M1.

TAXATION: THE INHERENT POWERS OF THE STATE

The Inherent Powers of the State

Inherent power means existing as a natural or basic part of every sovereign State, without being conferred or granted by the people or
the Constitution.

The 3 Inherent Powers of the State:

1. POWER TO TAX — The act of levying a tax. It's the process or means by which the sovereign (independent State), through its
law-making body (legislative branch), raises income to defray the necessary expenses of the government. It is the power by which the
State raises revenue to defray the necessary expenses of the government.

2. POLICE POWER - it is the power of the state of promoting public welfare by restraining and regulating the use of liberty and
property. It may be exercised only by the government. The property taken in the exercise of this power is destroyed because it is
noxious or intended for a noxious purpose.

3. EMINENT DOMAIN - it is the power to take private property for public purpose upon payment of just compensation.

SIMILARITIES among Taxation, Eminent Domain and Police Power

➢ They are inherent in the State.

➢ They exist independently of the constitution although the conditions for their exercise may be prescribed by the constitution.
➢ Ways by which the State interferes with private rights and property.
➢ Legislative in nature and character.
➢ Presuppose an equivalent compensation received, directly or indirectly, by the persons affected.

Purposes of Taxation

1. Primary Purpose — To raise revenues/funds to defray the necessary expenses of. the government (also called Revenue or Fiscal
Purpose).

2. Secondary Purpose:

a) Regulatory Purpose - Taxation is employed as a devise for regulation or control (to implement the police power of the State for the
promotion of the general welfare) by means of which certain effects or conditions envisioned by the government may be achieved.

b) Compensatory Purposes
➢ Reduction of Social Inequality
➢ Economic Growth
➢ Protect local industries against unfair competition
Nature and Characteristics of Taxation
1) Inherent Power— may be exercised although not expressly granted by the constitution.
2) Essentially a legislative function — only the legislative can impose taxes.
3) Subject to inherent and constitutional limitations — not an absolute power.
4) For public purpose
5) The 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

In the absence of inherent and constitutional limitations, the power to tax is comprehensive, plenary, supreme and unlimited. It is
socomprehensive that in the words of Justice Marshall, the power to tax includes the power to destroy.

Taxes Defined Are 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.
ESSENTIAL CHARACTERISTICS OF TAX
➢ A tax is a forced charge, imposition or contribution
➢ It is a pecuniary burden payable in money
➢ It is imposed for public purpose
➢ It is imposed pursuant to a legislative authority
➢ It is levied within the territorial and legal jurisdiction of a state
➢ It is assessed in accordance with some reasonable rule of apportionment

Theory of Taxation
1. Necessity Theory — The existence of government is a necessity. The government cannot continue to perform of serving and protecting its people
without means to pay its expenses. For this reason, the state has the right to compel all its citizens and property within its limits to contribute.
2. Lifeblood Doctrine - Taxes are the lifeblood of the government without which it can neither exist nor endure.

MANIFESTATION OF THE LIFEBLOOD THEORY:

➢ No Estoppel against the Government.
➢ Collection of taxes cannot be enjoined (stopped) by injunction.
➢ Taxes could not be the subject of compensation or set-off.
➢ Right to select objects (subjects) of taxation.
Basis of Taxation

The Benefits-Protection Theory - The basis of taxation is the reciprocal duties of "protection and support" between the state and its inhabitants.
The state collects taxes from the subjects of taxation in order that it may be able to perform the functions of government. The citizens, on the other
hand, pay taxes in order that they may be secured in the enjoyment of the benefits of organized society. This theory spawned the Doctrine of
Symbiotic Relationship which means, taxes are what we pay for a civilized society.
DISTINCTIONS AMONG THE THREE (3) INHERENT POWERS OF THE STATE

Similarities among the three (3) Inherent Powers

1. They are inherent in the State
2. Underlie and exist independently of the constitution although the conditions for their exercise may be prescribed by
the constitution.
3. Ways by which the State interferes with private rights and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received, directly or indirectly, by the persons affected.

Module 2. Scope of the Taxing Power of the Legislative

The Supreme Court held that the power of taxation is the most absolute of all powers of

the government. It has the broadest scope of all the powers of the government because

in the absence of limitations, it is considered as comprehensive, unlimited, plenary and

supreme (130 SCRA 654).

The matters within the competence of the legislature include the determination of the

following:

● The subject or object (person, property, or excises/privileges) to be taxed. Excise or

privileges to be taxed.

● The purpose of the tax as long as it is a public purpose.

● The amount or rate of the tax.

● Kind of tax

● Apportionment of the tax (i.e., whether the tax shall be general or limited to a

particular locality or partly general and partly local)

● Situs of taxation

● The manner or method of collection

Stages/Aspects of Taxation

1. Levying or Imposition - This process involves the passage of tax laws or ordinances

through the legislature.

2. Assessment and Collection - This process involves the act of administration

and implementation of tax laws by the executive through its administrative agencies

such as the Bureau of Internal Revenue or Bureau of Customs.

3. Payment of Tax - This process involves the act of compliance by the taxpayer in

contributing his share to pay the expenses of the government.

Principles of Sound Tax System

1. Fiscal Adequacy - The sources of government revenue must be sufficient to meet

government expenditures and other public needs.

2. Administrative Feasibility - Tax laws must be capable of convenient, just and effective

administration- free from confusion and uncertainty.

