What is Taxation?

- Taxation may be defined as a State power, Legislative process, and a mode of

government cost distribution

• As a State power- Taxation is an inherent power of the state to enforce a proportional contribution from
its subjects for public purpose.

• As a process- Taxation is a process of levying taxes by the legislature of the

state to enforce proportional contributions from its subjects for public purposes.

• 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 from its spending.

Government provides a vast array of public services including:

Theory of Taxation

• Defense • Public order and safety

• Health • Education • Social Protection

However, a Government cannot exist without a system funding. The government's necessity for funding is
the Theory of taxation

Basis of Taxation

This mutuality is illustrated as follows:

* government * public purposes

* people *taxes

Theories of Cost allocation

- Taxation is a mode of allocating government costs or burdens, to the people distributing costs or
burdens, the government regards the following general considerations in the exercise of its taxation
power:

• Benefit received theory- The benefit received theory presupposes that the more benefits one receive
from the government, the more taxes he should pay.

• Ability to pay theory- The Ability to pay theory presupposes that 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.

Aspects of the Ability to Pay Theory

[Link] equity - Vertical equity proposes that the extent of one's ability to pay is directly proportional to
the level of his tax base.- the person who has great income should pay more tax.

[Link] equity - Horizontal equity requires consideration of the particular circumstance of the
taxpayer.- the person has lesser expenses should pay more tax.

* Vertical equity is a GROSS CONCEPT while Horizontal equity is a NET CONCEPT

The Lifeblood doctrine

Taxes are the lifeblood of the government.

Implications 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

• Government reserves the right to choose the objects of taxation.

• The court is not allowed to interfere with the collection of taxes

• In income taxation

Inherent powers of the state

A government has its basic needs and rights which co-exist with its creation. It has rights to sustenance,
protection, and properties.

The inherent power of the state

1. Taxation power- Is the power of the state to enforce proportional contribute from its subjects to sustain
itself

2. Police power- Is the general power of the state to enact laws to protect well being of the people.

3. Eminent domain- Is the power of the state to take private property for public use after paying just
compensation.

SCOPE OF THE TAXATION POWER

The scope of the taxation is widely regarded as comprehensive, plenary, unlimited and supreme.
However, despite the seemingly unlimited nature of taxation, it is not absolutely unlimited. Taxation has its
own inherent limitations and limitations imposed by the constitution.

THE LIMITATIONS OF THE TAXATION POWER

A. Inherent limitations

1. Territoriality of taxation 2. International comity 3. Public purpose

4. Exemption of the government 5. Non-delegation of the taxing power

B. Constitutional limitations

1. Due process of law 2. Equal protection of law 3. Uniformity rule in taxation

4. Progressive system of taxation 5. Non-imprisonment for non-payment of debt or poll tax

6. Non-impairment of obligation and contract 7. Free worship rule

INHERENT LIMITATIONS OF THE TAXATION

Territoriality of taxation

Two-fold obligations of taxpayers:

1. Filing of returns and payment of taxes

2. Witholding of taxes on expenses and its remittance to the government

These obligations can only be demanded and enforced by the Philippine government upon its citizens
and residents.

International Comity

No coutry is powerful than the other. It is by this principle that each country

observes international comity or mutual courtesy or reciprocity between

them. Hence,

1. Goverment do not tax the income and properties of the other governments

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

Public purpose

Tax is intended for the common good. Taxation must be exercised absolutely fo: public purpose. It cannot
be exercised to further any private interest.

Exemption of the government

The taxation power is broad. The government can exercise the power upor anything including itself.
However, the government normally does not tax itself as this will not raise additional funds but will only
impute additional costs.

Non-delegation of the taxing power

The legislative taxing power is vested exclusively in Congress and is non delegable, pursuant to the
doctrine of separation of the branches of the government to ensure a system of checks and balances.

CONSTITUTIONAL LIMITATIONS OF TAXATION

Observance of due process of law

No one should be deprived of his life, liberty, or property without due process o law. Tax laws should
neither be harsh nor oppressive.

Aspects of Due Process

1. 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.

2. Procedural due process- There should be no arbitrariness in assessment and collection of taxes, and
the government shall observe the taxpayer's right to notice and hearing.

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.

Uniformity rule in taxation

The rule of taxation shall be uniform and equitable. Taxpayers under dissimilar circumstances should not
be taxed the same. Each class is taxed differently, but taxpayers falling under the same class are taxed
the same. Hence, uniformity is relative equality.

Progressive system of taxation

Congress shall evolve a progressive system of taxation. Under the progressive system, tax rates increase
as the tax base increases. Moreover, the progressive system aids in an equitable distribution of wealth to
society by taxing the rich more than the poor.

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

As a policy, no one shall be imprisoned because of his poverty, and no one shall te imprisoned for mere
inability to pay debt.

However, this Constitutional guarantee 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 demand of sovereignty. It is distinguished from debt which arises from private
contracts. The nonpayment of tax is similar to a crime. The Constitutional guarantee on non-imprisonment
for non-payment of debt does not extend to non-payment of tax, except poll tax.

