Module 01 General Principles of Taxation PDF

INSTITUTO NG PANGANGALAKAL AT PAGTUTUOS Subject Code: ACT25 Subject Title: Income Taxation No. of Units: 3 MODULE 1 GENERAL PRINCIPLES OF TAX...

INSTITUTO NG PANGANGALAKAL AT PAGTUTUOS Subject Code: ACT25 Subject Title: Income Taxation No. of Units: 3 MODULE 1 GENERAL PRINCIPLES OF TAXATION I. PRE-TEST / ACTIVITY 1. The actual effort exerted by the government to effect the exaction of what is due from the taxpayer is known as ___. a. Assessment b. Levy c. Collection d. Payment 2. The nature of taxation is as follows, with one exception. Which is the exception? a. It is inherent and sovereignty b. It is essentially a legislative function c. It is subject to inherent and constitutional limitation. d. It is subject to the approval of the people II. CONTENT A. INHERENT POWERS OF THE STATE 1. Police Power. It is the power of the State for promoting public welfare by restraining and regulating the use of liberty and property. It may be exercise only by the government. The property taken in the exercise of this power is destroyed because it is noxious or intended for a noxious purpose. 2. Power of Taxation. It is the power by which the State raises revenue to defray the necessary expenses of the government. 3. Power of Eminent Domain. It is the power of the State to acquire private property for public purpose upon payment of just compensation. Similarities among the three (3) inherent powers of the state 1. They are inherent in the State. 2. They exist independently of the Constitution although the conditions for their exercise may be prescribed by the Constitution. 3. Ways by which the State Interfere with private rights and property. 4. Legislative in nature and character. 5. Presuppose an equivalent compensation received, directly or indirectly, by the persons affected. Distinctions among the three (3) inherent powers Taxation Police Power Eminent Domain Power to enforce Power to take private property Nature Power to make and implement laws contribution to raise for public use with just for the general welfare government funds compensation Government or political Government or political Maybe granted to public Exercising subdivisions subdivisions service companies or public Authority utilities Raise revenue in support Promotion of general welfare To facilitate the taking of Purpose of the government through regulation private property for public purpose Persons Upon the community or Upon the community or class of On an individual as the owner Affected class of individuals individuals of a particular property Plenary, comprehensive, Broader in application. General Merely a power to take private Scope supreme power to make and implement law property for public use Contribution becomes part No transfer of title. There may just There is a transfer of title to Effect of public fund be a restraint on the injurious use of property property Protection and general No direct or immediate benefit but Market value of the property Benefits benefits from the only such as may arise from the Received government maintenance of a healthy economic standard of society Amount of Limited to the cost regulation, No imposition, the owner is Imposition No ceiling except inherent issuance of license, or surveillance paid the fair market value of limitations his property 1 B. DEFINITION AND PURPOSE OF TAXATION Taxation is the power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of government. It is merely a way of apportioning the costs of government among those who, in some measure, are privileged to enjoy its benefits and must bear its burdens. (Aban, 2001) In other words, taxation is: 1. The inherent power of the sovereign exercised through legislature 2. To impose burdens 3. Upon subjects and objects 4. Within its jurisdiction 5. For the purpose of raising revenues 6. To carry out the legitimate objects of government Purpose of Taxation 1. Primary or revenue purpose The primary purpose of taxation on the part of the government is to provide funds or property with which to promote the general welfare and the protection of its citizens and to enable it to finance its multifarious activities. A government can run its administrative set up only through public funding which is collected in the form of tax. 2. Secondary or non-revenue purpose a. Promotion of general welfare - Taxation may be used as an implement of police power to promote the general welfare of the people. In the case of Lutz v. Araneta (G.R. No. L- 7859, December 22, 1955), the Supreme Court upheld the validity of the Sugar Adjustment Act, which imposed a tax on milled sugar since the purpose of the law was to strengthen an industry that is so undeniably vital to the economy the sugar industry. (Aban, 2001) b. Regulation of activities/industries - Taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened industry which is affected with public interest, like the oil industry. (Caltex Philippines, Inc. v. Commission on Audit, et al., GR. No. 92585, May 8, 1992) Taxation also has a regulatory purpose as in the case of taxes levied on excises or privileges like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets, cockpits, etc. (Aban, 2001) c. Reduction of social inequality - A progressive system of taxation prevents the undue concentration of wealth in the hands of few individuals. Progressivity is based on the principle that those who are able to pay more should shoulder the bigger portion of the tax burden. d. Encourage economic growth - The grant of incentives or exemptions encourage investment