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A REVIEW OF THE GENERAL PRINCIPLES OF

TAXATION By: Atty. Rommel Mirasol

A. Three Inherent Powers of the


State

1. Police Power (Salus Populi Est Suprema Lex) 2 power of the state to enact rules
and regulations for the general welfare of the people;

2. Eminent Domain 2 power of the state to take private property for public use,
upon payment of just compensation

3. Taxation - is the process or means by which the sovereign, through its lawmaking
body, raises income to defray the necessary expenses of the government.

B. Two-fold Nature of
Taxation

1. Inherent in character 2 it means that it co-exists with the State.


- if there is a state, it is understood that the State ,thru its government has the power to
tax its citizens - it dusnt need a law.

2. Legislative in Character 2 the power to tax is EXCLUSIVELY lodged in the


Congress. - what are the three branches of the govt? What are its
functions? - example , law saying that wearing a BLUE shirt is illegal.
Congress makes the law, administrative dept, enforces the law, judiciary settles conflict
whether the law means Dark Blue, or Light Blue.

C. Doctrines or Theories about the Importance of Taxation

1. Lifeblood Theory

- Taxes are the lifeblood of the government and their prompt and certain availability are
an imperious need. A government cannot continue to exist and operate without financial
means. This inherent power gives the government the right to tax citizens and properties
within its jurisdiction.

Taxation is likened to a human body·s blood. With out blood, we cannot survive. In the
same way, the state, the country cannot survive without taxes

2. Necessity Theory
- Taxation is a power predicated upon necessity. It is a necessary burden to preserve
the State·s Sovereignty. Ex.
a. Navy to defend the state·s shores from invasion; b. Public improvement for the
enjoyment of its citizens and those who are
within its territory; c. Army to
resist aggression.

3. Benefits-protection Theory
- Taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for the lack of the motivation to activate and operate it. Hence, despite of the
natural reluctance of a person to surrender part of their hard-earned income to the
government, every person who is able to must contribute his share in the running of the
government. The government for its part is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their moral
and material value.

This theory should dispel or eradicate the notion that taxes are nothing but arbitrary
methods of exacting money from the people. Taxation is viewed as a give and take system
between the people and the government. We give taxes, the govt takes them. In turn, the
govt gives us protection thru its projects and services

D. Objectives of Taxation

1. Revenue Objectives
You are all familiar with the term revenue right? Revenue means raising money, profit or
income. So, one objective of taxation is of course raising money to defray the expenses of
the government. 2. Non Revenue Objectives (PIER)
Aside from raising money for govt expenses, taxation is also used for purposes other
than money. How? a. Protection of Local Industries;
How can taxes protect local industries from foreign competition? - high
tariff rates on imported products - our local industries and products are
protected b. Implementation of the Police Power of the State;
- rmember Police Power? The power to enact laws that regulate private rights? -clue,
night clubs, gambling businesses c. Encourage local industry for economic progress; By
granting tax exemptions to local industries d. Reduce Social Inequality by the equitable
distribution of property.
Inequality is ever present..taxes aim to reduce this. Higher income
tax base, higher income tax rate. Lower, lower.
E. Aspects of
Taxation
1. Levying of the Tax 2 Legislative; By Congress 2. Collection of
the Tax levied 2 Administrative; Through BIR
We discussed the three branches earlier. Making of tax laws, by the congress,
collection, by administrative dept.

F. Basic Principles of a Sound Tax System


(FAT)

1. Fiscal Adequacy 2 revenue raised must be sufficient to meet government


expenditures; This is simple and practical. If the revenue raised thru taxation duz not meet
the expenses, then there is no use for taxes at all. 2. Administrative Feasibility 2 tax laws
must be clear and concise; capable of
proper and effective enforcement and not burdensome; What does this mean. By the
term feasible, what do u understand by the phrase Administrative feasibility..Feasible...to
administer.

The most dramatic sounding principle of taxation. It sounds like a title of a john grisham
novel or a movie...

