Chapter 1: General Principles of Taxation

Taxation

It is the inherent power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government.

A manner of apportioning the costs of the government among those who, in some measure, are privileged to enjoy its benefits and must bear its burdens.

Inherent to the State

Its exercise is guaranteed by the mere existence of the state, even in the absence of a constitutional grant

Power to Tax

• Proceeds upon the theory that the existence of a government is a necessity; a power emanating from necessity

• An essential and inherent attitude of sovereignty, belonging as a matter of right to every independent state or government

• An attribute of sovereignty

Scope of the Legislative Power to Tax

1. Purposes

2. Subjects

3. Amount or rate

4. Kind

5. Agencies

6. Administrative and judicial remedies

7. Tax exemptions and condonations

Life Blood Theory

Taxes are the lifeblood of the government, and so should be collected without unnecessary hindrance.

Necessity Theory

The government is necessary; however, it cannot continue without the means of paying for its existence; hence, it has the right to compel all citizens and property within its power to contribute for the same purpose.

Symbiotic Relationship Theory

Without taxes, the government would be paralyzed for a lack of the motive power to activate and operate it.

Primary Purpose of Taxation

to raise revenues; to support the existence of the State and enable the State to promote the general welfare

Secondary Purpose of Taxation

non-revenue or sumptuary

1. Promotion of general welfare

2. Regulation

3. Reduction of social inequity

4. Encouragement of economic growth

5. Protectionism

Characteristics of the Power to Tax

1. Comprehensive - covers persons, businesses, activities, professions, rights, and privileges

2. Unlimited - in force and searching in extent that courts scarcely venture to declare that it is subject to any restrictions, except those that such rests in the discretion of the authority which exercises it

3. Plenary - complete, qualified, absolute; the BIR may avail of certain remedies to ensure collection of taxes

4. Supreme

Principles of a Sound Tax System

1. Fiscal Adequacy - sufficient revenue

2. Administrative Feasibility - clear & concise tax laws, effective & efficient enforcement, convenient payment (time & manner), does not obstruct business and economic development

3. Theoretical Justice - Ability to Pay Theory (Art. VI, Section 28 (1) of the 1987 Constitution)

Justice Marshall

The power to tax is the power to destroy.

Taxation is a destructive power which interferes with the personal and property rights the people.

Justice Holmes

The power to tax is not the power to destroy as long as this court sits. Taxpayers may seek redress before the courts in case of illegal imposition of taxes and irregularities.

Imprescriptibility of Taxes

unable to be taken away by prescription or lapse of time

Double Taxation

taxing the same person for the same tax period and the same activity twice, by the same jurisdiction

Double Taxation in a Strict Sense

• same subject matter

• same purpose

• same taxing authority

• same jurisdiction

• same taxing period

• same kind or character of tax

Double Taxation in a Broad Sense

the opposite of direct double taxation and is not legally objectionable; the absence of one or more of the foregoing requisites of obnoxious direct tax makes it indirect

Constitutionality of Double Taxation

unconstitutional in its stricter sense but not necessarily so in its broader sense; will not be allowed if it results in a violation of the equal protection clause

Modes of Eliminating Double Taxation

1. Tax Deduction - subtracted from the gross income

2. Tax Credit - subtracted from tax liability

3. Treaties with other states - Tax treaties are agreements between countries that clarify who has the right to tax income or assets. In some cases, only one country can tax, while in others, both can tax but with limits on how much the source country can charge.

Forms of Escape from Taxation

1. Shifting - Passing the tax burden to someone else legally.

2. Capitalization - Lowering the price of a taxed item to reflect future taxes.

3. Transformation - Producers absorb the tax and cut production costs instead of raising prices.

4. Tax Avoidance - Legally reducing taxes through deductions or alternative methods.

5. Tax Exemption - Granting specific individuals or entities freedom from taxes.

6. Tax Evasion - Illegally avoiding taxes through fraud or bad intent.

7. Compensation or Set-off - Taxes cannot be offset because they are duties, not debts.

8. Compromise and Abatement - Reducing tax debts or penalties through official approval.

9. Tax Amnesty - Government waives tax collection and penalties to help tax evaders fix their records.

Basic Principles Regarding Tax Exemption

1. need strong legal proof

2. legally & factually justify exemptions

3. strict interpretation against the person claiming them.

