1. General Principles of Taxation PDF

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INHERENT POWERS OF THE STATEThree inherent powers of a state: Police Power – it refers to the inherent power of a sovereign state to enact laws to promote public health, public safety, public morals and the common good. Power of Eminent Domain – it refers to the inherent power of a sovereign state t...

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GENERAL PRINCIPLES OF TAXATION

JLM

INHERENT POWERS OF THE STATE Three inherent powers of a state: 1. Police Power – it refers to the inherent power of a sovereign state to enact laws to promote public health, public safety, public morals and the common good. 2. Power of Eminent Domain – it refers to the inherent power of a sovereign state to take private property for public use upon payment of a just compensation. 3. Power of Taxation – inherent power of a sovereign state acting through its legislature to impose a proportionate burden upon persons, property, rights or transaction to raise revenue to support government expenditure and as a tool for general and economic welfare (PUBLIC PURPOSE) SIMILARITIES: 1. They are indispensable to government existence. 2. They can exist independent of the constitution. 3. They are means by which the state interferes with private rights and properties. 4. They are generally exercised by the legislature. 5. They contemplate an equivalent compensation or benefit. Point of Distinction Purpose

Limitation Exercising Authority

Police Power To regulate the activities for welfare/Property is taken for public use Public purpose Government

Amount of Imposition

Sufficient to cover the costs of regulation

Compensation

Compensation is the intangible, altruistic feeling that the individual has contributed to the public good. liberty and property Community or class of individuals

Object/Persons affected

Non-Impairment Clause/Relationship with the Constitution

Superior to the “Non-Impairment Clause” of the Constitution

Eminent Domain To purchase/buy Property is taken for public use Public purpose and just compensation Government or private entities No imposition, the owner is paid the fair market value of his property Compensation is the full and fair equivalent of the property taken. – Just compensation

property rights Owner of the property

Superior and may override the “NonImpairment Clause” of the Constitution

Taxation To raise Revenue and support of the government Constitution and Inherent Limitations Government Unlimited

Compensation is the protection and public improvements instituted by the government for the taxes paid Property Community or class of individuals

Inferior to the “NonImpairment Clause” of the Constitution

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Theory of Taxation - government’s necessity for funding The Lifeblood Doctrine – Taxes are indispensable to the continued subsistence of the government. Without taxes, the government would be paralyzed for lack of motive power to activate or operate it. (CIR vs. Algue) – Implication of the Lifeblood Doctrine in taxation: – Tax is imposed even in the absence of a Constitutional grant – Claims for tax exemption are construed against taxpayers. – The government reserves the right to choose the objects of taxation. – The courts are not allowed to interfere with the collection of taxes. – In income taxation: – Income received in advance is taxable upon receipt. – Deduction for capital expenditures and prepayments is not allowed as it effectively defers the collection of income tax. – A lower amount of deduction is preferred when a claimable expense is subject to limit. – A higher tax base is preferred when the tax object has multiple tax bases. Basis of Taxation – The mutuality of support between the people and the government – Receipt of benefits is conclusively presumed Theories of Cost Allocation 1. Benefit Received Theory  Presupposes that the more benefit ones receive from the government, the more taxes he should pay. 2. Ability to pay Theory  Presupposes that taxation should also consider the taxpayers’ ability to pay.  Vertical Equity – proposes that the extent of one's ability to pay is directly proportional to the level of his tax base  GROSS Concept  Horizontal Equity - requires consideration of the particular circumstance of the taxpayer.  NET Concept PURPOSES OF TAXATION 1. Primary purpose is to raise revenue 2. Secondary purposes: a) Regulation b) Promotion of General Welfare c) Reduction of Social Inequality d) Encourages Economic Growth NATURE AND CHARACTERISTICS KEY: LeNS 1. Legislative in character 2. Inherent power

