Income and Business Tax Introduction Hand-Out

Taxation: the act of levying the tax, the process or means by which the sovereign, through its
law-making body, raises income to defray the necessary expenses of the government. It is
merely a ways of apportioning the cost if the government among those who in some measures
are privileged to enjoy its benefits and therefore must bear its burdens.
Taxation can also refer to taxes as an abstract concept, a actual dollar amount of tax that has
been levied or the material funds that have been received as taxes. Although all of these
definitions are technically correct, the one listed above is the most common. Taxation is one of
the primary powers of government over the people.
When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties
(such as incarceration) may be imposed on the non-paying entity or individual. It is a mode by
which government make exactions for revenue in order to support their existence and carry out
their legitimate objectives (Tax Law and Jurisprudence by Justice Vitug,2000).It is the inherent
power by which the sovereign state imposes financial burden upon persons and property as a
means of raising revenues in order to defray the necessary expenses of the government
(Tax Digest by Crescencio Co Untian 2002 ed).Nonetheless, it is the most pervasive and the
strongest of all the powers of the government. Taxes are the lifeblood of the government, without
which, it cannot subsist
Tax: a compulsory contribution to state revenue levied by the government on workers' income
and business profits or added to the cost of some goods, services, and transactions.
Tax is the lifeblood of the government. Major revenue of the government is sourced from taxation
so that in the most pressing times of financial and economic crisis, the agency authorized to
administer taxes The Bureau of Internal Revenue (BIR) should always be on the front line.
*BIR nowadays is becoming stricter in the implementation of the tax laws and is seeking ways to
collect much revenue from taxes. They widened the coverage of mandatory withholding of
virtually all income payments certain taxpayers by the implementation of the Top Twenty
Thousand Corporation (TTC). Under this program, on top of those income payments subjected to
expanded withholding tax, these corporations are required to withhold 1% for payments to its
suppliers of goods and 2% for regular suppliers of services. Additionally, reportorial requirements
are required to be submitted to BIR to monitor and verify compliance through its computer
systems. Currently, the BIR is coming up with the similar scheme for individual taxpayers,
expectedly, under the same procedures of TTC above.
Income: The amount of money or its equivalent received during a period of time in exchange
for labor or services, from the sale of goods or property, or as profit from financial investments.
Income Tax: a tax on a person's income, emoluments, profits arising from property, practice of
profession, conduct of trade or business or on the pertinent items of gross income specified in
the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income, by the Tax Code, as
amended, or other special laws.
Nature of Taxation:
1. Tax imposed by the national government under the National Internal Revenue Code;
2. It is an excise tax because it is imposed on the right to generate or receive income through
labor, capital and others, and not or persons or property;
3. It is a direct tax since it is imposed on the person who is personally bound to pay the tax, a
burden he cannot shift to another
4. Income tax is a general tax because it is primarily intended to provide large amounts of
revenue to the government and secondarily to offset the regressive sales and consumption

taxes, and to mitigate the evil of inequalities in the distribution of wealth;

