BA Core Course 3 - Income Taxation Flashcards by Mezrhyme Bagalihog

It is the process or means by which the sovereign (independent State), through its law-making body (the legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government.

Taxation

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It is a power inherent in every sovereign State being essential to the existence of every government.

Taxation

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In simple terms, it is the act of levying a tax to apportion the cost of government among those who, in some measure, are privileged to enjoy its benefits and must therefore bear its burdens.

Taxation

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What are the three inherent powers of the State?

Police Power, Power of Taxation, and Power of Eminent Domain

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It is the power of the State for promoting public welfare by restraining and regulating the use of liberty and property. It may be exercise only by the government. The property taken in the exercise of this power is destroyed because it is noxious or intended for a noxious purpose.

Police Power

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It is the power by which the State raises revenue to defray the necessary expenses of the government.

Power of Taxation

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It is the power of the State to acquire private property for public purpose upon payment of just compensation.

Power of Eminent Domain

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What are the two purposes of taxation?

Primary: Revenue or Fiscal Purpose
Secondary: Regulatory Purpose (or Sumptuary/Compensatory)

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The primary purpose of taxation on the part of the government is to provide funds or property with which to promote the general welfare and the protection of its citizens and to enable it to finance its multifarious activities.

Primary: Revenue or Fiscal Purpose

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While the primary purpose of taxation is to raise revenue for the support of the government, taxation is often employed as a devise for regulation or control (implementation of State’s police power) by means of which certain effects or conditions envisioned by the government may be achieved such as:

Promotion of General Welfare
Reduction of Social Inequality
Economic Growth

Secondary: Regulatory Purpose (or Sumptuary/Compensatory)

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A government can run its administrative set up only through public funding which is collected in the form of tax. Examples of taxes imposed for raising revenues are income and business.

Primary: Revenue or Fiscal Purpose

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What are the types of Social and Economic
Objective of Taxation?

Shifting of wealth from rich to poor
Maintaining price stability
Stimulating economic growth
Encourage full-employment

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What are these?

Theory (Authority): LIFEBLOOD THEORY and/or NECESSITY THEORY
Basis of Taxation: BENEFITS RECEIVED or RECIPROCITY THEORY

Theory and Basis of Taxation

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The power of taxation is essential because the government can neither exist nor endure without taxation.

Theory (Authority): LIFEBLOOD THEORY and/or NECESSITY THEORY

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What doctrine is this quote?

“Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need”

Lifeblood Doctrine

(part of Theory (Authority): LIFEBLOOD THEORY and/or NECESSITY THEORY)

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The government cannot continue to perform its basic functions of serving and protecting its people without means to pay its expenses. Consequently, the State has the right to compel all its citizens and property within its limits to contribute.

Theory (Authority): LIFEBLOOD THEORY and/or NECESSITY THEORY

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The basis is the reciprocal duties of protection and support between the State and its inhabitants. The State collects taxes from the subjects of taxation in order that it may be able to perform the functions of government.

Basis of Taxation: BENEFITS RECEIVED or RECIPROCITY THEORY

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The citizens, on the other hand, pay taxes in order that they may be secured in the enjoyment of the benefits of organized society.

Basis of Taxation: BENEFITS RECEIVED or RECIPROCITY THEORY

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Who said this quote?

“This theory spawned the Doctrine of Symbiotic Relationship which means, taxes are what we pay for a civilized society.”

Commissioner v. Algue

(part of Basis of Taxation: BENEFITS RECEIVED or RECIPROCITY THEORY)

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A. Rule of “No Estoppel against the Government”
B. Collection of taxes cannot be enjoined (stopped) by injunction
C. Taxes could not be the subject of compensation or set-off
D. Right to select objects(subjects) of taxation
E. A valid tax may result in the destruction of the taxpayer’s property

Manifestation of the Lifeblood Theory

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What are the scope of the power to tax? Give four.

Comprehensive
Unlimited
Plenary
Supreme

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as it covers persons, businesses, activities,
professions, rights and privileges.

Comprehensive

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Its force is so searching to the extent that the courts
scarcely venture to declare that it is subject to restriction.

