. Definition and Concept of Taxation-Mode by which governments make exactions for revenue in order to

support their existence and carry out for their legitimate objectives.- it is indispensable and inevitable price for civilized society ;without

which the government would be paralyzed.

Basis of Taxation1.Necessity-government cannot exist and function without the means

to pay its Expenditures.

2. Reciprocal Duties – protection and support between the state and its inhabitants.

.Nature of taxation (2 fold)1.Inherent –co-existing with the state.no legislation is necessary to exercise the power of Taxation.2. Legislative - only the legislature can make tax law.Subject to

constitutional limitation The legislative taxing power includes the authority

(a) to determine the nature, object, extent, coverage and situs of tax

imposition (b) to grant tax exemptions or condonations (c) to specify to provide

for the administrative, as well as the judicial, remedies that

either the government or the tax payer may avail themselves of in the proper implementation of the tax measure.

Limitations of Taxation1. Taxation is for public purpose- the proceeds of the tax must be used for the support of the state or for some recognized objects of government or to directly promote the welfare of the community.2. Taxation is inherently legislative- inherent power of sovereignty

3.Taxation is territorial- exercised only within territorial jurisdiction of the taxing Authority.

A.Tax Situs Criteria a. poll taxes-residence of taxpayer b. property tax- where the property is situated

c.excise tax – where the privilege is exercised, taxpayer is a national of, and his residence .

4.Subject to international comity-State must recognize he generally accepted tenets of

international law among which are the principles of

sovereign equality among states and their freedom

from suit without their consent.

.Characteristics of Tax1.It is an enforced contribution2.It is exacted pursuant to legislative authority3.It involves the exercise of the taxing power4.It is a contribution in money5.It is for the purpose of raising revenue6.It is used for governmental purposes.

Aspect of Taxation

1. Levy- refers to the legislative act of imposing the tax and is exercised by congress

2. Collection – administrative act of collecting the tax and is exercised by the executive branch of the government

. Power of taxation compared with other powers1.Taxation is the inherent power of the sovereign state to impose

financial burden on persons and property as a means of raising revenue in order to defray the necessary expenses of the government.

2.Police power- inherent power of the sovereign state to enact laws to promote public health, public morals.public safety and the general welfare of the people.

3.Eminent domain- inherent power of the sovereign state to take private property for public use upon payment of just compensation.

AMOUNT:Taxation-no limit so as long as it is not confiscatoryPolice power- should only cover the cost of the regulation (issuance of

a license)Eminent domain- the amount depends on the value of property

needed

COMPENSATIONT-general benefit to all inhabitantsP-intangible altruistic feeling of having done something goodE- just compensation

PROPERTY TKENT-generally moneyP-property including money which is the source, implements, or

proceeds of the danger to health, safety or morals

E- property other than money and chooses in action

SCOPET & E- interfere only with property rights although violation of tax

laws may result to imprisonment

P-regulates both liberty and property.

Purpose of Taxation1.Revenue raising-to support purposes of government, to finance the

needs of the citizen and to advance the common well

2.Non Revenue/Special or regulatory-taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state.

- Reduce social inequality, encourage the growth of local industries, protect local industries against unfair competition and implement police power of the state.

Principles of Sound Tax System

1.Fiscal Adequacy- the sources(proceeds) of tax revenue should coincide with and approximate the needs of government expenditure. Neither an excess or a deficiency of revenue vis-à-vis the needs of government would be in keeping with the principle.

- sources of revenue should be sufficient to meet the expanding expenditures of the government

2. Administrative feasibility- the tax system should be capable of being properly and efficiently administered by the government and enforced with the least convenience to the taxpayer.

- Tax must be plain and clear to the taxpayer and should be capable of efficient enforcement by government officials.

3. Theoretical justice – tax system should be fair to the average taxpayer and based upon his ability to pay.

- equitable- proportionate to the ability of taxpayer.

.Theory and Basis of Taxation

1.Life Blood Theory-taxes constitute the lifeblood of the nation and are greatly needed to support the government and its widely expanding services to the people. Application of lifeblood

-must be collected with unnecessary hindrance-claims for refund or tax credit should be exercised within

the time fixed by law

-government agencies continue to operate and with which the state effects functions for the welfare of its constituents

-court must be similarly sensitive of its responsibility to apply principles of

justice,equity and fairness as its guide in its difficult tasks of weighing the evidence and of deciding cases.

2.Necessity Theory- Government has the right to compel all its citizens and property within its limits to pay taxes since its existence is a necessity.

3.Benefits-Protection Theory(Symbiotic relationship)- A citizen pays from his property the portion demanded in order that he may be secured in the enjoyment of of the benefits of the organized society. A Tax is not imposed on the basis of a special or particular benefit accruing to each citizen in proportion to the tax paid.

-one must surrender a part of his hard earned income to the taxing authority,every person must contribute his share in the running of the government.The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values.

4.Jurisdiction over subject and objects

.Doctrines in Taxation

1.Prospectivity of Tax Laws- taxes may b imposed retroactively but, unless so expressed by

such law it must be imposed prospectively.

