Income Taxation Reviewer Banggawan 2019 PDF

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1Chapter 1. Introduction to Taxation TAXATION – state power, legislative process, mode of government cost distribution.  THEORY OF TAXATION – government’s necessity for funding.  BASIS OF TAXATION – mutuality of support between the people and the government.  Receipts of benefits are conclusivel...

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Chapt er1.I nt r oduct i ont oT axat i on     

TAXATION – state power, legislative process, mode of government cost distribution. THEORY OF TAXATION – government’s necessity for funding. BASIS OF TAXATION – mutuality of support between the people and the government. Receipts of benefits are conclusively presumed. THEORIES OF COST ALLOCATION Benefit received theory – more benefit, more taxes. Ability to Pay Theory – contribute based on relative capacity to sacrifice. AS PE CT S : : Vertical Equity – gross concept; extent of ability to pay is proportional to tax base. : Horizontal Equity – net concept; consideration of circumstances

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THE LIFEBLOOD DOCTRINE – without taxes, government would be paralyzed: Taxes – essential and indispensable. I MPL I CAT I ON: : doesn’t need constitutional grant. : tax exemption – claims: construed against taxpayer : right to choose object of taxation – government : courts not allowed to interfere : Income taxation taxable upon receipt; deduction for capital expenditures and prepayment not allowed; lower amount of deduction is preferred, in case claimable expense subject to limit; higher tax base is preferred, in case of multiple tax bases.

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INHERENT POWERS OF THE STATE (pg. 45) Taxation Power – enforce proportional contribution Police Power – enact laws to protect wellbeing of the people Eminent Domain – take private property for public use after paying just compensation

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SCOPE OF TAXATION POWER (CPUS) – comprehensive, plenary, unlimited, and supreme.

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THE LIMITATIONS OF THE TAXATION POWER Inherent Limitations (TIPEN)  Territoriality of Taxation – demand tax

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– encroachment of foreign sovereignty. International Comity – all nations deemed equal to one another (co- equal sovereignty); non-taxing of income and properties of other governments

obligations within territorial jurisdiction; extraterritorial taxation

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Public Purpose (only) – intended for the common good Exemption of the Government – exemption: income from its properties and activities conducted for profit (GOCC) Non-delegation of the Taxing Power – vested exclusively in congress and is non- delegable. Exemption: LGU, President – fix amount of tariffs, other cases requiring expedient and effective administration and implementation.

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Constitutional limitations (DEUP-NNFE-NECNNNTT) 

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Due process of law – neither harsh nor oppressive As pect s : : Substantive due process – tax must be imposed only for public purpose : Procedural due process – no arbitrariness, right to notice and hearing. Assessment – made within 3 years from due date of filing of return or actual filing (whichever is later) Collection – made within 5 years from date of assessment Equal protection of the Law – equal treatment both in terms of rights conferred and obligations imposed; appl i est ot ax payer sunders ame ci r cums t ances . Uniformity rule in taxation – taxation shall be uniform and equitable; : taxpayers under dissimilar circumstances should not be taxed the same (substantial distinction) : each class is taxed differently – falling under same class are taxed the same (relative equality) Progressive system of taxation – tax rates increase as tax base increases (consistent with taxpayer’s ability to pay)

Non-imprisonment for non-payment of debt or poll tax – applies only when the debt is acquired in good faith ( bad f ai t h –es t af a) Non-impairment of obligation and contract – honored and shouldn’t be cancelled by a unilateral government action. Free worship rule – free exercise of religion but does not extend to income from properties or activities that are proprietary or commercial in nature Exemption of the following lands, buildings, and improvements from property taxes

: Religious, charitable and educational entities : Non-profit cemeteries, churches and mosques 

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Doctrine of use: applies only to properties actually, directly, and exclusively devoted to religious activities, etc. Non-appropriation of public funds or property for the benefit of any church, sect, or system of religion – government should not favor nor support any particular system of religion : however, compensation to priests, etc. with military, penal institutions, etc. not considered religious appropriation.

