PHILIPPINE LAWS ON INCOME TAXATION
GENERAL PRINCIPLES OF TAXATION Inherent Powers of the State 1. Power of Taxation - Power of the state to exact an enforced contribution upon persons, property or rights for the purpose of generating revenues for the use and support of the government. - Exercised only by the government or its political subdivision. - Generally Generally no limit to the amount of tax that may be imposed. 2. Power of Eminent Domain - Power of the state st ate to expropriate private property for public purpose in return for a just or reasonable reasonable compensation. compensation. - May be granted by the government to public service companies or public utilities. 3. Police Power - Power of the state to promote the general welfare of of the people people by limiting limiting or regulating regulating the rights or properties of any person. - Relatively free from the constitutional limitations and is superior to the nonimpairment clause provisions on obligations of contracts. Similarities among the Inherent Powers of the Government 1. They all underlie and exist independently with the constitution constitution although although the conditions for their exercise maybe prescribed by the constitution and by law 2. They are ways or means by which w hich the government interferes with private rights and properties 3. They all rest upon necessity because there can be no effective government without them 4. They all presuppose an equivalent compensation received, directly or indirectly, indirectly, by the persons affected by the exercise of any of these governmental powers
Distinctions between Power of Taxation and Power of Eminent Domain POWER OF TAXATION Directed against persons, properties, or rights Purpose is to raise revenues revenues to support the government (Taxpayer) gives money representing his taxes in consideration for services and protections presumed furnished by the government.
POWER OF EMINENT DOMAIN Directed against real property Purpose is to have real property for public purpose (Taxpayer) (Taxpayer) gives away his real property in consideration for a just or reasonable monetary consideration.
Distinctions between Power of Taxation and Police Power POWER OF TAXATION To raise revenues to support the government Directed against persons, properties, or rights The amount of tax imposition may be unlimited
POLICE POWER To regulate or limit the rights of persons for public welfare Directed against a taxpayer‟s rights or property The amount of regulation fee must be limited what is needed to carry out the regulation
Limitations on the Power of Taxation 1. Constitutional Limitations a. Due process of the law b. Equal protection of the law c. Non-imprisonment for non-payment of a debt or poll tax d. Non-impairment Non-impairment of the provisions on Obligations of Contracts e. The rule of taxation shall be uniform and equitable - Progressive system of Taxation f. No public money shall be appropriated for a religious or private purpose
PHILIPPINE LAWS ON INCOME TAXATION g. Exemption from Taxation of Educational, Religious and Charitable Organizations - Basis is the use of property, not ownership. h. No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of congress. i. Non-impairment of the Jurisdiction of the Supreme Court on Tax Cases j. The Philippine President has the Power to approve or veto a Tax Bill approved and passed by the Congress. - Veto may be overridden by a 213 vote by Congress 2. Inherent Limitations a. Taxes may be levied only for public purpose b. Non-delegation of the power to tax except to local government c. Exemptions from taxation of government entities d. Tax laws must be within the state‟s territorial jurisdiction e. Tax laws must be subject to international comity, convention, pr agreements f. Prohibition of double taxation Definitions of “Taxation”
Taxation refers to the inherent power of the state to exact an enforced contribution upon persons, properties or rights for the purpose of generating revenues for the use of the government. Taxation is a way or means of apportioning the operational cost of the government and all its public needs among those who, in some measures, are privileged to enjoy its benefits and therefore must bear the burden. Taxation is the act of levying a tax or the process by which the government, through its law-making body, raises revenues to defray its necessary expenses.
Nature of Taxation 1. Authority - Theory of Taxation / Lifeblood Theory
- Taxation rests upon necessity and is inherent in every government or sovereignty - Power is legislative in nature and essential to the existence of any independent government - “Government cannot exist without taxation, thus taxation is an important necessity.” 2. Basis - Benefits Received Principle - Taxes are imposed upon persons, properties or rights for the support of the government in return for the general advantages and protections which the government affords the taxpayers, their protections and rights. - “Where there is no benefit, there is no power to tax .” - Reciprocal duties of protection and support between the state and those that are subject to its authority (symbiotic relationship between the state and its citizen). Purposes of Taxation 1. To raise revenues for the use and support of the government to enable it to carry out its appropriate functions 2. It is a means to contend or promote the general welfare, social and economic development of a country and its people Scope of Taxation (CUPS) 1. Comprehensive 2. Unlimited – without restrictions, except constitutional 3. Plenary – whole power 4. Supreme – strongest inherent power Nature of Tax Laws/Internal Revenue Laws Civil in nature Not political or penal (although there are penalties for violations) Tax laws remain even if the government changes. National Internal Revenue Code (a special law) prevails over a general law.
