BASIC PRINCIPLESOF TAXATION

TAXATION is defined in many ways.

Commonly heard definitions include:

It is the process by which the sovereign, through its law making body, races revenues use to defray expenses of government.It is a means of government in increasing its revenue under the authority of the law, purposely used to promote welfare and protection of its citizenry.It is the collection of the share of individual and organizational income by a government under the authority of the law.

Taxation is the inherent power of the state to impose and demand contribution upon persons, properties, or rights for the purpose of generating revenues for public purposes.

The power of taxation upon necessity and is inherent in every government or sovereignty.

Taxes are the enforced proportional contribution, generally payable in money, levied by the law-making body of the State by virtue of its sovereignty upon the persons or property within its jurisdiction for the support of the government and all public needs.

Principles and Theories of TaxationThe Benefit Principle. This principle holds the individuals should be taxed in proportion to the benefits they receive from the governments and that taxes should be paid by those people who receive the direct benefit of the government programs and projects out of the taxes paid.

The Ability-to-Pay Principle. This principle holds that taxes should relate with the peoples income or the ability to pay, that is, people with greater income or wealth and can afford to pay more taxes should be taxed at a higher rate than people with less wealth. Ex. Individual income tax.

The Equal-Distribution Principle. This principle that income, wealth, and transaction should be taxed at a fixed percentage; that is, people who earn more and buy more should pay more taxes, but will not pay a higher rate of taxes.

Structures of a Tax SystemA tax is proportional. Meaning the government takes an amount of money from a person which is indirect proportion to his income. Ex. Ben salary is 10,000pesos and the government is deducting 10% of his salary for tax. After a year his income increases to 15,000pesos and the governments now deducts 12% of his salary for tax. The said tax is proportional.A tax is regressive. Meaning that the governments takes a larger percentage of a persons income per tax, while he is receiving a lower income. Ex. Bens salary 10,000pesos and government is asking him to pay 15% of his salary for tax which is contrary to our given example in number 1. A tax is progressive. Meaning that the government takes a lager percentage of his salary for tax due to his high salary. Ex. Ben has a monthly income of 30,000pesos and the governments deducted 20% of his salary for tax. The tax amount is proportionately equal to someones status in the society. A rich man should pay more than a poor man.

Significance of TaxationPrimary purpose: generates funds or revenues use to defray expenses incurred by the government in promoting the general welfare of its citizenry.

Other purposes: to equitably contribute to the wealth of the nationto protect new industriesto protect local producers

Characteristics of TaxIt is enforced contribution. Its payment is not voluntary nature, and the imposition is not dependent upon the will of the person taxed.

It is generally payable in cash. This means that payment by checks, promissory notes, or in kind is not accepted.

It is proportionate in character. Payment of taxes should be base on the ability to pay principle; the higher income of the tax payer the bigger amount of the tax paid.

It is levied (to impose; collect) on person or property. There are taxes that are imposed or levied on acts, rights or privileges. Ex. Documentary tax.

Characteristics of TaxIt is levied by the state which has jurisdiction over the person or property. As a general rule, only persons, properties, acts, right or transaction with in the jurisdiction of the taxing state are subject for taxation.

It is levied by the law making body of the state. This means that a prior law must be enacted first by the congress before assessment and collection may be implemented of the 1987 constitution.

It is levied for public purposes. Taxes or imposed to support the government for implementation of projects and programs.

Basic Principles of a Sound Tax SystemFiscal adequacy. Means that the sources of revenue taken as a whole should be sufficient to meet the expanding expenditures of the government regardless of business, export taxes, trade balances, and problems of economic adjustment. Revenues should be capable expanding or contracting annually in response to variations of public expenditures.

Equality or Theoretical Justice. Means the taxes levied must be base upon the ability of the citizen to pay.

Administrative Feasibility. This principle connotes that in a successful tax system, such tax should be clear and plain to taxpayers, capable of enforcement by an adequate and well-trained staff of public office, convenient as to the time and manner payment, and not unduly burdensome upon on discouraging to business activity.

Consistency or Compatibility with Economic Goals. This refer to the tax laws that should be consistent with economic goals or programs of the government. This are the basic services intended for the masses.

