Taxation PDF

TAXATION The act of levying a tax; the process or means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. 26  TAXES Enforced proporti...

TAXATION The act of levying a tax; the process or means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. 26  TAXES Enforced proportional contributions levied by the state’s law-making body by virtue of its sovereignty upon the persons or properties within its jurisdiction for the support of the government and all its public needs. 27 Nature and Scope of The Power of Taxation The power of taxation is comprehensive, plenary, unlimited and supreme. It is essentially legislative in character and is inherent in the state. 28  THEORIES OF TAXATION Lifeblood Theory 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 Necessity Theory 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. Benefits-Protection / Reciprocity Theory CIR v. Algue, Inc. 29  THEORIES OF TAXATION Lifeblood Theory The power to tax is an attribute of sovereignty emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores Necessity Theory from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a Benefits-Protection government is supposed to provide. / Reciprocity Theory Phil. Guaranty Co., Inc. V. CIR 30  THEORIES OF TAXATION Lifeblood Theory Necessity Theory Taxation is described as a symbiotic relationship whereby in exchange of the benefits and protection Benefits-Protection that the citizens get from the Government, taxes are / Reciprocity Theory paid. CIR v. Algue, Inc. 31 Primary Purpose of Taxation Generate funds or property with which to promote the general welfare and afford protection to its citizens. 32 Secondary or Non-Revenue Purposes of Taxation Reduce excessive inequalities in the distribution of wealth and means by using the progressive scheme of income taxation and imposing estate taxes to equalize wealth; Protect local industries against foreign competitors by imposing protective tariff on imported goods; Encourage the growth of home industries through the proper use of tax exemptions and tax incentives; Implement the police power of the state in promoting the general welfare; 33 Secondary or Non-Revenue Purposes of Taxation Use as bargaining tool in trade negotiations with other countries; Curb spending power and halt inflation by increasing taxes in periods of prosperity and expand business. It also wards off depression by lowering taxes in periods of slump. Promote science and invention; and Finance activities to improve efficiency of military or local police forces in the maintenance of peace and order through the grant of subsidies. 34  Aspects of Taxation or Taxation System Levying or imposition of the tax – this refers to the process of determining the persons or property to be taxed; the purpose of the tax as long as it is a public purpose; the sum/s to be raised; the rate, manner, means and agencies of tax collection. It is a legislative act with powers vested in Congress. Assessment- this refers to the determination of the correct amount of applicable tax. Collection of the tax – this refers to the manner of enforcing the tax obligation on the part of those required to pay the tax. It is essentially administrative in character with powers vested in the Department of Finance especially BIR, Bureau of Customs (BOC) and local government units. 35 ESSENTIAL CHARACTERISTIC OF TAX An enforced contribution Levied pursuant to legislative authority Proportionate in character Generally payable in money Levied by the state which has jurisdiction over the persons or property 36 ESSENTIAL CHARACTERISTIC OF TAX Levied and collected for public purpose/s Commonly required to be paid at regular periods or intervals An involuntary contribution and revenue to the government for public purpose Compulsory government exaction or levy on persons, property, income and business 37 BASIC PRINCIPLES OF A SOUND TAX SYSTEM Fiscal Adequacy – sources of revenues should be sufficient to meet expenditures of government regardless of business conditions. Equality or theoretical justice – taxes must be imposed with equity, certainty, convenience, and consideration of the taxpayer’s ability to pay. 38 BASIC PRINCIPLES OF A SOUND TAX SYSTEM Administrative feasibility and compliance – the law must reasonable, just and effective administration. Moreover, taxpayers should find it easy and convenient to comply. Consistency or compatibility with economic objectives or goals – economic effects of taxation extend far beyond the matter of incidence, allocation of resources to the public sector and redistribution of income. 39 Taxation, Eminent Domain and Police Power Taxation – the power by which the sovereign raises revenue to defray the necessary expenses of the government. Eminent Domain – the power of the state or those to whom the power has been delegated to take private property for public use upon payment of just compensation to be ascertained according to law. It is sometimes called the power of expropriation. Police Power – the power of the state to enact laws, in relation to persons and property, that may promote public health, morals, safety and the general welfare and prosperity of its inhabitants. 40 Taxation, Eminent Domain and Police Power Similarities Rest upon necessity because there can be no effective government without them. Underlie and exist independently under the Constitution although the conditions for their exercise may be prescribed by the statutes or laws. The state lawfully interferes with private rights and property. 