General Principles of Taxation Maybe

Authority Government Government granted to

Taxation is the process or means by which the sovereign only only public
through its lawmaking body, imposes burdens upon subjects service/utility
and objects within its jurisdiction for the purpose of raising companies
revenues to carry out legitimate objects of the government or For the support Promotion
raises income to defray the necessary expenses of the of the of general Taking of
government Purpose government welfare private
through property for
•It is the act of levying a tax apportion the cost of government regulation public use
among those who, in some measure, are privileged to enjoy its Community or Community
benefits and must therefore bear its burdens. a class of or a class of On an
individuals. individuals. individual as
•It is a power inherent to the existence of every government. Persons Applied to all Applied to the owner of
Affected persons, all persons, the personal
property and property and property
Taxes are the enforced proportional contributions or charges excises excises
from persons and property levied by the law-making body of Boarder in
state by virtue of its sovereignty for the support of the application. Merely a
government and all the public needs. Plenary, General power to take
Scope comprehensive, power to property for
supreme make and public use
implement
INHERENT POWERS OF THE STATE law
1. Police Power - For promoting welfare by restraining and Contribution There is a
regulating the use of liberty and property Effect becomes a part No transfer transfer of
of public fund. of title title to
2. Power of Taxation – Raises revenue to defray the necessary property
expenses of the government In form of
Benefits protection and No direct or Market value
3. Power of Eminent Domain - To acquire private property for received benefits immediate of property
public purpose upon payment of just compensation. received from benefit taken
government
Sufficient to
Similarities among the three (3) inherent power of the state Amount of cover cost of
Imposition No limit the license No
1. They are inherent in the state. and imposition
necessary
2. They exists independently of the Constitution. expenses
3. Ways by which the State interfere with private rights and
properties. Purpose of Taxation
4. Legislative in nature and character. Primary
5. Presuppose an equivalent compensation received, directly or • Revenue or Fiscal Adequacy
indirectly by the person affected.
To provide funds or property with which to promote the
general welfare and protection of its citizens and to enable it to
finance its multifarious activities

Distinction among the 3 Inherent Powers Secondary

• Regulatory Purpose
Taxation Police Eminent
Power Domain a. Promotion of General Welfare
Power to Power to Power to take
enforce make and private b. Reduction of Social Inequality
Nature contribution to implement property for
raise laws for the public use c. Economic Growth
government general with just
funds welfare compensation
Theory and Basis of Taxation E. A valid tax may result in the destruction of the taxpayer’s
property
Theory - The power of taxation proceeds upon the theory
that the existence of the government is a necessity
(NECESSITY THEORY) that it cannot continue without
means to pay its expenses; and that it has a right to compel Scope of Taxation
all its citizens and property within its limits to contribute. The power of taxation is unlimited, comprehensive, plenary
The power of taxation is essential because the government and supreme. The principal check upon its abuse resting in
can neither exist nor endure without taxation. Taxes are the the responsibility of the members of the legislature to their
lifeblood of the government and their prompt and certain constituents. Since the power to tax is the strongest of all the
availability is an imperious need. (LIFEBLOOD THEORY) powers of the government, the legislature is free to select
the subjects or objects to be taxed. They may be persons
whether natural or juridical property, whether real or
Basis - The basis of taxation is found on the reciprocal personal, tangible or Intangible, businesses, transactions,
duties of protection and support between the State and its rights, or privileges
inhabitants. The state receives taxes that it may be enabled
to carry out its mandates into effect and perform functions
of government and the citizen pays the portion of taxes Essential Elements of Tax
demanded in order that he may, by means thereof be secured 1.Enforced Contribution.
in the enjoyment of benefits of an organized society. This is 2. It is generally payable in money
otherwise known as benefit-received principle. DOCTRINE 3. It is proportionate in character.
OF SYMBIOTIC RELATIONSHIP which means, taxes are
what we pay for a civilized society. 4. It is levied on persons, property, or the exercise of a
rights. It is levied for public purpose.
5. It is levied by the law-making body of the State.
Manifestation of Life Blood Theory
A. Rule of “No estoppel against the government” Aspects of Taxation • Levying • Assessment • Collection

- The state cannot be stopped by the neglect of its

agents/officers. Nature/Characteristics of the State’s power to tax
1.It is inherent in sovereignty. - The power of taxation may
- Erroneous application and enforcement of law by public be exercised by the State although not expressly granted by
officers do not block the subsequent correct application of the constitution.
statutes.
B. Collection of taxes cannot be enjoined (stopped) by 2. Legislative in character. - It is only the legislature that
injunction. can enact tax laws.

