Income Taxation Reviewer PDF

INTRODUCTION TO TAXATION limitations. (Mamalateo, Bar Reviewer on Taxation, 2019, p.15) WHAT IS TAXATION? 2. REGULATORY Taxation may be defined as a...

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