TAXATION INHERENT POWERS OF THE STATE

Taxation is the process/means by which the sovereign, through its law making body, - A government has its basic needs and rights which co-exist with its creation. It has
raises income to defray the necessary expenses of the government. the rights to sustenance, protection, and properties.
- The government sustains itself by the power of taxation, secures itself and the well-
being of the people its police power, and secure its own properties to carry out its
public services by the power of eminent domain.
PURPOSES OF TAXATION
- These powers are “natural”, “inseparable”, and “inherent” to every government. It is
presumed acknowledged and understood by the people from the very moment they
Primary Purpose Secondary Purposes establish their government.
 Provide funds/ property with  strengthen anemic enterprises
o TAXATION POWER
which promote the general welfare by giving tax exemptions
- the power of the state to enforce proportional contribution from its subject to sustain itself
and protection of its citizen;  protect legal industries against
finance multifarious activities. foreign competitions o POLICE POWER
 reduce inequalities in wealth & - general power of the State to enact laws to protect the well-being of the people
income by imposing progressively
higher tax rates
 prevent inflation by increasing o EMINENT DOMAIN
tax rates; ward-off depression by - the power of the State to take private property for public use after paying just compensation
decreasing them

Point of Difference Taxation Police Power Eminent Domain

“Power of tax is the strongest of all the powers of the government” Exercising authority Government Government Government and
Private utilities
- the legislature is free to select the subjects or objects to be taxed
Purpose For the support of To protect the For public use
 persons (natural/juridical) the government general welfare of
 property (real/ personal) the people
 tangible or intangible Persons affected Community or class Community or class Owner of the
 businesses of individuals of individuals property
 transactions Amount of imposition Unlimited Limited No amount imposed
 rights (Tax is based on (Imposition is (The government
 privileges government needs.) limited to cover cost pays just
of regulation) compensation)
Importance Most important Most superior Important
 The power of tax may include the POWER TO DESTROY if it is used validly as Relationship with the Inferior to the “Non- Superior to the Superior to the
an implement of the police power in discouraging & ultimately prohibiting the Constitution impairment Clause” “Non-impairment “Non-impairment
effect certain things or enterprises inimical to the public welfare. of the Constitution Clause” of the Clause” of the
Constitution Constitution
- - does not cease to be valid merely because it regulates, discourages, or even
Limitations Constitutional and Public interest and Public purpose and
definitely deters the activities taxed
inherent limitations due process just compensation
  SIMILARITIES OF THE THREE POWERS OF THE STATE  LIFEBLOOD DOCTRINE
1. Necessary attributes of sovereignty - Taxes are the lifeblood of the government, and their prompt and certain availability
2. Inherent to the State are imperious need.
3. Legislative in nature Implication of the lifeblood doctrine in taxation
4. All ways in which the state interferes with the private rights and  Tax is imposed even in the absent of Constitutional grant
properties  Claims for tax exemption are construed against tax payer
5. Exist independently of the Constitution; exercisable by the  The government reserves the right to choose the object of taxation
government even w/o Constitutional grant  The courts are not allowed to interfere with the collection of taxes
6. Presuppose an equivalent form of compensation received by the  In income taxation:
person affected by the exercise of power o Income received in advance is taxable upon receipt
7. May be limited by national legislature o Deduction for capital expenditures and prepayments is not
allowed as it effectively defers the collection of income tax
o A lower amount of deduction is preferred when a claimable
expense is subject to limit
SCOPE OF TAXATION o A higher tax base is preferred when the tax object has
 unlimited “In the absence of constitutional restrictions & multiple tax bases
 comprehensive subject to the will of the legislative bodies with
 plenary whom it is entrusted & the discretion of the
 supreme authority which exercise it. “

BASIS

- The basis of taxation is found in the reciprocal duties of protection and support
between the state and its inhabitants
- The government t provides benefits to the people in form of public service, and
THEORY AND BASIS OF TAXATION the people provide the funds that finance the government.

