Introduction to Taxation – Comprehensive Study Notes

LEARNING OBJECTIVE

• Understand the concept of taxation and its importance in the life of the nation

WHAT IS TAXATION?

• It is a state power, a legislative process, and a mode of government costs distribution.

THEORY OF TAXATION

• Government’s necessity for funding

• Necessity includes various public services including defense, public order and safety, health, education, and social protection among others.

• BASIS OF TAXATION

  • Mutuality of support between people and the government

  • GOVERNMENT → PEOPLE → PUBLIC SERVICES → TAXES

• NOTE: Receipt of benefit is conclusively presumed.

THEORIES OF COST ALLOCATION

• 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.

  • Based on relative capacity of the taxpayer.

Aspects of Ability to Pay Theory

• Vertical Equity

  • Proposes that the extent of one’s ability to pay is directly proportional to the level of his tax base.

  • Example: Jaja has P500,000 income while Jojo has P1,000,000. Here, the government should tax Jojo more than Jaja because he has greater income, therefore, a greater capacity to contribute.

• Gross Concept

• Horizontal Equity

  • Requires consideration of the particular circumstance of the taxpayer.

  • Example: Jaja and Jojo both have P500,000 income. Jaja incurred P200,000 in business expenses while Jojo incurred P100,000 business expenses. Here, the government should tax Jojo more than Jaja because he has lesser expenses and thus greater capacity to contribute taxes.

• Net Concept

LIFEBLOOD DOCTRINE

• Taxes are essential and indispensable to the continued subsistence of the government.

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

IMPLICATION OF THE LIFEBLOOD DOCTRINE IN TAXATION

• Tax is imposed even in the absence of a Constitutional grant.

• Claims for tax exemption are construed against taxpayers.

• The government reserves the right to choose the objects in taxation.

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

• In income taxation:

  • Income received in advance is taxable upon receipt.

  • Deduction for 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.

INHERENT POWERS OF THE STATE

• Taxation Power

  • Power of the State to enforce proportional contribution from its subjects to sustain itself.

• Police Power

  • General power of the state to enact laws to protect the well-being of the people.

• Eminent Domain

  • Power of the State to take private property for public use after paying just compensation.

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COMPARISON OF THE THREE POWERS OF THE STATE

• Point of Difference (summarized)

  • Taxation: Exercising Authority – Government; Purpose – For the support of the government; Persons affected – Community or class of individuals.

  • Police Power: To protect the general welfare of the people; Persons affected – Community or class of individuals; Owner of the property – Government & Private Utilities; For public use.

  • Eminent Domain: To take property for public use; Owner of the property – Private owner; Amount of imposition – No amount imposed (government pays just compensation);

• Relationship with the Constitution: Taxation – Constitutional and inherent limitations; Police Power – Superior to the non-impairment clause; Eminent Domain – Superior to the non-impairment clause; Public purpose and just compensation.

SIMILARITIES OF THE THREE POWERS OF THE STATE

• They are all necessary attributes of sovereignty.

• They are all inherent to the State.

• They are all legislative in nature.

• They are all ways in which the State interferes with private rights and properties.

• They all exist independently of the Constitution and are exercisable by the government even without a Constitutional grant.

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

• The exercise of these powers by the local government units may be limited by the national legislature.

SCOPE OF TAXATION POWER

• Comprehensive

• Plenary

• Unlimited

• Supreme

LIMITATIONS OF THE TAXATION POWER

• Territoriality of taxation

• International comity

• Public purpose

• Exemption of the government

• Non-delegation of the taxing power

• A. INHERENT LIMITATIONS NEXT

TERRITORIALITY OF TAXATION

• Two-fold obligation of taxpayers (imposed upon its citizens and residents):

  • Filing of returns and payment of taxes

  • Withholding of taxes on expenses and its remittance to the government

• EXCEPTIONS:

  • In income taxation, resident citizens and domestic corporations are taxable on income derived both within and outside the Philippines.

  • In transfer taxation, residents or citizens such as resident citizens, non-resident citizens and resident aliens are taxable on transfers of properties located within or outside the Philippines.

INTERNATIONAL COMITY

• In the UN Convention, countries of the world agreed to one fundamental concept of co-equal sovereignty wherein all nations are deemed equal with one another regardless of race, religion, culture, economic condition or military power.

• Governments do not tax the income and properties of other governments.

• Governments give primacy to their treaty obligations over their own domestic tax laws.

• Embassies or consular offices of foreign governments in the Philippines including international organizations and their non-Filipino staff are not subject to income taxes or property taxes.

• Under the NIRC, the income of foreign government and foreign government-owned and controlled corporations are not subject to income tax.

EXEMPTION OF THE GOVERNMENT

• Under the NIRC, government properties and income from essential public functions are not subject to taxation.

• However, income of the government from its properties and activities conducted for profit including income from government-owned and controlled corporations is subject to tax.

NON-DELEGATION OF TAXING POWER

• Legislative taxing power is vested exclusively in Congress and is non-delegable in pursuance of the doctrine of separation of the branches of the government to ensure a system of checks and balances.

