TAXATION LAW REVIEW

University of San Carlos College of Law

Part 1 - General Principles
A. Basic Concepts and Considerations
1. Meaning of Taxation - the process or means by which the
sovereign, through its law making body, raises income to defray
the necessary expenses of government.
- the inherent power of the state to
demand enforced contribution for public purpose/s.
. Meaning of Tax!es" - the enforced proportional and
pecuniary contributions from persons and property levied by the
law-making body of the state having #urisdiction over the sub#ect
of the burden for the support of the government and all public
needs.
$. %ssential &haracteristics and 'ttributes of Taxes
a" it is an enforced contribution
- not dependent on the will of the person
taxed, not a contact but a positive act of the
government
b" it is proportionate in character
- taxes must be based on the ability to pay in
accordance with the constitutional mandate to
&ongress to evolve a progressive system of
taxation.
c" it is generally payable in money
- unless (ualified by law, the term )tax/es* is
usually understood to be a pecuniary burden
d" it is levied on persons/property
e" it is levied by the state which has #urisdiction over the
person/property
- the ob#ect to be taxed must be sub#ect to
the #urisdiction of the taxing state.
f" it is levied by the law-making body of the state
- the power to tax is a legislative power which
under the &onstitution only &ongress can exercise
through enactment of tax statutes.
g" it is levied for public purpose/s
- revenues derived from taxes cannot be
used for purely private purposes or for the
exclusive benefit of private persons.
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+. ,mportance of Taxes - the power of taxations is essential
because the government can neither exist nor endure without
taxation. Taxes are the lifeblood of the government and their
prompt and certain availability is an imperious need.
-. .ature of the /ower of Taxation
a" inherent prerogative of the sovereignty
- it exists apart from constitutions and without
being expressly conferred by the people.
b" legislative in character
- the power to tax is peculiarly and
exclusively legislative and cannot be exercised by
the executive or #udicial branch of government.
c" sub#ect to constitutional and inherent limitations
- individual e(uities or ine(ualities, however,
are not considered in the exercise of the power.
B. Theory and Basis of Taxation
1. .ecessity Theory
a" involves the power to destroy
b" does not involve the power to destroy as long as the 0&
sits
11'ccording to the 0&, taxation is a power emanating from
necessity. ,t is a necessary burden to preserve the 0tate2s
sovereignty and a means to give the citi3enry an army to resist
aggression, a navy to defend its shores from invasion, a corps of
civil servants to serve, public improvements designed for the
en#oyment of the citi3enry, and those which come within the 0tate2s
territory and facilities, and protection which a government is
supposed to provide.
. 4enefits 5eceived or &ompensation Theory
0ymbiotic 5elationship - ,n return of his contribution,
the taxpayer receives the general advantages and
protection which the government affords the taxpayer and
property.
11'ccording to this theory, the 0tate demands and receives
taxes from the sub#ects of taxation within its #urisdiction so that it
may be enabled to carry its mandate into effect and perform the
functions of government, and the citi3en pays from his property the
portion demanded in order that he may, be means thereof, be
secured in the en#oyment of the benefits of organi3ed society.
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C. Purpose and Objectives of Taxation
1. 5evenue - 4asically, the purpose of taxation is to provide
funds or property with which the 0tate promotes the general
welfare and protection of its citi3ens.
. .on-5evenue
a" regulation
- taxation also has a regulatory purpose as in
the case of taxes levied on excises or privileges
like those imposed on tobacco and alcoholic
products, or amusement places like night clubs,
cabarets, cockpits, etc.
b" promotion of general welfare
- as an implement of police power in order to
promote the general welfare of the people
c" reduction of social ine(uality
- reduce ine(ualities in wealth and incomes
- possible through progressive system of
taxation where the ob#ect is to prevent the undue
concentration of wealth in the hands of a few
individuals
d" encourage economic growth
- through granting tax exemptions or the
creation of conditions conducive to their growth
e" protectionism
- taxes sometimes provide protection to local
industries like protective tariffs and custom duties
D. Scope of the Legisative Taxing Po!er
1. 6etermination of /urpose!s"
- as long is it is for a public purpose
. 6etermination of the 0ub#ects and 7b#ects of Taxation
- refers to the coverage and nature of the tax
$. 6etermination of the 'mount and 5ate of Tax
- the legislature may levy a tax of any amount or
rate as it sees fit. ,f the taxes are oppressive or un#ust,
the only remedy is the ballot box and the election of new
representatives.
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- the power of taxation carries with it the power to
destroy.
+. 6etermination of the 8ind of Tax to be &ollected
-
-. 6etermination of 'pportionment of the Tax
-
9. 6etermination of the Manner and Mode of %nforcement and
&ollection
- refers to the administration of the tax or the
implementation of tax laws.
:. 6etermination of the 0itus of Taxation
-
". Aspects of Taxation
1. ;evy !,mposition of the tax" - enactment of tax laws or
statutes, includes the determination of the persons, property or
excises to be taxed, the sum or sums to be raised, the due date
thereof and the time and manner of levying and collecting taxes.
