Module 1 - Introduction to Taxation PDF

Subject Code: CBA 5, COA 9 Credit Units: 3 Course Description: Income Taxation School Year/Semester: 2024-2025/ First Semester Module I Instructor: Johnny B. Corono, CPA...

Subject Code: CBA 5, COA 9 Credit Units: 3 Course Description: Income Taxation School Year/Semester: 2024-2025/ First Semester Module I Instructor: Johnny B. Corono, CPA INTRODUCTION TO TAXATION STRUCTURE 1.1 Objective 1.2 Introduction 1.3 Definition of Taxation 1.4 Purpose of Theory and Basis of Taxation 1.5 Objective of Taxation 1.6 Aspects of Taxation 1.7 Doctrines in Taxation 1.8 Forms of Escape from Taxation 1.9 Situs of Taxation 1.10 Self-Assessment Questions 1.11 References 1.1 OBJECTIVE LEARNING OBJECTIVES At the end of this module, the students shall be able to: 1. Define taxation 2. Identify the purpose of theory and basis of taxation 3. Understand the objective of taxation 4. Understand aspect of taxation 5. Understand some Doctrines in Taxation 6. Identify the forms of escape from taxation. 7. Understand situs of taxation. 1.2 INTRODUCTION Module 1 provides an overview on the taxation. This will includes definition of the taxation and its objectives. This will also serve as an introductory lesson, which is essential in the succeeding discussions. 1.3 TAXATION DEFINED Taxation is a process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses of the government. 1 1.4 PURPOSE AND BASIS OF TAXATION Purpose of Taxation: 1. Primary Purpose To provide funds or property with which to promote the general welfare of its citizens and to enable it to finance its multifarious activities. 2. Secondary Purposes a. To strengthen anemic enterprises by giving tax exemptions; b. To protect local industries against foreign competition through imposition of high customs duties on imported goods; c. To reduce inequalities in wealth and income by imposing progressively higher taxes; d. To prevent inflation by increasing taxes or ward off depression by decreasing taxes. Theory and Basis of Taxation: Theory a. The existence of the government is a necessity; b. The government cannot continue without a means to pay its expenses; c. The government has the rights to compel its citizens and property within its limits to contribute. Basis a. Taxation is based on the reciprocal duties of protection and support between the government and its people; b. Government receives taxes from the people which is used to perform functions of government and other benefits; c. Benefit-received theory. 1.5 OBJECTIVE OF TAXATION Objectives: 1. Taxation is more than just a means of raising revenue; it is also one of the major means in achieving the various economic and social objective of the government. 2. Shifting wealth from rich to the poor; 3. Maintaining price stability; 4. Stimulating economic growth; 5. Encouraging full employment; Efforts in achieving the objective. 1. Some of the tax rules are enacted for the purpose of mitigating certain undesirable economic and social considerations already existing; a. Capacity to pay of the taxpayer; b. Deduction of depreciation, etc. 2 Basic principles of sound tax system. 1. Fiscal adequacy a. The source of government revenue should be efficient to demand the needs of public expenditure; b. Creating new taxes or new tax machinery or by merely changing the rates applicable to existing taxes. 2. Equality or theoretical justice a. The tax burden should be proportionate to the taxpayer’s ability to pay; b. Ability-to-pay principle 3. Administrative feasibility a. The tax laws should be capable of convenient, just and effective administration; b. Each tax should be:  Clear and plain to the taxpayer.  Capable of uniform enforcement.  Convenient as to time, place and manner of payment.  Not unduly burdensome upon or discouraging to business activity. Nature of Taxation. 1. It is inherent in sovereignty. 2. Legislative in character. 3. Subject to constitutional and inherent limitations. Limitations of Taxation. 1. Inherent limitations. Restrictions on the power exists from the very nature of the power of taxation itself.  Requirement that levy must be for a public purpose.  Non-delegation of the legislative power to tax, except: a. Delegation to the President b. Delegation to local governments c. Delegation to administrative bodies.  Exemption from taxation of government entities;  International comity  Territorial jurisdiction 2. Constitutional limitations. Restrictions in the exercise of the power of taxation as expressly or implied provided in the Philippine Constitution or its provisions.  Due process  Equal protection of the laws.  Rule of uniformity and equity in taxation.  Non-imprisonment for non-payment of poll tax.  Non-impairment of the obligations and contracts.  Non-infringement of religious freedom.  No appropriation for religious purposes. 3   Exemption of religious, charitable or educational entities, non-profit cemeteries, and churches from taxation.  