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Exemption from taxes of the revenues and assets non-profit, non-stock educational institutions (Doctrine of use) : including grants, endowments, donations, or contributions : Private educational institutions – minimal 10% income tax  Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption : In withdrawal, only a relative or quorum majority is required  Non-diversification of tax collections – used only for public use.  Non-delegation of the power of taxation – as part of lawmaking be vested exclusively in Congress  Non-impairment of the jurisdiction of the Supreme Court to review tax cases – all tax cases can be raised to and be finally decided by the Supreme Court of the Philippines  Appropriations, revenue, or tariff bills shall originate exclusively in the house of representatives : does not necessarily mean that the House bill must become the final law. : Senate may propose or concur with amendments : Held constitutional – senate changed entire house version of tax bill 

Delegation of taxing power to local government units – constitutional recognition of the local autonomy of

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STAGES OF THE EXERCISE OF TAXATION POWER Levy or Imposition : impact of taxation; legislative act : enactment of a tax law by Congress – Hous e ofRepr es ent at i vesandT heS enat e : tax bills must originate from House of Representatives. : However, each may have their own versions proposed which is approved by both bodies. DISCRETION IN THE EXERCISE: (DSDKNSM)

‘Determine object of taxation ‘Set tax rates/amount collected ‘Determine purpose of levy – public use ‘Kind of tax to be imposed ‘National and local government apportionment ‘Situs of Taxation ‘Method of collection Assessment and Collection : incidence of taxation; administrative act of taxation : tax law is implemented by the administrative branch of the government

LGU

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: involves assessment/determination of the tax liabilities of taxpayers and collection.

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SITUS OF TAXATION  Si t us–place of taxation; tax jurisdiction.  Si t usr ul es–frames of reference whether tax object is within or without the jurisdiction. : Business Tax Situs – where the business is conducted. : Income tax situs on services – where service is rendered : Income tax situs on sale of goods – in the place of sale : Property tax situs – in its location : Personal tax situs – in their place of residence 

OTHER FUNDAMENTAL DOCTRINES IN TAXATION  Marshall Doctrine – “The power to tax involves the power to destroy”: an instrument of police power. : used to discourage or prohibit undesirable activities or occupation. (e.g. SINTAX) : solely for the purpose of raising revenues – does not include the power to destroy  Holme’s Doctrine – “Taxation power is not the power to destroy while the court sits.” : used to build or encourage beneficial activities – grant of tax incentives. (e.g. Tax Holidays)  Prospectivity of tax laws : expos tf act ol aw/law that retroacts – prohibited by constitution, unless intended by Congress under certain justifiable conditions. (e.g. under foreign occupation even after the war)  Non-compensation or set-off – cannot delay payment of tax; not a debt. Ex cept i ons : Taxpayer’s claim become due and demandable – recognized by government; a refund was made : overpayment of taxes : Local taxes  Non-assignment of taxes : Contracts executed shall not prejudice the right of government to collect  Imprescriptibility in taxation – government’s right to collect does not prescribe unless the law itself provides for such prescription. : Prescription – lapsing of a right due to the passage of time

Under NIRC, tax prescribed if not collected within: 

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5 years from the date of assessment  3 years from the date of return required to be filed, in abs ence ofanas s es s ment Doctrine of estoppel – “still the taxpayer’s fault” : error of any government

employee doesnotbi ndthe

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government since it is not subject to estoppel. 

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Judicial Non- Interference : generally, courts cannot issue injunction against the government’s pursuit to collect tax : anchored on the l i f ebl ooddoct r i ne Strict Construction of Tax Laws – “taxation is the rule; exemption is the exception” : when language of law is clear and categorical – no room for interpretation, only for application : Vague tax laws – means no tax law; construed against the government and in favor of the taxpayers – obligation arising from law is notpr es umed ( duepr oces s ) : Vague exemption laws – means no exemption law; claim for exemption is construed strictly against the taxpayer in accordance with the l i f ebl ooddoct r i ne ‘Exemption must be clear and unequivocal. Anydoubti s r es ol ved agai ns t t he t ax pay er .

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Categories of Escape from Taxation A. T hos et hatr es ul tt ol os sofgov er nment r ev enue( E v ,Av ,Ex ) : Tax Evasion ( t axdodgi ng)– any act or trick that tend to illegally reduce or avoid payment of tax ( e. g.under s t at ementof i ncome,over s t at i ngofex pens es ) : Tax Avoidance ( t axmi ni mi z at i on)– any act or trick that reduces or totally escapes taxes by any legally permissible means. ( e. g.s el ect i on/ ex ecut i onoft r ans act i ont hat woul deffectt ol owert ax es ) : Tax exemption ( t axhol i day)– immunity, privilege or freedom from being subject to tax granted by constitution, law, or contract. ‘Can be revoked by Congress except those granted by constitution and under contracts’ B. T hos et hatdonotr es ul tt ol os sof gover nmentr evenues( Shi CapT r a) : Shifting – process of transferring tax burden to other taxpayers Forms of Shifting ‘Forward Shifting’ follows the normal flow of distribution; common with essential commodities and services such as food and fuel ( e. g.manuf act ur er st o whol es al er s ,whol es al er st or et ai l er s )