4. self-executing exemptions

5. personal

6. deductions are like exemptions

7. refunds follow similar rules

Grounds for Tax Exemption

1. Contract - Tax exemptions are often granted in a corporation's charter.

2. Public Policy - Exemptions aim to promote industries or support charitable institutions.

3. Reciprocity - Exemptions in treaties prevent double taxation, are personal, non-transferable, and revocable unless contract-based.

Revocation of Tax Exemption

If the grant of an exemption does not constitute a contract, but merely "a spontaneous concession by the legislature, not connected with any service or duty imposed” it can be revoked at any time by the government without any obligation or compensation.

Tax Evasion connotes the integrations of 3 factors

1. The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due

2. An accompanying state of mind that is described as being "evil," "in bad faith," "willful," or "deliberate and not merely incidental"

3. A course of action or failure of action which is unlawful

Doctrine of Equitable Recoupment

A doctrine in common law; applicable where the taxpayer has a claim for a refund, but he was not able to file a written claim due to the lapse of the prescription period within which to make a refund.

Construction and Interpretation of Tax Laws

Tax Laws must be construed reasonably to carry out the purpose, intent, and objective of the law.

Tax Exemptions; deductions and refund

In case of ambiguity, the law will be construed strictly against the taxpayer and liberally in favor of the government except:

1. Statute expressly provides for a liberal interpretation

2. Special taxes; special cases and special classes

3. Private property

4. Traditional exemptees (i.e., religious and charitable institutions)

5. In favor of the government

6. Clear legislative intent

Presumption of Tax Exemptions

Tax exemptions are never presumed; must be:
• established and proved by the taxpayer,
• limited to what the law says, and
• personal to the person entitled to the same.

Eminent Domain

The power of the State to forcibly acquire private property, upon payment of just compensation, for some intended public use.

Police Power

The power of the State to regulate liberty and property for the promotion of general welfare.

Similarities of Taxation, Eminent Domain, and Police Power

1. Inherent and need not be conferred by the Constitution

2. Indispensable in that the State cannot continue or be effective unless it can exercise the same

3. Methods whereby the State interferes with private rights

4. Presuppose an equivalent compensation, tangible or otherwise, for the private rights interfered with

5. Primarily exercised by the legislature

Essential Characteristics of Tax

1. Imposed by the State which has jurisdiction over the person, property, or excises (activity);

2. Levied by the Legislature

3. It is an enforced contribution

4. Generally payable in money

5. Proportionate in character; based on the taxpayer ability to pay

6. Levied on persons, property, or excises

7. Levied for public purpose

8. Paid at regular periods of intervals

9. Personal to the taxpayer

Classification of Taxes

1. As to Purpose

a. General/Fiscal or Revenue

b. Special/Regulatory or Sumptuary

2. As to Subject Matter

a. Personal, poll, or capitation

b. Property

c. Excise or privilege

3. As to Incidence

a. Direct

b. Indirect

4. As to Amount

a. Specific

b. Ad valorem

5. As to Rate

a. Progressive

b. Regressive

c. Proportionate

6. As to Imposing Authority

a. National

b. Local

Excise Tax

imposed upon the performance of an act, enjoyment of a privilege, or engaging in an occupation, profession, or business

Direct Tax

the burden and impact for the payment of the tax falls on the same person; the person who pays is the person who is statutory liable to pay the tax (e.g., income tax)

Indirect Tax

where the incidence falls on one person, but the burden falls another (e.g., VAT)

Specific Tax

amounts fixed and is imposed by the head or a number or some measurement, hence, no valuation is needed except for the list of things to be taxed

Ad valorem Tax

one which is based on the value of the object to be taxed

Importance of Distinction between Tax and License Fees

1. Agencies may not collect taxes but can charge license fees.

2. Being exempt from taxes doesn’t mean exemption from license fees.

3. Taxes can be deducted from income tax, but fees count as business expenses.

4. Local tax ordinances are covered by Sec. 187 of the LGC, but regulatory ordinances fall under RTC jurisdiction, not the CTA.