thereby stimulating economic activity. e. Protectionism - Protective tariffs and customs duties are imposed as taxes in order to protect important sectors of the economy or local industries, as in the case of foreign importations. C. THEORY AND BASIS OF TAXATION 1. Theory: Lifeblood Theory and/or Necessity Theory The power of taxation proceeds upon the theory that the existence of government is a necessity (necessity theory). As stated in the case of Phil. Guaranty Co., Inc. V. Commissioner [13 SCRA 775], is a power predicated upon necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the state's territory and facilities and protection which a government is supposed to provide. The power of taxation is essential because the government can neither exist nor endure without taxation. "Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need" (lifeblood doctrine). The government cannot continue to perform its basic functions of serving and protecting its people without means to pay its expenses. Consequently, the state has the right to compel all its citizens and property within its limits to contribute. 2. Basis of taxation: Benefits Received or Reciprocity Theory The basis is the reciprocal duties of protection and support between the state and its inhabitants. The state collects taxes from the subjects of taxation in order that it may be able to perform the functions of government. The citizens, on the other hand, pay taxes in order that they may be secured in the enjoyment of the benefits of organized society. This theory spawned the Doctrine of Symbiotic Relationship which means, taxes are what we pay for a civilized society (Commissioner v. Algue). Taxpayers receive benefits from taxes through the protection the state affords to them. For the protection they get arises their obligation to support the government through payment of taxes. (CIR v. Algue, Inc., G.R. No. L- 28896 February 17, 1988, 158 SCRA 9) D. SCOPE AND LIMITATIONS OF TAXATION 1. Scope of the power to tax In the case of Sison v. Ancheta (130 SCRA 654), the Supreme Court held that the power of taxation is the most absolute of all powers of the government. It has the broadest scope of all the powers of the government because in the absence of limitations, it is considered as comprehensive, unlimited, plenary and supreme. 2  a. Comprehensive - As it covers persons, businesses, activities, professions, rights and privileges. b. Unlimited - In the absence of limitations prescribed by law or the constitution, the power to tax is unlimited and comprehensive. Its force is so searching to the extent that the courts scarcely venture to declare that it is subject to restrictions. c. Plenary - As it is complete; the BIR may avail of certain remedies to ensure collection of taxes. d. Supreme - In so far as the selection of the subject of taxation. 2. Inherent and constitutional limitations on taxation Inherent limitations a. Public purpose The proceeds of tax must be used (a) for the support of the State; or (b) for some recognized objective of the government or to directly promote the welfare of the community. Tax is considered for public purpose if: 1) It is for the welfare of the nation and/or for greater portion of the population; 2) It affects the area as a community rather than as individuals; and 3) It is designed to support the services of the government for some of its recognized objects. b. Inherently legislative Only the legislature has the full discretion as to the persons, property, occupation or business to be axed provided these are all within the State's territorial jurisdiction. It can also fully determine the amount or rate of tax, the kind of tax to be imposed and method of collection. (1 Cooley 176-184) General rule: The power to tax is exclusively vested in the legislative body, being inherent in nature. Hence, it may not be delegated. (Delegata potestas non potest delegari) Non-delegable legislative powers 1) Selection of subject to be taxed 2) Determination of purposes for which taxes shall be levied 3) Fixing of the rate/amount of taxation 4) Situs of tax 5) Kind of tax Exemptions 1) Delegation to Local Government - Refers to the power of LGUS to create its own sources of revenue and to levy taxes, fees, and charges. (Art X, Sec. 5, 1987 Constitution) 2) Delegation to the President - The authority of the President to fix tariff rates, import or export quotas, tonnage and wharfage dues or other duties and imposts. (Art VI, Sec 28(2), 1987 Constitution) c. Territorial Taxation may be exercised only within the territorial jurisdiction, the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the "place of taxation" or "tax situs." General rule: The taxing power of a country is limited to persons and property within and subject to its jurisdiction. Exemptions 1) Where tax laws operate outside territorial jurisdiction – e.g., Taxation of resident citizens on their incomes derived abroad. 