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Taxation Concepts and Principles
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Taxation Concepts and Principles
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What is taxation defined as?
Taxation is defined as a state power, legislative process, and a mode of government cost distribution.
What is taxation as a state power?
Taxation is an inherent power of the State to enforce a proportional contribution from its subjects for public purpose.
What is taxation as a process?
Taxation is a process of levying taxes by the legislature of the State to enforce proportional contributions from its subjects for public purpose.
What is taxation as a mode of cost distribution?
Taxation is a mode by which the State allocates its costs or burden to its subjects who are benefited by its spending.
What is the theory of taxation?
The theory of taxation states that a government cannot exist without a system of funding, hence the government's necessity for funding is the theory of taxation.
What is the basis of taxation?
The basis of taxation is that the government provides benefits to the people in the form of public services, and the people provide the funds that finance the government. The mutuality of support between the people and the government is the basis of taxation.
What is the Benefit Received Theory?
The Benefit Received Theory states that the more benefit one receives, the more he should pay.
What is the Ability to Pay Theory?
The Ability to Pay Theory considers the taxpayer's ability to pay and contributes based on their relative capacity.
What is Vertical Equity in the context of taxation?
Vertical Equity (Gross Concept) implies that the extent of one's ability to pay is directly proportional to the level of his tax base.
What is Horizontal Equity in the context of taxation?
Horizontal Equity (Net Concept) requires consideration of the particular circumstance of the taxpayer.
What is the Lifeblood Doctrine?
The Lifeblood Doctrine states that taxes are the lifeblood of the government, and without taxes, the government would be paralyzed for lack of motive power to activate or operate it.
What are the implications of the Lifeblood Doctrine in taxation?
1. Tax is imposed even in the absence of a Constitutional grant. 2. Claims for tax exemption are construed against taxpayers. 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.
In income taxation, what is taxable upon receipt?
Income received in advance is taxable upon receipt.
What are the rules regarding deductions in income taxation?
1. Deduction for capital expenditures and prepayments is not allowed effectively defers the collection of income tax. 2. A lower amount of deduction is preferred when a claimable expense is subject to limit. 3. A higher tax base is preferred when the tax object has multiple tax bases.
What are the inherent powers of the state?
The inherent powers of the state include: 1. Taxation Power - the power of the state to enforce proportional contribution from its subjects to sustain itself. 2. Police Power - the general power of the state to enact laws to protect the well-being of the people. 3. Eminent Domain Power - the power of the state to take private property for public use after paying just compensation.
What is the scope of taxation power?
The scope of taxation is widely regarded as comprehensive, plenary, unlimited and supreme, but not absolutely unlimited as it has inherent and constitutional limitations.
What are the similarities of the 3 powers of the State (Taxation Power, Police Power, and Eminent Domain Power)?
1. They are all necessary attributes of sovereignty. 2. They are all inherent of the state. 3. They are all legislative in nature. 4. They are all ways in which the state interferes with private rights and properties. 5. They all exist independently of the Constitution and are exercisable by the government even without a constitutional grant. However, the Constitution may impose conditions or limits for their exercise. 6. They all presuppose an equivalent form of compensation received by the persons affected by the exercise of the power. 7. The exercise of these powers by local government units may be limited by the national legislature.
What is the territoriality of taxation?
Public services are normally provided within the boundaries of the state. Thus, the government can only demand tax obligations upon its subjects or residents within its territorial jurisdiction.
What are the 2-fold obligations of taxpayers?
1. Filing of returns and payment of taxes. 2. Withholding of taxes on expenses and its remittance to the government.
What are the exceptions to the Territoriality Principle in taxation?
1. In income taxation, resident citizens and domestic corporations are taxable on income derived both within and outside the Philippines. 2. In transfer taxation, residents or citizens such as resident citizens, non-resident citizens, and resident aliens are taxable on transfers of properties located both within and outside the Philippines.
What is the principle of International Comity?
No country is more powerful than the other; it is by the principle that each country observes international comity or mutual courtesy or reciprocity between them. Therefore, governments do not tax the income and properties of other governments and give primacy to their treaty obligations over their own domestic tax laws.
What is the public purpose of taxation?
Tax is intended for the common good and taxation must exercise the power upon anything including itself. However, the government does not tax itself as this will not raise additional funds but will only impute additional costs.