. 'dministration !Tax 'dministration" - collection of tax levied
#. Basic Principes of a Sound Tax Syste$
1. <iscal 'de(uacy - that the sources of revenue, which are the
receipts therefrom, taken as a whole, should be sufficient to
meet the demands of public expenditure.
. Theoretical =ustice or %(uality - that the tax burden should be
in proportion to the taxpayer2s ability to pay.
- a sound tax system must take into consideration
the taxpayer2s ability to pay !'bility to /ay Theory". 7ur laws
mandate that taxes must be reasonable, fair, #ust and
conscionable. The &onstitution provides that taxation must be
uniform and e(uitable and that the 0tate must evolve a
progressive system of taxation.
$. 'dministrative <easibility - that tax laws should be
capable of convenient, #ust and effective administration.
+. %conomic %fficiency -
%. Cassification of Taxes
1. 's to 0ub#ect Matter or 7b#ect
a" personal, poll or capitation
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- tax of a fixed amount impose upon persons
residing within a specified territory, residing within a
specified territory, whether citi3ens or not, without
regard to their property, occupation or business in
which they may be engaged.
%xample> &ommunity Tax
b" property
- tax imposed on property, whether real or
personal, in proportion either to its value or some
other reasonable rule of apportionment.
%xample> 5eal /roperty Tax
c" excise or privilege
- charge imposed upon the performance of
an act, the en#oyment of a privilege or engaging in an
occupation, profession, or business tax.
%xample> 6onor2s Tax
. 's to who bears the burden>
a" direct
- tax which is demanded from the person who
also shoulders the burden of the tax? the taxpayer is
directly or primarily liable which he cannot shift to
another
%xample> ,ncome Tax
b" indirect
- tax wherein the incidence or liability for the
payment falls on one person but the burden can be
shifted or passed on to another.
%xample> @'T
$. 's to purpose>
a" general, fiscal or revenue
- tax imposed for the general purposes of the
Aovernment, to raise revenue for governmental
needs.
%xample> ,ncome Tax
b" 0pecial or 5egulatory
- tax imposed for a special purpose, to
achieve some social or economic ends, irrespective of
whether revenue is actually raised or not.
%xample> &ustom 6uties
+. 's to determination of amount>
a" specific
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- tax of a fixed amount imposed by the head
or number or by some standard or weight or
measurement? it re(uires no valuation other than a
listing or classification of the ob#ects to be taxed.
%xample>
b" ad valorem !value"
- tax of a fixed portion of the value of the
property with respect to which the tax is assessed? it
re(uires the intervention of assessors or appraisers to
estimate the value of such property before the amount
due from each taxpayer can be determined.
-. 's to taxing authority>
a" national - levied by the .ational Aovernment
b" local - levied by the local government
9. 's to rate>
a" progressive or graduated
- tax rate which increases as the tax base or
bracket decreases.
b" regressive
- tax rate which decreases as the tax base
increases
c" proportional
- based on a fixed percentage of the amount
of the property, receipts, or other basis to be taxed.
&. Li$itations on the Po!er of Taxation
1. ,nherent ;imitations - these proceed from the very nature
of the taxing power itself.
a" public purpose
- purpose affecting the inhabitants of the
state or taxing district as a community and not merely
as individuals and is designed to support the services
of government for some of the recogni3ed ob#ects of
the country.
b" non-delegation of the legislative power to tax
GEN. RULE: The power of taxation being purely
legislative, &ongress cannot delegate the power to
others. This limitation arises from the doctrine of
separation of powers among the three branches of our
government.
EXCEPTIONS:
a. delegation to the president
- the &onstitution expressly allows
&ongress to authori3e the /resident to fix
within specified limits and sub#ect to such
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limitations and restrictions as it may impose,
tariff rates, import or export (uotas, tonnage
and wharfage dues and other duties or
imposts.
b. delegation to local governments
- each local government unit shall
have the power to create is own sources of
revenues and to levy taxes, fees and
charges sub#ect to such guidelines and
limitations as the &ongress may provide,
consistent with the basic policy of local
autonomy. 0uch taxes, fees and charges
shall accrue exclusively to the local
government.
c. delegation to administrative agencies
- also known as the power of
subordinate legislation. The delegation
must comply with the completeness test
and existence of sufficiently determinate
standards test. 0hould only be for tax
administration or implementation.
c" exemption from taxation of government entities
- property of the national government as well
as those of the local government units are .7T
sub#ect to tax, otherwise, it will result in the absurd
situation of the government )taking money from one
pocket and putting it in another*.
d" international comity
- the property or income of a foreign state or
government may not be the sub#ect of taxation by
another.
Reasons:
a. in par pare$ non habet i$periu$.
's between e(uals, there is no
sovereign.
b. The rule of international law that a
foreign government may not be sued without its
consent so that it is useless to impose a tax
which could not be collected.
c. The concept that when a foreign
sovereign enters the territorial #urisdiction of
another, it does not sub#ect itself to the
#urisdiction of the other.
e" territorial #urisdiction
GEN. RULE: ' state may not tax property
lying outside its borders or lay an excise or privilege
tax upon the exercise or en#oyment of a right or
privilege derived from the laws of another state and
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therein exercised or en#oyed. Tax laws do not operate
beyond the #urisdictional limits of a country.
