instrumentalities.
The following are inherent limitations to the power of taxation except one.
Choose the exception. a. Territoriality of taxes b. Legislative in character C. For
public purpose d. Non-appropriation for religious purpose
12. Which of the following violates Constitutional provisions?
a. Payment of salaries to priests or religious ministers employed by the Armed
Forces of the Philippines b. Imposing tax on properties of religious institutions
which are not directly and
exclusively used for religious purposes C. Imposition of license for the sale of
religious literature d. Authorizing the President of the Philippines to fix the rates of
tariffs or
imposts

7. That all taxable articles or properties of the same class shall be taxed at the
same
rate underscores a. Equality in taxation c. Uniformity in taxation.
b. Equity of taxation d. None of these 8. The following are lin.itations of taxation:
A. Territoriality of taxation B. Exemption of the government C. Taxation is for
public purpose. D. Non-impairment of contracts E. Non-delegation of the power
to tax
13. In order to phase-out a huge den.cit, the President of the
Philippines passed a law
offering all taxpayers with previous tax delinquency to pay a minimum tax in
exchange for relief from tax assessment in the period of delinquency. Is this a
valid exercise of taxation power? a. Yes, becaust the measure adopted is grounded
upon necessity. b. Yes, because the President is inerely exercising his
presidential discretion. c. No, because the power of taxation is non-delegated. d. No,
because only the Department of Finance can issue such ruling.
14. Concerned with increasing unemployment rates in the country, the President
of
the Philippines encouraged the Philippine Senate to pass a law granting special tax
privileges to foreign investors who will establish businesses in the country. The Senate
accordingly drafted the bill and passed to Congress for approval.
29
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
d. Non-delegation of police power
Is this valid exercise of taxation power? a. Yes. It is the discretion of the President to
adopt any measures he deem
necessary to alleviate poor conditions in the country, Yes. Any means beneficial to
the public interest should be given Optimin
priority. C. Yes. The President's proposal will have to be finally approved and passed L
the legislature. The rule on non-delegation of taxation would not be violated
d. No. Tax bills shall originate from the House of Representatives.
19. The Philippine Congress enacted a law requiring foreign banks to withhold
taxes
earned by Filipino residents in their country and to remit the same to the
Philippine government. Is this a valid exercise of taxation power? a. Yes, because
foreign banks are within the territorial jurisdiction of the
Philippines. b. Yes, the Philippines can enforce tax requirements to subjects of
foreign
Sovereignty even if they are outside the country. c. No, as this leads to encroachment
of foreign sovereignty. d. No, this is prohibited by the Constitution.
15. Ram is the only practicing lung transplant specialist in Baguio City. The City
Government of Baguio passed a local ordinance subjecting the practice of lun
transplant to 2% tax based on receipts. Ram objected claiming that other transplant
specialists in other regions of the country are not subjected to tax. Is Ram's
contention valid? a. Yes, because the rule of taxation should be uniform and
equitably enforced. b. Yes, because Ram is the only one subject. Other practitioners
who would later
practice would not be covered by the ordinance. c. No, because the ordinance
would cover all transplant specialist who would
practice in Baguio City. The uniformity rule would not be violated. No, because
subjecting the new industry to taxation would hamper economic growth.
20. Which of the following normally pays real property tax?
a. Bantay Bata, a non-profit charitable institution b. Jesus Crusade movement, a
religious institution C. University of Pangasinan, a private proprietary educational
institution d. AM Property Holdings, a registered property development company
21. Tax exemption bills are approved by
a. Majority of all members of Congress b. Solely by the President of the Republic
c. 2/3 of all members of Congress d. Majority of the representatives constituting
a quorum
16. With the country under incessant shortage of sugar, the Philippine Congress
enacted a law providing tax exemptions and incentives to cane farmers without at
the same time granting tax exemptions to rice farmers who produce the staple
food of the Philippines. Is the new law valid? a. Yes, since there is a valid
classification of the taxpayers who would be
exempted from tax. b. Yes, since sugar is more important than rice. C. No, since the
grant of exemption is construed in favor of taxpayers. d. No, because there is no
uniformity in the grant of tax exemption.
22. The Japanese government invested P100,000,000 in a Philippine
local bank and
earned P10,000,000 interest Which is correct? a. The income is exempt on grounds of
territoriality. b. The income is exempt due to international comity. C. The income is
subject to tax on the basis ut sovereignty. d. The income is subject to tax because
the income is earned within the
Philippines.
17. Congress passed a law subjecting government-owned and controlled
corporations
(GOCCs) to income tax. Is the law valid? a. Yes, because all government agencies
and instrumentalities are subject to tax b. Yes, because GOCCs are not
government agencies and are essentially
commercial in nature. No, because government agencies are exempt. This would
pose a violation of
the equality clause in the constitution. d. No, because GOCCs are constitutionally
exempted from paying taxes.
Multiple Choice - Theory: Part 3 1. When a legislative body taxes persons and
property, rights and privileges under
the same taxable category at the same rate, this is referred to as compliance with
the constitutional limitation of: 2. Equity
c. Due process b. Uniformity
d. Equal protection clause

