Income Taxation: (Keynotes) : Nature of The POWER of Taxation

Income Taxation:
(keynotes)
Nature of the POWER of Taxation

1. Inherent in sovereignty
2. Essentially a legislative function
the power to tax is pecularly and exclusively LEGISLATIVE
and cannot be exercised by the executive and judicial branch of the govt.
3. Subject to constitutional and inherent limitations.
provided by fundamental law or implied.
Scope of TAXATION
a. SUPREME
b. UNLIMITED
c. PLENARY
d. COMPREHENSIVE
EXTENT OF THE LEGISLATIVE POWER TO TAX

1. Subjects or objects being taxed.
*the power to tax carries with it the power to grant exemption therefrom.
2. purpose or object of the tax so long as it is a public purpose.
3. The amount or rate of the tax.
*if the taxes are oppressive or unjust, the only remedy is the ballot box
and the election of new reppresentatives.
*"the power to tax involves the power to destroy"
-not the purposes for which the taxing power may be used
-but the extent to which it maybe employed in order to raise revenues.
*Constitutions mandates "The rule of taxation shall be uniform and equitable"
-Supreme Court once said:
"The POWER of TAXATION is sometimes called also the power to DESTROY. Therefore,
it should be exercised with CAUTION to minimize injury to the propriety rights
of the taxpayer. It must be exercised FAIRLY, EQUALLY, and UNIFORMLY."
=lest the tax collector kills the hen that lays the golden eggs'=
And in order to maintain the general public's trust and confidence in the
government, this power must be used justly and not treacherously.
4. The manner, means, and agencies of collection of the tax.
ESSENTIAL CHARACTERISTICS OF TAX

1.Enforced Contributions. - not dependent upon the will or assent of the person being taxed.
2.Payable in the form of MONEY.
3.Proportionate in character - based on ability to pay.
4.Levied on persons,property,rights,acts,priveleges, or transactions.
5.Levied by the STATE - has jurisdiction or control over the subject to be taxed.
6.Levied by the LAW-MAKING Body of the STATE. - Legislative Body
7.It is levied for public purpose.
*A tax levied for a private purpose constitutes a taking of property WITHOUT due process of law.
*It is also an important characteristics of most taxes that they are commonly required to be paid
at regular periods or intervals EVERY YEAR.
*NON IMPAIRMENT CLAUSE

" No LAW Impairing the obligation of contracts shall be passed"
-purpose of the non-impairment clause is to safeguard the integrity of contract against unwarranted
interference
by the STATE.
-there is impairment if a subsequent law changes the terms of a contract between the parties, imposes
new conditions,
dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the
parties. It is
anything that dimishes the efficacy of the contract.
PURPOSE OF TAXATION
Revenue Raising
-provide funds or property -> to promote the general welfare and protection of its citizens
*if the purpose is primarily revenue = TAX
NON Revenue/Special or Regulatory
-also known as Sumptuary.
1.Strengthen anemic enterprises or provide incentive to greater production through grant of tax
exemptions.
2.Protect local industries against foreign competition - by imposing additional taxes on imported goods.
or encourage foreign trade by providing tax incentives.
3.Be a bargaining tool - by setting tariff rates @ relatively high level.
4.Halt inflation- to curb spending power and ward off depression in periods of slump to expand
business.
5.Reduce inequalities in wealth and incomes.
6.Promote Science and invention; Finance educational activities; improve the efficiency of local police
forces.
7.Trigger for the implementation of police power to promote general welfare.
*As long as tax is for public purpose, its validity is not affected by collateral puposes or motives.
PRINCIPLES OF SOUND TAX SYSTEM

1.Fiscal Adequacy
revenue = variations of expenditure.
revenue should be elastic!
2.Administrative Feasibility
capable of uniform enforcement by government officials,convenient as to time, place and manner of
payment.
should be convenient, just and effective administrations.
3.Theoretical justice or equality
tax burden should be in proportion to the taxpayer's ability to pay (ABILITY TO PAY PRINCIPLE)
THEORY AND BASIS OF TAXATION

1. Life Blood Theory
Taxes are the lifeblood of the government and their prompt and certain availability is an IMPERIOUS
NEED!
2. Necessity Theory
Existence of the Government is a NECESSITY ->cannot continue without means to pay its EXPENSES.
It has the right to COMPEL ALL CITIZENS and PROPERTY within its limits to contribute.
For this reason, no one is allowed to object to or resist the payment of taxes solely.
3.Benefits-Protection Theory (symbiotic relationship)
Reciprocal duties of protection and support between the STATE and its INHABITANTS
*This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is
an arbitrary method of exaction
by those in the seat of power.
DOCTRINES OF TAXATION
PROSPECTIVITY OF TAX LAWS
tax laws are prospective in operation.
It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is provided.
the language of the statute must clearly demand or press that it shall have a retroactive effect.
NON-RETROACTIVITY IN RULINGS
GENERAL RULE: Any Revocation, modification or reversal of rules and regulations; rulings or circulars
promulgated by CIR
that is prejudicial to the taxpayer, shall NOT be given retroactive effects.
Exceptions:
1.misstatements return or any required doc of him by BIR.
2.facts subsequently gathered by BIR are MATERIALLY different from facts on which the ruling is based
i.e OR
3.Where the taxpayer acted in bad faith.
Imprescriptibility.
Unless otherwise provided by the tax itself, TAXES are imprescriptible.
Prescriptions found in Statutes

