Introduction to Taxation

Introduction to Taxation

• Taxation involves fundamental principles studied in the chapter
• Readers should comprehend the concept of taxation, the Lifeblood doctrine, government cost allocation, State power, scope and limitations of taxation, stages, situs, fundamental principles, escapes, and tax amnesty/condonation

What is Taxation?

• Taxation is the State's inherent power to enforce proportional contributions from its citizens for public purposes
• It also involves legislative process of levying taxes
• Taxation serves as a method for the State to allocate costs or burdens to subjects who benefit from its spending

The Theory of Taxation

• Governments provide public services like defense, order, safety, health, education, and social protection.
• Taxes fund these services
• A system of government is necessary for society and requires funding
• Mutuality of support between the people and the government is the basis of taxation
• Benefits from public services are conclusively presumed for all citizens, allowing taxation regardless of direct availment

Theories of Cost Allocation

• Taxation is allocating the government's costs or burden to the people
• Taxation power considers:
  • Benefit received: more benefits from the government lead to paying more taxes
  • Ability to pay: taxation considers the taxpayer's ability to pay

Aspects of the Ability to Pay Theory

• Vertical equity: proposes that the extent of ability to pay is directly proportional to the level of the tax base
• An example of vertical equity: B has a higher income than A therefore B has a greater capacity to contribute
• Horizontal equity: requires consideration of the taxpayer’s circumstances
• An example of horizontal equity: Tax B more than A because A incurred higher business expenses and thus less capacity to contribute
• Vertical equity is a gross concept, while horizontal equity is a net concept

The Lifeblood Doctrine

• Taxes are essential for the government's existence to operate and activate, as well as benefit the people
• Implications of the Lifeblood doctrine:
  • Tax is imposed even without a Constitutional grant.
  • Claims for tax exemption are construed against taxpayers.
  • The government reserves the right to choose objects of taxation
  • The courts are are not allowed to interfere with the collection of taxes
  • Advanced income is taxable upon receipt
  • Capital expenditure deductions are disallowed effectively.
  • Lower deduction is preferred when expense is limited
  • Higher tax base is preferred when multiple tax bases exist

Inherent Powers of the State

• Government powers are natural and inseparable such as; power of taxation, police power and eminent domain
• Exercise of these powers is presumed and acknowledged from the moment government is established, even without express grant of power in the Constitution
• Inherent powers of the state:
  • Taxation: The State's power to enforce proportional contribution from its subjects to sustain itself
  • Police Power: The State’s general power to enact laws to protect the well-being of the people
  • Eminent domain: The State’s power to take private property for public use with just compensation.

Comparison of the Three Powers of the State

Similarities of the three powers of the State

• They are all necessary attributes of sovereignty

• All inherent to the State

• All Legislative in nature

• They all are ways in which the State interferes with private rights and properties

• They all exist independently of the Constitution

  • exercisable by the government with or without a Constitutional grant

• The Constitution may impose conditions or limits for exercise

• They all presuppose equivalent compensation received by persons affected

• Exercise of these powers by local government units may be limited by national legislature

Scope of the Taxation Power

• The scope of taxation is comprehensive, plenary, unlimited, and supreme, but has its own limitations and limitations by the constitution.

Limitation of the Taxation Power

There are:

• Inherent limitations:
  • territoriality of taxation
  • international comity
  • public purpose
  • exemption of the government
  • non-delegation of the taxing power
• Constitutional Limitations:
  • due process of law
  • equal protection of the law
  • uniformity rule in taxation
  • progressive system of taxation
  • non-imprisonment for non-payment of debt or poll tax
  • non-impairment of obligation & contract
  • free worship rule
  • religious or charitable entities exemption
  • no public funds for religious benefits
  • tax exemption from revenues
  • Concurrence of majority of all members of Congress for passage of a law granting tax exemption
  • non-diversification of tax collections
  • Non-delegation of the power of Supreme court review in tax cases
  • bills originate exclusively in the House of Representatives (subject to Senate amendments)
  • delegation of taxing power to local government units

Territoriality of Taxation

• Public services are provided inside State boundaries
• Government can only demand tax obligations from subjects/residents within its territorial jurisdiction.
• Taxing foreign subjects abroad is not a basis to derive benefits
• Extraterritorial taxation amounts to foreign soverignty encroachment
• Taxpayer obligations:
  • Filing of returns and payment of taxes
  • Tax remittance on expenses
• Obligations are only by Philippine government upon citizens/ residents
• Exception to the principle:
  • resident citizens & domestic corporations are taxable on income derived both within & outside Philippines
    • residents/ citizen resident aliens are taxable on transfers of properties located within or outside the Philippines.