5. It is progressive because the tax rate increases as the tax base increases.
Basis of Taxation:
The theory underlying basis of taxation is governmental necessity because without it,
government can neither exist nor endure. The governments ability to serve the people depends
upon the taxes that are collected. Taxes are indispensable in the government operation and
without it, the government will be paralyzed. The main purpose of taxation is to accumulate
funds for the functioning of the government machineries. No government in the world can run its
administrative office without funds and it has no such system incorporated in itself to generate
profit from its functioning .The power of taxation may be used as an implement of the police
power of the state through the imposition of taxes with the end view of regulating a
particular activity. For example, the imposition of taxes to the video industry as a regulatory
measure considering the rampant unfair competition posed by rampant film piracy; the erosion
of the moral fiber of the viewing public brought about by the availability of unclassified and
unreview video tapes containing pornographic films and films with brutally violent sequences
and; losses in government due to the drop in the theatrical attendance
The bases of international tax:
Tax neutrality - The neutrality of international tax system is important because it must not affect
the economic efficiency. If the tax is neutral then it will not influence the locality of the
investment or nationality of the investor. The capital can shift from a nation with lesser return to
a nation with higher return. Therefore, resources will be allocated well, and the gross world
output in turn will be high.
Tax equity - The principle of tax equity states that all equally positioned tax players contribute in
the cost of operating the government according to the equal rules. The idea of equity can be
understood in two ways. The first one states that the input of each tax player must be consistent
with the amount of public services as received. The second idea is that the contribution of each
tax player must be in terms of their ability to pay. The ability to pay means the one with greater
ability is likely to pay a larger amount of tax.
Avoidance of double taxation - The avoidance of double income states that one must not be
taxed twice for the same income. However, if the post-tax income is sent to the foreign countries
then in that case the receiver of such income is taxed again. This implies the same income is
subjected to double taxation. As an alternative, the requirements of foreign tax credits may be
formed in the domestic tax system.
There also exist some tax laws which prevent the tax through artificial transactions such as
transfer pricing. In addition, the corporate structures will help to reduce the overall tax burden to
the enterprise.
Importance of Taxation:
Society
Taxation is important to society because the government use the tax collected to fund projects
related to health care systems, education systems, and public transports. Also, the money
collected can also be used to give unemployment benefits, pensions, and other matters that can
benefit the society as a whole. Without tax, the government would not be able to fund the
essential projects and services that people need.
The government allocates the money collected from the taxpayers to different areas of the
country. The areas picked are rural areas. Some rural areas may have resources that might be
beneficial for both the country and its economy. Therefore, the government would allocate part
of the tax money to provide the essential services required and to improve the standards of such
places.
Other important role taxation has is it can affect the rate of economic growth of a country.
Although taxation may discourage investors from investing in a country with a strict tax rules,
however, a recent study made by Prof. Myles, suggests both the positive and negatives effects of

tax would be offset, and thus, only a very small result would be noticed. In his study, he
discovered in developing countries, tax contributes to almost 10% of the gross domestic product
of the economy. Thus, resulting in an economic growth.
Moreover, another tax benefit on society is it discourages certain undesirable activities such as;
liquor, tobacco and gambling. On such activities the government imposes excise tax,
discouraging individuals from selling such commodities. Other important role tax provides to the
society other than funding of government expenditure is information about the total price for the
government projects.
Businesses
The concept of taxation is vital to businesses in the economy, as the amount of tax taken from
each business is accumulated, one of the ways that tax is used to help business is through the
government funding the money back into the economy as long term loans and/or funding. The
money could also be pumped back into the economy by the government in the event of an
economic recession or turmoil.
Another benefit of taxation to the society, Is that it helps develop the country as a whole, and the
more developed the country is; would therefore mean better prospects for the business's as it
increases the well being of the country's society.
The US tax system is considered one of the most complicated, as the tax is paid to more than
two levels of government, plus the diverse ways of calculating the tax. The UK tax system on the
other hand is considered to be less complicated than the USA, where the tax is paid to only two
government levels, Her Majesty's Revenue and Customs and the local government.
Objectives of Taxation:
Raise more Revenue The fundamental objective of taxation is to finance government
expenditure. The government requires carrying out various development and welfare activities in
the country, For this, it needs a huge amount of funds. The government collects funds by
imposing taxes. So, raising more and more revenues has been an importance objective of tax.
Prevent Concentration of wealth in a few hands Tax is imposed on persons according to their
income level. High earners are imposed on high tax through progressive tax system. This
prevents wealth being concentrated in a few hands of the rich. So, narrowing the gap between
rich and poor is another objective of tax.
3. Redistribute Wealth For Common Good
Tax collected by the government is expended for carrying out various welfare activities. In this
way, the wealth of the rich is redistributed to the whole community.
4. Boost Up The Economy
Tax serves as an instrument for promoting economic growth, stability and efficiency. The
government controls or expands the economic activities of the country by providing various
concessions, rebates and other facilities. The effective tax system can boost up the economy.
Similarly, taxes can correct for externalities and other forms of market failure (such as
monopoly). Import taxes may control imports and therefore help the country's international
balance of payments and protect industries from overseas competition.
5. Reduce Unemployment
The government can reduce the unemployment problem in the country by promoting various
employment generating activities. Industries established in remote parts or industries providing
more employment are given more facilities. As a result, the unemployment problem can be
reduced to a great extent through liberal tax policy.
6. Remove Regional Disparities

