Basic Principles TAXATION

THE POWER OF TAXATION

Taxation is the power by which

the sovereign, through its law-
making body, raises revenue to
defray the necessary expenses
of government from among
those who, in some measure, are
privileged to enjoy its benefits
and must bear its burdens.
TWOFOLD NATURE OF THE POWER OF
TAXATION

IT IS AN INHERENT ATTRIBUTE IT IS LEGISLATIVE IN

OF SOVEREIGNTY. CHARACTER.
Subject to constitutional and inherent restrictions,
the power of taxation is regarded as
comprehensive, unlimited, plenary and SUPREME.

EXTENT OF TAXING POWER

SCOPE OF LEGISLATIVE TAXING POWER
1. Amount or rate of tax
2. Apportionment of tax
3. Kind of tax
4. Method of collection
5. Purpose(s) of its levy,
provided it is for public
purpose
6. Subject to be taxed, provided
it is within its jurisdiction
7. Situs of taxation
 Taxes are enforced proportional
contributions from the persons and
property levied by the law-making
TAXES body of the state by virtue of its
sovereignty in support of
government and for public needs.
 Forced charge;

Pecuniary burden payable in

money;

Levied by the legislature;

CHARACTERISTICS
Assessed with some
reasonable rule of
OF TAXES
apportionment;

Imposed by the state within

its jurisdiction;

Levied for public purpose.

REQUISITES OF A VALID TAX
1. Should be for a public purpose;
2. The rule of taxation shall be uniform;
3. That either the person or property
taxed be within the jurisdiction of the
taxing authority;
4. That the assessment and collection of
certain kinds of taxes guarantees
against injustice to individuals,
especially by way of notice and
opportunity for hearing be
provided;
5. The tax must not impinge on the
inherent and constitutional limitations
on the power of taxation.
THEORIES AND BASES OF
TAXATION
1. Lifeblood Theory
2. Necessity Theory
3. Benefits-Protection/ Reciprocity
Theory
LIFEBLOOD THEORY
Taxes are what we pay for civilized society.
Without taxes, the government would be paralyzed
for lack of the motive power to activate and
operate it.
Hence, despite the natural reluctance to surrender
part of one’s hard-earned income to taxing
authorities, every person who is able must
contribute his share in the running of the
government.
 The power to tax is an attribute of
sovereignty emanating from
necessity. It is a necessary burden to
preserve the state’s sovereignty and
a means to give the citizenry an
NECESSITY army to resist an aggression, a navy
to defend its shores from invasion, a
THEORY corps of civil servants to serve, public
improvements designed for the
enjoyment of the citizenry and those
which come within the state’s
territory, and protection which a
government is supposed to provide.
Taxation is described as a symbiotic relationship
whereby in exchange of the benefits and
protection that the citizens get from the
government, taxes are paid.

BENEFITS-PROTECTION /
RECIPROCITY THEORY
IS THE POWER TO TAX THE POWER TO
DESTROY?
Marshall Dictum : “The power to tax is
the power to destroy.” This refers to the
unlimitedness and the degree with
which the taxing power may be
employed to raise revenue.
Holmes Dictum: “Power to tax is not
the power to destroy while the Supreme
Court sits.” The power to tax knows no
limit except those expressly stated in
the Constitution.
 Although the power to tax is almost
MARSHALL unlimited, it must not be exercised in
an arbitrary manner.
AND HOLMES If the abuse is so great as to destroy
DICTUM the natural and fundamental rights
of people, it is the duty of the
RECONCILED judiciary to hold such an act
unconstitutional.
Revenue: basically, the purpose of
taxation is to provide funds or property
with which the state promotes the general
welfare and protection of its citizens.
Non-revenue:
 Promotion of general welfare
 Regulation
 Reduction of social inequality
 Encourage economic growth
 Protectionism

PURPOSES AND
OBJECTIVES OF TAXATION
1. Fiscal Adequacy – sufficiency to meet government
expenditures and other public needs.
2. Administrative Feasibility – capability of being
effectively enforced.
3. Theoretical Justice – based on the taxpayer’s ability to
pay; must be progressive.

BASIC PRINCIPLES OF A
SOUND TAX SYSTEM
 Police Power

Eminent Domain

Taxation

INHERENT POWERS OF THE STATE

 DISTINCTIONS AMONG INHERENT
POWERS OF THE STATE
Police Power Eminent Domain Taxation

PURPOSE
To promote public purpose To facilitate the State’s To raise revenues.
through regulations need of property for
public use.

AMOUNT OF EXACTION
Limited to the cost of No exaction; but private No limit.
regulation, issuance of the property is taken by the
license or surveillance. State for public purpose.
 DISTINCTIONS AMONG INHERENT
POWERS OF THE STATE
Police Power Eminent Domain Taxation

BENEFITS RECEIVED
No direct benefit is A direct benefit results in
received; a healthy the form of just
economic standard of compensation to the
society is attained. property owner.
No special or direct
benefit is received by the
taxpayer; merely general
benefit of protection.

