General Principles of Taxation

Tax 111 – Income TaxationFerdinand C. Importado

CPA, MBA

What are taxes?

Taxes are enforced proportional contributions from persons and properties

levied by the lawmaking body of the government by virtue of its sovereignty for the support of the government and public

need.

Elements of a tax

• Enforced contribution• Generally payable in money• Proportionate in character• Levied on persons, properties, or the exercise

of a right or privilege• Levied by the state which has jurisdiction

over the subject or object of taxation• Levied by the lawmaking body of the state• Levied for public purpose

Levied for public purpose examples

• Construction of roads and bridges.• Pensions to retired government

employees and their widow and children.• Assistance to victims of calamities• Social welfare and healthcare projects.

As to subject matter or object

• Personal, poll or capitation tax – tax of a fixed amount imposed on individuals (citizens or aliens), residing within a specified territory without regard to their property or occupation in which they may be engaged.

• Example: Community tax

As to subject matter or object

• Property tax – tax imposed on property (real or personal), in proportion either to its value or in accordance with some other reasonable method of apportionment.

• Example: Real property tax

As to subject matter or object

• Excise of privilege tax – tax imposed upon the:– Performance of an act– Enjoyment of a privilege– Engaging in an occupation

• Example: Income tax

As to who bears the burden

• Direct tax – tax that is demanded from the person who also shoulders the burden of the tax. (e.g. Income tax, estate tax, donor’s tax)

• Indirect tax – tax demanded from one person in the expectation and intention that he shall indemnify himself at the expense of the others. (e.g. VAT, percentage tax)

As to determination of amount

• Specific tax – tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement; it requires no assessment other than a listing of classification of the subjects to be taxed. (e.g. Excise tax on distilled spirits, cigars and cigarettes)

As to determination of amount

• Ad valorem tax – tax of a fixed proportion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. (e.g. Real estate tax)

As to purpose

• General, fiscal or revenue tax – tax that is imposed solely to raise revenue for government expenditures. (e.g. Income tax, VAT)

• Special or regulatory tax – tax imposed for a special purpose. (e.g. Sugar adjustment taxes, Oil price stabilization fund)

As to authority imposing

• National – tax imposed by the national government. (e.g. Internal revenue taxes, customs duties)

• Municipal or local – tax imposed by municipal agencies. (e.g. Sand and gravel tax, occupation tax)

As to graduation or rate

• Proportional – tax based on a fixed percentage of the amount of the property, receipts or other basis to be taxed. (e.g. VAT)

• Progressive – tax the rate of which increases as the tax base or bracket increases. (e.g. Income tax, estate tax, donor’s tax)

• Regressive – tax the rate of which decreases as the tax base or bracket increases.

Inherent powers

• Eminent domain – the power of the state to take private property for public use upon paying to the owner a just compensation.

• Police power – the power of the state to enact such laws in relation to persons and properties as may promote public health, public morals, public safety, and the general welfare of the people.

• Taxation

Distinctions

Eminent domain

Police power Taxation

Regulates Property Liberty and property Property

Exercised by Public companies Government Government

Property taken Public use Destroyed Public use

CompensationConcrete, full

and fair equivalent

IntangibleConcrete, full

and fair equivalent

Limit Market value Cost of license No limit

Terminologies

• Permit or license fee – charge imposed under the police power for purposes of regulation.

• Toll – a sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge of a public nature.

• Special assessment - an enforced proportional contribution from owners of lands for special benefits resulting from public improvements.

Permit versus tax

Permit or license fee Tax

Levied by virtue of Police power TaxationPurpose Regulation Revenue generationLimit Cost of regulation No limit

Imposed on Legitimate business or occupation

Persons, properties, occupation, exercise of rights or privilege

legal or notEffect of non-payment Becomes illegal Does not render

illegal

Toll versus tax

Toll TaxDemand of Proprietorship Sovereignty

PurposeCompensation for

the use of property or improvements

Support of government

Imposed by Government or private individuals Government

Tax versus special assessment

Tax Special assessment

Application General Specific

Levied onPersons, properties, occupation, exercise of rights or privilege

Land

Basis Necessity and partially on benefits Wholly on benefits

Debt versus tax

Debt Tax

Source Contract, express or implied Law

Assignable Yes NoPayable Money and in kind MoneyNon-payment No imprisonment Imprisonment

Tax versus customs duties

Tax Customs duties

Imposed onPersons, properties, occupation, exercise of rights or privilege

Commodities imported or

exported

• Taxes include customs duties.• An act granting exemptions from all taxes of any kind and

nature carries with it exemptions from customs duties.

Double taxation

Direct duplicate or direct double taxation• Taxing twice for the:

– Same purpose– Same taxing authority– Same jurisdiction– Same period– Some of the property in the same territory

Revenue

• Refers to all funds or income derived by the government, whether from tax or any other source. – Grants received from other government– Donations from non-government sources– Loans from other entities (private and gov’t entity)– Administrative revenues (fines, penalties,

forfeitures) – Commercial revenues (GOCC)– Tax (internal revenue and customs duties)

Situs of taxation

• This shall mean the place of taxation.• The state which has jurisdiction to tax the

person, property or transactions may rightfully levy and collect the tax.

Situs of taxation

Object Situs of taxationBusiness, occupation, transaction

Place of business, occupation or transaction

Real and tangible personal property Location of property

Intangible personal property

Domicile of the owner unless the property has acquired a business status in another jurisdiction

Income Place where earned, citizenship or domicile of the owner

Gratuitous transfer of property

Residence or citizenship of the taxpayer or location of the property

Escape from taxation

• Means or methods by which the taxpayer saves the tax or escapes the burden of tax payment.

• It may or not result to a loss of revenue to the government.

• Legal or illegal mean

Forms of escape from taxation

• Do not reduce revenue collection of the government– Shifting– Capitalization– Transformation

• Result in loss of revenue of the government– Tax evasion– Tax avoidance– Exemption from taxation

Do not reduce government revenue

• Shifting – transfer of tax burden by one on whom the tax is assessed to another.

• Capitalization – 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.

Do not reduce government revenue

• Transformation – a method by which the manufacturer or producer upon whom the tax is imposed pays the tax and strives to recover such expenses through lower production costs without sacrificing quality of the product.

Result in loss to government revenue

• Tax evasion – fraudulent or forbidden schemes or devices designed to lessen or defeat taxes.

• Tax avoidance – exploitation by the taxpayer of the legally permissible alternative tax rates or methods of assessing taxable property or income in order to reduce tax liability.

Result in loss to government revenue

• Exemption from taxation – 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 taxing district are obliged to pay.

Tax amnesty

• Immunity from all criminal and civil obligations arising from non-payment of taxes.

• General pardon given to all taxpayers.• It applies only to past periods (retroactive

application).

Amnesty versus Exemption

Tax amnesty Tax exemption

ImmunityCivil and criminal obligations

Civil liability only

Application Retroactive Prospective

Set-off or compensation

• Taxes are not subject to set-off or compensation.

• A person cannot refuse to pay tax on the ground that the government owes him an amount equal to or greater than the tax being collected.

Taxpayer’s suit

• A taxpayer has a sufficient personality and interest to seek judicial assistance with a view of restraining what he believes to be an attempt to unlawfully disburse public funds.