What is inherent power?

• power existing as a natural or basic part of every sovereign state without being conferred or granted by the people or the State Constitution

What are the three inherent powers of the state?

1. Power to tax / Taxation

2. Eminent Power

3. Police Power

What is power to tax?

• It is an inherent power of the state to enforce a proportional contribution from its subject for public purpose.

• The money raised from the collection of tax is used to defray the expenses of the government

What is police power?

• It is the general power of the state to enact laws to protect the well-being of the people

• It promotes public welfare

What is eminent domain?

• It is the power of the state to take private property for public use after paying just compensation.

Similarities of the three inherent powers of the State

1. They are all inherent to the state

2. They exist independently of the Constitution although the conditions for their exercise may be prescribed by the constitution

3. Ways by which the State interfere with private rights and property

4. Legislative in natural and character

5. Presuppose an equivalent compensation received directly or indirectly by the persons affected

Purpose of Taxation

• Primary Purpose: for revenue and fiscal purpose

• Secondary:

  • Regulatory Purpose: regulative or for control

  • Compensatory Purpose: social equality

Nature and characteristics of Taxation

1. inherent power

2. essentially a legislative function

3. subject to inherent and constitutional limitations

4. for public purpose

5. strongest of all the inherent powers of the State

6. subject to international treaty or comity

7. generally payable in money

8. territorial in scope

What are taxes?

• enforced proportional contributions from persons and property levied by the State by virtue of its sovereignty for the support of the government and for all its public needs.

Scope of taxation

1. Subject of taxation - person or object

2. Purpose of taxation

3. Kind of tax

4. Amount of tax

5. Apportionment of Tax

6. Situs of taxation - place of taxation

7. Method collection

Inherent Limitations of Taxation

1. Territoriality - within the boundaries of the State. Government can only tax subjects or residents within its territorial jurisdiction.

2. International Comity/Treaty - cannot tax income and properties of other government

   1. including embassies or consular office (international organization and their non-Filipino staffs are not subject to income or property tax.)

3. Public purpose - taxes should be intended for the common good.

4. Exemption of the government - do not tax itself because it will not raise funds.

   1. Government agencies:

      1. Government Service Insurance System (GSIS)

      2. Social Security System (SSS)

      3. Philippine Health Insurance Corporation (PHIC)

      4. Local Water Districts (RA 10026)

      5. Philippine Charity Sweepstake Office (PCSO) - under the Train Law exempted

5. Non-delegation of taxing power- exclusively in Congress.

Stages/ Aspect of Taxation

1. Levy or Imposition - legislative act

   1. House of Representative, and

   2. Senate

2. Assessment and Collection

   1. If national = It is done by the BIR and BOC

   2. If local = LGU Treasurer

National Internal Revenue Taxes under the administration of the BIR

1. Income tax

2. Estate and donor’s tac

3. Value added tax

4. Other percentage taxes

5. Excise taxes

6. Documentary stamp taxes

Double Taxation

• occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing

  • Primary: same subject

  • Secondary: same type of tax, same purpose same taxing jurisdiction, same tax period

• Types of Double taxation

  1. Direct double taxation - all elements of double taxation exist for both impositions.

  2. Indirect double taxation - one of the secondary elements of double taxation is common for both impositions.

Sources of Tax Laws

1. Constitution

2. Tax Treaties and Conventions with Foreign Countries

3. Tax Code RA 8424 NIRC amended by 10963 Train Law; RA 11534 Create Law, Tariff and Custome Code, and portion of the Local Government

4. Statues and laws like RA 1125

5. Presidential Decrees and Executive Orders

6. Court Decisions

Nature of tax Law

1. Tax laws are civil and not penal in nature

2. Construction or Interpretation of tax laws in case od doubt or ambiguity

3. application of tax laws

Classification of Taxes

1. According to subject matter

   1. personal, poll or capitation tax - basic community tax

   2. property tax - real estate

   3. excise tax- tax on consumption

2. According to who bears the burden

   1. Direct tax (income tax, estate tax, donor’s tax) - cannot transfer to another payor.

   2. Indirect tax (VAT OPT) - can transfer

3. According to Determination of amount

   1. Specific tax - fixed rate

   2. Ad valorem tax - according to the value

4. According to purpose

   1. Fiscal/General/Revue Tax - to earn revenue (income, real, estate)

   2. Regulatory/Special/Sumptuary Tax - social economic

5. According to jurisdiction/scope or authority

   1. National Tax

   2. Local tax

6. According to Graduation or Rate

   1. Proportional/Flat rate tax - fixed tax rate

   2. Progressive/Graduated - if tax base increases, tax also increase

   3. Regressive tax - if tax base increases, tax decreases

• Toll - demand of proprietorship; compensation for the use of somebody’s property

• Penalty - imposed to regulate conduct

• Assessment - levied on land

• License fee - emanate from the police power of the state

• Custom Duties - imposed on imported or exported goods

• Debt - based on contract

• Subsidy - pecuniary aid directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public.

