Principles Of Taxation PDF

GENERAL PRINCIPLES OF TAXATION Objective: At the end of this lesson, the student shall be able to: Classify and differentiate taxes versus other charges. Explain how tax is administered in the Philippines. Differentiate tax evasion from tax avoidance....

GENERAL PRINCIPLES OF TAXATION Objective: At the end of this lesson, the student shall be able to: Classify and differentiate taxes versus other charges. Explain how tax is administered in the Philippines. Differentiate tax evasion from tax avoidance. Know and state the powers and authority of the Commissioner of Internal Revenue. Know the various escapes from taxation. TAXES The 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 and all public needs. Theory of Taxation Taxation proceeds from the theory that the existence of government is a necessity. The government will not be able to discharge its functions without the revenues or taxes. This theory of taxation proceeds from this principle that government is a necessity. Taxes are the lifeblood of the government. The basis for this power is the reciprocal obligation or duty between the state and the citizens or its inhabitants. The obligation of the state is to provide protection, that it would be able to have an orderly society. The citizens, on the other hand, have the duty to support the state. In that sense, when the citizens are required to support the state, it means to financially support the state. And that financial support is through the process of taxation. Even if one pays more and the other pays less, what the state can guarantee or ensure is that protection will be provided equally. No obligation on the part of the state that one who pays more taxes should be given more protection. That is not the essence of that obligation. What the state would assure is everyone will have a just and orderly society. The government’s necessity for funding is the theory of taxation. 1. Lifeblood Doctrine Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. The power of taxation is essential because the government can neither exist nor endure without taxation. “Taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need” (Lifeblood Doctrine). The government cannot continue to perform its basic functions of serving and protecting its people without the means to pay its expenses. Consequently, the State has the right to compel all its citizens and property within its limits to contribute. 2. Necessity Theory It is a power emanating from necessity. It is a necessary burden to preserve the state’s sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the state’s territory, and facilities and protection which a government is supposed to provide. Basis if Taxation Benefits received or reciprocity theory The basis is the reciprocal duties of protection and support between the state and its inhabitants. The state collects taxes from the subjects of taxation in order that it may be able to perform the functions of the government. The citizens, on the other hand, pay taxes, in order that they may be secured in the enjoyment of the benefits of organized society. This theory spawned the Doctrine of Symbiotic Relationship which means, taxes are what we pay for a civilized society. The government provides benefits to the people in the form of public services, and the people provide the funds that finance the government. This mutuality of support between the people and the government is referred to as the basis of taxation. Essential Characteristics/Elements of Taxes 1. Enforced contribution. 2. Generally payable in money. 3. Proportionate in character. 4. Levied on persons, property, or the exercise of a right or privilege. 5. Levied by the state which has jurisdiction over the subject or object of taxation. 6. Levied by the lawmaking body of the state. The power of taxation can only be levied by the Congress of the Philippines through enactment of tax statutes. But this power is also granted by the Constitution to local government units, subject to such limitations as may be provided by law. 7. Levied for public purpose or purposes. a. Construction of roads and bridges; b. Pensions to retired government employees and their widows and children; c. Assistance to victims of calamities; and d. Social welfare and health care projects Classification of Taxes 1. As to subject matter or object a. Personal, poll or capitation. Tax of a fixed amount imposed on individuals, whether citizens or not, residing within a specified territory without regard to their property or the occupation in which they may be engaged. Example: Community tax b. Property. Tax imposed on property whether real or personal in proportion either to its value, or in accordance with some other reasonable method of apportionment. Example: Real Property Tax c. Excise (Privilege Tax). A tax imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation; any tax which does not fall within the classification of a poll tax or a property tax. Example: Income tax, donor’s tax, estate tax 2. As to who bears the burden a. Direct. A tax that is demanded from the person who also shoulders the burden of the tax. Examples: Income tax, estate tax, donor's tax b. Indirect. - A tax demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. Examples: ✓ business taxes like VAT – The VAT is passed on to the buyer of that item or merchandise. ✓ percentage tax – another form of business tax; ✓ excise tax 3. As to determination of amount a. Specific. Tax of fixed amount imposed by the head or number, or by some standard of weight or measurement; it requires no assessment other than a listing of classification of the subjects to be