Principles of Taxation

Principles of Taxation

• These include: inherent powers of government, limitations on taxation (situs/place), sound tax system principles, nature/scope/classifications/characteristics of taxes, enumerations/definitions/features of taxes, tax evasion vs. tax avoidance, double taxation, legislation of tax laws, tax remedies, and BIR organization/powers.

Taxation

• Considered as a principal attribute of sovereignty
• Taxing power stems from the State's very existence
• The state must promote public interest and good

State Defined

• A community with a relatively large number of people
• They permanently occupy a territory
• They have an independent government
• They are organized for political purposes, and are usually obedient to authority

Elements of a State

• People: The state's inhabitants
• Territory: Geographical area under the state's jurisdiction and control
• Government: The agency that formulates and expresses the state's will
• Sovereignty: The state's supreme, uncontrollable inherent power that is permanent, exclusive, comprehensive, absolute, indivisible, inalienable, and imprescriptible

Inherent Powers of the State

• Police Power: Regulates freedom and property for public welfare
• Power of Eminent Domain: Forceful acquisition of private property with just compensation for public use
• Power of Taxation: Requires proportional contribution from society members to maintain government

Power of Taxation as a Process

• It involves imposing charges on property, individuals, or transactions by the government to raise funds for public purposes
• It is an inherent power to impose charges on persons, properties, or rights
• The state via law raises income to cover expenses, distributing government costs among those benefiting from it

Similarities of taxation, police power and power of eminent domain

• They are inherent, with no need for constitutional grant
• Not only necessary, but also indispensable
• The State interferes with private rights

Differences between taxation, police power and power of eminent domain

• Police power regulates both liberty and property, while eminent domain and taxation affect only property rights
• Police power and taxation are exercised by the government, but eminent domain may be delegated to private entities
• Property taken under police power is destroyed, while property taken under eminent domain/taxation serves a public purpose
• Compensation for police power is the altruistic feeling of contributing to public welfare
• Compensation for eminent domain/taxation is concrete, it is a fair equivalent of expropriated property and public improvements for taxes paid

Primary Purpose of Taxation

• Taxation provides funds/property to promote citizens' welfare and finance development
• It redistributes income/wealth
• Progressive systems tax higher incomes at higher rates to reduce inequality
• Taxes on luxury goods/sin products raise revenue and discourage consumption

Secondary Taxation Purposes

• To protect local industries from foreign competition via high custom duties
• For economic development of resource mobilization, undeveloped areas are taxed less than urban areas

Basis of Taxation

• Benefits are conclusively presumed via government providing public services funded by taxes
• Taxpayers cannot avoid taxes because they claim to not receive benefits
• Direct receipt/availment of government services is not a precondition to taxation

Theories of Cost Allocation

• Benefit Received Theory: More benefits received means more taxes paid, e.g., higher income leads to higher taxes
• Ability to Pay Theory: Taxes based on the capacity to sacrifice, e.g., higher income with fewer expenses should pay more

Marshall Doctrine

• The power to tax, if used as police power, can discourage or prohibit undesirable activities, and destroy
• Example: excessive tax imposed on cigarettes

Holmes's Doctrine

• Taxation power may encourage beneficial industries through incentives
• Example: creation of economic zones with tax holidays

Omnibus Investment Code (EO 226)

• Government committed to encourage investments.
• It adopts cohesive investment incentives law.
• Basic investment laws are clarified to harmonize for both domestic and foreign investors.

Declaration of Investment Policies (Article 2)

• Designed to accelerate the development of the national economy
• It adheres to economic nationalism
• It promotes small/medium industries
• It encourages competition and discourages monopolies

State Policies

• Encourages Filipino and foreign investments in various sectors
• These investments must create jobs, increase productivity, improve labor skills, foster economic growth, meet competitiveness tests, accelerate regional development, and boost exports

BMBE Act of 2002

• Designed to encourage the development of barangay micro-business enterprises
• It does so by granting incentives
• Signed November 13, 2002 by President Gloria Macapagal-Arroyo

Defined BMBE

• Any business involved in production, processing, manufacturing, or services, including agro-processing
• Has total assets not more than P3 million
• The assets include those from loans, except land where plant/equipment are located

Objectives of BMBE Act

• To integrate micro enterprises into the economic mainstream and foster Filipino entrepreneurial talent
• Strengthening BMBEs will lead to more jobs, better livelihoods, and improved quality of life for Filipinos

BMBE Incentives

• Registered BMBEs get income tax exemption, exemption from Minimum Wage Law, priority access to credit, technology transfer, and training

