Taxation General Principles PDF

Module 1.0: General Principles 1. PRIMARY PURPOSE OF TAXATION. To raise revenue to finance governmental expenditures. 2. SCOPE – (C. U. P. S)...

Module 1.0: General Principles 1. PRIMARY PURPOSE OF TAXATION. To raise revenue to finance governmental expenditures. 2. SCOPE – (C. U. P. S) Taxation is Comprehensive, Unlimited, Plenary, and Supreme subject to limitations enumerated in the constitution and the will of the legislatures. 3. PRINCIPLE / CANONS OF A SOUND TAX SYSTEM – (F.A.T) Taxation is the process by which governments collect money from individuals and a. Fiscal Adequacy – revenue must be sufficient to meet the demands of public businesses. This money is used to fund various public services and programs. expenditures. b. Administrative feasibility – capable of convenient, just, and effective revenue generated from taxes must be sufficient to meet government spending needs. administration. c. Theoretical justice or Equalitythe– based tax system shouldtobe on ability easy pay; to administer progressive – and enforce. (ability to – pay principle) taxes should be based on an individual's ability to pay. ( the higher the 4. wages CHARACTERISTICS OF THE the higher STATE’S the contribution) POWER TO TAX - (I. L.S) a. Inherent in sovereignty – maybe exercise although not expressly granted. b. Legislative in character – only the legislature can impose taxes. House of representative c. Subject to constitutional and inherent limitations – not an absolute power that /congress ang process can be exercised by the government. pag gagawa ng taxation 5. LIMITATIONS ON POWER OF TAXATION a. Inherent Limitations - (P. E. N. T. I) 1. P – levied for Public purpose 2. E – Exemption from taxation ofLEVIED government - Act ofentities. imposing/ collecting 3. N – Non – delegation of legislative power to tax 4. T – Territorial 5. I – International comity b. Constitutional Limitations 1. Due process of law 2. Equal protection of the laws 3. Non – imprisonment for non-payment of poll tax 4. Non – impairment of obligation of contracts 5. Rule of taxation shall be uniform and equitable 6. Exemption from real property tax of charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, and non – profit institutions, and all lands, buildings and improvements actually, directly and exclusively used for religious or charitable purposes. 7. Exemption from income taxes and custom duties of non – stock, non – profit educational institutions, and exemption from real property taxes exclusively for educational purposes. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law. 6. THEORY OR BASIS OF TAXATION a. Life – blood Theory - Taxes are the lifeblood of the government. Without taxes, no government can function. Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles b. Benefits Protection Theory (Symbiotic Relationship) - Taxes are what we pay for a civilized or organized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. 7. ESSENTIAL ELEMENTS OF TAX a. Enforced contribution a. Taxes are mandatory payments imposed by the b. Generally payable in money government. c. Proportionate in character b. Taxes are typically paid in monetary form. d. Levied c. the amount of tax owed is usually proportional to a 1. property, orperson's on persons,(pagkolekta) Pagpapataw exerciseincome or the of right value of their property. or privilege 2. by state which has jurisdiction over the subject or object of taxation 3. by lawmaking body of the state 4. for public purpose 8. CLASSIFICATION OF TAXES a. ACCORDING TO SCOPE OR EXERCISING AUTHORITY National Tax Municipal or Local Tax - Imposed by the national Government - Imposed by the local government units. Examples: Examples: Income Tax, Estate Tax, Donor’s Tax Occupation Tax, Real Property Tax b. ACCORDING TO SUBJECT MATTER OR OBJECT Personal, Capitation, or Property Tax Excise Tax Poll Tax - Fixed amount imposed - Imposed on property. - Imposed upon the upon persons of a certain performance of an act; the class without regard to exercise of a right; or the property, trade, business engaging in business or or occupation. profession. Example: Example: Examples: Community Tax Real Property Tax VAT, Donor’s Tax, Estate Tax, Income Tax, Occupation Tax, Excise Tax Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles c. ACCORDING TO WHO BEARS THE BURDEN OF TAX Direct Tax Indirect Tax - The liability for the tax (impact), and - The liability or impact for the tax falls the burden thereof (incidence) fall on on the original taxpayer, but the the same taxpayer. burden or incidence thereof is shifted to another. Example: Examples: Income Tax VAT, Excise Tax, Custom Duties d. ACCORDING TO PURPOSE General or Revenue Tax Special Tax - Levied without a specific or pre- - Levied for a special purpose determined purpose Example: Examples: Income Tax, VAT, etc. Protective tariffs e. ACCORDING TO RATE APPLIED Proportional Progressive Regressive - Based on a fixed - The tax rate increases - The tax rate decreases percentage of the tax as the tax base as the tax base base increases increases f. ACCORDING TO MEASUREMENT OF THE AMOUNT DUE Specific Ad Valorem - Measured by number, or based on - Based on the value of the property weight or physical measurement and may require the intervention of assessors and appraisers. Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles 9. DISTINCTIONS a. Taxation, Police Power, & Eminent Domain Taxation Police Power Eminent Domain 1. As to authority Exercised only by the government. Granted also to public service companies or public utilities 2. As to purpose To support Or destroyed to For public use - Property is government promote general taken welfare 3. As to persons Group or class of individuals Individual as the affected owner of a particular property. 4. As to effect Becomes part of No transfer of title; There is transfer of public funds at most, there is right or ownership restraint on injurious use of ex pag binayaran ka aalis ka property. Nalang sa property mo 5. Amount of No limit on the Limited to cover No imposition. imposition amount of tax cost of license & Property owner is expenses of police paid its market surveillance and value. regulation. b. Tax vs. Debt Tax Debt 1. Source of obligations LAW CONTRACT 2. Obligee Due to the government in Due to oblige under a its sovereign capacity contract; may be due to the government in its corporate capacity. 3. Form of payment Money Money, property, or services 4. Interest No interest except in If stipulated or if the cases of delinquency payment is in delay 5. Assignability Not assignable Generally assignable Sino magbabayad 6. Compensation / NO YES Set - off 7. Incarceration for YES, except for non- NO person can be Imprisonment non - payment payment of poll tax imprisoned for non- payment of debts (constitution). Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles c. Tax vs. Toll Tax Toll 1 Demand of sovereignty Demand of ownership or proprietorship 2 Paid for the use of another’s Paid for support of government. property 3 Based on necessities of the state Amount is based on cost of construction or maintenance of public improvement 4 Imposed only by government Imposed by government, private individuals or entities. d. Tax vs. License Tax License 1. Purpose To raise revenue To regulate action, businesses, industries, professions 2. Limitations on taxation Subject to constitutional Not subject to the and inherent limitation on limitations on taxation. the power to tax 3. Amount Unlimited Limited to the cost of regulation (licensing, inspection, surveillance) 4. Effect of non – Does not make the Makes the business payment business illegal illegal 10. SPECIAL ASSESSMENT a. CHARACTERISTICS 1. Can be levied only on land. 2. Cannot (at least in most states) be made a personal liability of the person assessed. 3. Based wholly on benefits. 4. Exceptional both as to time and locality. b. DISTINCTION TO TAX Tax - imposed on all property (real or personal) in a prescribed area. SA - Imposed only on property which benefit from the improvement. Imposed on land/property SPECIAL BENEFIT public IMPROVEMENT Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles 11. DOUBLE TAXATION - Not unconstitutional but being discouraged. a. Direct Duplicate Taxation - Taxing twice, the same - Taxing authority - Jurisdiction - Purpose - Period - Some property in the territory b. Indirect Duplicate Taxation (Indirect double) - Double taxation other than direct duplicate - It extends to all cases in which there us burden two or more pecuniary impositions. - EXAMPLE: The income of a corporation is subject to income tax and the same income if distributed to the stockholders in the form of dividends are subject to dividend tax. 12. FORMS OF ESCAPE FROM TAXATION Tax avoidance vs. Tax evasion 1. Evasion (Tax dodging) – Illegal or fraudulent means to defeat or lessen payment of tax 2. Avoidance (Tax minimization) – Legal or permissible means to reduce tax liability. Other forms of escape from taxation 3. Shifting – transfer of burden of tax by the original payor or the one on whom the tax was assessed or imposed to another or someone else. It is possible only when there is an exchange of commodities. 4. Capitalization - 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. - occurs when tax falls on an income – producing property. 