FORMS OF ESCAPE FROM TAXATION/ EXEMPTION FROM TAXATION

FORMS OF ESCAPE FROM TAXATION

1. Shifting
2. Capitalization
3. Transformation
4. Avoidance
5. Exemption
6. Evasion

Shifting- process by which tax burden is transferred from statutory taxpayer to another without violating the law.

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.

Capitalization- is 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.

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.

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.

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.

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.

Tax evasion- use of taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax.

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.