-neither political nor penal in nature and deemed laws of occupied territory rather than of occupying enemy.

2.Imprescribility of taxes- taxes are imprescriptible. - NIRC provides for statutes of limitation - secs 203 AND 222 - prescriptive period were considered to be

applicable only to those taxes that were thereunder required to be reported or returned by the taxpayer for tax purposes.

-Tax law provides limitations in collection of taxes to safeguard taxpayers from any unreasonable examination, investigation or assessment.-RA 9135 amended the Tariff and Customs Code making the prescriptive period for payment of customs duties into 3 years.-LGU provides prescriptive period for the assessment(5years) and collection (5 yrs) of taxes

3.Double Taxation-taxing for the same taxing period the same thing or

activity twice when it should be taxed but once, for the same purpose with the same kind of character of tax.

Constitutionality

Double Taxation in its stricter sense isundoubtedly  unconstitutional  but that  in  thebroader sense is not necessarily so.

General  Rule:

Our  Constitution  does  notprohibit double taxation; hence, it may not be invoked as a defense against the validity of taxlaws.

a.Where a tax is imposed by the NationalGovernment and another by the city for theexercise of occupation or business as the taxesare not imposed by the same public authority(City of Baguio vs De Leon, Oct. 31, 1968)

b.When a Real Estate dealer’s tax is imposedfor engaging in the business of leasing real estatein addition to Real Estate Tax on the propertyleased and

the tax on the income desired as theyare different kinds of taxc.Tax  on manufacturer’s  products  andanother tax on the privilege of storing exportablecopra in warehouses within a municipality areimposed as first tax is different from the secondd.Where, aside from the tax, a license fee isimposed in the exercise of police power.

Exception:Double Taxation while not forbidden,is something not favored.  Such taxation, it hasbeen held, should, whenever possible, be avoidedand prevented.a.Doubts as to whether double taxation hasbeen imposed should be resolved in favor of thetaxpayer.  The reason is to avoid injustice andunfairness.b.The taxpayer may seek relief under theUniformity  Rule  or the  Equal  Protectionguarantee

Direct Double Taxation-taxing twice by the same public authority for the same purpose during the same taxing period some of the property in the territory in which the tax is laid without taxing all of them a second time

Indirect duplicate taxation-permissible double taxation -taxes are of different nature or character

imposed by different taxing authority.

C. Constitutionality of Double Taxation(Manufacturers Life v. Meer, GR L-2910, June 29,1951)NO constitutional prohibition

D.Modes of Eliminating Double Taxation-Treaty provisions against double taxation-Reciprocity provisions-Tax credit provisions

TAX TREATY AS A MODE OF ELIMINATINGDOUBLE TAXATION:

1)EXEMPTION METHOD – the income or capitalwhich is taxable in the state of source or situs isexempted in the state of residence, although insome instances it may taken into account indetermining the rate of tax applicable to the taxpayer’s remaining income or capital (ex. TaxSparing Credit scheme)

2)CREDIT METHOD – the tax paid in the state ofsource is credited against the tax levied in thestate of residence

4. Escape from taxationA.Shifting of tax burden- transfer of the burden of tax by original payer or the one on whom the tax was assessed or imposed to another or someone else who bears it

1.Ways of Shifting Tax Burdena.Forward shifting- transfer of tax from a factor of

production through the factors of distribution until the burden finally rest on the consumer.

b.Backward shifting- transfer the tax from the point of consumption through the factors of distribution to the factors of production.

Ex. the consumer may shift the tax to the retailer by refusing to purchase unless the price is reduced.

c.Onward shifting- tax is transferred two or more times through the factors of distribution or production.(maybe forward or backward)

2.Taxes that can be shifted-. It is only possible in connection with a price transaction, whether of goods, services or of the factors of production.

3.Meaning of impact and incidence of taxation- transfer of the burden of tax by original payer or the one

on whom the tax was assessed or imposed to another or someone else who bears it

B. Tax Avoidance - use of the taxpayer of legally permissible methodsto reduce his tax Liability.

-must be used in good faith and arm length-proper use of depreciation methods in claiming

deductible

expenses to lessen income taxes.C.Tax Evasion-use of the taxpayer of illegal means to avoid or minimize payment of tax

Deliberate understatement of revenues or overstatement of expenses to lessen taxes.

5. Exemption from taxationA.Tax exemption- privilege of not being imposed financial burden to which other may be subject.Strictly construed against the taxpayer and liberally construed in favor of the government.

B.Nature of exemption- public policy and expediency1 . It is merely a personal privilege of thegrantee2. It  is

generally  revocable  by  thegovernment unless the exemption is founded ona contract which is protected from impairment,but the contract must contain the other essentialelements of contracts, such as, for example, avalid cause or consideration.3. It implies a waiver on the part of thegovernment of its right to collect what otherwisewould be due to it, and in this sense is prejudicialthereto.4. It is not necessarily discriminatory so longas the exemption has a reasonable foundation orrational basis

C.Kinds of Tax exemption 1.Express-provisions in the constitution, statutes, treaties or similar legislative acts

2.implied- by omission,equity is a basis of statutory exemption3.contractual-agreed by taxing authority in contracts lawfully

entered into.