- Under section 218 of the tax code, no court, except the court
of tax appeals (through administrative remedies when 3. Exemption of government entities, agencies and
collection could jeopardize the interest of the government or instrumentalities.
taxpayer. a. Agencies performing governmental functions are tax
exempt unless expressly taxed.
C. Taxes cannot be the subject of compensation of set off. b. Agencies performing proprietary functions are subject to
D. Right to select objects (subjects) of taxation. tax unless expressly exempted.
c. GOCCs performing proprietary functions are subject to
- The power to tax is essentially legislative in nature. tax except GSIS, SSS, PHIC., Local Water Districts, and
a. Subject or object to be taxed. HDMF.

b. The purpose of the tax as long as it is a public purpose. c.

4. International Comity
The Amount of rate of tax.
Under the international law, property of foreign state may
d. Kind of tax. not be taxed by another state due to:
e. Apportionment of the tax. a. Sovereign equality of state.
b. When the state enters the territory of another state.
f. Situs of Taxation.
c. Immunity from suit of a state.
g. The manner, means and agencies to collect the tax.
5. Limitation on territorial jurisdiction.
6. Strongest among the inherent power of the state. 5. As to purpose
a. General, fiscal or revenue --Tax that is imposed solely to
Classification of taxes raise revenue for government expenditures. Examples:
Income tax, value-added tax
1. As to authority imposing the same/As to Scope
b. Special or regulatory - Tax imposed for a special
a. National - Tax imposed by the national government
purpose, i.e. to achieve some social or economic ends
Examples Internal revenue taxes (BIR), customs duties
irrespective of whether revenue is actually raised or not.
(BOC)
Examples Sugar adjustment taxes, Oil Price Stabilization
b. Municipal or local – Tax imposed by municipal Fund (OPSF), road users tax Classification of taxes
corporations, Examples Sand and gravel tax, occupation tax,
professional tax receipts (PTR) P 300.00 practice
profession. Classification of taxes 6. As to graduation or rate
a. Proportional - Tax based on a fixed percentage of the
amount of the property, receipts, or other basis to be taxed.
2. As to subject matter or object
Example: Value-added tax = 12%
a. Personal, poll or capitation - Tax of a fixed amount
b. Progressive- Tax the rate of which increases as the tax
imposed on individuals, whether citizens or not, residing
base bracket increases Examples income tax, estate tax,
within a specified territory without regard to their property
donor's tax
or the occupation in which they may engaged. Example.
Community tax c. Regressive -Tax rate of which decreases as the tax base
increases
b. Property. - Tax imposed on property, whether real or
personal in proportion either to its value, or in accordance
with some other reasonable method of apportionment Basic Principles of a Sound Tax System
Example: Real Property Tax
1. Fiscal adequacy.
c. Excise (Privilege Tax) - A tax imposed upon the
performance of an act the enjoyment of a privilege, or the The sources of revenue should be sufficient to meet the
engaging in an occupation; any tax which does not fall demands of public expenditures. This can be obtained by
within the classification of a poll tax or a property tax creating new taxes or new tax machinery or by merely
Example: Income tax, donor's tax, estate tax changing the rates applicable to existing taxes so that the
revenue would substantially respond to the expanding needs
of public expenditures
3. As to who bears the burden
a. Direct - A tax that is demanded from the person who also 2. Equality or Theoretical Justice
shoulders the burden of the tax. Examples: Income tax,
estate tax, donor's tax The tax burden should be proportionate to the taxpayer's
ability to pay (this is the so-called Ability-To-Pay Principle)
b. Indirect - A tax demanded from one person in the
expectation intention that he shall indemnity himself at the
expense of another – pass on tax Examples: Value-added tax 3. Administrative Feasibility.
and percentage taxes Classification of taxes The tax laws should be capable of convenient, just and
4. As to determination of amount effective administration.
a. Specific - Tax of fixed amount imposed by the head or Each tax should be clear and plain to the taxpayer, capable
number, or by some standard of weight or measurement; it of uniform enforcement by government officials, convenient
requires no assessment other than a listing of classification as to time, place, and manner of payment, and not unduly
of the subjects to be taxed. Examples Excise tax on distilled burdensome upon, or discouraging to business activity
spirits, cigars, cigarettes
b. Ad valorem - Tax of a fixed proportion of the value of the Limitations on the power of taxation
property respect to which the tax is assessed, it requires the 1.Inherent limitations These are limitations which exist
intervention of assessors or appraisers to estimate the value despite the absence of an express constitutional provision.
of such property before with the amount due from each
a. Purpose must be public in nature
