INTRODUCTION TO TAXATION

Question 1

What is Taxation?

Answer 1

1. As a state power, taxation is an inherent power of the State to enforce a proportional contribution from its subjects for public purpose.
2. As a process, taxation is the process of levying taxes by the legislature of the State to enforce a proportional contribution from its subjects for public purpose.
3. As a mode of cost distribution, taxation is a mode by which the State allocates its costs or burdens to its subjects who are benefited by its spending.

Question 2

Explain the Theory of taxation.

Answer 2

A government cannot exist without a system of funding. The government’s necessity for funding is the theory of taxation.

Question 3

Explain the Basis of taxation.

Answer 3

Basis of taxation refers to the mutuality of support between the people and the government. The government provides benefits to the people in the form of public service and the people provide the funds that finance the government.

Question 4

Roger does not want to pay taxes since he lives in the mountains and therefore does not receive any benefit from the government in any way. Is he correct?

Answer 4

Taxpayers cannot avoid payment of taxes under the defense of absence of benefit received. The direct receipt or actual availment of government services is not a precondition to taxation.

Question 5

Explain the Benefits-Received theory.

Answer 5

Benefits-Received theory presupposes that the more benefit one receives from the government, the more taxes he should pay.

Question 6

Explain the Ability to Pay theory.

Answer 6

Ability to Pay theory presupposes that taxation should also consider the taxpayer’s ability to pay, and contribution should be based on their relative capacity to sacrifice for the support of the government. It has two aspects:

1. VERTICAL EQUITY - extent of one’s ability to pay is directly proportional to the level of his tax base.
2. HORIZONTAL EQUITY - requires the consideration of the particular circumstance of the taxpayer.

Question 7

Explain the Lifeblood Doctrine.

Answer 7

Taxes are essential and is the lifeblood of the government. Upon taxation depends the government’s ability to serve the people for whose benefit taxes are collected. It has the following implications:

1. Tax is imposed even in the absence of a Constitutional grant
2. Claims for tax exemptions are construed against the taxpayers
3. Government reserves the right to choose the objects of taxation
4. The courts are not allowed to interfere with the collection of taxes

Question 8

What are the Inherent Powers of the State? Explain each.

Answer 8

1. Taxation Power - power of the State to enforce proportional contribution from its subjects to sustain itself. (MOST IMPORTANT)
2. Police Power - General Power of the State to enact laws to protect the well-being of its people. (MOST SUPERIOR)
3. Eminent Domain - power of the State to take private properties for public use after paying just compensation.

Question 9

What are the limitations on taxation power?

Answer 9

It is divided into two:

1. Inherent Limitations
2. Constitutional Limitations

Question 10

What are the inherent limitations on taxation power? Explain each.

Answer 10

1. Territoriality of taxation - taxes can be imposed only within the territories of the State, except for:
   a. income taxation, resident citizens and domestic
   corporations are taxable on income derived within
   and outside PH.

b. transfer taxation - residents or citizens are taxable
on transfers of properties within or outside PH

2. International Comity - mutual courtesy or reciprocity between states. It is a basic principle that all states are equally sovereign, and each observes co-equal sovereignty by not taxing its fellow states.
3. Public Purpose - Taxes are intended and exercised only for public purpose.
4. Exemption of the government - government normally does not tax itself as this will not raise additional funds and will only impute additional costs. Exception includes its activities intended for profit-making and those from GOCCs.
5. Non-delegation of taxing power - legislative taxing power is vested exclusively in Congress and is non-delegable pursuant to the doctrine of separation of the branches of the government to ensure a system of checks and balances. What has been delegated cannot be delegated further. Exceptions to this includes:

a. LGUs are allowed to exercise the power to tax to
enable them to exercise fiscal autonomy.
b. Under the Tariff and Customs Code, the President is
empowered to fix the amount of tariffs to be flexible to
trade conditions.
c. Other cases.

Question 11

What are the constitutional limitations of taxation?