EXCEPTION: privity of relationship
. &onstitutional ;imitations
a" due process of law
'ny deprivation is with due process if it is done>
a. Bnder the authority of a law that is valid
or of the &onstitution itself the tax statute is within the
&onstitutional authority of &ongress to pass, and that
it must be reasonable, fair, and #ust. This is
Substantie !ue Process which limits the
government2s law and rule making powers.
b. 'fter compliance with fair and
reasonable methods of procedure prescribed by law,
with notice or hearing or at least an opportunity to be
heard whenever necessary. This is Proce"ural !ue
Process which limits the actions of #udicial and (uasi-
#udicial bodies.
- ,n addition>
a. 6ue process in taxation re(uires>
1. Tax must be for public purpose
. ,mposed within territorial
#urisdiction
$. .o arbitrariness or oppression in
a. assessment
b. collection
b. 6ue process in taxation does not
re(uire>
1. 6etermination through #udicial
in(uiry of
a. property sub#ect to tax
b. amount of tax to be
imposed
. .otice and hearing as to
a. amount of tax
b. manner of apportionment
b" e(ual protection of the laws
%(ual protection does not re(uire e(ual rates of
taxation or different classes of property, nor prohibit
une(ual taxation so long as the ine(uality is not based
upon arbitrary classification? it merely re(uires that all
persons sub#ected to such legislation shall be treated
alike, under like circumstances and conditions both in
the privileges conferred and in the liabilities imposed.
c" rule of uniformity and e(uity in taxation
Uni#or$it% - all taxable articles or
properties of the same class shall be taxed at the
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same rate. 6ifferent articles or other sub#ects may be
taxed at different rates provided that the rate is
uniform on the same class everywhere.
E&uit% - re(uires that such
apportionment be more or less #ust in the light of the
taxpayer2s ability to shoulder the tax burden, usually
measured in terms of wealth, and if warranted, on the
basis of the benefits he receives from the government.
Taxation may be uniform, but ine(uitable where the
amount is excessive or unreasonable.
d" no imprisonment for non-payment of a poll tax
' poll tax is imposed on persons without any
(ualification. 'n example is the community tax under
0ec. 19 of the ;A& which provides that a person or
corporation who does not own any real property, does
not receive any income, or even a minor may be
permitted to pay basic community tax and be issued a
community tax certificate.
7ne cannot be imprisoned for non-payment of poll
tax because payment thereof is .7T mandatory.
/ayment is merely permissive? it cannot be imposed
compulsorily upon taxpayers.
Dhile a person may not be imprisoned for non-
payment of poll tax, 'e $a% be i$prisone" #or non-
pa%$ent o# ot'er (in"s o# ta)es *'ere t'e la* so
e)pressl% proi"es.
e" non-impairment of the obligation of contracts
- The obligation of a contract is impaired
when its terms or conditions are changed by law or by
a party without the consent of the other, thereby
weakening the position or rights of the latter.
Rationale: Dhen the state grants an exemption
on the basis of a contract, consideration is presumed
to be paid to the 0tate, and the public is supposed to
receive the whole e(uivalent therefore.
Rules:
a. Dhen the exemption is bilaterall% agreed
upon between the government and the taxpayer
- it cannot be withdrawn without violating
the non-impairment clause
b. Dhen it is unilaterall% granted by law and
the same is withdrawn by virtue of another law
- no violation
c. Dhen the exemption is granted under a
#ranc'ise.
- may be revoked because under the
&onstitution, a franchise is )sub#ect to amendment,
alteration, or repeal.*
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f" non-infringement of religious freedom
- ' municipal license tax on the sale of bibles
and religious articles by a non-stock, non-profit
missionary organi3ation at minimal profit constitutes
curtailment of religious freedom and worship which is
guaranteed by the &onstitution.
,ncome of such organi3ations from any activity
conducted for profit or from any of their property, real
or personal, regardless of the disposition made of
such income, is ta)able.
g" no appropriation for religious purposes
-
h" exemption of religious, charitable and educational
entities, non-profit cemeteries, and churches from
property taxation
- exemption from real estate tax
Test of %xemption> ,t is the use of the property
and not ownership.
.ature of Bse> The properties must be
actually, directly and exclusively used for
the purposes mentioned.
0cope of %xemption> The exemption is not limited
to property actually indispensable for
religious, charitable or educational purpose.
,t extends to facilities which are incidental to
or reasonably necessary for the
accomplishment of said purposes.
i" exemption of non-stock, non-profit educational institutions
from taxation
'note( Congress is authori)ed to grant si$iar
exe$ptions to proprietary educationa institutions
subject to i$itations provided by a!.*
- The exemption covers income, property,
and donor2s taxes and custom duties.
GEN. RULE: To be exempt, the revenue and
assets must be used actually, directly and exclusively
for educational purposes.
#" concurrence by a ma#ority of all the members of
&ongress for the passage of a law granting tax exemption
Reason: The re(uirement is obviously
intended to prevent indiscriminate grant of tax
exemptions.
The phrase )a ma#ority of all the members of the
&ongress* means at least F plus 1 of all the members
voting separately.