Encouragement for LGUs

• Local government units are encouraged to reduce or exempt BMBEs from local taxes, fees, and charges

Prospectivity of Tax Laws

• The Constitution prohibits retroactive tax laws
• An exception would be under justifiable conditions

Non-Compensation or Set-Off

• Taxes are not subject to automatic compensation
• Payment cannot be delayed for lawsuit resolution
• Tax is not a debt and, therefore, not subject to set off
• Exception: overpayment cases are subject to refund

Taxes: Non-assignment

• Cannot be assigned or transferred contractually
• Contracts attempting to do so are invalid regarding the government's collection rights

Imprescriptibility in Taxation

• Prescription is the lapsing of a right over time
• The government's right doesn't prescribe unless the law states otherwise

Under the NIRC (National Internal Revenue Code)

• Tax prescribes if uncollected within 5 years of assessment
• Without assessment, tax prescribes if uncollected by judicial action within 3 years of return's due date
• Taxes do not prescribe for non-filers or fraudulent filers

Doctrine of Estoppel

• One should not misrepresent another party who relies upon it in good faith
• The government is not subject to estoppel
• Errors by government employees dont bind the government
• Neglect of government officials also doesnt bind the government
• Erroneous application of the law does not block its correct application later on

Judicial Non-Interference

• Courts generally cannot issue injunctions against government tax collection
• This is due to the Lifeblood Doctrine

Strict Construction of Tax Laws

• Taxation is the rule, unless clear exemption exists
• Clear and categorical language is required
• Vague laws favor taxpayers (no tax law)
• Obligations must be based on law
• Vague tax exemptions are construed against the taxpayer
• Tax exemption must be clear and absolute

Ability to Pay Theory

• Vertical Equity: Ability to pay is proportional to the tax base
• Horizontal Equity: Considers individual circumstances

Inherent Limitations on Taxation

• Territoriality: Taxes imposed on subjects/residents within its jurisdiction
• International Comity: Mutual courtesy among countries
• Public Purpose: Taxes for common good
• Exemption: Government entities don't tax themselves
• Non-Delegation: Legislative taxing power vested in Congress, has exceptions

Constitutional Limitations on Taxation

• Observance of Due Process: Prevents deprivation of life, liberty, or property without due process
• Equal Protection: Taxpayers treated equally in rights and obligations
• Uniformity and Equity: Unequal circumstances should not be taxed the same
• Progressive System: Tax rates increase as tax bases increase
• Non-Imprisonment: Applied when debtor is in good faith

Constitutional Limitations continued

• Non-Impairment: Obligations not set aside from contracts by taxation power
• Free Worship:
  • Exemption for religious/charitable groups from property taxes
  • No public funds for any religion
  • Exemption for revenues/assets of non-profit educational institutions

More Taxation Constraints

• Requires majority in Congress for tax exemptions
• No diversification of tax collections
• Non-delegation applies; Congress creates tax laws adhering to checks and balances
• Supreme Court jurisdiction maintained for tax case reviews
• Revenue bills originate in the House, Senate may amend
• Local governments create own revenue sources and justly share national taxes
• President can veto specific revenue/tariff items
• Appropriations, revenue and tariff bills originate in the House
• Supreme Court maintains jurisdiction to review tax cases

Stages of Taxation Power

• Levy/Imposition:
  • enactment of a tax law by Congress
• Assessment/Collection:
  • administrative branch implements taxation, including assessment and collection
  • includes incidence of taxation and administrative acts

Situs of Taxation

• The tax location with power to levy taxes on tax objects
• Frames of reference gauge whether tax objects are within the tax jurisdiction

Examples of Situ Taxation

• Business Tax: Taxed where business is conducted
• Income Tax (services): Service fees taxed where rendered
• Sale of Goods: Gain is taxed at the sale area
• Property Tax: Taxed where properties are located
• Personal Tax: Persons are taxed in residence place

Aspects of Double Taxation

• The same taxpayer doubly taxed by the same jurisdiction
• Double taxation includes:
  • Same type of tax
  • Same purpose
  • Same jurisdiction
  • Same period

Double Taxation Types

• Direct: All elements of double taxation exist
  • Examples:
    • 10% income tax on monthly sales plus 2% annual sales tax
    • 5% bank reserve deficiency tax and 1% daily penalty
• Indirect: One or more secondary elements not common -National Government tax on business sales with local government tax on the same -National Government collects income, then local government collects community tax -The Philippines and a foreign country both tax the same income