International Comity

• Countries deem each other equals regardless of race, religion, economic condition or military power, and observe mutual courtes
• Hence,
  • governments do not tax the income/properties of other governments.
  • governments give primacy to treaty obligations over domestic tax laws
• Foreign government offices in the Philippines and their non-Filipino staff are not subject to domestic income taxes.

Public purpose

• Tax is intended for the common good and exercised absolutely
• Cannot be further exercised to further any private interest

Exemption of the government

• Government generally refrains from taxing itself to avoid additional costs
• However, the government's income from properties and activities conducted for profit is taxable.

Non-delegation of the taxing power

• Legislative taxing power is belongs exclusively to Congress and is non- delegable, for checks and balances
• Power of lawmaking delegated to legislate, including taxation
• Exceptions to the rule:
  • local government units allowed to exercise power to tax
  • President empowered to fix tariffs
  • other cases that require expedient administration and collection

Constitutional Limitations of Taxation

• No harsh/oppressive tax laws.
• Observance of due process ensures no deprivation of life, liberty, or property

Aspects of Due Process

• Substantive: tax must be imposed for public and by jurisdiction
• Procedural: government must observe taxpayer's right to notice and hearing
• Assessments shall be made within 3 years
• Collection shall be made within 5 years from assessment date

Equal protection of law

• Taxpayers should be treated equally in rights and obligations
• Congress cannot exempt sellers of “balot” while subjecting sellers of "penoy" to tax

Uniformity rule in taxation

• Taxpayers under similar circumstances should/shouldn't be taxed the same
• Classifications should be based on attributes
• Each class will be taxed differently, taxpayers in same class are taxed the same, uniformity is relative equality.

Progressive system of taxation

• Tax rates increase with tax base increases
• Constitution favors progressive tax as it distributes wealth by taxing the rich more

Non-imprisonment

• No imprisonment because of his poverty or mere unaility to pay debt
• This applies when debt is acquired in good faith as a result of a criminal offence
• The tax derives from law/sovereignty and is not equal to debt
• It will not extend here, expect poll tax

Non-impairment of obligation and contract

• The state should set an example by honoring excemptions granted and is no cacellation by a unilateral government action.

Free worship rule

• The Philippine government adopts free exercise of religion and do not subject its exercise to taxation
• Properties/revenues of tithes or offerings are not subject to tax
• Exemption is not to income from properties/activities that are commercial or have a proprietary nature

Religious/Charitable and education excemptions

• Follows use doctrine, where they devoted use for those activities are exempt
• The constitutional exemption from property tax applies for properties actually, directly, and exclusively used for those purpose

All members of congress must count

• Must proceed as if the act deprived from the government, if the tax excemption
• absolute majority of members of congress not just relative or a quorum

Non-diversification of tax collections

• Collections should be used for public puposes
• Never be diverted or used for private purpose

Non - delegation of the power of taxation

• Congress is given power to checks and balances
• Matters of delegation maybe matters to do with the expedient administration
• Administrative agencies clarify application of the law - Not creating authorities not inteded to
• The Non-impairment to the supremem court to review tax cases - Can be raised and finalised decided by the highest court

Stages of the exercise of taxation power

• Levy/imposition
• Assessment and collection
• This is the enactment of law, its call impact to the other law b.v Congress

Determining the Tax Liability of Taxpayers & Collection

• This state is administrative taxation, to asses the liabilites of the payer

Situs of traxation

• The place has the power to levy taxes for tax objects
  • businesses, where is its conducted by
    • business are taxed
• Incomer Tax situts- service tax- rendered services Illustration of a coropration leasing to a non resident of philipines, the rest, will be excempt bc the service happened abroad.

