LAW ON TAXATION

LAW ON TAXATIONGeneral Principles of Taxation

Anna Bettina B. Dela CruzDefinition of TaxationTaxation is the power inherent in every sovereign state to impose charge or burden upon persons, properties, or rights to raise revenues for the use and support of the government to enable it to discharge its appropriate functions.Nature of TaxationIt is inherent attribute of sovereigntyIt is legislative in characterCharacteristics of TaxationForced charge;Pecuniary burden payable in money;Levied by the legislature;Assessed with some reasonable rule of apportionment; (see Theoretical justice)Imposed by the State within its jurisdiction;Levied for public purpose.TAXATIONPOLICE POWEREMINENT DOMAIN1. As to purposeTo raise revenueTo promote public welfare through legislationThe taking of property for public use2. As to the amount of exactionNo limitLimited to the cost of regulation , issuance of license, or surveillanceNo exaction; but private property is taken by the State for public purpose3. As to the benefits receivedNo special or direct benefit is received by the taxpayer; merely general benefit of protectionNo direct benefit is received; a healthy economic standard of society is attainedA direct benefit results in the form of just compensation to the property owner4. Non-impairment of contractsContracts may not be impairedContracts may be impairedContracts may be impairedTAXATIONPOLICE POWEREMINENT DOMAIN5. As to the transfer of property rightsTaxes paid become part of public fundsNo transfer but only restraint in its exerciseTransfer is effected in favor of the State6. ScopeAll persons, property and excisesAll persons, property, rights and privilegesOnly upon a particular propertyPurpose of TaxationRevenue-raisingNon-revenue/special or regulatoryPrinciples of Sound Tax SystemFiscal AdequacyAdministrative FeasibilityTheoretical JusticeTheory and Basis of TaxationLifeblood Theory (Necessity Theory)Benefits-protection Theory (Symbiotic relationship)Doctrines in TaxationProspectivity of Tax LawsGeneral Rule: Taxes must only be imposed prospectively.Exception: If the law expressly provides for retroactivity imposition. Retroactive application of revenue laws may be allowed if it will not amount to denial of due process.Doctrine of ImprescriptibilityTaxes are imprescriptible as they are the lifeblood of the government. However, tax statutes may provide for statute of limitations.Double Taxationdirect duplicate taxationthe two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character.Kinds of Double TaxationDirect Double Taxation (Obnoxious) Double taxation in the objectionable or prohibited sense since it violates the equal protection clause of the Constitution.Indirect Double Taxation Not repugnant to the Constitution.Allowed if the taxes are of different nature or character imposed by different taxing authorities.Generally, it extends to all cases when one or more elements of direct taxation are not present.Domestic Double Taxation when taxes are imposed by the local or national government within the same State. International Double Taxation occurs when there is an imposition of comparable taxes in two or more States on the same taxpayer in respect of the same subject matter and for identical periods.Modes of Eliminating Double TaxationTax creditTax deductionTax exemptionImposition of a rate lower than the normal domestic rateEscape from TaxationBasic forms of escape from taxation:Shifting*CapitalizationAvoidance*TransformationEvasion*Exemption

ShiftingThe transfer of the burden of tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else without violating the law.

Kinds of Shifting:Forward ShiftingBackward shifting Onward shiftingImpact of Taxationburden of taxationIt is the economic cost of the tax.It may fall on another person not statutorily liable to pay the tax.

Incidence of TaxationThe incidence of taxation is upon the person statutorily liable to pay the tax.Tax AvoidanceIt is the scheme where the taxpayer uses legally permissible alternative method of assessing taxable property or income, in order to avoid or reduce tax liability.Tax EvasionIt is where the taxpayer uses illegal or fraudulent means to defeat or lessen payment of a tax.

Elements of Tax Evasion:End to be achieved;Accompanying State of mind which is described as being evil, in bad faith, willful or deliberate and not accidental; andCourse of action which is unlawful.Indicia of Fraud in Tax EvasionFailure to declare for taxation purposes true and actual income derived from business for 2 consecutive years;Substantial under-declaration of income tax returns of the taxpayer for 4 consecutive years coupled with intentional overstatement of deductions.Exemption from TaxationIt is the grant of immunity to particular persons or corporations from the obligation to pay taxes.