Classification of TaxesAs to subject matterPersonal, Poll or Capitation Tax (ex. Residence Tax)Property Tax. (ex. Real State Tax)Excise Tax (ex. RVAT)

As to who bears the burdenDirect Tax (ex. Income Tax)Indirect Tax (ex. Buying of goods and services (RVAT) )

As to determination of account Specific Tax (ex. Taxes on wines)Ad Valorem Tax (ex. Tax according to value such as Real Estate Tax.

Classification of TaxesAs to purpose General Tax (ex. Almost All Taxes)Special Tax

As to scopeNational Tax (ex. National Revenue Taxes)Local Tax

6. As to graduation rateProportionalProgressive or graduatedRegressive

Classification of TaxesAs to subject matterPersonal, Poll or Capitation Tax (ex. Residence Tax) Tax of fixed amount imposed on individuals residing within a specified territory without regard to their property or the occupation in which they may be engaged. Example: community tax

Property Tax. (ex. Real State Tax) Tax 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 Tax (ex. RVAT) Tax imposed upon the performance of an act, the enjoyment of privilege, or the engaging in an occupation. Example: income tax, value added tax, percentage tax

Classification of TaxesAs to who bears the burdenDirect Tax (ex. Income Tax) Tax which is demanded from the person who is intended to pay. Example: community tax, income tax

Indirect Tax (ex. Buying of goods and services (RVAT) ) Tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another; or tax which the tax payer can shift to another.Example: value-added tax

Classification of TaxesAs to determination of account Specific Tax (ex. Taxes on wines) Tax of a fixed amount imposed by the head or number, or by some standard of weight of measurement; it requires no assessment other than a listing or classification of the objects to be taxed. Example: Excise tax on distilled spirits, cigars and cigarettes.

Ad Valorem Tax (ex. Tax according to value such as Real Estate Tax. Tax of fixed proportion of the amount or value of the property with respect to which tax is assessed. Example: income tax, real estate tax, customs duties, excise tax on automobiles and non essential goods.

When classifying taxes according to subject matter or object, excise tax or privilege tax is employed to refer to as other than personal tax and property tax.

Excise Tax are taxes applicable to certain specified articles manufactured or ;produced in the Philippines for domestic sale or consumption or any other disposition and to things imported into the Philippines.

These taxes maybe specific or ad valorem.Classification of TaxesAs to determination of account

Classification of TaxesAs to purpose General, Fiscal, or Revenue Tax (ex. Almost All Taxes) Tax imposed for the general purpose of the government to raise revenue for governmental needs. Example: income taxes, business taxes.

Special Tax Tax imposed for special purpose of the government to achieve some social or economic ends irrespective of whether revenue is actually raised or not. Example: protective tariffs on imported goods.

Classification of TaxesAs to authority imposing the tax

National Tax imposed by the national government. Example: National Internal Revenue Tax - income taxes, customs duties, national taxes imposed by special lwas .

Municipal or Local Tax imposed by municipal corporations or local governments. Example: real estate tax, tax on occupations

Classification of Taxes6. As to graduation rateProportional Tax based on fixed percentage of the amount of the property, income tax or other basis as to be taxed. Example: real estate taxes, value added tax, percentage taxes

Progressive or graduated Tax the rate at which increases as the tax base increases. Example: income tax, estate tax, donors tax

Regressive Tax the rate at which decreases as the tax base increases.

Income Tax

Tax on all yearly profits arising from property, profession, trades or offices, or as a tax on a persons income, emoluments, and profits.

It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but upon the right of a person to receive income or profits.

Power to Impose Income Tax

Taxes are imposed based on constitutional provisions expressly authorizing the imposition of specified kind of taxes other than income taxes.

Functions of Income Tax

To provide large amounts of revenues.

To offset regressive sales and consumption taxes and together with estate tax.

To mitigate the evils arising from the inequalities in the distribution of income and wealth which are considered deterrents to social progress, by a progressive scheme of taxation.

Functions of Income Tax

Income Tax is regarded as the best measure of persons ability to pay.

Distinction of TaxTax distinguished from TollA tax is demand of sovereignty, while toll is demand for proprietorship.A tax is paid for the use of the governments property, while a toll is paid for the use of anothers property.A tax may be imposed by the government only, while a toll is enforced by the government or a private individual or entity.

Tax distinguished from PenaltyA tax is intended to raise revenue, while penalty is designed to regulate conduct.A tax may be imposed by the government only while a penalty may be imposed by the government or a private individual.

