Tax - General Information

Tax - General Information

• An enforced proportionate contribution is imposed on persons, properties, businesses, rights, interests, privileges, transactions, and acts within the taxing authority's jurisdiction.
• Exercise is by the legislature for a public purpose and generally payable in money.
• It is a compulsory contribution to state revenue, levied by the government on workers' income and business profits.
• It is also added to the cost of some goods, services, and transactions.
• Tax is an enforced proportional contribution from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the government support and all public needs.
• The sum of money the government demands for its support or for specific facilities or services are levied upon incomes, property, sales, etc.
• Involuntary fees levied on corporations or individuals are enforced by a level of government to finance government activities.
• It is a contribution for the support of a government required of persons, groups, or businesses within the domain of that government.

Taxation as a Power

• The power by which the sovereign raises revenue to defray the expenses of government.
• The inherent power of the state to demand enforced contribution for a public purpose to support the government.
• It is the destructive power that interferes with people's personal and property rights and takes a portion of their property for government support.

Taxation as a Means or Process

• The process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses.
• It is the means by which governments finance their expenditure by imposing charges on citizens and corporate entities.
• It is the process or means by which the sovereign through its law-making body, imposes burdens upon subjects or objects within its jurisdiction to raise revenues to carry out the legitimate objects of the government.

Taxation as a Price

• It is the indispensable and inevitable price for civilized society.

Taxation as an Act

• The legislative act of levying or imposing a tax to raise income for the government to defray its necessary expenses.
• The act refers to a taxing authority actually levying tax.
• The practice is on collecting taxes (money) from citizens based on their earnings and property.

Taxation as a Mode of Cost Allocation

• Taxation is a way of apportioning the cost of government among those who, to some extent, are privileged to enjoy its benefits and must bear its burden.

Elements of a Valid Tax (LP-PLUG)

• It must not violate the constitutional, inherent, or contractual limitation of the power of taxation.
• It must be for a public purpose.
• It must be proportionate in character.
• It must be levied by the taxing power (legislature) having jurisdiction over the taxation object.
• It must be uniform and equitable, not unjust, excessive, oppressive, confiscatory, or discriminatory.
• It is generally payable in money.

Purposes/Objectives of Taxation

• Primary (Revenue or Fiscal) - to raise revenue to promote the general welfare and protect its citizens.
• Secondary include:
  • Regulatory - providing means for the rehabilitation and stabilization of a threatened industry affected with public interest as to be within the State's police power.
  • Compensatory - providing compensation to an activity.
  • Promotion of general welfare - as an implement of police power.
  • Reduction of social inequality - progressive taxation prevents the undue concentration of wealth.
  • Encourage economic growth by granting incentives and exemptions
  • Protect local industries from foreign competition.

Theory or Underlying Basis of Taxation/Principles Behind the Power of Taxation

• Lifeblood Theory:

  • The government's existence is a necessity and cannot endure without means to pay its expenses.
  • The government has the right to compel all citizens and property to contribute in taxes.
  • Taxes are indispensable to the existence of the State to support its operations.
  • Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed.
  • The principle of necessity/theory of taxation exists.

• Benefit-Received Theory or Benefits-Protection Theory or Reciprocity Theory:

  • The government and the people have reciprocal and mutual duties of support and protection.
  • This is the basis of Taxation
  • The Doctrine of Symbiotic Relationship states that every person able must contribute to the running of the government, which should respond with tangible and non-tangible benefits improving lives.

Inherent Powers of the Government

• Power of Taxation: The power to take property for the support of the government and for public purpose.
• Police Power: Powers to enact laws to promote the general welfare of the people.
  • It is wider in application and is the general power to make laws.
• Power of Eminent Domain: The power to take private property for public use upon payment of just compensation (Power to Expropriate)
  • Elements include:
    • Permanent taking of private property (not temporary).
    • Payment of Just Compensations
    • Public use.

Distinctions of the Inherent Powers of the State

Similarities of the Three Powers

• They are inherent powers of the State.
• They are legislative.
• Attributes of sovereignty.
• They means by which the State interferes with private rights of persons.
• Taxation power can be used as an implement of Police power.
• Police power can be used to raise revenue for the government (ex: license fee)
• If revenue generation is primary and regulation is secondary or incidental, the imposition is a tax. The other way = no tax.

Nature or Characteristics of the Power of Taxation

• It is an attribute of sovereignty.
• Legislative in character.
• Subject to international comity or treaty.
• Subject to constitutional and inherent limitations.
• Generally payable in money.
• Territorial.
• For public purposes.
• Scope of the Power of Taxation
  • Comprehensive - tax covers nearly everything: persons, businesses, activities, etc.
  • Unlimited - without limitations.
  • Plenary - complete.
  • Supreme - refers to the subject/object of taxation selection.