3. Theoretical Justice 2 tax imposed must be based on the taxpayer·s ability to pay.

Now, taxation is a very intrusive and comprehensive power of the government. It is


comprehensive because, it affects us from the moment we are born until we die and even beyond
that. So from cradle to the grave, taxation affects our lives. That is why, it is important that there
should be limitations on the power of taxation. Otherwise, it may be abused by those who are in
power...by the government.

G. Limitations on the Power to


Tax

1. Inherent Limitations (PINET)


They are inherent because it automatically attaches with the power of taxation. If there is
taxation, there are these limitations. They do not need a law for their existence.

a. Public Purpose; b. International Comity; c. Non Delegation of Taxing


Power d. Exemption of govt. Agencies and instrumentalities from taxation;
e. Territoriality. 2. Constitutional Limitations 2 Limitations provided for by the different
provisions of
the Constitution. As the name implies, these limitations, exist because they are provided
for by the Constitution. There are a lot actually, im just gonna discuss a few important
ones. Exemption of Religious Entities from taxation - churches, sects, and other duly
recognized religious organizations are exempt from paying taxes in so far as their
income from religion related activities are concerned. But if they engage in businesses
that are proprietary, and no longer connected with the spreading of the g ́ ood wordμ,
then they may be taxed
Take for example the Gideon Case

Another example would be the exemption of Educational Institutions from taxation.


Basically it follows the same principle as the religious entities.

H. Classification of
Taxes

So what are the kinds of taxes? How are they classified? It is important for us to be
familiar with the classification because it affects the rates of taxes, their manner of
collection and as to who has the authority to collect these taxes.

1. As to subject matter
a. Personal, poll or capitation 2 tax of a fixed amount imposed on individuals
Ex. Community tax b. Property tax 2 tax imposed on property whether real or
personal
Ex. Real Estate Tax c. Excise tax 2 tax imposed on the performance of an act, the
enjoyment of a
privilege or engaging in an occupation. Ex.
Income tax, donor·s tax, value added tax.

2. As to who bears the burden


a. Direct 2 Tax demanded from persons who are intended or bound by law to
pay the tax. Ex. Community tax, income tax, estate tax. b. Indirect tax 2 tax which the tax
payer can shift to another. Ex. Value-added
tax, customs duties.

Why is VAT called an Indirect tax? - because in VAT, the person to be taxed is
actually the seller. The tax is imposed on the activity of SELLING. But, the seller in
turn pushes this burden to
the buyers by making it a part of the cost of the goods or services purchased by the
consumer or customers.
3. As to determination of amount
a. Specific 2 Tax imposed based on a physical unit of measurement, as by head
or number, weight, or length or volume. Ex.
Tax on wines, cigars, fireworks, etc.

b. Ad Valorem 2 Tax of a fixed proportion of the value of property; needs an


independent appraiser to determine its value. Ex.
Real Estate Tax, Gasoline Tax, etc.

4. As to Purpose
a. General, fiscal or revenue 2 tax with no particular purpose or object for which
revenue is raised, but is simply raised for whatever need may arise. Ex.
Income tax, value added tax.

b. Special or Regulatory 2 Tax imposed for a special purpose regardless of whether


revenue is raised or not, and is intended to achieve some social or economic end. Ex.
Protective tariffs or customs duties on certain imported goods to protect local industries
against foreign competition.

5. As to authority imposing the tax or scope


a. National tax 2 tax imposed by the national government.
Ex. Internal revenue taxes, tariff and customs duties.

b. Municipal or local 2 tax imposed by the national governments for specific


needs. Ex. Real estate taxes, municipal
licenses

6. As to graduation or rate
a. Proportional 2 tax based on a fixed percentage of the amount of property
income or other basis to be taxed. Ex.
Percentage taxes, real estate taxes

b. Progressive or graduated 2 tax rate increases as the tax base increases.


Ex. Income tax, estate tax, donor·s tax.

c. Regressive 2 tax rate decreases as the tax base increases.


Ex. Value-added tax.

I. Essential Characteristics of a
Tax

1. It is an enforced contribution;

Why are taxes an enforced contribution? Its because there is law which mandates or tells
us that we must pay taxes, other wise, there are corresponding penalties for its non
payment.