,n granting tax exemptions, an absolute ma#ority of
the members of &ongress is re(uired, while in cases
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of withdrawal of such tax exemption, a relative
ma#ority is sufficient.
Tax amnesties, condonations and refunds are in
the nature of tax exemptions, such being the case, a
law granting them re(uires the vote of an absolute
ma#ority.
' constitutional grant of exemption may be self-
executing or may re(uire an act of &ongress for its
operation. Dhere a &onstitutional provision granting
an exemption is self-executing, the legislature can
neither add nor detract from it. ,t may, however,
prescribe a procedure to determine whether a
claimant is entitled to the &onstitutional exemption.
k" power of the /resident to veto any particular item or items
in a revenue or tariff bill
- see 'rt. @,, 0ec. :HI, 1EC: &onstitution
l" non-impairment of the #urisdiction of the 0& in tax cases
- see 'rt. @,,,, 0ec. J -, 1EC: &onstitution
+. Po!er of ,udicia -evie!
1. courts can determine public purpose,
constitutionality or legality of a tax
- 's long as the legislature, in imposing a tax,
does not violate applicable constitutional limitations or
restrictions, it is not within the province of the courts to
in(uire into the wisdom or policy of the exaction, the
motives behind it, the amount to be raised or the persons,
property or other privileges to be taxed.
. courts cannot in(uire into the wisdom of a taxing act/legislation
- The court2s power in taxation is limited only
to the application and interpretation of the law.
,. Situs of Taxation
1. Meaning of 0itus of Taxation
- is the place or authority that has the right to
impose and collect taxes. The state where the sub#ect to be
taxed has a situs may rightfully levy and collect the tax. The
situs is necessarily in the state which has #urisdiction or which
exercises dominion over the sub#ect in (uestion.
. 0itus of 0ub#ects on Taxation
a. persons - poll, capitation, or community taxes
are based upon the residence of the taxpayer,
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regardless of the source of income or location of
the property of the taxpayer.
b. property
i. real property - real estate is sub#ect to
taxation in the state in which it is located whether
the owner is a resident or non-resident and is
taxable only there.
This is the principle of ex rei sitei.
Reasons:
a" The taxing authority has control because
of the stationary and fixed character of the property.
b" The place where the real property is
situated gives protection to the real property, hence the
property or its owner should support the government of
that place.
ii. tangible personal property - the
modern rule is that it is taxable in the state where it has
actual situs? where it is physically located although the
owner resides in another #urisdiction.
Reason: The place where the tangible
personal property is found gives it protection.
iii. intangible personal property
GEN. RULE: The situs is at the domicile of
the owner. This is in accordance with the principle
of $obilla se&uuntur persona$, or movable
follow the person.
EXCEPTIONS:
a" when the property has ac(uired a
business situs in another #urisdiction.
b" when the law provides for the situs of the
sub#ect.
$. Multiplicity of 0itus
E##ect - due to the variance in the concept of Kdomicile2, for
tax purposes, and considering the multiple distinct relationships
that may arise with respect to intangible personalty and the use
to which the protection of the laws of #urisdiction other than the
domicile of the owner thereto, the same income or intangible
may be sub#ect to taxation in several taxing #urisdictions.
Re$e"ies - a" provide for exemptions or allowance of
deduction or tax credit for foreign taxes
b" enter into treaties with other states
.. Doube Taxation
1. Meaning of 6ouble Taxation
- means taxing the same property twice when it should
only be taxed once.
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a" strict sense
!irect !uplicate Ta)ation + Obno)ious
- double taxation in the ob#ectionable or
prohibited sense. This violates the e(ual protection
clause of the &onstitution, hence prohibited.
%lements>
a. The same property or sub#ect matter is
taxed twice when it should be taxed only once?
b. 4oth taxes are levied for the same
purpose?
c. ,mposed by the same taxing authority?
d. Dithin the same #urisdiction?
e. 6uring the same taxing period?
f. &overing the same kind of character of
tax.
b" broad sense
In"irect !uplicate Ta)ation
- is permissible double taxation. This is
allowed if the taxes are of different nature or character
imposed by different taxing authorities. Aenerally, it
extends to all cases in which there is a burden of two or
more pecuniary impositions. The absence of one or more
of the above-mentioned elements makes the double
taxation indirect.
. ,nstances of 6ouble Taxation
They include>
a" a tax on a mortgage as personal property when the
mortgaged property is also taxed at its full value as real estate
b" a tax upon a corporation for its property and upon its
shareholders for their shares
c" a tax upon a corporation for its capital stock as a
whole and upon the shareholders for their shares
$. &onstitutionality of 6ouble Taxation
- 6ouble taxation in its narrow sense is undoubtedly
unconstitutional but that in the broader sense is not necessarily so.
a" general rule
- our &onstitution does not prohibit double
taxation, hence, it may not be invoked as a
defense against the validity of a tax law.
b" exception
i. doubts as to whether double taxation has
been imposed should be resolved in favour of the
taxpayer. The reason is obviously to avoid
in#ustice or unfairness.
ii. where double taxation occurs, the
taxpayer may seek relief under the uniformity rule
or the e(ual protection guarantee.