Sources of Revenue

1. Income Tax

2. Estate and Donor's Taxes

3. Value-added Tax

4. Other percentage taxes

5. Excise Tax

6. Documentary Stamp Tax

7. Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue

Inherent Limitations

1. It must be for a public purpose

2. Exemptions of government entities, agencies, and instrumentalities

3. The power to tax is inherently legislative (non-delegability)

4. International comity

5. Territorial in application (situs)

Tests in Determining Public Purpose

1. Duty Test: Checks if the government is responsible for providing what the tax revenue is funding.

2. General Welfare Test: Ensures the tax benefits the community fairly, either directly or indirectly.

Exceptions for Exemption of Government Entities, Agencies, and Instrumentalities

1. Agencies performing proprietary functions

2. When the charter creating the agency or instrumentality or the law provides that they are subject to tax

3. If the government wishes to tax itself

Exempted GOCCs

1. GSIS

2. SIS

3. PHIC

4. Local Water Districts

5. Home Development Mutual Fund (HMDF)

Exceptions to the Non-delegability of the Power to Tax

1. Delegation to Local Government

2. Delegation to the President

3. Delegation to Administrative Agencies

   • Completeness Test

   • Sufficiently Determinable Standards Test

Completeness Test

in order for the delegation to the valid, the law must be complete in all aspects when it leaves the legislature

Sufficiently Determinable Standards Test

There must be clear guidelines that set limits on the delegate's authority, outlining the legislative goals and when and how they should be applied.

Par in parem non habet imperium

A principle of international law forming the basis of state immunity which translates to "equals have no sovereignty over each other."

1987 Constitution, Art. III, Section 1

No person shall be deprived of life, liberty, or property without due process, nor shall any person be denied the equal protection of laws.

Procedural Due Process

It requires that taxpayers be notified of the assessment in writing and state the facts and the law upon which it is based. Assessments and collection must not be arbitrary.

Substantive Due Process

It requires that assessments must not be harsh, oppressive, or confiscatory; it must be made under the authority of a valid law; and must be imposed within the territorial jurisdiction of the State.

Requisites for a Valid Classification Under the Equal Protection Clause

1. Must be based upon substantive distinctions

2. Must be germane to the purpose of law

3. Must apply to both present and future conditions

4. Must apply equally to all members of a class

2 Ways by Which Equal Protection Clause is Violated

1. When classification is made when there should be none

2. When classification is not made when called for

Uniformity of Taxation

All taxable articles or kinds of property of the same classes shall be taxed at the same rate. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found.

Uniformity vs. Equitability vs. Equality

Uniformity - All taxable property shall be taxed alike.

Equitability - The burden of taxation falls to those better able to pay.

Equality - When the burden of the tax falls equally and impartially upon all persons and property subject to it.

Progressivity

The tax rate increases as the tax base thereof increases; progressive when its rate goes up depending on the resources of the person affected.

Poll Tax

A tax on individuals residing within a specified territory, whether citizens or not, without regard to their property or the occupation in which they may be engaged.

Property Tax

The tax exemption under Art. VI, Section 28 covers property taxes only; lands, buildings, and improvements used for religious, charitable, or educational purposes; does not cover estate and donor's tax unless specifically provided under the Tax Code.

Exclusive

defined as possessed and enjoyed to the exclusion of others, debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude, as enjoying a privilege exclusively." The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively."

Proprietary Educational Institutions

• Subject to 10% income tax (1% under the CREATE Act from July 1, 2020, to June 30, 2023).

