Tax Reviewer Quiz 1 PDF

REVIEWER FOR QUIZ 1 Taxation Taxation Taxation is the process or means by which the sovereign (independent State), through its law-making body (the legislature), imposes burdens upon subjects and objects - within its ju...

REVIEWER FOR QUIZ 1 Taxation Taxation Taxation is the process or means by which the sovereign (independent State), through its law-making body (the legislature), imposes burdens upon subjects and objects - within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. In simple terms, it is the act of levying a tax to apportion the cost of. government among those who, in some "measure, are privileged to enjoy its benefits and must therefore bear its burdens. Taxes, on the other hand, are the enforced proportional contributions or charges from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of the government and all public needs. Aspects refer to “stages or phases” that are Dene or embodied in the term “taxation” such as: 1. Levying or imposition of the tax which is a legislative act or function. 2. Assessment or determination of the correct amount of applicable tax. 3. Collection of the tax levied which is essentially administrative in character. The national agency charged with the function of collecting internal revenue taxes is the Bureau of Internal Revenue. PURPOSES OF TAXATION 1. Primary: Revenue or Fiscal Purpose The primary purpose of taxation on the part of the government is to provide funds or property with which to promote the general welfare and the protection of its citizens and to enable it to finance its multifarious activities. A government can run its administrative set up only through public funding which is collected in the form of tax. Examples of taxes imposed for raising revenues are income and business faxes. 2. Secondary: Regulatory Purpose (or Sumptuary/Compensatory) While the primary purpose of taxation is to raise revenue for the support of the government, taxation is often employed as a device for regulation or control (implementation of State’s police power) by means of which certain effects or conditions envisioned by the government may be achieved such as: a.Promotion to general welfare B. reduction to social inequality C. Economic Growth ELEMENTS OF SOUND TAX SYSTEM  1. Fiscal Adequacy The fundamental purpose of taxation is to raise the revenue necessary to fund public services. Consequently, it is necessary that the sources of revenues must be adequate to meet government expenditures and sustain the level of public services demanded by citizens and policymakers. 2. Theoretical Justice or Equity (“ability to pay principle”) Taxpayer's ability to pay must be taken into consideration. The tax burden should be proportionate to the taxpayer's ability to pay. 3. Administrative Feasibility Tax laws must be capable of effective and efficient enforcement. A good tax system requires informed stakeholders who understand how taxes are assessed, collected and complied with. It should be clear who and what is being taxed, and how tax burdens. affect them. Therefore, the tax system should be as simple as possible, and should minimize gratuitous complexity. Complicated tax rules make the tax system difficult for citizens to understand. Complexity also makes it harder for governments to monitor and enforce tax collections, and makes it easier for lawmakers to enact (and conceal) targeted tax breaks benefitting particular groups. CLASSIFICATION OF TAXES 1.: AS TO SCOPE ' a. National — imposed by the National Government (e.g. income tax, estate tax, donor’s tax, VAT other percentage taxes, documentary stamp tax) b. Local — imposed by local government units such as municipal corporations (e.g. real estate tax and professional tax receipts). The local government unit's power to tax is based on a constitutional grant that paved the way for the enactment of the Local Government Code of the Philippines. Hence, the local government's power to tax is not inherent. 2. AS TO SUBJECT MATTER OR OBJECT a. Personal, poll or capitation — tax of a fixed amount imposed upon an individual, whether citizens or not, residing within a specified territory - without regard to their property or. the occupation in which he may be engaged (e.g. 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 (e.g. real estate tax) C. Excise — any tax which does not fall within the classification of a poll tax or a property tax. This is a tax on the exercise of certain rights and privileges (e.g. income tax, estate tax, donor's tax). Excise tax may also refer to the tax levied or imposed on sin products and non-essential goods such as cigars and liquorsExcise taxes of this nature are taxes applicable to certain specified articles or products manufactured in the Philippines for domestic sale or.consumption or any other disposition and to specified things or goods imported into the Philippines. It may be specific or ad valorem 3. AS TO WHO BEARS THE BURDEN  a. Direct — tax which is demanded from the person who also shoulders the burden of tax or tax which the taxpayer cannot shift to another. Both the incidence (liability for the payment of the tax) as well as the impact or burden of the tax falls on the same person (e.g. income tax, estate tax, - donor's tax). b. ‘Indirect — tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, These are taxes wherein the incidence of or the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person (e.g. VAT, percentage tax, excise tax on exciseable articles). In the case of Maceda v. Macaraig (197 SCRA 771), an indirect tax is defined as one paid by a person who is not directly liable therefor, and who may therefore shift or pass on the tax to another person or entity, which ultimately assumes the tax burden. 