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DOUBLE TAXATION – occurs when same taxpayer is taxed twice by same tax jurisdiction for the same thing.  Elements of double taxation (OTPJP) : Primary elements – same object : Secondary elements – same type, purpose, taxing jurisdiction and/or tax period.  Types of Double Taxation : Direct double taxation – all the element of double taxation exists for both impositions; discouraged since it is oppressive and burdensome. ‘counter the rule of equal protection and uniformity in the constitution’ : Indirect double taxation – at least one of the secondary elements of double taxation is not common for both impositions; prevalent in practice.  Impact of double taxation minimized: : Provision of tax exemption – only one tax law is allowed to apply to the tax object : Allowing foreign tax credit – payment made in foreign tax law is deductible against the tax due of the domestic tax law : Allowing reciprocal tax treatment – reduced tax rates or exemption on foreign taxpayer if the country of the same give same treatment to Filipino non-resident therein : Entering into treaties or bilateral agreements – lower tax rates for their residents engage in transaction that are taxable by both of them

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ESCAPE FROM TAXATION – means available to the taxpayer to limit or even avoid the impact of taxation. Chapt er2:T axes ,T axL aws ,andT axAdmi ni s t r at i on

‘Backward shifting’ reverse of forward shifting; common to non-essential commodities; buyers have market power with numerous alternatives ‘Onward shifting’ any tax shifting in the distribution channel exhibits either of the former forms. : Capitalization – adjustment of the value of an asset caused by changes in tax rates. ‘Value of mining property decreases when output is subject to higher tax – form of backward shifting : Transformation – elimination of wastes or losses by taxpayer to form savings to compensate for the tax imposition or increase in taxes. (e.g. improvement of goods)

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TAX AMNESTY VS. TAX CONDONATION – both construed against taxpayers and in favor of the government  Tax Amnesty : general pardon – granted by government for erring taxpayers : chance to reform and enable fresh start – clean slate : retrospective in application : covers both civil and criminal liabilities : conditional upon the taxpayer paying a portion t axr emi s s i on)  Tax Condonation ( : forgiveness under certain justifiable grounds : covers only civil liabilities : applies prospectively to any unpaid balance – portion paid will not be refunded : requires no payment 

TAXATION LAW – any law that arises from the exercise of the taxation power

of the state.

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TYPES OF TAXATION LAWS : Tax Laws – provide for the assessment and collection of taxes ( e. g.NI RC,T ar i ffandCus t omsCode, L GU) : Tax Exemption Laws – grant certain immunity from taxation. ( e. g. Mi ni mum WageL aw,BMBEL aw, Coop. Devel opmentAct )  SOURCES OF TAXATION LAWS : Constitution : Statutes and Presidential Decrees – t ar i ffandcus t omscode : Judicial decisions or case laws – due t oambi gui t y : Executive Orders and Batas Pambansa : Administrative Issuance - DOF : Local Ordinances : Tax treaties and conventions with foreign countries : Revenue Regulations – Admi ni s t r at i on,DOF ,BI R,BOC

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‘In cases of conflict in the preparation and filing of tax returns, tax laws shall prevail – mandatory’ 

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TAX – enforced proportional contribution levied by the lawmaking body of the State to raise revenue for public purpose

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Elements of a Valid Tax Must (be): 1. Levied by taxing power having jurisdiction 2. Not violate constitutional and inherent limitations 3. Uniform and equitable 4. For public purpose 5. Proportional in character 6. Generally payable in money

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Classification of Taxes

Revenue Memorandum Orders ‘RMOs’ (s t eps ) : issuance that provide directives or instructions, etc. necessary in the implementation of the Bureau in all areas except auditing. Revenue Memorandum Rulings ‘RMRs’ (ex empt i on) : rulings, opinions and interpretations of the CIR : BIR Rulings, cannot contravene duly issues RMR’s; otherwise, rulings are null and void ab initio. 