2) Where tax laws do not operate within the territorial jurisdiction of the State. a. When exempted by treaty obligations; or b. When exempted by international comity. d. International comity It refers to the respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a foreign state may not be the subject of taxation by another State. This is a limitation founded on reciprocity designed to maintain productive relationships among the various state. e. Exemption of government entities, agencies and instrumentalities General rule: The government is exempt from tax. Rationale: Otherwise, we would be "taking money from one pocket and putting it in another." (Board of Assessment Appeals of Laguna v. CTA, G.R. No. L-18125, May 31, 1963) Exemption: When it chooses to tax itself. Nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing government functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom. (MCIAA v. Marcos, G.R. No. 120082, September 11, 1996) Constitutional limitations Provisions directly affecting taxation a. Prohibition against imprisonment for non-payment of poll tax Basis: No person shall be imprisoned for debt or non-payment of a poll tax. (Art III, Sec. 20) 3  In other words, while a person may not be imprisoned for non-payment of a cedula or poll tax, he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides. (Dimaampao, 2015) b. Uniformity and equality of taxation Basis: The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. (Art VI, Sec. 28(1)) 1) Uniformity - It means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. A tax is considered uniform when it operates with the same force and effect in every place where the subject is found. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere, with all people at all times. 2) Equitability - Taxation is said to be equitable when its burden falls on those better able to pay. 3) Equality - It is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it. c. Grant by Congress of authority to the president to impose tariff rates Basis: The Congress may, by law, authorize the President to fix within specified limits and subject to such limitations and restrictions at it may impose, tariff rates, import and export quotas, tonnage and wharfage dues and other duties or imposts within the framework of the national development program of the Government. (Art. VI, Sec. 28 (2)) Flexible tariff clause This clause provides the authority given to the President to adjust tariff rates under Sec. 1608 of RA. 10863, known as Customs Modernization and Tariff Act (CMTA) of 2016. This authority, however, is subject to limitations and restrictions indicated within the law itself. d. Prohibition against taxation of religious, charitable entities, and educational entities Basis: Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non- profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. (Art. IV, Sec. 28 (3)) Coverage of tax exemption It covers real property taxes only. Accordingly, a conveyance of such exempt property can be subject to transfer taxes. Requisite to avail of this exemption Property must be "actually, directly, and exclusively used" by religious, charitable, and educational institutions. Test for the grant of this exemption Use of the property for such purposes, not the ownership thereof. e. Prohibition against taxation of non-stock, non-profit educational institutions Basis: All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. (Sec 4 (3) and (4), Art XIV) f. Majority vote of Congress for grant of tax exemption Basis: No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress. (Section 28 (4), Art. VI) The inherent power of the State to impose taxes carries with it the power to grant tax exemptions. Granting of exemptions Exemptions may be created (1) by the Constitution; or (2) by statute, subject to limitations as the Constitution may provide. Required vote for withdrawal of such grant of tax exemption A relative majority or plurality of votes is sufficient, that is, majority of a quorum. g. Prohibition on use of tax levied for special purpose Basis: All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the government. (Sec. 29(3), Art. VI) h. President's veto power on appropriation, revenue, tariff bills Basis: The President shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill but the veto shall not affect the item or items which he does not object. (Art. VI, Se 27(2)) The item or items vetoed shall be returned to the Lower House of Congress together with the objections of the President. If after consideration 2/3 of all the members of such House shall agree to pass the bill, it 4  shall be sent, together with the objection, to the other House by which it shall likewise be considered and if approved by 2/3 of all the members of that House, it shall become a law (Dimaampao, 2015) Note: The President can only veto particular item or items for ART Bills. The President cannot veto particular item or items with regard to non-ART Bills; he can only veto them as a whole. i. Non-impairment of jurisdiction of the Supreme Court Basis: The Supreme Court shall have the power to review, revise, reverse, modify, or affirm on appeal on certiorari as the laws or the Rules of Court may provide, final judgments or orders of lower courts in all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto. (Art VII, Sec. 5(2)(b)) j. Grant of power to the LGUs to create its own sources of revenue Basis: Each LGU shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. (Art. X, Sec. 5) k. Origin of Revenue and Tariff Bills Basis: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House Representatives, but the Senate may propose or concur with amendments. (Art VI, Sec. 24) l. No appropriation or use of public money for religious purposes Basis: No public money or property shall be appropriated, applied, paid, or employed directly or indirectly for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such, except when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution or government orphanage or leprosarium. (Art VI, Sec 29(2)) This is in consonance with the inviolable principle of separation of the Church and State. Provisions indirectly affecting taxation (Art. II, 1987 Constitution) a. Due process Basis: No person shall be deprived of life, liberty, or property without due process of law. (Art. III, Sec.1) Requirements of due process in taxation 1) Substantive due process a. Tax must be for public purpose; and b. It must be imposed within territorial jurisdiction. 