2. Which is not a legislative act? a. Assessment of the tax

c. Determination of the subject of the tax b. Setting the amount of the tax d.
Determining the purpose of the tax
18. Which of the following is not a constitutional limitation of the power to tax?
a. Non-impairment of obligation or contracts b. Due process and equal
protection of the law C. Non-appropriation for religious purposes
30
Chapter 1 - Introduction to Taxation
Chapter 1 - Introduction to Taxation
3. The inherent powers of the State are similar in the following respect
a They are inherent to the existence of the State. b. They are exercisable without
the need for an express constitutional or c. All are not exercised by private entities. d.
They are exercised primarily by the legislature.
Which is mandatorily observed in implementing police power? a. Public interest
c. Public use b. Just compensation d. All of these
12. Statement 1: Congress can exercise the power of taxation even without
Constitutional delegation of the power to tax. Statement 2: Only the legislature
can exercise the power of taxation, eminent domain, and police power. Which
statement is correct? a. Statement 1
c. Statements 1 and 2 b. Statement 2
d. Neither statement 1 nor 2

5. Which is considered in the exercise of eminent domain?

a. Public use
c. Both a and b b. Just compensation d. Neither a norb
13. Which power of the State affects the least number of people?
a. Police power
c. Taxation b.Eminent domain
d. Taxation and police power

The general power to enact laws to protect the well-being of the people is called
a. Police power
c. Taxation b. Eminent domain d. All of these

7. Which of the following entities will least likely exercise the power of eminent
domain? a. Electric cooperatives c. Telecommunication business b. Water
cooperatives d. Transportation operators
14. Select the correct statement
a. The benefit received theory explains that the government is obliged to serve
the people since it is benefiting from the tax collection from its subjects. b. The
lifeblood theory underscores that taxation is the most superior power of
the State. The police power of the State is superior to the non-impairment
clause of the
Constitution. d. The power of taxation is superior to the non-impairment clause of
the
Constitution.
8. In exercising taxation, the government need not consider
a. Inherent limitations c. Due process of law b. Just compensation d. Constitutional
limitations
15. Which of the following is not exercised by the government?
a. Taxation
c. Eminent domain b. Police power
d. Exploitation
9. Licensing of business or profession is an exercise of
a. Police power
c. Eminent domain b. Taxation
d. All of these
16. Select the incorrect statement
a. Since there is compensation, eminent domain raises money for the
government. b. Once a government is established, taxation is exercisable.
The most important of the power is taxation. d. Police power is more superior
than the non-impairment clause of the
Constitution.
10. Select the correct statement
a. Eminent domain refers to the power to take public property for private
use
after paying just compensation. b. Police power being the most superior power
of the State is not subject to any
limitation. c. Taxation power shall be exercised by Congress even without an
express
Constitutional grant. d. Taxes may be collected even in the absence of a
law since obligation arising
from law is always presumed.
C.

