Income Taxation 2019 Edition by Banggawan (Book)

Taxation
A) State Power
- Inherent (inbuilt) power to enforce contribution for public purpose.
B) Process
- Levying (imposing) taxes by the legislature of the state to enforce contribution.
C) Mode of cost distribution
- Allocate it to its subjects who are benefited by its spending.

The Theory of Taxation

- It is the GOVERNMENT’S NECESSITY FOR FUNDING.
- Every government provides public service.
- A system of government is indispensable (essential) to every society.
- It cannot exist without system of funding.

The Basis of Taxation

- The MUTUALITY SUPPORT between the people (gives tax) and the government (public
service).

Receipt of benefits conclusively presumed

- Every citizen and resident of state DIRECTLY or INDIRECTLY benefits from the public services
of the government.
- Most of them ae received INDIRECTLY and their realization by citizens is UNDENIABLE
(unquestionable).
- Direct receipt of these services is NOT A PRECONDITION (requirement) to taxation.
- The receipt of these benefits by the people is presumed.
- Taxpayers CANNOT AVOID PAYMENT of taxes under the defense of absence of benefits
received.

Theories of cost allocation:

- The Following General considerations in the exercise of its taxation power
1) Benefits Received
- The more benefit he receives, the more taxes he should pay.
2) Ability to Pay
- Based on their relative capacity.

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Aspects of the ability to pay theory

1) Vertical equity (GROSS concept)
- Extent of his ability to pay is the same level as his tax base.
2) Horizontal Equity (NET concept)
- Consideration of a particular circumstance.
- Ex: Expenses.

The Lifeblood doctrine (TAXES)

- Taxes are the lifeblood of the government

- Without this, the government will be PARALYZED.
- Essential and indispensable to the continued subsistence of the government.
- Government’s ability to serve the people depends upon taxation.

Implication of the lifeblood doctrine in taxation

1) Tax is imposed even in the ABSENCE of a CONSTITUTIONAL GRANT.
2) Claims for TAX EXEMPTION are taken against TAXPAYERS.
3) Court not allowed interfering with collection of tax.

Inherent (inbuilt) powers of the state

- Government sustains itself with these powers.
- These powers are natural, inseparable, and inherent to every government.
- The exercise of these powers are UNDERSTOOD and ACKNOWLEDGED by the people from
THE MOMENT THEY ESTABLISH their government.
- Naturally exercisable by the government even in the ABSENCE of an express grant of power
in the CONSTITUTION.
1) Taxation Power
- 2nd most important
- Has constitutional and inherent limitations
- Unlimited imposition
- To enforce proportional contribution from its subjects to sustain itself.
2) Police power
- Most important
- Limited imposition just to cover cost of regulation.
- To enact laws to protect well-being of the people.
3) Eminent Domain
- Least important
- To take private property for public use after paying just compensation.

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Scope of Taxation Power

- Comprehensive (broad)
- Plenary (Complete)
- Unlimited
- Supreme
- Not absolutely unlimited and has its own limitations.

Inherent Limitations
1) Territoriality of taxation
- Only within the boundaries of the state.
- Cannot tax other countries.
A) 2 fold obligations of taxpayers
 Filing of returns and payments of taxes.
 Withholding of taxes on expenses and its remittance to the government.

2) International Comity or mutual courtesy

- All nations are deemed equal.
- Government do not tax other governments
- Embassies and their non-Filipino of other governments here cannot be taxed.
- When states enter into treaties, they must respect agreements as a matter of this even if
conflict with local tax laws.

3) Public purpose
- Tax is for the common good.
- Cannot be for private interest.

4) Exemption of the government

- Government does not tax itself.

5) Non-delegation of Taxing power

- What has been delegated can no longer be delegated.
- It is vested exclusively to the congress.

Exceptions to the rule of non-delegation

1) Under constitution, local government units can exercise tax to exercise fiscal autonomy
(independence).
2) Under Tariff (rate) and Customs code, President can fix rate on trade conditions.

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Constitutional limitations of taxation

1) Observance of due process of law
- Tax should not be harsh nor oppressive
A) Substantive Due Process
- Imposed only for public purpose
- By authority having jurisdiction.
B) Procedural Due Process
- Right to notice and hearing of taxpayer in case of violation.

2) Equal Protection of Law

3) Uniformity Rule in Taxation

- Must be fair and uniform
- Everyone is taxed with the same basis.

4) Progressive system of taxation

- Tax rates increase as tax base increases.
- Constitution favors this.
- Aids in equitable distribution of wealth to society by taxing rich more than the poor.