THEORY BENEFIT-RECEIVED PRINCIPLE

 state receive taxes that it may be enabled to carry out its mandates into effect
- The power of taxation proceeds upon the theory that the existence of the and perform functions of government and the citizen pays the portion of taxes
government is a necessity; it cannot continue without means to pay its demanded in order that he may, by means thereof, be secured in the enjoyment
expenses; has a right to compel all its citizens and property within its limit to of benefits of an organized society
contribute
 w/o taxes, the government would be paralyzed for lack of the motive power to Receipt of benefits is conclusively presumed.
activate and operate it - Every citizen and resident of the state directly or indirectly benefits from the public
 despite the natural reluctance to surrender part of one’s hard-earned money to services rendered by the government
the taxing authorities, every person who is able to must contribute his share in - benefits can be in the form of daily free usage of public expenditures, access to public
the running government health or educational services, the protection and security of person and property, or
simply the comfort of living in a civilized and peaceful society

THEORIES OF COST ALLOCATION

  ADMINISTRATIVE FEASIBILITY
o Benefit received theory (Reciprocity Theory) - tax laws should be:
- the benefit received theory presupposes that the more benefit one Convenient as to time, place, and manner of payment
receives from the government, the more taxes he should pay Just clear and plain to the taxpayer
Effective Administration capable of uniform enforcement by government
o Ability to pay theory officials; not unduly burdensome upon, or discouraging to business activity
- The ability to pay theory presupposes that taxation should also
consider the taxpayer’s ability to pay. Taxpayers should be required
to contribute based on their relative capacity to sacrifice the support NATURE OR CHARACTERISTICS OF THE STATES POWER TO TAX
of the government.
- Those who have more should be taxed more even if they benefit less 1. Inherent in Sovereignty
from the government -may be exercised by the state although not expressly granted by the
- Those who have less shall contribute less even if they receive more of constitution
the benefits from the government -it is an inherent power of the state and can be exercised by the
ASPECTS OF THE ABILITY TO PAY THEORY legislation without a previous constitutional authority
o Vertical Equity (gross concept) -it is not merely a constitutional grant
- proposes that the extent of one’s ability to pay is
directly proportional to the level of his tax base 2. Legislative in character
-it is only the legislature that can enact tax laws
o Horizontal Equity (net concept) -the President of the Philippines is not empowered to grant tax
- requires consideration of the particular exemption as this power is lodged solely with Congress
circumstance of the taxpayer -Taxation can be exercised only by the lawmaking body; this rule is
also true to the granting of tax exemption
- “What one cannot impose, one cannot condone”

3. Subject to constitutional and inherent limitations

- taxation is not an absolute power that can be exercised by the
legislature anyway it pleases

BASIC PRINCIPLE OF A SOUND TAX SYSTEM

 FISCAL ADEQUACY LIMITATIONS ON THE POWER OF TAXATION

- sources of revenue should be sufficient to meet the demands of
public expenditures A. CONSTITUTIONAL LIMITATIONS
o can be obtained by creating new taxes or new tax machinery - restrictions found in the constitution or implied from its provisions
or by merely changing the rates applicable to existing taxes so
that the revenue would substantially respond to the expanding  Due Process
needs of the public - No person shall be deprived of life, liberty, or property w/o
due process of law, nor shall any person be denied the equal
 EQUALITY OR THEORITICAL JUSTICE protection of the law
- tax burden should be proportionate to the taxpayer’s ability to pay
(Ability-To-Pay Principle) Taxes which are excessive and beyond the paying capacity of
the taxpayers are confiscatory, oppressive, and could be
 unquestionably struck down as deprivation of the taxpayer’s property  Progressive system of taxation
without due process if it finds no support in the constitution. - Congress shall evolve a progressive system of
taxation.
Aspects of Due Process - Tax rate increase as the tax base increases

 Substantive due process The constitution favors progressive tax as it is consistent with the
- tax must be imposed only for public purpose, collected only taxpayer’s ability to pay. Progressive tax system aids in an
under authority of valid law and only by the taxing power equitable distribution of wealth to society by taxing the rich more
having jurisdiction
than the poor.
- an assessment without a legal basis violates the
requirement of due process