What is the observance of Due Process of Law in taxation?
No one should be deprived of his life, liberty, or property without due process of law. Tax laws should neither be harsh nor oppressive.
What are the 2 aspects of Due Process?
1. Substantive Due Process - Tax must be imposed only for public purpose, collected only under authority of a valid law, and only by the taxing power having jurisdiction. 2. Procedural Due Process - There should be no arbitrariness in assessment and collection of taxes, and the government shall observe the taxpayer's right to notice and hearing.
What is the Equal Protection of the Law in taxation?
No person shall be denied the equal protection of the law. Taxpayers should be treated equally both in terms of rights conferred and obligations imposed.
What is the Uniformity Rule in taxation?
In taxation, taxpayers under dissimilar circumstances should not be taxed the same.
What is a progressive system of taxation?
A progressive system of taxation is one in which tax rates increase as the tax base increases, and the Constitution favors this system as it is consistent with the taxpayer's ability to pay.
What is the policy regarding non-imprisonment for non-payment of debt or poll tax?
As a policy, no one shall be imprisoned because of his poverty, and no one shall be imprisoned for mere inability to pay debt. Non-Payment of Tax compromises the public, while Non-Payment of Debt compromises private interest.
What are the components of Poll Tax?
1. Basic Community Tax 2. Additional Community Tax.
What is the principle of Non-diversification of Tax Collections?
Tax collection should be used only for public purpose and should never be diversified or used for private purposes.
What is the principle of Non-delegation of the Power of Taxation?
The principle of checks and balances in a republican state requires that taxation power, as a part of lawmaking, be vested exclusively in Congress.
What are the non-impairments regarding the jurisdiction of the Supreme Court in tax cases?
Notwithstanding the existence of the Court of Tax Appeals, which is a special court, all cases involving taxes can be raised to and be finally decided by the Supreme Court of the Philippines.
What institutions are exempted from property taxes?
Exempted institutions include religious, charitable, or educational entities, non-profit cemeteries, churches, and mosques, lands, buildings, and improvements.
What are the 2 stages of the exercise of taxation power?
1. Levy or Imposition - referred to as the legislative act process involving the enactment of a tax law by Congress. 2. Assessment and Collection - referred to as the incidence of taxation or administrative act of taxation, where tax law is implemented by the administrative branch of the government.
What is the Situs of Taxation?
The Situs of Taxation is the place of taxation, serving as a frame of reference in gauging whether the tax object is within or outside the tax jurisdiction of the taxing authority.
What are the 5 examples of Situs Rules?
1. Business Tax Situs - businesses are subject to tax in the place where the business is conducted. 2. Income Tax Situs on Services - service fees are subject to tax where they are rendered. 3. Income Tax Situs on Sale of Goods - the gain on sale is subject to tax in the place of sale. 4. Property Tax Situs - properties are taxable in their location. 5. Personal Tax Situs - persons are taxable in their place of residence.
What is the Marshall Doctrine in taxation?
The Marshall Doctrine states that the power to tax involves the power to destroy; taxation power can be used as an instrument of police power.
What is the Holmes Doctrine in taxation?
The Holmes Doctrine states that taxation power is not the power to destroy; while the court sits, taxation power may be used to build or encourage beneficial activities or industries by the grant of tax incentives.
What is the prospectivity of tax laws?
Tax laws are generally prospective in operation. An ex post facto law or a law that retroacts is prohibited by the Constitution.
What is the principle of Non-Compensation or Set-Off in taxation?
Taxes are not subject to automatic set-off or compensation; the taxpayer cannot delay payment of tax to wait for the resolution of a lawsuit involving his pending claim against the government.
What is the principle of Non-Assignment of Taxes?
Tax obligations cannot be assigned or transferred to another entity by contract; contracts executed by the taxpayer to such effect shall not prejudice the right of the government to collect.
What is imprescriptibility in taxation?
Prescription is the lapsing of a right due to the passage of time; the government's right to collect taxes does not prescribe unless the law itself provides for such prescription.
What is the Doctrine of Estoppel in taxation?
Under the doctrine of estoppel, any misrepresentation made by one party toward another, who relied therein in good faith, will be held true and binding against that person who made the misrepresentation.
What does Judicial Non-Interference mean in taxation?