Nature of Tax Exemptions:Personal in nature and covers only taxes for which the grantee is directly liable.Strictly construed against the taxpayer.Exemptions are not presumed. But when public property is involved, exemption is the rule, and taxation, the exception.Kinds of Tax ExemptionExpressImpliedContractualRationale for Tax ExemptionThe increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives.Revocation for Tax ExemptionSince the law granted the press a privilege, the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative; indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been subject.Revocation of Tax ExemptionThe rule is that a special and local statute applicable to a particular case is not repealed by a later statute which is general in its terms, provisions and application even if the terms of the general act are broad enough to include the cases in the special law unless there is manifest intent to repeal or alter the special law.Compensation or set-offCompensation or set-off take place when two persons, in their own right, are creditors and debtors of each other.CompromiseIt is an agreement between two or more persons who, to avoid lawsuit, amicably settle their differences on such terms and conditions as they may agree on. Tax AmnestyA tax amnesty, being a general pardon or intentional overlooking by the state of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute forgiveness or waiver by the government of its right to collect what otherwise would be due to it, and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent or are willing to reform a chance to do so and become a part of the new society with a clean slate. TAX AMNESTYTAX EXEMPTIONScope of immunityImmunity from all criminal, civil and administrative obligation arising from non-payment of taxesImmunity from civil liability onlyGranteeGeneral pardon given to all erring taxpayersA freedom from a charge or burden to which others are subjectedHow appliedApplied retroactivelyApplied prospectivelyPresence of actual revenue lossThere is revenue loss since there was actually taxes due but collection was waived by the government.None, because there was no actual taxes due as the person or transaction is protected by tax exemption.Construction and interpretation of Tax LawsTax laws are:

Not politicalCivil in natureNot penal in characterHow are Tax Laws construed?1. Generally, no person or property is subject to tax unless within the terms or plain import of a taxing statute. 2. Tax laws are generally prospective in nature. 3. Where the language is clear and categorical, the words employed are to be given their ordinary meaning. 4. When there is doubt, tax laws are strictly construed against the Government and liberally in favor of the taxpayer.

5. Provisions of the taxing act are not to be extended by implication. 6. Tax laws are special laws and prevail over general laws. Construction of Tax exemption General Rule: Strict construction of tax exemptions against grantee. Exceptions:

1. If the statute granting exemption expressly provides for liberal interpretation; 2. In case of exemptions of public property; 3. Those granted to traditional exemptees; 4. Exemptions in favor of the government; 5. Exemption by clear legislative intent. 6. In case of special taxes (relating to special cases affecting special persons).

Tax Rules and RegulationsThe construction placed by the office charged with implementing and enforcing the provisions of a Code should be given controlling weight unless such interpretation is clearly erroneous. Penal provisions of Tax LawsPenal provisions are given strict construction so as not to extend the plain terms thereof that might create offenses by mere implication not so intended by the legislative body. Scope and limitation of TaxationInherent limitations:Situs or territoriality of TaxationMust be for Public purposeInternational comityNon-delegability of the taxing powerExemption of government agenciesInherently LegislativeGeneral Rule: The power of taxation is peculiarly and exclusively exercised by the legislature. Exceptions to Non-delegability:1. Flexible Tariff Clause: Authority of the President to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts. 2. Power of local government units to levy taxes, fees, and charges. 3. Delegation to administrative agencies for implementation and collection.TerritorialSitus of taxation is the place or authority that has the right to impose and collect taxes. OBJECTSITUSINCOME TAX Nationality applied to RC, DC

Place applied to NRC, NRA, NRFC

Residence applied to RA, RFC Upon sources of income derived within and without the Philippines

Upon sources of income derived within the Philippines

Upon sources of income derived within the Philippines

PROPERTY TAXESReal Property Tax

Personal Property TaxLocation of property(Lex rei sitae)-tangible: where it is physically locatedor permanently kept (Lex rei sitae)-intangible: subject to Sec. 104 of theNIRC and the principle of mobiliasequuntur personamOBJECTSITUSEXCISE TAX / DONORS TAX / ESTATE TAX Nationality applied to RC, NRC

