Tax: Its Classification and Characteristics

Double Taxation Escape from Taxation Tax Definition Classification of Tax Characteristics of Tax

What is Double Taxation?

Double taxation means an act of the sovereign by taxing twice for the same purpose in the same year upon the same property or activity of the person, when it should be taxed once, for the same purpose and with same king of character of tax.

Double taxation may be classified as (a) Direct Duplicate Taxation, and (b) Indirect Duplicate Taxation

Indirect Duplicate Taxation.

This is double taxation in its broad sense. It extends to all cases in which there is a burden of two or more pecuniary impositions. It is usually allowed as long as there is no violation of the equal protection and uniformity clauses of the Constitution.

Direct Duplicate Taxation

This is double taxation in its strict sense. It is prohibited because it comprises imposition of the same tax on the same property for the same purpose by the same state during the same taxing period.

There is no double taxation in the following cases:

By taxing corporate income and stockholders dividends from the same corporation. A tax imposed by the state and the local government upon the same occupation, calling or activity. Real estate tax and income collected on the same real estate property leased for earning purposes. Taxes are imposed on the taxpayers final product and the storage of raw materials used in the production of the final product.

Escape from Taxation

Ways by which a taxpayer could escape tax burdens may be as follows:

Evasion Avoidance Shifting Capitalization Transformation Exemption

The doctrine of escape to taxation permits the taxpayer to minimize (if not to escape) payment of tax by lawful means.

It is to be noted that all, except evasion, are legal means of escape from taxation. A tax evader breaks the law, the tax avoider sidesteps it
(Schultz and Harris, American Public Finance)

Evasion

The taxpayer uses unlawful means to evade or lessen the payment of tax. This form of tax dodging is prohibited and therefore subject to civil and/or criminal penalties Examples: 1) non-inclusion of sales; 2) deliberate fabrication of expenses; and 3) forming an artificial person to evade taxation/to deliberately reduce taxable income. A group of persons which forms a corporation in order to save in taxes is guilty of tax evasion because a corporation is a business purposes and not for tax savings.

Avoidance
This is also called Tax Minimization. It is reducing or totally escaping payment of taxes through legally permissible means. Examples of tax avoidance are: Selling shares of stock through a stock exchange in order to avail of the lower tax rates. Estate planning within the means sanctioned by the tax code has been held to be one of permissible tax minimization.

Tax avoidance is valid if used by the taxpayer in good faith. The law does not forbid it and it does not constitutes tax fraud.

Shifting

Basically, it the tax burden to another. The imposition of tax is transferred from the statutory taxpayer to another without violating the law. This is the best exemplified by indirect taxes like the value-added tax.

KINDS OF SHIFTING Forward Shifting is the transfer of tax burden from the producer to distributor until it finally reaches the ultimate purchasers or consumers. (Example: Tax is included in the final price of the product to be paid by the customer. Price, therefore, increases).

KINDS OF SHIFTING

Backward Shifting -is the reverse of forward shifting. For example, the manufacturer has agreed to buy the suppliers product only if the price is reduced by the amount of the tax. Price, therefore, decreases. Onward Shifting - the tax burden is shifted twice ort more either forward or backward.

Capitalization

A backward shifting of tax burden whereby the tax on the selling price of the property, which is supposed to be paid by the buyer, shall be capitalized by the seller at the time of purchase by deducting the same from the total selling price by the amount of related tax.

Transformation

The producers absorbs the payment of tax to reduce prices and to maintain market share. He recovers his additional tax expense by improving the process of production. The tax, therefore, is transformed into a gain through the medium of production.

What is tax?

TAX refers to the burden or enforced contribution imposed by the government based on its power of taxation, upon persons, property, or rights (Litonjua). Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of the government and all public needs (Ballada). Tax, in a general sense, is any contribution imposed by the government upon individuals, for the use and service of the state. Tax, in its essential characteristics, is not a debt.

ESSENTIAL CHARACTERISTICS OF A TAX

It is an enforced contribution. Imposed in accordance with law or legislative in nature. Imposed for public purpose. Proportionate in character. Generally paid in money. Paid at regular intervals Imposed upon persons, property or rights.

Classification of Taxes

As to Subject Matter or Object

a) Personal, poll or capitation tax of a fixed amount imposed on individuals, whether citizens or not, residing within a specified territory without regard to their property or the occupation in which they may be engaged. b) Property Tax imposed on property, whether real or personal, in proportion either to its value or in accordance with some other reasonable method of appointment. (Ex. Real Estate Tax) c) Excise - Tax imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. (Examples: Estate Tax, Donors Tax, Income Tax, Value Added Tax.)

Classification of Taxes

As to Who bears The Burden a) Direct Tax demanded from persons who are intended or bound by law to pay the tax. (Examples: Community Tax, Income Tax, Estate Tax, Donors Tax) b) Indirect Tax which the taxpayer can shift to another. (Examples: Customs duties, Value-Added Tax, Some Percentage Taxes)

Classification of Taxes

As to determination of amount a) Specific Tax imposed based on a physical unit of measurement, as by head or number, weight, or length or volume. (Examples: tax on distilled spirits, fermented liquors, cigarettes, wines, fireworks) b) Ad-valorem Tax of a fixed proportion of the value of property; needs an independent appraiser to determine its value. (Examples: real estate tax, certain customs duties, excise taxes on cigarettes, gasoline and others.)

Classification of Taxes

As to purpose a) General, Fiscal or Revenue tax with no particular purpose or object for which the revenue is raised, but is simply raised for whatever need may arise. (Examples: income tax, value added tax) b) Special or Regulatory Tax imposed for a special purpose regardless of whether revenue is raised or not, and is intended to achieve some social or economic end. Example: protective tariffs or customs duties on certain imported goods to protect local industries against foreign competition.

Classification of Taxes

As to authority imposing the tax or scope a) National tax imposed by the national government. Examples: Internal revenue taxes, tariff and custom duties.

b) Municipal or Local Tax imposed by municipal government for specific needs. Examples: real estate taxes, municipal licenses.

Classification of Taxes

As to graduation or rate a) Proportional tax based on a fixed percentage of the amount of property income or other basis to be taxed. (Examples: value added tax, percentage taxes, real estate taxes). b) Progressive or Graduated tax rate increases as the tax base increases. (Examples: income tax, estate tax, donors tax) c. Regressive Tax rate decreases as the tax base increases. There is no regressive tax in the Philippines.