Regional disparity has been a chronic problem to the developing countries. Tax is one of the ways
through which regional disparities can be minimized. The government provides tax exemptions
or concessions for industries established or activities carried out in backward areas. This will help
increase economic activities in those areas and ultimately regional disparity reduces to
minimum.
Principles of Sound Taxation system
As a nonpartisan educational organization, the Tax Foundation has earned a reputation for
independence. However, it is not devoid of perspective. All Tax Foundation research is guided by
the following principles of sound tax policy, which should serve as touchstones for good tax
policy everywhere:
Simplicity: Administrative costs are a loss to society, and complicated taxation undermines
voluntary compliance by creating incentives to shelter and disguise income.
Transparency: Tax legislation should be based on sound legislative procedures and careful
analysis. A good tax system requires informed taxpayers who understand how tax assessment,
collection, and compliance works. There should be open hearings and revenue estimates should
be fully explained and replicable.
Neutrality: The fewer economic decisions that are made for tax reasons, the better. The primary
purpose of taxes is to raise needed revenue, not to micromanage the economy. The tax system
should not favor certain industries, activities, or products.
Stability: When tax laws are in constant flux, long-range financial planning is difficult.
Lawmakers should avoid enacting temporary tax laws, including tax holidays and amnesties.
No Retroactivity: As a corollary to the principle of stability, taxpayers should rely with
confidence on the law as it exists when contracts are signed and transactions made.
Broad Bases and Low Rates: As a corollary to the principle of neutrality, lawmakers should
avoid enacting targeted deductions, credits and exclusions. If such tax preferences are few,
substantial revenue can be raised with low tax rates. Broad-based taxes can also produce
relatively stable tax revenues from year to year.
THE THREE INHERENT POWERS OF THE STATE
POLICE POWER
It is the sovereign power to promote and protect the general welfare. It is the most pervasive and
the least limitable of the three powers of the state, the most essential, consistent and illimitable
which enables the State to prohibit all hurtful things to the comfort, safety and welfare of the
society.
It also refers to the power vested in the legislature by the Constitution to make, ordain, establish
all manner of wholesome and reasonable laws, statutes, or ordinances, either with penalties, or
without, nor repugnant to the constitution, as they shall be judge to be for the good and welfare
of the state and the subjects.
Police power is an inherent attribute of sovereignty. It can exist even without reservation in the
constitution. It is based on necessity as without it, there can be no effective government. It is
also referred to as the law of overwhelming necessity.
Basis of the exercise of the police power of the state.
The exercise of police power is founded on the basic principles of salus populi est suprema lex
(the welfare of the people is the supreme law) and sic utere tu et alienum non laedas (so use
your property so as not to impair another)

The ultimate power to determine the necessity and the means of exercising the police power of
the state.
Congress has the ultimate power, because it is the judge of necessity, adequacy, reasonableness
and wisdom of any law. The congress is the constitutional repository of police power and exercise
the prerogative of determining the policy of the state.
Limitations in the exercise of Police power
1.
Due process clause
2.
Equal protection clause
The basic purposes of Police Power are:
1.
2.
3.
4.
5.
6.

To
To
To
To
To
To

serve the general welfare, comfort and convenience of the people;

promote and preserve public health;
promote and protect public safety;
maintain and safeguard public order;
protect public morals; and
promote the economic security of the people.

POWER OF EMINENT DOMAIN

It is an inherent power of the state that enables it to forcibly acquire private property, which is
intended for public use, upon the payment of just compensation. It is based on political
necessity; it is inseparable from the state unless it is denied to it by its fundamental law.
Condemnation of private property is justified only if it is for the public good character. It is the
courts of law that have the power to determine whether there is necessity therefore. Also called
the power of expropriation, eminent domain is described as the highest and most exact idea of
property remaining in the government that may be acquired for some public purpose through a
method in the nature of a compulsory sale to the state.
Who
1.
2.
3.
4.
5.

may exercise the Power of Eminent domain?

The Congress
The President
The local legislative bodies
Certain public corporations (e.g. Land Authority and the MWSS)
Quasi-public corporations (e.g. PLDT and Meralco)

What are the requisites in exercising the power of eminent domain?

1.
The property taken must be private property;
2.
The taking must be within constitutional sense;
3.
The taking must be for public use
4.
Just compensation must be paid;
5.
There must be due process of law.
The following essential requisites must concur before an LGU can exercise the power of eminent
domain:
1.
An ordinance is enacted by the local legislative council authorizing the local chief executive
to exercise the power of eminent domain;
2.
It is exercised for the public use, purpose and welfare;
3.
There must be payment of just compensation; and
4.
A valid and definite offer has been previously made to the owner of the property south to be
expropriated.
Taking may not only include the import of a physical possession of the owner, as when he is
ousted from his land or relieved of his watch or car but also covers trespass without actual

eviction of the owner, material impairment of the value of the property or prevention of the
ordinary uses for which the property was intended.
The following cases constitute taking:

Where a farmland is inundated because of the construction of a damn nearby, the owner
who is prevented from planting on the land.