TRANSFER OF PROPERTY RIGHTS

No transfer but only Transfer is effected in Taxes paid become part
restraint in its exercise. favor of the State. of public funds.
 DISTINCTIONS AMONG INHERENT
POWERS OF THE STATE
Police Power Eminent Domain Taxation

SCOPE
All persons, property, Only upon a All persons, property
rights, and privileges. particular property. and excises.

PERSONS AFFECTED
Community or a class Only the owner of a Community or a class
of individuals. private property. of individuals.
 Public purpose is always presumed.

If the law is clear, apply the law in accordance to its plain and
simple tenor.

A statute will not be construed as imposing a tax unless it does

so clearly, expressly, and unambiguously.

In case of doubt, it is construed most strongly against the

Government, and liberally in favor of the taxpayer.

CONSTRUCTION OF TAX LAWS

 Provisions of a taxing act are not to
be extended by implication.

Tax laws operate prospectively

unless the purpose of the legislature
CONSTRUCTION to give retrospective effect is
OF TAX LAWS expressly declared or may be
implied from the language used.
The tax laws are special laws and
prevail over a general law.
 As to subject matter

As to burden

As to purpose

As to manner of computation

As to taxing authority

As to rate

CLASSIFICATION OF TAXES
 Personal Tax – taxes are of fixed
amount upon all persons of a
certain class within the jurisdiction Property Tax – assessed on
without regard to property, property of a certain class.
occupation, or business in which
they may be engaged.

Customs Duties – duties charged

Excise tax – imposed on the upon the commodities on their being
exercise of a privilege. imported into or exported from a
country.

AS TO SUBJECT MATTER
 Direct tax – both the incidence of or liability for the payment of
the tax as well as the impact or burden of the tax falls on the
same person.

Indirect tax – the incidence of or liability for the payment of the

tax falls on one person but the burden thereof can be shifted or
passed on to another.

AS TO BURDEN
 1 2
General tax – levied for Special tax – levied for
the general or ordinary special purposes.
purposes of the
Government.

AS TO PURPOSE
 Specific tax – the Ad Valorem tax – tax upon
computation of the tax or the value of the article or
the rates of the tax is thing subject to taxation;
already provided for by the intervention of another
law. party is needed for the
computation of the tax.

AS TO MANNER OF COMPUTATION
AS TO TAXING AUTHORITY

National tax – Local Tax – levied

levied by the by the local
National government.
Government.

NIRC Taxes:
• Income Tax
• Estate & Donor’s Tax
• Value-added tax
• Other percentage taxes
• Excise taxes
• Documentary stamp tax
Progressive tax – rate or amount
of tax increases as the amount of
income or earning to be taxed
increases.
Regressive tax – tax rate
decreases as the amount of
income to be taxed increases. AS TO RATE
Proportionate tax – based on a
fixed proportion of the value of
the property assessed.
 ASSIGNMENT
STUDY THE INHERENT AND QUIZ NEXT MEETING.
(THURSDAY)
CONSTITUTIONAL
LIMITATIONS OF THE TAXING
POWER.
ASSIGNMENT (NEXT TUESDAY)
Differentiate tax from the following:
1. Toll
2. Penalty
3. Special assessment
4. License fee
5. Custom duties
6. Debt
7. Subsidy
8. Revenue
9. Internal revenue
10. Tariff
STAGES OR PROCESS OF TAXATION
1. Levy or Imposition – involves the passage of
tax laws or ordinances through the legislature.
2. Assessment and Collection – involves the act
of administration and implementation of tax
laws by the executive through its administrative
agencies such as the BIR or BOC.
3. Payment – the act of compliance by the
taxpayer in contributing his share to pay the
expense of the government.
INHERENT LIMITATIONS ON THE TAXING
POWER
Inherent limitations proceed from the
very nature of the taxing power itself.
The taxing power has very distinct and
positive limitations some of which
inherent in its very nature and exists
whether declared or not declared in
the written constitution.
INHERENT LIMITATIONS ON THE TAXING
POWER (D-PINES)
1. Double Taxation
2. Public Purpose
3. International Comity
4. Non-delegability of the Taxing Power
5. Exemption of the government
6. Situs of taxation or territoriality
1. DOUBLE TAXATION

a. Direct Duplicate Taxation – prohibited

because it violates the constitutional
provision on uniformity and equality.
b. Indirect Duplicate Taxation – not legally
objectionable. It extends to all cases in
which there is a burden of two or more
pecuniary imposition but imposed by
different taxing authority.
2. PUBLIC PURPOSE

Proceeds from tax must be used for:

Support of the government
Some of the recognized objects of
government
To promote the welfare of the community
(not individuals)
3. INTERNATIONAL COMITY