2) Procedural due process No arbitrariness or oppression either in the assessment or collection. b. Equal protection Basis: No person shall be denied the equal protection of the laws. (Art. III, Sec. 1) Definition: It means that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed. (1 Cooley 824-825; Sison Jr. v. Ancheta, GR. No. 59431, July 25, 1984) c. Religious freedom Basis: No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. (Art l, Sec. 5) d. Non-impairment of obligations of contracts Basis: No law impairing the obligation of contracts shall be passed. (Art III, Sec. 10) Rationale for the non-impairment clause in relation to contractual tax exemption When the State grants an exemption on the basis of a contract, consideration is presumed to be paid to the State and the public is supposed to receive the whole equivalent thereof. Note: This applies only where one party is the government and the other party, a private person. E. STAGES OR ASPECTS OF TAXATION 1. Levy or imposition (tax legislation) This refers to the enactment of a law by Congress authorizing the imposition of tax. It further contemplates the determination of the subject of taxation, purpose for which the tax shall be levied, fixing the rate of taxation, and the rules of taxation in general. 2. Assessment and collection (tax administration) This is the act of administration and implementation of the tax law by executive through its administrative agencies. The act of assessing and collecting taxes is administrative in character, and therefore can be delegated. (Dimaampao, 2015) 5  Note: The term "assessment" which here means notice and demand for payment of a tax liability. 3. Payment The act of compliance by the taxpayer, including such options, schemes, or remedies as may be legally available. General rule: Tax shall be paid by the person subject thereto at the time the return is filed. (Sec. 56(A)(1), NIRC) Exception: When the tax due is in excess of ₱2,000, the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before October 15 following the close of the calendar year. (Sec. 56(4)(2), NIRC) Note: If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with delinquency penalties. 4. Refund The recovery of any alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively, or in any manner wrongfully collected. F. GENERAL CONCEPTS IN TAXATION 1. Prospectivity of tax laws General rule: Tax laws must only be imposed prospectively. Exception: If the law expressly provides for retroactive application. Retroactive application of revenue laws may be allowed if it will not amount to denial of due process. There is a violation of due process when the tax law imposes harsh and oppressive tax. (CIR V. Acosta, GR. No. 154068 August 3, 2007) 2. Imprescriptibility General rule: Taxes are imprescriptible by reason that it is the lifeblood of the government. Exception: Tax laws may provide for statute of limitations. In particular, the NIRC and LGC provide for the prescriptive periods for assessment and collection. Tax laws provide for statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment (CIR v. B.F. Goodrich Phils., G.R. No. 104171, February 24, 1999) NOTE: Although the NIRC provides for the limitation in the assessment and collection of taxes imposed, such prescriptive period will only be applicable to those taxes that were returnable. The prescriptive period shall start from the time the taxpayer files the tax return and declares his liability. (Collector of Internal Revenue v. Bisaya Land Transportation Co, Inc, GR Nos. L-12100 & L-11812, May 29, 1959) 3. Situs of taxation It is the place or authority that has the right to impose and collect taxes. (Commissioner of Internal Revenue v. Marubeni Corporation, GR. No. 137377, December 18, 2001) Factors that determine the situs of taxation a. Residence of the taxpayer b. Citizenship of the taxpayer c. Nature of the tax d. Subject matter of the tax e. Source of income Summary rules on determination of situs according to kinds of income Kinds of Income Tax Situs Service or compensation income Place of performance of service Rent Location of property (real or personal) Royalties Place of use of intangibles Merchandising Place of sale Gain on sale of personal property purchased and not produced Place of sale Gain on sale of real property Location of property Mining income Location of mines Farming income Place of farming activities Gain on sale of domestic stock Income within the Philippines Interest Residence of the debtor Manufacturing: 1. Produced in whole within and sold within Income purely within 2. Produced in whole without and sold without Income purely without 3. Produced within and sold without Income partly within and partly without 4. Produced without and sold within Income partly within and partly without Dividend income from: 1. Domestic Corporation Income within 6  2. Foreign Corporation – If for the 3-year period preceding the declaration of dividend, the ratio of such corporation’s Phil. Income to the world(total) was: -Less than 50% Entirely without -50% and above Proportionate* * Formula (Proportionate) Phil. Gross Income x Dividend received = Income within Entire Gross Income 4. Double taxation There