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Fundamentals of Taxation: An
Introductory Guide
Introduction to Taxation
Taxation
Taxation is a state power, a process, and a mode of cost distribution. The theory of taxation is based on the government's necessity for funding and the mutuality between the people and the government, where the receipt of benefits is conclusively presumed.
Theories of Cost Allocation
Benefit Received Theory : Taxes are levied based on the benefits received by the taxpayer from the government. Ability to Pay Theory : Taxes are levied based on the taxpayer's ability to pay, which is determined by factors such as income, wealth, and consumption.
Aspects of the Ability to Pay Theory
A. Vertical Equity : Taxpayers with higher ability to pay should contribute a larger share of their income in taxes. B. Horizontal Equity : Taxpayers with the same ability to pay should contribute the same amount of taxes.
The Lifeblood Doctrine
The lifeblood doctrine states that: 1. Taxes are imposed even in the absence of a constitutional grant. 2. Claims for tax exemption are construed against the taxpayer. 3. The government reserves the right to choose the objects of taxation. 4. The courts are not allowed to interfere with the collection of taxes. 5. In the context of income taxation: A. Income received in advance is taxable upon receipt. B. Deduction for capital expenditures and prepayments is not allowed, as it effectively defers the collection of income tax. C. A lower limit of deduction is preferred when a claimable expense is subject to a limit. D. A higher tax base is preferred when the tax object has multiple tax bases.
Inherent Powers of the State
Taxation Power Police Power Eminent Domain
Scope of Taxation Power
The taxation power of the state is comprehensive, plenary, unlimited, and supreme.
Limitation of Taxation Power
A. Inherent Limitations 1. Territoriality of Taxation : Tax can be imposed only within the territories of the state, with exceptions for income taxation (resident and non-resident) and transfer taxation (resident, non-resident, and alien). 2. International Comity : All states are equally sovereign, and the properties, income, or effects of fellow states should not be taxed. Treaty agreements take precedence over local tax law. 3. Public Purpose : Taxes must be levied for a public purpose. 4. Exemption of the Government : Taxing the government will not raise additional funds but will only impute additional costs. 5. Non-delegation of the Taxing Power : The power to tax is generally vested in the legislature, with some exceptions for local government units and the president.
B. Constitutional Limits of Limitation 1. Observance of Due Process of Law : Aspects of due process include substantive due process and assessments within 3 years from the due date of filing or the date of actual filing, and collections within 5 years from the date of assessment. 2. Equal Protection of Law : Taxpayers should be treated equally under the same circumstances. 3. Uniformity Rule in Taxation : The rule of taxation must be uniform and equitable under dissimilar circumstances, and taxpayers should not be taxed the same. 4. Progressive System of Taxation : Tax rates should increase as the tax base increases. 5. Non-imprisonment for Non-payment of Debt or Poll Tax : Non-payment of taxes, except for the basic community tax, should not result in imprisonment. 6. Non- impairment of Obligation and Contract : The government should not set aside its obligations from contracts by the exercise of taxation power. 7. Free Worship Rule : Tithes or offerings are not subject to tax, but properties or activities that are proprietary or commercial in nature are subject to tax. 8. Exemption of Religious, Charitable or Educational Entities, Non-profit Cemeteries, Churches and Mosques, Lands, Buildings, and Improvements from Property Tax : The doctrine of use applies, where the exemption applies for properties actually, directly, and exclusively used for charitable, religious, and educational purposes. 9. Non- appropriation of Public Funds or Property for the Benefit of any Church, Sect or System of Religion : There is a general prohibition on the appropriation of government funds to any particular system of religion, with some exceptions. 10. Exemption from Taxes of the Revenues and Assets of Non-profit, Non-stock Educational Institutions Including Grants, Endowments, Donations, or Contributions for Educational Purposes : The exemption applies to revenues and assets actually, directly, and exclusively devoted for educational purposes. 11. Concurrence of a Majority of All Members of Congress for the Passage of a Law Granting Tax Exemption : The approval of tax exemption requires an absolute majority, while the withdrawal of tax exemption requires a relative majority. 12. Non-diversification of Tax Collections : Tax collections
Non-compensation or Set-off : Taxes are not subject to automatic set- off or compensation, except in cases of obvious overpayment of taxes or local taxes. Non-assignment of Taxes : Tax obligations cannot be assigned or transferred to another entity by contract. Imprescriptibility in Taxation : The government's right to collect taxes does not prescribe unless the law itself provides for it. Doctrine of Estoppel : The government is not subject to estoppel, and the error of its employees is not binding on the government. Judicial Non-interference : The courts are not allowed to issue injunctions against the government's pursuit to collect taxes. Strict Construction of Tax Laws : Taxation is the rule, and exemption is the exception. Vague tax laws are construed against the government and in favor of taxpayers, while vague exemption laws are construed against the taxpayer and in favor of the government. Double Taxation : Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing, with the same type of tax, the same purpose of tax, and the same tax period.
Escapes from Taxation
A. Result to Loss of Government Revenue 1. Tax Evasion : Illegal tax dodging 2. Tax Avoidance : Legal tax minimization 3. Tax Exemption : Tax holiday, immunity, privilege, or freedom granted by the Constitution, law, or contract
B. Do Not Result to Loss of Government Revenue 1. Shifting : Forward shifting, backward shifting, and onward shifting 2. Transformation
Tax Amnesty and Tax Condonation
Tax Amnesty : A general pardon or absolute forgiveness, providing a fresh start for taxpayers. Tax Condonation : Forgiveness of tax obligation, including civil and criminal liability, but only for the civil liability.
