TAXATION

General Principles of Taxation The key to the understanding and interpretation of the tax rulings is through a sound knowledge of its basic principles. Taxpayers often claim that a certain tax measure is baseless, irrational, unjust and even goes to the extent of branding it unconstitutional. His aversion lies on his poor knowledge and comprehension of the principles from which tax rulings emanate.

The Sovereign Powers   Eminent Domain – is the power of the State or those to whom the power has been delegated, to take private property for public use upon paying the owner a just compensation to be ascertained according to law. Police Power – has been referred to as the power of the State to enact such laws in relation to persons and property as may promote public health, public morals, public safety and the general welfare of the people. Taxation – the power by which the sovereign raises revenue to defray the necessary expenses of government.

Similarities of the Three Powers They are inherent in the state. They exist independently of the constitution They interfere with private rights and properties. They are legislative in nature and character. Each presupposes an equivalent compensation.

What is Taxation? TAXATION is the act of levying a tax, i.e., the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. As a power, it refers to the inherent power of the State to demand enforced contributions for public purpose or purposes.

Theory and Basis of Taxation The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; that it cannot continue without means to pay its expenses; and that for this means it has a right to compel all its citizens and property within its limits to contribute.  The basis of taxation is found in the reciprocal duties of protection and support between the State and its inhabitants. In return for his contribution, the taxpayer receives benefits and protection from the government. This is the so-called “benefits received principles.” The one is compensation for the other: protection for support and support for protection.

Purposes of Taxation

Principal Purpose – To raise revenue for governmental needs.   Secondary Purposes To reduce excessive inequalities of wealth. Example, the use of the progressive scheme of income taxation. Protective tariff on imported goods may be imposed to protect local producers against foreign competitors. To encourage the growth of home industries through the proper use of tax exemptions and tax incentives, and To implement the police power of the state in promoting the general welfare.

The Nature or Characteristics of Taxation   It is inherent in sovereignty; hence it may be exercised although not expressly granted by the Constitution It is legislative in character; hence, only the legislature can impose taxes (although the power may be delegated) It is subject to constitutional and inherent limitations; hence, it is not an absolute power that can be exercised by the legislature anyway it pleases.

What are Taxes?   TAXES are the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of the government and all public needs.

Basic Principles of a Sound Tax System Fiscal Adequacy – It means that the sources of revenue should be sufficient to meet the demands of public expenditures;   Equality or Theoretical Justice – It means that the tax burden should be proportionate to the taxpayer’s ability to pay. This is the so-called “ability to pay principle”; and Administrative Feasibility – The law must be capable of convenient, just and effective administration

Essential Elements of a Tax It is an enforced contribution It is generally payable in money. It is proportionate in character. It is levied on persons, property, or the exercise of a right or privilege. It is levied by the State which has jurisdiction over the subject or object of taxation. It is levied by the law-making body of the State. It is levied for public purpose or purposes.

Classifications of Taxes

As to subject matter or object of the tax Personal, poll or capitation – tax of a fixed amount on individuals residing within a specified territory without regard to their property or occupation. Example : Community tax Property – imposed on property whether real or personal, in proportion either to its value or in accordance with some other reasonable method of apportionment. Example : Real estate tax Excise – imposed upon the performance of an act, the enjoyment of a privilege or engaging in an occupation. Example: Donor’s tax, income tax

As to who bears the burden Direct – demand from persons who are intended or bound by law to pay the tax. Example : Corporate and individual income taxes Indirect – one which the taxpayer can shift to another. Example : Value-added tax; amusement tax; custom duties

As to determination of amount Specific – 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 or classification of the subjects to be taxed. Examples: Excise tax on distilled spirits, wines fermented liquors, cigars, petroleum products Ad Valorem – Tax of a fixed proportion of the value of the property with respect to which the tax is assesses. Example : Real estate; excise taxes on automobiles

As to purpose General, fiscal or revenue – Tax imposed solely for the general purposes of the government, i.e., to raise revenue for government expenditures. Examples : Income tax; value-added tax Special or regulatory – Tax imposed for a special purpose, i.e., to achieve some social or economic ends irrespective of whether revenue is actually raised or not. Example : protective tariffs or custom duties.

As to government authority imposing the tax National – Tax imposed by the national government. Example: Internal Revenue taxes; Custom duties Municipal or local – Taxes imposed by municipal corporations or local government units. Example : Real property tax; professional 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. Example : Real property taxes Progressive or graduated – Tax, the rate of which increases as the tax base or bracket increases. Example: Income tax Regressive – Tax, the rate of which decreases as the tax base or bracket increases. We have no regressive taxes.

Tax and Other Terms or Imposts

Distinguish tax from toll TOLL has been defined as a sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge or the like, of a public nature. A toll is a demand of proprietorship, while tax is paid for the support of the government. A toll is paid for the use of another’s property, while tax is paid for the support of the government. The amount of toll is based on the cost of construction or maintenance of the public improvement used, while the amount of tax is based on the necessities of the State; and A toll may be imposed by the government or private individual or entities, while a tax may be imposed only by the State.

Distinguish tax from penalty PENALTY is any sanction imposed as a punishment for violation of law or acts deemed injurious. Thus, the violation of tax laws may give rise to imposition of penalty. A penalty is designed to regulate conduct, while a tax is primarily aimed at raising revenue; and A penalty may be imposed by the government or private individuals or entities, while tax may be imposed only by the government.

Distinguish tax from special assessment SPECIAL ASSESSMENT is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements.   A tax can be distinguished from a special assessment by considering the characteristics of the latter, namely: A special assessment is levied only on land;. It is not a personal liability of the person assessed; It is based wholly on benefits (not necessity); and It is exceptional both as to time and place.

Distinguish tax from permit or license fee   PERMIT or LICENSE FEE is a charge imposed under the police power for purposes of regulation. License fee is imposed for regulation, while tax is levied for revenue; It involves an exercise of police power, while a tax involves the exercise of the taxing power; Its amount is usually limited to the necessary expenses of regulation, while there is generally no limit on the amount of tax that may be imposed;

It is imposed on the right to exercise a privilege, while a tax is imposed also on persons and property; It is the legal compensation or reward of an officer for specific services, while tax is an enforced contribution assesses by sovereign authority to defray public expenses; and Failure to pay a license makes the act or business illegal, while failure to pay a tax does not necessarily make the act or business illegal.

Distinguish tax from debt A debt is generally based on contract, while tax is based on law; A debt is assignable, while a tax cannot generally be assigned; A debt may be paid in kind, while a tax is generally payable in money; A debt may be the subject of set-off or compensation, while tax is generally not;

A person cannot be imprisoned for non-payment of debt (except when it arises from a crime), while imprisonment is a sanction for non-payment of tax (except poll tax); A debt is governed by the ordinary periods of prescription, while a tax is governed by the special prescriptive periods provided for in the Tax Code; and A debt draws interest when it is so stipulated or when there is default, while a tax does not draw interest except only when delinquent.

Distinguish tax from subsidy SUBSIDY is a pecuniary aid directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public. A subsidy, therefore, is not a tax although a tax may have to be imposed to pay it.

Distinguish tax from revenue REVENUE refers to all the funds or income derived by the government, whether from tax or any other source. While revenue refers to the amount collected, tax refers to the amount imposed.

Distinguish tax from custom duties CUSTOM DUTIES (or simply “duties”) are taxes imposed on goods exported from or imported into a country. “Custom duties” are really “taxes” but the latter term is broader in scope.

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