• If unrelated income exceeds 50% of total gross income, taxed at 30% (25% under regular corporate tax).

Rationale for grant of exemption requires the majority vote of congress

to prevent the indiscriminate grant of tax exemptions

Revocability of Tax Exemption

A law which changes the terms of the contract by making new conditions, or changing those in the contract, or dispenses with those expressed, impairs the obligation.

Non-impairment of the Jurisdiction of the Supreme Court

Congress cannot enact a law which makes the decisions of the Court of Tax Appeals final and non-appealable to the Supreme Court.

Constitutional Limitations

1. Due Process Requirement

2. Equal Protection of the Laws

3. Uniformity and Progressivity of Taxation

4. No Imprisonment for Payment of Poll Tax

5. Exemption from Property Tax of Religious, Charitable, and Educational Institutions

6. Exemption of Non-stock, Non-profit Educational Institutions

7. Grant Exemption Requires the Majority Vote of Congress

8. Prohibition on Tax Levied for Special Purpose

9. Veto Power of the President

10. Revenue of Tariff Bill Must Exclusively Originate From the Lower House

11. Local Government's Power to Tax

12. No Appropriation for Religious Purposes

13. Religious Freedom

14. Non-impairment of Contracts

15. Non-impairment of the Jurisdiction of the Supreme Court

Stages or Aspects of Taxation

1. Levy

2. Assessment and Collection

3. Payment

4. Refund

Levy

The determination by Congress of the subject and object of taxation as well as the rate. It refers to the enactment of tax laws or statutes.

Assessment and Collection

A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. Collection is the final stage and goal of tax administration.

Rules governing assessment and collection of taxes to prevent its abuse

1. The tax law must designate which agency will collect the taxes

2. The circulars or regulations issued by the Secretary of Finance or the Commissioner of the Internal Revenue must be in accordance with the tax measures imposed by Congress.

Payment

The act of compliance by the taxpayer, including such options, schemes or remedies as may be legally open or available to him.

Refund

The taxpayer asks for restitution of the money paid as tax which is either excessive or erroneous.

BIR Composition

1. Commissioner of Internal Revenue/Chief of the BIR

2. 4 Deputy Commissioners

   1. Operations

   2. Legal

   3. Information Systems

   4. Resource Management

Powers and Authority of the Commissioner of Internal Revenue

1. Exclusive authority to interpret the Tax Code and other tax laws, reviewable by the Secretary of Finance.

2. Power to resolve disputes on assessments, tax refunds, fees, penalties, and matters under the Tax Code, subject to appeal by the Court of Tax Appeals.

3. The power to verify returns, file returns when absent, determine tax liabilities, collect taxes, and assess compliance.

4. Inquiry into bank deposits

5. Power to resort to the Best Evidence Obtainable Rule

6. Inventory taking, Surveillance and Prescribe Presumptive Gross Sales or Receipts

7. Authority to Terminate Taxable Period

8. Authority of the Commissioner to Prescribe Real Property Values

9. Authority to Accredit and Register Tax Agents

10. Authority of the Commissioner to Prescribe Additional Procedural or Documentary Requirements

11. Delegation of Power

Authority of the Commissioner

1. To examine

2. To obtain any information

3. To summon

4. To take testimony

5. To cause revenue officers and employees to make a canvass

Cases for an Inquiry into Bank Deposits

a. Figuring out the total value of everything a person owned when they passed away.

b. Checking if a taxpayer can pay less tax because they don’t have enough money.

c. Sharing tax details about a specific person with another country if there’s an agreement between the Philippines and that country.

Powers which may not be delegated

1. to recommend the promulgation of rules and regulation

2. to issue rulings of first impression of to reverse, revoke, or modify any existing ruling of the Bureau

3. to compromise or abate any tax liability

4. to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept

Sources of Tax Laws

1. Constitution

2. Statutes

3. Revenu Regulations

4. BIR Issuances (Revenue Memo Circulars, Memo Orders, Admin Orders, Delegation of Authority Orders)