Sale of Goods

• The subject to where to tax occurs, what happens in china stays in China as tax

Property tax

• The property are taxable in the location

Personal Tax

• People are taxed in their place of residence

Other fundamental doctrines in Taxation

• Marhsall: The power involves the power to destroy it -Power discourage/prohibit, Taxation carries this power
• Holme’s: Taxation power is limited - It’s uses can make better the industries bu granting incentives
• Generally prospective in operation - Is only ex post facto if allowed by constitution from congress

Non-compensation or set-off

• Tax obligations cant be transfer due to a contract
  • Taxes aint automatically able to be set/compensate, the payer cant delay for results of law suit

Imprescriptibility-the facts of rules for not being to late

• Taxes don’t per scribe, the laws provides them - Has 5 yr from assessment, 3yr absent of that action

Taxation Chapter 2

• Tax laws, regulation, and distinguish the system of collection
• Distinguish the type of taxation laws- regulation of rullings

Taxation Law

• Arisis from the exercise of the power of state, the taxation power in code

Admin Issuances Types

• signed by secretary of finace, commissioner of internal revenue this is effective
• Is to clarifty expalin the taxes- rules for details etc

Memo Orders

• Prescribe direction of institutions
• Guidlines, operations, flow of actions

Ruling's

are opionons - interpertations in line with code - issue from time to time Memo Ciriculars

• publish amplifications of rules from other agencies

BIR rulings

• Queries riased by them
• Adviosry, sorted

GAAp vs laws of taxes

• Accounting rinnciples isn't law - benchmarks fair evaluation
• Law is the guide

Nature of Philippine tax laws

• Is civil, not political nature in time of ememy occupation
• its is not panel

Valid Tax Elements

• levied by taxing ower
• no violations _ for public
• must fit standards, proportionally
• generally money

Classification to taxes

• Fiscal, revenue for gen purpose
• regular for commerce acts

Tax v revenue

• tax amount government
• all income amount

Tax v toll

• Tax by government
• toll charges
• tax upon amount
• toll is a demand of owners

Debt v tax

• debt from contracts
• law is tax arises

Tax v specical assessment value only with land

Tax v tariff- tax imposed on import

Penalty V tax- - - penalized if acted

Sound tax system

• Adam Smiths: gov ahre to the following prinicles Canons to a good system
• Fiscal adequacy, enough funds cover, government cost -must not cause, defits - budget paralysis -Teorical Justitce- equity- suggest consider - tax payer, unjust
• Administrative - tax laws efficient encourgage compliance -

Applying The Priciples

• efiling employee filing
• final filing

Administration of taxes

• Manage the national tax system - the bureau of internal revenue -the department of finance
• Commissioner 1
• Deputies 4, each below
• Operations
• Legam Information
• -Reource Mang

The POWERS Of BIR- Assessment taxes -Judgments forfeitures

• Give effects to administation

• Assigns to employee

• Provides distribution stamp

• Issuance repect clearance

• Submssions for congress Oversight

• Tax due is at the CIR and demand from rep

• • Returns can't with draw but can

• Tax payer has 3 yr from Date to fill

• After audit serve

• CIR determines the date to assess proper tax best evidence

• CIR can make and mend a required return false or willful

• Conduct inventory serivillence

  • to be presemt sales after no receipt

CIR POWERS

• to divide and percribe with help

• zonal values refered to automatic

• adjusted 3 yrs -publish with standards etc

• The value can be set under congress or not

• Tax liability, comprimise with CIR with approval

• CIR can inquire

• CIR can look into bank deposits, when necessary, for the amount only.

Chapter 3

• Concept of tax laws, source of income

Concept

• Is to pay tax -ability - excellent tax allociation goverment COST gross is tax

• Simply means tax income - reffereed as taxable of gross income on inclusions gross

• In layman is taX InCome, more to be had though

Gross Income

• is broad inflow wealth tax payer that increases net worth
• source is from employment to properties

3 elements

• return on capital realizsed. benefit
• not exempeted- law - treaty -contract

On capital- any wealth

• Gross increases it, to the payer

Items with infinite value -

• life
• health
• human

The Insurance collected by beneicary from his -like recovery on the advance

• Taxable -*any more then value is
• The ones given - Injries deemed areun capital" not t taxed reputation that is to

Explore the core principles of taxation, including the Lifeblood doctrine and government cost allocation. Understand the State's power, scope, limitations, and stages of taxation. Learn about situs, fundamental principles, escapes, and tax amnesty/condonation.