General Principles Of Taxation PDF

**General Principles of Taxation** **Inherent Limitation of Taxation:** - Public Purpose - Inherently Legislative - Territorial - International Comity - Exemption of Government Entities, Agencies, and Instrumentalities **Public Purpose:** The proceeds of the tax must be used: -...

**General Principles of Taxation** **Inherent Limitation of Taxation:** - Public Purpose - Inherently Legislative - Territorial - International Comity - Exemption of Government Entities, Agencies, and Instrumentalities **Public Purpose:** The proceeds of the tax must be used: - for the **support of the State**; or - for some recognized objects of government or directly to promote the welfare of the community. **Test:** Whether the statute is designed to promote the public interest, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public. - The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. - Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and public convenience. - It is the **[purpose]** which determines the public character of the tax law, **[not the number of persons benefited.]** - **Duty Test** -- Whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a government to provide. **In Simple Terms:** Before spending public funds, the government should ask: \"Is this something we, as a government, are supposed to take care of?\" - **Promotion of General Welfare Test** -- Whether the proceeds of the tax will directly promote the welfare of the community in equal measure. **In Simple Terms:** The government should check if the tax revenue will directly help everyone or at least provide benefits that reach a wide part of the community. - **Character of the Direct Object of the Expenditure** -- It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion. **In Simple Terms:** 1. The reason for spending the tax money matters more than how big or wide the benefit might be. 2. Even if the benefit to the community is small or not immediately clear, the spending must have a valid public purpose to justify the tax. **Inherently Legislative:** - **General Rule:** ***Delegata potestas non potest delegari***. (No delegated powers can be further delegated.) - The **power to tax** is exclusively vested in **the legislative body** and it may not be re-delegated. - Stated in another way, taxation may exceptionally be delegated, subject to such well-settled limitations as: 1. The delegation shall not contravene any constitutional provision or the inherent limitations of taxation 2. The delegation is effected either by: a. the Constitution; or b. by validly enacted legislative measures or statute; and 3. The delegated levy power, except when the delegation is by an express provision of the Constitution itself, should only be in favor of the local legislative body of the local or municipal government concerned. - For a valid delegation of power, it is essential that the law delegating the power must be: 1. complete in itself, that is, it must set forth the policy to be executed by the delegate and, 2. it must fix a standard --- limits of which are sufficiently determinate or determinable --- to which the delegate must conform. **Legislature has the power to determine the:** a. Nature (kind), b. Object (purpose), c. Extent (rate), d. Coverage (subjects) and e. Situs (place) of taxation. **Exceptions:** a. **Delegation to local governments** - This exception is in line with the general principle that the power to create municipal corporations for purposes of local selfgovernment carries with it, by necessary implication, the power to confer the power to tax on such local governments. - Under the new Constitution, however, LGUs are now expressly given the power to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may provide which must be consistent with the basic policy of local autonomy. b. **Delegation to the President** - The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as 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. - Emergency Powers - To enter into Executive agreements; and - To ratify treaties which grant tax exemption subject to Senate concurrence c. **Delegation to administrative agencies** - Limited to the administrative implementation that calls for some degree of discretionary powers under sufficient standards expressed by law or implied from the policy and purposes of the Act. - There are certain aspects of the taxing process that are not legislative and they may, therefore, be vested in an administrative body. The powers which are not legislative include: 1. The power to value property for purposes of taxation pursuant to fixed rules; 2. The power to assess and collect the taxes; and 3. The power to perform any of the innumerable details of computation, appraisement, and adjustment, and the delegation of such details. - **The powers which cannot be delegated include:** a. The determination of the subjects to be taxed; b. The purpose of the tax, the amount or rate of the tax; c. The manner, means, and agencies of collection; and d. The prescribing of the necessary rules with respect thereto. **Territorial:** - **Rule:** A state **may not tax property lying outside its borders** or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercise and enjoyed. - **Reasons:** a. Tax laws do not operate beyond a country's territorial limits. b. Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be a compensation. - **Note:** Where privity of relationship exists. It does not mean, however, that a person outside of state is no longer subject to its taxing powers. The fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. - A person may be taxed where there is between him and the taxing state, a privity of the relationship justifying the levy. Thus, the citizen's income may be taxed even if he resides abroad as the personal (as distinguished from territorial) jurisdiction of his government over him remains. In this case, the basis of the power to tax is not dependent on the source of the income nor upon the location of the property nor upon the residence of the taxpayer but upon his relation as a citizen to the state. - **As such a citizen, he is entitled, wherever he may be, inside or outside of his country, to the protection of his government.** **International Comity:** - **Comity --** respect accorded by nations to each other because they are sovereign equals. Thus, **the property or income of a foreign state or government may not be the subject of taxation by another state.** - **Reasons** - a. In par in parem non habet imperium. As between equals there is no sovereign (Doctrine of Sovereign Equality among states under international law). One state cannot exercise its sovereign powers over another. All states, including the smallest and least influential, are also entitled to their dignity and the protection of their honor and reputation. **Exemption of Government Entities, Agencies, and Instrumentalities** **If the taxing authority is the National Government:** - **General Rule:** **Agencies and instrumentalities of the government are exempt from tax.** Their exemption rests on the **State\'s sovereign immunity from taxation**. The **State cannot be taxed** **without its consent and such consent**, being in derogation of its sovereignty, is to be strictly construed. - **Note:** Unless otherwise provided by law, **the exemption applies only to government entities** through which the government immediately and directly exercises its sovereign powers. With respect to **government-owned or controlled corporations performing proprietary** (not governmental) functions, they **are generally subject to tax unless exempted** **If the taxing authority is a local government unit:** - RA 7160 expressly prohibits LGUs from levying tax on the National Government, its agencies and instrumentalities and other LGUs. a. To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over for itself. b. This immunity also rests upon fundamental principles of government, being necessary in order that the functions of government shall not be unduly impeded. c. The practical effect of granting tax exemptions to government agencies is that it **reduces the financial burden** on the government, allowing it to keep more resources to support its operations. Because of this, when laws provide exemptions to government entities, they are often **interpreted in a way that favors** keeping these agencies **free from tax liability**. - **Exception:** Government-owned or controlled corporations (GOCCs) perform proprietary functions hence, they are subject to taxation. **Exception to the Exception:** **The following GOCCs are considered tax exempt**: 1. Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3. Philippine Health Insurance Corporation (PHIC) 4. Philippine Charity Sweepstakes Office (PCSO) \[NIRC as amended, Sec 27(c)\] These GOCCs are **tax-exempt** because they serve important public functions like social security, health insurance, and charity. Their main purpose is not to make a profit, but to benefit the public, which is why they are granted tax exemptions under specific provisions of the law. **Constitutional Limitations** **Provision directly affecting taxation:** - Prohibition against imprisonment for non-payment of poll tax; Uniformity and equality of taxation; - Grant by Congress of authority to the President to impose tariff rates; - Prohibition against taxation of religious, charitable entities, and educational entities; - Prohibition against taxation of non-stock, non-profit educational institutions; - Majority vote of Congress for grant of tax exemption; - Prohibition on use of tax levied for special purpose; - President's veto power on appropriation, revenue, tariff bills; - Non-impairment of jurisdiction of the Supreme Court; - Grant of power to the local government units to create its own sources of revenue; - Flexible tariff clause; - Exemption from real property taxes; and - No appropriation or use of public money for religious purposes. **Provision indirectly affecting taxation:** - Due process - Equal protection; - Religious freedom; - Non-impairment of obligations of contracts; - Freedom of speech and expression; - Presidential power to grant reprieves, communications, and pardons, and remit fines and forfeitures after conviction by final judgement; and - No taking of private property for public use without just compensation **Due Process:** - **Sec. 1, Art. III, 1987 Constitution. -** No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. - **Substantive Due Process** -- An act is done under the authority of a valid law or the Constitution itself. - **Procedural Due Process** -- An act is done after compliance with fair and reasonable methods or procedure prescribed by law. **Due Process in Taxation requirements:** - Public purpose - Imposed within taxing authority's territorial jurisdiction - Assessment or collection is **not arbitrary or oppressive** *If a tax law **is so high or unfairly applied** that it takes all of someone\'s property, leaving them with nothing, that could be **considered a confiscation and would likely violate the Due Process Clause** because **the law would be seen as arbitrary and lacking a valid constitutional purpose.