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3. Subject to inherent and constitutional limitations. INHERENT LIMITATIONS (KEY: D – PINES) 1. Double Taxation 2. Public purpose 3. International comity or treaty 4. Non-delegability of the Taxing power 5. Exemption of the government 6. Situs of taxation or territoriality KINDS OF DOUBLE TAXATION: 1) Direct Duplicate Taxation – Prohibited. It means: a. taxing twice b. same object/subject c. same period d. same purpose e. same kind of tax f. same taxing authority 2) Indirect Duplicate Taxation – not legally objectionable. CONSTITUTIONAL LIMITATIONS 1. Observance of due process of law 2. Equal protection of law 3. Uniformity in taxation 4. Progressive scheme of taxation 5. Non-imprisonment for non-payment of poll tax 6. Non-impairment of the obligations and contracts 7. Free-worship clause 8. Exemption of charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, and non-profit cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes. 9. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions including grants, endowments, donations or contributions for educational purposes. 10. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion, etc. 11. No money shall be paid out of the Treasury except in pursuance of an appropriation made by law. 12. Concurrence of a majority of ALL members of Congress for the passage of a law granting tax exemption 13. Non-diversification of tax collections 14. The President shall have the power to veto any particular item (s) in an appropriation, revenue or tariff, but the veto shall not affect the item (s) to which no objection has been made. 15. Non-impairment of the jurisdiction of the Supreme Court to review tax cases 16. Appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

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17. Each local government unit shall exercise the power to create its own sources of revenue and shall have a just share in the national taxes ASPECTS or STAGES or PROCESS OF TAXATION 1. Levying/imposition of tax Matters of legislative discretion in the exercise of Taxation 1. Determining the subjects/objects to be taxed 2. Determining the purpose of the tax 3. Setting the amount/rate of the tax 4. Kind of tax to be imposed 5. Apportionment of the tax between the national and local government 6. Situs of Taxation 7. manner and means of collection of the tax 2. Assessment/collection of tax 3. Payment SITUS OF TAXATION Situs is a Latin term which means “situation”, “location”, or “place.” In short, its literal meaning refers to a place taxation. FACTORS IN DETERMINING THE SITUS 1. Subject Matter/Object – what is being taxed 2. Nature of tax – which tax to impose 3. Citizenship of the taxpayer 4. Residence of the taxpayer Object/Subject of situs of taxation: 1. Persons – residence of the taxpayer 2. Real Property or Tangible personal property – location of the property 3. Intangible personal property - DOMICILE of the owner 4. Income - Citizenship or residence of taxpayer or place where income is earned 5. Business, Occupation, and Transaction – place of operation of business, 6. Gratuitous transfer of property - Citizenship or residence of taxpayer or place Other Fundamental DOCTRINES IN TAXATION 1. Marshall Doctrine – “the power to tax involves the power to destroy”. Taxation power can be used as an instrument of police power. It can be used to discourage or prohibit undesirable activities or occupation. 2. Holme’s Doctrine – “taxation power is not the power to destroy while the court sits.” It may be used to build or encourage beneficial activities or industries by the grant of tax incentives. 3. Prospectivity of tax laws – Tax laws are generally prospective in operation. 4. Non- compensation or set – off – Taxes are not subject to automatic set – off or compensation. Exceptions:

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a. where the taxpayer’s claim has already become due and demandable such as when the government already recognized the same and an appropriation for refund was made b. Cases of obvious overpayment of taxes c. Local taxes 5. Non – assignment of taxes – tax obligations cannot be assigned or transferred to another entity by contract. 6. Imprescriptibility in taxation – as a rule, taxes do not prescribe unless the law itself provides for prescription - under NIRC, tax prescribes if not collected within 5 years from the date of its assessment. In the absence of an assessment, tax prescribes if not collected by judicial action within 3 years from the date the return is required to be filed. However, taxes due from taxpayers who did not file a return or those who filed fraudulent returns do not prescribe. 7. Doctrine of Estoppel – any misrepresentation made by one party toward another who relied therein in good faith will be held true and binding against that person who made the misrepresentation. - The GOVERNMENT is not subject to estoppel 8. Judicial Non-interference – generally, courts are not allowed to issue injunction against the government’s pursuit to collect tax exemption. This is anchored on the Lifeblood Doctrine. 9. Strict Construction of Tax Laws - “Taxation is the rule, exemption is the exception.” in case of VAGUE laws – Vague tax laws are construed against the government and in favor of the taxpayers. in case of VAGUE exemption laws – Vague exemption laws are construed against the taxpayer and in favor of the government. ESCAPES FROM TAXATION 1. Tax EVASION – taxpayer resorts to unlawful means to lessen or to get away with his tax liability. - known as “TAX DODGING” 2. Tax CAPITALIZATION – same with tax transformation except that mark-up is reduced in order that the tax paid can be added to the selling price. 3. Tax SHIFTING – process of transferring tax liabilities from one taxpayer to another without violating any provisions of the tax laws. e.g. Forward shifting – E-Vat Backward shifting – Onward shifting – transfer tax burden twice or more. 4. Tax EXEMPTION – privilege of not being levied with a particular tax wherein other individuals are obliged to pay. “Tax Holiday” e.g. PEZA

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5. Tax AVOIDANCE – taxpayer minimizes his tax liability by taking advantage of legally available tax planning opportunities - known as “TAX PLANNING” 6. Tax TRANSFORMATION – escape from tax burden wherein the producer of goods absorbs the tax. - Improving the process of production to reduce cost of sales. TAX AMNESTY VS. TAX CONDONATION Tax Amnesty – a general pardon granted by the government for erring taxpayers to give them chance to reform and to enable them a fresh start to be part of a society with a clean slate. It is an absolute forgiveness or waiver by the government on its right to collect and is retrospective in application Tax Condonation – is forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. Also known as “tax remission” TAX LAWS, TAXES, AND TAX ADMINISTRATION Taxation Laws – Taxation laws refers to any law that arises from the exercise of the taxation power Types of Taxation Laws 1. Tax Laws 2. Tax Exemption Laws 1. Tax Laws – laws that provide for the assessment and collection of taxes 1. The National Internal Revenue Code (NIRC) 2. The Tariff and Customs Code 3. The Local Tax Code 4. The Real Property Tax Code 2. Tax exemption laws – laws that grant immunity from taxation 1. The Minimum Wage Law (MWEs’) 2. The Omnibus Investment Code of 1987 (E.O. 226) 3. Barangay Micro Business Enterprise Law (BMBE’s) 4. Cooperative Development Act (CDA) SOURCES of Tax Laws 1. 1987 Constitution 2. Tax Statutes 3. Executive Orders 4. Local Tax Ordinances 5. Tax Treaties 6. Judicial Decisions 7. Rules and Regulations (BIR, BOC, DOF) 8. Administrative Interpretations and Types of Administrative Issuances 1. Revenue Regulations issuances signed by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue (CIR) that specify prescribe, or define rules

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and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes. Revenue regulations are formal pronouncements intended to clarify or explain the tax law and carry into effect its general provisions by providing details of administration and procedure. Revenue regulation has the force and effect of a law, but is not intended to expand or limit the application of the law; otherwise, it is void. 2. Revenue Memorandum Orders issuances that provide directives or instructions; prescribe guidelines; and outline processes, operations, activities, workflows, methods, and procedures necessary in the implementation of stated policies, goals, objectives, plans, and programs of the Bureau in all areas of operations except auditing. 3. Revenue Memorandum Rulings rulings, opinions and interpretations of the CIR with respect to the provisions of the Tax Code and other tax laws as applied to a specific set of facts, with or without established precedents, and which the CIR may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio 4. Revenue Memorandum Circulars issuances that publish pertinent and applicable portions as well as amplifications of laws, rules, regulations, and precedents issued by the BIR and other agencies/offices. 5. Revenue Bulletin refer to periodic issuances, notices, and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant tax laws, and other issuances for the guidance of the public. 6. BIR Rulings BIR Rulings are official positions of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws. Rulings are merely advisory or a sort of information service to the taxpayer such that none of them is binding except to the addressee and may be reversed by the BIR at anytime. Types of rulings 1. Value Added Tax (VAT) rulings 2. International Tax Affairs Division (ITAD) rulings 3. BIR rulings 4. Delegated Authority (DA) rulings

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Tax Laws vs. PFRS/ PAS In case of difference between the provisions of the Tax Code and the rules and regulations implementing Tax Code and the rules and regulations implementing PFRS/PAS, TAX CODE shall prevail. NATURE OF PHILIPPINE TAX LAWS - Civil and NOT political/penal in nature Nature and Characteristics of Tax Laws a. Tax Laws are prospective, in general b. Revenue laws are not political in nature c. Legislative intent d. Tax Laws are special laws, and prevail over general laws e. Tax Laws are not penal in character Philippine TAX LAWS and Taxes NIRC of 1997 (PD 1158, as amended) 1. Income taxes (individual and corporate) 2. Estate and Donor’s Tax 3. VAT 4. OPT 5. Excise Tax 6. Documentary Stamp Tax Taxes defined: Enforced proportional contribution from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of the government, all public needs and generally payable in money. Essential Characteristics of Tax 1. It is an enforced contribution 2. It is levied by the law-making body of the state 3. It is generally payable in money 4. It is proportionate in character 5. It is imposed for the purpose of raising revenue 6. It is levied for public purpose Classification of Taxes As to subject matter or object a. Personal, Poll or Capitation - a tax on a persons who are residents of a particular territory. “No person shall be imprison of non-payment of POLL, PERSONAL or CAPITATION tax” “CEDULA” b. Property – tax imposed on property whether REAL or PERSONAL in proportion to its value or in accordance with some other reasonable apportionment e.g. Real Estate Tax/Property Tax

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c. Excise – tax imposed on PERFORMANCE of an act, the enjoyment of privilege or the engaging in an occupation. e.g. Estate tax, Donor’s tax, Income tax, VAT As to WHO BEARS THE BURDEN/Incidence a. Direct – tax demanded from the persons who are intended or bound by law to pay tax. e.g. Community tax, income tax, Donor’s Tax, Estate tax b. Indirect – tax which the taxpayer can shift to another. e.g. Customs Duties, VAT As to DETERMINATION of AMOUNT c. Specific – tax imposed based on the PHYSICAL unit of measurement as by head, numbers, weight or length or volume. e. g. cigars, wines fireworks d. Ad Valorem – tax of a FIXED PROPORTION of the value of property; needs an independent appraiser to determine the value e.g. real estate tax, customs duties, excise taxes on cigarettes and gasoline As to PURPOSE a. General, Fiscal or revenue – tax with no particular purpose or object for which the revenue is raised, but is simply raised for whatever need may arise. e.g. Income tax, VAT b. Special or Regulatory – tax imposed for a special purpose regardless of whether revenue is raised or not, and is intended to achieve some social or economic end. e.g. Protective Tariffs or customs duties c. Sumptuary – a tax levied to achieve some social or economic objectives As to IMPOSING AUTHORITY OR SCOPE a. National – tax imposed by national government. e.g. Internal Revenue Taxes, tariff and Duties b. Municipal or Local – tax imposed by municipal governments for specific needs. e. g. Real Estate Taxes, Municipal License As to GRADUATION OR RATE a. Proportional – tax based on a fixed percentage of the amount of property income or another basis to be taxed. e.g. Percentage taxes, Real Estate Taxes b. Progressive or Graduated – tax rate increases as the tax base increases. e.g. Income Taxes, Estate Tax, Donor’s Tax c. Regressive – tax rate decreases as the tax base increases.

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DISTINCTION OF TAXES WITH SIMILAR ITEMS TAX VS. TOLL Tax Demand of sovereignty One’s support for the government Imposed only by the government Based on government needs

Toll Demand of ownership Compensation for the use of somebody else’s property May be imposed by the government or by private individuals Determined by the cost of the property or improvements thereon

TAX VS. PENALTY Tax Purpose

to raise revenue

Exercising authority

the government

Source Mode of settlement

Law in money

Subject of the imposition Effect on the person owning the subject

Basis of Imposition

Coverage of application

Point of distinction Purpose Amount Subject of Imposition

Effect of non-compliance

Revocability Scope

Penalty to regulate conduct through punishment and suppression of injurious act the government or by private individuals Law or contract in money or in kind

TAX VS. SPECIAL ASSESSMENT Tax Special Assessment business, interests, transactions, Land rights, persons, properties or privileges May be...