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L. Three '/* 0ain Po!ers of the %overn$ent
1. &oncept of /olice /ower
. &oncept of %minent 6omain
$. Taxation distinguished from /olice /ower
+. Taxation distinguished from %minent 6omain
-. 6istinctions
9. 0imilarities
T,X,TION POLICE PO-ER E.INENT !O.,IN
1. As to Purpose
To raise revenue To promote public
purpose through
regulations
To facilitate the 0tate2s
need of property for
public use
2. As to amount of Exaction
.o limit ;imited to the cost of
regulation, issuance of
the license or
surveillance
.o exaction? but private
property is taken by the
0tate for public purpose
3. As to Benefits Received
.o special or direct
benefit is received by
the taxpayer? merely
general benefit of
protection
.o direct benefit is
received? a healthy
economic standard of
society is attained
' direct benefit results in
the form of #ust
compensation to the
property owner
4. As to Non-Impairment of Contracts
&ontracts may not be
impaired
&ontracts may be
impaired
&ontracts may be
impaired
. As to !ransfer of Propert" Ri#$ts
Taxes paid become part
of public funds
.o transfer but only
restraint in its exercise
Transfer is effected in
favour of the 0tate
%. As to &cope
'll persons, property
and excises
'll persons, property,
rights and privileges
7nly upon a particular
property
0. Taxes Distinguished fro$ Other +$positions
1. Toll <ee
T,X TOLL
%nforced proportional contributions ' sum of money for the use of
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from persons and property something, a consideration which is
paid for the use of a property which is
of a public nature? e.g. road, bridge
' demand of sovereignty ' demand of proprietorship
.o limit as to the amount of tax 'mount of toll depends upon the cost
of construction or maintenance of the
public improvement used
,mposed only by the 0tate May be imposed by >
!1" Aovernment
!" /rivate ,ndividuals or entities
. /enalty
T,X PEN,LT/
%nforced proportional contributions
from persons and property
0anction imposed as a punishment
for violation of a law or acts deemed
in#urious? violation of tax laws may
give rise to imposition of penalty
,ntended to raise revenue 6esigned to regulate conduct
May be imposed only by the
government
May be imposed by >
!1" Aovernment
!" /rivate ,ndividuals or entities
$. 0pecial 'ssessment
T,X SPECI,L ,SSESS.ENT
,mposed on persons, property and
excises
;evied only on land
/ersonal liability attaches on the
person assessed in case of non-
payment
&annot be made a personal liability of
the person assessed
.ot based on any special or direct
benefit
4ased wholly on benefit
;evied and paid annually %xceptional both as to time and
locality
%xemption granted by 'rt. @,, 0ec. C
H$I, 1EC: &onstitution is applicable
%xemption does not apply.
..4. ,f property is exempt from 5eal
/roperty Tax, it is also exempt from
0pecial 'ssessment
+. ;icense or /ermit <ee
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T,X LICENSE 0EE
4ased on the power of taxation %manates from police power
The purpose is to generate revenue The purpose is regulatory
'mount is unlimited 'mount is limited to the cost of
!1" issuing the license, and
!" inspection and surveillance
.ormally paid after the start of a
business
.ormally paid before commencement
of business
Taxes, being the lifeblood of the
0tate, cannot be surrendered except
for lawful consideration
;icense fee may be with or without
consideration
.on-payment does .7T make the
business illegal but maybe a ground
for criminal prosecution
.on-payment makes the business
illegal
-. 6ebt
T,X !E1T
'n obligation imposed by law &reated by contract
6ue to the government in its
sovereign capacity
May be due to the government but in
its corporate capacity
/ayable in money /ayable in money, property or
services
6oes not draw interest except in case
of delin(uency
6raws interest if stipulated or delayed
.ot assignable 'ssignable
.ot sub#ect to compensation or set-off 0ub#ect to compensation or set-off
.on-payment is punished by
imprisonment except in poll tax
.o imprisonment in case of non-
payment
,mposed only by public authority &an be imposed by private individual
9. 0ubsidy
T,X SU1SI!/
,t is a pecuniary aid directly granted
by the government to an individual or
private commercial enterprise
deemed beneficial to the public?
,t is not a tax, although a tax may
have to be imposed to pay it.
:. 5evenue
T,X RE2ENUE
,t refers to the amount imposed. ' broad term that includes not only
taxes but income from other sources
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as well. ,t refers to the amount
collected.
C.. ,nternal 5evenue
T,X INTERN,L RE2ENUE
Taxes other than duties on imports or
exports in the nature of excise taxes
such as taxes on tobacco, li(uor, etc.
E. &ustoms 6uties
T,X CUSTO. !UTIES
' broader term to include not only
customs duties but other taxes as
well.
6uties charged upon commodities on
their being imported into or exported
from a country. They are regulatory
imposts on goods.
1G. Tariff
T,X T,RI00
'll embracing term to include various
kinds of enforced contributions upon
persons for the attainment of public
purposes
' kind of tax imposed on articles
which are traded internationally
11. &ompulsory ;abor
T,X CO.PULSOR/ L,1OR
1. #or$s of "scape fro$ Taxation
1. 0ix !9" 4asic <orms
a" 0hifting
b" %vasion
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c" %xemption
d" &apitali3ation
e" 'voidance
f" Transformation
. Meaning of the following terms>
a" shifting, in general
- the transfer of the burden of a tax by the
original payer of the one on whom the tax was assessed
!impact of taxation or statutory taxpayer" or imposed to
another or someone else !incidence of taxation".