*** **Due process is usually violated where:** - The tax imposed is for private, as distinguished from, public purposes - A tax is imposed on property outside the State, i.e., extraterritorial taxation; or - Arbitrary or oppressive methods are used in assessing and collecting taxes. *But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such taxpayer.* : A **tax may harm an individual** (e.g., by imposing a financial burden), but that alone **does not** make the **tax unconstitutional.** :Even if the tax is detrimental to an individual taxpayer, **due process** is not violated unless the tax is **arbitrary, unjust**, or **unconstitutional** in its design or application. - Due process does not require that the property subject to the tax or the amount to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law. : In short, **due process** ensures fairness in the **tax law** itself, but does not demand extensive individual hearings for each tax decision. **Instances of violations of the due process clause:** - If the tax **amounts to confiscation of property**; - If the **subject of confiscation is outside the jurisdiction** of the taxing authority; - If the **tax is imposed for a purpose other than a public purpose**; - If the law which is **applied retroactively imposes just and oppressive taxes.** - If the law **violates the inherent limitations on taxation**. **Equal protection** - What the Constitution prohibits is **class legislation** which **discriminates against some** and **favors** **others.** As long as there are rational or reasonable grounds for so doing, Congress may, therefore, group the persons or properties to be taxed and it is sufficient "if all of the same class are subject to the same rate and the tax is administered impartially upon them." - The **Equal Protection Clause** of the Constitution ensures that **no person or group** is unfairly discriminated against by the government. **Religious Freedom** - **Sec. 5, Art. III, 1987 Constitution -** No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. **(Non-establishment clause)** - The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed**. (Free exercise clause)** - The **free exercise clause** is the **basis of tax exemptions** - The **imposition of license fees** on the distribution and sale of bibles and other religious literature by **a non-stock, non-profit** missionary organization **not for purposes of profit** **amounts** to a condition or permit for the exercise of their right, **thus violating the constitutional guarantee of the free exercise** and enjoyment of religious profession and worship which carries with it the right to disseminate religious beliefs and information. *: Requiring a license fee for distributing religious literature by **a non-profit** missionary organization **could violate the constitutional guarantee of free exercise of religion.** Such fees may act as an **undue burden** on the organization's ability to practice its religion and spread its beliefs, which is **a fundamental right under the Free Exercise Clause**.* - The **Constitution does not prohibit generally applicable taxes** on the sale of religious materials by religious organizations as long as the tax is **neutral** and applied **equally** to all types of sellers. The **Free Exercise Clause** only comes into play if the tax specifically targets **religious activities** or creates an **undue burden** on religious practices. Generally, as long as the tax is **broad and non-discriminatory**, it is likely to be upheld. **Non-impairment of obligations of contracts** - **Sec. 10, Art. III, 1987 Constitution -** No law impairing the obligation of contracts shall be passed. - The **Contract Clause** has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. **General Concepts of Taxation** **Prospectivity of Tax Laws:** - **General rule:** Tax laws are prospective in operation *means that taxes typically apply to activities, transactions, or income that occur **after the law takes effect**.* - **Reason:** Nature and amount of the tax under tax laws enacted after the transaction could not have been foreseen and understood by the taxpayer at the time of the transaction means *the prospective nature of tax laws respects taxpayers\' ability to foresee and plan for their tax obligations, ensuring fairness and preventing undue hardship caused by retroactive tax changes.* - **For a law to be retroactive**, its language must be **clear and explicit** in demanding such an effect. If it is ambiguous or silent on the matter, it is usually not applied retroactively. - **Exception:** Tax laws **may be applied retroactively provided it is expressly declared or it is clearly the legislative intent** (e.g., increase taxes on income already earned) except when retroactive application would be so harsh and oppressive. - **Statutes are prospective** and not retroactive in their operation, laws being the formulation of rules for the future, not the past *means that laws are designed to govern future actions and events, not those that have already occurred.