Chapter 1 Income Taxation- Reviewer for Beginners 2019 by ENRICO B. TABAG, CPA MBA PDF

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INCOME TAXATIONCHAPTER 1Fundamental Principles of TaxationThe Inherent Powers of the State Inherent power means existing as a natural or basic part of every sovereign State, without being conferred or granted by the people or the Constitution.The 3 Inherent Powers of the State: POWER TO TAX - The a...

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INCOME TAXATION CHAPTER 1

Fundamental Principles of Taxation The Inherent Powers of the State 

Inherent power means existing as a natural or basic part of every sovereign State, without being conferred or granted by the people or the Constitution.

The 3 Inherent Powers of the State: 1. POWER TO TAX - The act of levying a tax. It's the process or means by which the sovereign (independent State), through its law-making body (legislative branch), raises income to defray the necessary expenses of the government. It is the power by which the State raises revenue to defray the necessary expenses of the government. 2. POLICE POWER - it is the power of the state of promoting public welfare by restraining and regulating the use of liberty and property. It may be exercised only by the government. The property taken in the exercise of this power is destroyed because it is noxious or intended for a noxious purpose. 3. EMINENT DOMAIN - it is the power to take private property for public purpose upon payment of just compensation. SIMILARITIES among Taxation, Eminent Domain and Police Power a. They are inherent in the State. b. They exist independently of the constitution although the conditions for their exercise may be prescribed by the constitution. c. Ways by which the State Interfere with private rights and property. d. Legislative in nature and character. e. Presuppose an equivalent compensation received, directly or indirectly, by the persons affected. Purposes of Taxation 1. Primary Purpose - To raise revenues/funds to defray the necessary expenses of the government (also called Revenue or Fiscal Purpose). 2. Secondary Purpose: a. Regulatory Purpose - Taxation is employed as a devise for regulation or control (to implement the police power of the State for the promotion of the general welfare) by means of which certain effects or conditions envisioned by the government may be achieved.

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b. Compensatory Purposes  Reduction of Social Inequality  Economic Growth  Protect local industries against unfair competition Nature and Characteristics of Taxation 1. 2. 3. 4. 5. 6. 7. 8.

Inherent Power – may be exercised although not expressly granted by the constitution. Essentially a legislative function only - the legislative can impose taxes. Subject to inherent and constitutional limitations - not an absolute power. For public purpose. The strongest of all the inherent powers of the State. Subject to international treaty or comity. Generally payable in money. Territorial in scope. In the absence of inherent and constitutional limitations, the power to tax is comprehensive, plenary, supreme and unlimited. It is so comprehensive that in the words of Justice Marshall, the power to tax includes the power to destroy.

Taxes Defined Are enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty for the support of the government and for all its public needs.

ESSENTIAL CHARACTERISTICS OF TAX a. b. c. d. e. f.

A tax is a forced charge, imposition or contribution. It is a pecuniary burden payable in money. It is imposed for public purpose. It is imposed pursuant to a legislative authority. It is levied within the territorial and legal jurisdiction of a state. It is assessed in accordance with some reasonable rule of apportionment

Theory of Taxation 1. Necessity Theory - The existence of government is a necessity. The government cannot continue to perform of serving and protecting its people without means to pay its expenses. For this reason, the state has the right to compel all its citizens and property within its limits to contribute. 2. Lifeblood Doctrine - Taxes are the lifeblood of the government without which can neither exist nor endure.

MANIFESTATION OF THE LIFEBLOOD THEORY: 

No Estoppel against the Government.

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   

Collection of taxes cannot be enjoined (stopped) by injunction. Taxes could not be the subject of compensation or set-off. A valid tax may result in the destruction of the taxpayer's property. Right to select objects (subjects) of taxation.

Basis of Taxation The Benefits Protection Theory - The basis of taxation is the reciprocal duties of "protection and support" between the state and its inhabitants. The state collects taxes from the subjects of taxation in order that it may be able to perform the functions of government. The citizens, on the other hand, pay taxes in order that they may be secured in the enjoyment of the benefits of organized society. This theory spawned the Doctrine of Symbiotic Relationship which means, taxes are what we pay for a civilized society.

DISTINCTIONS AMONG THE THREE (3) INHERENT POWERS OF THE STATE Taxation

Police Power

Eminent Domain

NATURE

Power to enforce contributions to raise government funds.

Power to make and implement laws for the general welfare.

Power to take private property for public use with just compensation.

AUTHORITY

Government only.

Government only.

May be granted to public service/utility companies.

PURPOSE

For the support of the Government.

Promotion of general welfare through regulation.

The taking of private property for public use.

PERSONS AFFECTED

Community or a class of individuals. Applies to all persons, property and excises that may be subject thereto.

Community or a class of individuals. Applies to all persons, property and excises that may be subject thereto.

On an individual as the owner of personal property. Only particular property is comprehended.

TYPE OF PROPERTY

Property is wholesome and is devoted to public use or purpose.