4. 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 B. Ad valorem- tax of fixed proportion of the values of the property with respect to which the tax is assessed 5. AS TO PURPOSE. a. Primary, Fiscal, or Revenue Purpose— tax imposed solely for the general purpose of the government, ie., to raise revenue for government purposes (e.g. income tax, donor's tax and estate tax). B, Secondary, Regulatory, Special or Sumptuary Purpose — tax imposed for a specific purpose, i.e., to achieve some social or economic ends irrespective of whether revenue is actually raised or not (e.g. tariff and certain duties on imports). 6. AS TO GRADUATION OR RATE a. Proportional — tax based on a fixed percentages of amount of the property, receipts, or other basis to be taxed (Ad-valorem tax on distilled spirits)] Progressive or graduated — tax the rate of which increases as the tax | base or bracket increases (e.g. income tax on individual taxpayers) Regressive — tax the rate of which decreases as the tax base or bracket increases 7. AS TO TAXING AUTHORITY a. National — taxes imposed under the National Internal Revenue Code (commonly known as the Tax Code) collected by the national government through the Bureau of Internal Revenue (BIR) and other national government agencies. Other national taxes other than those collected by the BIR as provided for under special laws include but not limited to: Customs duties Taxes on narcotic drugs Special education fund taxes Energy taxes on aircraft, motorized watercraft, and electric power consumption Sugar adjustment taxes  Travel tax « Private motor vehicle tax b. Local — taxes imposed by local government units SCOPE of the Power to Tax In the case of Sison vs. Ancheta (130 SCRA 654), the Supreme Court held that the power of taxation is the most absolute of all powers of the government. It has the broadest scope of all the powers of the government because in the absence of limitations, it is considered as comprehensive, unlimited, plenary and supreme. a. Comprehensive — as it covers persons, businesses, activities, professions, rights and privileges. b. Unlimited — In the absencé of limitations prescribed by law or the constitution, the power to tax is unlimited and comprehensive. Its force is so searching to the extent that the courts scarcely venture to declare that it is subject to restrictions. c. Plenary — as it is complete; the BIR may avail of certain remedies to ensure collection of taxes. d. Supreme - in so far as the selection of the subject of taxation. THEORY and BASIS OF TAXATION.. Theory (Authority): LIFEBLOOD THEORY and/or NECESSITY THEORY The power of taxation proceeds upon the theory that the existence of government is a necessity (“Necessity theory”).. As stated in the case of Phil. Guaranty Co., Inc. v. Commissioner [13 SCRA 775], is a power predicated upon necessity. It is a necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements 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. 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 means to pay its expenses. Consequently, the State has the right to compel all its citizens and property within its limit to contribute BASIS of 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 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 (Commissioner v. Algue). Taxpayers receive benefits from taxes through the nittaction the State affords them. For the protection they get arises their obligation to support * the government through payment of taxes. The Three (3) Inherent Powers of the State 1. Police Power. It is the power of the State for promoting public welfare by restraining and regulating the use of liberty and property. It may be exercised only by the government. The property taken in the exercise of this power is destroyed because it is noxious or intended for a noxious. purpose. 2..Power of Taxation. \t is the power by which the State raises revenue to defray the necessary expenses of the government. 3. Power of Eminent Domain. It is the power of the State to acquire private property for public purposes upon payment of just compensation. Meaning of “INHERENT Power” Built-in, inbom, ingrained Existing in something as a permanent, essential, or characteristic attribute. Vested in someone (i.