INCOME TAX: Chapter 1 Flashcards
____ are those not explicitly stated in the Constitution that allows the government to take actions, which are needed to efficiently perform essential duties.
It exist as essential force in order that a government can command, maintain peace and order, and survive, irrespective of any Constitutional provision.
Inherent powers
States have (3) three inherent powers
- Police Power
- The power of eminent domain
- The Power of Taxation
The power to protect citizens and provide for safety and welfare society.
Police Power
The power to take private property (with just compensation) for public use.
Eminent Domain
The tax power to enforce contributions to support the government. and other inherent powers of the state.
Taxation Power
(2) Requisites of a valid police measure:
(a.) _______ - the activity or property sought to be regulated affects the public welfare
It requires the primacy of the welfare of the many over the interests of the few
(b.) _______ - the means employed must be reasonable and must conform to the safeguards guaranteed by the Bill of Rights
(a.) Lawful Subject
(b.) Lawful Means
What are the 7 Purposes of Taxes?
(REFOPSH) or (REFSHOP)
- Rising Revenue
- Economic Stability
- Fair distribution of Income
- Optimum Allocation of resources
- Protection Policy
- Social Welfare
- Higher Employee Level
The Four R’s of Taxation
Taxation has four main purposes or effects:
- Revenue
- Redistribution
- Repricing
- Representation
The 4 R’s of Taxation:
The taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems.
Revenue
The 4 R’s of Taxation:
This refers to the transferring wealth from the richer sections of society to poorer sections.
Redistribution
The 4 R’s of Taxation:
Taxes are levied to address externalities; for example, tobacco is taxed to discourage smoking, and a carbon tax discourages use of carbon-based fuels.
Repricing
OBJECTS OF TAXATION
refers to individual taxpayers?
Natural person
OBJECTS OF TAXATION
includes corporations, tangible or partnerships and any association
Juridical person
It is immovable properties such as land and buildings
Real Properties
It is movable properties such as car and other personal belongings
Personal properties
Properties that which may be felt or touched and are necessarily corporeal, either real or personal properties
Tangible properties
Properties that are ‘rights’ rather than physical objects. Examples are patents, stocks, bonds, goodwill, trademarks, franchises and copyrights.
Intangible properties
It is the act of conducting activities related to any business or profession such selling, servicing, leasing, borrowing, mortgaging or lending
Transaction
It is a benefit derived through gratuitous transfer by fact of death or donation.
Privilege
It is a power, faculty or demand inherent in one person and incidental to another
Right
It is a power, faculty or demand inherent in one person and incidental to another
Right
It is an advantage accruing from anything
Interest
What are the 3 Scope of Taxation?
- Plenary or Complete
- Comprehensive
- Supreme
Scope fo Taxation
Taxation has unlimited area of application and only restricted by the inherent and constitutional limitation.
Plenary or Complete
Scope of Taxation
It has a wide scope of coverage. It covers all persons, properties, rights and transactions subject to taxation, unless expressly exempted by laws within the sovereign.
Comprehensive
Scope of Taxation
It has the highest degree of application and it considered as the strongest among the inherent power of the state.
Taxation reaches every trade or occupation, every object of industry, and every species of possession. It imposes a burden which, in case of failure to discharge, may be followed by seizure or confistication of property.
Supreme
What are 5 Inherent Limitations to Taxation
Inherent limitations are the natural restrictions to safeguard and ensure that the power of taxation shall be exercised by the government only for the betterment of the people whose interest should be served, enhanced and protected:
- Taxes may be levied only for public purpose
- Taxation cannot be delegated
- Taxation is limited to territorial jurisdiction
- Taxation is subject to international comity
- The government is generally tax exempt
Constitutional limitations
8 Constitutions
These are provisions of the fundamental law of the land that restrict the supreme, plenary, unlimited and comprehensive power to tax by the state.
