TAX : CH 1

Taxation

the process by which the sovereign (State), through the legislature, imposes burdens on subjects and objects to raise revenues for government purposes

Taxes

enforced contributions from persons and property levied by the law-making body

The power to tax is inherent in a sovereign State, essential for government existence, and not merely a

constitutional grant

3 Inherent Powers of the State

1. Police Power – regulate liberty and property for public welfare.
2. Power of Taxation – raise revenue for government expenses.
3. Eminent Domain – acquire private property for public purpose with just compensation.

Similarities Among the 3 Inherent Powers

1. Inherent in the State
2. Exist independently of the Constitution
3. Interfere with private rights/property
4. Legislative in nature
5. Presuppose compensation for affected persons

Taxation – Nature

Power to enforce contributions to raise government funds.

Taxation – Authority

Government only

Taxation – Purpose

For the support of the government

Taxation – Persons Affected

Community or class of individuals; applies to all persons, property, and excises

Taxation – Scope

Plenary, comprehensive, supreme

Taxation – Effect

Contribution becomes part of public fund

Taxation – Benefits Received

Protection and benefits from the government

Taxation – Amount of Imposition

No limit

Police Power – Nature

Power to make and implement laws for general welfare

Police Power – Authority

Government only

Police Power – Purpose

Promote general welfare through regulation

Police Power – Persons Affected

Community or class of individuals; applies to all persons, property, and excises

Police Power – Scope

Broad; general power to make and implement law

Police Power – Effect

No transfer of title; may restrain injurious use of property

Police Power – Benefits Received

No direct benefit; arises from societal economic maintenance

Police Power – Amount of Imposition

Sufficient to cover license and regulatory expenses

Eminent Domain – Nature

Power to take private property for public use with just compensation

Eminent Domain – Authority

May be granted to public service/utility companies

Eminent Domain – Purpose

Taking private property for public use

Eminent Domain – Persons Affected

Individual owner; only particular property

Eminent Domain – Scope

Power to take private property for public use

Eminent Domain – Effect

Transfer of title to property

Eminent Domain – Benefits Received

Market value of property taken

Eminent Domain – Amount of Imposition

No imposition; owner paid fair value

Primary Purpose of Taxation

Revenue or Fiscal Purpose – to provide funds/property to promote general welfare, protect citizens, and finance government activities.

Taxes for Raising Revenue

Income taxes, Business taxes

Secondary/Regulatory/Sumptuary/Compensatory Purpose of Taxation

taxation used as a device for regulation/control to achieve government effects or conditions.

Objectives of Secondary/Regulatory Taxation

a) Promotion of General Welfare
b) Reduction of Social Inequality
c) Economic Growth

Examples of Taxes for Regulation

Excise taxes on sin products (cigarettes, alcohol), Amusement taxes (night/day clubs, cockpits, racetracks)

Examples of Taxation to Attain Social/Economic Objectives

• Increasing taxes during prosperity to curb spending and halt inflation

• Granting tax incentives to promote new/pioneer industries and local growth

• Lowering taxes during economic breakdowns, e.g., Covid-19 pandemic

Lifeblood/Necessity Theory of Taxation

Lifeblood - taxation is necessary because government existence is a necessity.

Necessity - taxation is a necessary burden to preserve sovereignty, provide army/navy, civil services, public improvements, and government protection.

Lifeblood Doctrine

Taxes are the lifeblood of government; without taxation, the government cannot exist, endure, or perform basic functions.

Government Right under Taxation

The State has the right to compel all citizens and property within its limits to contribute.

Benefits Received/Reciprocity Theory/Basis of Taxation

reciprocal duties of protection and support between the State and its inhabitants.

Purpose of Reciprocity Theory

State collects taxes to perform government functions; citizens pay taxes to enjoy benefits of organized society.

Doctrine of Symbiotic Relationship under Reciprocity Theory

taxes are what we pay for a civilized society

Taxpayer Benefits under Reciprocity Theory

Protection by the State; obligation to support government through payment of taxes

Doctrine of Symbiotic Relationship / Benefits-Protection Theory

Every able person must pay taxes; in return, taxpayers receive tangible or intangible benefits improving lives and property protection.

Manifestation of Lifeblood Theory – Rule of "No Estoppel against the Government"

The State cannot be stopped by neglect of its agents; erroneous enforcement does not block subsequent correct application of law.