Discretion of the Taxing Power (Legislative Branch of Government)

• Determine the:
  • Nature or kind of tax.
  • Object to be taxed.
  • Purpose of taxation.
  • Extent (amount or tax rate).
  • Situs or place of the imposition.
  • Coverage of those to be taxed.
  • Apportionment of the tax.
  • Method of collection.
• Grant tax exemptions or condonations or amnesty.
• Administrative issues or remedies are not part of legislative discretion.

Legislation of Tax Laws

• A tax bill (proposal) is introduced by a House of Representatives member.

How a Tax Bill becomes a law

• Process includes:
  • A number is assigned to it
  • Title and relevant info is read.
  • Referral to the appropriate committee
  • Committee schedules hearings.
  • Members vote the Bill, and if passed submitted to Plenary for Debates.
  • Committee Report is calendared.
  • 2nd Reading - debates by the members of the contents of the bills.
  • Voting, as a whole, will be made after deliberations through ayes and nays (viva voce) or nominal voting
  • 3rd reading
  • Transmission to the Senate for concurrence.
  • Senate approval is needed, else a Bicameral Conference Committee is formed to resolve differences.
• After ratification, sent to the President for signature.
• President's action:
  • Signs to finalize the bill.
  • After 30 days, and there is no signature the bill will lapse to law.
  • Vetoes the bill for resubmission with changes.
• The Bill in the HOR is prefixed by a HB No. while SB No. (Senate Bill) in the Senate.
• Congress may override the veto by 2/3 vote of both "Houses" voting separately.
• Laws generally take effect 15 days after publication in the Official Gazette or in at least two (2) national newspapers of general circulation.

Aspects of Taxation (Phases/Stages/Process)

• Levy or Imposition - legislative - enactment of law imposing tax.
• Assessment of tax - administrative (BIR).
• Collection of the tax - administrative (BIR).
• Assessment and collection refer to tax administration.
• Payment refers to the act of compliance by the taxpayer.

Principles of a Sound Tax System (FAT)

• Fiscal Adequacy: revenue sources meet public demand.
• Administrative Feasibility: Tax laws lead to just and effective administration, Examples:
  • Establishment of Revenue District Offices.
  • Introducing electronic Filing (Electronic Filing and Payment System (EFPS) or e-BIR Forms Package).
    • Accreditation of Authorized Agent Banks (AABs).
    • Substituted Filing of Qualified Compensation Income Earners.
    • Payment of tax thru credit/debit/prepaid cards/G-Cash.
    • Electronic Tax Payment System (eTPS)/Land Bank Remittance System (LBRS).
    • Introduction of the e-AFS, an online system of the BIR
    • Introduction of NewBizReg
    • E-ONETT System
    • Online Registration and Update System (ORUS) Theoretical Justice
• Considers taxpayers ability to pay; manifested through equity in taxation or progressive tax scheme.

Limitations of Power of Taxation

Inherent Limitations include:

• Territoriality of taxation.
• International comity or treaty.
• Exemption of the government from taxation.
• Taxes for public purpose.
• Non-delegation of the power of taxation.

Exceptions for power delegation

• The President - Flexibility Clause of the Tariff and Customs Code through administrative regulation.
• Local government units - Local Government Code (R.A.7160).
• President to grant tax incentives in the interest of national economic development.

Constitutional Limitations include:

• Due process of law - notice and hearing.
• Equal protection of the law -equality among equals.
• Uniformity in taxation - taxation of same class.
• Progressive system of taxation use of graduated tax table.
• Non-imprisonment for non-payment of debt or poll tax.
• Non-impairment of obligation and contract.
• Freedom to exercise religion.
• Freedom of the press.
• Non-appropriation of public funds or property for the benefit of any church, sect or system of religion.
• Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosque from property taxes.
• Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions for educational purposes.
• Concurrence of a majority of all members of Congress separately vote for tax exemption.
• Non-impairment jurisdiction of Supreme Court to review tax cases
• Appropriations originate in HOR, but it can be amended by senate.
• Revenue share allocated to each local govt entity, exercising power to their own sources of revenue.

Situs of Taxation

• Place of taxation, jurisdiction, or source of income.

Factors that determine the situs of taxation

• Nature, kind, and classification of the tax.
• Subject matter of the tax.
• Citizenship of the taxpayer.
• Residence of the taxpayer.
• Sources of income.
• The place for taxed exercise, business or occupation.
• Place of income producing activity.
• Activity

Criteria in Imposing Tax Under Philippine Setting

• Citizenship Principle (Nationality Theory) considers citizenship of taxpayer
• Residence Principle (Domiciliary Theory) considers residence of taxpayer
• Source Principle (Source of the Income) considers source of the income.

