Stages of Taxation Power

Stages of Taxation Power

• There are two stages to exercising taxation power.
• These stages are Levy or Imposition and Assessment and collection.

Levy or Imposition

• Congress enacts a tax law during this process.
• It is also known as the legislative act in taxation or impact of taxation.
• According to the Constitution, tax bills must begin in the House of Representatives.
• Both Senate and House may formulate their own versions of proposed laws.
• Tax bills cannot start exclusively in the Senate.

Assessment and Collection

• The administrative branch of the government implements the tax law.
• Implementation involves assessing the tax liabilities of taxpayers and collecting taxes.
• This stage is known as incidence of taxation or the administrative act of taxation.

Situs of Taxation

• Situs refers to the place of taxation.
• Provides the tax jurisdiction that has the power to levy taxes on a tax object.
• Rules act as reference for measuring if a tax object falls inside or outside the taxing authority's jurisdiction.

Business Tax Situs

• Businesses are subject to tax where the business is conducted.
• If a taxpayer is involved in a car dealership abroad and a restaurant in the Philippines, the restaurant business is subject to Philippine business tax.
• The car dealing business is exempt, because it is conducted abroad.

Income Tax Situs on Services

• Service fees are subject to tax where rendered.
• A foreign corporation leasing residential space to a non-resident Filipino citizen abroad leads to rent income that will be exempt from Philippine taxation.
• Exemption exists as the leasing service is rendered abroad.

Income Tax Situs on Sale of Goods

• The gain on sale is subject to tax in the place of sale.
• If a non-resident OFW in China agrees to sell a diamond necklace to a Chinese friend, with delivery and payment in the Philippines, the sale is consummated in China.
• China is the situs of taxation.
• Gain on the sale of the necklace will be taxable abroad, but exempt in the Philippines.

Property Tax Situs

• Properties are taxable in their location.
• An overseas Filipino worker with a residential lot in the Philippines will still pay property tax, even without residing there.
• Tax is due the property's location.

Personal Tax Situs

• People are taxed where they live.
• Ahmed Lofti, a Sudanese medical student in the Philippines, will pay personal tax in the Philippines.
• Tax is due as he is residing in the Philippines, even if he is an alien.

Marshall Doctrine

• The power to tax involves the power to destroy.
• Taxation power can discourage or prohibit undesirable activities.
• Taxation is able to destroy, but does not include the power to destroy if it is used solely for revenue raising.

Holme's Doctrine

• Taxation power can be used to build or encourage beneficial activities with tax incentives.
• The Marshall and Holme's Doctrines both employed in practice.
• Imposition of excessive tax on cigarettes manifests the Marshall doctrine, while Ecozones with tax holidays, the Omnibus Investment Code, and BMBE law show the application of the Holme's doctrine.

Prospectivity of tax laws

• Tax laws usually operate prospectively.
• Ex post facto laws, or laws that retroact, are prohibited by the Constitution.
• Income tax laws may exceptionally operate retrospectively with Congress's intent and under justifiable conditions, allowing Congress to tax income earned during foreign occupation periods, even after the war.

Non compensation or set-off

• Taxes are not subject to automatic set-off or compensation.
• Taxpayers cannot delay tax payments while awaiting the resolution of a lawsuit involving claims against the government.
• Tax is not a debt, so it's not subject to set-off.
• Exceptions include cases where the taxpayer's claims have become due and demandable.
• Also when the government already recognized the claim and appropriated it for refund, obvious tax overpayments, and local taxes.

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 government's right to collect.

Imprescriptibility in Taxation

• Prescription is the lapsing of a right due to the passage of time.
• The government's right to collect taxes does not prescribe unless the law itself provides for such prescription.
• According to NIRC, tax prescribes if not collected within 5 years from the date of assessment, and in the absence of assessment, tax prescribes if not collected by judicial action within 3 years from the date the return is required to be filed.
• Taxes due from taxpayers who didn't file or filed fraudulent returns do not prescribe.

Doctrine of Estoppel

• Any misrepresentation made by one party toward another who relied therein in good faith will be held true and binding against that person who made the misrepresentation.
• The government is not subject to estoppel.
• Errors made by any government employee are not binding on the government.
• Neglect or omission of government officials entrusted with collecting taxes should not harm the people.

Judicial Non-interference

• Courts usually cannot issue injunctions against the government to collect tax.
• This would unnecessarily defer tax collection and is based on the Lifeblood Doctrine.

