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 (Blacks 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 EXEMPTION

a) Contract, wherein the government is the
contracting party
b) Public policy
c) 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 .