Property is noxious or intended for a noxious purpose and as such taken and destroyed.

Property is wholesome and is devoted to public use or purpose.

EFFECT

Contribution becomes part of public fund.

No transfer or title. There may just be a restraint on the injurious use of property.

There is a transfer of title to property.

RIGHTS AFFECTED

Property right.

Property right and liberty.

Property right.

SCOPE

Plenary, comprehensive, supreme.

Broader in application. General power to make and implement law.

Merely a power to take private property for public use.

BENEFITS RECEIVED

In form of protection and benefits received from government.

No direct and immediate benefit but only such as may arises from the maintenance of a healthy economic standard of society.

Market value of property taken.

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AMOUNT OF IMPOSITION

No limit

Sufficient to cover cost of the license and the necessary expenses of police surveillance and regulation.

No imposition. The owner is paid equivalent to the fair value of his property.

Similarities among the three Inherent Powers 1. They are inherent in the State. 2. Undertie and exist independently of the constitution although the conditions for their exercise may be prescribed by the constitution. 3. Ways by which the State Interfere with private rights and property. 4. Legislative in nature and character. 5. Presuppose an equivalent compensation received, directly or indirectly, by the persons affected.

Scope of the Taxing Power of the Legislative The Supreme Court held that the power of taxation is the most absolute of all powers of the government. It has the broadest scope of all the powers of the government because in the absence of limitations, it is considered as comprehensive, unlimited, plenary, and supreme (130 SCRA 654). The matters within the competence of the legislature include the determination of the following: 1. The subject or object (person, property, or excises/privileges) to be taxed. Excises or privileges to be taxed. 2. The purpose of the tax as long as it is a public purpose. 3. The amount or rate of the tax. 4. Kind of tax. 5. Apportionment of the tax (i.e., whether the tax shall be general or limited to a particular locality or partly general and partly local) 6. Situs of taxation. 7. The manner or method of collection.

Stages/Aspects of Taxation 1. Levying or Imposition - This process involves the passage of tax laws or ordinances through the legislature. 2. Assessment and Collection - This process involves the act of administration and Implementation of tax laws by the executive through its administrative agencies such as the Bureau of Internal Revenue or Bureau of Customs. 3. Payment of Tax - This process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the government.

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Principles of Sound Tax System 1. Fiscal Adequacy - The sources of government revenue must be sufficient to meet government expenditures and other public needs. 2. Administrative Feasibility - Tax laws must be capable of convenient, just and effective administration- free from confusion and uncertainty. 3. Theoretical Justice - A good tax system must be based on the taxpayer's ability to pay. This suggests that taxation must be progressive conformably with the constitutional mandate that congress shall evolve a progressive system of taxation.

LIMITATIONS ON THE TAXING POWER A. Inherent Limitations - inherent limitations proceed from the very nature of the taxing power itself. The taxing power has very distinct and positive limitations some of which inhere in its very nature and exist whether declared or not declared in the written constitution.

1. Public purpose Proceeds from tax must be used for: a. Support of the government. b. Some of the recognized objects of government. c. To promote the welfare of the community (not individuals). 2. Situs of taxation or territoriality- the taxing power of a country is limited to person and property within and subject to its jurisdiction. PLACE OF TAXATION a. The state where the subject to be taxed has a situs may rightfully levy and collect the tax. b. The situs is necessarily in the State which has jurisdiction or which exercises dominion over the subject in question.

FACTORS TO CONSIDER IN DETERMINING SITUS OF TAXATION a. b. c. d.

     

Subject matter (person, property, or activity) Nature of the tax Citizenship Residence of the taxpayer

APPLICATION OF SITUS OF TAXATION SUBJECT MATTER SITUS Persons Residence of the taxpayer Real Property Location Tangible Personal Property Location Intangible Personal Property Domicile of the owner Income Residence, citizenship, source of income Business Place of business

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

Gratuitous Transfer of Property

Residence or citizenship of the transferor or location of property

3. International comity or treaty - a State cannot tax another State based on the principle of Sovereign Equality among States. i.e. tax law passed imposing taxes on foreign ambassadors is not a valid law. 4. Non-delegability of the Taxing power (Enactment of Tax Laws) - Power of taxation is purely legislative, hence the power cannot be delegated either to the executive or judicial departments. The limitation arises from the doctrine of separation of powers among the three branches of the government. EXCEPTIONS TO THE RULE AGAINST DELEGATION: a. Delegation to the President, subject to some limitations and restrictions, to fix within specified limits, tariff rates and tonnage or wharfage duties and other duties and imposts. b. Delegation to local governments the power to create its own sources of revenues and to levy taxes, subject to such limitations as may be provided by law. c. Delegation to administrative agencies certain aspects of the taxing process that are not legislative such as:  the power to fix value of property for purposes of taxation pursuant to fixed rules  the power to assess and collect taxes.