Judicial Non-Interference means that the courts are generally not permitted to interfere with the assessment and collection of taxes.
What is the principle of Strict Construction of Tax Laws?
Taxation is the rule, exemption is the exception; taxation is the general rule unless there is a clear exemption.
What is Double Taxation?
Double Taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing.
What are the 2 elements of Double Taxation?
1. Primary Element - Same Object 2. Secondary Elements - a. Same Type of Tax b. Same Purpose of Tax c. Same Taxing Jurisdiction d. Same Tax Period.
What are the 2 types of Double Taxation?
1. Direct Double Taxation - occurs when all the elements of double taxation exist for both impositions. 2. Indirect Double Taxation - occurs when at least one of the secondary elements of double taxation is not common for both impositions.
How can double taxation be minimized?
1. Provision of Tax Exemption - only one tax law is allowed to apply to the tax object while the other tax law exempts the same tax object. 2. Allowing Foreign Tax Credit - tax payments made in the foreign tax law are deductible against the tax due of the domestic tax law. 3. Allowing Reciprocal Tax Treatment - provisions in tax laws imposing reduced tax rates or even exemption if the country of the foreign taxpayer also gives the same treatment to Filipino non-residents. 4. Entering Into Treaties or Bilateral Agreements - countries may stipulate for lower tax rates for their residents if they engage in transactions taxable by both of them.
What are escapes from taxation?
Escapes from taxation are the means available to the taxpayer to limit or even avoid the impact of taxation.
What are the 3 categories of escapes from taxation?
A. Those that result in loss of government revenue: 1. Tax Evasion - refers to any act or trick that tends to illegally reduce or avoid the payment of tax. 2. Tax Avoidance - refers to any act or trick that reduces or totally escapes taxes by any legally permissible means. 3. Tax Exemption - refers to the immunity or privilege from being subject to a tax. B. Those that do not result in loss of government revenue: 1. Shifting - refers to the process of transferring tax burden to other taxpayers. 2. Capitalization - pertains to the adjustment of the value of an asset due to changes in tax rates. 3. Transformation - pertains to eliminating wastes or losses by the taxpayer to form savings to compensate for the tax imposition.
What is Tax Amnesty?
Tax Amnesty is a general pardon granted by the government for erring taxpayers to give them a chance to reform and enable them to have a fresh start.
What is Tax Condonation?
Tax Condonation is the forgiveness of the tax obligation of a certain taxpayer under justifiable grounds.
What is the difference between Tax Amnesty and Tax Condonation?
Tax Amnesty covers both civil and criminal liabilities, while Tax Condonation covers only civil liabilities of the taxpayer.
What is taxation law?
Taxation law is any law that arises from the exercise of the taxation power of the state.
What are the 2 types of taxation laws?
1. Tax Laws - laws that provide for the assessment and collection of taxes. Examples include NIRC, Tariff and Customs Code, Local Tax Code, Real Property Tax Code. 2. Tax Exemption Laws - laws that grant certain immunity from taxation, such as the Minimum Wage Law.
What are the 8 sources of tax laws?
1. Constitution 2. Statutes and Presidential Decrees 3. Judicial Decisions or case laws 4. Executive Orders and Batas Pambansa 5. Administrative Issuances 6. Local Ordinances 7. Tax Treaties and conventions with foreign countries 8. Revenue Regulations.
What are Internal Revenue Circulars (CIR)?
CIR that specify or define rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes.
What are Revenue Memorandum Orders (RMOs)?
Issuances that provide directives, instructions, prescribe guidelines, and outline processes, operations, activities, workflows, methods, and procedures necessary in the implementation of state policies, goals, objectives, plans, and programs of the Bureau in all areas of operation except auditing.
What are Revenue Memorandum Rulings (RMRs)?
Rulings, opinions, and interpretations of the CIR with respect to the provisions of the Tax Code and other tax laws as applied to a specific set of facts, with or without established precedents, provided to give taxpayers guidance on the tax consequences in specific situations.
What happens if BIR Rulings contravene issued RMRs?
If BIR Rulings contravene issued RMRs, the Rulings are null and void ab initio.
What are Revenue Memorandum Circulars (RMCs)?
Issuances that publish pertinent applicable portions as well as amplifications of laws, rules, regulations, and precedents issued by the BIR and other agencies/offices.