 Procedural due process  Non-imprisonment for non-payment of poll tax

- there should be no arbitrariness in assessment and - No person shall be imprisoned for debt or non-payment of
collection of taxes, and the government shall observe the a poll tax (cedula).
tax payer’s right to notice and hearing
- Under the NIRC, assessments shall be made within three However, this Constitutional guarantee only applies when the
(3) years from the due date of filling of the return or from debt is acquired by the debtor in good faith. Debt acquires in
the date of actual filing, whichever is later. Collection shall
bad faith constitute “estafa” – a criminal offense punishable
be made within five years from the date of assessment.
Failure of the government to observe these rules violates by imprisonment.
the requirement of due process.
Is non-payment of tax equivalent to non-payment of
 Equal protection of the laws debt?
 Poll tax has two components- basic community tax
The constitutional provision on equal protection of laws means and additional community tax. The constitutional
that no person or class of person shall be deprived of the same guarantee of non-imprisonment for non-payment of
protection of laws enjoyed by other persons or other classes in the same poll tax applies only to the basic community tax.
place and in like circumstances.
Non-payment of the additional community tax is an
act of tax evasion punishable by imprisonment.
Tax payers should be treated equally both in terms of rights
 Non-impairment of the obligations of contracts
conferred and obligation impose
- No law impairing the obligations of contracts shall be
passed.
 Rule of uniformity and equity in taxation - The State should set an example of good faith among its
- The rule of taxation shall be uniform and equitable. The
constituents. It should set aside its obligations from
Congress shall evolve a progressive system of taxation
contracts by the exercise of its taxation power. Tax
exemptions granted under contract should be honored and
Uniformity of taxation means that all taxable persons or
should not be cancelled by a unilateral government action.
property of the same class shall be taxed at the uniform or same rate.
There is uniformity of taxation when the tax operates with the same There is “impairment” when a law substantially invalidates,
force and effect on this subject wherever found. releases, or extinguishes the obligations of a contract, or that derogates
Taxpayers should be classified according to commonality in
substantial contractual rights.
attributes, and the tax classification to be adopted should be based on
substantial distinction.
 on revenues and assets that are actually, directly, and exclusively
 Free worship rule devoted for educational purposes.

The Philippine government adopts free exercise of religion and Consistent with this constitutional recognition of education
does not subject its exercise to taxation. Consequently, the properties as a necessity, the NIRC also exempts government educational
and revenues of religious institutions such as tithes or offerings are not institutions from income tax and subjects to private
subject to tax. educational institutions to a MINIMAL 10% income tax.
This exemption, however, DOES NOT extend to income from
properties or activities of religious institutions that are proprietary or
commercial in nature.  Concurrence of majority of all members of Congress for the
passage of a law granting tax exemption.
Tax exemption law counters against the lifeblood doctrine as it
 Exemption of religious, charitable, or educational entities, non-profit deprives the government of revenues. Hence, the grant of tax
cemeteries, churches and mosques, lands, buildings, and improvements exemption must proceed only upon a valid basis.
from property taxes
Grant of tax exemption- Constitution requires the ABSOLUTE MAJORITY or
The Constitutional exemption from property tax applies for majority of all members of Congress, not relative majority or quorum
properties actually, directly, and exclusively used for charitable, majority, is required.
religious, and educational purposes.
Withdrawal of tax exemption- relative majority
The Philippine follows the doctrine of use wherein only properties
actually devoted for religious, charitable, and educational purposes are
exempt from real property tax.
 Non-diversification of tax collections.