As a rule, the Constitution does not create the power to tax on the State. Instead, it simply defines and regulates the exercise of tax power in order to safeguard the interest of affected taxpayer
What are the (8) 1987 Philippine Constitution sets limitations in the exercise of the power to tax as follows:
- Due process of law
- Equal protection of laws
- Rule of uniformity and equity 4. Non-impairment of contracts
- Origination of appropriation, revenue, and tariff bills
- President’s power to veto separate items in revenue or tariff bills
- Congress granting tax exemptions
- Exemption from taxation of properties actually, directly and exclusively used for religious, charitable or educational purposes
What are the 4 stages of Taxation?
- Levy or imposition
- Assessment and Collection
- Payment
- Refund
This process involves the passage of tax laws or ordinances through the legislature or through a local lawmaking body (e.g. sanggunian). The tax laws to be passed shall determine those to be taxed (person, property or rights), how much is to collect (the rate and the base of tax), and how taxes are to be implemented (the manner of imposing and collecting tax, i.e, tax remedies).
It may also include the grant of tax exemptions, tax amnesties or tax condonation.
Stage 1: Levy or imposition
This process involves the act of administration and implementation of tax laws by the executive through its administrative agencies such as the Bureau of Internal Revenue (BIR) or Bureau of Customs (BOC).
Stage [2] Assessment and Collection.
This process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the Government.
Payment of tax also includes the options, schemes or remedies as may be legally open or available to the taxpayer.
Stage [3] Payment.
This is a process of claiming for tax illegally collected or mistakenly paid. For a refund request to prosper, it must first be filed with the Commissioner of Intemal Revenue (CIR)
A suit or proceeding may be filed within the period provided by law from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment.
The Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the retum, such payment appears clearly to have been erroneously paid.
Stage [4] Refund.
What are the 2 Basis of Taxation?
- Principle of Necessity
- Principle of Benefit-Received or Benefit-Protection Theory
Basis of Taxation
Taxation is a power emanating from necessity to preserve the state’s sovereignty.
The government has the right to compel all its citizens, residents and property within its territory to contribute money. It is because the government cannot exist without any means to pay its expenses
- a necessary burden to preserve the state’s sovereignty. Taxation is the “lifeblood” or the “bread and butter” of the government and every citizen must pay his taxes.
Principle of Necessity
Basis of Taxation
Based on the recoprocal duties, the government collects taxes from the subjects of taxation in order that it may bable to perform its functions and provide services to them The government’s right to tax income emanates from its being a sëent partner in the production of income through means of providing protection, proper business climate and peace and order to the taxpayers in making of earnings
Under the benefit principle, taxes are seen as serving a function similar to that of prices in private transactions, that is, they help determine what activities the government will undertake and who will pay for them. If this principle could be implemented, the allocation of resources through the public sector would respond directly to consumer wishes
Principle of Benefit-Received of Benefit-Protection Theory
What are the 3 PRINCIPLES OF A SOUND TAX SYSTEM?
- FISCAL ADEQUACY
- ADMINISTRATIVE FEASIBILITY
- THEORETICAL JUSTICE OR EQUALITY
PRINCIPLES OF A SOUND TAX SYSTEM
► It is the sources of tax revenue should coincide with, and approximate the needs of, government expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to variations in public expenditures.
FISCAL ADEQUACY
PRINCIPLES OF A SOUND TAX SYSTEM
It is principle that…
►Tax laws should be capable of convenient, just and effective administration. Each tax should be:
➤ capable of uniform enforcement by government officials, convenient as to the time, place, and manner of payment, and not unduly burdensome upon, or discouraging to business activity.
ADMINISTRATIVE FEASIBILITY
PRINCIPLES OF A SOUND TAX SYSTEM
This is a principle that….
► The tax burden should be in proportion to the taxpayer’s ability to pay. This is the so-called ability to pay principle. Taxation should be uniform as well as equitable
Note: The non-observance of the above principles will not necessarily render the tax imposed invalid except to the extent those specific constitutional limitations are violated. (De Leon)
THEORETICAL JUSTICE OR EQUALITY
What are the 3 Certain Doctrines in Taxation?
