Principles of Taxation

Inherent Powers of the STATE

The Inherent Powers
TAXATION POLICE POWER EMINENT DOMAIN

Sovereign Enact laws to Appropriate

raises revenue promote private
to defray the public health, property for
necessary public moral, public use
expenses of public safety, upon payment
the and general of just
government welfare compensation
 Similarities:
 Inherent in the State
 Necessary and indispensable
 Exist independent of the Constitution
 Presupposes equivalent compensation
 Methods wherein the State interfere with
private rights and private property
 Differences:
TAXATION POLICE POWER EMINENT DOMAIN

 Authority Government only Government only Includes public

service/utilities co.

 Purpose Support of General welfare Public purpose

government

 Persons affected Community/class of Community/class of Owner of property

individuals individuals

 Benefits received protection No direct and Just compensation

immediate benefit;
maintenance of a
healthy and orderly
society
 Relation to non- inferior superior inferior
impairment
clause
 Inherent Powers Distinguished:
TAXATION POLICE POWER EMINENT DOMAIN

 Basis Public necessity Public necessity and Public necessity for

right of state/public private property
to self
preservation/protec
tion

 Purpose Raise revenue Promote public Facilitate state’s

welfare thru need of property for
regulations public use
 Scope Affects all persons, Affects all persons, Affects only
property, and property, privileges particular property
excises and even rights
 Exaction Not limited limited No exaction; just
compensation is
paid by government
 TAXATION POLICE POWER EMINENT DOMAIN

 Benefits No special/direct No direct benefits; Direct benefits

benefit damnum absque result in form of just
injuria is attained compensation

 Non-impairment Contracts may not Contracts may be Contracts may be

of contracts be impaired impaired impaired
What is Taxation?
AS STATE POWER:
Power by which the sovereign raises revenue to
defray the necessary expenses of the government
from among those who in some measure are
privileged to enjoy its benefits and must bear its
burden.
Power inherent in every sovereign State to impose
a charge or burden upon persons, properties, or
rights to raise revenues for the use and support of
the government to enable it to discharge its
appropriate functions.
What is Taxation?
AS A PROCESS:

The act of imposing a tax by the sovereign state,

thru its lawmaking body, to raise revenue for the use
and support of government.
Nature:
A. INHERENT
The state has the power to tax, even if not mentioned in the
Constitution.

B. LEGISLATIVE FUNCTION
Even in the absence of a constitutional provision, the
legislature has the power to tax as part of its powers.

C. SUBJECT TO INHERENT AND CONSTITUTIONAL

LIMITATIONS
 Concepts of Taxation:
 Imposition of Tax
 System by which Taxes are
imposed
 Revenue gathered by imposing
Taxes
 Means of raising revenue for
Public Purpose
Scope:
SCOPE OF LEGISLATIVE TAXING POWERS:
 Method of collection;
 Situs of taxation
 Subject to be taxed, provided it is within its jurisdiction;
 Amount or rate of the tax;
 Purposes for its levy, provided it be for public purpose;
 Apportionment of the tax; and
 Kind of tax to be collected.
Purpose:
 REVENUE