Construction of Tax Laws
PHILIPPINE LAWS ON INCOME TAXATION
Construed strictly against the government and liberally in favor of the taxpayer „Tax Exemptions & Deductions‟ – construed strictly against the taxpayer asserting the claims for exemptions/deductions (there is loss of revenue against the government) Construed as to include the power to destroy (imposing higher taxes on sin products and on imported goods)
Applications of Tax Laws Prospective in operation May operate retroactively, if expressly declared or it is the legislative intent.
Basic Principles of a Sound Tax System (FAT) 1. Fiscal Adequacy - Sources of revenues must be adequate to meet the expenditures of the government regardless of business or economic conditions. 2. Administrative Feasibility - Capable of reasonable and convenient enforcement, just and effective administration. 3. Theoretical Justice / Equality - Tax burden shall be shouldered by those who have the ability to pay. - There must be an equitable or proportionate distribution of tax burden Tax
Enforced burden or mandatory contribution imposed by the government based on its power of taxation, upon persons, properties, or rights. Tax is the bread and butter or the lifeblood of the government hence, no court shall be empowered to interfere with or restrain the collections of taxes.
Essential Characteristics of Tax 1. Enforced contribution 2. Legislative in nature 3. In accordance with/based on law 4. For public purpose 5. Proportionate in character 6. Pecuniary in character/payment in kind 7. Paid at regular intervals
8. Imposed upon persons, properties, or rights 9. To raise government revenues Classifications of Taxes 1. As to Subject Matter a. Personal ax / Capitation Tax / Poll Tax - Fixed amount of taxes, regardless of property, professions, or occupations. - e.g., Community Tax b. Property Tax - Imposed on taxpayer‟s property (real or personal), situated within the territorial jurisdiction of the state - e.g., Real Property/Estate Tax c. Excise Tax / Privilege Tax - Imposed on taxpayer‟s exercising of rights and privileges of performing an act or engaging in an occupation - e.g., Donor‟s Tax, Income Tax 2. As to Scope or Authority a. National Tax - Imposed by the national government, enforced by the BIR, or Bureau of Customs, under the Dept. of Finance - e.g., Corporate Income Tax, Customs duties, Tariffs b. Local Tax - Imposed by the local government (barangays, cities, municipalities, or provinces) - e.g., Real Estate Tax, Community Tax 3. As to Purpose a. General Tax - For general purposes, which go to the national/general funds - e.g., Estate Tax b. Special Tax - Imposed for a special purpose, which go to certain special funds - e.g., Gasoline Tax, Flood Tax 4. As to Liabilities a. Direct Tax - Cannot be passed on or shifted to other persons for payment - e.g., Income Taxes
PHILIPPINE LAWS ON INCOME TAXATION b. Indirect Tax - Permitted by law to be shifted or passed on to other persons for payment - e.g., Value Added Tax 5. As to Determination of Amounts a. Specific Tax - Determined based on weight or volume capacity or any physical unit of measurements - e.g., Excise Tax on liquors and cigarettes b. Ad Valorem Tax - “According to Value” - Amounts are determined based on the sales price or other specified values of the property - e.g., Value Added Tax (12%) 6. As to Graduation or Rates a. Progressive/Graduated Tax - Amount of taxes increase as the bracket/layer increases - e.g., Gift Tax, Estate Tax b. Regressive Tax - Amount of tax decreases as the bracket/layer increases - NO REGRESSIVE TAX in the Philippines c. Proportionate Tax / Flat Tax - Amount of tax may be higher or lower depending upon the bracket Distinctions between Tax and License Fee License - payment require to exercise a certain right, e.g., Driver‟s License
unless business is legally registered) Distinction between Tax and Toll Toll - the compensation charged by the owner for the use of his property and improvements, e.g., Toll Fee
TAX Demand of sovereignty (pursuant to political authority) Government-imposed To raise revenues for the support and use of the government
