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INTRODUCTION TO TAXATION
INTRODUCTION
This chapter discusses the fundamental principles of taxation.
After this chapter, readers must be able to comprehend and demonstrate
mastery of the following:
1. Concept of taxation and its necessity for every government
2. Lifeblood doctrine and its implication to taxation
3. Theories of government cost allocation
4. Inherent power of the State
5. Scope of the taxation power
6. Limitations of the taxation power
7. Stages of taxation
8. Concept of situs in taxation
9. Fundamental principles surrounding taxation
10. Various escapes from taxation
11. Concept of tax amnesty and condonation
What is Taxation?
Taxation may be defined as a State power, a legislative process, and a mode of
government cost distribution.
1. As a state power
Taxation is an inherent power of the State to enforce a proportional contribution
from its subjects for public purpose.
2. 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 purpose.
3. 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.
In short, those who have more should be taxed more even if they benefit less
from the government. Those who have less shall contribute less even if they receive
more of the benefits from the government.
Horizontal equity
Horizontal equity requires consideration of the particular circumstance of the
taxpayer.
For example, Businessmen A and B both have P300,000 income. A
incurred P200,000 in business expenses while B incurred only P50,000 business
expenses. The government should tax B more than A because he has lesser
expenses and thus greater capacity to contribute taxes.
Taxes are the lifeblood of the government, and their prompt and certain
availability are an imperious need. Upon taxation depends on the government's ability to
serve the people for whose benefit taxes are collected. (Vera vs. Fernandez)
These rights, dubbed as "powers" are natural, inseparable, and inherent to every
government. No government can sustain or effectively operate without these powers.
Therefore, the exercise of these powers by the government is presumed understood
and acknowledged by the people from the very moment they establish their
government. These powers are naturally exercisable by the government even in the
absence of an express grant of power in the Constitution.
B. Constitutional Limitations
1. Due process of law
2. Equal protection of the 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
8. Exemption of religious or charitable entities, non-profit cemeteries,
churches and mosque from property taxes
9. Non-appropriation of public funds or property for the benefit of any church,
sect or system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions
11. Concurrence of a majority of all members of Congress for the passage of
a law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax
cases
15. The requirement that appropriations, revenue, or tariff bills shall originate
exclusively in the House of Representatives
16. The delegation of taxing power to local government units
ASPECTS OF TAXATION
1. Levying or imposition of tax
2. Assessment and collection of tax
Levy or imposition
This process involves the enactment of a tax law by Congress and is called
impact of taxation. It is also referred to as the legislative act in taxation.
As mandated by the Constitution, tax bills must originate from the House of
Representatives. Each may, however, have their own versions of a proposed law which
is approved by both bodies, but tax bills cannot originate exclusively from the Senate.
SITUS OF TAXATION
Situs 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.
Illustration
A taxpayer is involved in car dealership abroad and restaurant operation in the
Philippines.
The restaurant business will be subject to business tax in the Philippines
since the business is conducted herein, but the car dealing business is
exempt because the business is conducted abroad.
2. Income tax situs on services: Service fees are subject to tax where they are
rendered.
Illustration
A foreign corporation leases a residential space to a non-resident Filipino citizen
abroad.
The rent income will be exempt from Philippine taxation as the leasing
service is rendered abroad.
3. Income tax situs on sale of goods: The gain on sale is subject to tax in the
place of sale
Illustration
While in China, a non-resident OFW citizen agreed with a Chinese friend to sell
his diamond necklace to the latter. They stipulated that the delivery of the item
and the payment will be made a week later in the Philippines. The sale was
consummated as agreed.
The contract of sale is consensual and is perfected by the meeting of the
minds of the contracting parties. The perfection of the contract of sale is in
China. The situs of taxation is China. The gain on the sale of the necklace
will be taxable abroad and exempt in the Philippines.
Illustration
An overseas Filipino worker has a residential lot in the Philippines.
He will still pay real property tax despite his absence in the Philippines
because his property is located herein.