Reduced Double Taxation

• Via tax exemption: one tax law applies, another exempts the same object
• Via foreign tax credit: domestic and foreign taxes the same object, payment to the foreign country is deductible
• Via reciprocal tax treatment: tax rates reduced for foreign taxpayers with same treatment, by the Filipino country

Double Taxation Treaties

• Bilateral agreements: Countries stipulate lower rates for residents involved in taxable transactions

Escapes from Taxation

• Categories causing a revenue loss includes Tax avoidance and evasion
• Categories not causing a revenue loss are the following
  • Shifting
  • Capitalization
  • Transformation

Tax Amnesty

• General pardon for errant taxpayers, offering a fresh start

Tax Condonation

• Forgiveness of a tax obligation given certain grounds

Comparison of tax amnesty and tax condonation

• Tax amnesty covers both civil and criminal liabilities, but condonation only civil liabilities.
• Amnesty works retroactively, while condonation is prospective
• Amnesty requires payment, but condonation requires no payment

Good Tax Systems Principles

• Systems must have fiscal adequacy, theoretical justice, and administrative feasibility.

Fiscal Adequacy

• Government revenue source must meet societal needs

• Tax system must efficiently meet public service demands, public expenditures, creating new taxes/tax machinery or rate changes to existing taxes

• Governments should avoid deficits to keep delivering essential things

• Taxes should react in government spending

Equality/Theoretical Justice

• Taxation should consider the taxpayer’s ability to pay
• Should not be oppressive, unjust, or confiscatory;

Administrative Feasibility

• Tax laws must be: convenient, just, effective, and efficient

• The tax system should be simple and clear for taxpayers and collectors

  • Laws must be clear and plain
  • Capable of uniform enforcement
  • Convenient by time, place, and manner
  • Not unduly burdensome or discouraging

Applications

• E-filing and e-payment of taxes
• Substituted filing for employees
• Final withholding tax on aliens or corporations
• Accreditation of authorized agent banks for filing and payment

Nature of Tax Laws

• Philippine tax laws are civil
• Effective even during enemy occupation
• They are the law of the occupied, not the occupier
• Foreigners payment of taxes are valid
• They are not penal in nature
• Penalties are for tax compliance

Nature of Taxation

• It is an enforced proportional state levied contribution to raise public revenues

Scope of National vs Local Taxes

• National: Taxes under the National Internal Revenue Code of 1997
• Local: Taxes under the Local Government Code of 1991

Aspects of a Valid Tax include:

• Levied by taxing power with the correct jurisdiction
• Not violate Constitution or inherent limits
• Uniform, equitable, and for public goals
• Proportional and payable in money

Taxonomy - Classification of Taxes by Purpose

• Fiscal/revenue tax is for public purposes
• Regulates conducts, acts, transactions
• Sumptuary seeks to achieve socials/economic objectives

Taxation - Classification by Subject

• Personal: Tax on Residents
• Property: On real/personal properties
• Excise On right

Sumptuary Taxation Motivation

• To protect government or stimulate new industries
• To create special duties like dumping, marking duties, etc and this promotes the non-revenue

Incidence

• As to incidence, taxonomy also includes direct taxes (income tax)
• Business taxes

Amount

• Specific tax: fixed, unit based amount
• Proportional tax on value

Excise Taxes

• Apply to both services and locally made goods for any use from sale to import
• Excise taxes are on goods and services meant to discourage consumption or balance associated costs
  • Traditional sales target bread swarth of commerce -While Excise targets specific such as fuel, tobacco, and firearm examples

The Liability for paying excise tax resides with:

• the manufacturer or producer of domestic goods
• The product owner lacking payment and removal
• The owner/importer for all taxable import articles

Rates

• Proportional/Fixed: equality biased
• Progressive Graduated Increase biased + taxation decrease the rich poverty line cut
• Regressive decrease the base taxation increase biased opposite =violation

Authority

• National tax: collected by fed
• Local tax: collected by LGUs

National Taxes

• Includes : income tax, estate tax, donors tax, value added tax and other taxes
• Includes Documentary stamp which is on accepted assignments, loans or transfers

Local Taxes

• Property, Profession, Business, Community, Financial Institutes etc

Distinct

• Taxes are tied to shared revenue,
• While Licenses and Tolls are police powers assigned to regulate the industries not revenue generation

Relationship

• Taxes, assessment and tariff are law mandated but the debt is not

System Tax

• Its all the tax regulation meant to assess the enforcements by GOs