- Prospective application of tax laws
- Imprescriptibility of Taxes
- Double Taxation
CERTAIN DOCTRINES IN TAXATION
This states that a tax bill must only be applicable and operative after becomin a law. Thus, the effectivity of the law commences upon its approval and its scope would only cover the present and future transactions.
Prospective application of tax laws
CERTAIN DOCTRINES IN TAXATION
It states that unless otherwise provided by the tax law itself, taxes in general are not cancelable. The court held that there is no time limit on the right of the BIR Commissioner to assess taxes on unreasonable accumulated earnings of the corporation. The law on prescription being a remedial measure should be interpreted liberally in order to protect the taxpayer.
Imprescriptibility of Taxes
CERTAIN DOCTRINES IN TAXATION
It refers to the imposition of taxes on the same income, assets or financial transaction at two different points of time. _____ can be economic, which refers to the taxing of shareholder dividends after taxation as corporate earnings.
Double Taxation
Double Taxation (Cont)
There is double taxation where one tax is imposed by the State and the other is imposed.
What are Kinds of Double Taxation?
As to its validity:
(2)
As to its scope:
(2)
As to its validity:
a. Direct Duplicate Taxation
b. Indirect Duplicate Taxation
As to its scope:
a. Domestic
b. International
As to its validity: ____
. It constitutes double taxation in the objectionable or prohibited sense.
. It violates the equal protection clause of the Constitution.
Same property is taxed twice when it should be taxed but once.
Local business tax based on gross revenues amounts to direct double taxation.
DIRECT
As to its validity: ____
- It is permissible and not repugnant to the Constitution.
- This is allowed if the taxes are of different nature or character imposed by different taxing authorities.
INDIRECT
As to its scope: _____
This arises when the taxes are imposed by the local or national government within the same State.
DOMESTIC
As to its scope: _____
It refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.
INTERNATIONAL
As to its scope: _____
It refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.
INTERNATIONAL
Occurs when illegal efforts are made to escape the payment of a tax
Tax Evasion
Powers not explicitly stated in the Constitution that allow the government to perform essential duties.
Inherent powers
The legislative body responsible for imposing and collecting taxes in the State.
Congress
What are the 4 R’s of Taxation?
The four main purposes or affect of Taxation
Revenue
Redistribution
Repricing
Representation
The taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems.
Revenue
This refers to the transferring wealth from the richer sections of society to poorer sections.
Redistribution
Taxes are levied to address externalities; for example, tobacco is taxed to discourage smoking, and a carbon tax discourages use of carbon-based fuels.
Repricing
What are the 3 OBJECTS OF TAXATION?
Person
Properties
Excise Objects
What are the 11 Certain Doctrines of Taxation?
- Prospective application of tax laws
- Imprescriptibility of Taxes
- Double Taxation
- Escape from Taxation
- Exemption from Txation
- EQUITABLE RECOUPMENT
- SET-OFF TAXES
- TAXPAYER SUIT
- COMPROMISES
- POWER TO DESTROY
- SITUS OF TAXATION
ESSENTIAL CHARACTERISTICS OF TAXES (At least 5)
- Enforced Contribution
- Imposed by the legislative body
- Proportionate in character
- Payable in the form of money
- Imposed for the purpose of raising revenue
- Used for a public purpose
- Enforced on some persons
- Commonly required to be paid at regular intervals
- Imposed by the sovereign state within its jurisdiction
Sources of Philippine Tax Laws
(At least 5)
- Constitution of the Philippines
- Judicial Decisions
- Executive Orders
- Special Laws
- Tax Treaties and Conventions with Foreign Countries
- Revenue Regulated promulgated by the Department of Finance
- BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum Orders
- BIR Rulings
- Local Government Code
It occurs when illegal efforts are made to escape the payment of a tax. (unlawful means)
Tax Evasion
Examples of Tax Evasion (At least 3)
Examples of Tax Evasion
1. Non-inclusion of Sales
- Deliberate fabrication of expenses
- Forming an artificial person to evade taxation
- Deliberate ly reduce taxable income
- Malicious failure to report income to defeat tax liability
It occurs when legally permissible attempts are made to minimize or reduce the tax to be paid. (lawful means)
Tax Avoidance
Examples of what?
