Basic Principles

Tax Laws

Confucius:
In a country that is well governed, poverty is something to be ashamed of; In a badly governed country, wealth is something to be ashamed of.
PDI: 40 richest people in the Philippines saw their wealth grow over $13 billion to $47.4 billion this year. According to Forbes Asia there are 15 PH billionaires with Henry Sy leading the list.

Definition, Nature and Basis of Taxation

Taxation is the process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses of the government. Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need. A government cannot continue to exist and operate without financial means. The inherent power gives the government the right to tax citizens and properties within its jurisdiction.

Objectives of Taxation
Means of raising revenue for the government. Shifting wealth from the rich to the poor. Maintaining price stability. Stimulating economic growth Encouraging full employment.

State Powers
1. Taxation. The power of the state by which the sovereign raises revenue to defray the necessary expenses of the government. 2. Eminent Domain. The power of the state to take private property for public use upon payment of just compensation. 3. Police Power. The power of the state to enact laws to promote public health, public morals, public safety and the general welfare of the people.

Aspects of Taxation
1. Levying of the tax. The imposition of tax by the legislative or Congress. 2. Tax assessment. The process of determining the correct amount of tax due in accordance with the prevailing tax laws. 3. Collection of tax. Payment of tax which involves the act of compliance by the taxpayer.

Basic Principles of a Sound Tax System

1. Fiscal adequacy. Sources of revenue are sufficient to meet government expenditures. 2. Equality or theoretical justice. The tax imposed must be proportionate to taxpayers ability to pay. 3. Administrative feasibility. The law must be capable of convenient, just and effective administration.0

Limitations on the Power of Taxation

1. Purpose. Taxes may be levied only for public purpose. 2. Territoriality. The State may tax persons and properties under its jurisdiction. 3. International comity. The property of a foreign state may not be taxed by another. 4. Exemption. Government agencies performing government functions are exempt from taxation. 5. Non-delegation. The power to tax being legislative in nature may not be delegated.

Doctrines in Taxation
Prospective of Tax Laws. A tax bill must only be applicable and operative after becoming a law. The effectivity of the tax law commences upon its approval and its scope would only cover the present and future transactions. Double Taxation. An act of the sovereign by taxing twice for the same purpose, in the same year upon the same property or activity of the same person, when it should be taxed once, for the same purpose and with the same kind of character of law.

 Set-off of Taxes. A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater than the tax being collected. Escape from Taxation. When a taxpayer escape the tax burdens through tax evasion, and tax avoidance. Situs of Taxation. The place of taxation, or the state or political unit which has jurisdiction to impose tax over its inhabitants.

Situs of Taxation
1. Person. Residence of the taxpayer. 2. Real property or tangible personal property. Location of the property. 3. Intangible personal property. Domicile of the owner unless he has acquired a situs elsewhere. 4. Income. Taxpayers residence or citizenship, or place where the income was earned.

5. Business, occupation and transaction. Place where business is being operated, occupation being practiced and transaction completed. 6. Gratuitous transfer of property. Taxpayers residence or citizenship or location of the property.

Taxes
Taxes are enforced proportional contribution 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.

Essential Characteristics of a Tax

1. 2. 3. 4. 5. It is an enforced contribution. It is levied by the lawmaking body. It is proportionate in character. It it generally payable in money. It is imposed for the purpose of raising revenues. 6. It is to be used for public purpose.

Classification of Taxes
1. As to subject matter or object: a. Personal, poll or capitation. Example: community tax. b. Property. Example: real estate tax. c. Excise. Tax imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. Example: estate tax, donors tax, income tax, value-added tax.

2. As to who bears the burden: a. Direct. Examples: community tax, income tax, estate tax, donors tax. b. Indirect. Examples: customs duties, valueadded tax, some percentage taxes.

3. 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, cigars, wines, fireworks, etc. 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.

4. 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 competitor.

5. As to authority imposing the tax or scope: a. National. Tax imposed by the national government. b. Municipal or local. Tax imposed by municipal government for specific needs.

6. As to graduation or rate: a. Proportional. Tax based on fixed percentage of the amount of the property, income or other basis to be taxed. Examples: percentage taxes, real estate taxes. b. Progressive or graduated. Tax rate increases as the tax base increases. Example: income tax. c. Regressive. Tax rate decreases as the tax base increases.

Tax Distinguished from Other Fees

1. Toll. It is a sum of money for 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. 2. Penalty. Any sanction imposed as a punishment for violation of law or acts deemed injurious.

3. Special assessment. It is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements. Special assessment is levied only on land, is not a personal liability of the person assessed, is based wholly on benefits and is exceptional both as to time and place. Tax is levied on personal property, or exercise of privilege, which may be made a personal liability of the person assessed, is based on necessity and is of general application.

4. Permit or license fee. A charge imposed under the police power for purposes of regulation. License fee is imposed for regulation and involves the exercise of police power while tax is levied for revenue and involves the exercise of the taxing power. Failure to pay a license fee makes an act or a business illegal while failure to pay a tax does not necessarily make an act or a business illegal.

5. Debt is generally based on contract, is assignable and may be paid in kind while a tax is based on law, cannot generally be assigned and is generally payable in money. A person cannot be imprisoned for non-payment of debt while he can be for non-payment of tax.

6. Revenue. Refers to all funds or income derived by the government taxes included. 7. Customs duties. Are taxes imposed on goods exported from or imported to a country.

Sources of Tax Laws

1. 2. 3. 4. Constitution. Statutes and Presidential Decrees. Revenue Regulations by the DOF. Rulings issued by the Commissioner of Internal Revenue and Opinions by the Secretary of Justice. 5. Decisions of the Supreme Court and the Court of Tax Appeals.

6. Provincial, city, municipal, and barangay ordinances subject to limitations set forth in the Local Government Code. 7. Treaties or international agreements the purpose of which is to avoid or minimize double taxation.

Philippine Tax Laws and Taxes

1. National Internal Revenue Code of 1997 (PD 1158, as amended): a. Income taxes b. Estate and donors taxes c. Value-added tax d. Other percentage taxes e. Excise tax f. DST

2. Tariff and Customs Code of 1978 (PD 1464, as amended): a. Import duties b. Export duties

3. Local Government Code of 1991 (RA 7160): a. Real property tax b. Business taxes, fees and charges c. Professional tax d. Community tax e. Tax on banks and other financial institutions.

4. Special Laws a. Motor Vehicle Law (RA 4136) b. Private Motor Vehicle Tax Law (PD 1958) c. Philippine Immigration Act of 1940 (CA 613, as amended) d. Travel Tax Law (PD 1183, as amended)

Other Provisions
In case difference between the provisions of the Tax Code and the rules and regulations implementing the Tax Code, on one hand, and the GAAP and GAAS, on the other hand, the provisions of the Tax Code and the rules and regulations issued implementing the said Tax Code shall prevail. Internal revenue laws are neither political nor penal in nature although there are penalties in case of violations.