41 Taxation, Eminent Domain and Police Power Similarities Exercise of the powers is given to the executive authorities (national or local) although legislative in nature and character. Presuppose an equivalent compensation received, directly or indirectly, by the persons affected in the exercise of these governmental powers 42 Taxation, Eminent Domain and Police Power Differences As to Compensation or Benefits Received Taxation It is assumed that the individual receives the equivalent of the tax in the form of protection and benefits from the government. Police Power The person affected receives no direct and immediate benefits but only such as may arise from the maintenance of public safety, health and welfare of the public Eminent Domain The person affected receives the market value of the property taken from him 43 Taxation, Eminent Domain and Police Power Differences As to whom directed Taxation To the public Police Power To the public Eminent Domain To a particular person or property As to nature of compensation Taxation Presumes protection or benefits Police Power Provides better social and economic standards Eminent Domain Requires payment of just compensation 44 Taxation, Eminent Domain and Police Power Differences As to purpose Taxation To support the government Police Power For public welfare Eminent Domain For public use 45 Taxation, Eminent Domain and Police Power Differences As to relation to impairment clause Taxation Inferior to non-impairment clause of the constitution Police Power Superior to non-impairment clause of the constitution Eminent Domain Inferior to Non impairment clause of the constitution 46 Taxation, Eminent Domain and Police Power Differences As to why property is taken Taxation The property is taken from the taxpayer to support the government. Police Power The use of property is regulated for the purpose of promoting the general welfare; hence, it is not compensable Eminent Domain The property is taken for public use; hence, it must be compensable. 47 Taxation, Eminent Domain and Police Power Differences As to effect Taxation The money becomes part of the public funds. Police Power There is no transfer of title; at most, there is restraint in the injurious use of property. Eminent Domain There is transfer of the right of property whether it be of ownership or a lesser right or possession. 48 Taxation, Eminent Domain and Police Power Differences As to relationship to the Constitution Taxation Subject to certain constitutional limitations including the non-impairment of the obligations and contracts. Police Power Relatively free from constitutional limitations and is superior to the impairment provisions. Eminent Domain Inferior to the impairment clause. The government cannot expropriate property which is previously bound by contract to purchase from other contracting party. 49 Taxation, Eminent Domain and Police Power Differences As to authority which exercises the power Taxation May be exercised only by the government or its political subdivisions Police Power May be exercised only by the government or its political subdivisions Eminent Domain May be exercised by entity engaged in public service or public utilities, if the power is granted by the law. 50 Taxation, Eminent Domain and Police Power Differences As to amount imposition Taxation No limit to the amount of tax that may be imposed. Police Power Limit to the cost of the license and the necessary expenses of police surveillance, inspection, examination, or regulation. Eminent Domain Not fixed because the basis of computing is the property’s fair market value or finally determined by the court. 51 CLASSIFICATION OF TAXES As to Subject Matter or Object 1. Kinds of Taxes on Persons Individual Income Tax – is the tax or imposition on: o The Gross Compensation Income of a person based on a graduated scale. Income tax is based on the gross compensation income less premium on health and/or hospital insurance as the case maybe. o The net income from the exercise of a profession or other income derived from business. 52 CLASSIFICATION OF TAXES Poll or Residence Tax – refers to per capita or poll tax. Privilege or Professional Tax – levied in the practice of profession. All professionals like lawyers, CPAs, doctors are required to pay their Professional Tax before they can practice. 53 CLASSIFICATION OF TAXES 2. Kinds of Taxes on Property Transfer Tax – vary depending on the manner in which property may be transferred. Kinds of Transfer Tax under the NIRC: o Estate Tax – levied on property transferred by way of succession. It is based on the gross value of the estate of a deceased person. o Donor's Tax – refers to the gratuitous transfer of property by one person to another during the former's lifetime. This is called "donation intervivos" which means that the terms of the donation will take effect during the lifetime of the donor. 54 CLASSIFICATION OF TAXES Taxes on Real Property o Real Property Tax – imposed on a property owner based on the assessed value of his property. Percentage tax varies depending on the classification of the property whether classified as commercial or residential. It is also based on the current fair market value or zonal value of the property, whichever is higher. o Capital Gains Tax (CGT) – a property owner who sells, exchanges or transfers his real property must pay this CGT based on the selling price; fair market or zonal value, whichever is higher. 55 CLASSIFICATION OF TAXES 3. Kinds of Business Taxes: Value-Added Tax (VAT) – is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal), lease of goods or properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on to the buyer. Percentage Tax – is a business tax imposed on persons or entities who sell or lease goods, properties or services in the course of trade or business with gross annual sales or receipts that do not exceed P3,000,000 and are not VAT-registered. 