• Revenue - funds or income derived by the government

• Internal revenue - taxes imposed by the legislature other than duties on imports and exports

• Tariff - books of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same

  • duties payable on good imported or exported

  • the system or principle of imposing duties on the importation (or exportation) of good

• Schedular system - different types of income are subject to different sets of graduated or flat income tax rates

• Global system - all items of gross income, deductions are reported in one income tax return and the applicable tax rate is applied on the tax base

Other Doctrines/Rules in Taxation

1. Equitable recoupment - claim for refund which 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 debtor of each other

3. Taxpayer Suit - this provides that a taxpayer suit can only be allowed if the act involves a direct and illegal disbursement of public funds derived from taxation

• Exemptions from Taxation - it is a grant of immunity, express or implied to particular persons or corporations of a particular class, from a tax upon property or an excise tax which persons and corporations generally within the same taxing district are obliged to pay.

Classification of Exemption

1. Express or affirmative - they are expressed in the provision in the Constitution, statues, treaties, ordinances, franchises or contracts.

2. Implied or exemption by omission - this occurs when a tax is levied on certain classes of persons, properties or transactions without mentioning other classes. Those not mentioned are deemed exempted by omission.

3. Interpretation - exemptions grants are strictly constructed against the person or entity claiming exemption. One must justify such claim by clear and positive grant.

Escape from Taxation

1. Evasion or Dodging - unlawful; it means evade or lessen the payment of tax

2. Avoidance - tax minimization; it is the reduction or totally escaping payments of tax

3. Shifting - transfer of tax burden to another without violating the law

   1. Forward - When a tax is shifted backward the price which constitute the vehicle for shifting, will increase.

      1. When the burden of the tax is transferred to the end user, ultimate purchaser or ultimate consumer

      2. seller shifts the tax forward to the consumer

   2. Backward - When a tax is shifted backward the price which constitute the vehicle for shifting, will decrease

      1. When the burden of tax is taken away from the end user by adjusting production or distribution variables, there is backward shifting.

      2. if taxes are levied on tenants, it can be deducted to the next pay

   3. Onward - When the tax burden is shifted two or more times either forward or backward

• impact - the point at which tax is originally imposed

• incidence - the point at which the tax burden finally rests or settle down

4. Capitalization - the seller is willing to lower the price of the commodity provided the taxes will be shouldered by the buyer

5. Transformation - manufacturer absorb the additional taxes imposed by the government without passing it to the buyer for fear of losing the market

   1. increasing the production turning the units of production at the lower cost resulting to the transformation of the tax gain through the medium of production

6. Exemption - immunity, privilege or freedom from payment of a charge or burden to which others are obliged to pay

Chapter 2

Non-Resident Citizens:

• citizens of the Philippines who establishes to the satisfaction of the commissioner of the fact of his physical presence abroad with a definite intention to reside therein.

• a citizen of the Philippines who leaves during the taxable period to reside abroad (as an immigrant or for work on a permanent basis)

• a citizen who works and derives income from abroad and whose employment threat requires him to be physically abroad most of the time (183 days or more) during the taxable period.

• a citizen who has been previously considered as nonresident citizen who arrives during the taxable year to reside permanently in the Philippines - they shall be deemed nonresident for the taxable year in which he arrives.

Overseas Contract Workers:

• Filipino citizens employed in foreign countries commonly known as OFWs

Resident aliens - individuals whose residence is within the Philippines but not a citizen

• A person comes to the Philippines for definite purpose

• AN alien who comes to the Philippines for a definite purpose, would require an extended stay making his home temporarily the Philippines.

• An alien who shall come to the Philippines with no definite intention as to his stay

Non-Resident Aliens

1. Engaged in trade or business - An individual actually engaged in business in the Philippines who comes in the Philippines for an aggregate period of 180 days during the calendar year shall be deemed nonresident alien doing business in the Philippines

2. Not engaged in trade or business

Chapter 3

• Residents and citizens (RC and domestic corporation) of the Philippines are taxable on all from within and without the country

• Situs of income - place of taxation of income. It is the jurisdiction that has the authority to impose tax upon the income.

• Source of income - activity or property that produces the income

1. Interest Income - Debtor’s residence

2. Royalties - where the intangible is employed

3. Rent income - location of the property

4. Service income - where service is rendered

5. Domestic securities - presumed earned within the Philippines

• other personal properties - earned in the place where the property is sold.

6. Real property - earned where the property is located

7. Dividend Income from:

   1. Domestic corporation - earned within

   2. Foreign corporation

      1. Resident foreign corporation - depends on the predominance test

         1. If at least 50% of the dividend corresponding to the Philippine gross income ratio - earned within

         2. Less than 50% the entire dividends earned abroad

      2. non-resident foreign corporation - earned abroad

8. Merchandising Income - earned where the property is sold

9. Manufacturing - earned where the goods are manufactured and sold

   1. if branch then home office is the only taxable entity

   2. if subsidiary then both entities are taxable