5) Non imprisonment for nonpayment of debt or poll tax

- Can’ be imprisoned because of his poverty or inability to pay debt.
A) Poll has 2 components
 Basic Community Tax
- Non-imprisonment for nonpayment applies to only this.
 Additional Community Tax
- Nonpayment of this leads to tax evasion and can be imprisoned.

6) Non impairment of obligation and contract

- State should set aside its personal obligation from contracts by the exercise of its taxation
power.

7) Free Worship rule

8) Exemption of charitable, educational and religious entities
9) Non appropriation of public funds to benefit of any church
- Religious property not taxed unless for commercial
- Religion and state is separate
- Compensation to priests and ministers are not considered religious appropriation.
- Private educational institutions have 10% minimal tax.

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

10) Grant Exemption

- Must have valid basis and majority votes of the congress.

11) Non-diversification of tax collections

- Only for public purpose and never diversified for private purpose.

12) Non delegation of the power of taxation

- With congress only.

Stages of the exercise of taxation power

1) Levy or Imposition
- Involves showing of a tax law by congress and is called the impact of taxation.
- Also referred to as the legislative act in taxation.
A) Congress
 House of Representatives (where tax bills must originate)
 Senate
2) Assessment and Collection

Matters of legislative discretion in the exercise of taxation

1) Determining the object of taxation

2) Setting tax rate
3) Determining the purpose of the levy
4) Kind of tax to be imposed
5) Apportionment tax of local and national government
6) Situs of taxation
7) Method of Allocation

Situs of taxation

- Place of taxation
- Frame of reference in gauging whether tax object is in or outside the tax jurisdiction of
taxing authority.
 Business tax situs (place of business)
 Income tax situs on services (service taxed where they are rendered)
 Income Tax situs on sale of goods (gain on sale is taxed where they are sold)
 Property tax situs (property taxable in their location)
 Personal Tax Situs (taxable at place of residence)

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Other Fundamental Doctrines of Taxation

1) Marshall’s Doctrine (power to destroy, sin tax)

2) Non-assignment of taxes (can’t be assigned to another entity)
3) Inprescriptibility (government’s right to collect ta does not prescribe or go away)
4) Doctrine of Estoppel ( employee of government will be liable only, not government)

5) Strict Construction of Tax Laws

- taxation is the rule, exemption is the exception
A) Vague Tax laws
- Against government and favors citizen.
B) Vague exemptions
Against taxpayer in accordance with lifeblood doctrine

6) Holme’s Doctrine
- Not to destroy while court sits, build or encourage beneficial activities with or by granting
tax incentives.

7) Prospectivity of Tax laws

8) Non compensation or set off

- Tax is not a debt so it cannot be set off and cannot be delayed payment.

9) Judicial Non-interference
(Court not allowed issuing injunction against government from collecting tax cause anchored on
lifeblood doctrine).

Right of Taxation

- Inherent to the state.

- Prerogative (privilege) essential to the perpetuity (timelessness) of the government.

Tax Exemption

- When claimed, must be shown undoubtedly to exist.

- Cannot arise from vague inference.
- Any doubt of this is against the taxpayer.
- Must be clear and unequivocal.
-

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Double Taxation

- Occurs when same taxpayer is taxed twice by the same tax jurisdiction for the same thing.
 Primary Element: Same object
 Secondary Elements: Same type, purpose, jurisdiction and period of tax.
A) Double Taxation
 Occurs when all the elements for both impositions.
B) Indirect Double Taxation
 When at least one of the SECONDARY elements is not common for both
impositions.

How can double taxation be minimized

1) Provision of tax exemption

2) Allowing foreign tax credit
3) Allowing reciprocal tax treatment
4) Entering into treaties or bilateral agreements (between countries)

Escapes of Taxation

- Means available of taxpayer to limit or avid impact of taxation.

A) Those that result to loss of government revenue
 Tax evasion or dodging
 Tax avoidance or minimization
 Tax exemption or holiday
B) Those that do not result to loss
 Shifting (transferring burden to other taxpayers)
o Forward (normal flow, retailer to consumers)
o Backward (opposite of forward)
o Onward (exhibits both of them)
 Capitalization (pertains to adjusting asset value caused by changes in ta rate)
 Transformation (elimination of wastes or losses to form savings to compensate
increase in taxes.)

Tax Amnesty

- General pardon of government to have taxpayers have a fresh start.

- Covers both civil and criminal liabilitiesl.
- Forgiving past violations and giving government portion of tax.

Tax Condonation

- Forgiveness under justifiable grounds, no payment.

- Also referred to as tax remission.

Abraham D. Chin