taxed. Examples: Excise tax on distilled spirits, cigars, cigarettes  b. Ad valorem. - Tax of a fixed proportion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. Example: Real property tax 4. As to purpose a. General, fiscal or revenue. Tax that is imposed solely to raise revenue for government expenditures. Examples: Income tax, value-added tax b. Special or regulatory. Tax imposed for a special purpose, i.e. to achieve some social or economic ends irrespective of whether revenue is actually raised or not. Examples: Sugar adjustment taxes; Oil Price Stabilization Fund (OPSF) 5. As to authority imposing the same a. National. Tax imposed by the national government. Examples: Internal revenue taxes, customs duties b. Municipal or local. - Tax imposed by municipal corporations. Examples: Sand and gravel tax, occupation tax 6. As to graduation or rate c. Proportional. Tax based on a fixed percentage of the amount of the property. receipts, or other basis to be taxed. Example: Value-added tax, estate tax donor's tax. d. Progressive. Tax the rate of which increases as the tax base or bracket increases. Examples: Income tax e. Regressive. - Tax rate of which decreases as the tax base increases. Progressive System of Taxation This is different from a progressive tax rate. In the case of progressive or graduated tax rate, this is where the rate increases as the tax base increases. In the case of income, the more income you have, the higher will be the tax rate. Progressive System of Taxation means that the state has more direct taxes than indirect taxes. Regressive System of Taxation The regressive rate is different from the regressive system of taxation. Regressive System of Taxation means that there are more indirect taxes than direct taxes. Example: VAT – regardless of your economic status as a taxpayer, the purchase of an item or commodity, regardless of who the buyer is, they are made to pay the same tax. Whether you are rich or poor and you buy the same item, you pay the same tax. Tax vs. Other charges (toll, special assessment, license fee, debt) Tax Distinguished from Penalty Penalty - Does not operate as a tax. It is a sanction imposed for a violation, whether you will be made to pay a fine or subject yourself to imprisonment for such violation. But when you are made to pay a tax, that enforced contribution does not operate as a penalty. Tax Distinguished from License Fee Permit or license fee is a charge imposed under the police power for purposes of regulation. 1. Taxes are levied by virtue of the taxing power; license tees are imposed by virtue of the police power; 2. Taxes are levied for revenue; license fees are imposed for regulation; 3. There is generally no limit on the amount of tax that may be imposed; license fees may not exceed the amount necessary to defray the cost of regulation; 4. Taxes are imposed on persons, property, business, occupation, or the exercise of any privilege, whether legal or illegal; license fees may be imposed only on legitimate businesses and occupation; and 5. Failure to pay a tax does not render the business or occupation illegal: non-payment of a license fee renders the business or occupation illegal. Tax Distinguished from Toll Toll is a sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge or the like, of a public nature. 1. Toll is a demand of proprietorship; tax is a demand of sovereignty;  2. Toll isa compensation for the use of another's property, or of improvements made by him; taxes are levied for the support of the government, and the amount is regulated by necessities, and 3. A toll may be imposed by the government or private individuals or entities, a tax may be imposed only by the State. Tax Distinguished from Special Assessment Special assessment is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements. 1. Tax, has general application; special assessment has special application only as to a particular time and place; 2. Tax can be levied on land, persons, property, income, business, etc.; special assessment is levied only on land; and 3. Tax is based on necessity and partially on benefits; special assessment is based wholly on benefits (Apostolic Prefect vs Treasurer of Baguio, 71 Phil 547). In the Local Government Code of 1991, special assessment is called as Special Levy (Sec. 240, LGC). Tax Distinguished from Debt 1. Debt generally arises from contract, express or implied tax is created by law; 2. Debt is assignable; tax cannot generally be assigned; 3. Debt may be paid in kind; tax is generally payable in money; and 4. A person cannot be imprisoned for non-payment of debt; imprisonment is a a sanction for non-payment of tax (except poll tax). Tax Distinguished from Customs Duties A tax includes various kinds of imposition on persons or property, for supplying the treasury as tribute, subsidy, excise, imposts, or customs; customs duties are taxes levied upon commodities, imported into or exported across national boundaries. It follows that taxes include customs duties; and an act granting exemption from all taxes of any kind and nature carries with it exemptions from customs duties. TAX ENFORCEMENT AND COLLECTION Sources of Tax Laws 1. The Constitution. The provision of the Constitution dealing on taxation merely regulate the exercise of the power of taxation. They are not actually grants of the power, because taxation can be exercised by the government; as stated earlier, the power of taxation is not a mere constitutional grant. 2. Statutory enactments. This refers to the tax laws passed by the Congress. 