¢., State or government) as a right or privilege. LIMITATIONS ON THE STATE’S POWER TO TAX Inherent Limitations These are restrictions arising from the very nature of the power to tax itself. Inherent limitations are those limitations which exist despite the absence of an express constitutional provision. a) Purpose must be public in nature This one is synonymous to “governmental purpose.” A tax must always be imposed for a public purpose, otherwise, it will be declared as invalid. No tax law may be enacted for the purpose of raising revenue for private purposes. The purpose should affect the inhabitants of the State or taxing district as a community and not merely as individuals. It has been said that the best test of rightful taxation is that the proceeds of the tax must be used: a. For the support of the government; or b. For some of the recognized objects of government; or c. To promote the welfare of the community. EFFECT OF INCIDENTAL BENEFIT TO PRIVATE INTEREST The purposes to be accomplished by taxation need not be exclusively public. Although private individuals are directly benefited, the tax would still be valid provided such benefit is only incidental. LEGISLATIVE PREROGATIVE It is the Congress which has the power to determine whether the purpose is public or private. A question on the validity of such a tax measure may be raised before the courts on the ground that it is not for public purpose. However, once it is settled that it is for a public purpose, it can no longer be a subject of inquiry. "It is not the immediate result but the ultimate result that determines whether the purpose is public or not. It is not the number of persons benefited but it is the character of the purpose that determines the public character of such law. What is not allowed is that if it has no link to public welfare. Public purpose is determined by the use to which the tax money is devoted. If it benefits the community in general, then it is for public purpose no matter who collects it". b) Prohibition against delegation of the taxing power What cannot be delegated is the legislative "enactment/imposition/levying" of tax measure. However, as regards to administrative implementation of a tax law (ie., assessment, collection, valuation of property for tax purposes), that can be delegated. c) Territorial limitation Tax laws cannot operate beyond a State's territorial limits. Property outside one’s jurisdiction does not receive any protection from the State. 2. Constitutional Limitations a) Due process of law There must be a valid law and the measure should not be unconscionable and unjust as to amount to confiscation of property. Tax statute must not be arbitrary as to find no support in the Constitution. The power to tax should not be harsh, oppressive or confiscatory. This limitation is also known as the right to notice and hearing. b.) Equal protection of laws All persons subject to legislation shall be treated alike under similar circumstances and conditions both in the privileges conferred: and liabilities imposed..The doctrine does not require that persons or properties different in fact be treated in law as though they were the same. What it prohibits is class legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for so doing, Congress may group persons or properties to be taxed and it is sufficient if all members of the same class are subject to the same rate and the tax is administered impartially upon them. c) Rule of uniformity and equity in taxation “The rule of taxation shall be uniform and equitable.” \t requires the uniform application and operation, without discrimination, of the tax in every place where the subject of the tax is found. It does not, however, require absolute identity or equality under all circumstances, but subject to reasonable classification. d). Prohibition against imprisonment for non-payment of “poll tax” No person shall be imprisoned for debt or non-payment of poll tax. The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge, but not to other violations like falsification of community tax certificate and nonpayment of other taxes. Poll tax is a tax of fixed amount imposed on residents within a specific territory regardless of citizenship, business or profession. e) Prohibition against taxation of religious, charitable and educational entities Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. This is an exemption from real property tax only. The exemption in. favor of property used exclusively for charitable or educational purposes Is not limited to property actually indispensable therefore, but extends to facilities which are. incidental to and reasonably necessary for the ~ accomplishment of said purposes. The test of exemption refers to actual use, not ownership. The term “exclusively” should be interpreted as Pamenly: rather than “solely”. SITUS OF TAXATION Literally, situs of taxation means "place" of taxation. It is the State or political unit which has jurisdiction to impose a particular tax. The State where the subject to be taxed has a situs may rightfully levy and collect