Poll tax has two components:

1. Basic community tax 2. Additional community tax

The constitutional guarantee of non-imprisonment for non-payment of poll tax applies only to the basic
community tax. Non-payment of the additional community tax is an act of tax evasion punishable by
imprisonment.

Non-impairment of obligation and contract

The State should set an example of good faith among its constituents. It should not set aside its
obligations from contracts by the exercise of its taxation power.

Free worship rule

The Philippine government adopts free exercise of religion and does not subject its exercise to taxation.
Consequently, the properties and revenues of religious institutions such as tithes or offerings are not
subject to tax

Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosques,
lands, buildings, and improvements from property taxes

Introduction to Taxation

Vague exemption laws Vague tax exemption laws are construed against the taxpayer and in favor of the
government. A vague tax exemption law means no exemption law. The right of taxation is inherent to the
State. It is a prerogative essential to the perpetuity of the government. Tax exemption cannot arise from
vague inference. Tax exemption must be clear and unequivocal. A taxpayer claiming a tax exemption
must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption
from a common burden.

DOUBLE TAXATION

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.

Types of Double Taxation

Direct double taxation- This occurs when all the element of double taxation exists for both impositions.

Indirect double taxation- This occurs when at least one of the secondary elements of double taxation is
not common for both impositions.

Nothing in our law expressly prohibits double taxation. In fact, indirect double taxation is prevalent in
practice. However, direct double taxation is discouraged because it is oppressive and burdensome to
taxpayers

How can double taxation be minimized?

The impact of double taxation can be minimized by any one or a combination of the following:

a. Provision of tax exemption only one tax law is allowed to apply to the tax object while the other tax
law exempts the same tax object.

b. Allowing foreign tax credit - both tax laws of the domestic country and a foreign country tax the tax
object, but the tax payments made in the foreign tax law are deductible against the tax due of the
domestic tax law.

c. Allowing reciprocal tax treatment - provisions in tax laws imposing a reduced tax rates or even
exemption if the country of the foreign taxpayer also gives the same treatment to Filipino non-residents
therein.

d. Entering into treaties or bilateral agreements - countries may stipulate for a lower tax rates for their
residents if they engage in transactions that are taxable by both of them.

ESCAPES FROM TAXATION

Escapes from taxation are the means available to the taxpayer to limit or even avoid the impact of
taxation.

Categories of Escapes from Taxation

A. Those that result to loss of government revenue

1. Tax evasion, also known as tax dodging, refers to any act or trick that tends to illegally reduce or avoid
the payment of tax.

2. Tax avoidance, also known as tax minimization, refers to any act or trick that reduces or totally
escapes taxes by any legally permissible means.

3. Tax exemption, also known as tax holiday, refers to the immunity, privilege or freedom from being
subject to a tax which others are subject to. Tax exemptions may be granted by the Constitution, law, or
contract.

B. Those that do not result to loss of government revenue

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

Forms of shifting

a. Forward shifting -This is the shifting of tax which follows the normal flow of distribution Forward
shifting is common with essential commodities and services such as food and fuel

b. Backward shifting - This is the reverse of forward shifting. Backward shifting is common with non-
essential commodities where buyers have considerable market power and commodities with numerou
substitute products.

c. Onward shifting - This refers to any tax shifting in the distribution channel that exhibits forward shifting
or backward shifting.

2. Capitalization - This pertains to the adjustment of the value of an asset caused by changes in tax
rates.

3. Transformation - This pertains to the elimination of wastes or losses by the taxpayer to form savings
to compensate for the tax imposition or increase in taxes.

Tax Amnesty

Amnesty is a general pardon granted by the government for erring taxpayers to give them a chance to
reform and enable them to have a fresh start to be part of a society with a clean slate. It is an absolute
forgiveness or waiver by the government on its right to collect and is retrospective in application.

Tax Condonation

Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds.
This is also referred to as tax remission.

Tax Amnesty vs. Tax Condonation

Amnesty covers both civil and criminal liabilities, but condonation covers only civil liabilities of the
taxpayer. Amnesty operates retrospectively by forgiving past violations. Condonation applies
prospectively to any unpaid balance of the tax; hence, the portion already paid by the taxpayer will not be
refunded.

TAXES, TAX LAWS, AND TAX ADMINISTRATION

Taxation Law- Refers to any law that arises from the exercise of the taxation power of the State.

Types of Taxation Laws

TAX LAWS- Provide for assessment and collection of taxes.

Examples:

1. The National Internal Reveneu Code 2. The Tariff anf Customs Code

3. The Local Tax Code 4. The Real Property Tax Code

TAX EXEMPTION LAWS- A law that grant certain immunity from taxation.

Examples:

1. The Minimum Wage Law [Link] Omnibus Investment Code of 1987

3. Barangay Micro-Business Enterprise [Link] Development Act

Sources of Taxation Laws

Constitution Statutes and Presidential Decrees

Judicial Decisions or Case Laws Executive Orders and Batas Pambansa

Administrative Issuances Local Ordinances

Tax Treaties and Conventions with Foreign Countries Revenue Regulations

Types of Administrative Issuance

REVENUE REGULATION

Revenue Regulations are issuances signed by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue (CIR) that specif prescribe, or define rules and regulations for the
effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related
statutes.