taxpayer can be determined. (percentage or tax bracket or
tax table) Example: VAT, Income Tax, Donor’s Tax A tax imposed must always be imposed for a public
Classification of taxes purpose, otherwise, it will be declared invalid.
The purpose should affect the inhabitants of the state of the
taxing district as a community and not merely as individuals
2.Non-delegation of the legislative power to tax
The rule is "potestas delegata non delegare potest” - what 5. Non-impairment of the obligations of contracts.
has been delegated cannot be delegated. The people created No law impairing the obligations of contracts shall be
a legislative department for the exercise of legislative passed (Sec. 10, Art. II, id.). There is "impairment when a
power. Thus, this power should not be delegated to any law substantially invalidates, releases or extinguishes the
other person or body. obligations of a contract, or that derogates substantial
However, delegation of this power is permitted in the contractual rights.
following cases:
a. Delegation to the President. 6. Non-infringement of religious freedom
b. Delegation to local governments No law shall be made respecting the establishment of
c. Delegation to administrative bodies religion, or prohibiting the free exercise thereof. The free
exercise of religious profession and worship, without
3. Exemption from taxation of government entities discrimination or preference, shall forever be allowed. No
religious test shall be required for result the exercise of civil
Case
or political rights
The Congress passed a law requiring government agencies
to pay taxes to the government. Should the government be
liable for taxes? 7. No appropriation for religious purposes.
As a rule, the government is not liable for taxes on the No public money or property shall be appropriated applied,
theory that it would be tantamount to taking money from paid or employed, directly or indirectly, for the use, benefit,
one's pocket and putting it in another or support of any sect, church, denomination, sectarian
institution, or system of religion, or of any priest, preacher,
minister, or other religious teacher, or dignitary.
Constitutional limitations
1. Due process.
8. Exemption of religious, charitable or educational entities,
- No person shall be deprived of life, liberty, or property
non-profit cemeteries, and churches from taxation.
without due process of law, nor shall any person be denied
the equal protection of the law Charitable institutions, churches, and parsonages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and improvements,
2. Equal protection of the laws actually, directly. and exclusively used for religious,
- The constitutional provision on equal protection of laws charitable, or educational purposes shall be exempt from
means that "no person or class of persons shall be deprived taxation
of the same protection of laws enjoyed by other persons or The word "exclusive" means primarily rather than solely.
other classes in the same place and in like circumstances. Thus, the admission of pay patients does not detract from
the charitable character of a hospital if all its funds are
3. Rule of uniformity and equity in taxation devoted exclusively to the maintenance of the institution as
a public charity
- The rule of taxation shall uniform and equitable The
Congress shall evolve a progressive system of taxation
9. Exemption of revenues and assets of non-stock, non-profit
educational institutions and donations for educational
4. Non imprisoned for debt or non-payment of a poll tax purposes from taxation
Case All revenues and assets of non-stock, non-profit educational
Evander refused to pay the basic community tax of P5.00 institutions used actually, directly and exclusively for
and the additional tax of P 1.00 for every P 1,000 of his educational purposes shall be exempt from taxes and duties.
income from business. Can he be imprisoned for non- Upon the dissolution or cessation of the corporate existence
payment? of such institutions, their assets shall be disposed of in the
He cannot be imprisoned for non-payment of the basic tax manner provided by law.
of P5.00. However, imprisonment is a sanction for his Proprietary educational institutions, including those
failure to pay the additional community tax because it is not cooperatively owned may likewise be entitled to such
a poll tax. exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestments.
Subject to the conditions prescribed by law, all grants,
endowments donations or contributions used actually,
directly, and exclusively for educational purposes shall be Non Resident Citizens of the Philippines
exempt from tax
1. Establishes, to the satisfaction of the Commission of Internal
Revenue, the fact of his physical presence abroad with a
10. Concurrence by a majority of all the members of the definite intention to reside therein;
Congress for the passage of a law granting any tax
exemption. 2. Leaves the Philippines during the taxable year to reside
abroad
No law granting any tax exemption shall be passed without
the concurrence of a majority of all the members of the a. As an immigrant
Congress
b. For employment on a permanent basis