5. Exemption of the government a. Agencies performing governmental functions are tax exempt unless expressly taxed b. Agencies performing proprietary functions are subject to tax unless expressly exempted. c. GOCCS performing proprietary functions are subject to tax, however the following are granted exemptions:  Government Service Insurance System (GSIS)  Social Security System (SSS)  Philippine Health Insurance Corporation (PHIC)  Local Water Districts (RA 10026)  Philippine Charity Sweepstakes Office (PCSO) - already taxable beginning Jan. 1, 2018 under the TRAIN Law

B. Constitutional Limitations on the Taxing Power - the following provisions may be said to be limitations prescribed in the Constitution on the taxing power of the government. 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 of contracts 7. Free-worship clause 6

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 1 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. 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.

NATIONAL TAXES vs. LOCAL TAXES NATIONAL Inherent Power

LOCAL Delegated Power

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AUTHORITY



NATURE

Legislative in nature through enactment of tax laws by the Congress and the Senate.

Legislative in nature through enactment of local ordinances by the local legislative branch.

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PROCESS

1. Levying = Congress 2. Assessment/Collection = BIR & BOC

1. Levying = Legislative branch of the LGU 2. Assessment/Collection = Treasurer

National Internal Revenue Taxes under the administration of the BIR: a. b. c. d. e. f.

Income Tax Estate and donor's tax Value-added tax Other percentage taxes Excise taxes Documentary stamp taxes

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DOUBLE TAXATION

KINDS OF DOUBLE TAXATION: a. Direct Duplicate Taxation, this is objectionable and prohibited because it violates the constitutional provision on uniformity and equality. It means:  Taxing twice  By the same taxing authority  Within the same jurisdiction or taxing district  For the same purpose  In the same year or taxing period  Same kind or character of tax

b. Indirect Duplicate Taxation is not legally objectionable. It extends to all cases in which there is a burden of two or more pecuniary imposition but impost by different taxing authorities. SOURCES OF TAX LAWS a) Constitution b) Tax Treaties and Conventions with Foreign Countries c) The "Tax Code (RA No. 0424 National Internal Revenue Code, as amended; Le RA 10963 TRAIN Law), Tariff and Customs Code, and portion of the Local Government Code d) Statutes and laws like RA 1125 (an Act Creating the Court of Tax Appeals), RA 7716 (E-VAT Law) e) Presidential Decrees f) Executive Orders g) Court Decisions h) Revenue regulations promulgated by the Department of Finance i) Administrative issuances of the BIR like Revenue Memorandum Circulars, and those of the Bureau of Customs like Customs Memorandum Orders j) BIR Rulings k) Local Tax Ordinances

TAX LAWS

NATURE OF INTERNAL REVENUE LAWS - Tax laws are civil and not penal in nature, although there are penalties provided for their violation. The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof.

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CONSTRUCTION OR INTERPRETATION OF TAX LAWS IN CASE OF DOUBT OR AMBIGUITY a. Tax statutes are construed strictly against the government and liberally in favor of the taxpayer. Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. b. Provisions granting tax exemptions are construed strictly against the taxpayer claiming tax exemption and liberally in favor of the government.

APPLICATION OF TAX LAWS Tax laws are prospective in operation because the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transactions which the law seeks to tax was completed.

EXCEPTION: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent. But a tax law should not be given retroactive application when it would be harsh and oppressive.

CLASSIFICATION OF TAXES a. According to Subject Matter:  Personal, Poll or Capitation Tax - tax of a fixed amount imposed upon individual, whether citizens or not, residing within a specified territory without regard to their property or the occupation in which he may be engaged (e.g basic community tax) 

Property Tax - tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable method of apportionment (e.g. real estate tax)

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Excise Tax - any tax which does not fall within the classification of a poll tax or a property tax. This is a tax on the exercise of certain rights and privileges (e.g. income tax, estate tax, donor's tax, VAT)

b. According to Who Bears the Burden: 

DIRECT TAX (e.g. income tax, estate tax, donor's tax)  Imposed on the person obliged to pay the same and this burden cannot be shifted or passed on to another.  A tax in which the taxpayer who pays the tax is directly liable therefor, that is, the burden of paying the tax falls directly on the person paying the tax  Demanded from the very person who, as intended, should pay the tax which he cannot shift to another

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

INDIRECT TAX (e.g. VAT and OPT)  Payment is demanded from a person who is allowed to transfer the burden of taxation to another.  A tax paid by a person who is not directly liable therefor, and who may therefore shift or pass the tax to another person or entity, which ultimately assumes the tax burden (Maceda v. Macaraig, 197 SCRA 771).  Is demanded in the first instance form one person with the expectation that he can shift the burden to someone else, not as a tax but as part of the purchase price

c. According to Determination of Amount:  Specific Tax - this is a fixed amount based on volume, weight or quantity of goods as measured by tools, instruments, or standards. (e.g. excise tax on cigars and liquors)  Ad Valorem Tax - this imposition is based on the value of the property subject to tax. (e.g. VAT, income tax, donor's tax and estate tax)

d. ...