2. REVENUE MEMORANDUM ORDERS (RMOS) - Revenue Memorandum Orders (RMOs) are

issuances that provide directives instructions; prescribe guidelines; and outline processes, operations,
activities workflows, methods, and procedures necessary in the implementation of state policies, goals,
objectives, plans, and programs of the Bureau in all areas of operation except auditing.

3. REVENUE MEMORANDUM RULINGS (RMRS) - Revenue Memorandum Rulings (RMRs) are rulings,
opinions and interpretations of th CIR with respect to the provisions of the Tax Code and other tax laws as
applied to specific set of facts, with or without established precedents, and which the CIR ma issue from
time to time for the purpose of providing taxpayers guidance on the t consequences in specific situations.

4. REVENUE MEMORANDUM CIRCULARS (RMCS)- Revenue Memorandum Circulars (RMCs) are

issuances that publish_pertinent ar applicable portions as well as amplifications of laws, rules,
regulations, and precedent issued by the BIR and other agencies/offices.

5. REVENUE BULLETINS (RB) - Revenue Bulletins (RB) refer to periodic issuances, notices, and official
announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal
Revenue's position on certain specific issues of law or administration in relation to the provisions of the
Tax Code, relevant tax laws, and other issuances for the guidance of the public.

6. BIR RULINGS - BIR Rulings are official positions of the Bureau to queries raised by taxpayers and
other stakeholders relative to clarification and interpretation of tax laws.

Rulings - are merly advisory or a sort of information service to the taxpayer such that none of them is
binding except to the addressee and may be reversed by the BIR at anytime.

Types of Rulings

[Link] Added Tax (VAT) rulings 2. International Tax Affairs Division (ITAD) rulings

3. BiR rulings 4. Delegated Authority (DA) rulings

Generally Accepted Accounting P rinciples (GAAP) vs. Tax Laws

Generaly accepted accounting principles or GAAP are not laws, but are mere conventions of finan cial
reporting, They are benchmarks for the fair and relevant valuation and recognition of income, expense,
assets, liabilities, and equity of a reporting entity for general purpose financial reporting.

Tax laws including rules, regulations, and rulings prescribe the criteria for tax reportng a special form of
financial reporting which is intended to meet specific needs of tax authorites.

NATURE OF PHILIPPINE TAX LAWS

Philippine tax laws are civil and not political in nature. They are effective even during periods of enemy
occupation. Tax payments made during occupations of foreign enemies are valid.

Our intemal revenue laws are not penal in nature because they do not define crime. Their -penalty
provision s are merely intended t secure taxpayers' compliance.

Tax- Tax is an enforced proportional contribution levied by the lawmaking body of the State to raise
revenue for public purpose.

Element of Valid Tax

1. Tax must be levied by the taxing power having jurisdiction over the object of taxation.

2. Tax must not violate Constitutional and inherent limitations.

3. Tax must be uniform and equitable.

4. Tax must be for public purpose.

5. Tax must be proportional in character.

6. Tax is generally payable in money

Classification of Taxes

A. As to purpose

1. Fiscal or revenue tax - a tax imposed for general purpose

2. Regulatory - a tax imposed to regulate business, conduct, acts or transactions

3. Sumptuary - a tax levied to achieve some social or economic objectives

B. As to subject matter

1. Personal, poll or capitation - a tax on persons who are residents of a particular territory

2. Property tax - a tax on properties, real or personal

3. Excise or privilege tax - a tax imposed upon the performance of an act, enjoyment of a privilege or
engagement in an occupation

C. As to incidence

1. Direct tax - When both the impact and incidence of taxation rest upon the same taxpayer, the tax is
said to be direct. The tax is collected from the person who is intended to pay the same.

2. Indirect tax - When the tax is paid by any person other than the one who is intended to pay the same,
the tax is said to be indirect.

D. As to amount

[Link] tax - a tax of a fixed amount imposed on a per unit basis such a per kilo, liter or meter, etc.

[Link] valorem - a tax of a fixed proportion imposed upon the value of the tax object

E. As to rate

1. Proportional tax - This is a flat or fixed rate tax. The use of proportional tax emphasizes equality as it
subjects all taxpayers with the same rate without regard to their ability to pay.

2. Progressive or graduated tax - This is a tax which imposes increasing rates as the tax base increase.
It aids in lessening the gap between the rich and the poor.

3. Regressive tax - This tax imposes decreasing tax rates as the tax base increase. This is the total
reverse of progressive tax. Regressive tax is regarded as anti-poor.

4. Mixed tax - This tax manifest tax rates which is a combination of any of the above types of tax.

F. As to imposing authority

1. National tax - tax imposed by the national government

Examples

a. Income tax b. Estate tax C. Donor's tax d. Value Added Tax

e. Other percentage tax f. Excise tax g. Documentary stamp tax