Income Taxation Chapter 1

Taxation

It is as a State power, a legislative process, and a mode of government cost distribution.

Taxation as a state power

Taxation is enforce a proportional contribution from its subjects for public purpose.

Taxation as a Purpose

Taxation is a process of levying taxes by the legislature of the State to enforce proportional contributions from its subjects for public purpose.

Taxation as a mode of cost distribution

Taxation is a mode by which the State allocates its costs or burden to its subjects who are benefited by its spending.

theory of taxation

The government's necessity for funding.

basis of taxation

This mutuality of support between the people and the government.

Taxation

It is a mode of allocating government costs or burden to the people.

benefit received theory

The more benefit one receives from the government, the more taxes he should pay.

Ability to pay theory

taxation should also consider the taxpayer's ability to pay. Taxpayers should be required to contribute based on their relative capacity to sacrifice for the support of the government.

Vertical equity

the extent of one's ability to pay is directly proportional to the level of his tax base.

Horizontal equity

consideration of the particular circumstance of the taxpayer.

Life blood doctrine

Taxes are the lifeblood of the government, and their prompt and certain availability are an imperious need.

Inherent Power of the State

Taxation Power, Police Power, Eminent Domain

Taxation Power

the power of the State to enforce proportional contribution form its subjects to sustain itself

STAGES OF THE EXERCISE OF TAXATION POWER

1. Levy or imposition2. Assessment and collection

Levy or imposition

This process involves the enactment of a tax law by Congress and is called impact of taxation.

Levy or imposition

It is also referred to as the legislative act in taxation.

Assessment and Collection

The tax law is implemented by the administrative branch of the government.

incidence of taxation or the administrative act of taxation.

Assessment and collection is referred to as

Situs

It is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the tax object.

Situs Rules

serve as frames of reference in gauging whether the tax object is within or outside the tax jurisdiction of the taxing authority.

Business Tax Situs

Businesses 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 place of residence.

Marshall Doctrine

"The power to tax involves the power to destroy." Taxation power can be used as an instrument of police power.

Holme's Doctrine

"Taxation power is not the power to destroy while the court sits." Taxation power may be used to build or encourage beneficial activities or industries by the grant of tax incentives.

Prospectivity of tax laws

Tax laws are generally prospective in operation.

ex post facto law

a law that retroacts is prohibited by the Constitution.

Non-compensation or set-off

Taxes are not subject to automatic set-off or compensation. The taxpayer cannot delay payment of tax to wait for the resolution of a lawsuit involving his pending claim against the government.

Non-assignment of taxes

Tax obligations cannot be assigned or transferred to another entity by contract. Contracts executed by the taxpayer to such effect shall not prejudice the right of the government to collect.

Imprescriptibility in taxation

Prescription is the lapsing of a right due to the passage of time. When one sleep on his right over an unreasonable period of time, he is presumed to be waiving his right. The government's right to collect taxes does not prescribe unless the law itself provides for such prescription.

Doctrine of estoppel

The error of any government employee does not bind the government. It is held that the neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the interest of the people.

Judicial Non-interference

courts are not allowed to issue injunction against the government's pursuit to collect tax as this would unnecessarily defer tax collection.

Strict Construction of Tax Law

When the law clearly provides for taxation, taxation is the general rule unless there is a clear exemption. Hence the maxim, "Taxation is the rule, exemption is the exception."

Vague Tax Laws

these are construed against the government and in favor of the taxpayers. A _ means no tax law. Obligation arising from law is not presumed. The Constitutional requirement of due process requires laws to be sufficiently clear and expressed in their provisions.

Vague tax laws

these are construed against the government and in favor of the taxpayers. A ___ means no tax law. Obligation arising from law is not presumed. The Constitutional requirement of due process requires laws to be sufficiently clear and expressed in their provisions.

INHERENT LIMITATION OF TAXATION

These are limitations on the taxing power arising from the nature of the power itself, including territoriality, international comity, public purpose, government exemption, and non-delegation.

Territoriality of Taxation

The principle that a government can only demand tax obligations upon its subjects or residents within its territorial jurisdiction, as foreign subjects abroad do not derive benefits and extraterritorial taxation would encroach on foreign sovereignty.