11Direct tax cannot be shifted 2 a tax cannot be
shifted !hen it is purey persona or !hen it has no
reation to any business deaings of the taxpayer.
i. impact of taxation
- point on which tax is originally imposed or
the one on whom the tax is formally
assessed.
ii. incidence of taxation
- point on which the tax burden finally rests
or settles down.
iii. relations among impact, shifting, and incidence
118inds of 0hifting>
1. forward shifting - when burden of tax is transferred
from a factor of production through the factors of
distribution until is finally settles on the ultimate
purchaser or consumer.
. backward shifting - when burden is transferred
from consumer through factors of distribution to
the factors of production.
$. onward shifting - when the tax is shifted or more
times either forward or backward
b" capitali3ation
- the reduction in the price of the taxed ob#ect
e(ual to the capitali3ed value of future taxes which the
purchaser expects to be called upon to pay.
c" transformation
- the manufacturer or producer upon whom
the tax has been imposed, fearing the loss of his market if
he should add the tax to the price, pays the tax and
endeavours to recoup himself by improving his process of
production, thereby turning out his units at a lower cost.
d" tax evasion
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- a term that connotes fraud though the use
of pretenses and forbidden devices to lessen or defeat
taxes.
- a scheme used outside of those lawful
means and when availed of, it usually sub#ects the
taxpayer to further or additional civil or criminal liabilities.
e" tax avoidance
- 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.
Tax avoidance is the tax saving device within the
means sanctioned by law. This method should be used
by the taxpayer in good faith and at arms length.
f" exemption
- is the grant of immunity to particular
persons or corporations or to persons or corporations of a
particular class from a tax which persons or corporations
generally within the same state or taxing district are
obliged to pay.
$. 6istinction between Tax %vasion and Tax 'voidance
T,X ,2OI!,NCE T,X E2,SION
As to 'a(idit"
;egal and not sub#ect to criminal
penalty.
,llegal and sub#ect to criminal penalty.
As to Effect
Minimi3ation of taxes. 'lmost always results in absence of
tax payments.
+. <actors in Tax %vasion and the %vidence to /rove Tax %vasion
30actors in Ta) Easion
a. The end to be achieved, i.e. payment of less than that
known by the taxpayer to be legally due, or paying no tax when
it is shown that the tax is due.
b. 'n accompanying state of mind which is described as
being evil, in bad faith, wilful, or deliberate and .7T
coincidental.
c. ' course of action which is unlawful.
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3Ei"ence to Proe Ta) Easion
a. <ailure to declare for taxation purposes true and
actual income derived from business for consecutive years.
b. 0ubstantial under declaration of income in the tax
returns of the taxpayer for + consecutive years, coupled with
intentional overstatement of deductions.
O. "xe$ption fro$ Taxation
1. Meaning of %xemption from Taxation
- the grant of immunity to particular persons or
corporations or to persons or corporations of a particular class
from a tax which persons or corporations generally within the
same state or taxing district are obliged to pay.
. .ature of Tax %xemption
a" personal privilege
- an exemption from taxation is a mere personal
privilege of the grantee
b" generally revocable
- it is generally revocable by the government
unless the exemption is founded on a contract
which is protected from impairment.
c" waiver on the part of the government
- it implies a waiver on the part of the government
of its right to collect what otherwise would be due
to it and pre#udicial thereto.
d" not necessarily discriminatory
-
$. .ature of the /ower to Arant Tax %xemption
- ;ike the inherent power to tax, the power to exempt is an
attribute of sovereignty to the power to prescribe who or what
property shall be taxed implies the power to prescribe who or
what property shall not be taxed.
11Municipal corporations have no inherent power to tax.
4ut the moment the power to impose tax is granted, they also
have the power to grant exemption unless forbidden by the
&onstitution or law.
+. 5ationale of Tax %xemption
- The power of the legislature to exempt form taxation,
although of wide scope, is not unlimited.
a" 'side from the limitations provided by the &onstitution,
there must underlie its exercise some principle of public policy
that can support a presumption that the public interest will be
subserved by the exemption allowed.
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b" ,t may not be amiss to add that no tax exemption L
like any other legal exemption/exception L is given without any
reason therefore. ,n much the same way as other statutory
commands, its avowed purpose is some public benefit or
interest, which the law making body considers sufficient to offset
the monetary loss entailed in the grant of the exemption.
-. Arounds for Tax %xemption
a4 contract
- tax exemption may be based on contract in which case
the public represented by the government is supposed to
receive a full e(uivalent therefore.
b4 public polic%
- it may be based on some ground of public policy, such
as, for example to encourage new and necessary
industries, or to foster charitable and other benevolent
institutions.
c4 reciprocit%
- it may be created in a treaty on grounds of reciprocity,
or to lessen the rigors of international double or multiple
taxation.
