GENERAL PRINCIPLES OF TAXATION

Definition of Taxation

- This is the power by which the sovereign raises revenue to defray the necessary expenses of government. - The mode by which government make exactions for revenue in order to support their existence and carry out their legitimate objective. - The power of the state to collect revenue for public purposes.

Scope of Power of Taxation

1. Comprehensive 2. Plenary 3. Unlimited 4. Supreme The power of taxation is subject to inherent and constitutional limitation.

Essential Characteristic of Tax

1. Enforced contribution 2. Legislative authority 3. Proportionate in character 4. Generally payable in money 5. Levied on persons and property within the jurisdiction of the state 6. Commonly required to be paid at regular intervals

Basic Principles of a Sound Tax System (Canons of Taxation)

1. Fiscal adequacy - the source of revenues must be adequate to meet government expenditures. 2. Theoretical Justice/Equality on theoretical Justice - based on the ability to pay (Equity) and proportionate character. 3. Administrative Feasibility - which means a. The tax law must be clear and concise b. Convenient c. Just and effective administration

Manifestation of lifeblood theory:

1. Imposition of tax even in the absence of constitutional grant 2. Right to select objects of taxation 3. No injunction to enjoin (or stop) tax collection a. Rule of "No Estoppel against the Government". It means that in the performance of its governmental functions: the state cannot be stopped by the neglect of its agents and officers. Erroneous application and enforcement of law by public officers do not block the subsequent correct application of statutes. b. Collection of taxes cannot be enjoined (stopped) by injunction. Under section 218 of the tax code (as amended), no court, except the Court of Tax Appeals (CTA), shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the tax code. This prohibition shall apply to all collection activities, including imposition and collection of taxes, issuance of warrants of distraint and garnishment, and/or levy on final decisions of the BIR on disputed assessment, cases filed before the CTA, and the sale of property distrained or garnished (RMO 42-2010) c. Taxes could not be the subject of compensation or set - off.

Aspect/Process/Phases/System of Taxation (Embodied in the Term Taxation)

1. Levying or imposition of the tax - Legislative act. This is pertains to the passage of tax laws and tax ordinance through legislature. (Impact of taxation / process of determining) 2. Assessment aspect - refers to the appraisal and valuation process of the subject or object of taxation to arrive at total amount of collectible tax. 3. Collection of the tax - essentially administrative character (BIR or BOC) 4. Payment - an incidence of taxation. This is the compliance phase. • The impact of taxation corresponds to the imposition of the tax, shifting refers to transfer of tax and incidence consist of the payment of tax.

The Fundamental (Inherent) Power of the State

1. Police power - to promote the general welfare. It is the power to regulate liberty, public health and morals. 2. Eminent Domain - it is also called as expropriation. The power of the state to take the private property for public use upon payment of just compensation. 3. Power of taxation - the power of the state to collect revenue for the necessary expenses of government.

Tax Legislative Function

1. Prescribe the general rules of taxation 2. Selection of the object /subject to be taxed 3. Determination of the purpose for which taxes shall be imposed 4. Fixing the amount of the tax to be imposed 5. Fixing the amount of tax rate

Nature of Power of Taxation

1. The power is inherent in the state. It may be exercises although not expressly granted by the constitution. 2. It is essentially a legislative function. Only the legislature can impose taxes (high prerogative of sovereignty) 3. Based ability to pay 4. Subject to inherent and constitutional limitation. It is not an absolute power than can be exercised by the legislature anyway it pleases.

Matters within the Competence of the Legislature to Determine

1. The subject matter or object to be taxed 2. The purpose of the tax so long as it is a public purpose 3. The amount or rate of the tax 4. The manner, means and agencies of collection of the tax.

Similarities among the Fundamental Power of State

1. They are inherent in the state. 2. They are independently exists of the constitution. 3. They are not only necessary but indispensable, as the state cannot continue or be effective unless it is able to exercise them. 4. They are methods by which the state interferes with private rights. 5. Each presupposes an equivalent compensation. 6. They are legislative in nature.

Tax Administrative Function

1. Valuation of property for taxation 2. Equalization of assessment 3. Collection of tax

Non-stock, non-profit educational institutions What taxes are exempt?

