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CHAPTER 1 INTRODUCTION TO TAXATION TAXATION Gross concept State power – inherent power to 2. Horizontal equity – requires...
CHAPTER 1 INTRODUCTION TO TAXATION TAXATION Gross concept State power – inherent power to 2. Horizontal equity – requires enforce a proportional contribution consideration for the particular from its subjects for public purpose. circumstance of the taxpayer. Net concept Process – process of levying taxes by the legislature of the state to enforce THE LIFEBLOOD DOCTRINE proportional contributions from its Without taxes the government would subjects for public purpose. be paralyzed for lack of motive power to activate or operate it. Mode of government cost distribution – the state allocates its costs or burden Taxes are the lifeblood of the to its subjects who are benefited by its government, and their prompt and spending. certain availability are an imperious need. THE THEORY OF TAXATION A government cannot exist without a IMPLICATION OF THE LIFEBLOOD DOCTRINE OF system of funding. The government’s TAXATION necessity for funding is the theory of 1. Tax is imposed even if the absence of taxation. Constitutional grant. 2. Claims for tax exemption are construed THE BASIS OF TAXATION against taxpayers. The government provides benefits to 3. The government reserves the right to the people in the form of public choose objects of taxation. services, and the people provide the 4. The courts are not allowed to interfere funds that finance the government. with the collection of taxes. 5. In income taxation: Taxpayers cannot avoid payment of a. Income received in advance is taxes under the defense of absence of taxable upon receipt. benefit received. b. Deduction for capital expenditures and prepayments is not allowed as The direct receipt or actual availment of it effectively defers the collection of government services is not a income tax. precondition to taxation. c. A lower amount of deduction is preferred when a claimable expense THEORIES OF COST ALLOCATION is subject to limit. 1. Benefit received theory – the more d. A higher tax base is preferred when benefit he receives; the more taxes he the tax objects has multiple tax should pay. bases. 2. Ability to pay theory – based on their INHERENT POWERS OF THE STATE capacity to sacrifice for the support of 1. Taxation power – to enforce the government. proportional contribution from its subjects to sustain itself. ASPECTS OF ABILITY TO PAY THEORY 1. Vertical equity – directly proportional 2. Police power – to enact laws to protect to the level of his tax base. the well-being of the people. 7 CHAPTER 1 INTRODUCTION TO TAXATION 3. Eminent domain – to take private property for public use after paying just 1. Governments do not tax the income compensation. and properties of other governments. These rights, dubbed as “powers” are 2. Governments give primacy to their natural, inseparable and inherent to treaty obligations over their own every government. domestic tax laws. SIMILARITIES OF THE THREE POWERS OF THE 3. Public purpose STATE 1. Necessary attributes of sovereignty. 4. Exemption of the government – this 2. Inherent to the State. will not raise additional funds but will 3. Legislative in nature. only impute additional costs. 4. Ways in which the State interferes with private rights and properties. Income of the government from its 5. Exist independently of the Constitution/ properties and activities conducted for and are exercisable by the government profit including income from even without Constitutional grant. government owned and controlled 6. Presuppose an equivalent form of corporations is subject to tax. compensation received by the persons affected by the exercise of the power. 5. Non-delegation of the taxing power – 7. The exercise of these powers by the legislative taxing power is vested local government units may be limited exclusively in Congress. by the national legislature. What has been delegated cannot SCOPE OF THE TAXATION POWER further be delegated. Comprehensive Plenary EXCEPTIONS TO THE RULE OF NON- Unlimited DELEGATION Supreme 1. Under the Constitution, local government units are allowed to THE LIMITATIONS OF THE TAXATION POWER exercise the power to tax to enable A. INHERENT LIMITATIONS them to exercise their fiscal autonomy. 1. Territoriality of taxation – it cannot 2. Under the Tariff and Customs Code, the enforce upon subjects outside its President is empowered to fix the territorial jurisdiction. amount of tariffs to be flexible to trade conditions. Two-fold obligations of taxpayers 3. Other cases that require expedient and 1. Filing of returns and payments of effective administration and taxes implementation of assessment and 2. Withholding of taxes on expenses collection of taxes. and its remittance to the government. B. CONSTITUTIONAL LIMITATIONS 1. Due process of law 2. International comity – mutual courtesy or reciprocity between countries (no Aspects of Due Process country is powerful than the other). 7 CHAPTER 1 INTRODUCTION TO TAXATION 1. Substantive due process – tax must 5. Non-imprisonment for non-payment of be imposed only for public purpose, debt or poll tax collected only under authority of a valid law and only by the taxing Applies only when the debt is acquired power having jurisdiction. by the debtor in good faith. 