Lesson 3 - TAX Its Characteristics and Classification

7/30/2019 Lesson 3 - TAX Its Characteristics and Classification

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Tax: Its Classificationand Characteristics

Double TaxationEscape from Taxation

Tax DefinitionClassification of Tax

Characteristics of Tax


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What is Double Taxation?

Double taxation means an act of the sovereign bytaxing twice for the same purpose in the same yearupon the same property or activity of the person,when it should be taxed once, for the same purposeand with same king of character of tax.


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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 equalprotection and uniformity clauses of theConstitution.

Direct Duplicate Taxation This is double taxation in its strict sense. It isprohibited because it comprises imposition of thesame tax on the same property for the samepurpose by the same state during the same taxingperiod.


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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 localgovernment upon the same occupation, calling oractivity.Real estate tax and income collected on the samereal estate property leased for earning purposes.

Taxes are imposed on the taxpayers final productand the storage of raw materials used in theproduction of the final product.


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Escape from TaxationWays by which a taxpayer could escape tax

burdens may be as follows:

Evasion

Avoidance Shifting Capitalization Transformation Exemption

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)

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


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Evasion

The taxpayer uses unlawful means to evade orlessen the payment of tax. This form of taxdodging is prohibited and therefore subject tocivil and/or criminal penaltiesExamples: 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 inorder to save in taxes is guilty of tax evasionbecause a corporation is a business purposesand not for tax savings.


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Avoidance

This is also called Tax Minimization. It isreducing or totally escaping payment of taxesthrough legally permissible means. Examples of taxavoidance are:Selling shares of stock through a stock exchange inorder to avail of the lower tax rates.Estate planning within the means sanctioned by the tax code has been held to be one of permissibletax 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.


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Shifting

Basically, it the tax burden to another. Theimposition of tax is transferred from the statutory taxpayer to another without violating the law. Thisis the best exemplified by indirect taxes like the

value-added tax.

KINDS OF SHIFTING Forward Shifting is the transfer of tax burdenfrom the producer to distributor until it finally

reaches the ultimate purchasers or consumers.(Example: Tax is included in the final price of theproduct to be paid by the customer. Price,therefore, increases).


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KINDS OF SHIFTING

Backward Shifting-is the reverse of forward shifting. For example, themanufacturer 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 eitherforward or backward .


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Capitalization

A backward shifting of tax burden whereby the taxon the selling price of the property, which issupposed to be paid by the buyer, shall becapitalized 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 reduceprices and to maintain market share. He recovers hisadditional tax expense by improving the process of production. The tax, therefore, is transformed into again through the medium of production.


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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.


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ESSENTIAL CHARACTERISTICSOF A TAX

It is an enforced contribution.Imposed in accordance with law orlegislative in nature.Imposed for public purpose.Proportionate in character.Generally paid in money.

Paid at regular intervalsImposed upon persons, property or rights.


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Classification of TaxesAs to Subject Matter or Objecta) Personal, poll or capitation tax of a fixed amountimposed on individuals, whether citizens or not, residingwithin a specified territory without regard to theirproperty or the occupation in which they may be

engaged.

b) Property Tax imposed on property, whether real orpersonal, in proportion either to its value or inaccordance 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 anoccupation. (Examples: Estate Tax, Donors Tax, Income

Tax, Value Added Tax.)


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Classification of TaxesAs to Who bears The Burden

a) Direct Tax demanded from persons who areintended 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 toanother. (Examples: Customs duties, Value-Added

Tax, Some Percentage Taxes)


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As to determination of amount

a) Specific Tax imposed based on a physical unitof measurement, as by head or number, weight, orlength or volume. (Examples: tax on distilled spirits,fermented liquors, cigarettes, wines, fireworks)

b) Ad-valorem Tax of a fixed proportion of thevalue of property; needs an independent appraiserto determine its value. (Examples: real estate tax,certain customs duties, excise taxes on cigarettes,gasoline and others.)

Classification of Taxes


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Classification of TaxesAs to purpose

a) General, Fiscal or Revenue tax with noparticular purpose or object for which the revenueis raised, but is simply raised for whatever needmay arise. (Examples: income tax, value added tax)

b) Special or Regulatory Tax imposed for aspecial purpose regardless of whether revenue israised or not, and is intended to achieve somesocial or economic end. Example: protective tariffsor customs duties on certain imported goods toprotect local industries against foreign competition.


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Classification of TaxesAs to authority imposing the tax or scope

a) National tax imposed by the nationalgovernment. Examples: Internal revenue taxes,tariff and custom duties.

b) Municipal or Local Tax imposed by municipalgovernment for specific needs. Examples: realestate taxes, municipal licenses.


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Classification of TaxesAs to graduation or rate

a) Proportional tax based on a fixed percentage of the amount of property income or other basisto be taxed. (Examples: value added tax,percentage taxes, real estate taxes).

b) Progressive or Graduated tax rate increasesas the tax base increases. (Examples: incometax, estate tax, donors tax)

c. Regressive Tax rate decreases as the tax baseincreases. There is no regressive tax in thePhilippines.

Lesson 3 - TAX Its Characteristics and Classification

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