General Principles of Taxation PDF May 2022

May 2022 GENERAL PRINCIPLES OF TAXATION Atty. C. Llamado Taxation Defined The exercise of the sovereign power to raise revenues for the expenses of the government. Stages or Coverage of Taxation Taxation cover...

May 2022 GENERAL PRINCIPLES OF TAXATION Atty. C. Llamado Taxation Defined The exercise of the sovereign power to raise revenues for the expenses of the government. Stages or Coverage of Taxation Taxation covers three (3) separate areas or aspects of government activity, namely: 1. Levying or imposition of the tax. This involves the passage of tax laws which is generally a legislative act. In the Philippines, the taxing power is exercised by Congress. 2. Assessment. The process of determining the correct amount of tax due. 3. Collection and payment – the act of compliance with the tax law by the taxpayer. Executive or administrative in nature. Done by the Bureau of Internal Revenue (“BIR”) 3 Inherent Powers of a State: 1) Power to Tax 2) Police Power 3) Power of Eminent Domain The Power to Tax Subject to inherent and constitutional limitations, the power of taxation is regarded as supreme, plenary, unlimited, and comprehensive.1 As long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or restrictions, the courts have no concern with the wisdom or policy of the exaction, the political or other collateral motives behind it, the amount to be raised, or the persons, property, or other privileges to be taxed.2 Police Power Police power is the inherent power of a sovereign state to legislate for the protection of the health, general welfare, safety, and morals of the public. It involves the power to regulate both liberty and property for the promotion of the public good. Note: The police power of the State may be exercised through taxation because taxes may be levied for the promotion of the welfare of the public.3 Power of Eminent Domain The power of eminent domain is the inherent power of a sovereign state to take private property for a public purpose. The Constitution limits the exercise of this power by providing that: “Private property shall not be taken for public use without just compensation.”4 1 To say that “the power to tax is the power to destroy” is to describe not the purpose for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue (1 Cooley 179-181). 2 51 Am. Jur. 77-78. 3 Lutz v. Araneta, 98 PHIL. 148. 4 Art. III, Sec. 9, 1987 Philippine Constitution. 1 May 2022 Distinctions Among the Three Inherent Powers A) Purpose: Taxation To raise revenues for the expenses of the State. Police Power To promote the general welfare thru regulations. Eminent Domain To facilitate the State’s need of property for public use. B) Amount of Exaction Taxation No limit. Police Power Limited to the cost of regulation, issuance of the license, and/or surveillance. Eminent Domain No exaction but private property is taken for public use. C) Benefits Received Taxation No special or direct benefit is received by an individual taxpayer. The public receives the general benefit of protection of person, property and the promotion of the general welfare. Police Power No direct benefit is received by an individual. A healthy economic standard of society is attained. Eminent Domain A direct benefit results in the form of just compensation to the property owner. D) Non-Impairment of Contracts Taxation Obligations in contracts may not be impaired by the state where tax exemptions are bilaterally agreed upon by the state and the taxpayer. Tax exemptions bilaterally agreed upon between the government and the taxpayer cannot be withdrawn. Police Power Obligations in contracts may be impaired by the government. Eminent Domain Obligations in contracts may be impaired by the government. E) Transfer of Property Rights Taxation Taxes paid become part of public funds. Police Power No transfer, but only restraint in the exercise of property rights. Eminent Domain Transfer is effected in favour of the State. F) Scope Taxation All persons, property, rights, and privileges. Police Power All persons, property, rights, privileges, and liberties Eminent Domain Only upon specific property. G) Authority which exercises the power Taxation Exercised by the government or its political subdivisions 2 May 2022 Police Power Exercised by the government or its political subdivisions Eminent Domain May be exercised by public service corporations or private entities operating public utilities if granted by law Limitations on the Power to Tax (1) Constitutional limitations. (a) No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.5 (b) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.6 Uniformity – persons or properties falling under the same class should be taxed the same kind and rate of tax. Equality – the same means and methods be applied impartially to all the members of each class Equal protection of the law – means equality before the law. However, such equality does not deny to the state the power to recognize factual differences between individuals and classes. It recognizes that inherent in the right to legislate is the right to classify, provided that it is a valid and reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another.7 (c) No person shall be imprisoned for debt or non-payment of a poll tax.8 (d) Charitable institutions, churches, and parsonages, or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.9 Note: The exemption referred to here is exemption from the real property tax which is a local tax levied by a province or city (not by the National Government). (e) No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress.10 (f) No law impairing the obligation of contracts shall be passed.11 5 Art. III, Sec. 1. 6 Art. VI, Sec. 28(1). 7 Tiu v. CA, G.R. No. 127410. 8 Art. III, Sec. 20. 9 Art. VI, Sec. 10. Exempt from real property taxation. 10 Art. VI, Sec 28(4). 11 Art. III, Sec. 10. 3 May 2022 i) When the tax exemption is bilaterally agreed upon between the government and the taxpayer, the exemption cannot be withdrawn without violating the non- impairment clause. ii) However, when the tax exemption is unilaterally granted by law, the same may be withdrawn by virtue of another law without violating the non-impairment clause. Ex. When the tax exemption is granted under a franchise embodied in a law, the same may be withdrawn at any time. (g) No law shall be made respecting an establishment of a religion or prohibiting the free exercise thereof.12 No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or other religious teacher or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution, or government orphanage or leprosarium.13 (h) All appropriation, revenue or tariff bills xxxxxxx shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.14 (i) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.15 (j) The Supreme Court shall have the power to review, revise, reverse, modify, or affirm on appeal or certiorari as the law or the Rules of Court may provide, final judgments and orders of lower courts in xxxx all cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto.16 (k) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.17 (l) The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object.18 12 Art. III, Sec. 5. 13 Art. VI, Sec. 29 (2). 14 Art. VI, Sec. 24. 15 Art. VI, Sec. 28 (2). 16 Art. VIII, Sec. (5) (2) (b). 17 Real properties of non-stock, non-profit educational institutions are exempt from real property taxes which are imposed by the local government. Provided such properties are actually, directly, and exclusively used for educational purposes. Moreover, income of a non-stock, non-profit educational institution derived from any activity or property shall be exempt from income taxation as long as such income is used actually, directly, and exclusively for educational purposes (CIR vs. De La Salle, Inc., Supreme Court G.R. No. 196596, November 2, 2016). 18 Art. VI, Sec. 27 (2). 4 May 2022 (m) All money collected or any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government.19 (2) Inherent limitations. These are restrictions arising from the very nature of the power to tax itself. They are: (a) The levy must apply within territorial limits for the exercise of effective tax jurisdiction. (b) The tax must be for a public purpose. (c) Exemption from taxation of the government, any political subdivision thereof, or agencies performing purely governmental functions. Ex. City government of Makati. However, when a local government unit (LGU), government agency, or government owned and controlled corporation engages in activities which are proprietary in character (i.e. engaging in businesses and activities similar to those performed by other taxable corporations), such LGU, government agency, or GOCC shall be subject to both income and business taxes as other private corporations. Exs. Land Bank of the Philippines; PAGCOR. EXC: The Government Service Insurance System (GSIS), the Social Security System (SSS), Home Development Mutual Fund (Pag-Ibig), the Philippine Health Insurance Corporation (PHIC or Philhealth), and local water districts (LWDs); are exempt from the income tax imposed under Section 27 of the National Internal Revenue Code (“NIRC”). (d) As a general rule, the taxing power of the legislature may not be delegated. Exceptions to this non-delegability