Two-Fold Obligations of Taxpayers (Philippines)

1. Filing of returns and payment of taxes
2. Withholding of taxes on expenses and its remittance to the government

These can only be enforced by the Philippine government upon its citizens and residents within its territorial jurisdiction.

Exceptions to the Territoriality Principle (Income Taxation)

Resident citizens and domestic corporations are taxable on income derived both within and outside the Philippines.

Exceptions to the Territoriality Principle (Transfer Taxation)

Residents or citizens (e.g., resident citizens, nonresident citizens, resident aliens) are taxable on transfers of properties located within or outside the Philippines.

International Comity (Taxation)

A fundamental concept of co-equal sovereignty among nations where countries observe mutual courtesy and reciprocity, leading to governments not taxing the income and properties of other governments and prioritizing treaty obligations over domestic tax laws.

Public Purpose (Taxation)

The principle that taxation must be exercised absolutely for the common good and public purpose, and cannot be used to further any private interest.

Exemption of the Government (Taxation)

The general rule that the government normally does not tax itself, as it would only impute additional costs rather than raise additional funds. However, government-owned and controlled corporations (GOCCs) are subject to tax.

Non-Delegation of the Taxing Power

The principle that the legislative taxing power is vested exclusively in Congress and cannot be further delegated, consistent with the doctrine of separation of powers.

Exceptions to Non-Delegation of Taxing Power

1. Local government units are allowed to exercise the power to tax.
2. The President is empowered to fix the amount of tariffs under the Tariff and Customs Code.
3. Other cases requiring expedient and effective administration and implementation of assessment and collection of taxes.

Observance of Due Process of Law (Taxation)

The constitutional limitation stating that no one should be deprived of his life, liberty, or property without due process of law, meaning tax laws should be neither harsh nor oppressive.

Substantive Due Process (Taxation)

Requires that tax must be imposed only for public purpose, collected only under authority of a valid law, and by the taxing power having jurisdiction. An assessment without legal basis violates this.

Procedural Due Process (Taxation)

Requires that there should be no arbitrariness in assessment and collection of taxes, and the government must observe the taxpayer's right to notice and hearing, adhering to law-established procedures for assessments and collections.

Equal Protection of the Law (Taxation)

The constitutional rule that taxpayers should be treated equally both in terms of rights conferred and obligations imposed, applying when taxpayers are under the same circumstances and conditions.

Uniformity Rule in Taxation

The principle that the rule of taxation shall be uniform and equitable, meaning taxpayers under dissimilar circumstances should not be taxed the same, but those falling under the same class (based on substantial distinction) are taxed uniformly. Uniformity is relative equality.

Progressive System of Taxation

A system where tax rates increase as the tax base increases, favored by the Constitution as it aligns with the taxpayer's ability to pay and aids in the equitable distribution of wealth.

Non-Imprisonment for Non-Payment of Debt or Poll Tax

A constitutional guarantee that no one shall be imprisoned for mere inability to pay debt (acquired in good faith). This guarantee extends to basic community tax (poll tax) but not to non-payment of other taxes, which arises from law and is a governmental demand analogous to a crime.

Poll, Personal, Community, or Residency Tax

A tax with two components: basic community tax and additional community tax. The constitutional guarantee of non-imprisonment applies only to the basic community tax; non-payment of the additional community tax is considered tax evasion punishable by imprisonment.

Non-Impairment of Obligation and Contract (Taxation)

The principle that the State should not set aside its obligations from contracts by exercising its taxation power, meaning tax exemptions granted under contract should be honored and not unilaterally cancelled.

Free Worship Rule (Taxation)

The principle that the Philippine government adopts free exercise of religion and does not subject its exercise to taxation, thus properties and revenues (like tithes or offerings) of religious institutions are generally exempt, except for income from proprietary or commercial activities.

Exemption of Certain Entities from Property Taxes

The constitutional exemption from property tax for lands, buildings, and improvements actually, directly, and exclusively (primarily) used for charitable, religious, and educational purposes (e.g., non-profit cemeteries, churches, mosques).