* - **Exception to the exception**: Collection of interest in tax cases is not penal in nature; it is but a just compensation to the State. Thus, the constitutional prohibition against ex post facto laws is not applicable to the collection of interest on back taxes. **Example:** *If a taxpayer fails to pay income tax due in 2019, and a law is enacted in 2024 specifying a higher interest rate on overdue taxes, the government may apply this increased interest rate retroactively to back taxes. **This is allowed because the interest is not a penalty but a form of compensation for the delay.*** - **General rule:** Rulings do not have retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer means *Rulings generally **cannot be applied retroactively** if doing so would harm the taxpayer, especially when the taxpayer relied on the ruling in good faith when making their tax decisions. This rule helps ensure fairness and prevent retroactive penalties or changes to tax obligations.* - **Exceptions:** - Taxpayer's deliberate misstatement or omission of facts - BIR's gathered facts is materially different from the facts from which the ruling was based on - Taxpayer acted in bad faith **Note:** The rule on non-retroactivity of rulings may be applied only if the parties in the ruling involve the taxpayer himself/itself. The taxpayer cannot invoke the rulings granted in favor of the other taxpayers. **Imprescriptibility of Taxes** - Generally, taxes are **imprescriptible**, meaning there is no time limit for the government to collect them. However, specific laws or provisions may impose time limits for **assessment** or **enforcement** of certain taxes. - The law on prescription, being a remedial measure, **should be liberally construed in order to afford such protection.** As a corollary, the exceptions to the law on prescription should perforce be strictly construed means *the law on prescription is intended to protect taxpayers, so it should be liberally interpreted to allow taxpayers to benefit from its provisions.* **National Internal Revenue Code --** statute of limitations in the assessment and collection of taxes therein imposed. +-----------------------------------+-----------------------------------+ | ***3 YEARS*** | Prescription of assessment and | | | collection from: | | | | | | a\. The prescribed last day of | | | filing of returns | | | | | | b\. The day when the return was | | | actually filed later than the | | | last day of the filing | | | | | | which ever comes later | +===================================+===================================+ | ***10 YEARS*** | Prescription of assessment in | | | cases of: | | | | | | a\. false or fraudulent return | | | with intent to evade tax; or | | | | | | b\. failure or omission to file | | | a return | +-----------------------------------+-----------------------------------+ | ***5 YEARS*** | Prescription of collection of tax | | | if: | | | | | | a\. assessed within the 3-year | | | and 10-year prescriptive period | | | | | | b\. assessed within the extended | | | period agreed upon by the | | | Commissioner and taxpayer | +-----------------------------------+-----------------------------------+ **Note:** The prescriptive period from final liquidation is three (3) years, except in cases of: 1\. Tentative liquidation; 2\. Payment under protest; 3\. Fraud; and 4\. Compliance audit. The prescriptive period is tolled when: a\. The treasurer is legally prevented from making the assessment or collection; b\. The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and c\. The taxpayer is out of the country or otherwise cannot be located. **Situs of Taxation** The Place of Taxation - The state where the subject to be taxed has a situs may rightfully levy and collect the tax; and - The situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question. Within the territorial jurisdiction, the taxing authority may determine the situs. **Factors that Determine Situs:** a\. Nature of the tax; b\. Subject matter of the tax (person, property, act or activity) c\. Possible protection and benefit that may accrue both to the government and the taxpayer; d\. Citizenship of the taxpayer; e\. Residence of the taxpayer; f\. Source of income. **Double Taxation** - Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing the same person twice by the same jurisdiction for the same thing." **a. Strict sense (Direct Duplicate Taxation)** The same property must be taxed twice when it should be taxed once. **The requisites are:** 1\. Both taxes must be imposed on the same property or subject matter; 2\. For the same purpose; 3\. By the same State, Government, or taxing authority; 4\. Within the same territory, jurisdiction or taxing district; 5\. During the same taxing period; and 6\. Of the same kind or character of tax. b\. Broad sense (Indirect Duplicate Taxation) **There is double taxation** **in the broad sense or indirect duplicate taxation** even if any of the elements for direct duplicate taxation **is absent**. It extends to all cases in which **there is a burden of two or more pecuniary impositions**. For example, a tax upon the same property imposed **by two different states.** Double taxation, standing alone and not being forbidden by our fundamental law, is not a valid defense against the legality of a tax measure *means **double taxation** (being taxed on the same income or property by different authorities) is **not inherently illegal** under the Constitution. While it might seem unfair, the **Constitution** does not explicitly forbid the imposition of taxes by multiple authorities (like state, local, or national governments) on the same subject. Therefore, double taxation by itself does not automatically make a tax measure **unconstitutional** or illegal.