Answer 11

1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt/poll tax (Specifically, the BASIX COMMUNITY TAX)
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious/charitable entities, non-profit cemeteries, churches, mosques, from PROPERTY TAXES ONLY.
9. Non-appropriation of public funds or property for the benefit of a church, sect, or religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
11. Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption.
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. Requirement that appropriations, revenue, or tariff bills shall ORIGINATE EXCLUSIVELY in the House of Representatives.
16. The delegation of taxing power to LGUs

Question 12

Explain the stages of the exercise of taxation power

Answer 12

1. Levy or imposition -also called the IMPACT OF TAXATION, it involves the enactment of a tax law by Congress.
2. Assessment and collection - implemented by the administrative branch of the government. This stage is also called the INCIDENCE OF TAXATION.

Question 13

What is Situs of taxation?

Answer 13

Situs is the place of the taxation. Situs rules serve as frames of reference in gauging whether the tax object is within or outside the tax jurisdiction of a taxing authority.

Question 14

Explain the Marshall Doctrine.

Answer 14

This doctrine leans on the principle that “The power to tax involves the power to destroy.” Tax can be used to discourage or prohibit undesirable activities.

Question 15

Explain the Holmes Doctrine.

Answer 15

This doctrine leans on the principle that “Taxation power is not the power to destroy while the court sits.” Taxation is used to build and encourage activities by the grant of tax incentives.

Question 16

What is double taxation? What are its elements and its types?

Answer 16

Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing.

Elements of double taxation:

1. Primary element: Same object
2. Secondary elements:
   a. same type of tax
   b. same purpose of tax
   c. same taxing jurisdiction
   d. same tax period

Types of double taxation
1. Direct double taxation - occurs when all elements of double taxation exists for both impositions. Direct double taxation is DISCOURAGED.

2. Indirect double taxation - occurs when at least one of the secondary elements of double taxation is not common for both impositions.

Question 17

What are the escapes from taxation? Explain each.

Answer 17

Escapes from taxation are classified into 2 types:
A. Those that result to loss of government revenue
1. Tax evasion/dodging - illegally reducing/avoiding payment of tax

2. Tax avoidance/minimization - legal means of reducing tax
3. Tax exemption/holiday - immunity/privilege from being subject to tax which others are subject to.

B. Those that do not result to loss of government revenue

1. Shifting - process of transferring tax burden to other taxpayers
   a. Forward shifting - manufacturer to retailer
   b. Backward shifting
   c. Onward shifting - combination of forward and backward
2. Capitalization - adjustment of the value of an asset caused by changes in tax rates.
3. Transformation - elimination of wastes or losses by the taxpayer to form saving to compensate for the tax imposition or increase in taxes.

Question 18

What is a tax amnesty?

Answer 18

Amnesty is a general pardon granted by the government for erring taxpayers. It enables them to have a fresh start and it is an absolute forgiveness by the government on its right to collect and is retrospective in application. It covers BOTH CRIMINIAL AND CIVIL LIABILITIES OF THE TAXPAYER.

Question 19

What is a tax condonation?

Answer 19

Tax condonation/remission is the forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. It only applies to CIVIL LIABILITIES.

Question 20

Differentiate tax laws and tax exemption laws.

Answer 20

Tax laws - laws that provide for the assessment and collection of taxes. Philippine tax laws are CIVIL IN NATURE, not political.

Tax exemption laws - laws that grant immunity from taxes.

Question 21

What are the elements of a valid tax?

Answer 21

1. Tax must be levied by the taxing power having jurisdiction over the object of taxation
2. Tax must not violate constitutional and inherent limitations
3. Tax must be uniform and equitable
4. Tax must be for public purpose
5. Tax must be proportional in character
6. Tax is generally payable in money

Question 22

What are the classifications of taxes? Briefly define each.

