Taxation Ortega

Income taxation

1. Principles of a sound tax system

1) Fiscal adequacy

The taxes collected

Whatever is generated must be sufficient to meet the needs of the government

Tax is primarily for revenue-raising for the purpose of meeting the expenses of running the operations of the
government

It would be a sound tax system if what is collected is sufficient

There will be a problem if the amount collected as taxes would not be enough to cover the expenses of the
government

As much as practicable, the lawmaking body, which has the power of taxation, must set up a tax system that would be
able to generate the amount of funds that would be necessary for running the government

Will you consider our present tax system a tax system that is sufficient to cover the expenses of the government?

We want make sure that they money collected is sufficient because the money collected is intended for public use

To attain fiscal adequacy, for the purpose of generating more revenue to meet the expenses of the government,
there are a lot of ways

One way is to increase the rate. That will translate into collection of more taxes

Second way is to expand the tax base. The rate can be maintained, but by expanding the tax base, then there will be
a generation of more revenue

Expanding the tax base means expanding the subjects of taxation

Income was among those subjects of taxation

Transfer of properties isanother

If congress would select another tax base to be subjected to the tax, then it would mean expanding the tax base also

That will again be additional sources of revenue

That is by selecting an additional tax subject

That is what is meant by expanding the tax base

By removing exemptions

If nothing will be added to the tax subjects of our tax code, since income tax is already there, transfer tax, activities
subject to tax, percentage, excise and documentary tax, then tax base can still be expanded by removing exemptions

Of the existing tax base, there are recognized exemptions

By removing exemptions, that would mean more ability to generate more taxes
 That is also expanding the tax base, by removing certain exemptions

All these are possible courses of actions in order to raise more revenues

In the end so that in order for the needs of the government to be met

That is coming and coming to closer to meet fiscal adequacy

2) Theoretical justice

Income tax is 32%, why not increase it to 60% or 70%

This is because there are other principles of a sound tax system

For another you have, theoretical justice

It is based on ones ability to pay

So that is why in our constitution, congress is even mandated to evolve a progressive system of taxation.

This is not strictly mandatory. So that every tax system that will be made of, shall be in conformity of the progressivity
of the tax system

SC said that whether that a tax law cannot be invalidate just because it does not conform with the progressivity
principle

This is because VAT is at its very nature is regressive

Which is why among others, the ground that was utilized for assailing the constitutionality of the VAT law is that this
tax is inconsistent with the progressivity principle

But that alone will not be enough to invalidate the tax law. Congress or the Supreme Court even acknowledge that we
cannot do away with regressive taxes

By nature they are regressive, and we cannot do away with them

Even in develop countries, such kind of taxes are well embraced

Anyhow, under our constitution, it is not strictly prohibited that taxes should only be progressive

By regressive, it means that, taxes is rather insensitive to ones ability to pay

One example of this is the value added tax. It is a kind of tax that is rather insensitive to a persons ability to pay

Of course the value added tax is an indirect tax

For one thing is already expressed in the law itself Section 105

Other indirect taxes like percentage and documentary or excise tax, in the provisions in the law, there is no express
mention of them being indirect taxes

But vat is described as indirect tax

But even without that provision in the law, vat which is a business tax is an indirect tax

If it is indirect tax, then the person liable for that is free to shift or pass on to another person the burden of the tax

Hence, since the transactions subject to the vat are mostly sales transactions, it is upon the consumer that the burden
of taxation is placed
 If for example a restaurant is a VAT registered person, and we will be eating in that restaurant

The consideration for our food will have tax on it, although the tax itself is the liability of the seller

As the statutory tax payer under the law, the seller is free to shift the burden of taxation to the purchaser

So if our food amounts to 1000 pesos, 12% is for the VAT, that means the total cost on the part of the purchaser
including the VAT would be 1120 pesos

But if the person who eats there is Pedro who only has a monthly salary of 5,000, when he eats in that restaurant for
that amount 1120 pesos, that is for special occasions only

That is 1/5 already of his monthly salary

That 120 pesos that is taken from Pedros income is what percentage of Pedros income of 5,000

But to another who comes to the same restaurant and eat for the price of 1,000 pesos plus vat of 120 pesos, 120
pesos is nothing to him if his monthly income is 500,000

But to Pedro, 120 pesos it is already something substantial

That amount collected by the restaurant is already something to him

That is why VAT is rather insensitive to a persons ability to pay

Because the same vat is collected with respect to particular price, regardless if one is rich or not so much

But the law imposing the vat cannot be invalidated for the simple reason that it is rather regressive

3) Administrative feasibility

This principle means that tax system must be one that can easily be collected, easy to apply, with the least
inconvenience both on the part of the government and the taxpayer

When tax system is one that is difficult to implement, it does not by itself constitute a sufficient reason to invalidate a
law.

In a case, toll fees was sought to be invalidated

Toll way operators are also engaged in providing services

Sec 108 in sales of services

Persons rendering services may even include franchise grantees

Even in this law there is no qualification if the franchise is a legislative one or not

So long as franchises are providing services to another for a fee or remuneration, is rather subject to the value added
tax

Toll way operators are included in such category of persons

2. Theoretical justice

3. Set off and compensation

 1) Taxes cannot be the subject of set off

The government and the person may stand as creditor and debtor or each other

Debt is due to the government in its corporate capacity, whereas taxes is due to the government in its sovereign
capacity

It should be the same nature, before there can be set off or compensation

Taxes are not in the same category as debts.

That is why they cannot be set off or cannot be the subject of compensation

So, when a person has a claim against the government, he cannot allege that he cannot be made liable for the
deficiency assessment against him because his claim can answer for the deficiency being assessed against him

There is not here a situation to bring about the setting off or compensation

1) Pass on gross Philippine billings

a) This is a provision affecting airline carriers, those who have license to operate here in the Philippines
b)
c)
2)