Week-1_General-Principles.pdf

MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY ACT183: INCOME TAXATION...

MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY ACT183: INCOME TAXATION Jibran A. Tomindug, CPA GENERAL PRINCIPLES AND CONCEPTS OF TAXATION OVERVIEW Before entering Income Taxation, you need to finish this chapter. This will serve as your general knowledge about taxation. It’s a sort of mind conditioning wherein you will be able to know what taxation is all about. It’s more on answering the why’s and what’s of taxation. All learnings you’ll get with this module will be beneficial for you as you go along with the subject. This module focuses on the inherent powers of the state. ABSTRACTION Inherent Powers of the State When a sovereign state is born, it exists with indispensable powers necessary for its survival. The powers are: 1. Police Power – the power to protect and provide safety and welfare of society. It refers to the power of a sovereign state to legislate for the protection of health, welfare and morals of the community. It is exercised usually to guard against excesses or abuses of individual liberty. Examples of police power are preservation of natural resources, segregation of lepers from the public, imprisonment of convicted criminals, and regulation pf various professionals. 2. Eminent Domain Power – the power to take private property with just compensation for public use. It is base on the idea that the common necessities and interests of the community transcend individual rights in property. The state may expropriate private property when it is necessary in the interest of national welfare. Since eminent domain is inherent in sovereignty, pertinent provisions om the Constitution are not grants of power but rather limitations upon its exercise. 3. Taxation Power – the power to enforce contributions to support the government, and other inherent powers of the State. (see Module 2 for more discussion about the Power of Taxation) SUMMARY DISTINCTION or SIMILARITIES EMINENT TAXATION POLICE POWER DOMAIN 1. As to concept Power to enforce Power to make and Power to take contribution to raise implement laws for the private property for government funds general welfare public use with just compensation 2. As to scope Plenary, comprehensive, Broader in application – Merely a power to and supreme general power to make take private and implement laws. property for public use 3. As to authority Exercised only by Exercised only by May be granted to government or its political government or its public service or subdivision political subdivisions public utility companies. 1  MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY 4. As to purpose Money is taken to support Property is taken or Private property is the government destroyed to promote taken for public use general welfare 5. As to The power to make tax Can be expressly Can be expressly necessity of laws cannot be delegated delegated to the local delegated to the delegation government units by the local government law-making body units by the law- making body 6. As to person Operates on a community Operates on a Operates on the affected or a class of individual community or a class of particular private individual property of an individual. 7. As to benefits Continuous protection Healthy economic Market value of the and organized society standard of society property expropriated 8. As to amount Generally, no limit Cost of regulation, No imposition of imposition license and other necessary expenses 9. As to Inseparable for the Protection, safety and Common importance existence of a nation – it welfare of society. necessities and supports police power interest of the and eminent domain community transcend individual rights in property. 10. As to Subject to Constitutional Relatively free from Superior to and relationship to and inherent limitations Constitutional may override Constitution limitations Constitutional inferior to non-impairment impairment clause Superior to non- provision because impairment clause the welfare of the State is superior to any private contract. 11. As to Constraints by Limited by the demand Bounded by public limitation constitutional and for public interest and purpose and just inherent limitations due process compensation Similarities among Taxation, Eminent Domain, and Police Power 1. They are inherent in sovereignty; (they can be exercised even without being expressly granted in the Constitution.) 2. They are all necessary attributes of sovereignty because there can be no effective government without them; 2  MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY 3. They constitute the three ways by which the state interferes with private rights and property; 4. They are all legislative in nature and character; and 5. They presupposes an equivalent compensation. Power of Taxation I. Taxation Defined: Taxation is the process or means by which a sovereign state, through its lawmaking body, imposes burdens upon subject and objects within its jurisdiction for the purpose of raising revenue to carry-out the legitimate objects of the government. 