Chapter 1: Introduction to Taxation PDF

CHAPTER 1 INTRODUCTION TO TAXATION WHAT IS TAXATION? 1. A state power  Taxation is an inherent power of the S State tate to enforce a proportional contribution from its subjects for public purpose....

CHAPTER 1 INTRODUCTION TO TAXATION WHAT IS TAXATION? 1. A state power  Taxation is an inherent power of the S State tate to enforce a proportional contribution from its subjects for public purpose. 2. A process  Taxation is a process of levying taxes by the legislature of the State to enforce proportional contributions from its subjects for public purpose. 3. A mode of cost distribution  Taxation is a mode by which the State allocates its costs or burden to its subjects who are benefited by its spending. The Theory of Taxation A system of of government government is ind indispensa ispensable ble to e every very soc society. iety. However, However, a government cannot exist without a system of funding. The government's necessity for funding is the theory of taxation. The Basis of Taxation The mutuality of support between the people and the government (receipt of benefits is conclusively presumed) THEORIES OF COST ALLOCATION - allocating government costs or burden to the people. 1. Benefit received theory - presupposes that the more benefit one receives from the government, the more taxes he should pay. 2. Ability to pay theory - presupposes that taxation should also consider the taxpayer's ability to pay. Aspects ofof the Abili Ability ty to Pay Theory 1. Vertical equity - proposes that the extent of one's ability to pay is directly proportional to the level of his tax base. (proportional tax – same rate is applied on the taxable income) 2. Horizontal equity - requires consideration of the particular circumstance of the taxpayer. (graduated tax – low income, low tax rate; high income, high tax rate) The Lifeblood Doctrine - taxes are the lifeblood of the government. Implications: 1. Tax is imposed even in the absence of a Constitutional grant. 2. Claims for tax exemption are construed against taxpayers. 3. The government reserves the right to choose the objects of taxation. 4. The courts are not allowed to interfere with the collection of taxes. 5. In income taxation: a. Income received in advance is taxable upon receipt b. Deduction for capital expenditures and prepayments is not allowed as it effectively defers the collection of income tax. c. A lower amount of deduction is preferred when a claimable expense is subject to limit. d. A higher tax base is preferred when the tax object has multiple tax bases. INHERENT POWERS OF THE STATE 1. Taxation power 2. Police power 3. Eminent domain Similarities of the three powers of the State: 1. They are all necessary attributes of sovereignty. 2. They are all inherent to the State. 3. They are all legislative in nature. 4. They are all ways in which the State interferes with private rights and properties. 5. They all exist independently of the Constitution and are exercisable by the government even without Constitutional grant. However, the Constitution may impose conditions or limits for their exercise. 6. They all presuppose an equivalent form of compensation received by the persons affected by the exercise of the power. 7. The exercise of these powers by the local government units may be limited by the national legislature. SCOPE OF THE TAXATION POWER The scope of taxation is widely regarded as comprehensive, plenary, unlimited and supreme. However, it is not absolutely unlimited. THE LIMITATIONS OF THE TAXATION POWER 1. Inherent limitations   Territoriality of taxation. Tax can be imposed only within the territories of the State. o Exception to the territoriality principle  In income taxation, resident citizens and domestic corporations are taxable on income derived within and outside the Philippines.  In transfer taxation, residents or citizens such as resident citizens, nonresident citizens and resident aliens are taxable on transfers of properties located within or outside the Philippines.  International comity. Mutual courtesy or reciprocity between states.  Public purpose. It is intended for the common good and cannotcannot be exercised to further any private interest.  Exemption of the government. The government normally does not tax itself. However, income of the government from its properties and activities conducted for profit including income from government owned and controlled corporations is subject to tax.  Non-delegation of the taxing power. The legislative taxing power is vested exclusively in Congress and is non-delegable. o Exceptions to the rule of non-delegation  Under the Constitution, local government units are allowed to exercise the power to tax to enable them to exercise their fiscal autonomy.  Under the Tariff and Customs Code, the President is empowered to fix the amount of tariffs to be flexible to trade conditions.  Other cases that require expedient and effective administration and implementation of assessment and collection of taxes. 2. Constitutional Limitations  Due process of law  Equal protection of the law  Uniformity rule in taxation  Progressive system of taxation  Non-imprisonment for non-payment of debt or poll tax  Non-impairment of obligation and contract  Free worship rule  Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque from property taxes   Non-appropriation of public funds or property for the benefit of any church, sect or system of religion  Exemption from taxes of the revenues and assets of non-profit, non-profit , non-stock educational institutions  Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption  Non-diversification Non-diversificati on of tax collections  Non-delegation of the power of taxation  Non-impairment of the Jurisdiction of the Supreme Court to review tax cases  The requirement that appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives  The delegation of taxing power to local government units STAGES OF THE EXERCISE OF TAXATION POWER 1, Levy or Imposition - involves the enactment of a tax law by Congress. (The House of Representatives, and The Senate)  Matters of legislative discretion in the exercise of taxation o Determining the object of taxation o Setting the tax rate or amount to be collected o Determining the purpose for the levy which must be be public use o Kind of tax to be imposed o Apportionment of the tax between the national and local government o Situs of taxation o Method of collection 2. Assessment and collection - tax law is implemented by the administrative branch of the government (Department of Finance and BIR). SITUS OF TAXATION - is the place of taxation. Situs rules serve as frames of reference in gauging whether the tax object is within or outside the tax jurisdiction of the taxing authority. Examples of Situs Rules: 1. Business tax situs - Businesses are subject to tax in the place where the business is conducted. 