rule are: i) The authority of the President to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties and imposts (Art. VI, Sec. 28 (2), 1987 Constitution). ii) Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments (Art. X, Sec. 5, 1987 Constitution). Ex. Real property taxes. iii) Delegation to administrative agencies for implementation of the tax laws, and collection of the tax to the BIR. (e) International comity. This principle limits the authority of the government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held and activities undertaken in that capacity. As a rule, the Philippine government cannot tax foreign ambassadors nor impose real property taxes upon foreign embassies. (f) Double Taxation. Two types of double taxation are direct double and indirect double taxation. Direct double taxation – Where: (1) the same subject is taxed twice; 19 Art. VI, Sec. 29 (3). 5  May 2022 (2) by the same taxing authority; (3) within the same jurisdiction; (4) during the same taxing period; and (5) covering the same kind or character of tax (Villanueva v. City of Iloilo, L-26521). There is no constitutional prohibition against double taxation in the Philippines (Villanueva v. City of Iloilo, L-26521, December 28, 1968), though it is not favoured. Indirect double taxation, which lacks one or more of the elements of direct double taxation, is also permissible. Basic Principles of a Sound Tax System 1. Fiscal Adequacy – which means that the sources of revenue should be sufficient to meet the demands of public expenditures; 2. Equality or Theoretical Justice – which means that the tax imposed should be proportionate to the taxpayer’s ability to pay; and 3. Administrative Feasibility – which means that the tax laws should be capable of convenient, just, and effective administration Theory or Basis of Taxation 1) Life-blood Theory. - Taxes are the lifeblood of the government. Without taxes, no government can function. 2) 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 (Commissioner v. Algue, 158 SCRA 9). Essential Elements or Characteristics of a Tax 1. Enforced contribution 2. Exacted pursuant to legislative authority 3. For raising revenue for public needs 4. Proportionate in character or uniform 5. Payable in money 6. Imposed within the state’s jurisdiction 7. Personal to the taxpayer Classification of Taxes a) According to scope or exercising authority National tax Municipal or local tax - Imposed by the National Government - Imposed by local government units Exs. Income tax, Estate tax, Donor’s tax, Exs. Occupation tax, Real property tax (RPT) VAT, OPT, Excise Tax, DST b) According to subject matter or object Personal, capitation, or poll tax Property tax Excise tax - Fixed amount imposed upon persons - Imposed on - Imposed upon the performance of an act; of a certain class without regard to property the exercise of a right; or the engaging in business or profession 6  May 2022 property, trade, business, or occupation Ex. Community tax Ex. RPT Exs. VAT, Donor’s tax, Estate tax, Income tax, Occupation tax, Excise tax c) According to who bears the burden of the tax Direct tax Indirect tax - The liability for the tax (impact), and the burden - The liability or impact for the tax falls on the thereof (incidence) fall on the same taxpayer original taxpayer, but the burden or incidence thereof is shifted to another. Ex. Income tax Ex. VAT, excise tax, custom duties d) According to purpose General or Revenue tax Special tax Levied without a specific or pre-determined purpose Levied for a special purpose Ex. Income tax, VAT, etc. Ex. Protective tariffs; special assessments e) According to the rate applied Proportional Progressive Regressive Based on a fixed percentage of the The tax rate increases as the tax The tax rate decreases as the tax base base increases tax base increases Exs. RPT, VAT, Donor’s tax, Ex. Income tax on individuals Ex. None Estate tax. under the graduated rates f) According to measurement of the amount due Specific Ad Valorem Measured by number, or based on weight Based on the value of the property and may require the or physical measurement intervention of assessors and appraisers Exs. Excise tax on lubricating oils, waxes, Exs. RPT; excise tax on liquors, cigarettes packed by petroleum, etc. machine, and automobiles Nature or Construction of Tax Laws 1. Tax laws are prospective, generally, but can have retrospective application. The constitutional prohibition against the passage of laws having retrospective application (also called ex post facto legislation) is limited to penal or criminal statutes. Tax laws are not penal in character. Being civil in nature, the constitutional prohibition against ex post facto legislation does not apply to tax laws.20 They can therefore be given retrospective application if expressly declared by the tax law. However, tax laws, like other statutes, are to be construed as having only a prospective operation unless the purpose and intention of the legislature to give retrospective effect is expressly declared or is necessarily implied from the language used.21 20 Law of Basic Taxation in the Philippines, Benjamin Aban; citing Republic v. Oasan Vda. de Fernandez, et al., 99 Phil. 934; Ex Parte Garland, 18 Law Ed. 366. 