AS TO SOURCE: i. constitutional

ii.statutory

AS TO MANNER OF GRANT iii.express iv. implied

AS TO SCOPE v. total vi. partial

D.Grounds for exemption

1.Contract- binding upon succeeding legislature because the legislature is supposed to have surrendered it. It is binding upon the state and irrevocable during the term for which it purports to be granted, only if it is supported by a valuable consideration sufficient to uphold a contract between individuals.

2. Public Policy- such might justify a pension or donation of a public funds on some general rule of which all who come within it may have the benefit, or such makes the public at large interested in encouraging or favoring the class or interest in whose behalf the exemption is made.

Grounds for Tax Exemptions1. May be based on a contract in which

case,the public represented by the Government is supposed to receive a full equivalent therefore

2. May be based on some ground of public policy, such as, for example, to encourage new and necessary industries.

3. May be created in a treaty on grounds of reciprocity or to lessen the rigors of international double or multiple taxation which occur wherethere are many taxing jurisdictions, as in thetaxation of  income  and  intangible  personalproperty

E.Revocation of Tax exemption-exemption which does not constitute a contract but merely

spontaneous concession by the legislature ,not connected with any service or duty imposed is revocable by the power which made the grant. A State may withdraw an exemption which is a mere gratuity possessing no element of contract.

Tax exemption is subject to modification, repeal in the legislative discretion

SOURCES OF EXEMPTION1.Constitution2.Statutes3.Treaties4.Ordinances5.Franchises6.Contracts

6. Compensation and Set off-( taxes are not subject to set-off or legal comensation)

-there were taxes and taxpayer’s claim are fully liquidated,due and demandable,legal compensation under art 1279 of the Civil Code can take place by operation of law and both debts are extinguished to the concurrent amount.

-there can be no offsetting of taxes against the claims that the tax payer may have against the government. A Person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected.(PHILEX MINING CORP vs.Commissioner of Internal Revenue,GR no.125704)

Requisites of compensation1.That each one of the obligor be bound principally, and that he be at the sametime a principal creditor of the other.

2.That both debts consist in a sum of money, or if the things due areconsumable, they be of the same kind and also of the same quality if thelatter has been stated.

3.That the two (2) debts be due.

4.That they be liquidated and demandable.

5.That over neither of them there be any retention or controversy, commencedby third persons and communicated in due time to the debtors.

Rules re: set off or compensation of debts

•General rule: A tax delinquency cannot be extinguished by legalcompensation. This is so because the government and the tax delinquent arenot mutually creditors and debtors. Neither is a tax obligation an ordinary act.Moreover, the collection of a tax cannot await the results of a lawsuit againstthe government. Finally, taxes are not in the nature of contracts but grow outof the duty to, and are the positive acts of the government to the making andenforcing of which the personal consent of the taxpayer is not required.

(Francia v. IAC, 162 SCRA 754 and Republic v. Mambulao Lumber, 4 SCRA 622)

•Exception : SC allowed set off in the case of Domingo v. Garlitos [8 SCRA 443]re: claim for payment of unpaid services of a government employee vis-à-visthe estate taxes due from his estate. The fact that the court havingjurisdiction of the estate had found that the claim of the estate against thegovernment has been appropriated for the purpose by a corresponding lawshows that both the claim of the government for inheritance taxes and theclaim of the intestate for services rendered have already become overdue anddemandable as well as fully liquidated. Compensation therefore takes place byoperation of law.

Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)Philex Mining Corporation was to set off its claims for VAT

input credit/refundfor the excise taxes due from it. The Supreme Court disallowed such set off orcompensation.

7.Compromise-allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering into

it is duly authorized to do so.- Civil and criminal liability

8.Tax liabilityA.meaningB.Distinguished from tax exemption

9.Construction and interpretation of A. GR,.tax law-consideration is the legislative intent

-when doubt exists in determining that intent,the doubt must be resolved

liberally in favor of taxpayers and strictly against taxing authority.

-A Statute will not be construed as imposing tax unless it does so clearly, expressly, and unambiguously.

EX..does not extend to cases involving the issue of the validity of the tax law itself

which is presumed valid.-the government is not estopped from collecting taxes

because of mistakes or errors on the part of its agents.

B.Tax exemption and exclusion GR..not presumed and when granted, are strictly construed against the grantee.

EX.

C.Tax rules and RegulationsGR.

D.Penal Provisions of Tax Law

E,Non Retroactive application to tax payers-may be prejudicial to taxpayers

-EX.

-taxpayer deliberately misstates or omits material facts from his return or any document required of him by BIR

- facts subsequently gathered by BIR are materially different from the facts on which ruling is based

-taxpayer acted in bad faith