Introduction to Taxation PDF

INTRODUCTION TO TAXATION Diether Jean L. Otacan Faculty  WHAT IS TAXATION? 2 Taxation may be defined as a State power, a legislative process, and a mode of government cost distribution. 1. As a state power Taxation is an inherent power of the Sta...

INTRODUCTION TO TAXATION Diether Jean L. Otacan Faculty  WHAT IS TAXATION? 2 Taxation may be defined as a State power, a legislative process, and a mode of government cost distribution. 1. As a state power Taxation is an inherent power of the State to enforce a proportional contribution from its subjects for public purposes. 2. As a process Taxation is a process of levying taxes by the legislature of the State to enforce proportional contributions from its subjects for public purpose. 3. As a mode of cost distribution Taxation is the mode by which the State allocates its costs or burden to its subjects who are benefited by its spending. 20XX Pitch Deck 3  The power by which the sovereign, through its lawmaking body, raises revenue to defray the necessary expenses of the government. It is way of apportioning the costs of government among those in some measure are privileged to enjoy its benefits and must bear its burdens (Isagani Cruz, Constitutional Law) 4 TAXATION AS A POWER OF THE GOVERNMENT Taxation is a matter of right on the part of the government. It is an inherent right. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. (Pepsi-Cola Bottling Company vs, Municipality of Tanauan Leyte G.R. No. L-31156 February 27, 1976) 5 PURPOSES 1. REVENUE To raise revenue to promote the general welfare and AND protection of its citizens. The power of taxation is OBJECTIVES circumscribed by inherent and constitutional limitations. (Mamalateo, Bar Reviewer on Taxation, 2019, p.15) 2. REGULATORY Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. (Caltex Philippines vs. Commission of Audit G.R. No. 92585 May 8, 1992) 3. PROMOTION OF GENERAL WELFARE Taxation may be made the implement of the state’s police power (Lutz vs. Araneta, 98 Phil. 148) 6 PURPOSES 1. PRIMARY PURPOSE To raise revenue OF 2. SECONDARY PURPOSES TAXATION a. Regulatory ✓ To regulate the conduct of businesses or professions ✓ To achieve economic and social stability ✓ To protect local industries b. Compensatory ✓ Key instrument of social control ✓ Reduces inequalities in wealth distributions ✓ Strengthens anemic enterprises ✓ Provides incentives ✓ Uses as implement in the exercise of police power to promote general welfare ✓ Check inflations ✓ Tools on international bargains ✓ Promotes science and inventions 7 THE INHERENT POWERS OF THE STATE 1. POWER OF TAXATION – the power to take property for the support of the government and for public purpose. In the Philippine Airlines, Inc. v. Edu, it was held that the imposition of a vehicle registration fee is not an exercise by the State of its police power, but of its taxation power. The power of taxation is an inherent power of the state exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of the government. 8 2. POLICE POWER – the power to enact laws to promote the general welfare of the people. It is wider in application because it is the general power to make laws, whereas the power of taxation is more specific in terms of its purpose. The exercise of police power includes, but is not limited to, the regulation of trade and commerce, the protection of public health and safety, and the preservation of public morals. 9 3. POWER OF EMINENT DOMAIN – the power to take private property for public use upon payment of just compensation. This power is exercised for the purpose of promoting the public good, such as the construction of public infrastructure, the expansion of public utilities, or the development of public parks. 10 DIFFERENCES AND SIMILARITIES SIMILARITIES OF THE THREE POWERS 1. All three powers are necessary attributes of sovereignty, resting upon necessity 2. All are inherent powers of the State 3. All are legislative in nature 4. They are ways in which the State interferes with private and property 5. They exist independently with the Constitution although the condition for their exercise may be prescribed or limited by the Constitution 6. They all presuppose an equivalent compensation received by the persons affected by the exercise of the power, whether directly, indirectly or remote. 7. The exercise of these powers by the local government units may be limited by national legislature  HOW TAXATION EXERCISED? 1. The legislature identifies the need for the revenue. This may be due to a variety of factors, such as the need to finance new government programs or to cover unexpected expenses. 2. Legislation of laws by Congress and tax ordinances by the Local Sanggunian. The legislature enacts a tax laws. This law specifies the type of tax to be imposed, the rate of taxation, and who is subject to the tax. 3. The executive branch implements the tax law. This may involve creating a tax agency to collect the tax and developing procedures for taxpayers to comply with the law. 4. Taxpayers comply with the law and pay their taxes. This may involve filing tax returns and paying estimated taxes throughout the year. 5. Tax collection by the administrative branch of the government. The government collects the taxes and uses them to fund operations and provide services to its citizens 13  DISCRETION OF THE TAXING POWER 1. Amount or rate of the tax 2. Kinds of tax to be collected 3. Apportionment of the tax 4. The person, property and excises to be taxed, provided within it jurisdiction 