Income tax, property tax, customs duties.

Charitable, educational and religious institutions What taxes are exempt?

Property tax

Situs of Taxation

Situs - place of taxation, the country that has the power and jurisdiction to levy and collect the tax. The Situs will help in determining the source of an income, whether from within the Philippines or from abroad or sources outside the Philippines. For taxpayers other than resident citizen and domestic corporation which are taxable on incomes from all sources, this will serve to identify income which are taxable in the Philippines.

Differences among the Fundamental power c. As to Affected

Taxation: Community or class of individuals Police power: Community or class of individuals Power of eminent domain: Individuals as owner of a particular property

Differences among the Fundamental power e. As to Benefits Received

Taxation: Equivalent of tax in the form of protection and benefit Police powe: No direct and immediate benefit, only such as may arise from the maintenance of a healthy economic standard of society (damnum absque injuria or damage without injury) Power of eminent domain: Market value of the property taken from him

Differences among the Fundamental power h. As to Compensation

Taxation: For the protection and benefits received from the government Police power: The maintenance of a good economic standard of society Power of eminent domain: Just compensation for the property taken

Differences among the Fundamental power a. As to authority which exercises the power

Taxation: Government only Police power: Government only Power of eminent domain: Government, public service companies and public utilities

Differences among the Fundamental power g. As to Relationship to the Non-Impairment of Obligations Clause of the Constitution

Taxation: Inferior to the clause Police power: Superior to the clause Power of eminent domain: Inferior to the clause

Differences among the Fundamental power f. As to Amount of Imposition

Taxation: No limit Police power: Limited to the cost of the license and the necessary expenses of police surveillance and regulation Power of eminent domain: No imposition, the owner is paid the fair market value of his property

Differences among the Fundamental power b. As to purpose

Taxation: Support of government Police power: Promote public welfare Power of eminent domain: Public purpose

Differences among the Fundamental power d. As to Effect

Taxation: Taxes become part of public funds Police power: No transfer of title, there is restraint on the injurious use of property Power of eminent domain: There is transfer of the right to property, either ownership or a lesser right

Basis of Taxation

The Benefits-Protection Theory- Taxes are what we pay for a civilized society. The government and the people have a reciprocal and mutual duties of support and protection to one another (symbiotic relationship between the government and the taxpayer).

Purpose of Taxation

a. Principal purpose - To raise revenue for governmental needs. b. Secondary purpose i. To reduce excessive inequalities of wealth ii. Protective tariff on imported goods may be imposed to protect local produces against foreign competitors iii. To encourage the growth of home industries through the proper use of tax exemptions and tax incentives iv. To implement the police power of the state in promoting the general welfare v. To maintain high level of employment vi. To control inflation

Lifeblood Theory

a. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious (expecting obedience) need b. Upon taxation depends the government's ability to serve the people for whose benefit taxes are collected

Constitutional Limitation (DEO NUER)

are those which are expressly found in the constitution or implied from its provisions 1. Due process of law 2. Equal protection of the laws 3. Non-impairment of obligation of contract 4. Non-imprisonment for non-payment of poll tax 5. Rule of taxation shall be uniform and equitable 6. Exemption from real property tax of charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit institutions, and all lands, buildings and improvements actually, directly and exclusively used for religious or charitable purposes. 7. All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law.

Inherent Limitation (PENTI)

are those which restrict the power although they are not embodied in the constitution. 1. Public purpose - This is the purpose affecting the inhabitants of the State as a community and not merely as individuals 2. Exemption from taxation of government entities - Government agencies performing governmental functions are exempt from tax unless expressly taxed while those performing proprietary functions are subject to tax unless expressly exempted 3. Non-delegation of the power to tax - The power to tax is purely legislative, and it cannot be delegated by the legislature to the executive or juridical departments of the government. 4. Territorial jurisdiction - The tax laws of a state are enforceable only within its territorial limits 5. International comity - The property of a foreign state or government may not be taxed by another.

Taxes

the enforced proportional contributions levied by the law making body of the state by virtue of its sovereignty upon the persons or property within its jurisdiction for the support of the government and all public needs.