NDMU BAC 105: Income Taxation PDF

PLEASE READ: RULES ON THE USE OF HANDOUT 1. THIS HANDOUT IS FOR THE EXCLUSIVE USE OF BAC 105 CLASS ONLY. 2. ALL CONTENTS IN THIS HANDOUT ARE COMPILATION OF THEORIES AND EXAMPLES ABOUT THE SUBJECT FROM VARIOUS REFERENCES. 3. STUDENTS ARE ADV...

PLEASE READ: RULES ON THE USE OF HANDOUT 1. THIS HANDOUT IS FOR THE EXCLUSIVE USE OF BAC 105 CLASS ONLY. 2. ALL CONTENTS IN THIS HANDOUT ARE COMPILATION OF THEORIES AND EXAMPLES ABOUT THE SUBJECT FROM VARIOUS REFERENCES. 3. STUDENTS ARE ADVISED TO DO RESEARCH IN OTHER REFERENCE BOOKS OR SITES FOR THE SEATWORK, QUIZZES OR CASES. 4. THIS HANDOUT CAN BE PRINTED OR SAVE THE SOFTCOPY FOR CLASSROOM USE ONLY. 1 5. NOT FOR POSTING IN ANY INTERNET PLATFORM AND NOT FOR ELECTRONIC SHARING THRU MESSENGER OR ANY SOCIAL MEDIA. BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE)  NOTRE DAME OF MARBEL UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION BAC 105: INCOME TAXATION FUNDAMENTAL PRINCIPLES OF TAXATION CHAPTER 1 PART 1 3 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) LEARNING OBJECTIVES 1. Discuss the history, definition, nature and basis of taxation 2. Enumerate, aspects and purposes of taxation; Basic Principles of Sound Tax System and different State Powers. 3. Contrast inherent limitations from constitutional limitations 4. Determine situs of taxation 5. Define what is tax; it’s essential characteristics and classifications 6. Distinguish tax from other government fees/revenue 4 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.1 HISTORY OF TAXATION IN THE PHILIPPINES ¡ It all started from the Ancient Filipinos/ Pre-colonial time: o pay their taxes to their Datu or the Chiefs for the protection they gave to them, the tax was termed buwis or handug. o everyone (alipin & timawa) is required to pay their taxes, except for the Datu/Chieftain’s household (maharlikas). 5 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.1 HISTORY OF TAXATION IN THE PHILIPPINES § Arrival of the Spaniards from 1521 to 1898/Colonial times: o gave the Filipinos modern concepts of taxation, wherein 16 years old to 60 years old males where forced to pay tribute or tributo to the King of Spain through the Colonial Government. A tribute is equivalent to 8 reales = Php 1 o other forms of payment like gold, chickens, textile, rice and forced labor or Polo Y Servicio. 6 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.1 HISTORY OF TAXATION IN THE PHILIPPINES ¡ In 1884, under Spanish rule, the tribute was abolished and was replaced by the cedula or sedula, a certificate identifying the tax payer that needs to be carried all the time. ¡ If someone is not able to present their cedula to a guardia civil they will be imprisoned for being “indocumentado”, which means that they lack valid document or legal personal identification necessary to prove their identity. 7 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.1 HISTORY OF TAXATION IN THE PHILIPPINES § From 1898 to 1903, the American followed the Spanish System of taxation. § Under American rule, the Internal Revenue Law of 1904 was made. ¡ August 1, 1904 Bureau Internal Revenue was created ¡ The urbana which is a tax on the annual rental value of an urban real estate was replaced known as land tax that charge both urban and rural real estate Civil Government in the Philippines ¡ The industria tax was imposed. ¡ In 1937, the cedula tax was abolished. 8 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.1 HISTORY OF TAXATION IN THE PHILIPPINES ¡ 1987 Philippine Constitution states that it “sets limitations on the exercise of the power to tax.” ¡ The rule of taxation shall be uniform and equitable. ¡ The congress shall evolve a progressive system of taxation. The Philippines covers both national and local. ¡ National Taxes refer to national internal revenue taxes imposed and collected by the national government through the BIR or Bureau of Internal Revenue ¡ While the Local Taxes is those imposed and collected by the local government. 9 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.2 TAXATION IN THE PHILIPPINES 10 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.2 TAXATION IN THE PHILIPPINES SOURCES OF PHILIPPINE TAX LAWS 1. 1987 Philippine Constitution (Article VI, Section 28) 2. Statutes and Presidential Decrees (President) 3. Revenue Regulations by the Department of Finance 4. Rulings issued by Commissioner of Internal Revenue 5. Decisions of the Supreme Court and Court of Tax Appeals 6. National Internal Revenue Code 7. Local Government Code of 1991 8. Provincial, city, municipal and barangay ordinances 9. Tax treaties and international agreements 11 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.3 TAXATION ¡ Taxation - the power by which the sovereign through its law- making body raises revenue to defray the necessary expenses of the government. § Power – inherent power of a state to demand contributions for public purposes to support the government. § Process – passes a legislative undertaking thru enactment of tax laws and which will be implemented by