INCOME TAXATION- CHAPTER 1

State power, legislative process and a mode of government cost distribution

Taxation may be defined as

Theory of taxation

Government's necessity for funding

Basis of taxation

Mutuality of support between the people and the gov't

Benefit received theory

Ability to pay theory

Theories of cost allocation

Benefit received theory

More benefits one received, the more taxes he should pay

Ability to pay theory

The theory that consumers should contribute taxes consistent with their ability to pay

Vertical equity

Horizontal equity

Aspects of ability to pay theory

Taxation power

Police power

Eminent domain power

Inherent powers of the state

Taxation power

Power of the state to enforce proportional contribution from its subject to sustain itself

police power

state power to enact laws promoting health, safety, and morals

eminent domain

Power of a government to take private property for public use.

Comprehensive, plenary, unlimited and supreme

Scope of the taxation power

1. Territoriality of taxation

2. International comity

3. Public purpose

4. Exemption of the gov't

5. Non-delegation of the taxing power

Inherent limitations

Territoriality of taxation

Gov't can only demand tax obligations upon its subjects or residents within its territorial jurosdiction

International comity

All nations are deemed equal with other and no country is powerful than the other

Public purpose

Tax intended for the common good

Observance of due process of law

Tax laws should neither be harsh nor oppressive

Substantive of due process

Procedural due process

Aspects of due process

Substantive of due process

Tax must be imposed only for public purpose, collected only under valid law authority and only by taxing power having jurisdiction

Procedural Due Process

Constitutional requirement that governments proceed by proper methods; limits how government may exercise power.

equal protection of the law

a standard of equal treatment that must be observed by the government

Uniformity rule in taxation

Taxpayers under dissimilar circumstances should not be taxed the same.

Progressive system of taxation

the higher the level of income, the higher the rate of taxation

Basic community tax

Addt'l community tax

Components of poll tax

Non diversification of tax collections

Tax collections should be used only for public purpose

Levy or imposition

Assessment and collection

Stages of the exercise of taxation power

Levy or imposition

Process that involves the enactment of tax law by congress

1. The House of Representatives

2. The senate

2 bodies of congress

House of Representatives

Tax bills must originate from

Assessment and collection

Determination of the tax liabilities of taxpayers and collections

Situa of taxation

Tax jurisdiction that that's the power to levy taxes upon the tax object

Business tax situs

2. Income tax situs on services

3. Income tax situs on sale of goods

4. Property tax situs

5. Personal situs

Examples of situs rules

Business tax situs

Business are subject to tax in the place where the business is conducted.

Income tax situs on services

Service fees are subject to tax where they are rendered.

Income tax situs on sale of goods

The gain on sale is subject to tax in the place of sale.

Property tax situs

Properties are taxable in their location.

Personal tax situs

Persons are taxable in their location.

1. Marshall doctrine

2. Holme's doctrine

3. Prospectivity of tax laws

4. Non-compensation or set-off

5. Non-assignment of taxes

6. Imprescriptibility in taxation

7. Doctrine of estoppel

8. Judicial non-interference

9. Strict construction of tax laws

Other fundamental doctrines in taxation

Marshall Doctrine

The power to tax involves the power to destroy

Holme's doctrine

Taxation power is not the power to destroy while the court sits

Prospectivity of Tax Laws

Tax laws are generally prospective in operation

Non-compensation or set-off

Tax payer cannot delay payment of tax to wait for the resolution of a lawsuit involving pending claim against the gov't

Non-assignment of taxes

Tax obligations cannot be assigned or transferred to another entity by contract

Double taxation

Occurs when the same taxpayer is taxed twice by the same tax jurisdiction of the same thing

Primary element: same object

Secondary elements:

Same type tax

Same purpose of tax

Same taxing jurisdiction

Same tax period

Elements of double taxation

Direct double taxation

Indirect double taxation

Types of double taxation

Direct double taxation

When all the element of double taxation exists for both impositions

Indirect double taxation

Atleast one of the secondary elements of double taxation is not common for both impositions

1. Provision of tax exemption

2. Allowing foreign tax credit

3. Allowing reciprocal tax treatment

4. Entering into treaties or bilateral agreements

How can double taxation be minimized?

Escapes from taxation

Means available to the taxpayer to limit or avoid the impact of taxation

Those that result to loss of government revenue

2. Those that do not result to loss of govt revenue

Categories of escapes from taxation

Tax evasion

Tax avoidance

Tax exemption

Those that result to loss of govt revenue

Shifting

Capitalization

Transformation

Those that do not result to loss of govt revenue

Tax evasion

the use of illegal actions to reduce one's taxes or willful failure of paying taxes

Tax dodging

Tax evasion is also known as

Tax avoidance

the use of legitimate methods to reduce one's taxes

Tax minimization

Tax avoidance is also known as

Tax exemption

A part of a person's income on which no tax is imposed.

Tax holiday

Tax exemption is also known as

Forward shifting

Backward shifting

Onward shifting

Forms of shifting

Shifting

The process of transferring the burden of a tax to another party

Forward shifting

business increases its prices to reflect the tax

Backward Shifting

Reduced price business pays to the owners of the resources purchased, including wages, raw materials, etc.

Onward Shifting

Any tax shifting in the distribution channel that exhibits forward shifting or backward shifting

Capitalization

Pertains to the adjustment of the value of an asset caused by changes in tax rates

Transformation

Pertains to the elimination of wastes or losses by the taxpayer to form savings to compensate for the tax imposition or increase in taxes

Tax amnesty

is a general pardon granted by the government for erring taxpayers to give them a chance to reform and enable them to have a fresh start to be part of society with a clean slate