56 CLASSIFICATION OF TAXES Excise Tax – an internal tax imposed on the manufacture, sale or consumption of an item within a country, or paid for a license to carry on certain callings or occupations. Two (2) most common kinds of excise tax o Specific Tax - based on weight or volume, capacity, or any other physical unit of measurement of the subject goods. o Ad Valorem Tax - based on the selling price or on other specified value of the goods. 57 CLASSIFICATION OF TAXES As to who bears the burden Direct – demanded from persons who shoulder the burden of the tax which the taxpayer is directly liable, for which he cannot shift to another. Indirect – demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, and the burden of such tax falling finally upon the ultimate purchaser or consumer. 58 CLASSIFICATION OF TAXES As to determination of amount Specific – fixed amount that is imposed based on physical unit of measurement, as by head or number, weight or length or volume. Ad valorem – fixed amount in proportion to the value of property with respect to which the tax is assessed. 59 CLASSIFICATION OF TAXES As to purpose General, fiscal or revenue – imposed for the general purposes of the government to raise revenues for government needs. Special or regulatory – imposed for a special purpose, regardless of whether revenue is raised or not, and is intended to achieve some social or economic end. 60 CLASSIFICATION OF TAXES As to scope or authority imposing the tax National – imposed by the national government. Municipal or local – imposed by municipal or local government. 61 CLASSIFICATION OF TAXES As to graduation or rate Proportional – based on a fixed percentage of the amount of property, receipts, or other basis to be taxed. Progressive or graduated – the rate increases as the tax base or bracket increases. Regressive – the rate decreases as the tax base or bracket increases. Degressive – the increase in rates is not proportionate to the increase of tax base. 62 Tax as Distinguished from Other Terms 1. From license or permit fee Tax – an enforced contribution assessed by sovereign authority to defray public expenses; imposed for revenue purposes on persons, property and right to exercise privilege; involves exercise of taxing power; generally has no maximum amount imposed; non-payment does not make a business or act illegal. License – legal compensation or reward of an officer for specific services; imposed for regulatory purposes; involves exercise of police power; amount is limited to cost of issuing the license and reasonable police surveillance; imposed only on right to exercise privilege; non-payment makes the act or business illegal. 63 Tax as Distinguished from Other Terms 2. From toll Tax – a demand of sovereignty imposed exclusively by the state or government; it is for the support of government; the amount is regulated by the government to support it. Toll – a demand of proprietorship; imposed by private persons and also by government; a compensation for use of another’s property; the amount is determined by cost of property. 64 Tax as Distinguished from Other Terms 3. From penalty Tax – aimed at raising revenue; imposed only by the government. Penalty – imprisonment or fine to regulate conduct; imposed by the government and also by private entities. 65 Tax as Distinguished from Other Terms 4. From special assessment Tax – levied on persons, property, or exercise of privilege; can be made a personal liability of the person assessed; based on government’s necessity without any special benefit accruing to taxpayer; applied in general application; not exceptional as to time and locality. Special Assessment – levied only on land; based on special benefits resulting to property assessed and not on necessity; exceptional both as the time and place and not applied generally; not a personal liability of person assessed. 66 Tax as Distinguished from Other Terms 5. From revenue Tax – refers to the income derived from the regular system of taxation, and as such, accrues more or less regularly every year. Revenue – refers to the aggregate of all funds or income derived by the government from taxes or from whatever sources or whatever means. It is broader in scope. 67 Tax as Distinguished from Other Terms 6. From custom duties Tax – broader than custom duties on tariff because tax refers to an exaction by the government including tariff and custom duties. Custom duties – refers to a kind of tax imposed on articles that are traded internationally, particularly impositions on imported or exported goods. 68 Tax as Distinguished from Other Terms 7. From debt Tax – based on law; generally payable in money; cannot be a subject of set-off or compensation; governed by special prescriptive periods under the NIRC; imprisonment is sanctioned for the non-payment of tax; cannot generally be assigned; does not draw interest except when delinquent. Debt – generally based on expressed or implied contracts; may be paid in kind and be a subject of set-off or compensation; governed by prescriptive periods under the Civil Code and other special laws; a person cannot be imprisoned for non-payment thereof except when it arises from a crime. 69 Tax as Distinguished from Other Terms From subsidy Subsidy – a pecuniary aid granted directly by the government to an individual or private commercial enterprise deemed beneficial to the public. It is not a tax although a tax may have to be imposed to pay it. 70