Taxation 101: General Principles PDF

TAXATION 101 by: Atty. Rachelle Ann C. Baod, CPA GENERAL PRINCIPLES  A. Concepts, Nature and Characteristics of Taxation and Taxes Meaning of Taxation  Act of laying a tax  As a process, it is a means by which the sovereign, through its law-making b...

TAXATION 101 by: Atty. Rachelle Ann C. Baod, CPA GENERAL PRINCIPLES  A. Concepts, Nature and Characteristics of Taxation and Taxes Meaning of Taxation  Act of laying a tax  As a process, it is a means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the costs of government among those who in some measures are privileged to enjoy its benefits and must bear its burdens.  As a power, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.  Taxes Taxes are the enforced proportional and pecuniary contributions from persons and property (scope) levied by the law-making body of the State by virtue of its sovereignty for the support of government and for public needs. Rationale [Symbiotic relationship] Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it (lifeblood theory).  Essential Characteristics 1. Levied by the law-making body of the State legislative power The obligation to pay taxes is a statutory liability 2. Enforced contribution 3. Generally payable in money 4. Proportionate in character [ordinarily based on the ability to pay] 5. Levied on persons or property, acts, transactions, rights or privileges 6. Levied for public purpose or purposes 7. Levied by the State which has jurisdiction over the persons or property. -  Theory and Basis 1. Necessity Theory  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 designed for the enjoyment of the citizenry and those which come with the State’s territory and facilities, and protection which a government is supposed to provide. (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA 775). 2. Benefits-Protection Theory / Benefits-Received Principle Qualifications of the Benefit-Protection Theory a. Not only those who are able to pay and do pay taxes can enjoy... b. No special or commensurate benefit to any particular property/person c. The only benefit - living in an organized society (Gomez vs Palomar, 25 SCRA 829) d. Cannot object to or resist the payment solely because no personal benefit (Lorenzo vs Posadas, 64 Phil 353) 3. Lifeblood Theory  Nature of the Power of Taxation 1. Inherent in sovereignty The power of taxation can be exercised by the government even if the Constitution is entirely silent on the subject.  Constitutional provisions merely constitute limitations upon a power which would otherwise be practically without limit.  While the power to tax’s existence is recognized by the constitutional provisions relating to taxation. 2. Legislative in character 3. Subject to constitutional and inherent limitations  Most of these limitations are specifically provided in the Constitution or implied therefrom while the rest are inherent and they are those which spring from the nature of the taxing power itself although, they may or may not be provided in the Constitution.  Aspects of Taxation (Taxation System) 1. Levy (vis-a-vis Tax Legislation)  determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes (strictly speaking, such refers to taxation) 2. Collection / Tax Administration  consists of the manner of enforcement of the obligation on the part of those who are taxed  Extent/Scope of Legislative Power to Tax A. Discretion as to: 1. Subjects of Taxation 2. Purposes for which taxes shall be (public) 3. Amount or rate of the tax 4. Apportionment of the tax (general and / or local) 5. Situs (Place) of taxation 6. Method of collection (manner, means, agencies) B. Grant Tax Exemption / Condonation B. Provide Remedies (Administrative and Judicial)  Objectives of Taxation A. Revenue Objective  to provide funds or property with which the State promotes the general welfare and protection of its citizens B. Non-Revenue Objectives 1. Promotion of General Welfare (as an implement of police power) 2. Regulation – e.g. Taxes on tobacco or alcoholic products or amusement places like night clubs, cabarets, cockpits, etc. 3. Reduction of Social Inequality (through the progressive system) 4. Encourage Economic Growth – in the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments 5. Protectionism – in important sectors of the economy, e.g. Protective tariffs and customs duties (Anti-Dumping Act)  Sound Tax System 1. Fiscal Adequacy  The sources of tax revenue should be sufficient to meet the needs of public expenditure. Neither an excess nor a deficiency of revenue vis-à- vis the needs of government would be in keeping with the principle. 