11. Which is principally limited by the requirement of due process?

a. Eminent domain
c. Taxation b. Police power
d. All of these
17. The following statements reflect the differences among the inherent powers
except: a. The property taken under eminent domain and taxation are preserved
but
that of police power is destroyed. Eminent domain and police power do not require
Constitutional grant, but taxation, being a formidable power, requires
constitutional grant. Only eminent domain can be exercised by private entities.
Taxation, police power, and eminent domain are ways in which the government
interferes with private right and property.
32
33
Chapter 1 - Introduction to Taxation
Chapter 2 - Taxes, Tax Laws and Tax Administration
18. Statement 1: The Taxation power can be used to destroy if the law is
valid.
Statement 2: A tax law which destroys things, business, or enterprises for the purpose
of raising revenue is an invalid tax law. Which is incorrect?
a. Statement 1
c. Both statements b. Statement 2
d. Neither statement
CHAPTER 2 TAXES, TAX LAWS, AND TAX ADMINISTRATION

Chapter Overview and Objectives

=

This Chapter discusses tax laws, taxes, and their distinction from similar
items, and the administration of the tax system.
do
19. Select the correct statement.
a. The provisions on taxation in the Philippine Constitution are grants of the
power to tax.
The power to tax includes the power to destroy. c. When taxation is used as a tool for
general and economic welfare, this is called
fiscal purpose. d. The sumptuary purpose of taxation is to raise funds for the
government. 20. Which of the following powers is inherent or co-existent
with the creation of the
government? a. Police power
c. Taxation b. Eminent domain d. All of these
After this chapter, readers are expected to comprehend and demonstrate
knowledge on the following: 1. The type of taxation laws 2. Distinction among
tax laws, revenue regulations, and rulings 3. Tax, its elements, and
classifications 4. Distinction of tax from similar items 5. Tax system and its
types
The principles of a sound tax system 7. How tax is administered 8. The powers of
the Bureau of Internal Revenue (BIR) and the Commissioner of
Internal Revenue (CIR) and the non-delegated powers of the CIR 9. The
criteria for selection of large taxpayers
21. Which of the following is not an inherent limitation of the power to tax?
a. "Tax should be levied for public purpose. b. Taxation is limited to its territorial
jurisdiction. c. Tax laws shall be uniform and equitable. d. Government agencies
and instrumentalities are exempt from tax.
TAXATION LAW Taxation law refers to any law that arises from the
exercise of the taxation power of the State.
Select the incorrect statement. a. The power to tax includes the power to
exempt. b. Exemption is construed against the taxpayer and in favor of the
government. 4. Tax statutes are construed against the government in
case of doubt. d. Taxes should be collected only for public improvement.

23. Which of the following is not a constitutional limitation of the

power to tax?
a. Non-impairment of obligation or contracts b. Due process and equal
protection of the law C. Non-appropriation for religious purposes d. Non-
delegation of the taxing power
Types of taxation laws 1. Tax laws - These are laws that provide for the
assessment and collection of
taxes. Examples: a. The National Internal Revenue Code (NIRC) b. The Tariff
and Customs Code C. The Local Tax Code d. The Real Property Tax Code
24. Which of the powers of the State is the most superior? Which is
regarded as the
most important? a. Taxation; Eminent domain b. Police power; Taxation
Eminent domain; Police power d. All the powers are equally superior and
important
2. Tax exemption laws - These are laws that grant certain immunity from
taxation. Examples: a. The Minimum Wage Law b. The Omnibus Investment
Code of 1987 (E.0.226) C. Barangay Micro-Business Enterprise (BMBE) Law
d. Cooperative Development Act

35