2. It is levied by the law making body (legislative department);

As we have discussed last meeting, it is the legislative department or the congress who
enacts tax laws. Why is this? It is because taxation is grant by the people who allow
themselves to be taxed. It is only fitting that it should be enacted by the very people who
we elected to represent us in the government...namely the congressmen.

3. It is proportionate in character;
Meaning it depends on the tax payer·s ability to pay. Rmember theoretical justice? 4. It is
generally payable in money;
Question. Why is it that taxes are payable in money? Why not in kind? Like, when its
time to file ur income tax returns but u don·t have cash to pay the BIR, why cant u insist
that ull use ur chickens, or ur cellphones or laptops to pay ur taxes? - the answer is
Administrative feasibility. Who can rmember what that means? - it means that, our tax
system must be one that is practicable and easy to administer. Imagine if taxes could be
paid in kind? It would be utter chaos.

5. It is imposed for the purposes of raising revenues; and 6. It


is to be used for public purpose.

J. Situs of taxation

this refers to the place of taxation. The rule is that the State may rightfully levy
and collect the tax where the subject being taxed has a situs under its jurisdiction.
The situs of taxation is determined by a number of factors:

This is in accordance with the principle of Territoriality of Taxation.


1. Subject matter 2 or what is being taxed. He may be a person or it may be
a property, an act or activity; 2. Nature of the tax 2 or which tax to impose. It may be an
income tax, an
import duty or a real property tax; 3. Citizenship
of a tax payer; and 4. Residence of the
tax payer.

Rules on the situs of taxation

1. Persons 2 residence of a tax payer


Take for example the community tax, it is a personal tax as we have discussed.
So the rule is that only the municipality or the city in which the person resides can
tax him with the community tax

2. Real property or tangible personal property 2 location of the property


Example for this is ur real estate tax. If a land property is located in dgte, then
only the city of dgte may tax it..not any other city or municipality.

3. Intangible personal property 2 as a rule, situs is the domicile of the owner


unless he has acquired a situs elsewhere. Examples are trademarks, patents,
copywrights. These are intangible properties..meaning u cannot see them, touch
them, feel them but they are capable of ownership. The rule is that the place that
can tax these is the place where the owners of these properties reside.

4. Indome 2 taxpayer·s residence or citizenship, or place where the income


was earned.

5. Business, occupation and transaction 2 place where business is being


operated, occupation being practiced and transaction completed.

6. Gratuitous transfer of property 2 taxpayer·s residence or citizenship, or


location of the property.
K. Tax Laws

Sources of tax laws

1. Constitution; 2. Statutes and Presidential Decrees; 3. Revenue Regulations by the


Department of Finance; 4. Rulings issued by the Commissioner of Internal Revenue
and Opinions by
the Secretary of Justice; 5. Decisions of the Supreme Court and the Court of
Tax Appeals;
As i have mentioned during our last meeting, Decisions of the Supreme Court
become law, and you can no longer appeal from it. Which means that if u have a
case, and it reaches the supreme court, and the court decides on it...it becomes
final. You can no longer appeal. There·s this joke that goes around the legal
community. Girls, rmember, if a lawyer..or a law student hits on you..and uses
pick up lines, one of which is u ́ r so beautiful, your face is like the supreme courtμ
it may sound really flattering... u myt think na t́ his guy really thinks im beautiful
coz im compared to the highest court in the country..μ girls, think again. Since u
are compared to the SC, what he myt be saying is that, u ́ r face no longer has an
appealμ

6. Provincial, city, municipal and barangay ordinances subject to limitations


set forth in the Local Government Code; and

7. Treaties or international agreements the purpose of which is to avoid or


minimize double taxation.

Interpretation and Construction of Tax Statutes

The recognized rules in interpretations of other laws also apply to tax laws. As in other
laws, the intention of the law makers is the primary concern. However, if there is a doubt
as to in determining the law makers· intentions, the doubt must be resolved in favour of
the tax payers and against the taxing authority (government).