Distinction of TaxTax distinguished from Debt

A tax is base on law, while a debt is based on contract.A tax may not be assignable, while a debt is assignable.A tax is generally payable in cash, while debt is payable in cash or in kind.A person may be imprisoned for a non-payment of taxes, but any person may not be imprisoned for non-payment of debt.

Distinction of Tax

Tax distinguished from other Terms

Revenue. This refers funds or income derived by the government whether from tax or any other source in another sense.Internal Revenue. It refers to taxes imposed by the legislature other than duties on imports and exports.Customs Duties. These are taxes imposed on goods exported into a country.

Entities Exempted from TaxationReligious InstitutionsCharitable InstitutionsNon-Profit, Non-Stock Educational InstitutionsNon-profit CemeteriesGovernment InstitutionsForeign Diplomats

Situs of Taxation

Situs is a latin term which means situation, location, or place. In short, its literal meaning refers to a place taxation. In real property, the rules is tax is imposed to a place or state where the property is located and subject to be tax has a jurisdiction over the said property.

Situs of TaxationFactorsThe taxation jurisdiction or situs will depend upon various factors:the nature of the tax and the subject matter thereof, which may be a person, property, act, or activity.The possible protection and benefit that may accrue both to the government and to the tax payer. Domicile or residencecitizenship source of income

The accepted doctrine is that taxing power of a State does not extend beyond its territorial limits but within such limits it may tax persons, property, income or business.

Situs of Taxation2) BasisThe jurisdiction to impose and collect Income Tax is based on the following:the recipient of the income is a citizen or resident of the Philippines.the income is derived from sources within the Philippines.

The income tax is founded on the protection afforded by the State to the recipient of the income in his person, in his right to receive the income, and in his enjoyment of it when received. These are the rights and privileges which attached to domicile or citizenship. .

Income Derived within the State Taxabale It is also an accepted doctrine that the State can tax all income derived from sources within the State, regardless of whether the recipient is a citizen or not, a resident or no, or a domestic of foreign corporation.

SOURCE is not a place but the property, activity, or service that produced the income. In the case of income derived from

LABOR, it is the place where the labor is performed; in the case of income derived from the

Income Derived within the State Taxabale It is also an accepted doctrine that the State can tax all income derived from sources within the State, regardless of whether the recipient is a citizen or not, a resident or no, or a domestic of foreign corporation.

USE OF CAPITAL, it is the place where the capital is employed; in the case of profits

FROM THE SALE OF EXCHANGE OF CAPITAL ASSETS it is the place where the transactions occurs.

Double TaxationDirect DuplicateElements:Taxing twiceBy the same taxing authorityWithin the same taxing jurisdictionFor the same purposeIn the same taxable periodInvolving the same purpose

Indirect duplicateIndirect duplicate taxation, on the other hand, occurs when taxes on the property are not imposed by the same taxing authority. The local and national governments imposed taxes on the same property during one taxable period. This kind of imposition is legal.

Forms of Escape from Taxation6 forms of escape from taxationShifting. It is one way of passing the burden of tax from one person to another. Ex. Taxes paid by the manufacturer may be shifted to the consumer by adding the amount of the tax paid to price of the product.Kinds of ShiftingForward shifting occurs when the burden of the tax is transferred from a factor of the production to the factor of distribution.Backward shifting occurs when the burden of tax is transferred from the consumer to the producer or manufacturer.Onward shifting occurs when tax is shifted to two or more times either forward or backward.

Forms of Escape from TaxationCapitalization. This refers to the reduction in the price of the tax object to the capitalized value of future taxes which the purchaser expects to be called upon to pay. Ex: A reduction made by the seller on the price of the real estate, in anticipation of the future tax to be shouldered by the future buyer.

Transformationn occurs when the manufacturer or producer upon whom the tax has been imposed pays the tax and endeavor to recoup (make up for) himself by improving his process of production

Tax Evasion is the practice by the taxpayer through illegal or fraudulent means to defeat or lessen the amount for tax. This is also know as tax dodging.

Forms of Escape from TaxationTax Avoidance is the exploitation by the taxpayer of legally permissible methods in order to avoid or reduce tax liability. This is also known as tax minimization.

Tax Exemption is the grant of immunity or freedom from a financial charge or obligation or burden to which others are subjected.Grounds for tax exemption:Contract, wherein the government is the contracting party.Public policyReciprocity