is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform. (Villanueva v. City of Iloilo, 1968) Direct (strict sense) Double taxation in the objectionable or prohibited sense since it violates the equal protection clause of the Constitution. Elements of direct double taxation a. The same property is taxed twice when it should be taxed only once; and b. Both taxes are imposed: 1) on the same subject matter, 2) for the same purpose, 3) by the same taxing authority, 4) within the same jurisdiction, 5) during the same taxing period; and 6) the taxes must be of the same kind or character. (City of Manila v. Coca Cola Bottlers Philippines, GR. No. 181845, August 4, 2009) All the elements must be present in order to apply double taxation in its strict sense. Indirect (broad) sense It is a permissible double taxation. It is indirect when some elements of direct double taxation are absent. Modes of eliminating double taxation a. Provide for exemptions or allowance of deduction or tax credit for foreign taxes. b. Enter into tax treaties with other states (like the former Phil-Am Military Bases Agreements as to income tax). Tax treaties - the purpose is to reconcile the national fiscal legislation of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions (international double taxation). This is to encourage the free flow of goods and services and the movement of capital, technology, and persons between countries, conditions deemed vital in creating robust and dynamic economies. 5. Escape from taxation a. Shifting of tax burden Shifting is the transfer of the burden of tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else without violating the law. Examples of taxes when shifting may apply are VAT, percentage tax, excise tax on excisable articles, ad valorem tax that oil companies pay to BIR upon removal of petroleum products from its refinery. Ways of shifting the tax burden 1) Forward shifting - When the burden of tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer. 2) Backward shifting- When the burden is transferred from the consumer through the factors of distribution to the factors of production. 3) Onward shifting - When the tax is shifted two or more times either forward or backward. Meaning of impact and incidence of taxation Impact of Taxation Incidence of Taxation It refers to the statutory liability to pay the tax. It It is the economic cost of tax. It is also known falls on the person originally assessed with a as burden of taxation. particular tax. It is the imposition of tax It is the payment of tax It is on the seller upon whom the tax has been It is on the final consumer, the place at which imposed the tax comes to rest. b. Tax avoidance A scheme where the taxpayer uses legally permissible alternative method of assessing taxable property or income, in order to avoid or reduce tax liability. It is a tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arm's length. (CIR v. The Estate of Benigno Toda Jr, G.R. No. 30554, February 28, 2004) 7  c. Tax evasion A scheme where the taxpayer uses illegal or fraudulent means to defeat or lessen payment of a tax. It is a scheme used outside of those lawful means and when availed of. It usually subjects the taxpayer to further or additional civil or criminal liabilities. (CIR v. The Estate of Benigno Toda Jr, GR No. 30554, February 28, 2004) Tax avoidance distinguished from tax evasion Tax Avoidance Tax Evasion Other Name Tax Minimization Tax Dodging Validity Legal and not subject to criminal Illegal and subject to criminal penalty penalty Effect Minimization of taxes Almost always results in absence of tax payment d. Exemption It is the grant of immunity, express or implied, to particular persons or corporations, from a tax upon property or an excise tax which persons or corporations generally within the same taxing districts are obliged to pay. It is the legislature, unless limited by a provision of the state constitution, which has full power to exempt any person, corporation, or class of property from taxation; its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. (John Hay Peoples Alternative Coalition et al v. Lim et. al, G. R No. 119775, October 24, 2003) Nature of tax exemption 1) Personal in nature and covers only taxes for which the grantee is directly liable. Note: It cannot be transferred or assigned by the person to whom it is given without the consent of the State. 2) Strictly construed against the taxpayer. 3) Implies a waiver on the part of the government of its right to collect what otherwise would be due. 4) Exemptions are not presumed. The burden is upon the claimant to establish right to exemption beyond reasonable doubt. Kinds of tax exemption As to basis 1) Constitutional - immunities from taxation which originate from the Constitution 2) Statutory - Those which emanate from legislation 3) Contractual - Agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws 4) Implied - When particular persons, properties or excises are deemed exempt as they all outside the scope of the taxing provision. Note: The law looks with disfavor on tax exemptions and he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. (Western Minolco Corporation CIR GR Na L-61632, August 16 1983) 5) Treaty 6) Licensing ordinance As to extent 1) Total - Connotes absolute immunity 2) Partial - One where a collection of a part of the tax is dispensed with As to object 1) Personal - Granted directly in favor of certain persons. 