IT L1

General Principles & Concept of Taxation

3 Inherent Powers of State

1. Taxation

2. Power of Eminent Domain

3. Police Power

Taxation

power by which the sovereign raises revenues to defray the necessary expenses of govt

Power of Eminent Domain

power of government or those to whom the power has been delegated to take private property & convert it into public use upon paying the owners a just compensation to be ascertained by law

Police Power

enact laws in relation to persons/property to promote public health/morals/safety & general welfare of the people

Similarities of Inherent Powers of State

1. Inherent  in the state

2. Exist independently of the constitution

3. Constitute the 3 methods by which state interferes with private rights & property

4. Legislative in nature & character

5. Presupposes equivalent compensation

Differences of Inherent Powers of State

Taxation

• Process/act of imposing a charge by the govt. authority on property, indiv, or transactions to raise money for public purposes.

• Act of levying a tax, i.e. the process or by which the sovereign, through its law-making body, raises income to defray the necessary expenses of govt.

• Method of apportioning the cost of government among those who, in some measure, are privileged to enjoy its benefit & must therefore bear its burdens

Purposes

1. Revenue/Fiscal

2. Non-revenue/Regulatory

Revenue/Fiscal

provide funds/property with which to promote the general welfare & the protection of its citizens & to enable it to finance its multifarious activities

Non-revenue/Regulatory

1. imposition of tariffs on imported goods to local industries

2. adoption of progressively higher tax rates to reduce inequalities in wealth & income

3. Increase/decrease of taxes to prevent inflation/ward off depression

Theory Basis

1. Necessity Theory

2. Reciprocal Duties

3. Life Blood

4. Benefit-received Principle

Necessity Theory

existence of govt is a necessity that it can’t continue w/o means to pay its citizens; & that for these means, it has a right to compel all its citizens & property within its limits to contribute

Reciprocal Duties

basis of taxation & also called as benefit received principle. protection & support between the state & its inhabitants. in return for his contribution, the taxpayer received benefits & protection from govt

Life Blood

constitutes the theory of taxation, which provides that the existence of govt. is a necessity; that govt. can’t continue w/o means to pay its expenses; & that for these means it has a right to compel its citizens & property within its limits to contribute

Benefit-received Principle

serves as basis of taxation & founded on the reciprocal duties of protection & support between the state & its inhabitants. called as a symbiotic relation between the state & its citizens

7 Essential Elements of a Tax

1. Enforced contribution

2. Generally payable in money (not dacion en pago)

3. Proportionate in character

4. Levied on persons, property, the exercise of a right/privilege

5. Levied by the state which has jurisdiction over the subject/object of taxation

6. Levied by the law-making body of the State

7. Levied for public purpose/s

Principles of Sound Tax System

1. Fiscal Adequacy

2. Equality/Theoretical Justice

3. Administrative Feasibility

Fiscal Adequacy

sources of revenues of govt. must be sufficient to meet the demand of public expenditures regardless of business conditions

Equality/Theoretical Justice

tax burden must be proportionate to taxpayers’ ability to pay. In accordance with constitutions’ mandate that application of taxation should be equitable

Administrative Feasibility

tax laws must be convenient, uniform, & effective in their administration

Non-observance of the canon of administrative feasibility won’t render a tax imposition invalid

except to the extent that specific constitutional/statutory limitations are impaired

Non-observance of these principles won’t automatically

render a tax law unconstitutional/invalid

a tax law will continue to be valid even if it doesn’t observe the principles of fiscal adequacy & administrative feasibility since the Constitution doesn’t expressly require so

however, a tax law may be held unconstitutional if it runs afoul of the principle of theoretical justice since the constitution expressly requires that tax laws should be uniform & equitable

Stages of Taxation

1. Levy/Imposition - bill, enforced by govt.

2. Assessment - will be assessed by govt. 

3. Collection

Scope of Power of Taxation

• Comprehensive, plenary, unlimited, & supreme

• Strongest among the inherent powers of State

Limitation of Power to Tax

Nature of the Power of Taxation

1. Inherent in sovereignty; hence, it may exercise although it’s not expressly granted by constitution

2. Legislative in character; hence, only the legislature can impose taxes (although the power may be delegated)

3. Subject to constitutional & inherent limitations; hence, it’s not an absolute power that can be exercised by the legislature anyway it pleases