Where government planes fly over private property at such a low altitude as to practically
touch the tops of the trees.

A municipal ordinance prohibiting construction of any building that would destroy the view
of the plaza from the highway.
Query: A building which is on the verge of collapse was ordered to be demolished. The owner
objected thereto since the demolition constitutes taking without payment of just compensation.
Is the contention of the owner correct?
Answer: No, the demolition of the building is done in the exercise of police power. It is intended
to further the interest of the public as the structure is susceptible to harm the public, in case it
collapses. Hence, the owner is not entitled to compensation.
Query: An ordinance was passed requiring private cemeteries to reserve 6% of their total areas
for the burial paupers. The owners of the private cemeteries demand payment of just
compensation because the ordinance sought to deprive them of their property. However, the city
invoked that such ordinance was done in the exercise of their police power under the general
welfare clause. Is the argument of the city tenable?
Answer: No, although there was taking of private property for public use, nevertheless, it was
done without payment of just compensation. Hence, it violates the principles governing eminent
domain. The taking of property under the police power is sought to be destroyed.
Just compensation is the full and fair equivalent of the property taken from the private owner by
the expropriator. The measure of this compensation is not the takers gain but the owners loss.
POWER OF TAXATION
It is the inherent power of the state to raise revenues to defray the expenses of the
government or for any public purpose. This can be done through the imposition of burdens or
imposition on persons, properties, services, occupations or transactions.
The importance of taxation derives from the unavoidable obligation of the government to
protect the people and extend them benefits in the form of public projects and services. Taxation
is based on necessity and the reciprocal duties of protection and support between the state and
those that are subject to its authority.
Who may exercise the power of taxation?

It is the Congress who exercises the plenary power to tax. However, it may be delegated by
congress to local government units under such terms and conditions as may prescribed by law.
The following are the requisites or limitations on the power to tax:
1.
Public purpose;
2.
Territoriality;
3.
Uniformity;
4.
Due process and equal protection clause;
5.
Constitutionally exempt properties cannot be taxed;
6.
In the assessment and collection of certain kinds of taxes, notice and opportunity for
hearing must be provided.
The power of taxation generally refers to the combination of the following natural qualities.

1. Inherent power of Sovereignty

2. Essentially a legislative Function
3. For Public Purposes
4. The strongest of all the inherent powers of the State
5. Subject to International Treaty or Comity
6. Normally Payable in Money
7. Territorial in Scope
Definition:
1. Inherent power of Sovereignty the power of taxation is co-extensive with sovereignty. It is
existing inseparably with the State.
The government could exercise this power even without any provision in the Constitution mentioning
it.
i. Taxation begins its existence from the time a state is born with the concurrence of its
four elements which are people, territory, and sovereignty and government.
2. Essentially a legislative Function The Law-making body of the government and itspolitical
subdivisions exercise the power of taxation.
3. For Public Purposes Taxes are public money, and its appropriation to be valid must be forthe
common good of the people, such that no individual or particular entity shallprimarily be enriched or
benefited from its use.
4. The strongest of all inherent powers of the State - Without money, the government cannotexist
permanently and cannot dispense and exercise any of its powers and / or functionsfor its people.
i. In the absence o the limitations provided by the Constitutions, the power of taxation is
unlimited, complete, and supreme.
The members of the law-making body could impose taxes on things and rights at appropriate rates
within boundaries of its inherent restrictions.
5. Subject to Inherent International Treaty or Comity As a matter of international courtesy,
property of a foreign state may not be taxed by another state based on principle of sovereign
equality among states of international law.
One state cannot exercise its sovereign dominion over another; therefore, a nation cannot impose
enforced contribution to the properties of other nations.
6. Normally payable in Money Taxes are contributions normally payable in the form of money.
7. Territorial in Scope As a rule, tax laws do not operate beyond a countrys jurisdictional limits
unless there exists a private of relationship between the taxing State and the object of the tax.
Where private of relationship exists, the state can still exercise its taxing powers over its citizens
outside its territory because the personal jurisdiction of his government over him still remains
Characteristics of taxable income: The amount of income that is used to calculate an
individual's or a company's income tax due. Taxable income is generally described as gross
income or adjusted gross income minus any deductions, exemptions or other adjustments that
are allowable in that tax year.Taxable income is also generated from appreciated assets that
have been sold or capitalized during the year and from dividends and interest income. Income
from these sources is generally taxed at a different rate and calculated separately by the tax
entity.
Categories of income:
Compensation - Compensation is the total amount of the monetary and non-monetary pay
provided to an employee by an employer in return for work performed as required.
Compensation is based on:
market research about the worth of similar jobs in the marketplace, employee contributions and
accomplishments,
the availability of employees with like skills in the marketplace, the desire of the employer to
attract and retain a particular employee for the value they are perceived to add to
the employment relationship, and the profitability of the company or the funds available in a