5. Situs of taxation 6. Method of collection 7. Purposes for its levy, provided for the public purpose 14  TAXATION AS MODE OF COST ALLOCATION The Life Blood Doctrine Taxes are indispensable to the existence of the state. Without taxation the state cannot raise revenue to support is operations. Taxes are lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (CIR vs. Algue G.R. No. L-28896 February 17, 1988) 15 Symbiotic Relationship Doctrine Its is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. (CIR vs. Algue G.R. No. L-28896 February 17, 1988) 16  CHARACTERISTICS OF THE POWER OF TAXATION 1. For public purpose 2. Inherently legislative in nature 3. Subject to international comity or treaty 4. Not absolute being subject to constitutional and inherent limitations 5. Territorial 17  TAXATION AS MODE OF GOVERNMENT COST ALLOCATION Modes of Cost Allocation 1. Benefit Received Theory ✓tax payment should be based on benefits received ✓everyone is conclusively presumed receiving benefits from the government Taxation is the primary means by which governments fund their activities and provide services to their citizens. It is based on the idea that the state has a duty to protect and support its inhabitants, and that citizens have a reciprocal duty to contribute to the costs of providing those services. 18 2. Ability to Pay Theory ✓tax payment should be based relative to the ability of taxpayers to pay ✓ assessments of ability to pay: a. vertical equity means that those have more should pay more. This is often achieved through a progressive tax system, where tax rates increase as income levels rise. b. horizontal equity means that those in similar situations should be treated equally. This means that taxpayers with similar incomes and circumstances should pay similar amounts in taxes. 19  THE THEORY AND BASIS OF TAXATION 1. Theory – the existence of the government is a necessity and it cannot continue without means to support itself. 2. Basis – the government and the people have the reciprocal and mutual duties of support and protection. 20  THE SCOPE AND LIMITATIONS OF TAXATION Taxation is supreme, comprehensive, unlimited, and plenary. It includes the power to destroy. Governments have broad authority to impose taxes on a wide range of activities and transactions, and that their power to tax is not subject to significant limitations. The phrase “the power to tax is the power to destroy” is often attributed to Chief Justice John Marshall in the case of McCulloch vs. Maryland. This statement highlights the significant impact that taxation can have on individuals, businesses, and the economy as a whole. While taxation is necessary for governments to function, it is important that the tax policies are designed and implemented in a way that balances the need for revenue with potential impact on taxpayers. 20XX 21  LIMITATIONS OF TAXATION POWER A. Constitutional Limitation Rules or provisions in the constitution that limit the power of government branches, departments, agencies, or officers. These limitations are put in place to ensure that the government does not act beyond the scope of its auhthority as defined by the constitution. 20XX 22 1. Observance of due process of law 2. Equal protection of the law 3. Uniformity in taxation 4. Progressive scheme of taxation 5. Non-imprisonment for non-payment debt or poll tax 6. Non-impairment of obligation and contract 7. Free worship rule 8. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion 9. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosque from property taxes. 10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions including grants, endowments, donations or contributions for educational purposes. 11. Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption. 20XX 23 12. Non-diversification of tax collections 13. Non-delegation of the power of taxation Exception: a. Power to tax was delegated to the President under the Flexibility Clause of the Tariff and customs code b. Power to tax was delegated to the local government units under the Local Government Code c. Matters involving the expedient and effective administration and implementations of assessment and collection of taxes or certain aspects of taxing process that are not legislative in character 14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases 15. Appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments. 16. Each local government unit shall exercise the power to create its own sources of revenue and shall have a just share in the national taxes. 20XX 24  LIMITATIONS OF TAXATION POWER B. Inherent Limitation Restrictions that are inherent in the very nature of the power of taxation itself. These limitations cannot be removed by the legislature or the executive branch, they apply to all taxes. 1. Territoriality of taxation 2. Subject to international comity or treaty 3. Tax exemption of the government 4. Tax is for public purpose 5. Non-delegation of the power of taxation 20XX 25  SITUS OF TAXATION The place of taxation. The situs of taxation refers to the place where a tax is imposed or where the taxable event occurs. This can vary depending on the type of tax and the specific tax laws of a country or jurisdiction. For example, income taxes are often based on the taxpayer’s residence or place of business, while sales taxes are typically based on the location of the sale or consumption of goods and services. 