the executive branch § Means – way of collecting and apportioning the cost of government among those who are privileged to enjoy its 12 benefits. BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.4 INHERENT POWERS OF SOVEREIGN STATE Inherent powers are powers of a state or branch of government that are not expressly written in a Constitution: 1. POLICE POWER – the power to enact laws to promote public health, public morals, public safety and the general welfare of the people 2. POWER OF EMINENT DOMAIN – the power to take private property for the public use upon payment of just compensation and observance of due process 3. POWER OF TAXATION – the power by which the sovereign raises revenue to defray the necessary expenses of the government 13 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.4 INHERENT POWERS OF SOVEREIGN STATE SIMILARITIES OF THE POWERS 1. They are inherent powers of the state 2. They all underlie and exist independently of the constitution 3. They constitute the three ways by which the state interferes with the private rights and property 4. They are legislative in nature and character 5. They presuppose an equivalent compensation 14 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.4 INHERENT POWERS OF SOVEREIGN STATE DISTINCTIONS OF 3 INHERENT POWERS EMINENT CRITERIA TAXATION POLICE POWER DOMAIN Power to enforce Power to make Power to take As to Nature contribution to and implement private property for raise government laws for the public use with just funds general welfare compensation Exercised only by Exercised only by May be granted to government or its government or its public service or As to Authority political political public utility subdivisions subdivisions companies Broader in Merely a power to Plenary, application take private As to Scope comprehensive General power to property for public 15 and supreme make and use BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) implement laws 1.4 INHERENT POWERS OF SOVEREIGN STATE DISTINCTIONS OF 3 INHERENT POWERS EMINENT CRITERIA TAXATION POLICE POWER DOMAIN Property is taken Money is taken to Private property or destroyed to As to purpose support the is taken for public promote general government use welfare Can be expressly Can be expressly Cannot be delegated to the delegated to the As to delegation delegated local government local government units units Cost of regulation, As to amount of license and other No Limit No imposition imposition necessary 16 expenses BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.5 PURPOSE OF TAXATION Primary Purpose: Revenue or Fiscal Purpose To provide funds or property with which to promote general welfare and the protections of its citizens. Some examples of public goods and services that are funded by taxes include national defense, healthcare, education, and infrastructure. Secondary Purpose: 1. Promotion of General Welfare 2. Reduction of Social Inequality 3. Economic Growth 17 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.6 THEORY AND BASIS OF TAXATION THEORY OF TAXATION § Necessity Theory – the existence of government is a necessity which the power of taxation proceeds. § The exercise of the power to tax emanates from necessity, because without taxes, government cannot fulfill its mandate of promoting the general welfare and well being of the people § Lifeblood Theory – the power of taxation is essential because the government can neither exist nor endure without taxation. § emphasizes that taxation is indispensable to the existence of 18 government such that the government needs the contribution of its citizens in order to function and operate. BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.6 THEORY AND BASIS OF TAXATION Manifestation of the Lifeblood Theory 1. Rule of “No estoppel against the Government”. 2. Collection of taxes cannot be enjoined (stopped) by injunction by any courts except the Court of Tax Appeals. 3. Taxes could not be the subject of compensation or set-off since claim for taxes is not a debt or contract. 4. Right to select objects (subject) of taxation rests with the Congress. 5. A valid tax may result in the destruction of the taxpayer’s property – power to destroy. 19 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.6 THEORY AND BASIS OF TAXATION BASIS OF TAXATION § Benefits Received or Reciprocity Theory – the basis is the reciprocal duties of protection and support between the state and its people. § The theory argues that those who receive the greatest benefit from the government, either directly or indirectly, should pay the most taxes, in principle of fairness. 20 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.7 SCOPE OF THE POWER TO TAX ¡ The power to tax is unlimited, complete (plenary), with wide extent of application (comprehensive) and with highest degree (supreme). 1. Unlimited – force is searching to the extent that the courts scarcely venture to declare that it is subject to any restrictions. 2. Plenary – complete; BIR may avail of certain remedies to ensure collection of taxes. 