11. Power of the President to veto any particular item or c. For work and derives income from abroad
items in a revenue or tariff bill. 3. A citizen of the Philippines who shall have stayed outside
The President shall have the power to veto any particular the Philippines for one hundred eighty-three (183) days or
item or items in an appropriation, revenue or tariff bill, but more by the end of the year.
the veto shall not affect the item or items to which he does
not object Resident Citizens of the Philippines
A Filipino citizen taxpayer not classified as non-resident
12. Non-impairment of the jurisdiction of the Supreme Court
in tax cases. Alien
The Supreme Court shall have the power to review revise, A foreign-born person who is not qualified to acquire
reverse modify or affirm on appeal or certiorari is the law or Philippine citizenship by birth or after birth,
the Rules of Court may provide final judgments and orders
of lower Courts in all cases involving the legality of any tax, Resident Aliens
impost, assessment, or toll or any penalty imposed in An individual whose residence is within the Philippines and
relation
who is not a citizen thereof.
Non-Resident Aliens
INCOME TAX FOR INDIVIDUALS
An individual whose residence is not in the Philippines and
Individual Taxpayers who is not a citizen thereof.
• Are natural persons with income derived from within the
territorial jurisdiction of a taxing authority. Aliens who stayed in the Philippines for an aggregate period of
more than 180 days during the taxable year and/or aliens who
1. Resident Citizen (RC)
have business income in the Philippines are considered as
2. Non Resident Citizen (NRC) nonresident aliens engaged in trade or business (NRAET)
3. Resident Alien
A non-resident aliens engaged in trade or business (NRAET) is
4. Non- Resident Alien (NRA)
subject to25% income tax based on gross income from all
- Engaged in trade (NRAET) sources within the Philippines,
- Non-resident alien not engaged in Trade or Business
(NRANET)
- Alien individuals employed by POGOs and or OGLs Applicable income tax and tax rates
Generally, there are only three (3) types of income tax:
Citizens of the Philippines 1. Basic income tax or regular tax
Under SEC 1, Article IV of the Philippine Constitution, the 2. Final Withholding tax (FWT) on certain passive income
following are citizens of the Philippines. 3. Capital gains tax (CGT)
1. Those who are citizens of the Philippines at the time of The Applicable taxes for individuals depend on several
the adoption of the 1987 constitution; factors such as but not limited to:
2. Those whose fathers or mothers are citizens of the Classification of the taxpayer
Philippines;
Source of Income
3. Those born before January 17, 1973, of the Filipino
mothers, who elect Philippine citizenship upon reaching the Type of Income
age of majority
4. Those who are naturalized in accordance with law.
Classification of Taxpayers Income tax Tables under train law
• It is important to properly classify individual taxpayers (part 2 – applicable from year 2023 onwards)
because resident citizens are taxable on their income derived
from sources within and without the Philippines while other Annual Income Tax Rate
taxpayers are taxable only on their income derived from 250,000 and below None (0%)
Philippine sources. Moreover, individual taxpayers 250,000 to 400,000 15% of excess over 250,000
classified as nonresident aliens not engaged in trade or 400,000 to 800,000 22,500 + 20% excess over 400,000
business (NRANETB) are taxable based on their "gross 800,000 to 2,000,000 102,500 + 25% excess over 800,000
income" while others are taxable based on "net income" 2,000,000 to 8,000,000 402,500 + 30% excess over 2M
Above 8,000,000 2.2025M + 35% excess over 8M