Inherent Limitations

1. Purpose must be public in nature

2. Prohibition against delegation of the taxing power

3. Exemption of govt. entities, agencies, & instrumentalities

4. International Comity

5. Limitation of territorial jurisdiction  

Purpose must be public in nature

tax must always be imposed for a public purpose, otherwise, it’ll be declared as invalid

Prohibition against delegation of the taxing power

• General Rule - exclusively vested in the legislative body; hence, it can’t be delegated (Delegata potestas non potest delegari)

• Exceptions to the non-delegation rule: delegation to the president, delegation to local govt. units, delegation to administrative agencies

Exemption of govt. entities, agencies, & instrumentalities

except govt. entities performing proprietary functions such as PNR

1. Rationale - if the govt. taxes itself/if local govt units tax the national govt, it would be akin to taking money from one pocket to the other

2. Entities/agencies exercising sovereign functions (acta jure imperii) - tax exempted, unless expressly taxed, agencies performing proprietary functions are subject to tax unless expressly exempted

3. Govt owned & controlled c/p/ations performing proprietary functions - are subject to taxes, except those exempted under Sec. 27 (C) of RA 8424 as amended by RA 9337 & RA 10963, namely: GSIS, SSS, PHIC, & local water district

International Comity

state must recognize the generally accepted tenets of international law, they must accord each other as sovereign equals. this limits the authority of a govt to effectively impose taxes on a sovereign state & its instrumentalities, as well as on its property held, & activities undertaken, in that capacity. (Vitug) for example, a property of a foreign state/govt may not be taxed by another state

Government Entities that are exempted from Income Tax

1. Government Service Insurance System (GSIS) - pension fund

2. Social Security System (SSS) - pension fund

3. Philippine Health Insurance Corporation (PHIC) - pay as you go

4. Philippine Charity Sweepstakes Office (PCSO) - before the TRAIN Law para madagdagan ang funds ng govt

5. Local Water District

TRAIN Law

• effective Jan. 1, 2018

• PCSO is removed from tax exempt GOCCs

• under TRAIN Law Sec. 7, amending Sec. 27 of NIRC

Constitutional Limitations

tax law that violates the constitution has no legal force

1. Due process of law

2. Equal protection of laws

3. Rule of uniformity & equity in taxation

4. Prohibition against imprisonment for non-payment of poll tax like community tax/sedula

5. Prohibition against impairment of obligation of contracts

6. No public money shall be appropriated for religious purposes

7. Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of any church

8. Prohibition against taxation of religious, charitable, & educational entities

9. Prohibition against taxation of non-stock, non-profit educational institutions

10. Others

11. Prohibition on use of tax levied for special purpose

12. President’s veto power on appropriation, revenue, & tariff bills

13. Flexible tariff clause

Due process of law

• Art 3

• No person shall be deprived of life, liberty, or property without due process of law. Deprivation of life, liberty, & property is with due process of law when: 

1. It’s done under the authority of law that is valid

2. After compliance with fair & reasonable methods/procedures prescribed by law

Equal protection of laws

• all persons subject to legislation shall be treated alike under circumstances & conditions both in privileges conferred & liabilities imposed. No violation of equal protection when there’s proper classification made. Classification is allowed & valid when:

1. There’s substantial distinction

2. Classification is germane to the issue/purpose of law

3. Classification doesn’t apply not only to existing conditions but future conditions as well

4. Classification is applicable to all members of the same class

Rule of uniformity & equity in taxation

• Art. 6 Sec. 28

• rule of taxation shall be uniform & equitable

• tax is considered uniform when it operates with the same force & effect in every place where the subject may be found

• under the constitution, congress evolved a progressive system of taxation; meaning, that tax shall place emphasis on DIRECT rather than INDIRECT taxation (regressive system) with the ability to pay as principal criterion