3. Comprehensive – covers persons, businesses, activities, professions, rights and privileges 4. Supreme – refers to the selection of the subject of taxation 21 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.8 ESSENTIAL ELEMENTS OF A TAX 1. It is an enforced contribution. Payment of tax is not voluntary payment 2. It is generally payable in money which must be in legal tender. 3. It is proportion in character. Payment of taxes should be based on the ability to pay theory or theoretical justice. 4. It is levied on persons, property or the exercise of a right or privilege 5. It is levied by the law-making body of the state. Congress cannot delegate such power. 6. It is levied for public purpose. 22 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.9 ASPECTS OF TAXATION 1. LEVYING 3. COLLECTION 2. ASSESSMENT Stages or phases 1. Levying or imposition – legislative act or function. 2. Assessment – executive function 3. Collection of the tax – administrative in character. 23 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.10 NATURE/ CHARACTERISTICS OF TAXATION 1. Inherent power of sovereignty 2. Essentially a legislative function 3. Tax Exemption of government 4. International Comity 5. Subject to Constitutional and Inherent limitations 6. The strongest among the inherent powers of the government 24 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.10 NATURE/ CHARACTERISTICS OF TAXATION 1. INHERENT IN SOVEREIGNTY ¡ It co-exist with the four elements of a state- people, territory, sovereignty and government. ¡ National government exercises the inherent power of taxation of the state. ¡ Local government units or political subdivisions to have the power to tax, there must be an expressed constitutional provision granting them the power to tax. 25 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.10 NATURE/ CHARACTERISTICS OF TAXATION 2. ESSENTIALLY LEGISLATIVE FUNCTION ¡ The powers to enact laws and ordinance, and to impose and collect taxes are given to CONGRESS. ¡ Non-delegation of Legislative Power to Tax. The power to make tax laws cannot be delegated to other branches of the government. ¡ The power to tax is purely legislative. Congress can’t delegate the power to others (potestas delegata non delegare potest). 26 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.10 NATURE/ CHARACTERISTICS OF TAXATION ¡ Exceptions to Non Delegation: 1. Delegation to the President : the Constitution expressly allows Congress to authorize the President to fix within specified limits. 2. Delegation to local government : each local unit shall have the power to create its own sources of revenues and levy taxes, fees, charges subject to limitations & guidelines. 3. Delegation to administrative agencies : also known as the power of subordinate legislation. 27 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.10 NATURE/ CHARACTERISTICS OF TAXATION 3. TAX EXEMPTION OF THE GOVERNMENT ¡ Immunity is necessary in order that government functions will not be impeded. ¡ Tax exemption applies to government entities thru which the government immediately and directly exercises its government functions. ¡ However, if the entities are performing proprietary functions such as GOCCs, they are generally subject to tax in the absence of tax exemption. 28 ¡ Exempt – GSIS, SSS, PHIC, Local Water Districts, HDMF BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.10 NATURE/ CHARACTERISTICS OF TAXATION 4. INTERNATIONAL COMITY ¡ The power to tax can only be exercised within the territorial jurisdiction of a taxing authority except when there exists a “privity of relationship” between the taxing State and the object of tax. ¡ Privity of relationship- the state can still exercise the taxing powers over its citizen outside its territory. ¡ Taxation is bound to observe International Comity. ¡ It is the courteous recognition, friendly agreement, interaction and respect accorded by one nation to 29 the laws and institutions of another nation. BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.10 NATURE/ CHARACTERISTICS OF TAXATION 5. SUBJECT TO CONSTITUTIONAL AND INHERENT LIMITATIONS ¡ A law that violates the constitution shall be declared as null and void. ¡ The tax law that contradicts the limitation of taxation is also unconstitutional. 30 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.10 NATURE/ CHARACTERISTICS OF TAXATION 6. THE STRONGEST AMONG THE INHERENT POWERS ¡ Without money, the government can neither survive nor dispense any of its other powers and functions effectively. 