Tax collection should be used only for public purpose. It should

 Non-appropriation of public funds or property for the benefit of any never be diversified or used for private purposes.
church, sect, or system of religion Court ti rec

To support freedom of religion, the government should not Non-delegation of the power of taxation
favor any particular system of religion by appropriating public funds
or property in support thereof.
The principle of checks and balances in a republican state requires
Intended to highlight the separation of religion and the State. that taxation power as part of lawmaking be vested exclusively in
NOTE: Compensation of priest, imams, or religious ministers working with Congress.
the military, penal institutions, orphanages, or leprosarium is not considered
religious appropriation. Non-impairment of the jurisdiction of the Supreme Court in tax
cases
 Exemption from taxes of the revenues and assets of non-profit,
non-stock educational institutions including grants, The Supreme Court shall have to power to review, revise, reverse, or
endowments, donations, or contributions for educational modify or affirm on appeal or certiorari as the law or the Rules of
purposes. Court may provide, final judgements and orders of lower courts in all
cases involving the legality of any tax, impost, assessment, or toll, or
The Constitution recognizes the necessity of education in state any, penalty imposed in relation thereto.
building by granting tax exemption on revenues and assets of non-
profit educational institutions. This exemption, however, applies only
 Notwithstanding the existence if the Court of Tax Appeals, all cases International comity pertains to mutual courtesy or reciprocity
involving taxes can be raised to and be finally decided in the Supreme between states. It is a basic principle of international law that all
Court of the Philippines. states are equally sovereign. Each state observes co-equal sovereignty
by not taxing the properties, income, or effects of fellow states.
Power of the President to veto any particular item or items in a
revenue or tariff bill Embassies or consular offices of foreign government in the Philippines
including international organizations and their non-Filipino staff are not
The President shall have the power to veto any particular item or subject to Philippine taxation.
items in an appropriation, revenue, or tariff bill, but the veto shall
National Internal Revenue Code- the income of foreign government and
not affect the item or items to which he does not object.
foreign government-owned and controlled corporations are not subject to
income tax.

 Exemption of the government

B. INHERENT LIMITATIONS
The government can exercise the power upon anything including itself,
 Requirement that levy must be for a public purpose However, the government normally does not tax itself as this will not raise additional funds but
will only impute additional cost.
The true test of what is public purpose is that which requires
that the work shall be essentially public and for the general Government properties and income essential for its function are not subject to taxation.
good of all inhabitants of the taxing body. Income of the government from properties and activities conducted for profit including income
from government owned and controlled operations is subject to tax.
 Territoriality of taxation
 Non-delegation of the taxing power
The legislative power is vested exclusively in Congress and is non-debatable
Public services are normally provided within the boundaries of
pursuant to the doctrine of separation of the branches of the government to
the state. Thus, tax can be imposed only within the territories
ensure check and balances.
of the State. There is no basis in taxing foreign subjects abroad
since they do not derive benefits from our government.
The rule is “potestas delegate no delegate potest”- what has been delegared cannot
Furthermore, extraterritorial taxation will amount to be delegated. The people created a department for the exercise of legislative power.
encroachment of foreign sovereignty. Thus, this power should not be delegated to any other person or body.

XPNs;
Exemption: 1. Under the Constitution, local government units are allowed to exercise the
1. In income taxation, resident citizens and domestic corporations power to tax to enable them exercise their fiscal autonomy
2. Under the Tariff and Customs Code, the President is empowered to fix amount
are taxable on income derived within and outside the Philippines
of tariffs to be flexible to trade conditions
3. Other cases that require expedient and effective administration and
2. In transfer taxation, residents or citizens such as resident citizens, implementation of the assessment and collection of taxes.
non-resident citizens and resident aliens are taxable on transfers of
properties located within or outside the Philippines.