A state cannot tax another state

based on the principle of
Sovereign Equality among States.
E.g. Tax law passed imposing
taxes on foreign ambassadors is
not a valid law.
4. NON-DELEGABILITY OF THE TAXING
POWER
Power of taxation is purely
legislative, hence the power cannot
be delegated either to the executive
or judicial departments. The limitation
arises from the doctrine of separation
of powers among the three branches
of the government.
EXEMPTIONS TO THE RULE AGAINST THE
DELEGATION OF THE TAXING POWER:
1. Delegation to the President, subject to
some limitations and restrictions, to fix
within specified limits, tariff rates, import
and export quotas, tonnage and wharfage
dues, and other duties or imposts.
2. Delegation to local governments the power
to create its own sources of revenues and
to levy taxes, subject to such limitations as
may be provided by law.
EXEMPTIONS TO THE RULE AGAINST THE
DELEGATION OF THE TAXING POWER:
3. Delegation to administrative agencies certain
aspects of the taxing process that are not
legislative such as:
a. The power to fix value of property for
purposes of taxation pursuant to fixed
rules.
b. The power to assess and collect taxes.
5. EXEMPTION OF THE GOVERNMENT
Agencies performing governmental functions are
tax exempt unless expressly taxed.
Agencies performing proprietary functions are
subject to tax unless expressly exempted.
GOCCs performing proprietary functions are
subject to tax, however the following are granted
exemptions:
 GSIS, SSS, PHIC, PCSO, LWDs
6. SITUS OF TAXATION
The taxing power of the country is limited to
person and property within and subject to
its jurisdiction.
Factors to consider in determining Situs of
Taxation
 Subject Matter (person, property, or activity)
 Nature of the tax
 Citizenship
 Residence
 APPLICATION OF SITUS OF TAXATION
KIND OF TAX SITUS
Personal or Community Tax Residence or domicile of the taxpayer

Real Property Tax Location of the property

TANGIBLE: where it is physically
located or permanently kept.
Personal Property Tax INTANGIBLE: subject to Sec. 104 of
the NIRC and the principle of mobilia
sequuntur personam
Business Tax Place of business
Where the act is performed or where
Excise or Privilege Tax occupation is pursued
 APPLICATION OF SITUS OF TAXATION
KIND OF TAX SITUS
Sales Tax Where the sale is consummated
Consider:

Income Tax a. Citizenship

b. Residence, and
c. Source of income
Residence or citizenship of the taxpayer
Transfer Tax
of location of property.
Franchise Tax State which granted the franchise
CONSTITUTIONAL LIMITATIONS ON THE
TAXING POWER
1. Observance of due process of law
2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of poll tax
6. Non-impairment of the obligations of contracts.
7. Free worship Clause
CONSTITUTIONAL LIMITATIONS ON THE
TAXING POWER
8. Exemption of charitable institutions, churches,
parsonages, or convents appurtenant thereto,
mosques and non-profit cemeteries, and all
lands, buildings, and improvements actually,
directly, and exclusively USED for religious,
charitable or educational purposes.
CONSTITUTIONAL LIMITATIONS ON THE
TAXING POWER
9. Exemption from taxes of the revenues and assets
of non-profit, non-stock educational institutions
including grants, endowments, donations, or
contributions for educational purposes.
10. Non-appropriation of public funds or property for
the benefit of any church, sect or system of
religion, etc.
11. No money shall be paid out of the Treasury
except in pursuance of an appropriation made by
law.
CONSTITUTIONAL LIMITATIONS ON THE
TAXING POWER
12. Concurrence of a majority of ALL members of
Congress for the passage of a law granting tax
exemption.
13. Non-diversification of tax collections.
14. The President shall have the power to veto any
particular item(s) in an appropriation, revenue or
tariff, but the veto shall not affect the item(s) to
which no objection has been made.
CONSTITUTIONAL LIMITATIONS ON THE
TAXING POWER
15. Non-impairment of the jurisdiction of the
Supreme Court to review tax cases.
16. Appropriations, revenue or tariff bills shall
originate exclusively in the House of
Representatives but the Senate may propose or
concur with amendments.
17. Each local government unit shall exercise the
power to create its own sources of revenue and
shall have a just share in the national taxes.
OTHER DOCTRINES IN TAXATION
1. Equitable Recoupment – claim for refund which is prevented
by prescription may be allowed to be used as payment for
unsettled tax liabilities if both taxes arise from the same
transaction in which overpayment is made and
underpayment is due.
2. Set-off Taxes – taxes are not subject to set-off or legal
compensation because the government and the taxpayer
are not mutual creditors and debtors of each other.
3. Taxpayer Suit – provides that a taxpayer suit can only be
allowed if the act involves a direct and illegal disbursement
of public funds derived from taxation.
ESCAPE FROM TAXATION
1. Evasion or Dodging: the taxpayer uses unlawful
means to evade or lessen the payment of tax.
2. Avoidance: also called tax minimization, it is the
reduction or totally escaping payment of tax through
legally permissible means.
3. Shifting: the transfer of tax burden to another. The
imposition of tax is transferred from the statutory
taxpayer to another without violating the law.
 ESCAPE FROM TAXATION
4. Capitalization: the seller is willing to lower the price of the
commodity provided the taxes will be shouldered by the
buyer.
5. Transformation: the manufacturer absorbs the additional
taxes imposed by the government without passing it to the
buyers for fear of lost of its market. Instead, it increases
quantity of production, thereby turning their units of production
at a lower cost resulting to the transformation of the tax into a
gain through the medium of production.
6. Exemption: an immunity, privilege or freedom from payment
of a charge or burden to which others are obliged to pay.