3. Theoretical Justice - A good tax system must be based on the taxpayer's ability to pay.

This suggests that taxation must be progressive conformably with the constitutional

mandate that congress shall evolve a progressive system of taxation.

LIMITATIONS ON THE TAXING POWER

A. Inherent Limitations- inherent limitations proceed from the very nature of the

taxing power itself. The taxing power has very distinct and positive limitations, some

of which are inherent in its very nature and exist whether declared or not declared in

the written constitution.

1. Public purpose

Proceeds from tax must be used for:

a. Support of the government.

b. Some of the recognized objects of government.

c. To promote the welfare of the community (not individuals).

2. Situs of taxation or territoriality - the taxing power of a country is limited to

person and property within and subject to its jurisdiction.

PLACE OF TAXATION

A. The state where the subject to be taxed has a situs may rightfully levy and collect the tax.

B. The situs is necessarily in the State which has jurisdiction or which exercises dominion over the subject

in question.

3. International comity or treaty - a State Cannot tax another State based on the
principle of Sovereign Equality among States. i.e. tax law passed imposing taxes on foreign ambassadors is

not a valid law.

4. Non-delegability of the Taxing power (Enactment of Tax Laws) -

Power of taxation is purely legislative, hence the power cannot be delegated either to the executive or judicial

departments. The limitation arises from the doctrine of separation of powers among the three branches of the

government.

EXCEPTIONS TO THE RULE AGAINST DELEGATION:

1. Delegation to the President, subject to some limitations and restrictions, to fix within specified limits, tariff rates

and tonnage or wharfage duties and other duties and imposts.

2. Delegation to local governments the power to create its own sources of revenues and to levy taxes, subject to such

limitations as may be provided by law.

3. Delegation to administrative agencies certain aspects of the taxing process that are not legislative such as:

● the power to fix value of property for purposes of taxation pursuant to fixed rules

● the power to assess and collect taxes.

5. Exemption of the government

a. Agencies performing governmental functions are tax exempt unless expressly taxed

b. Agencies performing proprietary functions are subject to tax unless expressly exempted.

c. GOCCs performing proprietary functions are subject to tax, however the following are granted

exemptions:

• Government Service Insurance System (GSIS)

• Social Security System (SSS)

• Philippine Health Insurance Corporation (PHIC)

• Local Water Districts (RA 10026)

• Philippine Charity Sweepstakes Office (PCSO)-- already taxable beginning Jan. 1, 2018 under the TRAIN

Law

B. Constitutional Limitations on the Taxing Power- the following provisions may be said to be limitations

prescribed in the Constitution on the taxing power of the government.

 1) Observance of due process of law

2) Equal protection of law

3) Uniformity in taxation

4) Progressive scheme of taxation

5) Non-imprisonment for

non-payment of poll tax

6) Non-impairment of the obligations

of contracts

7) Free-worship clause

8) Exemption of charitable

institutions, churches, parsonages, or

convents appurtenant thereto,

mosques, and non-profit cemeteries, and all lands, buildings and improvements actually, directly and exclusively use for

religious, charitable or educational purposes.

9) Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions including

grants, endowments, donations or contributions for educational purposes.

10) Non-appropriation of public funds or property for the benefit of any church, sect or system of religion, etc.

11) No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.

12) Concurrence of a majority of ALL MEMBERS OF CONGRESS for the passage of a law granting tax

exemption.

13) Non-diversification of tax collections

14) The President shall have the power to veto any particular items) in an appropriation, revenue or tariff, but the

veto shall not affect the item(s) to which no objection has been made.

15) Non-impairment of the jurisdiction of the Supreme Court to review tax cases Appropriations, revenue or tariff

bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with

amendments.

16) Appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives but the Senate

may propose or concur with amendments.

17) Each local government unit shall exercise the power to create its own sources of revenue and shall have a just

share in the national taxes.

National Internal Revenue Taxes under the administration of the BIR:

a. Income Tax b. Estate and donor's tax c. Value-added tax

d. Other percentage taxes e. Excise taxes f. Documentary stamp taxes

DOUBLE TAXATION

KINDS OF DOUBLE TAXATION:

a. Direct Duplicate Taxation, this is prohibited because it violates the constitutional provision on uniformity and

equality. It means:

● Taxing twice

● By the same taxing authority

● Within the same jurisdiction or taxing district

● For the same purpose

● In the same year or taxing period

● Same kind or character of tax

b. Indirect Duplicate Taxation is not legally objectionable. It extends to all cases in which there is a burden of two

or more pecuniary impositions but imposed by different taxing authorities.

SOURCE OF TAX LAWS

a. Constitution

b. Tax Treaties and Conventions with Foreign Countries

c. The "Tax Code" (RA No. 8424 - National Internal Revenue Code, as amended; i.e., RA10963-TRAIN Law),

Tariff and Customs Code, and portion of the Local Government Code

d. Statutes and laws like RA 1125 (an Act Creating the Court of Tax Appeals), RA7716 (E-VAT Law)

e. Presidential Decrees

f. Executive Orders

g. Court Decisions

h. Revenue regulations promulgated by the Department of Finance

i. Administrative issuances of the BIR like Revenue Memorandum Circulars, and those of the Bureau of Customs

like Customs Memorandum Orders

j. BIR Rulings

k. Local Tax Ordinances