Exemption of revenues and assets of non-stock, non-profit educational institutions and donations for educational purposes from taxation.  Concurrence by a majority of all members of the Congress for the passage of a law granting any tax exemption.  Power of the President to veto any particular item or items in a revenue or tariff bill.  Non-impairment of the jurisdiction of the Supreme Court in tax cases. 1.6 ASPECTS OF TAXATION Levy. Deals with the provisions of law that determines:  The person or property to be taxed.  The sum or sums to be raised.  The rate of the tax.  The time and manner of levying, receiving and collection the tax. It is the Congress that levies tax. Collections. Constituted of the provisions of law that which prescribe the manner of enforcing the obligation on the part of those taxes to pay the demand thus created. This is essentially an administrative function. 1.7 SOME DOCTRINES IN TAXATION 1. Prosperity of Tax Law a. Imposition must be prospectively; b. Tax may only be imposed retroactively unless so expressed by law, otherwise retroactive application or imposition of tax shall prevail. 2. Double Taxation a. Not a valid defense against the legality of tax measure unless direct duplication of taxation or the same subject is being taxed twice. b. Indirect double taxation is avoided so as not to bring injustice to the taxpayer. Eg. Business tax imposed by municipal government then eventually income tax on business income. Concept of Double Taxation. The two (2) concepts of double taxation are: 1. Direct duplicate 2. Indirect duplicate Direct duplicate has the following elements: 1. Taxing twice 2. By the same taxing authority 3. Within the same purpose 4. For the same purpose 5. In the same taxable period 6. Involving the same period 4  3. Set-Off of Taxes. Taxes is not subject to set-off or legal compensation. Eg. Offsetting to the claims against the government. Meaning, a person cannot refuse to pay tax even though the government owes him an amount equal or greater than the tax. 4. Escape from Taxation Tax Avoidance. Taxpayers minimizes his tax liability by taking advantage of legally available tax planning opportunities. Is a completely legal activity. Tax Evasion. Occurs when the taxpayer resorts to unlawful means to lessen or to get away with his tax liability, such; a. Under-declaration of sales; b. Overstatement of expenses; c. Backdating of important documents 1.8 FORMS AND ESCAPE FROM TAXATION There are six (6) forms of escape from taxation. 1. Shifting. Is one way of passing the burden of tax from one person to another (black’s Law Dictionary, supra) Kinds of shifting. a. Forward shifting. Occurs when the burden of the tax transferred from a factor of production to the factor of distribution. b. Backward shifting. Occurs when the burden of tax is transferred from a factor the consumer to the producer or manufacturer. c. Onward shifting. Occurs when tax is shifted to two or more times either forward or backward. 2. Capitalization. This refers to the reduction in the price of the taxed object to the capitalized value of future taxes, which the purchaser expects to be called upon to pay. 3. Transformation. Occurs when the manufacturer or producer upon whom tax has been imposed pays the tax and endeavour to “recoup” himself/herself by improving his/her process of production. 4. Tax Evasion. Is the practice by the taxpayers through illegal or fraudulent means to defeat or lessen the amount for tax. This is known as “tax dodging”. 5. Tax Avoidance. Is the exploitation by the taxpayers of legally permissible methods in order to avoid or reduce tax ability. This known as “tax minimization”. 6. Tax Exemption. Is the grant of immunity or freedom from a financial charge, obligation, or burden to which others are subjected. Grounds for exemption. a. Contract, wherein the government is the contracting party. b. Public Policy c. Reciprocity 5 1.9 SITUS OF TAXATION  Situs is Latin term which means “situation”, ”location”, or “place”. Its literal meaning refers to place of taxation. In real property, the rule is “tax is imposed to place or state(city, municipality, or province) where the property is located, subject to be taxed, has a jurisdiction over said property.  In movable property taxation, the rule is , “mobilia sequnter personan” , a Latin term or phase which means “ movables follow the law person”(back’s Law Dictionary , 5th edition).  It gives us an idea that the place or state (city, municipality or province , wherein your property is located has a jurisdiction in imposing the payment for property tax 1.10 SELF ASSESSMENT QUESTIONS Online assessment for module will be provided to students. 1.11 REFERENCES Income Taxation 16/e (Based on Train Law) © 2020 Omar Erasmo G. Ampongan https://www.accelerapro.com/ (Marinor A. Gallardo, CPA, MBA, Ph.D., Lecturer) 6