Taxation is a very intrusive power of the state. From the day a person is born, till
the day he dies and even beyond that, taxation is ever present. From cradle to the grave. Because
of the comprehensiveness of this power, interpretation of tax laws is in favour of the taxpayer so
as to avoid any abuses on the part of the government.

The exeption to the general rule stated above is with regards to tax exemptions. Tax
exemptions are highly disfavored by law and are not to be presumed nor implied but must
be clearly expressed. A tax exemption must be
strictly interpreted against the tax payer and in favor of the government and a grantee
claiming exemption must clearly prove his right to such exemption in pursuance to law.

Internal Revenue Laws

Revenue law is a law passed for the purpose of authorizing the levy and collection of taxes
in some form to raise revenue. A revenue law is said to be national revenue law when it is
applicable all over the country.
The Bureau of Internal Revenue

y A bureau of the Department of Finance (Administrative) y Mission is to collect


taxes efficiently and effectively, for and at the least cost to the government, through
impartial and consistent enforcement of internal revenue laws;

Tax Collection System

y RA 8424 (Tax Reform Act of 1997) retained the ś elf-assessment systemμ of


the old law; y The taxpayer calculates the tax by himself or through an accountant, fills up
his tax return, files it with the proper tax office, and pays the tax due upon filing.

Powers and Duties of the BIR

y Composed of the Commissioner and 7 Deputy Commissioners

Duties of Commissioner:
1. Interpret tax laws and decide tax cases; 2. Obtain information and to
summon, examine, take testimony of
persons; 3. Make assessments and prescribe additional requirement for tax
administration and enforcement.

Duties of the Deputy Commissioners

1. Assessment and collection of all national internal revenue taxes,


fees and charges; 2. Enforcement of all forfeitures, penalties, and fines; 3. Execution of
judgments in all cases decided in its favour by the CTA
and ordinary courts; and
4. Administration of supervisory and police powers conferred to it.

L. Miscellaneous Doctrines Regarding Taxation

Prospectivity of Tax Laws

Taxes must be imposed prospectively and not retroactively. But if the intent of the law
makers is to apply it retroactively, such law must clearly state that the intention is such.

Prospectivity simply means, if a tax law is enacted to day, it has to effect tomorrow and
in the years to come...and not to affect the past.

Double Taxation
Double taxation per se is not forbidden if it is only indirect double taxation. However, if it
is direct double taxation, it invalidates the law. There is direct double taxation when the
following occurs:

1. Same property is taxed twice 2. The purpose for


the tax is the same 3. Imposed by the same taxing
authority 4. Imposed within the same place or
jurisdiction 5. Imposed during the same taxing period
6. Same kind or character of tax

Set Off of Taxes

Taxes are not subject to set off or legal compensation. A person cannot refuse to pay a
tax because the government owes him an amount equal to or greater than the tax being
collected.

In law, u have this thing called ś et offμ or to put in more simpler terms..μquitsμ

Example, u owe her a dept of say 100, and she owes u the same amount. Now, u both
can say that since u owe each other the same amount, u can set off ur debts and it will have the
effect of releasing you from ur contractual obligation towards each other.

Now, taxes dus not work in the same way. U cannot say that because last year u over paid ur
taxes, this year, u can set off ur overpayments against the taxes u owe. This is not allowed. Why?
Because taxes are not ordinary contractual obligations unlike a simple debt. Taxes are obligations
that are provided for by law it self. Remember lifeblood theory?it tells that there is a need for the
prompt and early collection of taxes.
If taxation is that important, and it is the obligation of every Filipino citizen to pay taxes. U get to
ask, is there a way out of it? Is there any escape from taxation? There is. There·s the legal way
out, and there is the illegal way out.

Escape from Taxation

Tax avoidance 2 this is legal and allowed. This happens when a tax payer minimizes his
tax liabilities by taking advantage of legally available tax planning opportunities. Otherwise
known as tax minimization.

Tax Evasion 2 illegal and prohibited. Occurs when the taxpayer resorts to unlawful
means to lessen or to get away from his tax liability.

One example of this..which is a sad reality prevailing today is the under valuation of
properties sold. How does this happen?

Say for example ...

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