31 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.11 TAXES § Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of the government. § Essential elements of a tax: 1. It is enforced contribution 2. It is levied by the lawmaking body 3. It is proportionate in character 4. It is generally payable in money 5. It is imposed for the purpose of raising revenues 32 6. It is to be used for public purpose BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.12 SITUS (PLACE) OF TAXATION TAXABLE SITUS (PLACE) PERSONS Residence of taxpayer REAL OR TANGIBLE Location of the property/ Place of Transaction PERSONAL PROPERTY INTANGIBLE PERSONAL General rule – “domicile” of the owner PROPERTY Source of Income INCOME Occupation – where the occupation is engaged Transaction – where the transaction took place BUSINESS, Place of business operation, occupation being OCCUPATION & practiced and transaction completed TRANSACTION GRATUITOUS Residence or citizenship of the taxpayer or 33 TRANSFER BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) location of the property 1.13 CLASSIFICATION OF TAXES 1. As to subject matter or object 2. As to who bears the burden 3. As to determination of amount 4. As to purpose 5. As to graduation or rate 6. As to authority imposing the tax or scope 34 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.13 CLASSIFICATION OF TAXES 1. AS TO SUBJECT MATTER OR OBJECT ¡ Poll or capitation tax – tax of a fixed amount imposed on individual residing within a specified territory (ex. Community tax) ¡ Property – tax imposed on property whether real or personal (ex. Real estate tax) ¡ Excise – tax on the exercise of certain rights & priviliges; tax imposed upon performance of an act, or engaging in an occupation (ex. Estate tax, income tax, 35 VAT, donor’s tax) BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.13 CLASSIFICATION OF TAXES 2. AS TO WHO BEARS THE BURDEN ¡ Direct – tax which is demanded from persons bound by law to pay the tax; tax which the taxpayer cannot shift to another (ex. Community tax, income tax, estate and donor’s tax) ¡ Indirect – tax that can be shifted or passed on to another person (ex. VAT, some percentages tax, customs duties, excise tax) 36 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.13 CLASSIFICATION OF TAXES 3. AS TO DETERMINATION OF AMOUNT ¡ Specific – tax of fixed amount imposed based on a physical unit of measurement, as by head or number, weight or length or volume (ex. Excise tax on distilled spirits, cigars , etc) ¡ Ad valorem – tax of fixed proportion based on value of property (ex. VAT, income tax, donor’s tax and estate tax) 37 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.13 CLASSIFICATION OF TAXES 4. AS TO PURPOSE ¡ Primary (General) – tax with no particular purpose or object for which the revenue is raised, but is simply raised for whatever need may arise (income tax, donor’s tax, estate tax) ¡ Secondary (Special) – tax for a specific or special purpose (ex. Protective tariffs or customs duties on certain imported goods to protect local industries against foreign competition) 38 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.13 CLASSIFICATION OF TAXES 5. AS TO GRADUATION OR RATE ¡ Proportional - tax based on a fixed percentages of amount (ex. VAT, Percentage taxes) ¡ Progressive or graduated – tax the rate of which increases as the tax base increases (ex. Income tax) ¡ Regressive – tax the rate of which decreases as the tax base increases 39 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 1.13 CLASSIFICATION OF TAXES 6. AS TO AUTHORITY IMPOSING THE TAX ¡ National – taxes imposed under the Tax Code and collected by the national government through BIR ¡ ex. Internal revenue taxes, tariff, customs duties, travel tax ¡ Local – taxes imposed by local government unit for specific needs (ex. Real estate taxes, municipal licenses) 40 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) FUNDAMENTAL PRINCIPLES OF TAXATION CHAPTER 1 PART 2 41 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.1 BASIC ELEMENTS OF SOUND TAX SYSTEM 1. Fiscal Adequacy – the sources of the government revenue must be sufficient to meet government expenditures and sustain the level of public needs demanded by citizens. 2. Administrative Feasibility – tax laws must be capable of effective and efficient enforcement. Tax system should be simple as possible and should minimize complexity. Complicated tax rules makes the tax system difficult for citizens. 3. Theoretical Justice or Equity – tax must be proportionate 42 to taxpayer’s ability to pay – “ability to pay” principle” BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.2 LIMITATIONS ON THE TAXING POWER A. INHERENT B. CONSTITUTIONAL 1. Public purpose 1. Due Process of Law 2. Non delegation of the 2. Equal Protection of Laws 3. Rule of Uniformity and equity taxing power 4. No imprisonment for non-payment of poll tax 3. Territorial Limitation 5. No money shall be appropriated for religious purposes 6. Exemptions of religious, charitable and educational entities 7. Grant of Tax exemption 8. President’s Power to Veto 9. Non-impairment of the Supreme Court (SC) Jurisdiction 10. Revocation of Tax Exemptions 43 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION 1. DUE PROCESS OF LAW ¡ “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.” Article III, Section I of the Constitution ¡ It requires giving notice to the taxpayer, providing him hearing, so as to be given fair opportunity to assert his substantial rights before a competent court before he shall be denied or deprived of his property for non- payment of tax. 44 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 2. EQUAL PROTECTION OF LAW ¡ All persons subject to legislation shall be treated alike under similar circumstances and conditions both in the privileges conferred and liabilities imposed. ¡ The purpose is to protect persons belonging to the same class against intentional and arbitrary discrimination. ¡ What it prohibits is class legislation which discriminates against some and favors others. 