3. Administrative rulings and regulations. Administrative rulings are the less general interpretation of tax laws which are issued from time to time by the Commissioner of Internal Revenue. They are usually rendered on request of taxpayers to clarify certain provisions of a tax law. They are commonly known as "BIR Rulings." Regulations are intended to clarify or explain the law and carry into effect its general provisions by providing the details of administration and procedure. However, in case of conflict between a regulation and a statute, the latter shall prevail. Regulations issued by the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, are known as "Revenue Regulations." 4. Judicial decisions. This refers to decisions of the Court of Tax Appeals and the Supreme Court applying or interpreting tax laws. They constitute major part of the jurisprudence on taxation and form part of the legal system of the Philippines. Decisions of the Court of Tax Appeals. however, are still appealable to the Supreme Court of the Philippines. Steps In the Legislative Process Under the 1987 Philippine Constitution, all revenue and tariff bills shall originate from the House of Representatives. A revenue bill is one that levies taxes and raises funds for the government, while a tariff bill specifies the rates or duties to be imposed on imported articles (Cruz, Philippine Political Law). Often, major tax proposals are initiated by the Executive Department thru the President upon the recommendation of the Department of Finance based on the latter's study or proposal, and then introduced into Congress by the allies of the President. The steps in the legislative process are as follows: 1. A tax bill is introduced in the House of Representatives and is referred to the House Committee on Ways and Means. This is known as the first reading. The first reading involves only a reading of the number and title of the measure. (Art. VI, Sec. 24, New Constitution). All appropriation, revenue or tariff bills, bills authorizing the increase of public debt, bills of local application, and private bills shall originate exclusively in the of House of Representatives, but the Senate may propose or concur with amendments. 2. The proposal is considered by the Committee on Ways and Means, committee hearings as well as public hearings are held. If there are several bills of the same nature or purpose, they shall all be consolidated in the conduct of the hearings. Moreover, the committee may introduce amendments or propose substitute bill. 3. The tax bill is voted on by the Committee and, if approved, is reported out to the House of Representatives for a vote. Deliberations, interpellations and even amendment by the members of the House are held. 4. If passed by the House, the bill is transmitted to the Senate for consideration by the Senate Committee on Ways and Means, and public hearings are held. The bill undergoes the same legislative process in the Senate. 5. Upon approval by the Senate, both the Senate and the House versions are sent to the Bicameral Conference Committee consisting of representatives of the House and of the Senate. 6. The two versions ate generally dissimilar. Thus, the conflict is reconciled in the Bicameral Conference Committee. This process of ironing out the differences generally involves substantial compromise. 7. A final bill, as approved by the Bicameral Conference Committee, is then resubmitted to the House and Senate for approval. 8. If the version of the Bicameral Conference Committee is approved by the House and Senate, it is sent to the President for approval or veto. This is known as the "enrolled bill." 9. If the President approves the bill, he shall sign it and the bill becomes a law. When the President vetoes it, both Houses may override the veto by two-thirds vote of all members of each house. If the required measure is met, the bill is converted into law over the President's objections. Moreover, the bill may become a law when the President does not act upon the measure within thirty (30) days after it has been presented to him. FORMS OF ESCAPE FROM TAXATION Escapes from taxation are means or methods by which the taxpayer saves the tax or escapes the burden of tax payment. The means resorted by the taxpayer may or may not result in loss of revenue to the government. They may also be legal or illegal. With the exception of tax evasion, all are legal means of escape from taxation. The basic forms of escape from taxation are: A. Those that do not reduce the revenue collection of the government: 1. Shifting. This is a transfer of the tax burden by one on whom the tax is assessed to another. This is exemplified by the different taxes on business. Forms of Shifting a. Forward Shifting - is a form of transfer of the tax from the factors of production through the factors of distribution until the burden finally rests to the consumer. b. Backward Shifting - is the transfer of the burden of the tax from the point of consumption to the factors of distribution to the factors of production. c. Onward Shifting - is a series of shifts. So, the series of shifts will be either two or more forward shifting or two or more backward shifting or a combination of forward or backward shifting, and you have what you call an onward shifting. This occurs when the tax is shifted two or more times either forward or backward. 2. Capitalization. It is the reduction in the selling of income producing property by an amount equal to the capitalized value of future taxes that may be paid by the purchaser. 3. Transformation. It is a method by which the manufacturer or producer upon whom the tax is imposed pays the tax and strives to recover such expense through lower production cost without sacrificing the quality of his product. This is resorted to because of his fear to loss his market if he will add tax to the selling price. Shifting and capitalization are means of escape through process of exchange, while transformations are means through process of production.  