 NON-REVENUE
 Promotion of general welfare;
 Regulation;
 Reduction of social inequity;
 Encouragement of economic growth; and
 Protectionism.
 Sources of TAX Laws
The Constitution
Statutes – Acts, Commonwealth Acts, Republic Acts, B.P.s
Presidential Decrees and Executive Orders
Revenue Regulations – issuances that specify, prescribe or define rules
and regulations for effective enforcement of NIRC and related statutes,
signed by Secretary of Finance, upon recommendation of the BIR
Commissioner.
Revenue Memo. Orders – issuances that provide directives/instructions;
prescribe guidelines; and outline processes necessary for
implementation of BIR policies, goals, programs, objectives, and plans.
Revenue Memo Circulars – issuances that publish pertinent and applicable
portions of laws, rules and regulations, and precedents issued by the
BIR and other agencies.
Local Government Ordinances
 Sources of TAX Laws
Jurisprudence/Stare Decisis
Judicial Decisions
Revenue Memo. Rulings – rulings, opinions and interpretations
of the BIR commissioner
BIR Rulings – official position of the BIR in interpretation of tax
laws
Revenue Bulletins – periodic issuances, notices and official
announcements of the BIR Commissioner that consolidates
the BIR’s position on specific tax issues.
 TAX LAWS IN THE
PHILIPPINES
 National Internal Revenue Code of 1997 (R.A. No.
8424, as amended)
 Tariff and Customs Code of 1979 (P.D. No. 1464, as
amended)
 Local Government Code of 1991 (R.A. No. 7160)
 Special Laws
 Distinctions:
NIRC TCC LGC Special Laws
Administered by- BIR Bureau of LGUs Corresponding
Customs Agency

Regulates- Income Tax, Tarriff and Professional Travel tax –

VAT, duties tax, Real regulated by
Percentage Property tax, Travel Tax Law
tax, Excise tax, Community tax, (P.D. 1183, as
Documentary Business taxes amended)
Stamp and and other local Motor Vehicle
other national taxes fee – by Motor
taxes Vehicle Law (R.A.
4136)
Taxes on
Narcotic Drugs –
by R.A. 953
Special
Education Fund
taxes – by R.A.
5447
S T A G E S:
How did Taxation came to life?
Theories/bases of taxation:
1. Lifeblood Theory
Taxes are the lifeblood of the nation. Without revenue raised
from taxation, the government will not survive, resulting in
detriment to society. Without taxes, the government would be
paralyzed for lack of motive power to activate and operate it.
(CIR vs Algue, Inc., et. al.)
Illustrations of Lifeblood Theory:
a. Collection of taxes may not be enjoined by injunction.
b. Taxes could not be the subject of compensation and set-
off.
c. A valid tax may result in destruction of the taxpayer's
property.
How did Taxation came to life?
Theories/bases of taxation:
2. Necessity Theory
Existence of a government is a necessity and cannot continue
without any means to pay for expenses.
a. Marshall Dictum
“ Power to tax is the power to destroy” – describes the
unlimitedness of the power and the degree of vigor with which
the taxing power may be employed in order to raise revenue.
b. Oliver Wendell Holmes Dictum
“Power to tax is not the power to destroy while this court (US
Supreme Court) sits” – power to tax knows no limits except
those expressly stated in the Constitution.
How did Taxation came to life?
Theories/bases of taxation:

Marshall and Holmes Dictums Reconciled:

Although the power to tax is almost unlimited, it must not be
exercised in an arbitrary manner. We have courts to which
people may seek redress in case of irregularities.

3. Benefits-Protection Theory
There exist reciprocal duties of protection and support
between State and its inhabitants. Inhabitants pay taxes and in
return receive benefits and protection from the State.
Subject:
Usual Reaction to Taxation:

 Self preservation
 Avoidance
 Minimization
 Evasion
Basic Principles Of a Sound Tax System:
 FISCAL ADEQUACY
Revenue should be sufficient to meet the demands
of public expenditure.

THEORETICAL JUSTICE
Imposed with equity and certainty, and consider
the taxpayers ability to pay, and benefits received.

ADMINISTRATIVE FEASIBILITY
capable of convenient, just and effective administration
consistent with compatibility with economic objectives.
 LIMITATIONS OF TAXATION
 INHERENT LIMITATIONS (SPINE)
 SITUS
 PUBLIC PURPOSE
 INTERNATIONAL COMITY
 NON-DELEGABILITY of taxing power
 EXEMPTION of Government agencies and
instrumentalities
 SITUS
Situs/territoriality of Taxation is an inherent mandate
that taxation shall only be exercised on persons,
properties and excises within the territory of the
taxing power.