2) Impersonal - Granted directly in favor of a certain class of property. e. Capitalization – is the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay. An example as the reduction made by the seller on the price of the real estate, anticipation of future tax to be shouldered by the future buyer. f. Transformation – the manufacturer absorbs the additional taxes imposed by the government without passing it to the buyers for fear of loss of his/its market. Instead, he/it increases quantity of production, thereby turning their units of production at a lower cost resulting to the transformation of the tax into a gain through the medium of production. 6. Prohibition on compensation and set-off Compensation or set-off shall take place when two persons, in their own right, are creditors and debtors of each other. (Article 1278, Civil Code) Rules governing compensation or set-off as applied in taxation No set-off is admissible against the demands for taxes levied for general or local governmental purposes. Taxes cannot be subject to compensation because the government and the taxpayer are not creditors and debtors of each 8  other. (Philex Mining Corporation v. CIR, 356 Phil. 189, 198; 294 SCRA 687, 695 (1998), cited in CIR v. Toledo Power Company, G.R. No. 196415. December 2, 2015) 7. Compromise A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to one already commenced. It implies the mutual agreement by the parties in regard to the thing or subject matter which is to be compromised. Compromises are generally allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering such compromise is duly authorized to do so. Persons allowed to enter into compromise of tax obligations a. BIR Commissioner, as expressly authorized by the NIRC, b. Collector of Customs, with respect to customs duties limited to cases where the legitimate authority is specifically granted such as in the remission of duties. (Sec. 709, TCC) c. Customs Commissioner, subject to the approval of the Secretary of Finance, in cases involving the imposition of fines, surcharges, and forfeitures. (Sec. 2316, TCC) 8. Tax amnesty A general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. (Asia International Auctioneers, Inc. v. CIR, G.R. No. 179115, September 26, 2012) A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. (Asia International Auctioneers, Inc. v. CIR, GR. No. 179115, September 26, 2012) Tax amnesty distinguished from tax exemption Tax Amnesty Tax Exemption Scope of Immunity from all criminal, civil and Immunity from civil liability only immunity administrative liabilities from non- payment of taxes Grantee General pardon given to all erring A freedom from a charge or burden to taxpayers which others are subjected How applied Applied retroactively Applied prospectively Presence of There is revenue loss since there was None, because there was no actual actual revenue actually taxes due, but collection was taxes due as the person or transaction is loss waived by the government protected by tax exemption III. ACTIVITY Multiple Choice Questions Encircle letter of the best answer 1. Incidence of taxation means _____. a. shifting of tax b. refund of tax c. payment of tax d. imposition of tax 2. Which of the following statements is incorrect? a. In the absence of limitations prescribed by Law or the constitution, the Power of tax is unlimited. b. Taxes are revenues raised in the exercise of the police power of the State. c. The three fundamental powers of the State are inherent in the State and may be exercised without the need of any constitutional grant. d. All of the above are correct 3. One of the following is not among the basic justification for taxation. a. Taxation is the lifeblood of the government b. Taxation is a voluntary contribution for the benefits received c. Taxation is based on necessity d. Taxation is the bread and butter of the government 4. Which of the following statements is correct? a. The purpose of taxation may also be “compensatory” meaning it may be used to make up for the benefit received. b. Taxes may be imposed for the equitable distribution of wealth and income in society. c. A and B d. Neither A nor B 5. Which of the following is not an inherent restriction on the exercise of taxation power? a. For public purposes b. International comity c. Rule of uniformity d. Territorial jurisdiction 9  6. Which of the following tax escape is permissible under the Tax Code? a. Tax evasion b. Overstatement of expenses c. Tax dodging d. Tax avoidance 7. On theoretical basis of taxation, which of the following statements is true? a. People pay taxes which their government uses to expand its powers and territorial domination. b. People demand from their government certain responsibilities and then provide this government with the means to carry them out. c. State needs taxation to exist, while people must support taxation because they need the presence of the state. d. B and C 8. A tax must be imposed for public purpose. Which of the following is not a public purpose? a. Improvement of a subdivision road b. National defense c. Public education d. Improvement of the sugar and coconut industries 9. Which of the following is not a determinant of the place of taxation? a. Amount of tax to be imposed b. Citizenship of the taxpayer c. Residence of the taxpayer d. Source of the income 10. Which of the following is to be regarded as tax minimization through legal means? a. Not declaring all taxable income b. Padding of expenses for deduction from income c. Opting to transfer the property through sale rather than through donation where tax liability would be higher d. All of the choices IV. REFERENCE Tabag, E., & Garcia, EJ. (2023). Income Taxation. 10