Strict Construction of Tax Laws

• Taxation is the general rule when the law clearly provides for taxation, except when a clear exemption exists.
• Taxation is the rule and exemption is the exception.
• When the language of the law is clear, there is no room for interpretation but only room for application.
• The doctrine of strict legal construction is observed when taxation laws are vague.
  • Vague exemption laws
    • 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.

Double Taxation

• When the same taxpayer is taxed twice by the same tax jurisdiction for the same thing.
• Elements of Double Taxation include a primary element and secondary elements.
  • Primary Element:
    • Same Object.
  • Secondary Elements:
    • Same type of tax.
    • Same purpose of tax.
    • Same taxing jurisdiction.
    • Same tax period.

Types of Double Taxation

• Direct Double Taxation.
• Indirect Double Taxation.

Direct Double Taxation

• This occurs when all elements of double taxation exist for both impositions.
• Examples:
  • 10% income tax on monthly sales and 2% income tax on annual sales (total of monthly sales).
  • 5% tax on bank reserve deficiency and another 1% penalty per day as a consequence of such reserve deficiency.

Indirect Double Taxation

• Occurs when at least one secondary element of double taxation is not common for both impositions.
• Examples:
  • National government levies business tax on sales while the local government levies business tax on the same sales.
  • National government collects income tax from a taxpayer's income while the local government collects community tax upon the same income.
  • The Philippine government taxes foreign income for domestic corporations and resident citizens while a foreign government also taxes the same income (international double taxation).

Indirect Double Taxation - Prohibited?

• Double taxation is not expressly prohibited.
• Indirect double taxation is prevalent in practice.
• Direct double taxation is discouraged because it is oppressive and counters the rule of equal protection and uniformity in the Constitution.

Minimizing Double Taxation

• The provision of tax exemption for one tax object while the other tax law exempts the same tax object.
• Allow foreign tax credit to give both tax laws to tax the object, but the tax payments made in the foreign tax law are deductible against the domestic tax law.
• Apply reciprocal tax treatment.
• Follow provisions in tax laws which impose reduced tax rates or even exemption if the country of the foreign taxpayer also gives similar treatment to Filipino non-residents.
• Countries enter into treaties or bilateral agreements and stipulate lower tax rates for residents in transactions taxable by both countries.

Escapes from Taxation

• These are the means for taxpayers to limit or evade the impact of taxation.
• There are two types of escapes from taxation.
  • Results to loss of government revenue.
  • Does not result to loss of government revenue.

Escapes from Taxation resulting in loss of government revenue

• The following result in loss of government revenue
• Tax Evasion (Tax Dodging):
  • Tactics which illegally reduce or avoid paying tax.
  • Examples:
    • Gross understatement of income.
    • Non-declaration of income.
    • Overstatement of expenses or tax credit.
    • Misrepresenting the nature or amount of a transaction to get lower taxes.
• Tax Avoidance (Tax Minimization)
  • Reduces or totally escapes taxes by legally permissible means.
  • Examples:
    • Selection and execution of transactions that expose the taxpayer to lower taxes.
    • Maximizing tax options, tax carry-overs or tax credits.
    • Careful tax planning.
• Tax Exemption (Tax Holiday)
  • Immunity, privilege or freedom from tax which those are subject to.
  • Tax exemptions get 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.

Escapes from Taxation not resulting in loss of government revenue

• The following does not result in loss of government revenue
• Shifting:
  • Transferring a tax burden to other taxpayers.
  • Occurs using:
    • Forward Shifting follows the standard distribution process (manufacturer to wholesalers to retailers to consumers), commonly used for essential commodities and services like food and fuel.
    • Backward Shifting commonly practices non-essential commodities where buyers have considerable market power.
    • Onward Shifting is a distribution channel that exhibits either forward or backward shifting.
• Capitalization:
  • Adjusting the value of an asset when there are changes in tax rates.
  • For instance, when mining output is subjected to higher taxes, the value of mining property decreases.
• Transformation:
  • The elimination of wastes or losses by the taxpayer to form savings, in order to compensate for a tax imposition.

Tax Amnesty

• A general pardon granted by the government for erring taxpayers to reform and start fresh.
• Includes absolute forgiveness, or waiver by the government to collect, and is retrospective.

Tax Condonation

• Forgiveness of tax obligation of taxpayers under certain justifiable grounds.
• Referred to as tax remission.
• Due to deprived government 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

• Scope:

  • Tax Amnesty covers civil and criminal liabilities.
  • Tax Condonation covers civil liabilities only.

• Application:

  • In Tax Amnesty is Retrospective.
  • Whereas, in Tax Condonation is Prospective.

• Requirement:

  • In Tax Amnesty payers conditionally pay the government a portion of the tax.
  • No Tax Condonation payment required.