B. Those that result in loss of revenue to the government: 1. Tax evasion. It refers to fraudulent or forbidden schemes or devices designed to lessen or defeat taxes (Yutivo Sons Hardware Co. vs CTA, L13203. January 28, 1965). This is also known as tax dodging. 2. Tax avoidance. The exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to reduce tax liability (also known as tax minimization) 3. Exemption from taxation. It is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same taxing district are obliged to pay. Case 1 - 27 Mr. Angdaya who wishes to avoid the payment of taxes assessable on the transaction was advised by his tax consultant to make it appear that his gross income in 2021 was only P1,000,000.00 instead of the correct amount of P1,500,000. Is this tax evasion or tax avoidance? Answer: This is tax evasion. Intentionally decreasing the income without basis is illegal because it will result to a clear reduction in the tax liability of the taxpayer. Tax Amnesty This is an immunity from all criminal and civil obligations arising from nonpayment of taxes. It is a general pardon given to all taxpayers; it applies only to past periods, hence, of retroactive application. It is distinguished from tax exemption in the sense that while amnesty is immunity from civil and criminal obligations, tax exemption is immunity from civil liability only. Moreover, tax exemption is prospective in application, while tax amnesty is retroactive. Rule on Set-off or Compensation A claim for taxes is not such a debt, demand, contract or judgment as allowed to be set-off; neither are they a proper subject of recoupment since they do not arise out of the contract or transaction. SITUS/PLACE OF TAXATION Situs of taxation means place of taxation. The rule is that the state which has jurisdiction to tax the person, property or transactions may rightfully levy and collect the tax. Situs of taxation shall be as follows: 1. Business, occupation or transaction. - Place where the business is conducted; the place where the occupation is practiced; or the place where the transaction took place. 2. Real and tangible personal property. - Location of property. 3. Intangible personal property. - Domicile of the owner unless the property has acquired a business situs in another jurisdiction. 4. Income - Place where the same is earned, or citizenship or domicile of the owner. 5. Gratuitous transfer of property. – Residence or citizenship of the taxpayer or location of the property. DOUBLE TAXATION (DIRECT AND INDIRECT) In its strict sense (referred to as direct duplicate or direct taxation), it means taxing twice for the same purpose, by the same taxing authority, in the same jurisdiction, in the same period, some of the property in the territory. In its broad sense (referred to as indirect duplicate or indirect double taxation), which is taxation other than direct duplicate, it extends to all cases in which there is a burden of two or more pecuniary impositions. Double Taxation is NOT Prohibited. In fact, indirect double taxation is prevalent in practice. However, direct double taxation is highly discouraged because It is oppressive and burdensome to taxpayers. Illustrative Example The Municipality of Buhi enacted an ordinance which imposes occupation tax upon owners of fishponds. The validity of the ordinance is being challenged on the ground that it constitutes double taxation because the fishpond owners are subject also to income tax. Is the ordinance valid? Answer: The ordinance is valid. Although there are actually two taxes being charged by the government, the first one is imposed by the local government unit of Buhi while the other is imposed by the national government. Since there are two different taxing authorities the imposition is not a direct duplicate taxation. At most, there is only indirect duplicate taxation. Remedies for Double Taxation 1. Tax Exemptions - Only one tax law is allowed to apply to the tax object while the other tax law exempts the same tax object. 2. Tax Reductions (reciprocal tax treatments) - Provisions in the tax laws imposing a reduced tax rates or even exemption if the country of the foreign taxpayer also gives the same treatment to Filipino non-residents therein. 3. Foreign Tax Credits - Both tax laws of the domestic country and foreign country tax the object, but the tax payments made in the foreign tax law are deductible against the tax due of the domestic tax law. 4. Tax Treaties or Bilateral agreements - Countries may stipulate for a lower tax rate for their residents if they engage in 5. transactions that are taxable by both. Interpretation of Tax Laws In case of doubt as to whether the taxpayer is covered by the tax or not, the doubt shall be resolved in favor of the taxpayer and strictly against the government (Comm. vs Firemans Ins. Co., G.R. L-30644, March 9, 1987). However, doubts as to the validity of tax exemptions are resolved liberally in favor of the government and strictly against the taxpayer, except: 1. When the statute granting exemption provides for liberal constructions thereof; 2. Exemptions in favor of the government, political subdivisions or instrumentalities (Maceda vs. Macaraig, 197 SCRA 771). 3. Exemptions in favor of exemptees traditionally exempt such as churches and educational institutions (Cooley); and 4. Special circumstances to special classes of persons such as the granting of exemptions to victims of the eruption of Mount Mayon.