Taxation 1 Chapter 1 PDF

TAX 1: Chapter 1: Introduction to Taxation Taxation – as a state power, a legislative process, and a mode of government cost distribution a.) State power – an inherent power to the state to enforce a proportional contribution from its subjects for public purpose...

TAX 1: Chapter 1: Introduction to Taxation Taxation – as a state power, a legislative process, and a mode of government cost distribution a.) State power – an inherent power to the state to enforce a proportional contribution from its subjects for public purpose b.) Legislative process – a process of levying taxes by the legislature of the state c.) Government cost – 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 government cannot exist without the system of funding → Governments provide essential public services like defense, health, education, and social protection, but they also require funding through taxation, ensuring a civilized and orderly society for its citizens. The Basis of Taxation → The mutuality support between the people and the government → The government provides benefits to the people in the form of public services, and the people provide the funds that finance the government → Taxpayers cannot avoid payment of tax under the defense of absence of benefit received Receipt of Benefits is conclusively presumed → Every citizen and resident of the state directly or indirectly benefits from the public services rendered by the government. → In taxation, the receipt of the benefits is conclusively presumed. → Thus, taxpayers cannot avoid payment of tax under the defense of absence of benefit received → The direct receipt or act of availment of government is not precondition to tax Theories of Cost Allocation ❖ Those who have more should be taxed more even if they benefit less from the government. Those who have less shall contribute less even if they receive more benefits from the government ▪ Benefit Received Theory - The more benefit one receives from the government, the more taxes he should pay ▪ Ability to Pay Theory - Taxpayers should be required to contribute based on their relative capacity to sacrifice for the support of the government Aspects of the Ability to Pay Theory: 1. Vertical equity (Gross Concept) - the extent of one’s ability to pay is directly proportional to the level of his tax base (greater income, greater tax) 2. Horizontal equity (Net Concept) - requires consideration of the particular circumstances of the taxpayer The Lifeblood Doctrine → Without taxes the government would be paralyzed by lack of motive power to activate or operate it. → Taxes are the lifeblood of the government because it is where the government depends on its ability to serve the people for whose benefit taxes are collected. Implication of the lifeblood doctrine in taxation 1. Tax is imposed even without a constitutional grant 2. Tax exemption claims are construed against taxpayers  3. The government has the right to choose the objects of taxation 4. The courts cannot interfere with the collection of taxes (court of tax appeals) 5. In income taxation: a. Income received in advance is taxable upon receipt (accrual of income) 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 The Inherent Powers of the State ❖ These powers are naturally exercisable by the government even in the absence of an express grant of power in the Constitution 1. Taxation power – power to enforce proportional contributions from its subjects to sustain itself 2. Police power – general power to enact laws to protect the well-being of the people 3. Eminent Domain – power to take private property for public use after paying just compensation Point of Difference Taxation Police Power Eminent Domain Exercising priority Government Government Government and private utilities Purpose For the support of the To protect the general For public use government welfare of the people Persons affected Community or class of Community or class of Owner of the property individuals individuals Amount of imposition Unlimited (based on Limited (to cover cost of No amount imposed government needs) regulation) (just compensation) Importance Most Important Most superior Important Relationship with the Inferior to the “non- Superior to the “non- Superior to the “non- constitution impairment clause” of impairment clause” of impairment clause” of the constitution the constitution the constitution Limitation Constitutional and Public interest and due Public purpose and just inherent limitations process compensation Similarities of the 3 Powers of the State 1. Necessary attributes of sovereignty 2. Inherent to the state 3. Legislative in nature 4. All ways in which the state interferes with private rights and properties 5. All exist independently of the constitution and are exercised by the government even without a constitutional grant. (subject to conditions and limits) 6. All presuppose an equivalent form of compensation received by the persons affected by the exercise power 7. The exercise of these powers by the local government units may be limited by national legislature Scope of the Taxation Power → The scope of the taxation is widely regarded as comprehensive, plenary, and supreme → Taxation has its own inherent limitations imposed by the constitution The Limitations of the Taxation Power 1. Territoriality of Taxation 2. International Comity 3. Public Purpose  4. Exemption of the Government 5. Non-delegation of the taxing power A. Constitutional Limitations 1. Due process of law 2. Equal protection of law 3. Uniformity rule in taxation 4. Progressive System of Taxation 5. Non imprisonment of non-payment of debt or poll tax 6. Non-impairment of obligation and contract 7. Free worship rule 8. Exemption of religious or charitable entities, non-profit cemeteries churches and mosque from property taxes 9. Non appropriation. Of public funds. Or property for the benefit of all church, sect or system of religion. 