the tax. The situs is necessarily in the State which has jurisdiction or which exercises dominion over the subject in question. FACTORS TO CONSIDER IN DETERMINING THE SITUS OF TAXATION: a. Subject matter (person, property, or activity) b. Nature of the tax c. Citizenship d. Residence of the taxpayer e. Source of income f. Place of excise, business or occupation being taxed TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS 1. TAX versus TOLL A Toll is a sum of money for the use of something, generally applied to the consideration, which is paid of the use of a road, bridge or the like of a public nature. TOLL Demand of proprietorship Paid for the use of another's property Amount is based on cost of construction or maintenance of the public improvement used TAX Demand of sovereignty Paid for the support of government Amount is based on the necessities of the State Maybe imposed by the government or May be imposed only by the State private individuals or entities 2.TAX versus PENALTY Penalty is a sanction imposed as a punishment for violation of law or ‘acts deem injurious. The violation of tax may give right to imposition of penalty. PENALTY Designed to regulate conduct TAX Primarily aimed at rising revenue May be imposed by the government or May be imposed only by the government private individuals or entities 3. TAX versus SPECIAL ASSESSMENT Special assessment is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements. In Republic v. Bacolod, 17SCRA632, a special assessment is a levy on property which derives some special benefit from the improvement. Its purpose is to finance such improvement, thus accruing only to the owners. thereof who, after all, pay the assessment. It is not a tax measure intended to raise revenues for the government because the proceeds thereof may be devoted to the specific purpose for which the assessment was authorized. CHARACTERISTICS OF SPECIAL ASSESSMENT a. Levied only on land b. Not a personal liability of the person assessed c. Based wholly on benefits (not necessary) d. Exceptional both as to time and place Special Assessment: A special assessment is a charge levied on property owners to fund specific public projects that directly benefit their property. Examples include road improvements, sewer installations, or sidewalk repairs. The assessment is used to cover the cost of these specific enhancements. Tax: Taxes are general revenue tools used by governments to fund a broad range of public services and infrastructure, such as education, healthcare, and defense. Taxes are not tied to specific benefits received by the taxpayer. In summary, while both special assessments and taxes are mechanisms for funding public services, special assessments are directly tied to specific benefits received by property owners, whereas taxes fund a wide array of general public services and infrastructure. 4. TAX versus REVENUE Revenue refers to all the funds or income derived by the government, whether from tax or any other source. REVENUE Amount collected 5. TAX versus SUBSIDY TAX Amount imposed Subsidy is a pecuniary aid directly granted the government to an individual or private commercial enterprise deemed beneficial to the public. Subsidy is not a tax although tax may have to be imposed to pay it. 6. TAX versus PERMIT or LICENSE FEE Permit or License is a charge imposed under the police power for purposes of regulation. 7.. TAX versus CUSTOMS DUTIES Customs duties are taxes imposed on goods exported from or imported into a country. 9. TAX versus TARIFF Tariff may be used in one of three (3) senses: a. A book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same; or b. The duties payable on goods imported or exported; or c. The system or principle of imposing duties on the importation (or exportation) of goods. ° ; *The term tariff and customs duties are used interchangeably in the Tariff and Customs Code  In the Philippine context, a common example of double taxation can be observed with the tax treatment of a corporation's income and its shareholders. For instance, a company operating in the Philippines pays corporate income tax on its earnings. Once the company distributes dividends to its shareholders, these dividends are subject to a separate tax called the final withholding tax on dividends. This means the income is taxed first at the corporate level and then again at the individual level when distributed. For instance, if a corporation earns PHP 1,000,000 and pays PHP 200,000 in corporate tax, any dividends paid out to shareholders will also be taxed at 10% or 15%, depending on the type of dividend. This can lead to a situation where the same income is effectively taxed twice—once when the corporation earns it and again when the shareholders receive it. Such double taxation can impact investor returns and business decisions. This example highlights how the structure of tax regulations can sometimes lead to multiple layers of tax on the same income. “Hard work is worthless for those that don’t believe in themselves.” – Naruto