Place applied to NRA

Residence applied to RA Taxed upon their properties wherever situated

Taxed on properties situated within the Philippines

Taxed upon their properties wherever situated

BUSINESS TAXPlace where the act/ business is performed or occupation is engaged in VATWhere the goods, property or services are destined, used or consumed Constitutional Limitationsa. Provisions directly affecting taxation1. Prohibition against imprisonment for non payment of poll tax2. Uniformity and equality of Taxation3. Grant by Congress of authority to the President to impose tariff rates4. Prohibition against taxation of religious, charitable entities, and educational entities5. Prohibition against taxation of non-stock, non-profit institutions6. Majority vote of Congress for grant of tax exemption7. Prohibition on use of tax levied for special purpose8. presidents veto power on appropriation, revenue, tariff bills9. Non-impairment of jurisdiction of the Supreme Court10. Grant of power to the Local Government Units to create its own sources of revenue11. Flexible tariff clause12. Exemption from real property taxes13. No appropriation or use of public money for religious purposesb. Provisions indirectly affecting taxationDue processEqual protectionReligious freedomNon-impairment of obligations and contracts

Stages of TaxationLevyAssessment and collectionPaymentRefundTAXESThese are enforced proportional contributions from persons and properties, levied by the State by virtue of its sovereignty for the support of the government and for all its public needs. Characteristics of Taxes1. It is levied by the State which has jurisdiction over the person or property 2. It is levied by the State through its Law-making body 3. It is an Enforced contribution not dependent on the will of the person taxed. 4. It is generally Payable in money 5. It is Proportionate in character 6. It is levied on Persons and property 7. It is levied for a Public purpose. Requisites of a valid Tax1. It should be for a public purpose; 2. It should be uniform; 3. That either the person or property being taxed be within the jurisdiction of the taxing authority; and 4. The tax must not impinge on the inherent and constitutional limitations on the power of taxation.

TAX AS DISTINGUISHED FROM OTHER CHARGES AND FEES TAXCUSTOM DUTIESCoverageMore comprehensive than customs dutyOnly a kind of tax therefore limited coverageObjectPersons, properties, etc.Goods imported or exportedTAXTOLLDefinitionAn enforced proportional contribution from persons and property for public purpose/s.A consideration paid for the use of a road, bridge or the like, of a public nature. BasisDemand of sovereigntyDemand of proprietorshipAmountGenerally the amount is unlimitedAmount is limited to the cost and maintenance of public improvementPurposeFor the support of the governmentFor the use of anothers propertyAuthorityMay be imposed by the State onlyMay be imposed by private individuals or entities TAXLICENSE FEEPurposeImposed to raise revenueFor regulation and controlBasisCollected under the power of taxationCollected under police powerAmountGenerally, amount is unlimitedLimited to the necessary expenses of regulation and controlSubjectImposed on persons, property, rights or transactionImposed on the exercise of a right or privilegeEffect of Non-PaymentNon-payment does not make the business illegalNon-payment makes the business illegalTime of PaymentNormally paid after the start of businessNormally paid before the commencement of the businessTAXSPECIAL ASSESSMENTNatureAn enforced proportional contribution from persons and property for public purpose/s.An enforced proportional contribution from owners of lands especially those who are peculiarly benefited by public improvementsSubjectImposed on persons, property rights or transactionsLevied only on landPerson LiableA personal liability of the taxpayerNot a personal liability of the person assessedPurposeFor the support of the governmentContribution to the cost of public improvementScopeRegular exactionExceptional as to time and localityTAXDEBTBasisObligation created by lawObligation based on contract, express or impliedAssignabilityNot assignableAssignableMode of PaymentPayable in money or in kind Payable in kind or in moneySet-offNot subject to set-offSubject to set-offEffect of Non-PaymentMay result to imprisonmentNo imprisonment (except when debt arises from crime)InterestBears interest only if delinquentInterest depends upon the written stipulation of the partiesPrescriptionGoverned by the special prescriptive periods provided for in the NIRCGoverned by the ordinary periods of prescriptionKinds of Taxes1. As to objectPersonal, capitation, or poll taxProperty taxPrivilege tax2. As to burden or incidenceDirectIndirect3. As to tax ratesSpecificAd valoremMixed4. As to purposeGeneral or fiscalSpecial, regulatory, or sumptuary5. As to scope or authority to imposeNational internal revenue taxesLocal real property tax, municipal tax6. As to graduationProgressiveRegressiveProportionate