45 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 3. RULE OF UNIFORMITY AND EQUITY IN TAXATION ¡ The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive system of taxation – ability to pay as the principal criterion. ¡ It requires the uniform application and operation, without discrimination, of the tax in every place where the subject is found. 46 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 4. NO IMPRISONMENT FOR NON-PAYMENT OF “POLL TAX” § No person shall be imprisoned for debt or non-payment of a poll tax. Poll tax is punishable only by a surcharge. Article III, Section 20 of the Philippine Constitution § Poll tax is a tax of fixed amount imposed on residents within a specific territory. 47 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 5. NO PUBLIC MONEY SHALL BE APPROPRIATED FOR RELIGIOUS PURPOSES § Principle of the separation of the church and the state. § The state shall have no official religion, or shall not set up a church, whether or not supported with public funds or prefer one religion over another. § No public money or property shall ever be appropriated, applied or paid directly or indirectly for the use, benefit, or support of any sect, church or system except when such priest or minister is assigned to the armed forces or to any 48 penal institution or government orphanage. BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 6. EXEMPTION OF RELIGIOUS, CHARITABLE AND EDUCATIONAL ENTITIES FROM PROPERTY TAX ¡ Charitable institutions, churches, etc. and all lands, buildings and improvements actually, directly and exclusively used for religious charitable or educational purposes shall be EXEMPTED from real property tax only. However, they are subject to tax on their income. ¡ All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be EXEMPTED from taxes and duties. However, they shall be subject to tax on income from 49 trade, business and other activities. BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 7. CONGRESS GRANTING TAX EXEMPTION § No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the congress. § Majority of all the members of the congress. 50 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 8. PRESIDENT’S VETO POWER ¡ Veto power refers to the President’s power to refuse to sign into law a bill that has been passed by the legislative. ¡ Item veto – the power to veto items in appropriation ¡ Pocket veto – the power to disapprove legislative act by the President with the result that bills shall fail to become laws. 51 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 9. NON-IMPAIRMENT OF THE SUPREME COURT (SC) JURISDICTION § Congress cannot take away from the Supreme Court the power given to it by the Constitution as the final arbiter of tax cases 52 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.3 CONSTITUTIONAL LIMITATION: 10. REVOCATION OF TAX EXEMPTION ¡ Tax exemptions such as “grant of franchise” may be revoked by another law as it is specifically provided in the Constitution 53 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.4 SITUS OF TAXATION (REVIEW ONLY) Situs of taxation is the place of taxation. It is the state or political unit which has jurisdiction to impose a particular tax General rule : a state may not tax property lying outside its borders Situs is determined by the number of factors: 1. Subject matter – what is being taxed? 2. Nature of tax – which tax to impose? 3. Citizenship of the taxpayer 4. Residence of the taxpayer 5. Source of the income being taxed 54 6. Place of the exercise, privilege, business or occupation BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.4 SITUS (PLACE) OF TAXATION TAXABLE SITUS (PLACE) PERSONS Residence of taxpayer REAL OR TANGIBLE Location of the property PERSONAL PROPERTY INTANGIBLE PERSONAL General rule – “domicile” of the owner PROPERTY Residence or citizenship, or place where the INCOME income was earned BUSINESS, Place of business operation, occupation being OCCUPATION & practiced and transaction completed TRANSACTION GRATUITOUS Residence or citizenship or location of the property TRANSFER 55 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.5 TAX VS. OTHER FEES (TOLL FEES) TAX TOLL FEES Enforced proportional A sum of money for the use of something, contributions from generally applied to the consideration which is persons and property paid of the use of a road, bridge and the like A demand of A demand of proprietorship sovereignty Paid for the support of Paid for the use of another’s property government May be imposed only Maybe imposed by the government or private by the State individuals or entities Examples: Toll fee in NLEX, SLEX, Skyway 