Double Taxation

• Taxing the same object or subject twice within the territorial jurisdiction, for the same period, involving the same kind of tax by the same taxing authority.
• Kinds of double taxation:
  • Direct Double Taxation/Direct Duplicate/Taxation in Strict Sense
    • Same object/subject (taxpayer).
    • Same type of tax.
    • Same purpose.
    • Same taxing authority.
    • Same period.
• Indirect Double Taxation/Indirect Duplicate/Taxation in Broad Sense
• International Double Taxation - double taxation caused by two different taxing authorities, one domestic and one foreign.

Elimination of Double Taxation

• Apply right to tax within contracting state.
• Process: Exemption principle
• Credit principle. -Other ways to provide relief: - Tax sparing - Matching credit - Application of the most favored nation clause.

Forms of Escape from Taxation (ESCATE)

• Evasion -(tax dodging) Scheme used to evade the payment of taxes, it is illegal. Examples:
  • Non-registration.
  • Non-issuance of receipts.
  • Non-filing of returns.
  • Understatement of sales or income.
  • non-declaration of income.
  • Refusal to pay the tax.
• Shifting: Transferring tax burden from statutory taxpayer.
• Capitalization: Selling process or exchange of land assets during their lifetime.
• Avoidance: Tax minimization- tax saving within legal means.
• Transformation - Manufacturer absorbs additional taxes without passing it.
• Exemption an immunity, privilege or freedom from payment of tax by virtue of law.

Distinction Between Tax Amnesty and Tax Condonation

• Tax Amnesty offers payment of a defined amount in exchange for forgiveness of a tax liability.
• Tax Condonation is remitting or desisting or refrain from exacting or imposing a tax. Condonation is in the nature of an exemption.

Statutory Construction and Interpretation of Tax Laws

• Clear tax laws equals no interpretation.

• Vague tax laws= strictly against taxing and liberally for authority the taxpayer.

• Exemptions can be interpreted against the taxpayer and liberally for the taxing authority

• Regulations followed unless the law states otherwise e.g. Tax Amnesty Law, CREATE law.

• Compensation and set-off followed with the same tax.

• Statutes not binding on successors.

• Special laws prevail over general laws e.g. Bayanihan Laws over Tax Code.

Income Tax Systems

• Global Tax System - income and deductions are in the tax return. different income types subject to different tax rates may be on gross or net income
• Schedular Tax System - different income types subject to different tax rates may be on gross or net income
• Semi-Schedular or Semi-Global Tax System - taxed at various fixed percentages: Global System; ordinary. Different returns are filed.

Tax Law

• Any law that provides for the assessment and collection of taxes for the government and other public purposes.

Sources of Tax Laws include:

Constitution of the Philippines

• RAs; PD’s
• EO Batas Pambansa Tax Treaties and conventions (for countries) Revenue Regulations (issued from the Department of Finance) Supreme Court (for decisions) Local Ordinances

Marshall vs Holmes

• Marshall Doctrine: "The power to tax destroy".
• Holmes Doctrine: The "power to tax build”.

Classification of Taxes

As to Authority (Who Imposes the Tax)

• National Tax (DIVE-PESO):
  • Donor's Tax
  • Income Taxes
  • Value-Added Tax
  • Estate Tax
  • Percentage Taxes
  • Excise Tax
  • Documentary Stamp Tax
  • Other taxes as may be imposed
• Local Tax: Imposed by local governments
  • Real property tax
  • Professional Tax
  • Business taxes, fees, and charges
  • Community tax

As to Purpose (P-FRS)

• Fiscal is a general tax.
• Regulatory exercises police powers or licenses.
• Special or Sumptuary used for social or economic ends e.g Special Education Fund.

As to Subject Matter or Object (SM-PPPE)

• Personal, Poll, or Capitation: a set amount for the specific territory e.g community tax.
• Property: A tax on property e.g real property.
• Excise: tax on products/Articles e.g cigarettes.
• Privilege: Tax for using the privilege.

As to Who bears the Burden of Paying the Tax/Incidence (I-DI)

• Direct - the taxpayer of the tax is directly liable.
• Indirect - one may shift to another person.

As to Determination of Amount (A-SA)

• Specific tax is a set amount for head or number e.g excise tax on distilled spirits.
• Ad Valorem: fix proportion of a value e.g income tax.

As to Rate (MR-PP)

Proportional/Flat Tax % based on value income