1. It is a POWER, it refers to the inherent power of a state, co-extensive with sovereignty to demand contributions for public purposes to support the government; 2. It is a PROCESS; it passes a legislative undertaking through the enactment of tax laws by the Congress which will be implemented by the Executive Branch of the government through its Bureau of Internal Revenue (BIR) to raise revenue in order to pay the necessary expenses of the government. (Enactment or Imposition: Legislative via Congress. Implementation: Executive via BIR) 3. It is a MEANS; it is a way of collecting and apportioning the cost of government among those who are privileged to its benefits. II. PURPOSES OF TAXATION 1. Primary Purpose: Revenue or Fiscal Purpose - The primary purpose of taxation is to raise fund for the government to defray its legitimate expenses. A government will be paralyzed without funding, it will be unable to perform its duty which is to promote general welfare and protection to its citizens. A government can run its administrative set up only through funding which is collected in the form of tax. 2. Secondary Purpose: Regulatory Purpose – taxation is often use to for regulation or control by means of which certain effects or conditions envisioned by the government may be achieved such as: promotion of general welfare, reduction of social inequality, and economic growth. Example: Cigarettes or sin products are seemed to be harmful to individuals, the government may use taxation to minimize sin product consumption by imposing higher taxes on these commodities (sin tax); III. THEORY and BASIS of TAXATION 1. Theory: Lifeblood Theory or Necessity Theory It says that the power of taxation proceeds upon the theory that the existence of government is a necessity. 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. 2. Basis of Taxation: Benefits Received or Reciprocity Theory It says that the government provides benefits to the people in the form of public services and the people to provide the funds that finance the government. The concept is illustrated below: TAXES 3  MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY GOVERNMENT PEOPLE PUBLIC SERVICES IV. SCOPE OF TAXATION Taxation is: 1. Supreme – in so far as the selection of the subject of taxation; 2. Unlimited – in the absence of limitations prescribed by law or the constitution, the power to tax is unlimited and comprehensive; 3. Comprehensive – as it covers persons, businesses, activities, professions, rights and privileges; 4. Plenary – as it is complete; BIR may avail certain remedies to ensure collection of taxes. V. ESSENTIAL ELEMENTS OF TAXATION A. It is an ENFORCED CONTRIBTION. Payment of tax is not voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority; B. It is generally PAYABLE IN MONEY. It is pecuniary burden payable in money which must be a legal tender; C. It is PROPORTIONATE IN CHARACTER. Payment of taxes should be based on the ability to pay theory or theoretical justice. D. It is levied on persons, property, or the exercise of a right or privilege; (subjects/objects of taxation) E. It is levied by the LAW-MAKING Body of the State; F. It is levied for PUBLIC PURPOSE. VI. NATURE & CHARACTERISTICS OF TAXATION A. Inherent power of the state; B. Essentially legislative in character, except: Delegations to the President Delegation to Local Government Units Delegation to Administrative Agencies C. Subject to constitutional and inherent limitations; D. Exception of Government Entities, Agencies and Instrumentalities; E. International Comity; F. Territorial jurisdiction. VII. CLASSIFICATION OF TAXES: A. As to Scope: National – these are taxes collected by the National Government as imposed by the National Internal Revenue Code and other National Tax Laws; Local – these are taxes collected by the Local Government Units as imposed by an Ordinance. B. As to Subject Matter: 4  MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY Personal – imposed on individuals residing within a specified territory without regard to their property or the occupation in which they may be engaged; Property – imposed on property, real or personal, in proportion, either to its value or in accordance with some other reasonable methods of apportionment. Excise – imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. C. As to Burden: Direct – tax demanded from the person who is intended to pay it; Indirect – tax which is demanded from one person in the expectation and intention that shall indemnify himself at the expense of another or tax which the taxpayer can shift to another. D. As to Determination of Amount: Specific – tax of fixed amount by the head or member, or by some standard of weight or measurement; Ad Valorem – fixed proportion of the amount or value of the property which the tax is assessed. E. As to Purpose: General (Fiscal or Revenue) – tax is imposed for the general purpose of the government or to raise revenue for government needs; Special or Regulatory – tax is imposed for a special purpose or to achieve some social or economic needs. F. As to Rate: Progressive – the rate increases as the tax base increases; Regressive – the tax rate decreases as the tax base increases; Proportionate – based on fixed percentage of the amount of property income or other basis to be fixed. POWER OF TAXATION LIMITATIONS I. CONSTITUTIONAL LIMITATIONS: 1. 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. The power to tax should not be harsh, oppressive or confiscatory. 2. Equal Protection of the Law All persons subject to legislation shall be treated alike under similar circumstances and conditions both in the privileges conferred and liabilities imposed. 3. Rule of Uniformity and Equality in Taxation The rule of taxation shall be uniform and equitable. It requires the uniform application and operation, without discrimination of the tax in every place where the subject of the tax is found. 4. No Imprisonment for non-payment of Poll Tax No person shall be imprisoned for debt or non-payment of poll tax. 5  MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY 5. Prohibition Against Impairment of Obligations of Contracts No law impairing the obligation of contracts shall be passed. The obligation of contract is impaired when its terms and condition are changed by law or by a party without the consent of the other, thereby weakening the position or rights of the latter. 6. Prohibition Against Infringement of Religious Freedom No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination preference, shall forever be allowed. 