2. Administrative Feasibility  Tax laws should be capable of convenient, just and effective administration or enforcement at a reasonable cost. 3. Theoretical Justice / Equality  The tax burden should be in proportion to the taxpayer’s ability to pay (ability-to-pay principle). The 1987 Constitution requires taxation to be equitable and uniform. B. CLASSIFICATIONS AND DISTINCTIONS GENERAL PRINCIPLES  Classifications of Taxes A. As to Subject matter 1. Personal, capitation or poll taxes example: community tax 2. Property Taxes example: real property tax (RPT) 3. Excise Taxes / Privilege Taxes examples: income tax, value-added tax, estate tax or donor’s tax B. As to Burden 1. Direct Taxes – taxes wherein both the “incidence” as well as the “impact” or burden of the tax faces on one person. examples: income tax, community tax, donor’s tax, estate tax 2. Indirect Taxes – 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 to another person. examples: VAT, percentage taxes, customs duties excise taxes on certain specific goods  Classifications of Taxes C. As to Purpose 1. General/Fiscal/Revenue  i.e., to raise revenues for governmental needs. Examples: income taxes, VAT, and almost all taxes 2. Special/Regulatory  i.e., to achieve some social or economic needs. Examples: educational fund tax under Real Property Taxation D. As to Measure of Application / Amount 1. Specific Tax  tax imposed per head, unit or number, or by some standard of weight or measurement and which requires no assessment beyond a listing and classification of the subjects to be taxed. Examples: taxes on distilled spirits, wines, and fermented liquors 2. Ad Valorem Tax (Value-based)  example: real property taxes, customs duties  Classifications of Taxes E. As to Date / Graduation / Rate 1. Progressive Tax – the rate or the amount of the tax increases as the amount of the income or earning (tax base) to be taxed increases. examples: income tax, estate tax, donor’s tax 2. Regressive Tax – the tax rate decreases as the amount of income or earning (tax base) to be taxed increases. 3. Proportional / Flat / Uniform Tax Real Property Tax, VAT, Percentage Tax Note: Estate Tax and Donor’s Tax (flat rate now at 6% due to TRAIN Law, effective January 1, 2018)  Classifications of Taxes F. As to Scope or authority imposing the tax 1. National Tax  tax imposed by the National Government examples: national internal revenue taxes, customs duties 2. Municipal/Local Tax  tax imposed by Local Government units examples: real estate tax, professional tax  Distinctions TAX TOLL 1. demand of sovereignty 1. demand of proprietorship 2. demand of sovereignty 2. paid for the use of another’s property 3. generally, no limit as to amount 3. amount depends on the cost of imposed construction or maintenance of the public improvement used 4. imposed only by the government 4. imposed by the government or private individuals or entities TAX PENALTY 1. generally intended to raise revenue 1. designed to regulate conduct 2. imposed only by the government 2. imposed by the government or private individuals or entities  Distinctions TAX SPECIAL ASSESSMENTS/ SEPECIAL LEVY 1. imposed on persons, property 1. levied only on land benefitted and excise by public works 2. personal liability of the person 2. not a personal liability of the assessed person assessed, i.e. his liability is limited only to the land involved 3. based on necessity as well as on 3. based wholly on benefits benefits received 4. general application (see 4. exceptional both as time and Apostolic Prefect vs Treas. Of Baguio, place 71 Phil 547)  Distinctions TAX LICENSE / PERMIT FEE 1. enforced contribution assessed 1. legal compensation or reward by sovereign authority to defray public of an officer for specific services expenses 2. for revenue purposes 2. for regulation purposes 3. an exercise of the taxing power 3. an exercise of the police power 4. generally no limit in the amount 4. amount is limited to the of tax to be paid necessary expenses of inspection and regulation 5. imposed also on persons and 5. imposed on the right to exercise property privilege 6. non-payment does not 6. non-payment makes the act or necessarily make the act or business business illegal illegal  Distinctions Importance of the distinctions between tax and license fee: 1. Some limitations apply only to one and not to the other, and that exemption from taxes may not include exemption from license fees. 2. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. 3. An extraction, however, maybe considered both a tax and a license fee. 4. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition of a tax.  Distinctions TAX DEBT 1. based on law 1. based on contracts, express or implied 2. generally, cannot be assigned 2. Assignable 3. generally payable in money 3. may be paid in kind 4. generally not subject to set- 4. may be subject to set-off or off or compensation compensation 5. imprisonment is a sanction for 5. no imprisonment for non-payment of non-payment of tax except poll tax debt 6. governed by special 6. governed by the ordinary periods of prescriptive periods provided for in the prescriptions Tax Code, as amended by the TRAIN Oral / Quasi-Contracts – 6 years law (3 years or 10 years), or Local Written – 10 years Government Code (5 years) 7. does not draw interest except 7. draws interest when so stipulated, or only when delinquent in case of default  Distinctions Tax Distinguished from other Terms. 1. Subsidy – a pecuniary aid directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public. 2. Revenue – all the funds or income derived by the government, from whatever source and whatever manner. 3. Duties – broader in scope as it includes customs duties. 4. Tariff – 3 senses: a. As a book of rates... xxx xxx b. As duties payable on goods imported or exported (PD No. 230) c. As the system or principle of imposing duties on the importation/exportation of goods. 5. Internal Revenue – refers to taxes imposed by the legislative other than duties or imports and exports.