Distinction between Tax and Special Assessment Special Assessment (BELL) - local imposition upon property in the immediate vicinity of municipal improvements, predicated upon the theory of benefits from such improvements, e.g., drainage system - Benefits - Exceptional as to time & place - Levied on Land only - Liability of a person assessed (not)
TAX TAX For the purpose of raising revenues Based on the Power of Taxation Direct authority from Congress levies a tax Generally no limit to the amount collectible Failure to pay does not render the business / occupation illegal (Taxes cannot be collected
LICENSE For the purpose of regulation Based on the Police Power License fee is imposed under a delegated power to the local government Enough only to cover the cost of services or regulation Failure to pay renders the business / occupation illegal
TOLL Demand of proprietorship (pursuant to right of ownership) Imposed by the government or private persons To recover the cost of property and its improvements
Imposed upon persons, properties, or rights Imposed by national or local government Enforced contribution for the use and support of the government Ordinary and general
SPECIAL ASSESSMENT Imposed only on land and its improvements Imposed only by local government Enforced contribution to recover the cost of the public improvements Extra-ordinary and situational as to time and locality
Distinction between Tax and Customs Duties
PHILIPPINE LAWS ON INCOME TAXATION TAX Not all taxes are customs duties Imposed upon persons, properties, or rights
CUSTOMS DUTIES All customs duties are taxes Imposed only upon articles imported to or exported from the country
Distinction between Tax and Debt TAX Based on law Non-assignable Generally payable in terms of money
In case of non-payment, there is a possibility of imprisonment May not be subject to the right of offset
DEBT Based on contract Assignable Payment is in terms of money or property ( Dacion en Pago payment of movable or immovable property) In case of non-payment, there is no possibility of imprisonment (unless criminal or fraudulent) May be subject to offset (Compensatio Morae)
Tax Situs / Place of Taxation 1. Persons - Inhabitants or residents of the state, whether citizens or not 2. Real Property - State in which it is located, whether owner is a resident or non-resident 3. Tangible Personal Property - Wherever property is located (?) 4. Intangible Personal Property - Domicile of the owner 5. Income - From persons who are residents or citizens in the taxing jurisdiction 6. Business, Occupation, and Transaction - Place where business was conducted 7. Gratuitous Transfer of Property - based on citizenship, residency, location Phases or Aspects of Taxation 1. Levying / Imposition of Tax - Legislative process - determining the persons, properties, transactions, or rights to be taxed
- determining the purpose of said tax (as long as for public purpose) - sum to be raise - Tax rate to be implied 2. Assessment and Collections of Tax - Administrative process - vested in Department of Finance, thru BIR, Bureau of Customs, and LGUs International Comity Fundamental rule of taxation that no law shall be passed to impose taxation on the property owned by a foreign government or sovereignty. Categories of Double Taxation Double Taxation - act of taxing the same taxpayer twice by the same kind and character of tax, by the same taxing authority, for the same purpose and during the same taxable period 1. Direct Double Taxation - direct act of taxing the same taxpayer twice during the same period - NOT ALLOWED 2. Indirect Double Taxation - A burden of two or more pecuniary impositions
There is no constitutional limitation on double taxation. It is merely subject to the inherent limitation, hence it is not prohibited legally speaking Classification of Tax Escapes 1. Tax Credit - payments made directly by the taxpayer through withholding agents 2. Tax Exemption - grant of immunity (express or implied) 3. Tax Evasion / Tax Dodging - fraudulent act of using pretenses or forbidden devices to lessen the tax liability - understate income, overstate expenses 4. Tax Avoidance - Legitimate means [permitted by laws to minimize / avoid one‟s tax liability 5. Tax Shifting - Legitimately passing one‟s tax liability for payment to other persons in accordance with provisions on tax laws