* **Constitutionality of 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. - If the tax law **follows the constitutional rule on uniformity**, there can be no valid objection to taxing the same income, business or property twice. **International Double Taxation** Double taxation usually takes place when **a person is resident of another state** and **derives income from, or owns capital in, the other state** and **both states impose tax on that income or capital.** In order to eliminate double taxation, **a tax treaty resorts** to several methods. **Modes of Eliminating Double Taxation:** a\. Allowing reciprocal exemption either by law or by treaty; b\. Allowance of tax credit for foreign taxes paid; c\. Allowance of deductions such as for foreign taxes paid, and vanishing deductions in estate tax; or d\. Reduction of Philippine tax rate **Escape from Taxation** **Modes of Escaping from Taxation:** - **Shifting of Tax Burden** - The **act of transferring the burden of a tax from the original payer** or the one on whom the tax was assessed or imposed **to someone else**. What **is transferred** **is** not the payment of the tax **but the burden of the tax.** - All **indirect taxes may be shifted**; **direct taxes cannot be shifted.** **Ways of Shifting:** - **Forward shifting** - When **the burden of the tax is transferred from a factor of production through the factors of distribution** until it finally settles on theultimate purchaser or consumer. - **Backward shifting** - When **the burden of the tax is transferred from the consumer** or purchaser **through the factors of distribution** to the factor of production. - **Onward shifting** - When the tax is shifted two or more times either forward or backward. - **Taxes that can be shifted:** - 1\. Value-added Tax - 2\. Percentage Tax - 3\. Excise Tax/Sin Tax **Meaning of Impact and Incidence of Taxation** **Impact of taxation** is the point where the tax is originally imposed or the one on whom the tax is formally assessed *means the **impact** of a tax refers to the **initial burden** or the point at which the tax is **directly imposed**.* **Incidence of taxation** is the point on whom the tax burden finally rests. \[INGLES\] It takes place when shifting has been effected from the statutory taxpayer to another *means the **final burden** or the ultimate party who **bears the cost** of the tax after any shifting (forward or backward) has taken place.* - **Tax Avoidance (Tax Minimization)** - The exploitation by the taxpayer of **legally permissible alternative tax rates** or **methods of assessing taxable property** or income **in order to avoid or reduce tax liability**. It is politely called **"tax minimization"** and **is NOT punishable by law.** **Example:** A person may invest in **tax-exempt bonds** or contribute to retirement accounts that offer tax deductions, thereby **reducing their taxable income and minimizing the taxes owed**. This is a form of **tax avoidance**. - **Tax Evasion (Tax Dodging)** - is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is also known as "tax dodging." It is punishable by law. - **The end to be achieved.** **Example:** A taxpayer knowingly **underreports income** to pay less tax or **intentionally fails to file tax returns** to avoid paying taxes. - **An accompanying state of mind described as being "evil," "in bad faith," "willful," or "deliberate and not accidental"; and** **Example:** A taxpayer knowingly **makes false statements** or omits key information with the **intent to mislead tax authorities.** - **A course of action (or failure of action) which is unlawful.** **Example:** A taxpayer who falsifies records, engages in \"off-the-books\" transactions, or **hides income in offshore accounts to evade taxes.** Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. Thus: - The **failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for *two consecutive years*** has been held as an indication of his fraudulent intent to cheat the government of its due taxes. - The **substantial underdeclaration of income in the income tax returns of the taxpayer for *four (4) consecutive years* coupled with his intentional overstatement of deductions** justifies the finding of fraud. - The **Willful Blindness doctrine** states that a taxpayer can no longer raise the defense that the errors on their tax returns are not their responsibility or that it is the fault of the accountants they hired. *In simple terms, The **Willful Blindness Doctrine** ensures that taxpayers cannot escape liability by claiming they were unaware of errors or fraud in their returns, especially when there is evidence that they intentionally avoided becoming aware of the issues.* - **Transformation** - Method of escape in taxation whereby the manufacturer or producer upon whom the tax has been imposed pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. The taxpayer escapes by a transformation of the tax into a gain through the medium of production. *In simple terms, the producer **pays the tax**, but by making their production better (like using cheaper materials, better technology, or faster processes), they **turn the tax into a gain** by reducing costs and improving profits.*