What are Revenue Bulletins (RB)?
Periodic issuances, notices, and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant tax laws, and other issuances for the guidance of the public.
What are BIR Rulings?
Official positions of the Bureau on queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws, which are advisory and may be reversed by the BIR at any time.
What are the four types of rulings mentioned?
1. Value Added Tax (VAT) rulings 2. International Tax Affairs Division (ITAD) rulings 3. BIR rulings 4. Delegated Authority (DA) rulings.
What is the nature of Philippine Tax Laws?
Philippine Tax Laws are civil and not political in nature, effective even during periods of enemy occupation.
What is a tax in terms of public purpose?
Tax is an enforced proportional contribution levied by the lawmaking body of the state to raise revenue for public purposes.
What are the six elements of a valid tax?
1. Tax must be levied by the taxing power having jurisdiction over the object of taxation. 2. Tax must not violate constitutional and inherent limitations. 3. Be uniform and equitable. 4. Be for public purpose. 5. Be proportional in character. 6. Is generally payable in money.
What are the five classifications of taxes as to purpose?
1. Fiscal or Revenue Tax 2. Regulatory Tax 3. Sumptuary Tax.
What are the three classifications of taxes as to subject matter?
1. Personal Poll Capitation Tax 2. Property Tax 3. Excise or Privilege Tax.
What are the two classifications of taxes as to incidence?
1. Direct Tax 2. Indirect Tax.
What are the two classifications of taxes as to amount?
1. Specific Tax 2. Ad Valorem Tax.
What are the four classifications of taxes as to rate?
1. Proportional Tax 2. Progressive Graduated Tax 3. Regressive Tax 4. Mixed Tax.
What are the classifications of taxes as to imposing authority?
1. National Tax 2. Local Tax.
What does the tax system refer to?
The methods or schemes of imposing, assessing, and collecting taxes.
What are the three types of tax systems according to imposition?
1. Progressive 2. Proportional 3. Regressive.
What are the two types of tax systems according to impact?
1. Progressive System 2. Regressive System.
What are the principles of a sound tax system?
1. Fiscal Adequacy 2. Theoretical Justice or Equity 3. Administrative Feasibility.
Who manages tax administration in the Philippines?
The Bureau of Internal Revenue (BIR), under the supervision of the Department of Finance.
What are the chief officials of the BIR?
1. One Commissioner 2. Four Deputy Commissioners (Operations group, Legal enforcement group, Information systems group, Resource management group).
What are the seven powers of the BIR?
1. Assessment and collection of taxes 2. Enforcement of forfeitures, penalties, and fines 3. Administer supervisory and police powers 4. Assign internal revenue officers 5. Provision of forms, receipts, etc. 6. Issuance of receipts and clearances 7. Submission of reports to Congress.
What are the four non-delegated powers of the CIR?
1. Recommend promulgation of rules and regulations 2. Issue rulings of first impression 3. Compromise or abate any tax liability 4. Assign and reassign internal revenue officers.
What are the four agencies tasked with tax collections or tax incentives related functions?
1. Bureau of Customs (BOC) 2. Board of Investments (BOI) 3. Philippine Economic Zone Authority (PEZA) 4. Local Government Tax Collecting Unit (LGTC).
What are the classifications of taxpayers for tax administration?
1. Large Taxpayers 2. Non-Large Taxpayers.
What are the criteria for large taxpayers?
1. Payment criteria (e.g., VAT at least P200,000/quarter) 2. Financial conditions (e.g., gross receipts or sales of P1T and net worth of P300M).
What is the concept of income in taxation?
Income is regarded as the best measure of taxpayers' ability to pay tax and is an excellent object of taxation in the allocation of government costs.
What three elements define gross income?
1. Return on capital that increases net worth 2. Realized benefit 3. Not exempted by law, contract or treaty.
What items are deemed with infinite value and exempt from income tax?
1. Life 2. Health 3. Human Reputation.
What is the situs of income?
The place of taxation of income; it is important in determining whether or not an income is taxable in the Philippines.
What are the three income taxation schemes under the NIRC?
1. Final income taxation 2. Capital gains taxation 3. Regular income taxation.
What does it mean for tax schemes to be mutually exclusive?
Tax schemes are mutually exclusive when an item of gross income that is subject to tax in one scheme will not be taxed by the other schemes. Items exempted in one scheme are not taxable by the other schemes.