20XX 26  APPLICATIONS OF SITUS 1. Persons – residence of the taxpayer 2. Community development tax – residence or domicile of the taxpayer 3. Business taxes – where the business was conducted or place where the transactions took place 4. Privilege or occupation tax – where the privilege is exercised 5. Real property tax – where the property is located 6. Personal property tax: a. tangible – where they are physically located b. intangible – domicile of the owner unless the property has acquired a situs elsewhere 7. Income – place where the income is earned or residence or citizenship of the taxpayer. 8. Transfer Taxes – residence or citizenship of the taxpayer or location of the property 9. Franchise Taxes – state that grants the franchise 20XX 10. Corporate Taxes – depend on the law of incorporation 27  KINDS: 1. Direct Double Taxation this is objectionable and prohibited because it violates the constitutional provision uniformity and equality. The principle of uniformity in taxation requires that similar objects or subjects be treated equally and uniformly under the tax laws. Direct double taxation, resulting in an unjust and unequal burden. Elements: a. Same subject/object taxed twice; b. For the same purpose; c. By the same taxing authority; d. Within the same jurisdiction; e. During the same period; f. Of the same kind or character. 28  KINDS OF TAXATION: 2. Indirect Double Taxation no constitutional violation. Indirect double taxation does not involve the same taxing authority imposing multiple taxes on the same object or subject. Example: Taxing the same property by two different taxing authority. 3. Domestic Double Taxation arises when the taxes are imposed by the local or the national government. 4. International Double Taxation a double taxation caused by two different taxing authorities, one domestic and one foreign 29  REMEDIES TO DOUBLE TAXATION 1. Provision for tax exemption 2. Allowance for tax credit 3. Allowance for principle of reciprocity 4. Allowance for principle of reciprocity 5. Enter into treaties with and agreement with foreign government 30  FORMS OF ESCAPES FROM TAXATION A. Those that will not result in loss of revenue to the government 1. Shifting – the process of transferring the tax burden from the statutory taxpayer to another without violating the law. a. Forward Shifting – the transfer of the burden of tax from the units of production to the units of distribution to the consumer. b. Backward shifting – the transfer of the burden of tax from the consumer back to the units of distribution to the units of production. c. Onward shifting – when the tax is shifted two or more times either forward or backward. More than one shift` 20XX 31  FORMS OF ESCAPES FROM TAXATION A. Those that will not result in loss of revenue to the government 2. Capitalization – the seller is willing to lower the price of the commodity provided the taxes will be shouldered by the buyers. 3. Transformation – the manufacturer absorbs the additional taxes imposed by the government without passing it to the buyers for fear of lost of his market. Instead, it increases quantity of production, thereby turning their units of production at lower cost resulting to the transformation of tax into a gain through the medium of productions. 20XX 32  FORMS OF ESCAPES FROM TAXATION B. Those that will result to loss of revenue to the government 1. Tax Evasion – tax dodging – resorting to acts and devices that illegally reduces or totally escape the payment of taxes that are due to the taxpayer. They are prohibited and are therefore are not subject to penalities. Tax evasion connotes the integration of three factors: a. The end to be achieved, e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; b. An accompanying state of mind which is described as being “evil”, in “bad faith”, “willfull”, or “deliberate and not accidental”; and 20XX c. A course of action or failure of action which is unlawful.33  FORMS OF ESCAPES FROM TAXATION B. Those that will result to loss of revenue to the government 2. Tax Avoidance – tax minization scheme – the reduction or totally escaping payment of taxes through legally permissible means that are not prohibited and therefore are not subject to penalties. 3. Tax Exemption – an immunity, privilege or freedom from payment of a charge or burden to which others are obliged to pay. 20XX 34  KINDS OF EXEMPTIONS 1. Express – granted by the constitution, statute, treaties, ordinance, contracts or franchise 2. Implied – exempted by accidental or intentional omission 3. Total – exemption from all taxes (OFWs) 4. Partial – exemption from certain taxes, partially or totally. 35  GROUNDS FOR EXEMPTION 1. It may be based on contract 2. It may be based on grounds of public policy – ex: granting of exemptions to rural banks, and sweepstakes or lotto winnings 3. It may be based on some grounds to foster charitable and other benevolent institutions 4. It may be created under a treaty on grounds of reciprocity 5. It may be created to lessen the rigors of international double or multiple taxation 36  EXEMPTIONS AS TO MANNER OF CREATION 1. Express or affirmative – when certain persons, property or transactions are, by express provision, exempted form all certain taxes. When the provision itself provides for exemption. 2. Implied exemption or exemption by omission – when a tax is levied on certain classes of persons, properties or transactions without mentioning the other classes. 3. Contractual – in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government, acting in its private capacity, shed its cloak of authority and waives its governmental immunity. 