2. Income tax situs on services - Service fees are subject to tax where they are rendered. 3. Income tax situs on sale of goods - The gain on sale is subject to tax in the place of sale. 4. Property tax situs - Properties are taxable in their location. 5. Personal tax situs - Persons are taxable in their place of residence. OTHER FUNDAMENTAL DOCTRINES IN TAXATION 1. Marshall Doctrine - "The power to tax involves the power to destroy." It can be used to discourage or prohibit undesirable activities or occupation. (e.g. sin tax) 2. Holme's Doctrine - "Taxation power is not the power to destroy while the court sits." Taxation power may be used to build or encourage beneficial activities or industries by the grant of tax incentives. (e.g. Ecozones with tax holidays and provision of incentives, such as the Omnibus Investment Code (EO 226) and the Barangay Micro- Business Enterprise (BMBE) Law) 3. Prospectivity of tax laws. An ex post facto law or a law that retroacts is prohibited by the Constitution. 4. Non-compensation or set-off. The taxpayer cannot delay payment of tax to wait for the resolution of a lawsuit involving his pending claim against the government. Exceptions: a. Where the taxpayer's claim has already become due and demandable such as when the government already recognized the same and an appropriation for refund was made b. Cases of obvious overpayment of taxes c. Local taxes 5. Non-assignment of taxes. Tax obligations cannot be assigned or transferred to another entity by contract. 6. Imprescriptibility in taxation. Prescription is the lapsing of a right due to the passage of time. Under the NIRC, tax prescribes if not collected within 5 years from the date of its assessment. In the absence of an assessment, tax prescribes if not collected by judicial action within 3 years from the date the return is required to be filed. However, taxes due from taxpayers who did not file a return or those who filed fraudulent returns do not prescribe. 7. Doctrine of estoppel. Any misrepresentation made by one party toward another who relied therein in good faith will be held true and binding  against that person who made the misrepresentation. The error of any government employee does not bind the government. 8. Judicial Non-interference. Generally, courts are not allowed to issue injunction (an authoritative warning or order) against the government's pursuit to collect tax as this would unnecessarily defer tax collection. 9. Strict Construction of Tax Laws. When the law clearly provides for taxation, taxation is the general rule unless there is a clear exemption. Hence the maxim, "Taxation is the rule, exemption is the exception." Vague tax laws. Vague tax laws are construed against the government and in favor of the taxpayers. A vague tax law means no tax law. Obligation arising from law is not presumed. The Constitutional requirement of due process requires laws to be sufficiently clear and expressed in their provisions. Vague exemption laws. Vague tax exemption laws are construed against the taxpayer and in favor of the government. A vague tax exemption law means no exemption law. The claim for exemption is construed strictly against the taxpayer in accordance with the lifeblood doctrine. DOUBLE TAXATION Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing. Elements of double taxation 1. Primary element: Same object 2. Secondary elements: a. Same type of tax b. Same purpose of tax c. Same taxing jurisdiction d. Same tax period Types of Double Taxation 1. Direct double taxation - this occurs when all the element of double taxation exists for both impositions. Direct double taxation is discouraged because it is oppressive and burdensome to taxpayers. 2. Indirect double taxation - this occurs when at least one of the secondary elements of double taxation is not common for both impositions. Indirect double taxation is prevalent in practice. How can double taxation be minimized? a. Provision of tax exemption b. Allowing foreign tax credit (deduction for taxes paid abroad) c. Allowing reciprocal tax treatment between the home country and a foreign country d. Entering into treaties or bilateral agreements. ESCAPES FROM TAXATION - Escapes from taxation are the means available to the taxpayer to limit or even avoid the impact of taxation. Categories of Escapes from Taxation A. Those that res result ult to loss loss of government government rev revenue enue 1. Tax evasion 2. Tax avoidance 3. Tax exemption B. Those that do not result to loss of government revenue 1. Shifting - This is the process of transferring tax burden to other taxpayers. Shifting is common with business taxes where taxes imposed on business revenue can be shifted or passed-on to customers. 2. Capitalization - This pertains to the adjustment of the value of an asset caused by changes in tax rates. 3. Transformation - This pertains to the elimination of wastes or losses by the taxpayer to form savings to compensate for the tax imposition or increase in taxes. Tax Amnesty - is an absolute forgiveness or waiver by the government on its right to collect and is retrospective in application. Tax Condonation - is forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. It applies prospectively to any unpaid balance of the tax; hence, the portion already paid by the taxpayer will not be refunded.