9. 8inds of Tax %xemption
a" as to manner of creation
i. %xpress or 'ffirmative %xemption
- expressly granted by organic or statute law
ii. ,mplied or %xemption by 7mission
- when particular persons, property or excises are
deemed exempt as they fall outside the scope of
the taxing provision itself.
b" as to scope or extent
i. Total - absolute immunity
ii. /artial - one where a collection of a part of the tax
is dispensed with
c" as to ob#ect
i. /ersonal - granted directly in favour of certain
persons.
ii. ,mpersonal- granted directly in favour of certain class
or property.
:. %xamples of Tax %xemption
!see 6e ;eon2s #unda$entas of Taxation*
a" as provided for in the &onstitution
b" as provided for in the Tax &ode
c" as provided for under 0pecial ;aws
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C. &onstruction of Tax %xemption 0tatutes
GEN. RULE: %xemptions are not favored and are
construed strictissi$i juris !by the most strict right or law" against
the taxpayer.
EXCEPTIONS:
i. when the statute granting exemption provides for liberal
construction thereof.
ii. in case of special taxes relating to special cases and affecting
only special classes of persons.
iii. if exceptions refer to public property.
iv. in cases of exemptions granted to religious, charitable and
educational institutions or their property.
v. in cases of exemption in favour of the government, its
political subdivisions or instrumentalities.
E. Meaning of Tax 'mnesty
- a general pardon or intentional overlooking by the 0tate
of its authority to impose penalties on persons otherwise guilty
of tax evasion or violation of a revenue or tax law.
11,t partakes of an absolute forgiveness or waiver by the
government of its right to collect that is due it and to give tax
evaders who wish to relent a chance to start with a clean slate.
- a general pardon to taxpayers without having to go
through the tedious process of a tax case.
11To avail of a tax amnesty granted by the Aovernment,
and to be immune from suit of its delin(uencies, the taxpayer
must have voluntarily disclosed his previously untaxed income
and must have paid the corresponding tax on such previously
untaxed income.
P. 1ature3 Construction3 Appication of Tax La!s
1. .ature of ,nternal 5evenue ;aw
a. not political in character
- They are deemed to be the laws of the occupied
territory and not of the occupying enemy.
b. civil in nature, not sub#ect to ex post facto a! prohibitions
c. not penal in character
- The purpose of tax laws in imposing penalties for
delin(uencies is to compel the timely payment of taxes or
to punish evasion or neglect of duty in respect thereof.
. &onstruction of Tax ;aws
a" legislative intention must be considered
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- tax statutes are to receive a reasonable
construction with a view to carrying out their purpose and
intent.
b" where there is doubt
- tax statutes are construed most strongly against
the Aovernment and liberally in favour of the citi3en
because burdens are not imposed beyond what the
statutes expressly and clear import.
c" where language is plain
- the rule of strict construction as against the
government is not applicable where the language of the
tax statute is plain and there is no doubt as to the
legislative intent. ,n such a case, the words employed
are to be given their ordinary meaning.
- ,t is a well-settled rule in taxation that a statute will
not be construed as imposing a tax unless it does so
clearly, expressly and unambiguously.
$. 'pplication of Tax ;aws
a" generally prospective
- the general rule is that tax laws are prospective in
operation. The reason is that the nature and amount of
the tax could not be foreseen and understood by the
taxpayer at the time the transaction which the law seeks
to tax was completed.
b" exception
- while it is not favored, a statute may nevertheless
operate retroactively provided it is expressly declared or
is clearly the legislative intent.
114ut a tax law should not be given retroactive application
when it would be harsh and oppressive, for in such a
case, the constitutional limitation of due process would be
violated.
+. Mandatory and 6irectory /rovisions of Tax ;aw
.an"ator% - those provisions intended for the
security of the citi3ens or which are designed to insure e(uality
of taxation or certainty as to the nature and amount of each
person2s tax.
!irector% - those provisions designed merely for
the information or direction of officers or to secure methodical
and systematic modes of proceedings.
33The distinction is important because the omission to
follow mandatory provisions renders invalid the act or
proceeding to which it relates while the omission to follow
directory provisions does not involve such conse(uence.
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-. %xisting Tax ;aws
The following are among the existing tax laws>
a" .ational
i. The .ational ,nternal 5evenue &ode of 1EE:,
as amended
ii. The Tariff and &ustoms &ode of 1E:C,
as amended
iii. other special laws
b" ;ocal
i. The ;ocal Aovernment &ode
ii. The respective tax ordinances of provinces, cities,
municipalities, and barangays sub#ect to the
limitations provided in the ;ocal Aovernment &ode
c" 7ther important laws
i. 5' 1GE$
ii. 5' 11- - act creating the &ourt of Tax 'ppeals
iii. 5' 11
9. 'uthority of the 0ecretary of <inance to promulgate 5ules and
5egulations
- Bnder 0ection ++ of the Tax &ode, it is provided that the
0ecretary of <inance, upon the recommendation of the
&ommissioner of ,nternal 5evenue, shall promulgate all needful
rules and regulations for the effective enforcement of the
provisions and of the &ode. The administrative power to provide
regulations is likewise authori3ed by 0ections :E-4 and --1 of
the 5evised 'dministrative &ode.