Unlimited

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as it is complete; BIR may avail of certain remedies to
ensure collection of taxes.

Plenary

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in so far as the selection of the subject of taxation.

Supreme

What are the essential elements of tax?

a. It is an enforced contribution. b. It is generally payable in money. c. It is proportionate in character d. It is levied on persons, property, or the exercise of a right or privilege (subjects or objects of taxation). e. It is levied by the law-making body of the State. f. It is levied for public purpose.

What are the aspects of taxation?

1. Levying (Legislative Function} 2. Assessment (Executive Function) 3. Collection (Executive Function)

What are the Classification of Taxes?

1. As to Scope 2. As to Subject Matter or Object 3. As to who hears the burden 4. As to determination of amount 5. As to Purpose 6. As to Graduation or Rate 7. As to taxing Authority

- National - Local What type of classification of taxes is this?

As to Scope

- Personal, poll or capitalization - Property - Excise What type of classification of taxes is this?

As to Subject Matter or Object

- Direct - Indirect What type of classification of taxes is this?

As to who hears the burden

- Specific - Ad valorem What type of classification of taxes is this?

As to determination of amount

- Primary: Fiscal or Revenue Purpose - Secondary: Regulatory, Special or Sumptuary Purpose What type of classification of taxes is this?

As to Purpose

- Proportional - Progressive or graduated - Regressive What type of classification of taxes is this?

As to Graduation or Rate

- National - Local What type of classification of taxes is this? (2)

As to taxing Authority

AS TO SCOPE: - imposed by the National Government (e.g. income tax, estate tax, donor's tax, VAT other percentage taxes, documentary stamp tax)

National

AS TO SCOPE: - imposed by local government units such as municipal corporations (e.g. real estate tax and professional tax receipts).

Local

AS TO SCOPE: It is based on a constitutional grant that paved the way for the enactment of the Local Government Code of the Philippines. Hence, the _____________________________ is not inherent.

Local - The government local unit's power to tax

AS TO SUBJECT MATTER OR OBJECT: It is a tax of a fixed amount imposed upon individual, whether citizens or not, residing within a specified territory without regard to their property or the occupation in which he may be engaged (e.g. community tax).

Personal, poll, or capitalization tax

AS TO SUBJECT MATTER OR OBJECT: It is a tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable method of apportionment (e.g. real estate tax)

Property tax

AS TO SUBJECT MATTER OR OBJECT: It is any tax which does not fall within the classification of a poll tax or a property tax. This is a tax on the exercise of certain rights and privileges (e.g. income tax, estate tax, donor's tax).

Excise tax

AS TO SUBJECT MATTER OR OBJECT: It may also refer to the tax levied or imposed on sin products and non-essential goods such as cigars and liquors (Discussed in volume 2 - Transfer and Business Taxes).

Excise tax

AS TO SUBJECT MATTER OR OBJECT: Excise taxes of this nature are taxes applicable to certain specified articles or products manufactured in the Philippines for domestic sale or consumption or any other disposition and to specified things or goods imported into the Philippines. It may be?

It may be specific or ad valorem.

AS TO WHO BEARS THE BURDEN A tax which is demanded from the person who also shoulders the burden of tax or tax which the taxpayer cannot shift to another. Both the incidence (liability for the payment of the tax) as well as the impact or burden of the tax falls on the same person (e.g. income tax, estate tax, donor's tax).

Direct tax

AS TO WHO BEARS THE BURDEN A tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. These are taxes wherein the incidence of or the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person (e.g. VAT, percentage tax, excise tax on excisable articles).

Indirect tax

AS TO WHO BEARS THE BURDEN: In the case of _____________________, an indirect tax is defined as one paid by a person who is not directly liable therefor, and who may therefore shift or pass on the tax to another person or entity, which ultimately assumes the tax burden.

Maceda v. Macaraig (197 SCRA 771)

AS TO DETERMINATION OF AMOUNT: It is a tax of fixed amount imposed by the head or number, or by some standard of weight or measurement (e.g. excise tax on cigars and liquors)

Specific

AS TO DETERMINATION OF AMOUNT: It is a tax of fixed proportion of the value of the property with respect to which the tax is assessed (e.g. vat, income tax, donor's tax and estate tax)

Ad valorem

AS TO PURPOSE: It is a tax imposed solely for the general purpose of the government, i.e., to raise revenue for government purposes (e.g. income tax, donor's tax and estate tax).