2. Procedural due process – there Debt is acquired by the debtor in bad should be no arbitrariness in faith constitutes a estafa, a criminal assessment and collection of taxes, offense punishable by imprisonment. and the government shall observe the taxpayer’s right to notice and Applies only to the basis community hearing. tax. Under the NIRC, assessments shall be Non-payment of the additional made within three years from the due community tax is an act of tax evasion date of filing of the return or from the punishable by imprisonment. date of actual filing, whichever is later. 6. Non-impairment of obligation and Collection shall be made within five contract – it should no set aside its years from the date of assessment. obligations from contracts by the exercise of its taxation power. 2. Equal protection of the law – taxpayers should be treated equally both in terms 7. Free worship rule – does not extend to of rights conferred and obligations income from properties or activities of imposed (same circumstances). religious institutions that are proprietary or commercial in nature. Congress cannot exempt sellers of “balot” while subjecting sellers of 8. Exemption of religious or charitable “penoy” to tax since they are essentially entities, non-profit cemeteries, the same goods. churches and mosques, lands, buildings and improvements from 3. Uniformity rule in taxation – the rule of property taxes – actually, directly and taxation shall be uniform and equitable. exclusively used for charitable, religious, and educational purposes. Taxpayers under dissimilar circumstances should not be taxed the Doctrine of use – properties actually same. devoted for religious, charitable, or educational activities are exempt from Uniformity is relative equality. real property tax. 4. Progressive system of taxation – tax Doctrine of ownership – properties of rates increase as the tax base increases. religious, charitable, or educational entities whether or not used un their Aids in an equitable distribution of primary operations are exempt from wealth t society by taxing the rich more real property tax (not applied in PH). than the poor. 7 CHAPTER 1 INTRODUCTION TO TAXATION 9. Non-appropriation of public funds or as part of lawmaking be vested property for the benefit of any church, exclusively in Congress. sect or system of religion – intended to highlight the separation of religion and 14. Non-impairment of the jurisdiction of the State. the Supreme Court to review tax cases – notwithstanding the existence of the Compensation to priests, imams, or Court of Tax Appeals, which is a special religious ministers working with the court, all cases involving taxes can be military, penal institutions, orphanages raise to and be finally decided by the or leprosarium is not considered Supreme Court of the Philippines. religious appropriation. 15. The requirement that appropriations, 10. Exemption from taxes of the revenues revenue, or tariff bills shall originate and assets of non-profit, non-stock exclusively in the House of educational institutions including Representatives, but the Senate may grants, endowments, donations, or propose or concur with amendments contributions for educational purposes – applies only on revenues and assets 16. The delegation of taxing power to local that are actually, directly and exclusively government units shall exercise the devoted for educational purposes. power to create its own sources of revenue and shall have a just share in Exempts government educational the national taxes – this is a institutions from income tax and constitutional recognition of the local subjects’ private educational autonomy of local government and an institutions to a minimal 10% income express delegation of the taxing power. tax. STAGES OF HE EXERCISE OF TAXATION POWER 11. Concurrence of a majority of all 1. Levy or imposition – enactment of a tax members of Congress for the passage law by Congress and is called impact of of a law granting tax exemption – taxation or legislative act in taxation. requires the vote of the majority of all members of Congress. Congress is composed of two bodies: 1. The House of Representatives In the approval of an exemption law, an 2. The Senate absolute majority or the majority of all members of Congress is required. Tax bills cannot originate exclusively from the Senate. In the withdrawal of tax exemption, only a relative majority or quorum 2. Assessment and collection – referred to majority is required. as incidence of taxation or the administrative act of taxation. 12. Non-diversification of tax collections – it should never be diversified for private SITUS OF TAXATION – the place of the taxation. purposes. Situs rules serve as frames of reference in gauging whether the tax object is 13. Non-delegation of the power of within or outside the tax jurisdiction of taxation – requires that taxation power the taxing authority. 7 CHAPTER 1 INTRODUCTION TO TAXATION Examples: 6. Imprescriptibility in taxation – 1. Business tax situs – where the business prescription is the lapsing of a right due is conducted. to the passage of time. 2. Income tax situs on services – where Tax prescribes if not collected they are rendered. within 5 years from the date of its 3. Income tax situs on sale of goods – assessment. place of sale. In the absence of assessment, tax 4. Property tax situs – location. prescribes if not collected by 5. Personal tax situs – place of residence. judicial action within 3 years from the date the return is required to be OTHER FUNDAMENTAL DOCTRINES IN filed. TAXATION Taxes due from taxpayers who did 1. Marshall Doctrine – “the power to tax not file a return or those who filed involves the power to destroy”. fraudulent returns do not prescribe. Does not include the power to destroy if it is used solely for the 7. Doctrine of estoppel – any purpose of raising revenue. misrepresentation made by one party Imposition of excessive tax on toward another who relied therein in cigarettes. good faith will be held true and binding against that person who made the 2. Holme’s Doctrine – “taxation power is misrepresentation. not the power to destroy while the The error of any government court sits”. employee does not bind the Include the creation of Ecozones government. with tax holidays and provision of incentives. 