non-profit or public sector setting, and thus, the ability of an employer to pay market-rate
compensation. Compensation also includes payments such as bonuses, profit sharing, overtime
pay, recognition rewards and checks, and sales commission. Compensation can also include nonmonetary perks such as a company-paid car, stock options in certain instances, company-paid
housing, and other non-monetary, but taxable, income items.
Business Income is any income that is realized as a result of business activity. Business income
is a type of earned income, and is classified as ordinary income for tax purposes.
Professional Income - Professional services income is defined as income derived from a
profession or activity related to the training and experience which constitute the individuals
qualification for University appointment, including professional witness fees, fees for advice
related to the practice of medicine, and industry consultation. Professional services income
includes cash and non-cash compensation, such as stock or stock options, received in exchange
for professional services provided.
Passive Income - Earnings an individual derives from a rental property, limited partnership or
other enterprise in which he or she is not actively involved.
Capital gains - A type of tax levied on capital gains incurred by individuals and corporations.
Capital gains are the profits that an investor realizes when he or she sells the capital asset for a
price that is higher than the purchase price.
Capital gains taxes are only triggered when an asset is realized, not while it is held by an
investor. An investor can own shares that appreciate every year, but the investor does not incur
a capital gains tax on the shares until they are sold.
Individuals tax payers
a. Resident citizens.
Resident citizens are taxed on their compensation business andother sources derived from
sources within and without the Philippines.
b. Non-resident citizens.
A non-resident citizen is one who establishes to thesatisfaction of the Commissioner the fact of
his physical presence abroad with a definiteintention to reside therein. He is a citizen of the
Philippines who leaves the Philippines duringthe taxable year to reside abroad, either as an
immigrant of for employment on a permanentbasis.Non-resident citizens are taxed on their
income derived from sources within thePhilippines. Their income derived from Philippine sources
is subject to tax exactly in the samemanner as such income would have been subjected to tax if
received by resident citizens.Income derived from foreign sources is tax exempt.
c. Resident aliens.
Resident aliens are taxed on their net income derived from sourceswithin the Philippines.Their
income derived from Philippine sources is subject to tax exactly inthe same manner as such
income would have been subjected to tax if received by non-residentcitizens.
d. Non-resident aliens
who may either be:a) Engaged in trade or business (the term denotes habituality or sustained
activity) andhe is deemed to be engaged in business if his aggregate stay in the Philippines
exceeds 180days for each calendar year. They are taxed on their income from sources within the
Philippinesand not from without the Philippines.b) Not engaged in trade or business. Non-resident
aliens not engaged in trade or business in the Philippines is subject to tax on their gross income
at 25%. They are not entitledto any personal or additional exemptions.
Sources of Income
Equipment - However, if you use any of the money to pay room and board, that portion is taxable
income. If you'd like to learn more, see Publication 970 at www.irs.gov.
Social Security - Depending upon your income, Social Security benefits might be entirely tax-free
or partly taxable. Ex: If your income is more than $25,000 -- or $32,000 if married filing jointly --

up to 85% of your Social Security benefits is taxable. When figuring your income, include tax-free
interest income and 50% of your Social Security benefits.
State and local tax refunds -- You might have received a refund of your state or local income tax
that you claimed as an itemized deduction on your prior-year return. If so, usually a portion of
your state or local income tax refund is taxable. However, even if you itemized, part of the
refund could be tax-free. If you'd like to learn more, see the State and Local Income Tax Refunds
tax tip.
Veterans' benefits - Veterans Affairs disability payments are tax-free.
Workers' compensation - If you receive workers compensation for an injury you suffered on the
job, that compensation is tax-free. However, you must receive the payment under a workers
compensation statute or a similar statute.
Resources:
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