The most formal pronouncements of the 6ept. of <inance
in this respect are known as )5evenue 5egulations*.
The power to recommend the promulgation of internal
revenue rules and regulations by the 0ecretary of <inance is
given only to the &ommissioner. Me is not allowed by law to
delegate such power to any of his subordinates.
:. .ature and /ower to Make 5egulations
- The power to make regulations is not the power to
legislate in the true sense, and under the guise of regulation,
legislation may not be enacted.
The statute which is being administered may not be
altered or added to by the exercise of a power to make
regulations thereunder. 0uch regulations cannot increase or
decrease the re(uirements of the law, nor embrace matters not
covered or intended to be covered by the statute.
C. .ecessity and <unction of 5egulation
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- 5egulations are deemed necessary to the proper
enforcement and execution of laws. They are intended to clarify
or explain the law and carry into effect its general provisions by
providing the details of administration and procedure.
E. 5e(uisites for @alidity and %ffectivity of 5egulations
The re(uisites are>
a" must not be contrary to law and the &onstitution? and
b" must be published in the 7fficial Aa3ette
11,t is provided, however, in the 'dministrative &ode of 1EC:
that> )%very agency of the government shall file with the Bniv. of
the /hilippines ;aw &enter three !$" certified copies of every
rule adopted by it x x x* and that )in addition to other rule-making
re(uirements provided by law not inconsistent with this 4ook,
each rule adopted shall become effective fifteen !1-" days from
the date of filing as above-provided unless a different danger to
public health, safety and welfare, the existence of which must be
expressed in a statement accompanying the rule.*
,n other words, the revenue rules and regulations
promulgated by the 0ecretary of <inance may take effect even
before publication in the 7fficial Aa3ette.
1G. <orce and %ffect of 5egulations
- 0uch regulations once established and found to be in
consonance with the general purposes and ob#ects of the law
have the force and effect of law, and so they must be applied
and enforced.
11. 'dministrative 5ulings and 7pinions
Rulin5s - are the less general interpretation of tax
laws at the administrative level, which are issued by tax officials
in the performance of their assessment functions. They are
usually rendered by the &ommissioner of ,nternal 5evenue on
re(uest of taxpayers to clarify certain provisions of a tax law.
These rulings may be revoked by the 0ecretary of <inance if the
latter finds them not in accordance with law.
Opinions - rulings in the form of )opinions* on tax
(uestions are also given by the 0ecretary of =ustice who is the
chief legal officer of the government. These take on the
character of substantive rules and are generally binding and
effective if not otherwise contrary to law and the &onstitution.
1. 'dministrative ,nterpretation and the &ourts
- ,t is a principle widely accepted that the
contemporaneous construction placed upon the statute by the
executive officers whose duty is to enforce it is entitled to great
respect by the courts. This is especially true if the administrative
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interpretation has been observed for a long time without
ob#ection.
1$. /ower of the 0ecretary of <inance to 5evoke the 5ulings of his
/redecessor
- The power to interpret the provisions of the Tax &ode and
other tax laws is under the exclusive and original #urisdiction of
the &ommission of ,nternal 5evenue sub#ect to review by the
0ecretary of <inance.
The 0ecretary of <inance has the power to revoke, repeal
or abrogate the acts or previous rulings of his predecessors in
office. The reason for this is that the construction of the statute
by those administering it is not binding on their successors if
thereafter the latter becomes satisfied that a different
construction should be given.
1+. .on-5etroactivity of 5epeal of 5egulations or 5ulings
GEN. RULE: 'ny revocation, modification, or reversal of
any of the rules and regulations or any of the rulings or circulars
promulgated by the &ommissioner of ,nternal 5evenue cannot
be given retroactive application when such revocation,
modification, or reversal will be pre#udicial to the taxpayer.
EXCEPTIONS:
a" where the taxpayer deliberately misstates or omits
material facts from his return or in any document
re(uired of him by the 4,5?
b" where the facts subse(uently gathered by the 4,5 are
materially different from the facts on which the ruling
is based? and
c" where the taxpayer acted in bad faith.
1-. 6ecisions of the 0upreme &ourt and the &ourt of Tax 'ppeals
- ,n tax cases, as in other case, the 0upreme &ourt is the
tribunal of last resort or final appeal. The importance of this
statement lies in the fact that the decisions of the 0& applying or
interpreting existing tax laws are binding on all subordinate
courts and have the force and effect of law. They constitute
evidence of what the law means.
The same is also true with respect to the decisions of the
&ourt of Tax 'ppeals. Mowever, by the nature of its #urisdiction,
the decisions of this court are still appealable to the 0& by a
petition for review on certiorari.
4. Sources of Tax La!s
1. ;egislations/0tatutes
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- including /residential 6ecrees and %xecutive 7rders on
taxation and tax ordinances
. 'dministrative 5ules and 5egulations, 5ulings or 7pinions of Tax
7fficials
- particularly the &ommissioner of ,nternal 5evenue,
including opinions of the 0ecretary of =ustice
$. =udicial 6ecisions
- they interpret the tax laws.
+. Tax Treaties or 'greements
- same force and effect as statutes
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