Taxation Fundamentals

Taxation

• Inherent power of the sovereign exercised through the legislature.
• Used to impose burdens on subjects and objects within its jurisdiction.
• Aims to raise revenues for legitimate government objectives.
• State power: the state's inherent power to enforce proportional contributions for public purposes from its subjects
• Process: how the legislature collects taxes to enforce contribution for public purpose
• Cost distribution methodology: the state allocates expenses or burdens to those who benefit from its spending

Essential Characteristics of Taxation

• It's an enforced contribution
• Generally payable in money.
• Proportionate in character.
• Levied on persons, property, or the exercise of a right or privilege.
• Levied by the State with jurisdiction over the subject or object.
• Levied by the law-making body of the State.
• Levied for public purposes.

Purpose and Objective of Taxation

• Primary purpose is revenue to provide funds or property for the state to promote general welfare and protection.
• Taxation is also used for regulation or control.
  • Promotion of general welfare.
  • Regulation.
  • Reduction of social inequality.
  • Encouraging economic growth.
  • Protection.

Basis of Taxation

• The government provides public services to the people
• Taxes that the people give to the government
• Receipt of benefits from the government is conclusively presumed

Theories of Cost Allocation

• Benefit Received Theory: The more benefit one receives from the government, the more taxes they should pay
• Ability to Pay Theory: taxation considers the taxpayer's ability to pay.

Life Blood Theory

• Also known as the importance of Taxation.
• The government cannot exist or endure without it.
• Tax collection must occur without hindrance for the State to maintain orderly existence.
• The state needs means to pay expenses and can compel its citizens to contribute property within its limits.

Inherent Limitations of the Taxation Power

• Territoriality of taxation.
• International Comity.
• Public Purpose.
• Exemption of the Government.
• Non-delegation of the taxing power.

Territoriality or Situs of Taxation

• The power to tax is limited to persons, property, and businesses within the taxing power territory.
• Factors that determine the situs of taxation:
  • Kind or classification of the tax being levied.
  • Situs of the thing or property taxed.
  • Citizenship of the taxpayer.
  • Residence of the taxpayer.
  • Source of income tax.
  • Situs of excise, privilege, business, or occupation being taxed.

International Comity

• Principles that limit the authority of government to impose taxes on a sovereign state.
• Also limits taxes on its instrumentalities, property, and activities.
• International laws seek peace and harmony, so no state should assert superiority by imposing taxation.

Public Purpose

• Tax is intended for common goods.

Exemption of the Government

• Exemption from taxation for property and municipal subdivisions devoted to government use as a matter of public policy.
• The government is tax-exempt by default.
• Exception: it may tax itself if a law is enacted

Non-Delegation of the Taxing Power

• The power of taxation is exercised exclusively by the legislature.
• The power emanates from and by the people.
• Delegated authority can't be further delegated.
• Exceptions to non-delegability:
  • Authority of the president to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts.
  • Power of local government units to levy taxes, fees, and charges.
  • Delegation to administrative agencies for implementation and collection.

Stages of the Exercise of Taxation Power

• Levy or Imposition: enactment of a tax law by congress called impact of taxation also referred to as the legislative act
• Assessment and Collection: the implementation done by the administrative branch and is also referred to as incidence of taxation or the administrative act

Fundamental Doctrines in Taxation

• Marshall: the power to tax involves the power to destroy.
• Holme's: taxation power is not the power to destroy while the court sits.
• Tax laws are generally prospective in operation.
• Non-assignment of taxes.
• Imprectriptibility in Taxation: Under the NIRC, the tax prescribes if not collected within 5 years from the date of assessment or 3 years from the date the return is required in the absence of assessment
• Strict Construction of Tax Laws: Taxation is the rule, exemption is the exception
  • Vague Tax Laws:are construed against the government and in favor of the taxpayer
  • Vague Tax Exemption Laws: are construed against the taxpayer and in favor of the government

Basic Principles of a Sound Tax System

• Fiscal Adequacy: sufficiency to meet government expenditures and other public needs.
• Administrative Feasibility: capable of efficient and effective administration to encourage compliance.
• Theoretical Justice: Based on taxpayer's ability to pay; must be progressive.

Double Taxation

• Occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing.
• Elements:
  • Primary: Same object.
  • Secondary: Same type of tax, purpose, and jurisdiction in the same period.

Types of Double Taxation

• Direct: All elements of double taxation exist for both impositions.
• Indirect: At least one secondary element of double taxation is not common for both impositions.

How to Minimize Double Taxation

• Provision of tax exemption.
• Allowing foreign tax credit.
• Allowing reciprocal tax treatment.
• Entering into treaties or bilateral agreements.