8. Judicial Non-interference – courts are not allowed to issue injunction against 3. Prospectivity of tax laws – tax laws are the government’s pursuit to collect tax generally prospective in operation. as this would unnecessarily defer tax an ex post facto law or a law that collection (Lifeblood Doctrine). retroacts is prohibited by the Constitution. 9. Strict Construction of Tax Laws – “taxation is the rule; exemption is the 4. Non-compensation or set-off – tax is exemption” not a debt; hence, it is not subject to There is no room for interpretation, set-off. there is only room for application. Exceptions: When taxation laws are vague, the a. Taxpayer’s claim has already doctrine of strict legal construction become due and demandable. is observed. b. Cases of obvious overpayment of taxes. Vague tax laws – construed against c. Local taxes the government and in favor of the taxpayers. 5. Non-assignment of taxes – tax o It means no tax law. obligations cannot be transferred to o Obligation arising from law is another entity by contract. not presumed. 7 CHAPTER 1 INTRODUCTION TO TAXATION deductible against the tax due of the Vague exemption laws – construed domestic tax law. against the taxpayer and in favor of the government. c. Allowing reciprocal tax treatment – o It means no exemption law. provisions in tax laws imposing a o Construed strictly against the reduced tax rates or even exemption if taxpayer in accordance with the the country of the foreign taxpayer also lifeblood doctrine. give the same treatment to Filipino non- residents therein. Tax exemption cannot arise from vague inference. d. Entering into treaties or bilateral agreements – countries may stipulate DOUBLE TAXATION – occurs when the same for a lower tax rates for their residents if taxpayer is taxed twice by the same tax they engage in transactions that are jurisdiction for the same thing. taxable by both of them. ELEMENTS OF DOUBLE TAXATION ESCAPES FROM TAXATION – available to the 1. Primary elements: taxpayer to limit or even avoid the impact of a. same object taxation. 2. Secondary elements: a. Same type of tax Categories of Escapes from Taxation b. Same purpose of tax A. Those that result to loss of government c. Same taxing jurisdiction revenue d. Same tax period 1. Tax evasion – also known as tax dodging, refers to any act or trick that TYPES OF DOUBLE TAXATION tends to illegally reduce or avoid the 1. Direct double taxation – all element of payment of tax. double taxation exists for both impositions. 2. Tax avoidance – also known as tax Discouraged because it is minimization, refers to any act or trick oppressive and burdensome to that reduces or totally escapes taxes by taxpayers. any legally permissible means. 2. Indirect double taxation – at least one 3. Tax exemption – also known as tax of the secondary elements of double holiday, refers to the immunity, privilege taxation is not common for both or freedom from being subject to a tax impositions. which others are subject to. Prevalent in practice. All forms of tax exemptions can be revoked by Congress except those How can double taxation be minimized? granted by the Constitution and a. Provision of tax exemption – only one those granted under contracts. tax law is allowed to apply to the tax object while other tax law exempts the B. Those that do not result to loss of same tax object. government revenue 1. Shifting – transferring tax burden to b. Allowing foreign tax credit – tax other taxpayers. payments in the foreign tax law is 7 CHAPTER 1 INTRODUCTION TO TAXATION Common with business taxes where TAX CONDONATION – forgiveness of the tax taxes imposed on business revenue obligation of a certain taxpayer under certain can be shifted or passed-on to justifiable grounds. customers. Also referred to as tax remission. Construed against the taxpayer and in a. Forward – normal flow of favor of the government. distribution (manufacturer to Covers civil liabilities of the taxpayer. customers). Applies prospectively to any unpaid common with essential balance of the tax; hence, the porting commodities and services such already paid by the taxpayer will not be as foods and fuel. refunded. Requires no payment. b. Backward – reverse of forward shifting. Common with non-essential commodities where buyers have considerable market power and commodities with numerous substitute products. c. Onward – any tax shifting in the distribution channel that exhibits forward or backward shifting. 2. Capitalization – adjustment of the value of an asset cause by changes in tax rates. This is a form of backward shifting of tax. 3. Transformation – elimination of wastes or losses by the taxpayer to form savings to compensate for the tax imposition or increase in taxes. TAX AMNESTY – general pardon granted by the government for erring taxpayer to give them a chance to reform and enable them to have a fresh start to be part of a society with a clean slate. Absolute forgiveness or waiver by the government on its right to collect and is retrospective in application. Covers both civil and criminal liabilities. Conditional upon the taxpayer paying the government of a portion of the tax. 7
