1 General Principles of Taxation PDF

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GENERAL PRINCIPLES OF TAXATIONI. TAXATIONTAXATION is the inherent power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government.It is a manner of apportioning the costs of the government among those who, in some measure, are privileged t...

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GENERAL PRINCIPLES OF TAXATION I.

TAXATION

TAXATION is the inherent power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. It is a manner of apportioning the costs of the government among those who, in some measure, are privileged to enjoy its benefits and must bear its burdens. INHERENT TO THE STATE: It is inherent in character because its exercise is guaranteed by the mere existence of the state. It could be exercised even in the absence of a constitutional grant. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent state or government. (Pepsi-Cola Bottling Co. of the Philippines vs.

Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27, 1976) SCOPE OF LEGISLATIVE POWER TO TAX 1. The determination of purposes for which taxes shall be levied provided it is for the benefit of the public. 2. The determination of subjects of taxation such as the person, property or occupation within its jurisdiction. 3. The determination as to the amount or rate of tax unless constitutionally prohibited. 4. The determination as to the kind of tax to be collected (i.e. property tax, income tax, inheritance tax, etc.). 5. The determination of agencies to collect the taxes. 6. The power to specify or provide for administrative and judicial remedies. 7. The power to grant tax exemptions and condonations. THEORY AND BASIS 1. Life Blood Theory – Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. (Commissioner of Internal

Revenue vs. Algue; GR No. L-28896; Feb. 17, 1988) 2.

Necessity Theory - government is necessary; however, it cannot continue without the means of paying for its existence; hence, it has the right to compel all citizens and property within its power to contribute for the same purpose. (71 Am. Jur. 2d 346) The power to tax is an attribute of sovereignty. 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 improvement 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. (Phil. Guaranty Co., Inc. vs. CIR; GR No. L-22074; April 30, 965)

3.

Symbiotic relationship theory - It is said that taxes are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. 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. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. (Commissioner

of Internal Revenue vs. Algue, supra) PURPOSE OF TAXATION 1. Primary – to raise revenues; to support the existence of the State and enable the state to promote the general welfare. 2. Secondary – non-revenue or sumptuary a. Promotion of general welfare – taxation may be used to implement police power (e.g., grant of VAT exemption and Discounts to Senior Citizens); b. Regulation - where taxes are levied on excises or privileges for purposes of rehabilitation and stabilization of threatened industry which is affected by public interest or to discourage consumption of harmful products (e.g., excise taxes on cigarettes and alcohol); c. Reduction of Social Inequity – This is made possible through the progressive system of taxation where the objective is to prevent the undue concentration of wealth in the hands of few individuals. Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger portion of the tax burden. (e.g., Income tax) d. Encouragement of economic growth – tax incentives and reliefs may be granted to encourage investment (i.e., Income Tax Holiday, 5% preferential Gross Income Tax for PEZA registered entities); e. Protectionism – for the protection of local industries, in case of foreign importations, protective tariffs and customs duties and fees (e.g., Special Duties imposed by the Bureau of Customs) CHARACTERISTICS OF THE POWER TO TAX (CUPS) 1. Comprehensive – it covers persons, businesses, activities, professions, rights and privileges. 2. Unlimited – it is so unlimited in force and searching in extent that courts scarcely venture to declare that it is subject to any restrictions, except those that such rests in the discretion of the authority which exercises it. (Tio vs. Videogram Regulatory Board; GR No. 75697; June 18, 1987) 3. Plenary – it is complete; unqualified; absolute. Under the Tax Code, the BIR may avail of certain remedies to ensure collection of taxes. 4. Supreme – insofar as the selection of the subject of taxation is concerned. PRINCIPLES OF A SOUND TAX SYSTEM (FAT) 1. Fiscal Adequacy – revenue raised must be sufficient to meet government/public expenditures and other public needs. (Chavez vs. Ongpin; GR No. 76778;

June 6, 1990) 2.

Administrative Feasibility – tax laws must be clear and concise; capable of effective and efficient enforcement; convenient as to time and manner of payment, must not obstruct business growth and economic development. The VAT law cannot be considered as violative of the Administrative Feasibility principle because it is principally aimed to rationalize the system on taxes of goods and services. Thus, simplifying tax administration and making the system more equitable to enable the country to attain economic recovery.

(Kapatiran ng Mga Naglilingkod sa Pamahalaan v. Tan; June 30, 1988) 3.

Theoretical Justice – must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory). Art. VI, Sec. 28(1) of the 1987 Constitution mandates that the rule on taxation must be uniform and equitable and that the State evolve a progressive system of taxation.