 International Comity
  Proportional in character
Aspects of Taxation  Levied on persons, property, or the exercise of a right or privilege
 Levied by the state which has jurisdictions over the subject or object of taxation
 Levy or Imposition  Levied by the lawmaking body of the state
 Assessment and collection  Levied for public purposes or purposes
The term “public purposes” includes the following:
a. construction of roads and bridges
LEVY OR IMPOSITION b. pensions to retired government employees and their widows
- this process involves the enactment of a tax law by Congress and is called “impact of and children
taxation” c. assistance to victims of calamities
- It is also referred to as the legislative act in taxation d. social welfare and healthcare projects
- deals with the provision of law which determines the person or property to be
- taxed,the sum or sums to be raised, the rate thereof, and the time and manner of CLASSIFICATION OF TAXES
levying, receiving, and collecting the taxes
 As to subject matter or object
Congress is composed of two bodies:
1. The House of Representatives; and a. Personal, poll, or capitalization
2. The Senate - tax of a fixed amount imposed on individuals, whether citizens or not, residing within
a specified territory without regard to their property or the occupation in which they
Matters of legislative discretion in the exercise of taxation may be engaged (ex. Community Tax)
1. Determining the object of taxation
2. Setting the tax rate or amount to be collected b. Property
3. Determining the purpose for the levy which must be public use - tax imposed on property, whether real or personal, in proportion either to its value,
4. Kinds of tax to be imposed or in accordance with some other reasonable method of apportionment (ex. Property
5. Apportionment of the tax between the national and local government Tax)
6. Situs of taxation
7. Method of collection c. Excise Tax
- tax imposed upon the performance of an act, the enjoyment of a privilege, or the
ASSESSMENT AND COLLECTION engaging in an occupation; any tax which does not fall within the classification of a
- the tax law is implemented by the administrative branch of the government poll tax or a property tax (ex. Income Tax, donor’s tax, estate tax)
- implementation involves assessment or the determination of the tax liabilities of tax
payers and collection
- constituted of the provisions of law which prescribes the manner of enforcing the  As to who bears the burden
obligation on the part of those taxed to pay the demand thus created
a. Direct
- tax that is demanded from the person who also shoulders the burden of the tax (ex.
TAXES Income Tax, donor’s tax, estate tax)
- the enforced proportional contributions from persons and property levied by the law
making body of the State by virtue of its sovereignty for the support of the b. Indirect
government and all public needs. - tax demanded from one person in the expectation and intention that he shall
Essential elements of a tax indemnity himself at the expenses of another (ex. Value-added tax and percentage
 Enforced contributions taxes)
 Generally payable in money
 As to determination of amount b. Progressive
- tax rate of which increases as the tax base or bracket increases (ex. Income Tax,
a. Specific donor’s tax, estate tax)
- tax fixed amount imposed by the head or number, or by some standard of weight or -
measurement; it requires no assessment other than a listing of classification of the
subjects to be taxed (ex. Excuse tax on distilled spiraits, cigars, cigarettes) c. Regressive
- tax rate of which decreases as the tax base increases
b. Ad valorem
- tax of a fixed proportion of the value of the property with respect to which the tax is
assessed; it requires the intervention of assessors to estimate the value of such SITUS OF TAXATION
property before the amount due from each tax payer can be determined. (ex. Real
property tax) Situs is the place of taxation. It is the tax jurisdiction that has the power to
levy taxed upon the tax object. Situs rules serve as frame of reference in
gauging whether the tax object is within or outside the tax jurisdiction of the
 As to purpose taxing authority.

a. General, fiscal or revenue Example of Situs Rules

- Tax that is imposed solely to raise revenue for government expenditures (ex. Income
Tax and value-added tax )  Business Tax Situs- Businesses are subject to tax in the place
where the business is conducted.
b. Special or regulatory  Income tax situs on services- Service fees are subject to tax where
- Tax imposed for a special purposes, i. e to achieve some social or economic end they are rendered.
irrespective of whether revenue is actually raised or not (Sugar adjustment taxes;  Income tax situs on sale of goods. The gain on sale is subject to
Oil Price Stabilization Fund ) tax in the place of sale.
 Property tax situs. Properties are taxable in their location.
 Personal tax situs. Persons are taxable in their place of residence
 As to authority imposing the same

a. National
- Tax imposed by the National Government (ex. Internal Revenue Taxes, customs
duties)

b. Municipal or Local
- Tax imposed by municipal corporations( Sand and gravel tax, occupation tax)

 As to graduation or rate

a. Proportional
- tax based on a fixed percentage of the amount of the property, receipts, or other
basis to be taxed (ex. Value Added Tax)