Sources of income
SELF EMPLOYES PROFESSIONALS (SEP)
Taxpayer Tax base Sources of taxable
income A sole proprietor or an independent contractor who reports
RC Net Income Within and without income arrived from self- employment.
NRC,RA,NRA-ETB Net Income Within only
Professional is a person formally certified by a professional
NRA-NETB Gross Income Within only
body belonging to a specific profession by virtue of having
completed a required course of studies and practice.
Types of Income
Beginning 2018 or upon the effectivity of RA 10963 [Tax
Three types of Income subject to income tax Reform for Acceleration and Inclusion Law (TRAIN Law)],
regular income of SEP amounting to more than P250,000 in a
1. Ordinary or regular income taxable year but with a gross sales/receipts and other non-
Refers to income such as compensation income, business operating income not exceeding the revised vat threshold of
income, income from practice of professions, income from P3,000,000 shall have the option to avail of 8% tax on gross
sales and or dealings of property and miscellaneous income sales/receipts and other non-operating income in excess of
and passive income other than those subject to final tax and P250,000 in LIEU of the graduated income tax rate and
capital gain tax. business tax under Section 116 of the Tax Code, as amended.

2. Passive income derived from Philippine sources

Refers to income subject to final withholding taxes from SELF EMPLOYES PROFESSIONALS (SEP)
sources with in the Philippines (Interest income, dividend Requisites to avail the 8% Preferential Tax Rate
income, royalties, prizes and other winnings.
In order to avail the 8% preferential tax, the SEP shall satisfy
3. Capital Gains subject to CGT all the following conditions:
CGT from sales of shares of stock of a domestic corporation 1. The gross sales/receipts and other non-operating income
not traded in the local stock exchange. does not exceed the vat threshold of P3,000,000;
CGT from sales of real property in the Philippines 2. The SEP shall be non-vat registered;
3. The gross sales/receipts were not derived from vat-exempt
Income tax Tables under train law sales and transactions;

(part 1 – applicable from year 2018 to 2022) 4. The SEP is not subject to Percentage Tax other than under
Section 116 of the Tax Code, as amended; and
Annual Income Tax Rate
250,000 None (0%) 5. The SEP signifies his/her intention to elect the 8% income
250,000 to 400,000 20% of excess over 250,000 tax.
400,000 to 800,000 30,000 + 25% excess over 400,000
800,000 to 2,000,000 130,000 + 30% excess over 800,000
2,000,000 to 8,000,000 490,000 + 32% excess over 2M
Above 8,000,000 2.41M + 35% excess over 8M
PUREPLY SEP PASSIVE INCOME
Gross sales or Income tax Business tax subject to Final Withholding Tax (FWT) Passive incomes
gross receipts subject to final withholding taxes are certain passive
And 1% tax under incomes from sources within the Philippines as enumerated
Graduated Tax SEC 116 NIRC as under the Tax Code (summarized in Table 2-3). These
Not more than 3M Rate amended by passive incomes are not subject to graduated tax rate or
create law basic tax presented in Table 2-2 but to specific final
withholding tax rates.
OR at the option of the SEP. 8% of The five (5) passive incomes derived from Philippine
Gross sales/receipt and other non- sources subject to final withholding taxes are as follows:
operating income in excess of 250,000 1) Interest income
in LIEU of the graduated income tax
rate and Section 166 of the tax code 2) Dividend Income
More than 3M Graduate Tax And 12% VAT 3) Royalties
Rate 4) Prizes; and
5) other winnings

SEP WITH MIXED INCOME

Gross sales and Income tax Business tax

gross receipt
Not more than 3M Graduated tax rate Percentage tax
(excluding on compensation under SEC 166 of
compensation income and the tax code on
income) income from self income derived
employed from self-
employment only
OR of the option of the SEP, 8%
-compensation income – graduated rate
-from self-employment:
8% of gross sales/gross receipt and
other operating income IN LIEU of the
graduated income tax rate and Section
166 of the tax code.
More than 3M Graduated tax rate 12% VAT
(exclude for both types of
compensation income
income)

SEP'S GROSS SALES/RECEIPTS EXCEEDED THE VAT

THRESHOLD DURING THE YEAR
• Percentage tax under Sec. 116 shall still be imposed from the
beginning of the year until taxpayer is liable to vat. The
Percentage tax pursuant to Section 116 of the Tax Code, as
amended, shall be imposed on the first P3,000,000.00. The
excess of the threshold shall be subject to VAT. Thus, for this
purpose, vat shall be imposed prospectively.
• Percentage tax due on the P3,000,000.00 shall be collected
without penalty, if timely paid on the due date immediately
following the month the threshold was breached.