Illustration
Ahmed Lofti is a Sudanese studying medicine in the Philippines.
Ahmed will pay personal tax in the Philippines even if he is an alien
because he is residing in the Philippines.
2. 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.
While the Marshall Doctrine and the Holme's Doctrine appear to contradict each
other, both are actually employed in practice. A good manifestation of the
Marshall Doctrine is the imposition of excessive tax on cigarettes while
applications of the Holme's Doctrine include the creation of Ecozones with tax
holidays and provision of incentives, such as the Omnibus Investment Code
(E.O. 226) and the Barangay Micro-Business Enterprise (BMBE) Law.
4. 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. Tax is not a debt; hence, it is not subject to set-off.
This rule is important to allow the government sufficient period to evaluate the
validity of the claim. (See Philex Mining Corporation vs. CIR, G.R. 125704)
Exceptions:
a. Where the taxpayer's claim has already become due and demandable such as
when the government already recognized the same and an appropriation for
refund was made
b. Cases of obvious overpayment of taxes
c. Local taxes
5. 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.
6. 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.
Under the NIRC, tax prescribes if not collected within 5 years from the date of its
assessment. In the absence of an assessment, tax prescribes if not collected by
judicial action within 3 years from the date the return is required to be filed.
However, taxes due from taxpayers who did not file a return or those who filed
fraudulent returns do not prescribe.
7. Doctrine of estoppel
Under the doctrine of estoppel, any misrepresentation made by one party toward
another who relied therein in good faith will be held true and binding against that
person who made the misrepresentation.
8. Judicial Non-interference
Generally, courts are not allowed to issue injunction against the government's
pursuit to collect tax as this would unnecessarily defer tax collection. This rule is
anchored on the Lifeblood Doctrine.
When the language of the law is clear and categorical, there is no room for
interpretation. There is only room for application. However, when taxation laws
are vague, the doctrine of strict legal construction is observed.
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. Any doubt whether a tax exemption exists is resolved
against the taxpayer. (see Digital Telecommunications, Inc. vs. City Government
of Batangas, et al)
DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax
jurisdiction for the same thing.
Examples:
a. An income tax of 10% on monthly sales and a 2% income tax on the annual
sales (total of monthly sales)
b. A 5% tax on bank reserve deficiency and another 1% penalty per day as a
consequence of such reserve deficiency
Examples:
a. The national government levies business tax on the sales or gross receipts of
business while the local government levies business tax upon the same sales or
receipts.
b. The national government collects income tax from a taxpayer on his income
while the local government collects community tax upon the same income.
c. The Philippine government taxes foreign income of domestic corporations and
resident citizens while a foreign government also taxes the same income
(international double taxation).
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. It is also believed to
counter the rule of equal protection and uniformity in the Constitution.
Examples:
a. This can be achieved by gross understatement of income, non-declaration of
income, overstatement of expenses or tax credit.
b. Misrepresenting the nature or amount of transaction to take advantage of lower
taxes.
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.
Examples:
a. Selection and execution of transaction that would expose taxpayer to lower
taxes.
b. Maximizing tax options, tax carry-overs or tax credits
c. Careful tax planning
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.
All forms of tax exemptions can be revoked by Congress except those granted by
the Constitution and those granted under contracts.
c. Onward shifting - This refers to any tax shifting in the distribution channel
that exhibits forward shifting or backward shifting.
For instance, the value of a mining property will correspondingly decrease when
mining output is subjected to higher taxes. This is a form of backward shifting of
tax.
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.
Because they deprive the government of revenues, tax exemption, tax refund,
tax amnesty, and tax condonation are construed against the taxpayer and in favor of the
government.
Amnesty is also conditional upon the taxpayer paying the government a portion
of the tax whereas condonation requires no payment.
Reference:
Banggawan, R. B. (2021), Income Taxation Laws Principles and Applications
Bureau of Internal Revenue, https://www.bir.gov.ph/index.php/tax-
information/income-tax.html