21 Lorenzo v. Posadas, 64 Phil. 353. 7 May 2022 A tax creates a civil obligation or liability on the part of the taxpayer, although the non- payment thereof creates a criminal liability, which could be the subject of criminal prosecution under existing laws. In short, in taxation, it is one’s civil liability to pay taxes that gives rise to criminal liability.22 2. A statute will not be construed as imposing a tax unless it does so clearly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the provisions of a taxing act are not to be extended by implication.23 In case of doubt, statutes imposing a tax are construed most strongly against the Government, and liberally in favor of the citizen because burdens are not to be imposed beyond what the statutes expressly can clearly import.24 3. Tax exemptions are to be construed strictly against the taxpayer. Legal provisions providing for tax exemptions are to be construed strictly against the grant and liberally in favor of the taxing power.25 Exemption from taxation is construed strictissimi juris, i.e. strictly against exemption. Hence, exemption must be anchored firmly on an express provision of law. He who claims exemption must be able to justify his claims by the clearest grant of organic and statute law.26 4. Revenue laws are not political in nature. Our internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government.27 5. Legislative intention must be considered. Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent.28 6. Tax laws are special laws, and prevail over general laws.29 Sources of Tax Laws 1. The 1987 Constitution; 2. Tax statutes such as the National Internal Revenue Code (“NIRC”), the Tariff and Customs Code, the VAT Law, the Revised Documentary Stamp Tax Law, the Amended Excise Tax Law, and portions of the Local Government Code; 3. Executive orders on taxation, and local tax ordinances; 4. Tax treaties and conventions with foreign countries; 22 Republic v. Patanao, L-22356, July 21, 1967. 23 Marinduque Mines Agents v. Municipal Council of Hinabangan, L-18924; Commissioner v. CA, GR 115349, April 18, 1997. 24 Manila Railroad v. Collector of Customs, GR 10214; CIR v. La Tondeña, Inc. et. al., L-10431. 25 Phil. Int’l. Fair, Inc. v. Collector, G.R. L-12928 and L-12932, 1962. 26 Collector v. Manila Jockey Club, Inc., 53 O.G. 3762. 27 Emilio Y. Hilado v. Collector, G.R. No. L-9408, October 31, 1956. 28 51 Am. Jur. 361. 29 Republic v. Gancayco, L-18307, June 30, 1964. 8  May 2022 5. Judicial decisions; 6. Rules and regulations promulgated by the Department of Finance, the Bureau of Internal Regulations (“BIR”), Bureau of Customs, etc. 7. Administrative interpretations and opinions of tax officials particularly those of the Commissioner of Internal Revenue. Forms of Escape from Taxation 1. Shifting the burden of the tax. 2. Capitalization. By not selling property which has increased in value, the owner avoids the income tax to be paid on the gain if the same is sold. An increase in the value of an asset is merely an unrealized increase (gain) in capital. 3. 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. He then endeavors to recoup the tax paid by making his production more efficient and lowering his cost of production. 4. Tax exemption. Exemption from taxation is the freedom from the burden of paying tax. 5. Tax avoidance. Tax avoidance occurs when the means used to minimize taxes are legal and not prohibited by law. 6. Tax evasion. Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes.30 Tax and Licence Distinguished Tax License Purpose To raise revenue To regulate action, businesses, industries, professions Limitations on taxation Subject to constitutional and inherent Not subject to the limitations on limitations on the power to tax taxation Amount Unlimited Limited to the cost of regulation (licensing, inspection, surveillance) Effect of non-payment Does not make the business illegal Makes the business illegal Tax Special Assessment Imposed on all property (real or personal) in a Imposed only on property which benefit from prescribed area the improvement “Special Assessment” Defined A special assessment is in the nature of a tax upon property levied according to benefits conferred on the property. The whole theory of a special assessment is based on the doctrine that the property against which it is levied derives some special benefit from the improvement xxxxxxx their property being increased in value by the expenditure to an amount at least equal to the sum they are required to pay.31 30 Yutivo Sons Hardware v. CTA, L-13203, January 28, 1961, 1 SCRA 160. 