NOTE: Non-observance of Fiscal Adequacy and Administrative Feasibility will render the tax measure unsound but not unconstitutional. However, non-observance of the Principle of Theoretical Justice is invalid because the Constitution itself requires that taxation must be equitable. “THE POWER TO TAX IS THE POWER TO DESTROY” According to Justice Marshall: The power to tax includes the power to destroy. Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. (McCulloch vs. Maryland, 4 Wheat, 316 4 L ed. 579,

607) However, according to Justice Holmes: The power to tax is not the power to destroy as long as this court (Supreme Court) sits. Taxpayers may seek redress before the courts in case of illegal imposition of taxes and irregularities. The Constitution, as the fundamental law, overrides any legislative or executive act that runs counter to it. In any case, therefore, where it can be demonstrated that the challenged statutory provision fails to abide by its command, then the court must declare and adjudge it null. (Sison Jr. v. Ancheta; G.R. No. L-59431; July 25, 1984) IMPRESCRIPTIBILITY OF TAXES: Taxes are generally imprescriptible, except when the law provides otherwise, e.g. the statute of limitations provided under the Tax Code. DOUBLE TAXATION: means taxing the same person for the same tax period and the same activity twice, by the same jurisdiction.

Double taxation in strict sense is when: 1. 2. 3. 4. 5. 6.

Both taxes are imposed on the same property or subject matter; For the same purpose; Imposed by the same taxing authority; Within the same jurisdiction; During the same taxing period; Covering the same kind or character of tax.

Double Taxation in Broad sense is the opposite of direct double taxation and is not legally objectionable. The absence of one or more of the foregoing requisites of obnoxious direct tax makes it indirect. Constitutionality of double taxation: Double taxation in its stricter sense is unconstitutional but that in the broader sense is not necessarily so. Our Constitution does not prohibit double taxation. However, double taxation will not be allowed if it results in a violation of the equal protection clause.

Modes of eliminating double taxation 1. 2.

Tax Deduction – an amount subtracted from the gross income to arrive at taxable income. Tax Credit - an amount subtracted from an individual’s or entity’s tax liability (tax due) to arrive at the tax liability still due. A deduction differs from a tax credit, in that a deduction reduces taxable income while a credit reduces tax liability .

3.

Treaties with other states: a tax treaty sets out the respective rights to tax of the state of source (situs) and the state of residence with regard to certain cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. It applies whenever the state of source is given full or limited right to tax. The treaty makes it incumbent upon the state of residence to allow relief in order to avoid double taxation. Note: The BIR issued RMO No. 1-2000, as amended by RMO No. 72-2010, requiring taxpayers to file for a Tax Treaty Relief Application on or before the transaction date before availing of the provisions of a tax treaty. However, as held by the Supreme Court, this administrative requirement cannot defeat the right of any taxpayer entitled to the preferential rates in the tax treaty.

FORMS OF ESCAPE FROM TAXATION 1. 2. 3. 4. 5.

Shifting – the burden of payment is transferred from the statutory taxpayer to another without violating the law (e.g., VAT); Capitalization – the reduction in the price of the taxed object equal to the capitalized value of future taxes the purchaser is expected to be called upon to pay. Transformation - for manufacturers or producers, upon whom tax are imposed, fearing the loss of his market if he should add to the price, pays the tax and endeavor to recoup himself by improving his process of production, thereby producing his units at a lower cost. Tax Avoidance – 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. Also known as “tax minimization.” (e.g. utilizing all permissible allowable deductions) Tax Exemption – grant of immunity to particular persons or corporations of a particular class from a tax which persons or corporations generally within the same rate or taxing district are obliged to pay.

Basic Principles Regarding Tax Exemption i.

Exemptions are highly disfavored by law and he who claims an exemption must be able to justify his claim by the clearest grant of law. An exemption from the common burden cannot be permitted to exist upon vague implication. (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466; see also House vs.

ii. iii.

He who claims exemption should prove his factual and legal basis for exemption. (Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation , G.R. No. 147295, February 16, 2007) Tax exemptions are strictly construed against the person claiming it. (Esso Standard Eastern, Inc. vs. Acting Commissioner of Customs; GR No. L-

iv. v.

Constitutional grant of exemptions are self-executing. In the same way that taxes are personal, tax exemptions are also personal.

Posadas, 53 Phil. 338)." (Collector of Int. Revenue vs. Manila Jockey Club, Inc., G.R. No. L-8755, March 24, 1956)

21841; Oct. 28, 1966)

vi.

Deductions from income tax purposes partake of the nature of tax exemptions, therefore should also be construed strictly against the taxpayer.

(Commissioner of Internal Revenue vs. General Foods (Phils), Inc.; GR No. 143672; April 24, 2003) vii. Same treatments are given to tax refunds. (Commissioner of Internal Revenue v. Eastern Telecommunications Phils., Inc., G.R. No. 163835, July 7,

2010) Kinds of Tax Exemption As to Form: a. Express - Expressly granted by the Constitution, statutes, treaties, franchises or similar legislative acts. b. Implied - When particular persons, properties, or exercise are deemed exempt as they fall outside the scope of the taxing provision itself. c. Contractual - Are those agreed to by the taxing authority in contract lawfully entered into by them under enabling laws. As to Basis: a. Constitutional Exemptions – Immunities from taxation which originate from the Constitution. b. Statutory Exemptions – those which emanate from legislation. As to Extent: a. Total Exemption – connotes absolute immunity. b. Partial Exemption – one where a collection of a part of the tax is dispensed with.

Grounds for Tax Exemption a. b. c.

Contract – the grant of tax exemption is usually contained in the charter of the corporation to which the exemption is granted. Public policy - to encourage new and necessary industries, or to foster charitable institutions. Reciprocity – to reduce the rigors of international double or multiple taxation, tax exemptions maybe granted in treaties. A tax exemption is a personal privilege of the grantee and therefore not assignable; it is generally revocable by the government, unless founded on contract and must not be discriminatory.

Revocation of Tax Exemption : If the grant of an exemption does not constitute a contract, but merely “a spontaneous concession by the legislature, not connected with any service or duty imposed” it is REVOCABLE by the power which made the grant. Thus, if the basis of the tax exemptions is by virtue of a franchise granted by Congress, the exemption may be revoked. However, if the tax exemption constitutes a binding contract and for a valuable consideration, the government cannot unilaterally revoke the tax exemption. 6.

Tax Evasion – use of a taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax. Also known as “tax dodging,” it presupposes malice, fraud, bad faith, or willful intent on the part of the taxpayer either to underdeclare income or overdeclare deductions to defeat tax liability. Connotes the integration of 3 Factors: a. The end to be achieved, i.e. the payment of less than that known by the taxpayer to be legally due; b. An accompanying state of mind which is described as being “evil”, in “bad faith”, “willful”, or “deliberate and not merely accidental”, and c. A course of action or failure of action which is unlawful.

7.

Compensation or Set-off: as a general rule, taxes cannot be the subject of a set-off or compensation because of the lifeblood doctrine; they are not contractual obligations but arise out of duty to the government; and the government and the taxpayer are not mutually debtors and creditors of each other. (Francia vs. IAC No. L-67649; June 28, 1988) Taxes are of a distinct kind, essence and nature, and these impositions cannot be classed in merely the same category as ordinary obligations; the applicable laws and principles governing each are peculiar, not necessary common, to each; and public policy is better subserved if the integrity and independence of taxes are maintained. (Republic vs. Mambulao Lumber Co.) A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. (Philex Mining Corp. v. Commissioner)

Doctrine of Equitable Recoupment: is a doctrine in common law applicable where the taxpayer has a claim for refund but he was not able to file a written claim due to the lapse of the prescription period within which to make a refund. The taxpayer is allowed to credit such refund to his existing tax liability. This doctrine is not allowed in the Philippines. Note that the prescription of tax refunds in this jurisdiction is generally two years from the date of payment and the assessment of taxes is generally 3 years from filing. Thus, if the taxpayer failed to file a refund within the 2 year period, his liability as assessed by the BIR cannot be recouped against such prescribed refund claim. 8.

Compromise and Abatement – these are powers granted to the Commissioner of Internal Revenue to reduce tax liabilities and/or penalties. (see Tax

Remedies) 9.

Tax Amnesty refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and power to impose penalties on persons or entities guilty of violating a tax law. Tax amnesty aims to grant a general reprieve to tax evaders who wish to come clean by giving them an opportunity to straighten out their records. (Metropolitan Bank and Trust Co. v. Commissioner of Internal Revenue, G.R. No. 178797, 4 August 2009)

Distinguished with tax exemption: Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods. (People vs. Castañeda, G.R. No. L-46881, September 15, 1988) It applies to past tax liabilities. Tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are subjected.

(Florer vs. Sheridan, 137 Ind. 28, 36 NE 365). It applies prospectively after the grant of exemption or qualification therefrom.

TAX AMNESTY ACT (Republic Act No. 11213): towards the policy of the State in protecting and enhancing revenue administration and collection, the State shall: a. Provide a one-time opportunity to settle estate tax obligations through an estate tax amnesty program that will give reasonable relief to estates with deficiency estate taxes b. Enhance revenue collection by providing a tax amnesty on delinquencies to minimize administrative costs in pursuing tax cases and declog the dockets of the BIR and the courts; and c. Provide a more equitable tax system by adopting a comprehensive tax reform program that will simplify the requirements on tax amnesties with the use of simplified forms and utilization of information technology in broading the tax base.

General Amnesty: the law originally includes a general tax amnesty to cover all other taxes, but this portion of the law (Title III) was vetoed entirely by the President stating that “without the provisions breaking down the walls of bank secrecy, setting the legal framework for us to comply with international standards on exchange of information for tax purposes, and safeguarding against those who abuse the amnesty by declaring an u ntruthful asset or net worth, a general amnesty that is overgenerous and unregulated would create an environment ripe for future tax evasion, the very thing we wish to address.” Estate Tax Amnesty: a. b.

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d. e.

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g. h. i. j.

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Coverage: estate of decedents who died on or before December 31, 2017, with or without assessments duly issued therefor, whose estate taxes have remained unpaid or have accrued as of December 31, 2017. Exceptions to the Coverage: the Estate Tax Amnesty shall not extend to cases which shall have become final and executory and to properties involved in cases pending in app...