MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION

 
 
Six basic forms of escape from taxation
 
1.       Shifting
 
2.       Capitalization
 
3.       Evasion
 
4.       Exemption
 
5.       Transformation
 
6.       Avoidance
 
Note: With the exception of evasion, all are legal means of escape.
 
SHIFTING
 
Shifting
 
                     Shifting is the transfer of the burden of a tax by the original payer or the one on whom
the tax was assessed or imposed to someone else.
 
                     It should be borne in mind that what is transferred is not the payment of the tax but
the burden of the tax.
 
Taxes that can be shifted
 
                     Only indirect taxes may be shifted; direct taxes cannot be shifted.
 
Ways of shifting the tax burden
 
1.       Forward shifting
 
When the burden of the tax is transferred from a factor of production through
factors of distribution until it finally settles on the ultimate purchaser or consumer.
 
Example: Manufacturer or producer may shift tax assessed to wholesaler, who
in turn shifts it to the retailer, who also shifts it to the final purchaser or consumer.
 
2.       Backward shifting
 
 When the burden of the tax is transferred from the consumer or purchaser
through the factors of distribution to the factor of production.
 
Example: Consumer or purchaser may shift tax imposed on him to retailer by
purchasing only after the price is reduced, and from the latter to the wholesaler, and
finally to the manufacturer or producer.
 
3.       Onward shifting
 
When the tax is shifted two or more times either forward or backward.
 
Thus, a transfer from the seller to the purchaser involves one shift; from the
producer to the wholesaler, then to retailer, we have two shifts; and if the tax is
transferred again to the purchaser by the retailer, we have three shifts in all.
 
Impact and incidence of taxation
 
                     Impact of taxation is the point on which a tax is originally imposed. In so far as the law
is concerned, the taxpayer is the person who must pay the tax to the government. He is
also termed as the statutory taxpayer – the one on whom the tax is formally assessed.
He is the subject of the tax.
 
                     Incidence of taxation is that point on which the tax burden finally rests or settle down.
It takes place when shifting has been effected from the statutory taxpayer to another.
 
Statutory taxpayer
 
                     The statutory taxpayer is the person required by law to pay the tax or the one on
whom the tax is formally assessed.  In short, he or she is the subject of the tax.
 
                     In direct taxes, the statutory taxpayer is the one who shoulders the burden of the tax
while in indirect taxes, the statutory taxpayer is the one who pay the tax to the
government but the burden can be passed to another person or entity.
 
Relationship between impact, shifting, and incidence of a tax
 
                     The impact is the initial phenomenon, the shifting is the intermediate process, and the
incidence is the result. Thus, the impact in a sales tax (i.e. VAT) is on the seller
(manufacturer) who shifts the burden to the customer who finally bears the incidence of
the tax.
 
                     Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is
the setting or coming to rest of the tax.
 
TAX EVASION
 
Tax evasion
 
                     Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or
lessen the payment of a tax. It is also known as “tax dodging.” It is punishable by law.
 
                     Tax evasion is a term that connotes fraud through the use of pretenses or forbidden
devices to lessen or defeat taxes. [Yutivo v. Court of Tax Appeals, 1 SCRA 160]
 
                     Example: Deliberate failure to report a taxable income or property; deliberate
reduction of income that has been received.
 
Elements of tax evasion
 
                     Tax evasion connotes the integration of three factors:
 
1.       The end to be achieved. Example: the payment of less than that known by the
taxpayer to be legally due, or in paying no tax when such is due.
 
2.       An accompanying state of mind described as being “evil,” “in bad
faith,” “willful” or “deliberate and not accidental.”
 
3.       A course of action (or failure of action) which is unlawful.
 
Evidence to prove evasion
 
                     Since fraud is a state of mind, it need not be proved by direct evidence but may be
proved from the circumstances of the case.
 
                     In Republic v. Gonzales [13 SCRA 633], the Supreme Court affirmed the assessment
of a deficiency tax against Gonzales, a private concessionaire engaged in the
manufacturer of furniture inside the Clark Air Base, for underdeclaration of his income.
SC held that the failure of the taxpayer to declare for taxation purposes his true and
actual income derived from his business for two (2) consecutive years is an indication of
his fraudulent intent to cheat the government if its due taxes.
 
 
TAX AVOIDANCE
 
Tax avoidance
 
                     Tax avoidance is the 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. It is politely called “tax minimization” and is not punishable by law.
 
                     In Delphers Traders Corp. v. Intermediate Appellate Court [157 SCRA 349], the
Supreme Court upheld the estate planning scheme resorted to by the Pacheco family in
converting their property to shares of stock in a corporation which they themselves
owned and controlled. By virtue of the deed of exchange, the Pachecho co-owners
saved on inheritance taxes. The Supreme Court said the records do not point to
anything wrong and objectionable about this estate planning scheme resorted to. The
legal right of the taxpayer to decreased the amount of what otherwise could be his
taxes or altogether avoid them by means which the law permits cannot be doubted.
 
TAX EXEMPTION
 
Tax exemption
 
                     It is the grant of immunity to particular persons or corporations or to 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. It is an immunity or privilege;
it is freedom from a financial charge or burden to which others are subjected.
 
                     Exemption is allowed only if there is a clear provision therefor.
 
                     It is not necessarily discriminatory as long as there is a reasonable foundation or
rational basis.
 
Rationale for granting tax exemptions
 
                     Its avowed purpose is some public benefit or interest which the lawmaking body
considers sufficient to offset the monetary loss entailed in the grant of the exemption.
 
                     The theory behind the grant of tax exemptions is that such act will benefit the body of
the people. It is not based on the idea of lessening the burden of the individual owners
of property.
 
 
Grounds for granting tax exemptions
 
1.       May be based on contract. In such a case, the public which is represented by the
government is supposed to receive a full equivalent therefor, i.e.  charter of a
corporation.
 
2.       May be based on some ground of public policy, i.e., to encourage new industries or to
foster charitable institutions. Here, the government need not receive any consideration
in return for the tax exemption.
 
3.       May be based on grounds of reciprocity or to lessen the rigors of international double or
multiple taxation
 
Note: Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear
provision therefor.
 
Nature of tax exemption
 
1.       It is a mere personal privilege of the grantee.
 
2.       It is generally revocable by the government unless the exemption is founded on a
contract which is protected from impairment.
 
3.       It implies a waiver on the part of the government of its right to collect what otherwise
would be due to it, and so is prejudicial thereto.
 
4.       It is not necessarily discriminatory so long as the exemption has a reasonable foundation
or rational basis.
 
Kinds of tax exemption according to manner of creation
 
1.       Express or affirmative exemption
 
          When certain persons, property or transactions are, by express provision,
exempted from all or certain taxes, either entirely or in part.
 
2.       Implied exemption or exemption by omission
 
          When a tax is levied on certain classes of persons, properties, or transactions
without mentioning the other classes.
 
          Every tax statute makes exemptions because of omissions.
 
Kinds of tax exemptions according to scope or extent
 
1.       Total
 
          When certain persons, property or transactions are exempted, expressly or
implied, from all taxes.
 
2.       Partial
 
          When certain persons, property or transactions are exempted, expressly or
implied, from certain taxes, either entirely or in part.
 
Does provision in a statute granting exemption from “all taxes” include indirect
taxes?
 
                     NO. As a general rule, indirect taxes are not included in the grant of such exemption
unless it is expressly stated.