56 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.5 TAX VS. OTHER FEES (PENALTY) TAX PENALTY Enforced proportional Sanction imposed as a punishment for contributions from violation of a law or acts deemed injurious – persons and property likely to occur damage Primarily aimed at Design to regulate conduct raising revenue May be imposed only Maybe imposed by the government or private by the State individuals or entities Example: fines, payment of civil damages, forfeiture of property imprisonment 57 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.5 TAX VS. OTHER FEES (SPECIAL ASSESSMENT) TAX SPECIAL ASSESSMENT Enforced proportional Enforced proportional contribution from owners contributions from of lands for special benefits resulting from persons and property public improvement Impose on person, Levied only on land for special benefits property and actions resulting from public improvement Example: public infrastructure improvements or repairs in a particular area. 58 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.5 TAX VS. OTHER FEES (REVENUE & SUBSIDY) TAX REVENUE Amount imposed/ Amount Collected/ Additional fund payable Example: Sales from goods TAX SUBSIDY Amount imposed A pecuniary and directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public. Example: 4 Ps, Rice subsidy, Fuel Subsidy59 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.5 TAX VS. OTHER FEES (PERMIT OR LICENSE FEE) TAX PERMIT OR LICENSE FEE Enforced proportional A charge imposed under the police power for contributions from purposes of taxation persons and property Purpose is to Purpose is regulatory generate revenue Paid after the start of Paid before the commencement business Generally no limit Amount is limited to the necessary expenses or regulation Examples: Business Permit, Sanitary 60 Permit, Occupancy Permit, License to Operate BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.5 TAX VS. OTHER FEES (DEBT) TAX DEBT An obligation imposed Created by contract by law Payable in money Payable in money, property or services Not assignable Assignable, may be the subject of the set-off or compensation Imprisonment is a A person cannot be imprisoned for non sanction for non- payment of debt payment of tax (except of poll tax Does not draw interest Draw interest when stipulated or when of except only when prescription default. 61 delinquent BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.5 TAX VS. TARIFF & CUSTOM DUTIES TAX TARIFF All embracing term to Kind of tax on articles which are traded include various kinds internationally of enforced contributions to attain Examples: Tariff on rice – 35% public purposes Tariff on corn – 5%, On Pork -15% TAX CUSTOM DUTIES Enforced proportional Taxes imposed on ALL imported goods contributions from regardless of the mode of acquisition or how persons and property these were acquired. 62 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.6 DOUBLE TAXATION ¡ An act of the sovereign by taking twice for the same purpose in the same year upon same property or activity of the same person when it should be taxed once. ¡ Forms of Double Taxation ¡ Indirect Double Taxation - legal ¡ Direct Double Taxation – illegal / means taxing twice: 1. By same taxing authority, jurisdiction 2. For same purpose 3. In the same year or taxing period 4. Same subject or object 5. Same kind/character of the tax 63 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.7 MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION 1. TAX EVASION 2. TAX AVOIDANCE § SHIFTING § TRANSFORMATION § TAX EXEMPTION 64 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.7 MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION 1. TAX EVASION ¡ Use of unlawful (illegal) means to evade or lessen the payment of tax. ¡ Also called as tax dodging (deliberate) ¡ Subject to civil (non-fraud) and criminal (fraudulent) penalties ¡ Example: willful non-inclusion of sales, deliberate fabrication of expenses 65 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.7 MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION 2. TAX AVOIDANCE § Tax minimization, tax saving device within the means sanction by law § Reducing of totally escaping payment of taxes through legally permissible means. § Example: Selling of shares of stock thru stock exchange, estate planning § FORMS: § Shifting, § Transformation, § Exemption 66 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.7 MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION ¡ SHIFTING ¡ Transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to someone else. Example: Value Added Tax ¡ TRANSFORMATION ¡ Escape from taxation where the producer or manufacturer pays the tax and endeavor to recoup (compensate) himself by improving his process of production thereby turning out of his units of products at a lower cost. 67 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.7 MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION § TAX EXEMPTION § A grant of immunity to particular persons or corporations, expressed or implied. § It is an immunity or privilege. § It is granted thru: § reciprocity, § public policy , § contracts. § Examples: deductions, tax amnesty (official pardon) and tax condonations (postpone) – real property tax condonations 68 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.8 CLASSIFICATIONS OF TAX EXEMPTIONS ¡ AS TO FORM ¡ Expressed Exemption ¡ Written. Provided by the constitution, treaties, ordinances. ¡ Example: Inter-corporate dividends by a domestic corporation ¡ Implied Exemption ¡ Intentional or accidental. 