5. Transformation - the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of reduction at a lower cost. 13. TAX LAWS a. INTERPRETATION OF TAX LAWS General Rule: Liberally in favor of the taxpayer and strictly against government. Exception: In cases of tax exemptions and deductions. Strictly against tax payer Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles b. SOURCES OF TAX LAWS 1. Republic Act / Statutes / Tax Code (R.A 8424) 2. Presidential Decrees 3. Executive Orders 4. Court Decisions 5. Revenue Regulations (least source of tax laws) c. HOW TO MAKE TAX LAW? Generally, all revenue bills (proposal) must originate from the House of Representatives. After passing 3 readings by a majority vote in technical committee, deliberation and journals of congress. It shall be elevated to Senate, which needs to pass the same 3 readings. Normally, the President signs a bill for its implementation. d. NATURE OF INTERNAL REVENUE LAWS Internals revenue laws are not political in nature. In times of war, they are deemed to be the laws of the occupied territory and not of the occupying enemy. Tax laws are civil and not penal in nature although there are penalties provided for their violation. e. MAJOR CLASSIFICATION OF TAX LAWS 1. Tax Imposition – one that provides burden 2. Tax Exemption – one that provides immunity DIFFERENT PRINCIPLES GOVERNING TAX EXEMPTIONS a. Exemptions from taxation are highly disfavored in law and are not presumed. b. He who claims as exemption must be able to justify his claim by the clearest grant of organic or statute law by words too plain to be mistaken. If ambiguous, there is no exemption. c. He who claims exemption should prove by convincing proof that he is exempted. d. Taxation is the rule, tax exemption is the exception. e. Tax exemption must be strictly construed against the taxpayer. f. Tax exemptions are not presumed, g. Constitutional grants of the tax exemption are self – executing h. Tax exemptions are personal, 14. TAX REGULATIONS a. DEFINITION - Are interpretations of an administrative body (BIR) intended to clarify or explain the tax laws and carry into effect its general provisions by providing the details of administration and procedure. They are deemed necessary to the proper enforcement and execution of tax laws. Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles b. REQUISITES OF TAX REGULATIONS 1. Must be reasonable – germane to the purpose of the law. 2. Within the authority conferred. 3. Not contrary to law. 4. Must be published. 5. Prospective, unless it is beneficial to the taxpayer, which may be given retroactive application. c. WITH AUTHORITY TO PROMULGATE TAX REGULATIONS - It is provided that the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, shall promulgate all needful rules and regulations of the tax code. (Quasi – legislative function). 15. BIR RULINGS BIR issues a general interpretation of tax laws usually upon a request of a taxpayer to clarify a provision of law (Quasi – judicial function). 16. ADMINISTRATIVE vs. JUDICIAL INTERPRETATION Interpretations at administrative level are given weight but are not laws, unlike court’s decisions which are considered part of the law of the land. 17. TAX ADMINISTRATION a. DEFINITION It is a system involving assessment, collection, and enforcement of taxes, including the execution of judgment in all tax cases decided in favor of the Bureau of Internal Revenue by the courts. b. DIFFERENT AGENCIES INVOLVED IN TAX ADMINISTRATION 1. Bureau of Internal Revenue – internal revenue taxes (national taxes) a. WHO COMPOSES THE BIR 1. One Commissioner 2. Four deputy commissioners 3. Regional revenue director 4. Revenue district officer 5. Revenue officer b. POWERS & DUTIES OF THE BIR 1. Assessment & collection of all national internal revenue taxes, fees, and charges Assessment – Synonymous to tax audit – Finding by the taxing authority that the taxpayer has not paid the correct taxes. – It is also a written notice to a taxpayer to the effect that the amount stated therein is due as a tax and containing a demand for the payment thereof. 2. Enforcement of all forfeitures, penalties, and fines connected therewith 3. Execution of judgments in all cases decided in its favor by the Court of Tax Appeals (CTA) and the ordinary courts. 4. Give effect to and administer the supervisory and police powers conferred to it by the Code or other laws. Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles c. POWERS & DUTIES OF THE BIR COMMISSIONER 1. Power to interpret tax law and decide tax cases (Quasi – judicial function) a. Interpret provisions of this Code and other tax laws subject to review of the Secretary of Finance. b. Decide cases: 1. Disputed assessment 2. Refunds of internal revenue taxes, fees and charges 3. Penalties impose in relation thereto 4. Other matters arising from this code or other laws or portions thereof administered by the BIR subject to the exclusive appellate jurisdiction of the CTA. 2. Power to obtain information, summon, examine and take testimony of persons. The commissioner is authorized: a. To examine any relevant book, paper, record or other data b. To obtain any information (costs, volume of production, receipts, sales, gross income etc.), on a regular basis c. To summon (subpoena duces decum and ad testificandum) d. To take the testimony of the person concerned, under oath as may be relevant to the injury. e. To cause revenue officers and employees to make a canvass of any revenue district or region. 3. Power to make assessments, prescribe additional requirements for tax administration and enforcement a. Examination of returns and determination of tax due. b. Terminate taxable period: 1. When the taxpayer is retiring from business subject to tax 2. When the taxpayer absconded 3. When the taxpayer removes his property from Philippines. 4. When the taxpayer hides or conceals his property. c. Prescribe Real Property Value Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles d. Authority to Inquire into bank deposit Notwithstanding R.A 1405 (Bank Secrecy Law) the Commissioner is authorized to inquire into the Bank deposits of: i. A decedent to determine his gross estate ii. A taxpayer who has filed an application to compromise payment of tax liability by reason of financial incapacity. e. Authority to register tax agents. f. Authority to prescribed additional requirements. 4. Authority to Delegate Power a. The commissioner may delegate the powers vested in him to subordinate officials with rank equivalent to Division Chief or higher, subject to limitations or restrictions imposed under the rules and regulation EXCEPT (should NOT be delegated): 1. Power to recommend the promulgation of rules and regulations by the Sec. of Finance 2. Power to issue rulings of first impression or to reverse, revoke modify any existing rule of the BIR. 3. Power to compromise or abate any tax liability 4. Power to assign or reassign internal revenue officers to establishments where articles subject to exercise tax are kept. 5. Other Powers a. Duty to ensure the provision and distribution of forms, receipts, certificates, and appliances, and the acknowledgment of payment of taxes. b. Authority to administer oaths and to take testimony. c. Authority to arrests and seizures. d. Authority to employ, assign or reassign internal revenue officers involved in excise tax functions to establishments where articles subject to excise tax is produced or kept. e. Authority to assign or reassign internal revenue officers and employees of the BIR to other or special duties connected with the enforcement or administration of the revenue laws. d. AGENTS OF THE BIR 1. Commissioner of Customs with respect to taxes on imported goods. 2. Head of the appropriate government office with the respect to energy tax. 3. Banks duly accredited by the Commissioner of Internal Revenue Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER  Module 1.0: General Principles e. DIFFERENT SOURCES OF INTERNAL REVENUE 1. Income Tax 2. Estate & Donor’s Tax 3. Value-Added Tax 4. Other Percentage tax 5. Excise Tax 6. Documentary Stamp Tax 18. SITUS OF TAXATION The power to tax is limited only to persons, property, or businesses within the jurisdiction or territory of the taxing power. FACTORS THAT DETERMINE THE SITUS OF TAXATION A. Kind or classification of the tax being levied B. Situs of the thing or property being taxed C. Citizenship of the taxpayer D. Residence of the taxpayer E. Source of the income tax F. Situs of excise, privilege, business, or occupation being taxed. APPLICATION OF SITUS OF TAXATION KIND OF TAX SITUS Personal or Community Tax Residence or domicile of the taxpayer Income Tax Consider (1) Citizenship, (2) Residence, and (3) Source of income (sec. 42, 1997 NIRC) Corporate Tax Law on Corporation Real Property Tax Location of the property (Lex rei sitae) Tangible: Where the property is physically located Personal Property Tax or permanently kept (Lex rei sitae) Intangible: Subject to Sec. 104 of the NIRC and the principle of mobilia sequuntur personam Business Tax Place of business Sales Tax Where the sale is consummated Excise or Privilege Tax Where the act is performed or where occupation is pursued. Franchise Tax State which granted the franchise. Transfer Tax Residence or citizenship of the taxpayer or location of the property. Author: Mr. Tyron C. Taylo DEPARTMENT OF MANAGEMENT - BM CLUSTER