37 DISTINCTION BETWEEN TAX EVASION AND TAX AVOIDANCE TAX EVASION TAX AVOIDANCE It is a scheme used outside of It is a tax saving device within those lawful means and when the means sanctioned by law availed of, it usually subjects the taxpayer to penalties It is accomplished by breaking Accomplished by legal the law procedures and do not violate the law It connotes fraud, deceit and No fraud is involved malice 38  PURPOSES OF TAXATION The grant of immunity to particular persons or corporations or to person or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. o Is not automatic o Is non-transferable o Is revocable by the government (except when granted under a valid contact or by the Constitution) o Rule shall be uniform o Does not contravene the Lifeblood Doctrine o Is always disfavored o Is allowed only under a clear and unequivocal provision of law o On real property tax will be based on the Doctrine of Usage and not Doctrine of Ownership, except for real properties owned by the government which is absolutely exempt form taxation o On real property tax cannot be granted by local governments but can condone real property tax liabilities in special cases o On local taxes can be granted by local governments but they cannot condone existing liabilities on local taxes 39  CONSTRUCTIONS OF TAX EXEMPTIONS General Rule: Tax exemption statutes are construed strictly against the taxpayer and liberally in favor of the government. a. In the construction of tax statutes, in case of doubt, exemptions are not favored and are construed strictissimi juris against the taxpayer. b. The fundamental theory is that all taxable property should bear its share in the cost and expenses of the government. c. Taxation is the rule and exemption the exception, and therefore, he who claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms 5% too plain to be mistaken and too categorical to be misinterpreted. d. Claims for an exemption must be able to point out some provision of law creating the right, and cannot be allowed to exist upon a mere vague implication or inference. e. Refunds are in the nature of exemption, and must be construed strictly against the grantee/taxpayer 40  CONSTRUCTIONS OF TAX EXEMPTIONS Exceptions: a. When the law itself expressly provides for liberal construction, that is, in case of doubt, it shall be resolved in favor of exemption. b. When the exemption is in favor of the government itself or its agencies, or of religious, charitable, and educational institutions because the general rule is that they are exempt from tax. c. When the exemption is granted under special circumstances to d. Special classes of persons e. If there is an express mention of if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction does not apply. f. If exemption refers to public property (in case of public property, the general rule is exemption and taxation is the exception) g. Solutio indebiti 41 RESTRICTIONS ON REVOCATION OF TAX EXEMPTION a. Non-impairment clause – applies in contractual tax exemptions or those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by then under enabling laws in which the government, acting in its private capacity, shed its cloak of authority and waives its government immunity. b. Adherence to form – if the exemption is granted by the Constitution, it can only be revoked through a Constitutional amendment. It cannot be revoked by mere passage of law. c. Tax-exempting grant is in the form of special law – where the grant is given through a special law and not by a general law, even if the terms of the general act are broad enough to include the intent to repeal or alter the special law, there 20XX would still be no revocation. 42 FUNDAMENTAL DOCTRINE IN TAXATION 1. No court may enjoin the collection of taxes 2. Claim for exemptions shall be interpreted strictly the taxpayer 3. A law that permits deduction from the tax base is strictly construed against the taxpayer 4. Tax assessments are presumed to be correct and done in good faith 5. Tax laws are generally prospective in application 6. Tax is not subject to compensation or set-off 7. Refund of taxes so not earn interest because interest do not run against the government 20XX 43  TAX AMNESTY VS. TAX CONDONATION VS. TAX EXEMPTION Tax Amnesty – general pardon or intentional overlooking by the state of its authority to impose penalties on persons otherwise guilty of tax evasion or violation of tax laws. The purpose is to give the erring taxpayer a chance to reform and become part of the society with a clean slate. 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. 20XX 44  TAX AMNESTY VS. TAX CONDONATION VS. TAX EXEMPTION Tax Condonation – means to remit or to desist or refrain form exactling or imposing a tax. It cannot extend to refund of taxes already paid when obtaining condonation. Must not be applied to a specific person. It is equivalent to an exemption and should thus follow the rules on tax exemption. Tax Amnesty Tax Exemption Connotes condonation from payment There is no tax liability at all of existing tax liability The grantee pays a portion The grantee need not pay anything Not always available Can be availed of by any qualified taxpayer 20XX 45  PRINCIPLES OF SOUND TAX SYSTEM 1. Fiscal Adequacy – sources of revenue should be sufficient to meet the demand for public expenditure 2. Administrative Feasibility – tax laws must be capable of convenient, just and effective administration 3. Theoretical Justice – tax must be imposed with equality and certainty and must consider the taxpayers ability to pay and benefits received. 46