Revenue Memorandum Circulars RMCs’ (announcementwhenever t her ear ei s s ues ) : issuance that publish relevant and applicable portions as well as implications – laws, rules, etc. issues by BIR and others agencies.  Revenue Bulletins ‘RB’ : periodic issuances, notices, and official announcements of the CIR for the guidance of the public  BIR Rulings : official positions of the Bureau to queries raised by taxpayer’s and other stakeholder relative to clarifications and interpretation of tax laws : merely advisory, none of them binding except to the addressee and may be reversed by BIR anytime

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NATURE OF PHILIPPINE TAX LAWS – civil and not political in nature; effective even during periods of enemy occupation. ‘Internal Revenue Laws’ not penal in nature, do not define crime; merely intended to secure compliance.

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TYPES OF ADMINISTRATIVE ISSUANCES  Revenue Regulations (cl ar i fi cat i ons ) : Issuance signed by Secretary of Finance, recommendation of the CIR : formal pronouncements intended to clarify – providing details of administration and procedure : has the force and effect of a law, but not intended to expand or limit; otherwise, void.

GENERALLY ACCEPTED ACCOUTING PRINCIPLES VS. TAX LAWS  GAAP – not law but mere conventions of financial reporting; intended to meet the common needs of a vast number of users in the general public.  TAX LAWS – special form of financial reporting which is intended to meet specific needs of tax authorities.

TYPES OF RULLINGS – VAT, International Tax Affairs Division, BIR, Delegated Authority

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As to purpose

: Fiscal or revenue tax – for general purpose : Regulatory – to regulate business, conduct, acts or transactions : Sumptuary – to achieve social/economic benefits 

As to subject matter

: Personal, poll or capitation – on persons/residents of a particular territory : Property Tax – on personal or real properties : Excise or Privilege tax – upon performance of an act; enjoyment of privilege: engagement in an occupation 

As to incidence

: Direct Tax – both impact and incidence of taxation rest upon the same taxpayer : Indirect Tax – paid by any person rather than statutory taxpayer ‘Statutory Taxpayer – person named by law to pay the tax ‘Economic Taxpayer – one who actually pays the tax 

As to amount

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: Specific tax – fixed amount on per unit basis (e.g. kilo, liter or meter, etc.) 

As to rate

: Proportional tax – flat/fixed rate tax; emphasizes equality

: Ad valorem – fixed proportion upon the value of tax object 

TAX VS. PENALTY : Tax – imposed for government support; arises from law : Penalty – imposed to discourage an act both government and private individuals)

: Progressive of graduated tax – increasing rates as the tax base increase : Regressive tax – decreasing tax rates as the tax base increase; anti-poor : Mixed Tax – combination of any of the above types of tax 

As to imposing authority

: National Tax – imposed by national government ‘Income Tax – annual income, gains or profits ‘Estate Tax – gratuitous transfer of properties by a decedent upon death ‘Donor’s Tax – gratuitous transfer of properties by a living donor ‘Value Added Tax – consumption tax collected by VAT business taxpayers ‘Other Percentage Tax – consumption tax collected by nonVAT business taxpayers ‘Excise Tax – tax on sin products and non-essential commodities (e.g. alcohol, cigarettes, metallic minerals) ‘Documentary Stamp Tax – on documents, instruments, loan agreements, etc. : Local Tax – imposed by the municipal or local government ‘Real Property Tax ‘Professional Tax ‘Business Taxes, fees, and charges ‘Community tax ‘Tax on banks, etc. 

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TAX VS. REVENUE : Tax – amount imposed : Revenue – amount collected TAX VS. LICENSE FEE : Tax – broader subject; post-activity imposition : License Fee – emanates from police power; pre- activity imposition TAX VS. TOLL : Tax – demand of sovereignty : Toll – demand of ownership; dependent upon the value of property leased ‘Both government and private entities can impose toll, but private entities can’t impose tax.’ TAX VS. DEBT : Tax – arises from law : Debt – arises from private contracts TAX VS. SPECIAL ASSESSMENT : Tax – imposed upon persons, properties, or privileges : Special Assessment – levied on lands adjacent to a public improvement; nonpayment will not imprison owner TAX VS. TARIFF : Tax - imposed upon persons, properties, or privileges : Tariff – imposed on imported or

; arises from both law and contracts

(by

exported commodities

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law requires withholding of relevant business tax (e.g. VAT, percentage tax)

TAX SYSTEM – methods or schemed of imposing, assessing, and collecting taxes. TYPES OF TAX SYSTEM (pg. 41-42)

 According to Imposition : Progressive – income of individuals, and transfers of properties by individuals : Proportional – corporate inco...