How can items of gross income be classified due to different tax schemes?
Items of gross income can be classified as follows: 1. Gross income subject to final tax 2. Gross income subject to capital gains tax 3. Gross income subject to regular tax.
What characterizes final income taxation?
Final income taxation is characterized by final taxes where taxes are withheld or deducted at source, and the taxpayer receives income net of tax. The payor of the income remits the tax to the government. Final taxation is applicable only to certain passive income.
What are passive incomes, and give examples?
Passive incomes are earned with very minimal or even without active involvement of the taxpayer in the earning process. Examples include: 1. Interest income from banks 2. Dividends from domestic corporations 3. Royalties.
What is active or regular income?
Active or regular income arises from transactions requiring a considerable degree of effort or undertaking from the taxpayer. It is the direct opposite of passive income. Examples include: 1. Compensation income 2. Business income 3. Professional income.
What is a capital gains tax?
A capital gains tax is imposed on the capital gain on the sale, exchange, and other disposition of certain capital assets. Not all capital gains are subject to capital gains tax; most are subject to regular income tax.
Differentiate between capital assets and ordinary assets.
Capital assets include all other assets other than ordinary assets, while ordinary assets are assets directly used in the business, trade, or profession of the taxpayer, such as inventory, supplies, and items of property, plant, and equipment.
What distinguishes capital gains from ordinary gains?
Capital gains arise from the sale, exchange, and other disposition of capital assets, whereas ordinary gains arise from the sale, exchange, and other disposition of ordinary assets.
How does the NIRC classify capital gains tax?
The NIRC identifies capital gains tax as a final tax; however, they are not actually final in the same manner as those imposed under final income taxation, as the taxpayer must still file a capital gains tax return to report the gain to the government and pay the corresponding tax.
What types of capital assets are subject to capital gains taxation?
Capital gains taxation applies only to two types of capital assets: domestic stocks and real property.
What is regular income taxation?
Regular income taxation represents the general rule in income taxation and covers all other income sources such as: 1. Active Income 2. Gains from dealings in properties (ordinary assets and other capital assets not subject to capital gains tax) 3. Other income, active or passive, not subject to final tax.
What is an accounting period?
An accounting period is the length of time over which income is measured and reported.
What are the types of accounting periods?
There are two types of accounting periods: 1. Regular Accounting Period - 12 months in length (Calendar, Fiscal) 2. Short Accounting Period - less than 12 months (Calendar year).
What defines a calendar accounting period?
The calendar accounting period starts from January 1 and ends December 31. It is available to both corporate taxpayers and individual taxpayers.
Under what circumstances must a taxpayer use the calendar year for accounting according to the NIRC?
The calendar year must be used when: 1. The taxpayer's annual accounting period is other than a fiscal year 2. The taxpayer has no annual accounting period 3. The taxpayer does not keep books 4. The taxpayer is an individual.
What is a fiscal year in accounting?
A fiscal accounting period is any 12-month period that ends on any day other than December 31. It is available only to corporate income taxpayers and not allowed for individual income taxpayers.
What is the deadline for filing the income tax return under the NIRC?
The return is due for filing on the fifteenth day of the fourth month following the close of the taxable year of the taxpayer.
What are the due dates for annual income tax returns for taxpayers under the calendar year and a corporate taxpayer with a fiscal year ending June 30, 2014?
1. Taxpayers under the calendar year must file their annual income tax return for the current period not later than April 15 of the following year. 2. A corporate taxpayer with a fiscal year ending June 30, 2014, must file its annual income tax return not later than October 15, 2014.
List instances that lead to a short accounting period.
Instances of a short accounting period include: 1. Newly Commenced Business 2. Dissolution of Business 3. Change of accounting period by corporate taxpayers (requires BIR approval) 4. Death of the taxpayer 5. Termination of the accounting period by the Commissioner of Internal Revenue.
What are accounting methods?
Accounting methods are accounting techniques used to measure income.
What are the five types of accounting methods?
1. General methods: a. Accrual Basis - income recognized when earned, expense recognized when incurred. b. Cash Basis - income recognized when received, expense recognized when paid. 2. Installment and deferred payment method 3. Percentage of completion method 4. Outright and spread-out method 5. Crop year basis.
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