31 1 Cooley on Taxation, 105. 9  May 2022 Characteristics of Special Assessment 1. A special assessment can be levied only on land; 2. A special assessment cannot (at least in most states) be made a personal liability of the person assessed; 3. A special assessment is based wholly on benefits; and 4. A special assessment is exceptional both as to time and locality. Tax and Debt Distinguished Tax Debt Source of obligations Law Contract Obligee Due to the government in Due to obligee under a contract; May be due to its sovereign capacity the government in its corporate capacity Form of payment Money Money, property, or services Interest No interest except in cases If stipulated or if the payment is in delay of delinquency Assignability Not assignable Generally assignable Compensation/Set-off No Yes Incarceration for non- Yes, except for non- No person can be imprisoned for non-payment payment payment of poll tax of debts (Constitution). Tax and Toll Distinguished Tax Toll Demand for sovereignty Demand of ownership or proprietorship Imposed by the government May be imposed by private persons or entities May be based on income or on the value Largely based on the cost of the property used, or on of the property the cost of the improvement used Forced contribution Compensation charged by the owner for the voluntary use of the property/improvements Tax Administration 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. Powers and Duties of the Bureau of Internal Revenue (“BIR”) 1. The assessment and collection of all national internal revenue taxes, fees, and charges; 2. The enforcement of all forfeitures, penalties, and fines connected therewith; 3. The execution of judgments in all cases decided in its favor by the Court of Tax Appeals, and the ordinary courts; 4. The giving effect to and the administering of the supervisory and police power conferred to it by the Tax Code or other laws. Powers of the Commissioner of Internal Revenue (“CIR”)32 1. Power to interpret tax laws subject to review by the Secretary of Finance; 2. Power to decide disputed assessments, refunds of internal revenue taxes, fees and other charges, penalties imposed in relation thereto, other matters arising under the National 32 The BIR shall have a chief to be known as the Commissioner of Internal Revenue (CIR), and four (4) assistant chiefs to be known as Deputy Commissioners (Sec. 4, NIRC). 10 May 2022 Internal Revenue Code (“NIRC”) or other laws or portions thereof administered by the Bureau of Internal Revenue (“BIR”), subject to the exclusive appellate jurisdiction of the Court of Tax Appeals (“CTA”); 3. Power to examine any book, paper, record, or other data which may be relevant or material to a tax inquiry; 4. Power to obtain information from any person other than the person whose internal revenue tax liability is subject to audit or investigation or from any office or officer of the national or local governments, government agencies and instrumentalities; 5. Power to summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records; 6. Power to take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; 7. Power to make assessments. 8. Power to prescribe real property values by dividing the country into different zones and determining the FMV of real properties located in each zone; 9. The Commissioner is authorized to inquire into the bank deposits and other related information held by financial institutions of: (a) A decedent to determine his gross estate; (b) A taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability; and (c) A taxpayer who is subject of a request for the supply of tax information from a foreign tax authority pursuant to an international agreement or treaty. 10. The Commissioner has the authority to accredit and register individuals and general professional partnerships (GPPs) and their representatives who prepare and file tax returns, statements, reports and other papers, or who appear before the BIR, for taxpayers. 11. Power to prescribe additional procedural or documentary requirements in connection with the submission or preparation of financial statements accompanying the tax returns. 11