Answer 22

1. As to purpose
   a. Fiscal/revenue tax - imposed for general purpose
   b. Regulatory - imposed to regulate business
   c. Sumptuary - imposed to achieve some social or economic objective.
2. As to subject matter
   a. Personal/poll/capitation - tax on residents
   b. Property tax - tax on real or personal properties
   c. Excise or privilege tax - imposed upon the performance of an act or the enjoyment of a privilege.
3. As to incidence
   a. Direct tax - both the impact and incidence of taxation rests upon the same taxpayer. Tax is collected from the same person who is intended to pay the same.
   b. Indirect tax - When the tax is paid by any person other than the one intended to pay the same.
4. As to amount
   a. Specific tax - tax of a fixed amount imposed on a per unit basis
   b. Ad valorem tax - tax of a fixed proportion imposed upon the value of the tax object
5. As to rate
   a. Proportional - flat/fixed rate tax
   b. Progressive/graduated - tax which imposes increasing rates as the tax base increases.
   c. Regressive tax - imposes decreasing tax rates as the tax base increases.
   d. Mixed tax - combination of any of the above.
6. As to imposing authority
   a. National tax - tax imposed by the national government
   b. Local tax - tax imposed by the municipal or local government

Question 23

What is special assessment?

Answer 23

Special assessment is levied by the government on lands adjacent to a public improvement. Special assessment is NOT A TAX.

Question 24

What are the principles of a sound tax system? Briefly explain each.

Answer 24

1. Fiscal adequacy - requires that the sources of government funds must be sufficient to cover government costs
2. Theoretical Justice - taxation should consider the taxpayer’s ability to pay.
3. Administrative Feasibility - suggests that tax laws should be capable of efficient and effective administration to encourage compliance.

Question 25

T or F
Police power of the government may be exercised through taxation

Answer 25

True

Question 26

What government agencies are exempt from tax?

Answer 26

1. GSIS
2. SSS
3. PCSO
4. PHIC

Question 27

Explain the non-impairment clause under the constitution.

Answer 27

The non-impairment clause safeguards the integrity of contracts against unwarranted interference by the State. Contracts should not be tampered with by subsequent laws that would change/modify the rights and obligations of parties.
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 deals with anything that diminishes the efficacy of a contract.

Question 28

What are the sources of tax laws?

Answer 28

In the order of priority:

a. Constitution
b. Tax Treaties and Conventions with other countries
c. Tax Code (NIRC RA 8424), TRAIN (RA 10963) CREATE (RA 11534) Tariff and Customs Code, Local Government Code
d. Statutes and laws
e. Presidential Decrees and Executive Orders
f. Court decisions
g. Revenue issuances promulgated by the Department of Finance (Revenue regulations, revenue memo circulars, revenue memorandum orders, BIR revenue rulings
h. Local Tax ordinances

Question 29

What is a taxpayer’s suit?

Answer 29

It provides that a taxpayer suit can only be allowed if the act involves a direct and illegal disbursement of public funds derived from taxation.

Question 30

What taxes apply to a charitable non-profit hospital?

Answer 30

A non-profit hospital is a special corporation subject to a preferential rate of 10% on income tax. It is also exempt from RPT.

Question 31

What taxes apply to a non-stock non-profit educational institution?

Answer 31

A non-stock non-profit educational institution is exempt from RPT, and exempt from income tax on activities related to its purpose.

Question 32

Explain the interpretation of tax laws and tax exemptions in case of ambiguity.

Answer 32

Tax law ambiguity - liberally in favor of the taxpayer and strictly against the government

Tax exemption ambiguity - liberally in favor of the government, strictly against the taxpayer

Question 33

Explain the Global System of Income Taxation.

Answer 33

All items of gross income, deductions are reported in one income tax return and the applicable tax rate is applied on the tax base.

PH follows a semi-global system

Question 34

Explain the Schedular System of Income Taxation.

Answer 34

Different types of income are subject to different sets of graduated or flat income tax rates.

PH follows a semi-schedular system

Question 35

Explain the Equitable Recoupment Doctrine.

Answer 35

Claims for refund which is PREVENTED BY PRESCRIPTION may be allowed to be used as payment for unsettled tax liabilities if both taxes arise from the same transaction in which overpayment is made and underpayment is due.