Introduction to Taxation

1.0 Principle of Taxation

Taxation as to Power

• refers to the inherent power of the state to demand enforced contribution for public purposes

Scope of Taxation (CUPS)

• Comprehensive - covers persons, business, activities, professions, rights and privileges

• Unlimited - unlimited in force but may be subjected to limitations

• Plenary - complete, unqualified, absolute

• Supreme - insofar as the selection of the subject of taxation is concerned

Nature and Characteristic of Taxation Power

1. for public purpose

2. legislative in nature

3. subject to international comity

4. not absolute, subject to limitations

5. payable in money

6. territorial

Inherent Limitations (TIPEN-D)

• Territoriality

• International Comity

  • treaty overrides local laws

• Public purpose - absolute

• Exemption of the government [Agency ✔; GOCC’s ❌]

• Non-Delegation of taxation power

Constitutional Limitation

1. Due Process

• substantive process (legal basis)

• procedural due process (implementing)

2. Equal protection - fairness

3. Uniformity rule

4. Progressive system - variable (tax table) _{^{only applicable to individual}}

5. Non-improsenment of debt _{^{(XPN. staffa)}}

6. Non impairment of obligation and contract

7. Free worship rule

8. Prohibition of religious appropriation

9. Property tax exempt of Religious, Education (NPO only), Charity

• Doctine of Use (Actually, Directly, Exclusively)

• Doctrine of Ownership

10. Exemption to non-profit educational institution

11. Absolute majority in granting tax exempt

12. Non-diversification of tax collection - public purpose

13. Non-delegation of taxing power

• _{^{XPN: Tariff Custom Code - President; LGU - Local Tax (Sanggunian)}}

10. Non-impairment of the jurisdiction of the Supreme Court

11. Appropriation, Revenue & Tariff bills shall originate from HOR

12. Fiscal autonomy of LGU’s

Taxation as to Process

• the legislative act of laying a tax to raise income for the government to defray its necessary expenses

Taxation as a mode of cost allocation

• taxation is a means of allocating government burden to the people

Inherent Power of the State

• Txation Power - power to enforce proportional contribution from its subjects to sustain itself

• Police Power - is the general power of the state to enact laws to protect the well-being of the people

• Eminent Domain - is the power of the state to take private property for public use after paying just compensation

Similarities of State Power

1. all are necessary attributes of sovereignty

2. all are inherent to the state

3. are are legislative in nature

4. all are ways of the State to interfere with private rights and properties

5. all exist independently of the constitution

6. all presuppose an equivalent form of compensation received by the persons affected by the exercise of the power

7. all may be limited by the national legislatures when exercised by local government

Stages of Taxation

1. Levy or Imposition - Impact of Taxation

2. Assessment of Tax - Incedence of Taxation

• these all comprise the taxation system

• Legislation of laws - Congress

• Tax ordinance - Local Sanggunian

Discretion of the Taxing Power

1. amounts or rate of the tax

2. kinds of tax to be collected

3. apportionment of the tax

4. the person, property, and exercise to be taxed, provided within its jurisdiction

5. situs of taxation

6. method of collection

7. purposes for its levy, provided for public purpose

Current Objects of Taxation

1. businesses

2. interests

3. transaction

4. rights

5. acts

6. Persons

7. properties

8. privileges

Situs of Taxation

Persons

Residence

Community Development Tax

Residence or domicile of the taxpayer

Business taxes

where the business conducted or place where transaction takes place

Privelege or occupation tax

where privilege is exercised

Real Property tax

where the property is located

Personal property tax

• a. Tangible - where they are physically located

• b. Intagible - domicile of the owner unless the property has acquired a situs elsewhere

Income

where the income is earned or residence or citizenship of the taxpayer

Transfer tax

residence or citizenship of the taxpayer or location of the property

Franchise tax

state that grant the franchise

Corporate taxes

depends on the law of incorporation

Double Taxation

1. Direct Double Taxation

• Not prohibited, but discouraged

• Violates constitutional provison on uniformity and equality

2. Indirect Double Taxation - non constitutional violation _{^{(e.g. taxing the same property by 2 different taxing authority)}}

Remedies of Double Taxation

• provision for tax exemption

• allowance for tax credit

• allowance for principle of reciprocity

• enter into treaties or agreements

Escape from Taxation _{^{(will not result in loss of revenue of government)}}

1. Shifting

• Forward - S to P

• Backward - P to S

• Onward - 2 or more times shift, backward/forward

2. Capitalization - adjustment in value of assets caused by tax rate change

3. Tranformation - improving production to compensate for tax imposed

Escape from Taxation _{^{(will result in loss of revenue of government)}}

1. Tax Evasion/Dodging

2. Tax Avoidance/Minimization

3. Tax Exemption/Holiday

Kinds of Exemption

• Express

  • Constitutional

  • Statutory

  • Contractual

• Implied - exempted by accidental or intentional omission

• Total - exemption from all taxes (OFW’s)

• Partial

Grounds for Exemption

1. Based on a contract

2. Based on grounds of public policy

3. Based on some grounds to foster charitable and other benevolent institutions

4. Be created under treaty on grounds of reciprocity

5. Be created to lessen the rigors of international double or multiple taxation

Tax Amnesty and Tax Condonation

Taxation and Economic Efficiency

• Income Effect - makes people economically efficient (e.g. transformation)

• Substitute Effect - makes people economically inefficient (e.g. indirect taxes)

Vagueness of Tax LAW

Construed strictly against the government (the State) and liberally in favor of the taxpayer

Vagueness of Tax EXEMPTION

Construed strictly against the taxpayer and liberally in favor of the government (the State)

The Lifeblood Doctrine

• taxes are essential and indispensable to the continued subsistence of the government

• upon taxation depends the government’s ability to serve the people

Implication of Lifeblood Doctrine

1. Tax is imposed even in the absence of constitutional grant

2. Claims for tax exemptions are construed against taxpayers

3. The government reserves the right to choose the objects of taxation

4. The courts are not allowed to interfere with the collection of taxes

5. In income taxation:

• income received in advance is taxable upon receipt

• deduction from 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.

Marshall Doctrine

the power to tax involves the power to destroy

Holme’s Doctrine

taxation may be used to build or encourage beneficial activities

Prospectivity of tax laws

retrospective application of tax law is prohibited by constitution

Non-compensation or set-off

taxes are not subject to automatic set-off or compensation

Non-assignment of taxes

taxes cannot be assigned or transferred to another entity by contract

Doctrine of estoppel

the government cannot be estopped

Judicial Non-interference

generally, courts cannot issue injunction against govt’s pursuit to collect tax

Strict Construction of Tax Laws

• vague tax laws are construed against the govt

• vague tax exemptions are construed against the taxpayer

Doctrine of Equitable Recoupment or Imprescriptibility in taxation

• the govt’s right to collect taxes does not prescribe unless law provides

• not applicable in Philippines since there are prescription laws

Prescription Laws

10 years for willful neglect