Primary, Fiscal, or Revenue Purpose

AS TO PURPOSE: It is a tax imposed for a specific purpose, i... to achieve some social or economic ends irrespective of whether revenue is actually raised or not (e.g. tariff and certain duties on imports).

Secondary, Regulatory, Special or Sumptuary Purpose

AS TO GRADUATION OR RATE: It is a tax based on a fixed percentages of amount of the property, receipts, or other basis to be taxed [e.g. VAT, Table 1-5 above (Ad-valorem tax on distilled spirits)

Proportional

AS TO GRADUATION OR RATE: It is a tax the rate of which increases as the tax base or bracket increases (e.g. income tax on individual taxpayers)

Progressive or graduated

AS TO GRADUATION OR RATE: It is a tax the rate of which decreases as the tax base or bracket increases

Regressive

AS TO TAXING AUTHORITY: These are taxes imposed under the National Internal Revenue Code (commonly known as the Tax Code) collected by the national government through the Bureau of Internal Revenue (BIR) and other national government agencies. Other national taxes other than those collected by the BIR as provided for under special laws include but not limited to: - Customs duties - Taxes on narcotic drugs - Special education fund taxes - Energy taxes on aircraft, motorized watercraft, and electric power consumption - Sugar adjustment taxes - Travel tax - Private motor vehicle tax

National

AS TO TAXING AUTHORITY: These are taxes imposed by local government units

Local

What are the 3 Elements of Sound Tax System?

A. Fiscal Adequacy B. Theoretical Justice or Equity C. Administrative Feasibility

Limitation on the state’s power to tax

1. Inherent Limitations 2. Constitutional Limitations

1. Purpose must be public in nature 2. Prohibition against delegation of the taxing power. 3. Territorial limitation

Inherent Limitation

1. Due process of law 2. Equal protection of laws 3. Rule of uniformity and equity in taxation 4. Prohibition against imprisonment for non-payment of “poll-tax” 5. Prohibition against impairment of obligation of contracts 6. Prohibition against infringement of religious freedom 7. Prohibition against appropriation of proceeds of taxation for the use, benefit, or any church 8. Prohibition against taxation of religious, charitable and educational entities 9. Prohibition against taxation of non-stock, non-profit educational institution

Constitutional Limitations

1. Subject matter(person, property or activity) 2. Nature of the Tax 3. Citizenship 4. Residence of the taxpayer 5. Source of Income 6. Place of excise, business or occupation being taxed

Situs of Taxation FACTORS TO CONSIDER IN DETERMINING THE SITUS OF TAXATION

Tax distinguished from other terms or imposts

1. TAX versus TOLL 2. TAX versus PENALTY 3. TAX versus SPECIAL ASSESSMENT 4. TAX versus REVENUE 5. TAX versus SUBSIDY 6. TAX versus PERMIT or LICENSE FEE 7. TAX versus CUSTOMS DUTIES 8. TAX versus DEBT 9. TAX versus TARIFF

A toll is a sum of money for the use of something, generally applied to the consideration, which is paid of the use of a road, bridge or the like of a public nature.

Tax versus Toll

Penalty is a sanction imposed as a punishment for violation of law or acts deem injurious. The violation of tax may give right to imposition of penalty.

Tax versus Penalty

* Special assessment is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements. In Republic v. Bacolod, 17SCRA632, a special assessment is a levy on property which derives some special benefit from the improvement. Its purpose is to finance such improvement, thus accruing only to the owners thereof who, after all, pay the assessment. * It is not a tax measure intended to raise revenues for the government because the proceeds thereof may be devoted to the specific purpose for which the assessment was authorized.

Tax versus Special Assessment

What are the characteristics of special assessment?

a. Levied only on land b. Not a personal liability of the person assessed c. Based wholly on benefits (not necessary) d. Exceptional both as to time and place

* Revenue refers to all the funds or income derived by the government, whether from tax or any other source.

