sin tax law

2012 sin tax presentation oct10 from Desiree Guasch

Atty Sababan TAX

TAX PRINCIPLES

Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability, an allowance against the tax itself, or a deduction from what is owned.

          A tax credit reduces the tax due, including –whenever applicable – the income tax that is determined after applying the corresponding tax rates to taxable income.  (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

A tax deduction is defined as a subtraction from income for tax purposes, or an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due.

          A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law. 

          It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.  (Philippine Banking Corporation, etc., v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)

Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal means to escape the payment of taxes.

Tax sparing is a provision in some tax treaties which provides that the state of residence allows as credit the amount that would have been paid, as if no reduction has been made. (Vogel, Klaus on Double Taxation Conventions, Third Edition, p.1255 cited in Segarra, Venice H, Tax Treaties: Trick or treat ?, Philippine Daily Inquirer, December 6, 2002, p. C5)

          There may be instances where a particular income is exempt from taxation in order to encourage foreign investments which may lead to economic development.  If the tax credit method is used, there would be no more tax to credit since there is no more tax to credit as a result of the tax exemption.  Consequently, when the tax method credit method is applied to these items of income, such incentives are siphoned off since, in effect, the tax benefits are cancelled out.  (Ibid.) Thus, the need for the tax sparing provision.

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Tax Evasion vs. Tax Avoidance

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Tax Evasion is the use by the taxpayer of illegal or fraudulent means to defeat or reduce the payment of a tax. It is punishable by law.
Examples: Deliberate failure to report taxable income or property; deliberate reduction of income that has been received.

Tax Avoidance is the use by the taxpayer of legally permissible means or methods in order to avoid or reduce tax liability. It is not punishable by law.
Examples: Situations where a person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental taxation or to lower his tax bracket for a taxable year to avoid the higher rate of tax.

Tax evasion should be applied to the escape from taxation accomplished by breaking the letter of the law for example deliberate omission to report a taxable item. Tax avoidance on the other hand, covers escape, accomplished by legal means which may be contrary to the intent of the sponsors of the tax law but nevertheless do  not violate the letter of the law.

Source: Textbook on Agrarian Reform and Taxation by Hector de Leon
            Fundamentals of Taxation