1.National Internal Revenue Code.
statute of limitations in the assessment and collection of taxes therein imposed.
2.Tariff and Custom Codes
3.Local Government Code
prescribes prescriptive periods for the assessment (5 years) and collection (5 years) of taxes.
DOUBLE TAXATION
Means taxing twice the same taxpayer for the same tax period upon the same thing or activity, when it
should be taxed but once,
for the same purpose and with the same kind of character of tax.
Double taxation, standing alone and not being forbidden by our fundamental law, is not a valid defense
against the legality of a tax measure
But from it might emanate such defenses against taxation as oppressiveness and inequality of the tax.
Double taxation in its narrow sense is undoubtedly unconstitutional but that in the broader sense is not
necessarily so.
Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the uniformity
rule or the equal protection guarantee.
MODES OF ELIMINATING DOUBLE TAXATION

1) Allowing reciprocal exemption either by law or by treaty;
2) Allowance of tax credit for foreign taxes paid.
3) Allowance of deductions such as for foreign taxes paid, and vanishing deductions in estate tax.
4) Reduction of Philippine tax rate.
ESCAPE FROM TAXATION

Shifting of tax burden
SHIFTING --
the transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or
imposed to someone else.
What is transferred is not the payment of the tax but the burden of the tax.
All indirect taxes may be shifted; direct taxes cannot be shifted.
WAYS OF SHIFTING TAX BURDEN

1. Forward Shifting --
Producer/Manufacrurer = Tax burden -> Distributors -> Consumer/Customer
2. Backward Shifting --
Producer/Manufacrurer <- Distributors <- TAX BURDEN = Consumer/Customer
3.Onward Shifting-When the tax is shifted two or more times either forward or backward.
IMPACT OF Taxation
is the point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer, the
subject of tax,
is the person who must pay the tax to the government.
INCIDENCE of Taxation
is that point on which the tax burden finally rests or settles down. It takes place when shifting has been
effected from the statutory taxpayer to another.
Relationship between Impact, Shifting, and Incidence of a Tax

The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the
result. Impact is the imposition of the tax;
shifting is the transfer of the tax; while incidence is the setting or coming to rest of the tax. (e.g impact
in a sales tax
is on the seller who shifts the burden to the customer who finally bears the incidence of the tax)
Tax avoidance (Tax Minimization)

The exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing
taxable property or income in order
to avoid or reduce tax liability. It is politely called “tax minimization” and is not punishable by law.
TRANSFORMATION
method of escape in taxation whereby the manufacturer or producer upon whom the tax has been
imposed pays the tax and endeavors to recoup himself
by improving his process of production thereby turning out his units of products at a lower cost.
The taxpayer escapes by a transformation of the tax into a gain through the medium of production.
Tax evasion (Tax Dodging)

Tax Evasion
is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of a tax. It is also known as “tax dodging.” It is punishable by law.
COMPROMISE
A contract whereby the parties, by making reciprocal concessions avoid litigation or put an end to one
already commenced. (Art. 2028, Civil Code).
It involves a reduction of the taxpayer’s liability.
Requisites of a tax compromise: (a) The taxpayer must have a tax liability. (b) There must be an offer (by
the taxpayer or Commissioner) of an amount to be paid by the taxpayer.
(c) There must be acceptance (by the Commissioner or the taxpayer, as the case may be) of the offer in
settlement of the original claim.
TAX AMNESTY
partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise
would be due it
and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing
to reform a
chance to do so and become a part of the new society with a clean slate.
Distinguished from tax exemption

Tax amnesty
is immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general
pardon given to all taxpayers.
It applies to past tax periods, hence of retroactive application.
Tax exemption
is an immunity from all civil liability only. It is an immunity or privilege, a freedom from a charge or
burden of which others are subjected.
It is generally prospective in application.
TAX is the rule, exemption is the exception.

NOTE:
Administrative rules and regulations must always be in harmony with the provisions of the law. In case
of conflict with the law or the Constitution,
the administrative rules and regulations are null and void. As a matter of policy, however, courts will
declare a regulation or provision thereof
invalid only when the conflict with the law is clear and unequivocal.
SCOPE AND LIMITATIONS OF TAXATION

Inherent Limitations
Territoriality
Rule: A state may not tax property lying outside its borders or lay an excise or privilege tax upon the
exercise or enjoyment of a right or privilege derived from the laws of another state and therein
exercise and enjoyed. (51 Am.Jur. 87-88).
Reasons:
(1) Tax laws (and this is true of all laws) do not operate beyond a country’s territorial limits.
(2) Property which is wholly and exclusively within the jurisdiction of another state receives none of the
protection for which a tax is supposed to be a compensation.

Income Taxation: (Keynotes) : Nature of The POWER of Taxation

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Income Taxation:

Nature of the POWER of Taxation

EXTENT OF THE LEGISLATIVE POWER TO TAX

ESSENTIAL CHARACTERISTICS OF TAX

*NON IMPAIRMENT CLAUSE

PRINCIPLES OF SOUND TAX SYSTEM

THEORY AND BASIS OF TAXATION

Prescriptions found in Statutes

MODES OF ELIMINATING DOUBLE TAXATION

ESCAPE FROM TAXATION

All indirect taxes may be shifted; direct taxes cannot be shifted.

WAYS OF SHIFTING TAX BURDEN

Relationship between Impact, Shifting, and Incidence of a Tax

Tax avoidance (Tax Minimization)

Tax evasion (Tax Dodging)

Distinguished from tax exemption

TAX is the rule, exemption is the exception.

SCOPE AND LIMITATIONS OF TAXATION

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