• Power of lawmaking, including taxation, is delegated by the people to the legislature; it is held that what has been delegated cannot be further delegated.

• EXCEPTIONS TO NON-DELEGATION:

  • Under the constitution, LGUs are allowed to exercise the power to tax to enable them to exercise their fiscal autonomy.

  • Under the Tariff Customs Code, the President is empowered to fix the amount of tariffs to be flexible to trade conditions.

  • Other cases that require expedient and effective administration and implementation of assessment and collection of taxes

LIMITATIONS OF THE TAXATION POWER (CONT.)

• Due process of law

• Equal protection of the law

• Uniformity rule in taxation

• Progressive system of taxation

• Non-imprisonment for non-payment of debt or poll tax

• Non-impairment of obligation and contract

• Free worship rule

CONSTITUTIONAL LIMITATIONS (CONT.)

• Exemption of religious or charitable entities, non-profit cemeteries, churches and mosques from property taxes.

• Non-appropriation of public funds or property for the benefit of any church, sect or system of religion.

• Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions.

• Concurrence of a majority of all members of Congress for the passage of law granting tax exemption.

• Non-diversification of tax collections

• Non-delegation of the power of taxation

• Non-impairment of the jurisdiction of the Supreme Court to review tax cases.

• The requirement that appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives. Laws that add income to the national treasury and those that allow spending therein must originate from the House of Representatives while the Senate may concur with amendments. The delegation of taxing power to local government units; each LGU shall exercise its own sources of revenue and shall have a just share in the national taxes.

DUE PROCESS OF LAW (CONSTITUTIONAL LIMITATION)

• No one should be deprived of life, liberty, or property without due process of law.

• ASPECTS OF DUE PROCESS

  • Substantive due process

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

  • An assessment without a legal basis violates due process.

  • Procedural due process

  • No arbitrariness in assessment and collection; taxpayer’s right to notice and hearing.

  • Under the NIRC:

    • Assessment shall be made within three years from the due date of filing of the return or from the date of actual filing, whichever is later.

    • Collection shall be made within five years from the date of assessment.

  • Failure to observe these rules violates due process.

EQUAL PROTECTION OF THE LAW

• No person shall be denied the equal protection of the law.

• Taxpayers should be treated equally both in terms of rights conferred and obligations imposed.

• Applies where taxpayers are under the same circumstances and conditions.

• Example: Congress cannot exempt sellers of balot while subjecting sellers of penoy to tax since they are essentially the same goods.

UNIFORMITY RULE IN TAXATION

• Taxation must be uniform and equitable.

• Taxpayers under dissimilar circumstances should not be taxed the same.

• Taxpayers should be classified according to commonality in attributes; tax classifications should be based on substantial distinction.

• Each class is taxed differently, but taxpayers in the same class are taxed the same.

• Hence, uniformity is relative to equity.

PROGRESSIVE SYSTEM OF TAXATION

• Tax rates increase as the tax base increases.

• Consistent with the taxpayer’s ability to pay and aids in an equitable distribution of wealth by taxing the rich more than the poor.

NON-IMPRISONMENT FOR NON-PAYMENT OF DEBT OR POLL TAX

• No one shall be imprisoned because of poverty, or mere inability to pay debt.

• Applies only when the debt is acquired by the debtor in good faith.

• Debt acquired in bad faith constitutes estafa, a criminal offense punishable by imprisonment.

• Is non-payment of tax equivalent to non-payment of debt?

  • Tax arises from law and is a sovereign demand; debt arises from private contracts.

  • Non-payment of tax compromises public interest and is similar to a crime.

  • Non-payment of debt is private interest.

  • The constitutional guarantee on non-imprisonment for non-payment of debt does not extend to non-payment of tax except poll tax.

• Poll tax components: basic community tax and additional community tax

EXEMPTION OF RELIGIOUS, CHARITABLE OR EDUCATIONAL ENTITIES (PROPERTY TAX)

• Constitution exemption applies for properties actually, directly, and exclusively used for charitable, religious, and educational purposes (Doctrine of Use).

• Under Doctrine of Ownership, the properties of charitable, religious and educational entities are exempt from real property tax even if not used in primary operations.

NON-APPROPRIATION OF PUBLIC FUNDS OR PROPERTY FOR THE BENEFIT OF ANY CHURCH OR RELIGION

• Separation of religion and the State; to support freedom of religion, government should not favor any particular religion by appropriating public funds or property.

• Compensation to religious workers in certain institutions (e.g., priests, imams, ministers with military, penal institutions, orphanages, leprosarium) is not considered religious appropriation.

EXEMPTION FROM TAXES OF REVENUES AND ASSETS OF NON-PROFIT EDUCATIONAL INSTITUTIONS

• Constitution recognizes the necessity of education in state building by granting tax exemption on revenues and assets of non-profit educational institutions.

• Applies only to revenues and assets that are actually, directly, and exclusively devoted for educational purposes.