69 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.8 CLASSIFICATIONS OF TAX EXEMPTIONS ¡ AS TO BASIS: ¡ Constitutional ¡ Immunities from taxation which originate from the constitution ¡ Statutory ¡ Immunities from taxation which emanates from legislation 70 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.9 SOURCES OF TAX LAWS 1. 1987 Philippine Constitution (Article VI, Section 28) 2. Statutes and Presidential Decrees (President) 3. Revenue Regulations by the Department of Finance 4. Rulings issued by Commissioner of Internal Revenue 5. Decisions of the Supreme Court and Court of Tax Appeals 6. National Internal Revenue Code 7. Local Government Code of 1991 8. Provincial, city, municipal and barangay ordinances 71 9. Tax treaties and international agreements BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.10 LANDMARK TAX LAWS ¡ Reorganization Act No. 1189 or the Internal Revenue Law of 1904 ¡ Republic Act 8424 –”The Comprehensive Tax Reform of the Philippines” known as National Internal Revenue Code (NIRC) of 1997 - the basic source of Philippine tax law which codifies all tax provisions ¡ Republic Act 9337 -”The VAT Reform Law” 2007 (from change from 10% to 12%) ¡ Republic Act No. 10963 - “Tax Reform for Acceleration and Inclusion (TRAIN) of 2018 ¡ Republic Act No. 11534 - “Comprehensive Tax Reform Program” (CREATE) of 2021 ¡ The Ease of Paying Taxes Act, also known as Republic Act 72 No. 11976 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.11 NATURE OF TAX LAWS ¡ Internal revenue laws are not political in nature. ¡ Tax laws are civil and not penal in nature, although there are penalties provided for their violation. ¡ The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof. ¡ Supreme Court has the exclusive power of interpreting tax laws. 73 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.11 NATURE OF TAX LAWS ¡ Rule when there is doubt in statute or tax law ¡ In every case of doubt, tax laws are construed strictly against the government and liberally in favor of the taxpayer. ¡ Rule on granting tax exemptions ¡ Such provision are construed against the taxpayer claiming tax exemption. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. 74 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.11 NATURE OF TAX LAWS ¡ Equitable Recoupment ¡ A tax claim for refund may be allowed to be used as payment for unsettled tax liability of both taxes arise from the same transaction in which overpayment is made and underpayment is due. ¡ Set-off Taxes ¡ Taxes are not subject to set-off or legal compensation because the government and the taxpayer are not mutual creditor and debtor of each other. 75 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.11 NATURE OF TAX LAWS ¡ Taxpayer Suit ¡ Effected thru court proceedings and could only be allowed if the act involves a direct and illegal disbursement of public funds derived from taxation. ¡ Compromises ¡ Allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering such compromise is duly authorized to do so. ¡ Persons allowed to compromise in behalf of the government ¡ BIR Commissioner ¡ Collector of Customs 76 ¡ Customs Commissioner BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.12 PROSPECTIVITY OF TAX LAWS § A tax bill (from Congress) must only be applicable and operative after becoming a law (signed by President). Tax law will only cover the present and future transactions. IMPRESCRIPTIBILITY OF TAXES ¡ It provides that taxes will not prescribe against the government because of the principle that taxes are lifeblood of the government and their prompt and certain availability is an imperious need. ¡ The prescriptive period shall start from the time the taxpayer files the tax return and declares his tax liability. ¡ The prescriptive period in non-fraud cases is 5 years; whereas in fraud cases s 10 years 77 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.13 BUREAU OF INTERNAL REVENUE (BIR) ¡ Function under the supervision of Department of Finance (DOF) ¡ Mission: ¡ To collect taxes efficiently and effectively, for the least cost to the government 78 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) 2.14 POWERS AND DUTIES OF THE BIR ¡ Assessment and collection of all national internal revenue taxes, fees and charges. ¡ Enforcement of all forfeitures, penalties and fines. ¡ Execution of judgements in all cases decided in his favor by court of tax appeals and ordinary courts. 79 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE) END OF CHAPTER 1 80 BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE)