371817960 CH 2 Doctrines in Taxation docx PDF

Preview

Summary

CHAPTER 2DOCTRINES IN TAXATIONI. Doctrine of Prospectivity of Tax Laws1. What is the “Doctrine of Prospectivity of Tax Laws”?As a general rule, tax laws are prospective in operation, 1 unless the legislative intent that statute should operate retrospectively is distinctly expressed or necessarily im...

Description

CHAPT ER2 DOCTRI NESI NT AXAT I ON I. Doctrine of Prospectivity of Tax Laws 1. What is the “Doctrine of Prospectivity of Tax Laws”? As a general rule, tax laws are prospective in operation, 1 unless the legislative intent that statute should operate retrospectively is distinctly expressed or necessarily implied. 2 Where a statute amending a tax law is silent as to whether it operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past transactions not subject to tax under the original act. Every case of doubt must be resolved against its retroactive effect. 3 II. Doctrine of Imprescriptibility 2. What is the “Doctrine of Imprescriptibility”? Considering that taxes are the lifeblood of the government, it may be stated that the assessment and collection of taxes are imprescriptible unless otherwise provided by the tax law itself. 4 Thus, if the tax law itself is silent on prescription, the right of the government to assess and collect taxes will not prescribe. In criminal cases involving tax offenses punishable under the Tax Code, it would indeed seem that tax cases are practically imprescriptible for as long as the period from the discovery and institution of judicial proceedings for its investigation and punishment, up to the filing of the information in court does not exceed five (5) years. As the provision5 of the law stands in the statute book (and to this day it has remained unchanged), prescription is a matter of defense and the information does not need to anticipate and meet it. The defendant could, at most, object to 1

Because taxes are burdens and should not be imposed without due process of law. Belle Corp. v. CIR, G.R.181298, Jan. 10, 2011 2 3 4 5

Lorenzo v. Posadas, 64 Phil. 353; CIR. v. Filipinas Cia. de Seguros, 107 Phil. 1055 CIR v. Marubeni Corporation, 372 SCRA 576 (2001) CIR v. Ayala Securities Corp., 101 SCRA 231 Sec. 281, NIRC

the introduction of evidence to defeat his claim of prescription. Anyway, the law says that prescription begins to run from ... "the institution of judicial proceedings for its ... punishment." Unless amended by the legislature, this provision stays in the Tax Code as it was written during the days of the Commonwealth. And as it is, must be applied regardless of its apparent one-sidedness in favor of the Government. In criminal cases, statutes of limitations are acts of grace, a surrendering by the sovereign of its right to prosecute. They receive a strict construction in favor of the Government and limitations in such cases will not be presumed in the absence of clear legislation. 6 III. Double Taxation 3. What is the meaning of double taxation?

BQ2015, 2014, 2013,

2012

“Double taxation” means taxing the same property / person / activity twice when it should be taxed only once; that is, taxing the same property/person/activity twice by the same jurisdiction, during the same taxing period for the same purpose and for the same kind of tax by the same taxing authority when it should only be taxed but once. 7 4. What are the kinds of double taxation? BQ2015, 2014, 2012 (a) In the Strict Sense - Double taxation in the strict or prohibited sense is called “direct double taxation” which is objectionable because it is a violation of the substantive due process under the Constitution since the same property or subject matter is taxed twice when it should be taxed once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing. Otherwise described as “direct duplicate taxation,” the following are the elements of direct double taxation: The two taxes must be imposed: (1) on the same person, property or subject matter, (2) for the same purpose, (3) by the same taxing authority, 6 7

Emilio E. Lim, Sr., v. CA, GR Nos. L-48134-37, Oct. 18, 1990 Nursery Care Corp v. City of Manila, GR 180651, July 30, 2014

(4) within the same territory or taxing jurisdiction, (5) during the same taxing period; and (6) the taxes must be of the same kind or character.8 (b)In the Broad Sense - Double taxation in the broad sense is called “indirect double taxation” or “indirect duplicate taxation” which extends to all cases in which there are two or more pecuniary impositions, but the ABSENCE OF ONE OR MORE of the above-mentioned elements makes the double taxation indirect. The Constitution does NOT prohibit the imposition of double taxation in the broad sense because it does not violate the substantive due process since no actual double taxation occurred. 5. What are the kinds of indirect duplicate taxation? BQ2013 There are two kinds of indirect duplicate taxation, namely: (1 ) Domestic double taxation. - This arises when the same taxes are imposed by the local or national government within the same State. Double taxation may not be invoked where one tax is imposed by the national government and the other by a local government, being widely recognized that there is nothing inherently obnoxious in the requirement that licenses or taxes be exacted with respect to the same occupation, calling or activity by both the state and its political subdivision.9 Thus, double taxation does not exist when a corporation is assessed with local business tax as a manufacturer, and at the same time, VAT as a person selling goods in the course of trade or business. (2) International juridical double taxation – It refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.10

8

Swedish Match Phils. Inc. v. The Treasurer of the City of Manila, G.R. 181277, July 3, 2013 (700 SCRA 428) Ibid; Nursery Care Corp. v. Anthony Acevedo & the City of Manila, GR 180651, July 30, 2014. 9

Punzalan v. Mun. Board of Manila , 95 Phils. 46 (1994); City of Baguio v. De Leon, 25 SCRA 38

(1968) 10

CIR v. SC Johnson and Son., Inc. 309 SCRA 87 (1999)

When an item of income is taxed in the Philippines and the same income is taxed in another country, there is a case of double taxation but it is only a case of indirect duplicate taxation, which is called “international juridical double taxation,” which is not legally prohibited because the taxes are imposed by different taxing authorities. 6. Is double taxation allowed in our Constitution? The Supreme Court held that there is no constitutional prohibition against double taxation in the Philippines. 11 Therefore, it is not a valid defense against the validity of a tax measure.12 However, it is not favored but the same is permissible, provided some other constitutional requirements are not thereby violated.13 For example, double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity 14 or by the same jurisdiction for the same purpose,15 but not in a case where one tax is imposed by the State and the other by a province, city or municipality. 16 7. Is double taxation a valid defense against the legality of a tax measure? No. Double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality of a tax measure.17 However, if double taxation amounts to a direct duplicate taxation, that the same subject is taxed twice when it should be taxed but once, in a fashion that both taxes are imposed for the same purpose by the same taxing authority, within the same jurisdiction or taxing district, for the same taxable period and for the same kind or character of a tax, then it becomes legally objectionable for being oppressive and inequitable. 8. Can a court impose local business tax on manufacturers of liquors, distilled spirits, whins and other article of commerce.

11 12 13

Villanueva v. Iloilo, 26 SCRA 578, Dec. 28, 1968 Pepsi Cola v. Mun. of Tanauan, GR L-31156, Feb. 27, 1976 (69 SCRA 460) Pepsi Cola Bottling Co. v. City of Butuan, GR L-22814, Aug. 28, 1968

14

CIR v. Lednicky GR L-18169, July 31, 1964 (11 SCRA 609) 15 SMB, Inc. v. City of Cebu, GR L-20312, Feb. 26, 1972 (43 SCRA 280) 16 Punzalan v. Mun. Board of City of Manila, 50 OG 2485 17

Pepsi Cola v. Mun. of Tanauan, GR L-31156, Feb. 27, 1976 (69 SCRA 460)

8. Is there double taxation where a lessor of a property pays real estate tax on the premises being leased, a real estate dealer’s tax based on rental receipts and income tax on the rentals? No. There is no double taxation here in the prohibited sense. Double taxation in the prohibited sense means (1) taxing for the same tax period, (2) the same thing or activity twice, (3) when it should be taxed but once, (4) by the same taxing authority, (5) for the same purpose, and (6) with the same kind or character of tax. The real estate tax is a property tax. On the other hand, the real estate dealer's tax is a tax on the privilege to engage in business of real estate dealership. While the income tax is a tax on the privilege to earn an income. These taxes are imposed by different taxing authorities and are essentially of different kinds and character. 18 9. Is there double taxation when the interest income of a bank derived from its bank deposits in another bank is subjected to tax and it will again be subjected to the 5% gross receipts tax on its interest income from its loan transactions? BQ2012 No. There is no double taxation when the interest income of a bank from its bank deposits in another bank had been subjected to the 20% final withholding tax (which is a passive income and a direct tax), and at the same time, its interest income on loan transactions to its debtors-customers is subjected to the 5% gross receipts tax (which is considered as active income and indirect tax) because the first tax is income tax, while the second tax is business tax. 10. Can a municipal mayor refuse to sign an ordinance which requires that all establishments selling liquor should pay a fixed annual fee and at the same time imposing a sales tax equivalent to 5% of the amount paid for the purchase or consumption of liquor in the said establishments on the ground that it would constitute double taxation? 18

Villanueva v. City of Iloilo, 26 SCRA 578

No. The refusal of the mayor is not justified. The impositions are of different nature and character. The fixed annual fee is in the nature of a license fee imposed through the exercise of police power while the 5% tax on purchase or consumption is a local tax imposed through the exercise of taxing powers. Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article and this is not in violation of the rule against double taxation. 19 11. Is there double taxation in the imposition of local business tax based on gross revenue in the case of a taxpayer whose method of accounting is on the accrual basis? Yes. In petitioner's case, its audited financial statements reflect income or revenue which accrued to it during the taxable period although not yet actually constructively received or paid. This is because petitioner uses the accrual method of accounting, where income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy; the right to receive income, and not the actual receipt, determines when to include the amount in gross income. The imposition of local business tax based on petitioner's gross revenue will inevitably result in the constitutionally proscribed double taxation - taxing of the same person twice by the same jurisdiction for the same thing -- inasmuch as petitioner's revenue or income for a taxable year will definitely include its gross receipts already reported during the previous year and for which local business tax has already been paid. Thus, respondent committed a palpable error when it assessed petitioner's local business tax based on its gross revenue as reported in its audited financial statements, as Sec. 143 of the LGC and Sec. 22(e) of the Pasig Revenue Code clearly provide that the tax should be computed based on gross receipts. 20 12. What are the modes of avoiding/eliminating double taxation? The usual methods of avoiding the occurrence of double taxation are: (a) Entering into tax treaties with other states. Double or multiple taxation is avoided by means of allowing 19 20

Compania General de Tabacos de Filipinas v. City of Manila, 8 SCRA 367 (1963) Ericsson Telecom vs. City of Pasig, GR 176667, Nov. 22, 2007( 538 SCRA 99)

reciprocal exemptions, which may be done either by statute or by treaty. (b) Application of the principle of reciprocity Exemption from taxation by treaty are generally granted on grounds of reciprocity21 and to lessen the rigors of international double or multiple taxation. (c ) Allowance of deduction/tax credit for foreign taxes paid - The rigors of international double taxation may also be lessened by the allowance of deduction or tax credit taxes paid to foreign countries.22 Example: A resident Filipino citizen has the option to either claim the amount of income tax withheld abroad as a deduction from his gross income in the Philippines or to claim it as a tax credit 23 provided that he includes the subject income in the computation of his worldwide gross income considering that he is a resident Filipino citizen. A resident Filipino citizen is subject to tax on his income derived from within and without the Philippines or his worldwide income. (d) Using the Tax Sparing Rule – A non-resident foreign corporation (NRFC) who earned cash and/or property intercorporate dividends from a domestic corporation is taxed on a reduced rate of 15% tax on dividends (in lieu of the 30% corporate income tax), which represents the difference between the regular income tax of 30% and the 15% tax on dividends on the condition that the country of residence of the NRFC shall allow a credit against the tax due from the NRFC, taxes deemed to have been paid in the Philippines. 24 The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. 25 IV. Escape from Taxation 13. What are the forms of escape from taxation? 21

Reciprocity is used to denote the relation between two states when each of them, by their respective laws or by treaty, gives the citizens or nationals of the other State certain privileges, as in the practice of a profession, on condition that its own citizens or nationals shall enjoy similar privileges in the latter state. Sison v. Board of Accountancy, 85 Phil. 276 (1949) 22 23 24 25

Sec. 34(C), NIRC Sec. 34(C)(1)(B), NIRC Sec. 28(B)(5)(b), NIRC; CIR v. PGMC, GR 66838, Dec. 2, 1991 CIR v. SC Johnson and Son, Inc., 309 SCRA 87 (1999)

Taxpayers escape paying their taxes thru the following modes, although the modes used may not necessarily be legal, and therefore, sanctionable. (a) Shifting the tax burden to another taxpayer. (b) Tax avoidance. (c ) Tax evasion. A. Shifting of Tax Burden 14. What is the meaning of the term “shifting of tax burden”? “Shifting of tax burden” simply means that the imposition of tax is transferred from the statutory taxpayer, or the person who is required by law to pay the tax, to another person who shall bear the burden of the tax without violating the law. Only the payment of indirect taxes may be shifted to another taxpayer, but not direct taxes. Example: Under the VAT system, the seller can shift the burden of the VAT to the buyer, the said tax (VAT) being an indirect tax. 15. What are the ways of shifting the burden of tax to another taxpayer? The ways of shifting the burden of tax to another taxpayer are as follows: (1) Forward shifting – refers to the transfer of tax burden from the producer to distributor until it finally reaches the ultimate purchasers or end consumers. Example: The producer shifts its VAT to the distributor, and the distributor shifts its VAT to the final consumer. (2) Backward shifting – refers to the reverse of forward shifting, meaning, the burden of the tax is transferred from the end consumer through the factors of distribution to the factor of production. Example: The end consumer may shift the tax imposed on him to the distributor by buying the goods only after the price of the goods is reduced by the amount of the tax, and lastly, the manufacturer agrees to buy the distributor’s products only if the price is also reduced by the amount of tax. (3) Onward shifting – the tax burden is shifted twice or more either forward or backward.

16. What are the taxes which can be shifted to another taxpayer? Under the National Internal Revenue Code, the national taxes which can be shifted to another taxpayers are the indirect taxes, such as the VAT, Other percentage taxes, excise tax on excisable articles and documentary stamp taxes. In the case of VAT, the seller, who is the statutory taxpayer, is given the right by law to shift the burden of tax to the buyer, which tax shall become part of the cost of the goods or services sold if the buyer is the end consumer. 17. What are the taxes which cannot be shifted to another taxpayer? Under the National Internal Revenue Code, all taxes which are the direct tax liabilities of the taxpayers are the taxes which cannot be shifted to another taxpayer, such as income tax, estate tax and donor’s tax. 18. Why does the law allow the shifting of the burden of tax to another person? When the law allows that the burden of tax may be shifted to another person, this is one form of escape from taxation which does not result to any loss on the part of the Government, hence, not objectionable. 19. What is the meaning of “impact” and “incidence” of taxation? The term "impact of taxation" refers to the point on which the tax is originally imposed or the person/taxpayer who is required by law to pay the tax or the taxpayer on whom the tax can be formally assessed. Example: VAT is originally assessed against the VAT-registered SELLER who is required to pay the said tax. (This is the so-called "impact of taxation.") On the other hand, "incidence of taxation" refers to the point on which the tax burden finally rests or settles down. It takes place when shifting has been effected from the statutory taxpayer to another. Hence, VAT, being an indirect tax, the burden of paying the tax is actually shifted or passed on to the BUYER. (This is the so-called "incidence of taxation.")

20. What is the relationship between Impact, Shifting, and Incidence of a tax? The”impact of taxation,” which is the imposition of the tax to the statutory taxpayer, is the initial phenomenon; the “shifting of the tax,” which is the passing on of the tax to the buyer, is the intermediate event, while the “incidence of the tax” which is the final point of the transaction makes the end consumer finally shouldering or bearing the burden of the tax, which is the resultant effect. B. Tax Avoidance 21. What is the meaning of “tax avoidance”? BQ2014 "Tax avoidance" is the other term for "tax minimization." It is a legal tax saving device within the means sanctioned by law the object of which is merely to minimize the payment of taxes. This method should be used by the taxpayer in good faith and at arm's length. A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. A taxpayer may therefore perform an act that he honestly believes to be sufficient to decrease his tax liability or to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient. 26 C. Tax Evasion 22. What is the meaning of “tax evasion”? "Tax evasion" is the other term for “tax dodging.” It is the use of the taxpayer of illegal means to avoid or defeat the payment of the tax. It is a scheme used outside of those lawful means and when availed of is punishable by law because its main purpose is to entirely escape the payment of taxes thru illegal means. It usually subjects the taxpayer ...