No public money shall be appropriated for religious purposes

based on principle that taxes are for public purposes & principles of separation of church & state

Prohibition against taxation of religious, charitable, & educational entities

• Art. 6, Sec. 28, par 3 of the constitution

• provides that charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques & non-profit cemeteries, & all lands & building & improvements actually, directly, & exclusively used for religious, charitable, & educational purposes shall be exempt from taxation

• exemption from property taxation only (RPT only)

• thus, sale of l& by religious institutions is subject to CGT

Prohibition against taxation of non-stock, non-profit educational institutions

• Art. 14, Sec. 4

• provides that all revenues & assets of non-stock, non-profit educational institutions used actually, directly, & exclusively for educational purposes shall be exempted from taxes & duties

• exemption covers income, real estate tax, don/’s tax, & customs duties (distinguished from the previous provision (Sec. 28, Art. 6, Constitution), which pertains only to real property tax exemption granted to real properties that are used for religious, charitable, or educational purposes

1. Proprietary educational institutions (Preferential tax rate of 10%) WHILE

2. Govt educational institutions (Tax-exempt, e.g., UP)

Others

1. Grant of tax exemption - majority of all members of Congress shall grant tax exemption

2. Veto of appropriation, revenue, tariff bills by the President

3. Non-impairment of the SC jurisdiction

4. Revenue bills shall originate exclusively from the House of Rep

5. Infringement of press freedom

6. Judicial power to review legality of tax

President’s veto power on appropriation, revenue, & tariff bills

president shall have the power to veto any particular item/s in an appropriation, revenue, or tariff bill, but the veto shan’t affect the item/s to which he doesn’t object

Flexible tariff clause

• Sec. 28 [2], Art. 6, Constitution

• Congress may, by law, authorized the President to fix within specified limits, & subject to such limitations & restrictions as it may impose, tariff rates, import, & export quotas, tonnage & wharfage dues, & other duties/imposts within the framework of the national development program of the govt

Due Process

• Sec 1, Art 3, Constitution

• no state may tax anything not within its jurisdiction without violating the due process clause; the taxing power of a state doesn’t extend beyond its territorial limits, but within such it may tax persons, property, income, or business

Substantive

• Should not be harsh, oppressive, or confiscatory (reasonableness)

• By authority of valid law

• must be for a public purpose

• imposed within territorial jurisdiction

Procedural

• no arbitrariness in assessment & collection

• right to notice & hearing

Doctrines in Taxation

1. Prospectivity of Tax Laws

2. Imprescriptibility of Taxes

3. Double Taxation

4. Escape from Taxation

Prospectivity of Tax Laws

principle provides that a tax law must only be applicable & operative prospectively, except when expressly provided by law to be imposed retroactively

Imprescriptibility of Taxes

although the NIRC provides for the limitation in the assessment & collection of taxes imposed, such will only be applicable to those taxes where a tax return is required. Unless otherwise provided by the tax law itself taxes in general are imprescriptible

Double Taxation

1. Indirect Duplicate Taxation

2. Direct Duplicate Taxation

Indirect Duplicate Taxation

• sense

• SC held that there’s no constitutional prohibition against double taxation

• therefore, it may not be a valid defense against the validity of a tax measure

Direct Duplicate Taxation

• double taxation in a strict sense

• it’s prohibited as it comprises imposition of tax to - same property/person - same period - same purpose - same tax rate - & same taxing authority

Escape from Taxation

1. Tax Evasion - use of unlawful means

2. Tax Avoidance - also called Tax Minimization; use of legal means

Tax Treaties as Relief from Double Taxation

Modes of eliminating double taxation

1. Provide for exemptions/allowance of deduction/tax credit for foreign taxes

2. Enter into treaties with other states (e.g, former Phil-Am Military Bases Agreements)

3. Apply the principle of reciprocity

Situs of Taxation (Income)

• Power to tax is limited to the territorial jurisdiction of the taxing state

• Place/authority that has the right to impose & collect taxes

• Situs - place of taxation