10. Exemption from taxes of the revenues and assets of nonprofit educational institutions. 11. Concurrence of a majority of all members of Congress for the passage of law granting exemptions. 12. Non-diversification of tax collections. 13. Non-delegation of the power of taxation. 14. Non–impairment of the jurisdiction of the Supreme Court to review taxation cases. 15. The requirement that appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives. 16. The delegation of taxing power to local government units. INHERENT LIMITATIONS Territoriality of Taxation → The government can only demand tax obligation upon its subjects or residents within its territorial jurisdiction. → Extraterritorial taxation will amount to encroachment of foreign sovereignty. `Two-fold obligations of taxpayers: 1. Filing of returns and payment of taxes 2. Withholding of taxes and expenses and its remittance to the government. Exception to the territoriality principle → In income taxation, resident citizens and domestic corporations are taxable on income derived both within and outside the Philippines. → In transfer taxation, resident citizens, non-resident citizens, and resident aliens are taxable on transfers of properties located within or outside the Philippines. International Comity → All nations are deemed equal with one another, regardless of race, religion, culture, economic condition or military power. → No country is more powerful than the other. It is by this principle that each country observes international committee or mutual courtesy or reciprocity between them. Hence: a. Governments do not tax the income and properties of the other governments. b. Governments give priority to other treaty obligations over their own domestic tax laws → Embassies of foreign governments in the Philippines, including international organizations and their non-Filipino staff, are not subject to income taxes or property taxes. → When the state enters treaties with other states, it is bound to honor the agreements as a matter of mutual courtesy with the treaty partner, even if the same conflicts with its local tax laws Public purpose  → Taxation must be exercised absolutely for public purpose → The government normally does not tax itself, as this will not raise additional funds, but will only impute additional costs. → Government properties and income from essential public functions are not subject to taxation. However, the income from the government’s properties and activities, 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. Exceptions to the rule of non-delegation: 1. Under the Constitution, local government units are allowed to exercise the power to tax to enable them to exercise their fiscal autonomy. 2. Under the Tariff and Customs Code, the president is empowered to fix the amount of tariffs to be flexible to trade conditions 3. Other cases that require expedient and effective administration and implementation of assessments and collection of taxed CONSTITUTIONAL LIMITATIONS Observance of Due Process of Law 1. Substantive Due Process → tax must be imposed only for public purpose, collected only under authority of a valid law and only by the taxing power having a jurisdiction → An assessment without a legal basis violates the requiremnt of due process 2. Procedural Due Process → There should be no arbitrariness in assessment and collection of taxes, and the government shall observe the taxpayers right to notice and hearing ❖ Under NIRC, assessment shall be made within 3 years from the due date of filing of the return or from the date of the actual filing, whichever is later. Collection shall be made within 5 years from the date of the assessment. Failure of the government to observe these rules violates the requirement of due process. Equal Protection of the Law → Taxpayers shall be treated equally both in terms of rights conferred and obligations imposed Uniformity Rule in Taxation → The rule of the taxation shall be uniform and equitable → Each class is taxed differently, but taxpayers falling under the same class are taxed the same Progressive System of Taxation → Tax rates increase as tax base increases (taxpayers ability to pay) → Taxing the rich more than the poor Non-Imprisonment for Non-payment of debt or poll tax → Non-payment of debt in good faith is non-imprisonment as no one shall be imprisoned because of poverty. → Non-payment of debt in bad faith is imprisonment as it constitutes estafa → Non-payment of tax is imprisonment on whatever grounds because tax is a demand of sovereignty except poll tax (basic community poll tax only) Non-impairment of Obligations and Contracts  → Tax exemptions granted under the contract should be honored and should not be cancelled by any unilateral government action Free Worship Rule → The properties and revenues of religious institutions such as tithes or offerings are not subject to tax except the income from the properties and activities that are proprietary or commercial in nature Exemption of Religious, Charitable, or Educational Entities, Non-profit Cemeteries, Churches and Mosques, Lands, and Buildings and Improvements from Property Taxes → Only properties actually, directly, and exclusively used for religious, charitable, or educational activities are exempt from real property taxes (doctrine of use) Non-appropriation of Public Funds or Property for the Benefit of any Church, Sect, or System of Religion → The government should not favor any particular system of religion by appropriating public funds or property in support thereof → Any compensation to religious ministers working with the military, penal institutions, orphanages, pr leprosarium is not considered religious appropriation Exemption from Taxes of the Revenues and Assets of Non-profit, Non-stock, Educational Institutions including