Tax versus Revenue

* Subsidy is a pecuniary aid directly granted the government to an individual or private commercial enterprise deemed beneficial to the public. Subsidy is not a tax although tax may have to be imposed to pay it.

Tax versus Subsidy

* Permit or License is a charge imposed under the police power for purposes of regulation.

Tax versus Permit or License Fee

* Customs duties are taxes imposed on goods exported from or imported into a country.

Tax versus Customs Duties

Tariff may be used in one of three (3) senses: * A book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same; or * The duties payable on goods imported or exported; or * The system or principle of imposing duties on the importation (or exportation) of goods.

Tax versus Tariff

In its strict sense, double taxation referred to is?

Direct duplicate taxation

In its broad sense, double taxation is referred to as?

Indirect double taxation

It becomes legally objectionable for being oppressive and inequitable. It violates the concept of equal protection, uniformity and equitableness of taxation in the Constitution. It means taxing twice.

Direct double taxation

* By the same taxing authority, jurisdiction or taxing district * For the same purpose * In the same year or taxing period * Same subject or object * Same kind/character of the tax

Double taxation

Means of Avoiding or Minimizing the Burden of Taxation

1. Shifting 2. Transformation 3. Tax evasion 4. Tax avoidance 5. Exemption 6. Capitalization

It is 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. Transferred is not the payment of the tax but the burden of the tax. Only indirect taxes may be shifted; direct taxes cannot be shifted.

Shifting

An escape from taxation where the producer or manufacturer pays the tax and endeavor to recoup himself by improving his process of production thereby turning out his units of products at a lower cost

Transformation

It 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 connotes fraud through the use of pretenses or forbidden devices to lessen or defeat taxes.

Tax evasion

Tax evasion connotes the integration of three factors:

a) The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; b) An accompanying state of mind which is described as being "evil," in "bad faith," "willful," or "deliberate and not accidental"; and c) A course of action or failure of action which is unlawful.

It is 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 a tax saving device within the means sanctioned by law. It is politely called "tax minimization" and is not punishable by law. This method should be used by the taxpayer in good faith and at arm's length.

Tax avoidance

It is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same State or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected (Greenfield v. Meer 77 Phil 394). Exemption is allowed only if there is a clear provision therefor. It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis. In the construction of tax statutes, exemptions are not favored and are construed against the taxpayer.

Exemption

What are these? a. May be based on contract. In such a case, the public which is represented by the government is supposed to receive a full equivalent therefore, i.e. charter of a corporation. b. May be based on some ground of public policy, i.e., to encourage new industries or to foster charitable institutions. Here, the government need not receive any consideration in return for the tax exemption. c. May be based on grounds of reciprocity or to lessen the rigors of international double or multiple taxation.

GROUNDS FOR GRANTING TAX EXEMPTIONS

Kinds of Tax Exemption

1. As to basis 2. As to form 3. As to extent

Immunities from taxation which originate from the constitution.

As to basis - CONSTITUTIONAL

Immunities from taxation which emanates from legislation.

As to basis - STATUTORY

Exemptions expressly granted by statute

As to form - EXPRESS

When persons, property or rights are deemed exempt as they fall outside the scope of the taxing provision itself.

As to form - IMPLIED

Connotes absolute immunity.

As to extent - TOTAL

One where collection of a part of the tax is dispensed with.

As to extent - PARTIAL

It is the general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver of the Government of its right to collect. It is a way to give tax evaders, who wish to relent and are willing to reform a chance to do so.

Amnesty

It is the reduction in the selling price of income producing property by an amount equal to the capitalized value of future taxes that may be paid by the purchaser.

Capitalization

What are the Sources of Tax Laws?

1. Philippine Constitution 2. Tax treaties and international agreements 3. The National Internal Revenue Code (NIRC) or the Tax Code 4. Tariff and Customs Code 5. Local Government Code 6. Local tax ordinances (City or Municipal tax codes) 7. Other special laws 8. Decisions of the Supreme Court and the Court of Tax Appeals 9. Revenue rules and regulations and administrative rulings and opinions