Manifestation of Lifeblood Theory – Collection of Taxes

Cannot be enjoined by injunction; only Court of Tax Appeals may grant relief when collection jeopardizes interests

Manifestation of Lifeblood Theory – Taxes as Lifeblood

Taxes should be collected without unnecessary delay, but collection must not be arbitrary

Manifestation of Lifeblood Theory – Taxes Cannot Be Set-Off

Taxes are compulsory, not a debt; cannot be subject to compensation or set-off, except when both claims are due and liquidated

Manifestation of Lifeblood Theory – Right to Select Objects of Taxation

Congress determines: subject/object to tax, purpose, amount/rate, kind, apportionment, situs, manner/means/agencies of collection.

Manifestation of Lifeblood Theory – Valid Tax and Destruction of Property

Power to tax includes "power to destroy"; taxpayer cannot nullify valid tax for impoverishment; invalid taxes violating limits may be struck down by court.

Scope of the Power to Tax

Most absolute power of government; broadest scope; comprehensive, unlimited, plenary, and supreme

Comprehensive (Scope of Tax Power)

Covers persons, businesses, activities, professions, rights, and privileges.

Unlimited (Scope of Tax Power)

Without legal/constitutional limitations, power to tax is unlimited and comprehensive; courts rarely restrict it.

Plenary (Scope of Tax Power)

Complete; BIR may avail remedies to ensure collection of taxes.

Supreme (Scope of Tax Power)

Supremacy in selecting subjects of taxation.

Essential Element of Tax – Enforced Contribution

Payment is not voluntary or donation, but enforced by legislative authority.

Essential Element of Tax – Generally Payable in Money

Pecuniary burden payable in legal tender.

Essential Element of Tax – Proportionate in Character

Based on ability to pay theory; use of graduated tax rates.

Essential Element of Tax – Levied on Subjects or Objects

Persons, property, or exercise of a right or privilege.

Essential Element of Tax – Levied by Law-Making Body

Purely legislative function; Congress cannot delegate (Separation of Powers).

Essential Element of Tax – Levied for Public Purpose

Purpose must be for public benefit.

Aspects of Taxation

1. Levying (Legislative)
2. Assessment (Executive)
3. Collection (Executive)

Levying (Aspect of Taxation)

Legislative function – imposition of tax.

Assessment (Aspect of Taxation)

Executive function – determination of correct tax amount.

Collection (Aspect of Taxation)

Executive function – collection of tax; BIR collects internal revenue taxes.

Nature of State's Power to Tax – Inherent in Sovereignty

State can enforce taxes even without constitutional provision; supreme power to command obedience.

Nature of State's Power to Tax – Legislative in Character

Levying/imposition is purely legislative; cannot be exercised by executive/judicial branches.

Exceptions to Non-Delegation Rule – Delegation to President

Congress may authorize President to fix, within limits: tariff rates, import/export quotas, tonnage/wharfage dues, other duties within national development program

Exceptions to Non-Delegation Rule – Delegation to Local Government Units

Local units can impose taxes/fees as limited by Congress; no inherent taxing power

Exceptions to Non-Delegation Rule – Delegation to Administrative Agencies

Power to value property, assess/collect taxes, perform computation/appraisement/adjustment.

Exceptions to Non-Delegation Rule – Subject to Constitutional & Inherent limitations

It is subject to Constitutional & Inherent limitations

Nature of State's Power to Tax – Exemption of Government Entities

Necessary to prevent taxing itself; agencies performing governmental functions are tax-exempt unless expressly taxed.

Taxable Government Entities

Agencies performing proprietary functions and GOCCs, except:

GSIS, SSS, PHIC, Local Water Districts (RA 10026),

HDMF/Pag-ibig (CREATE Law, April 11, 2021);

PCSO taxable from Jan. 1, 2018 (TRAIN Law).

Nature of State's Power to Tax – International Comity

Property of foreign State not taxed by another State due to sovereign equality, implied respect, and immunity from suit.

Nature of State's Power to Tax – Limitation on Territorial Jurisdiction

Tax laws cannot operate beyond a State's territorial limits; property outside jurisdiction not protected.

Nature of State's Power to Tax – Strongest Among Inherent Powers

Taxation is strongest inherent power of the State

Classification of Taxes – As to Scope

a. National – imposed by National Government (e.g. income tax, estate tax, donor's tax, VAT, documentary stamp tax)
b. Local – imposed by local government units (e.g. real estate tax, professional tax receipts); local power based on constitutional grant (Local Government Code)

Classification of Taxes – As to Subject Matter or Object

a. Personal/Poll/Capitation Tax – fixed amount on individual regardless of property or occupation (e.g. community tax)
b. Property Tax – imposed on property in proportion to value or reasonable apportionment (e.g. real estate tax)
c. Excise – tax not falling under poll or property tax; on exercise of rights/privileges, sin/non-essential products; may be specific or ad valorem (e.g. income tax, estate tax, donor's tax)

