MODULE 3: FORMS OF ESCAPE FROM TAXATION

There are six (6) basic forms of escape from taxation namely:
1. 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 another or someone else. In shifting, what is transferred is not the payment
of the tax but the burden of the tax. Shifting is possible only when there is an exchange of
commodities.

Kinds of Shifting
a. Forward shifting. This takes place when the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally settles on the ultimate purchaser or
consumer. Example: The tax is P 6.00, but the price is raised only by P 5.00, there is no shifting as
to the remaining P 1.00.

b. Backward shifting.
This takes place when the burden of the tax is transferred from the consumer or purchaser through
the factors of distribution to the factor of production. This is effected, for example, upon the
purchase of an article with a tax of P 9.00 is imposed payable by the purchaser and by reason the
seller is forced to reduce the price by P9.00, the tax is shifted in full backward. If reduced by P 7.00,
only the amount is shifted backward, the remaining P 2.00 of the tax being borne by the purchaser.
c. Onward shifting
This occurs when the tax is shifted two or more times either forward or backward. A transfer from
producer to consumer or from seller to purchaser involves one shift; from producer to wholesaler,
then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by theretailer,
we have three shifts in all.

2. Capitalization
Tax Capitalization - means the reduction in the price of the taxed object equal to the capitalized
value of future taxes which the pur chaser expects to be called upon to pay. It occurs when the tax
falls on an income-producing property. Capitalization may be a special form of backward shifting
except that while the latter involves the shifting back of a single tax, the former involves the throwing
back of the whole series of taxes and takes place before any of them, with the exception of the first
is paid.
3. Transformation
4. Evasion
Factors that determine the situs of taxation:
1. Nature of the tax;
2. Subject matter of the tax;
3. Citizenship of the taxpayer
4. Residence of the taxpayer;
5. Source of income.
Application of Situs of Taxation
1 Tax on persons residence of the taxpayer.
2. Community tax residence or domicile of the person taxed;
3. Business tax where business is conducted.
4. Privilege or occupation tax where occupation is pursued.
5. Sales tax where transaction takes place.
6. Real property tax - where property is located (lex rei sitae)
7. Personal property tax tangible, where it is physically located, intangible, and principle of mobilia
sequuntur personam;
8. Income where income is earned or residence or citizenship of the taxpayer.
9. Transfer tax residence or citizenship of the taxpayer or location of the property.
10. Franchise tax -State which granted the franchise.
11. Tax on corporations and other judicial entities - law of incorporation.
Situs of Property Tax on Personal Property
Mobilia Sequuntur personam. Generally, the place where the owner is found is the situs of taxation
under the rule that movables follow the person. This is generally, where the owner resides.
a. Tangible personal property. Where located usually the owner's domicile. Reason: The place
where the tangible personal property is found gives it protection hence the property or its owner
should support the government of that place.
b. Intangible personal property. Usually, the domicile of the owner. Reason: the place where the
owner is found is the situs of taxation under the rules of movables. Exception: The situs is location
not domicile.
Where the intangible personal property has acquired a business situs in another jurisdiction.
Example: Taxes imposed on the sale of Philippine stocks (stocks in Domestic Corporations) are
payable in the Philippines no matter where they may be found, or where owners domicile is.

Nationality theory. The country where the income earner is a citizen is the situs of taxation. Reason:
A citizen is given protection by his country no matter where he is found or no matter where he earns
his income. He is therefore obligated to support that country, in exchange for the protection he
receives.
The principle of mobilia seqquntur personam may likewise apply as income taxation laws of his
country follow the citizen no matter where he is found.
Source. The country which is the source of the income or where the activity that produced the
income took place is the situs of taxation.
Situs of Tax on Interest Income
The residence of the borrower who pays the interest irrespective of the place where the
obligation was contracted;
Reason: if the borrower is a resident of the Philippines the interest payment paid by him can have
no other source than within the Philippines. The interest is not paid by the bond, note or other
interest bearing obligations but by the borrower.
Tax Exemption strictly construed against the Tax payer
The power of taxation is a high prerogative of sovereignty. The relinguishment is never
presumed. Any reduction or demunition thereof with respect to its mode or its rate must be strictly
construed, and the same must be coached in clear and unmistakable term. He who claims an
exemption must be able to point out some provisions of laws creating the right; it cannot be allowed
to exist upon a mere vague implication or inference.
Reasons for strictissimi Juris Interpretation of exemptions:
Lifeblood Theory
Minimize differential treatment and foster impartiality, fairness and equality of treatment among
taxpayers. Taxation high prerogative of sovereignty whose relinguishment is never presumed.
Exceptions to strictissimi Juris
1. When the statute granting exemption provides for liberal construction thereof.
2. In case of special taxes relating to special cases and affecting special classes of persons.
3. It exemptions refer to public property.
4. In cases of exemptions granted to charitable and educational institution or their property.
5. In cases of exemptions in favor of governmental political subdivision or instrumentality.
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 tax law, partakes of an absolute
forgiveness or waiver of the government of its right to collect what otherwise would due to it, and in
this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to
reform a chance to do so and thereby become a part of the new society with a clean state.
Executive Order No. 64 expanded the tax amnesty to include estate, donor's and business
taxes. The additional tax amnesty payment must not be less than P 4,000 for individuals and P
7,000 for corporations. For those who did not file returns under Executive Order No.41, the tax
amnesty is higher at 15% of the increase in net worth; also the tax payment must not be less than P
9,000 for individuals and P 19,000 for corporations. Taxpayers who responded earlier were
benefited with lower additional tax.
Executive Order No. 94 extended the period for availing the tax amnesty up to January 3, 1987.
R.A. No. 7498 grants tax amnesty to persons repatriating their foreign currencies and/or securities
to the Philippines by paying 10% of the amount within two (2) months from the filing of the amnesty
tax selection the period of availment of the tax amnesty was within eight (8) months from the
promulgation of the rules and regulations by the Secretary of Finance.