Doctrine of Use (Philippine Taxation)

The principle followed in the Philippines for property tax exemption, where only properties actually devoted for religious, charitable, or educational activities are exempt from real property tax, unlike the Doctrine of Ownership which is not applied.

Non-Appropriation of Public Funds for Religion

A constitutional limitation highlighting the separation of religion and the State, preventing the government from favoring any particular religious system by appropriating public funds or property, though compensation for religious ministers in specific public service roles is not considered religious appropriation.

Tax Exemption for Non-Profit Educational Institutions

Constitutional recognition of education's necessity, granting tax exemption on revenues and assets of non-profit, non-stock educational institutions (including grants, endowments, donations) provided they are actually, directly, and exclusively devoted for educational purposes.

Concurrence for Tax Exemption Grant

A constitutional requirement stating that the passage of a law granting tax exemption needs the concurrence of an absolute majority (majority of all members) of Congress, as such laws counter the lifeblood doctrine by depriving the government of revenue.

Withdrawal of Tax Exemption

Requires only a relative majority (quorum majority) for its approval in Congress, distinguishing it from the absolute majority required for granting an exemption.

Non-Diversification of Tax Collections

The rule that tax collections should be used only for public purpose and should never be diversified or used for private purpose.

Non-Impairment of Supreme Court Jurisdiction (Tax Cases)

Ensures that all cases involving taxes can be raised to and finally decided by the Supreme Court of the Philippines, notwithstanding the existence of the Court of Tax Appeals.

Origination of Revenue Bills

Stipulates that appropriations, revenue, or tariff bills must originate exclusively in the House of Representatives, though the Senate may propose or concur with amendments, even to the extent of changing the entire House version.

Local Government Unit's Power to Tax

A constitutional recognition of the local autonomy of local governments, explicitly delegating to them the power to create their own sources of revenue and have a just share in national taxes.

Double Taxation

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

Elements of Double Taxation

1. Primary element: Same object
2. Secondary elements:
   a. Same type of tax
   b. Same purpose of tax
   c. Same taxing jurisdiction
   d. Same tax period

Direct Double Taxation

Occurs when all elements of double taxation exist for both impositions.

Indirect Double Taxation

Occurs when at least one of the secondary elements of double taxation is not common for both impositions.

Methods to Minimize Double Taxation

1. Provision of tax exemption
2. Allowing foreign tax credit
3. Allowing reciprocal tax treatment
4. Entering into treaties or bilateral agreements

Escapes from Taxation

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

Tax Evasion

Any act or trick that tends to illegally reduce or avoid the payment of tax, also known as tax dodging.

Examples of Tax Evasion

Examples include gross understatement of income, non-declaration of income, overstatement of expenses or tax credit, and misrepresenting the nature or amount of transaction to take advantage of lower taxes.

Tax Avoidance

Any act or trick that reduces or totally escapes taxes by any legally permissible means, also known as tax minimization.

Examples of Tax Avoidance

Examples include selection and execution of transactions that would expose a taxpayer to lower taxes, maximizing tax options, tax carry-overs, or tax credits, and careful tax planning.

Tax Exemption

The immunity, privilege, or freedom from being subject to a tax which others are subject to, also known as tax holiday. It may be granted by the Constitution, law, or contract.

Shifting (Taxation)

This is the process of transferring tax burden to other taxpayers.

Forward Shifting

The shifting of tax which follows the normal flow of distribution (i.e., from manufacturer to wholesalers, retailers to consumers); common with essential commodities and services.

Backward Shifting

The reverse of forward shifting, common with non-essential commodities where buyers have considerable market power and commodities with numerous substitute products.

Onward Shifting

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

Capitalization (Taxation)

The adjustment of the value of an asset caused by changes in tax rates, a form of backward shifting of tax.

Transformation (Taxation)

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

Tax Amnesty

A general pardon granted by the government for erring taxpayers, an absolute forgiveness or waiver by the government on its right to collect, retrospective in application.

Tax Condonation

Forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds, also referred to as tax remission.

Distinction between Tax Amnesty and Tax Condonation

Amnesty covers both civil and criminal liabilities, operates retrospectively, and is conditional upon payment of a portion of the tax. Condonation covers only civil liabilities, applies prospectively to unpaid balances, and requires no payment.