grants, endowments, donations, or contribrutions for educational purposes → Tax exemptions on revenues and assets that are actually, directly, exclusively devoted to non- profit educational institutions → NIRC exempts government educational institutions from income tax and subjects private educational institutions to minimal income tax Concurrence of Majority of all members of Congress for the passage of law granting tax exemption → The grant of tax exemption must proceed only upon a valid basis. → In the approval of exemption absolute majority is required → In withdrawal of exemption, relative majority is required Non-diversification of Tax Collection → Tax collections should be used only for public purposes and never be diversified or used for private purposes Non-delegation of the power of taxation → Taxation power as part of the lawmaking be vested exclusively in Congress → Department of Finance and the BIR issues revenue regulations, ruling orders, or circulars to interpret and clarify the application of the law. But even so, they are not allowed to introduce new legislation within their quasi-legislative authority Non-impairment of Jurisdiction of the Supreme Court to review Tax Cases → Court of Tax Appeals is a special court all tax cases can be raised and finally decided by the Supreme Court of the PH STAGES OF THE EXERCISE OF TAXATION POWER Levy or imposition → Impact of taxation → Legislative act Congress is composed of 2 bodies: 1. The House of Representatives (Congressman and Congresswoman)  2. The Senate (Senators) ❖ Tax bills must originate from HoR. However, each may have their own version of proposed law Matters of Legislative Discretion in the Exercise of Taxation 1. Determine the object of taxation 2. Setting the tax rate or amount to be collected 3. Determine the purpose for the levy 4. Kind of tax 5. Apportionment of the tax between national and local governments 6. Situs of taxation 7. Method of collection Assessment and Collection → Incidence of taxation → Administrative act of taxation SITUS OF TAXATION → Place of taxation Situs Rules 1. Business Tax Situs – place where the business is conducted 2. Income Tax Situs on Services – service fees in place of where service was rendered 3. Income Tax Situs on Sale of Goods – gain on sale in place of sale 4. Property Tax Situs – properties in their location 5. Personal Tax Situs – person in place of residence OTHER FUNDAMENTAL DOCTRINES IN TAXATION Marshall Doctrine → The power to tax involves power to destroy Holmes Doctrine → Taxation power is not the power to destroy while the court sits Prospectivity of Tax Laws → Prospective in operation → Ex post facto law or law that retroacts is prohibited by the constitution Non-compensation or Set-off → Taxpayer cannot delay payment of tax to wait for the resolution of a lawsuit involving his claim against the government → Tax is not a debt; hence, it is not subject to set-off Except when: 1. When the taxpayer’s claim has already been due and demandable 2. Obvious overpayment of tax 3. Local tax Non-assignment of Taxes → Tax obligations cannot be assigned to or transferred to another by contract Imprescriptibly in Taxation  → The government’s right to collect tax does not prescribe unless the law itself provides Doctrine of Estoppel → Government is not subject to estoppel – the error of any government employee does not bind the government Judicial Non-Interference → Courts are not allowed to issue injunctions against the government’s pursuit to collect tax because this would unnecessarily defer tax collection Strict Construction of Tax Law → Taxation is the rule, exemption is the exception ▪ Vague tax laws – construed against the government and in favor of the taxpayers ▪ Vague tax exemptions – construed against the taxpayers and in favor of the government DOUBLE TAXATION → Occurs when the same taxpayer is taxed twice by the same tax jurisdiction Elements of Double Taxation 1. Primary Element – same object 2. Secondary Elements: a. Same type of tax b. Same purpose c. Same tax jurisdictions d. Same tax period Types of Double Taxation 1. Direct Double Taxation – all the elements exist for both impositions 2. Indirect Double Taxation – at least one of the secondary elements is not common for both impositions ❖ Nothing in our law expressly prohibits double taxation. However, direct double taxation is discouraged because it is burdensome to taxpayers How can Double Taxation be minimized 1. Provision of Tax Exemption 2. Allowing foreign tax credit 3. Allowing reciprocal tax treatment 4. Entering into treaties or bilateral agreements ESCAPES FROM TAXATION Categories of Escapes from Taxation A. Resulting to loss of government revenue 1. Tax Evasion (tax dodging) → Illegal act or trick that avoids the payment of tax 2. Tax Avoidance (tax minimization) → Legal act or trick that reduces or totally escapes taxes by permissible means 3. Tax Exemption (tax holiday) → Immunity privilege, or freedom granted by the constitution, law, or contract B. Not Resulting to loss of government revenue 1. Shifting – transferring tax burden to another taxpayer a. Forward Shifting – follows the normal flow of distribution b. Backward Shifting – common with non-essential commodities  c. Onward Shifting - combination of forward and backward shifting 2. Capitalization – adjustment of the value of an asset by changes in tax rates 3. Transformation – elimination of losses by taxpayer to form savings to compensate for tax imposition Tax Amnesty → An absolute forgiveness by the government on its right to collect and is retrospective in application → Civil and criminal liability Tax Condonation (tax remission) → Forgiveness of the tax obligation of certain taxpayer under certain justifiable grounds → Construed against taxpayer and in favor of the government → Only civil liability and is prospectively in application