General Concepts and Principles of Taxation PDF

A. GENERAL CONCEPTS AND PRINCIPLES OF TAXATION Learning Objectives. At the end of this module, students are expected to: a) Understand the inherent powers of the State b) Understand the purposes of taxation c) Identify the nature, scope and limitations of taxation d) Have know...

A. GENERAL CONCEPTS AND PRINCIPLES OF TAXATION Learning Objectives. At the end of this module, students are expected to: a) Understand the inherent powers of the State b) Understand the purposes of taxation c) Identify the nature, scope and limitations of taxation d) Have knowledge on the basic principles of a sound tax system e) Identify the situs of taxation f) Identify the sources of tax laws g) Identify other doctrines in taxation TAXATION – the process by which the sovereign, through its law-making body, imposes burdens for the purpose of raising revenues to carry out legitimate objects of the government TAXES – the enforced contributions levied by the law-making body of the state for the support of the government and all the public needs. 3 INHERENT POWERS OF THE STATE 1. Police Power- the power of promoting public welfare and regulating the use of liberty and property. 2. Power of Taxation – the power which raises revenue for the expenses of the government 3. Power of Eminent Domain – the power to acquire private property for public purpose upon payment of just compensation PURPOSES OF TAXATION 1. Primary: Revenue or Fiscal Purpose - to provide funds or property with which to promote general welfare and protection of its citizens 2. Secondary: Regulatory Purpose - employed as a devise for regulation or control Effects: - Promotion of General Welfare - Reduction of Social Inequality - Economic Growth THEORIES OF TAXATION 1. Necessity Theory - to preserve the state’s sovereignty - a means to give for protection and facilities 2. Lifeblood Theory - used to continue to perform the government’s basic function of serving and protecting its people - give tangible and intangible benefits Basis of Taxation – The government may be able to perform its functions while the citizens may be secured in the enjoyment of the benefits. MANIFESTATION OF LIFEBLOOD THEORY 1. Rule of “No Estoppel against the government” 2. Collection of taxes cannot be stopped by injunction  Court of Tax Appeals – have the authority to grant injunction to restrain collection of internal revenue tax, fee or charge 3. Taxes could not be the subject of compensation or set-off  Tax is compulsory not bargain. 4. Right to select objects (subjects) of taxation a) Subject or object to be taxed  b) Purpose of the tax (as long as it is a public purpose) c) Amount or rate of the tax d) Kind of tax e) Apportionment of the tax f) Situs (place) of taxation g) Manner, means, and agencies of collection of the tax 5. A valid tax may result in the destruction of the taxpayer’s property.  Lawful tax cannot be defeated.  Bring out the insolvency of the taxpayer  Forfeiture of property through police power NATURE, SCOPE AND LIMITATIONS OF TAXATION SCOPE OF TAXATION The power of taxation is the most absolute of all the powers of the government. a) Comprehensive – covers all (persons, businesses, professions) b) Unlimited – absence of limitations c) Plenary – it is complete d) Supreme – ESSENTIAL ELEMENTS OF TAX a) It is an enforced contribution. b) It is generally payable in money. c) It is proportionate in character. d) It is levied on persons, property or right. e) It is levied by the law-making body of the state. f) It is levied for public purpose. ASPECTS OF TAXATION a) Levying or imposition of tax b) Assessment or determination of the correct amount c) Collection of tax NATURE/ CHARACTERISTICS OF THE STATE’S POWER OF TAX a) It is inherent in sovereignty. -can enforce contribution in the absence of law b) It is legislative in character. -cannot be exercised by executive and juridical branches c) Exemption of government entities, agencies and instrumentalities. d) International Comity e) Limitation of territorial jurisdiction f) Strongest among all the inherent powers of the state  Agencies performing governmental function are tax exempt unless expressly taxed  Agencies performing proprietary functions are subject to tax unless expressly exempted  GOCCs performing proprietary functions are subject to tax, however the following are granted tax exemptions:  Government Service Insurance System (GSIS)  Social Security System (SSS)  Philippine Health Insurance Corporation (PHIC)  Philippine Charity Sweepstakes Office (PCSO)  Local Water Districts (RA 10026) CLASSIFICATION OF TAXES  1. As to scope:  National- imposed by the national government  Local – imposed by the local government 2. As to subject matter or object:  Personal, poll, or capitation – tax of a fixed amount imposed upon individual residing within a specified territory.  