Classification of Taxes – As to Who Bears the Burden

a. Direct Tax – demanded from person who bears the burden; incidence and impact on same person (e.g. income tax, estate tax, donor's tax)
b. Indirect Tax – demanded from one person but burden can be shifted to another (e.g. VAT, percentage tax, excise tax)

Classification of Taxes – As to Determination of Amount

a. Specific Tax – fixed amount by head/number/weight/measurement (e.g. excise tax on cigars and liquors)
b. Ad Valorem Tax – fixed proportion of property value (e.g. VAT, income tax, donor's tax, estate tax)

Classification of Taxes – As to Purpose

a. Primary/Fiscal/Revenue – to raise revenue for government purposes (e.g. income tax, donor's tax, estate tax)
b. Secondary/Regulatory/Special/Sumptuary – for social/economic purpose irrespective of revenue (e.g. tariff, certain import duties)

Classification of Taxes – As to Graduation or Rate

a. Proportional – fixed percentage of property/receipts (e.g. VAT, ad-valorem tax on distilled spirits)
b. Progressive/Graduated – rate increases as tax base/bracket increases (e.g. income tax on individuals)
c. Regressive – rate decreases as tax base/bracket increases

Classification of Taxes – As to Taxing Authority

a. National – imposed under National Internal Revenue Code, collected by BIR and other national agencies; includes customs duties, narcotics taxes, special education fund taxes, energy taxes, sugar adjustment taxes, travel tax, private motor vehicle tax
b. Local – imposed by local government units

Elements of Sound Tax System – Fiscal Adequacy

Sources of revenue must be adequate to meet government expenditures and sustain public services.

Elements of Sound Tax System – Theoretical Justice or Equity

Tax burden should be proportionate to the taxpayer's ability to pay ("ability to pay principle").

Elements of Sound Tax System – Administrative Feasibility

Tax laws must be effective, clear, simple, and minimize complexity for assessment, collection, and compliance.

Limitations on the State's Power to Tax – Inherent Limitations: Purpose must be public

Tax must be imposed for public purpose affecting inhabitants as a community; proceeds must support government, recognized objects, or promote community welfare

Effect of Incidental Benefit to Private Interest

Tax is valid even if private individuals benefit, as long as the benefit is incidental.

Legislative Prerogative

Congress determines if the tax purpose is public or private; courts may review validity but cannot question a settled public purpose.

Limitations on the State's Power to Tax – Inherent Limitations: Prohibition Against Delegation of Taxing Power

Legislative enactment/levying cannot be delegated; administrative functions like assessment, collection, valuation can be delegated.

Limitations on the State's Power to Tax – Inherent Limitations: Territorial Limitation

Tax laws cannot operate beyond a State's territorial limits.

Constitutional Limitations – Due Process of Law

Tax must be valid, not arbitrary, oppressive, or confiscatory; includes right to notice and hearing.

Constitutional Limitations – Equal Protection of Laws

Persons under similar circumstances must be treated alike; class legislation allowed with rational basis; same rate and impartial administration for same class.

Constitutional Limitations – Rule of Uniformity and Equity

Taxation must be uniform and equitable; classification valid if based on substantial distinction, applies to present/future, germane to law’s purpose, and equal within same class.

Constitutional Limitations – Prohibition Against Imprisonment for Non-Payment of Poll Tax

No imprisonment for non-payment of poll tax; punishable only by surcharge.

Constitutional Limitations – Prohibition Against Impairment of Obligation of Contracts

No law shall impair contracts; example: later revocation of tax exemption granted for valid consideration.

Constitutional Limitations – Prohibition Against Infringement of Religious Freedom

No law shall restrict establishment or free exercise of religion; free exercise and enjoyment must be allowed without discrimination or preference.

Constitutional Limitations – Prohibition Against Appropriation for Church Use

No public money/property shall be used for church, denomination, or religious teacher, except in armed forces, penal institution, orphanage, or leprosarium.

Constitutional Limitations – Prohibition Against Taxation of Religious, Charitable, and Educational Entities

Churches, charitable institutions, mosques, cemeteries, and lands/buildings used exclusively for religious, charitable, or educational purposes are exempt from real property tax; "exclusively" interpreted as "primarily".

Constitutional Limitations – Prohibition Against Taxation of Non-Stock, Non-Profit Educational Institutions

Revenues/assets used exclusively for educational purposes exempt from taxes/duties; subject to income tax if derived from unrelated trade/business; proprietary non-profit institutions pay 10% on taxable income, except passive income.

Constitutional Limitations : Other Limitations – Grant of Tax Exemption

No law granting tax exemption (amnesties, condonations, refunds) without concurrence of majority of all Congress members.