• Government educational institutions are exempt from income tax; private educational institutions are subject to a minimal income tax.

CONCURRENCE OF A MAJORITY OF ALL MEMBERS OF CONGRESS FOR TAX EXEMPTION

• Tax exemption law counters lifeblood doctrine by depriving the government of revenues.

• Constitution requires the vote of a majority of all members of Congress for grant of tax exemption. An absolute majority or majority of all members (not relative majority or quorum) is required for approval; withdrawal requires a relative majority.

NON-DELEGATION OF THE POWER OF TAXATION (RECAP)

• The principle of checks and balances; taxation power as part of lawmaking is vested exclusively in Congress.

• Delegation may occur on expedient and effective administration and implementation aspects that are non-legislative in character; Department of Finance and BIR may issue revenue regulations, rulings, orders, or circulars (quasi-legislative authority).

STAGES OF THE EXERCISE OF TAXATION POWER

• Levy or imposition

• Assessment and Collection

LEVY OR IMPOSITION

• Involves the enactment of a tax law by Congress and is called the impact of taxation.

• Congress is bicameral: House of Representatives and the Senate.

• Tax bills must originate in the House of Representatives; both chambers must approve the same version.

MATTERS OF LEGISLATIVE DISCRETION IN THE EXERCISE OF TAXATION

• Determining the object of taxation.

• Setting the tax rate or amount to be collected.

• Determining the purpose for the levy which must be public use.

• Kind of tax to be imposed.

• Apportionment of the tax between the national and local government.

• Situs of taxation.

• Method of collection.

ASSESSMENT AND COLLECTION

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

• Implementation involves the assessment (determination of tax liabilities of taxpayers) and collection.

• This refers to the incidence of taxation.

SITUS OF TAXATION

• SITUS – place of taxation; the tax jurisdiction that has the power to levy taxes upon the tax object.

• Examples of SITUS Rules:

  • Business tax situs – tax where business is conducted.

  • Income tax situs on services – tax where service fees are rendered.

  • Income tax situs on sale of goods – gain on sale taxed in place of sale.

  • Income tax situs on sale of goods – gain on sale taxed in place of sale (duplicate line retained for completeness).

• SITUS OF TAXATION (cont.)

  • Property tax situs – properties taxable in their location.

  • Personal tax situs – persons taxable in their place of residence.

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

• 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.” Tax incentives may encourage beneficial activities or industries.

• Prospectivity of tax laws – ex post facto or retroactive laws are prohibited by the Constitution.

• Non-compensation or set-off – not subject to automatic set-off; exceptions exist (e.g., earlier due claims, overpayments, local taxes).

• Non-assignment of taxes – tax obligations cannot be assigned or transferred by contract.

• Imprescriptibility in taxation

  • Prescription: tax prescribes if not collected within 5 years from assessment date; if no assessment, prescription is within 3 years from date the return is required to be filed; exceptions for non-filing or fraudulent returns.

• Doctrine of estoppel – misrepresentation relied on in good faith binds the misrepresenting party.

• Judicial Non-interference – courts generally do not issue injunctions against government tax collection.

• Strict Construction of Tax Laws – taxation is the general rule; exemptions are the exception.

DOUBLE TAXATION

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

• Elements of Double Taxation:

  • Primary element: same object

  • Secondary elements: same type of tax, same purpose of tax, same taxing jurisdiction, same tax period

TYPES OF DOUBLE TAXATION

• Direct Double Taxation – all elements of double taxation exist for both impositions.

  • Example: 10% income tax on monthly sales and 2% income tax on annual sales (total monthly sales)

• Indirect Double Taxation – at least one secondary element is not common for both impositions.

  • Example: National government taxes business tax on sales; local government taxes the same sales.

MINIMIZING DOUBLE TAXATION

• Provisions to reduce double taxation:

  • Tax exemption

  • Foreign tax credit

  • Reciprocal tax treatment

  • Treaties or bilateral agreements

ESCAPES FROM TAXATION (CATEGORIES)

• Those that result in loss of government revenue

  • Tax evasion – illegal dodging of tax payments

  • Tax avoidance – legal minimization of taxes

  • Tax exemption – immunity or freedom from tax

• Those that do not result in loss of government revenue

  • Shifting – transferring tax burden to others

  • Capitalization

  • Transformation

TAX AMNESTY VS. TAX CONDONATION

• Tax Amnesty

  • General pardon granted by the government for erring taxpayers to reform and have a fresh start; retrospective in application; absolute forgiveness or waiver by the government on its right to collect; covers civil and criminal liabilities.

• Tax Condonation

  • Forgiveness of the tax obligation of a certain taxpayer under justifiable grounds; also called tax remission; applies prospectively to any unpaid balance; the portion already paid is not refunded.

• AMNESTY vs CONDONATION

  • Amnesty is retrospective and may cover civil and criminal liabilities; condonation is prospective and covers civil liabilities only.

  • Amnesty typically requires payment of a portion of the tax; condonation does not require payment.