7. No Money Shall be Appropriated for Religious or Private Purpose No public money or property shall be appropriated, applied, paid, or employed directly or indirectly, for the use or benefit, or support of any church, denomination, sectarian institution or system of religion, or of any priest, preacher, minister or other religious teacher, or dignitary as such except when such priest, preacher, minister or dignitary is assigned to AFP, or to any penal institution, or government orphanage or leprosarium. 8. Exemptions form Property Taxation of Charitable institutions, Churches, Educational Entities, Convents, Non-profit Cemeteries 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. 9. Prohibition against Taxation of Non-Stock, non-profit educational institutions All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. 10. No Law granting tax exemption shall be passed without the concurrence of a majority of all Members of Congress 11. Power of the President to Veto any Particular Item or items om a revenue or tariff bill 12. Non-impairment of the jurisdiction of the Supreme Court In tax cases Congress cannot take away from the Supreme Court the power given to it by the constitution as the final arbiter of tax cases. 13. Revenue Bills shall originate exclusively from the House of Representatives All appropriation, revenue or tariff bills, bills authorizing an increase of public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. II. INHERENT LIMITATIONS: 1. The tax must be for public purpose The power of taxation flows forth from the legitimate objective of supporting services of the government. Public taxes are public money. They must be used to finance recognized public needs. It has been held that tax has been utilized for public purpose of the welfare of the nation or the greater portion of its population has benefited with its use. 6  MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY 2. The levy must apply within its territorial limits for the exercise of the effective tax jurisdiction The taxis authority must observe “tax situs” because the country’s tax laws are effective and enforceable only within its territorial limits. 3. Exemption from taxation of the Government Agencies performing Governmental Functions Exemption from taxation is a grant of tax immunity to a particular class of persons or corporations. The State’s immunity from taxation is inherent in its power to impose tax. 4. Non-Delegation of Power to Tax In its strict sense, the power to make tax laws cannot be delegated to other branches of the government. Since peculiarity and exclusively legislative in nature, the power to make tax laws cannot be exercised by the executive or judicial branch of the Government. 5. International Comity Taxing system of a sovereign state may honor International Comity with other foreign sovereign state. OTHER MATTERS III, STAGES, ASPECTS OR PROCESSES OF TAXATION Taxation involves three stages, namely: 1. LEVY Levy or imposition of taxes involves the passage if tax laws or ordinances through the legislature. Strictly speaking, it refers to taxation or the tax policy of the Sovereign State. 2. ASSESSMENT Assessment involves the act of administration and implementation of the tax laws by the executive through its administrative agencies such as the BIR and BOC. 3. COLLECTION Collection of Tax is a process involving the act of compliance by the taxpayer in contributing his share to defray the expenses of the government. It is the process of obtaining payment IV. PRINCIPLE OF A SOUND TAX SYSTEM The fundamental principles of a sound taxation system based on Adam Smith’s Canons of Taxation are: 1. FISCAL ADEQUACY The principle of Fiscal Adequacy states that the sources of revenue of the government should be sufficient to meet the demand of public expenditures regardless of business conditions. The revenue of the government should be capable of expanding or contracting annually in response to variations in public expenditures. 2. EQUALITY OR THEORITICAL JUSTICE The principle states that the tax burden must be proportionate to the taxpayer’s ability to pay. It is based on the philosophy that “he who received more should give more”. The contribution of each individual to the government should be fair enough according to his earnings and wealth. 3. ADMINISTRATIVE FEASIBILTY 7  MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY Tax laws must be convenient, just, uniform and effective in their administration – free from confusion and uncertainty. Their exercise should be convenient as to the place, time and mode of payment, and not burdensome or discouraging to business. Competent public officials must enforce them uniformly. V. DOUBLE TAXATION 1. DIRECT DOUBLE TAXATION It means taxing twice 1. By the same taxing authority, jurisdiction or taxing district; 2. For the same purpose; 3. In the same year or taxing period; 4. Same subject or object; 5. Same kind/character of the tax 2. INDIRECT DOUBLE TAXATION There is indirect double/duplicate taxation if any of the elements above is not present. NOTE: Our constitution does not expressly prohibit direct double taxation. However, it is something not favored. VI. TAX EVASION vs TAX AVOIDANCE 1. TAX EVASION Tax evasion is the use of the taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax. It is also known as “tax dodging”. 2. TAX AVOIDANCE Tax avoidance is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is also known as “tax minimization” and is not punishable by law. In simpler sense, both are used to minimize tax but it is only a matter of legality, since tax avoidance is legal and tax evasion is not and punishable by law. VII. SITUS OR PLACE OF TAXATION It 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. FACTORS TO CONSIDER in DETERMINING SITUS: 1. Subject matter 2. Nature of Tax 3. Citizenship 4. Residence of the Taxpayer 5. Source of Income 6. Place of Exercise, business or occupation to be taxed REFERENCES Tabag, E. D. (2019). INCOME TAXATION. Manila: Info Page. Valencia, E. G. (2017). Income Taxation. Baguio City: Valencia Educational Supply 8  MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY DEPARTMENT OF ACCOUNTANCY 9