FORMS OF ESCAPE FROM TAXATION/ EXEMPTION FROM TAXATION
FORMS OF ESCAPE FROM TAXATION• A. Shifting• B. Capitalization• C. Transformation• D. Avoidance• E. Exemption• F. Evasion
A. SHIFTING• process by which tax burden is transferred from statutory taxpayer to another without violating the law.• One way of passing the burden of the tax from one person to other (Black’s Law Dictionary ,supra ). For Example, taxes paid by the manufacturer may be shifted to the consumer by adding the amount of the tax paid to the price of the product.• Kinds of Shifting• 1. Forward shifting- when burden of tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer• 2. Backward shifting – when the burden is transferred from consumer through factors of distribution to the factors of production;• 3. Onward shifting- when the tax is shifted 2 or more times either forward or backward.
B. CAPITALIZATION• the reduction in the price of the taxed object equal to the capitalized value of the future taxes which the purchaser expects to be called upon to pay .• This refers to the reduction in the price of the taxed object to the capitalize value of future taxes which the purchaser expects too be called upon to pay. An example as the reduction made by the seller on the price of the Real Estate, in anticipation of the future tax to be shouldered by the future buyer.
C. TRANSFORMATION• the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units at a lower cost.• Occurs when the manufacturer or the producer upon whom the tax has been imposed pays the tax and endeavor to “recoup” himself/herself by improving his/her process of production (De Leon, 1991).
D. TAX AVOIDANCE• exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability.• The exploitation by the taxpayer of legally permissible methods in order to avoid or reduce tax liability. This is also known as “tax minimization”. An example is exhausting and/or utilizing all allowable deductions in law to lessen or reduce the tax burden.
E. TAX EXEMPTION• grant of immunity to particular persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay.• The grant of immunity or freedom from financial charge, obligation, or burden to which others are subjected.
. GROUNDS FOR TAX EXEMPTIONa) Contract, wherein the government is the contracting partyb) Public policyc) Reciprocity
. BASIC PRINCIPLES REGARDING TAX EXEMPTIONS • 1. Exemptions are highly disfavored by law and he who claims an exemption must be able to justify his claim by the clearest grant of law. • 2. He who claims tax exemption should prove by convincing proofs that he is exempted • 3. Tax exemptions should be strictly construed against the person claiming it. • 4. Taxation is the rule and exemption Is the exception • 5. Constitutional grant of tax exemptions are self-executing • 6. In the same way that taxes are personal, tax exemptions are also personal • 7. Deductions for income tax purposes partake of the nature of tax exemptions, therefore deductions should also be construed strictly against the taxpayer.
F. TAX EVASION• use of taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax.• The practice by the taxpayer through illegal or fraudulent means to defeat or lessens the amount for tax. This is also known as “tax dodging”. Tax evasion presupposes malice, fraud, bad faith, or willful intent on the part of taxpayer (Rep. v. Gonzales, 13 SCRA 633) as in the case of substantial under declaration of income for four (4) consecutive years ( Perez v. CTA,L-10507). An example is the deliberate and/or malicious failure to report income to defeat tax liability.
. INDICIA OF FRAUD IN TAX EVASION Indicia of Fraud in tax evasion• 1. Failure to declare for taxation purposes true and actual income derived from business for 2 consecutive years;• 2. Substantial under declaration of income tax returns of the tax payer for 4 consecutive years coupled with intentional overstatement of deductions .