Property – tax imposed on property in proportion to its value  Excise – tax on certain rights and privileges (sin products or imported goods) 3. As to who bears the burden:  Direct – taxpayer cannot shift to another  Indirect – indemnify himself at the expense of another 4. As to determination of fixed amount:  Specific- tax of fixed amount by number, standard of weight, or measurement  Ad valorem – tax of fixed proportion of the value of the property 5. As to purpose:  Primary, Fiscal, or Revenue Purpose  Secondary, Regulatory, Special, or Sumptuary Purpose 6. As to graduation or rate:  Proportional – tax based on fixed percentages of amount  Progressive – tax the rate of which increases as the tax base or bracket increases  Regressive - tax the rate of which decreases as the tax base or bracket increases 7. As to taxing authority:  National – imposed under National Internal Revenue Code, collected by Bureau of Internal Revenue  Local – imposed by LGUs BASIC PRINCIPLES OF A SOUND TAX SYSTEM ELEMENTS OF SOUND TAX SYSTEM a. Fiscal Adequacy – sources must be adequate b. Theoretical Justice or Equity – tax should be proportionate c. Administrative Feasibility – law must be capable of effective and efficient enforcement LIMITIATIONS ON THE STATE’S POWER TO TAX 1. Inherent Limitations 2. Constitutional Limitations  Progressive System – emphasis on direct taxes  Regressive System – more indirect taxes imposed  Regressive Tax Rates – tax rates which decreases as tax base or bracket increases SITUS OF TAXATION FACTORS IN DETERMINING THE SITUS OF TAXATION  a. Subject matter ( person, property, or activity) b. Nature of tax c. Citizenship d. Residence of the taxpayer e. Source of Income f. Place of excise, business or occupation being taxed OTHER DOCTRINES IN TAXATION  TOLL is a sum of money for the use of something which is paid of the use of a road, bridge or public nature.  PENALTY is a sanction imposed as a punishment for violation of law or acts deem injurious.  SPECIAL ASSESSMENT is an enforced proportional contribution from owners of the lands for special benefits resulting from public improvements. Characteristics: a. Levied only on land b. Not a personal liability of the person assessed c. Based wholly on benefits (not necessary) d. Exceptional both as to time and place  REVENUE refers to all funds or income derives by the government.  SUBSIDY is a pecuniary aid directly granted by the government to an individual or enterprise deemed beneficial to the public.  PERMIT or LICENSE is a charge imposed under the police power for purposes of regulation.  CUSTOMS DUTIES are taxes imposed on goods exported from or imported into a country.  TARIFF is the system of imposing duties on the importation or exportation of goods. DIRECT DOUBLE TAXATION means taxing twice: 1. By the same taxing authority, jurisdiction or taxing district 2. For the same purpose 3. In the same year or taxing period 4. Same subject or object 5. Same kind or character of the tax MEANS OF AVOIDING THE BURDEN OF TAXATION 1. Shifting – the transfer of the burden of tax by the original payer to someone else 2. Transformation – the producer pays the tax and endeavor to recoup himself by improving his process of production 3. Evasion – the use of illegal means to defeat or lessen tax 4. Tax Avoidance – the exploitation of legally permissible alternative tax rates of assessing taxable income to reduce tax liability 5. Exemption – the grant of immunity to particular persons of a particular class 6. Capitalization – the reduction in the selling price of income producing property by an amount equal to the capitalized value 7. Avoidance – the tax saving device within the means sanctioned by law. SOURCES OF TAX LAWS 1. Constitution 2. National Internal Revenue Code 3. Tariff and Customs Code 4. Local Government Code (Book II) 5. Local tax ordinances/ City or municipal tax codes 6. Tax treaties and international agreements 7. Special Laws 8. Decision of the Supreme Court and the Court of Tax Appeals 9. Revenue rules and regulations and administrative ruling and opinion