- Selling shares of stock through a stock exchange in order to avail of the lower tax rates.
- Estate planning within the means sanctioned by the tax code has been held to be one of permissible tax minimization.
Examples of Tax Avoidance
SEVERAL (7) FORMS OF TAX AVOIDANCE
A. Tax Option
B. Shifting:
- Forward shifting
- Backward on shifting
- Onward shifting
C. Capitalization
D. Transformation
E. Exemption
F. Tax Amnesty
G. Tax Condonation or Tax Remission
FORMS OF TAX SHIFTING
______ The burden of tax is transferred from the manufacturer, then to the distributor and finally to the ultimate consumer of the product.
______ The tax burden in transferred from the ultimate consumer through factors of distribution to the factors of production.
______ The tax burden is shifted two or more times either forward or backward.
A. Forward Shifting
B. Backward Shifting
C. Onward Shifting
Several Forms of Tax Avoidance
Taxpayers may choose to pay lower tax rate in some transactions as permitted by Tax Laws.
Tax Option
Several Forms of Tax Avoidance
Basically, is the transfer of tax burden to another, the imposition of tax is transferred from the statutory taxpayer to another without violating the Law. As a rule, only indirect taxes may be shifted; direct taxes cannot be shifted
Shifting
Several Forms of Tax Avoidance
This refers to the reduction in the price of the taxed object equal to the capitalized value of the future taxes which the purchaser expects to be called upon to pay.
Capitalization
SEVERAL FORMS OF TAX AVOIDANCE
______ as a privilege is personal and in any ways cannot be transferred or assigned by the person to whom it is given without the consent of the state.
Exemption
SEVERAL FORMS OF TAX AVOIDANCE
The producer absorbs the payment of tax to reduce prices and to maintain market share. The tax, therefore, is transformed into a gain through the medium of production.
Transformation
SEVERAL FORMS OF TAX AVOIDANCE
Is a general pardon of the state by intentionally overlooking its authority to imposed penalties on persons guilty of tax evasion or violation of a particular revenue or tax law.
Used to give tax evaders a chance to start a new, properly comply with the tax laws, and pay the correct taxes.
Tax Amnesty
SEVERAL FORMS OF TAX AVOIDANCE
When the state desists or refrains from exacting, inflicting or enforcing something as well as to restore what has already been taken.
The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when expressed in the law.
Tax Condonation or Tax Remission
** (3) Classification of Tax Exemption**
- Expressed Exemption
- Implied Exemption or by Omission
- Contractual Exemption
Doctrine of Taxations
This doctrine of law states that a tax claim for refund, which is prevented by prescription, may be allowed to be used as payments for unsettled tax liabilities if both taxes arise from the same transaction in which overpayment is made and underpayment is due.
This doctrine is not applicable to cases where the taxes involved are totally unrelated.
EQUITABLE RECOUPMENT
Certain Doctrines of Taxation
This doctrine states that taxes are not subject to set-off or legal compensation because the government and the taxpayer are not mutual creditor and debtor of each other
A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater than the tax being collected.
SET-OFF TAXES
Certain Doctrines of Taxation
____ effected through court proceedings could only be allowed if the act involves a direct and illegal disbursement of public funds derived from taxation.
TAXPAYER SUIT A “TAXPAYER SUIT”
Certain Doctrines of Taxation
____ literally means place of taxation. The general rule is that the taxing power cannot go beyond the territorial limits of the taxing authority. Basically, the state where the subject to be taxed has a ___ may rightfully charge and collect the tax.
SITUS OF TAXATION