Factors that determine the situs of taxation:

Nature of the tax;
Subject matter of the tax;
Citizenship of the taxpayer;
Residence of the taxpayer; and
Source of income
Application of SITUS of Taxation:
Tax on persons/ Community tax – residence/domicile;
Business/ Privilege or occupation tax – where business/occupation is
conducted;
Sales tax – where transaction takes place;
Real property tax – where property is located;
Personal property tax – tangible; where physically located; intangible:
subject to Sec. 104 of CTRP and principle of mobilia sequuntur
personam;
Income – where earned/residence/citizenship of taxpayer;
Transfer tax – residence or citizenship of the taxpayer or location of
the property;
Franchise tax – State which granted the franchise;
Tax on corporations and other judicial entities – law of incorporation.
Intangible properties deemed with a SITUS in the
Philippines:
franchise which must be exercised in the Philippines;
shares, obligations or bonds issued by a corporation
organized and constituted by Philippine law;
shares, obligations or bonds issued by a foreign
corporation 85% of its business is located in the
Philippines/acquired a business situs in the Philippines;
and
shares or rights in any partnership, business or industry
established in the Philippines. (Sec. 104, R.A. 8424 or the
CTRP)
PUBLIC PURPOSE
Test in Determining Public Purpose
1. whether the thing to be furthered by the appropriation of
public revenue is something which is the duty of the state, as a
government, to provide
2. whether the proceeds of the tax will directly promote the
welfare of the community in equal measure.

INTERNATIONAL COMITY
“Property of a Foreign State may not be taxed by
another.”
 NON-DELEGABILITY OF TAXING POWER
Exclusively Legislative
Non-delegable
 Selection of property to be taxed
 Determination of purpose of the
tax
 Fixing the tax rate
 General rules of taxation
Exemption:
Authority of the President to fix
tariff rates, import and export quotas
Power of local government units to
tax subject to limitations as may be
provided by Local Government Code

EXEMPTION OF THE GOVERNMENT FROM TAXES

As a matter of public policy, property of the State or any of
its political subdivisions devoted to government uses and
purposes are generally exempt from taxation.
Applies only to entities exercising government functions
(acta jure imperii)
 LIMITATIONS OF TAXATION
 CONSTITUTIONAL LIMITATIONS
 DUE PROCESS
 EQUAL PROTECTION of Laws
 UNIFORMITY, EQUITABILITY, and PROGRESSIVITY of Taxation
 NON-IMPAIRMENT OF CONTRACTS
 NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX
 Origin of APPROPRIATION, REVENUE, AND TARIFF BILLS
 DELEGATION OF LEGISLATIVE AUTHORITY TO PRESIDENT to Fix
Tariff Rates, Imports and export Quotas
 Non-Infringement of RELIGIOUS FREEDOM AND WORSHIP
 TAX EXEMPTION of Revenues and Assets of, including GRANTS,
ENDOWMENTS, DONATIONS, OR CONTRIBUTIONS to,
EDUCATIONAL INSTITUTIONS
 Other provisions
 DUE PROCESS of Law (Sec.1, Art. III of the Constitution)
Substantive Procedural
 Should not be harsh,  No arbitrariness in assessment
oppressive, or confiscatory and collection
 By authority of valid law  Right to notice and hearing
 Must be for public purpose
 Imposed within territorial
jurisdiction
EQUAL PROTECTION of the Law (Sec. 1, Art. III of the Constitution)
All persons subject to legislation shall be treated alike, under same
circumstance and condition both in privilege conferred and liability
Imposed. Power to tax includes the power to classify provided:
Based on substantial distinction
Apply to present and future conditions
Germane to the purpose of law
Apply equally to the members of the same class
Uniformity, Equitability, and Progressivity of
Taxation (Art. VI, Sec. 28 (1) of the Constitution)
Definitions:
Uniformity: All taxable articles or kinds of property of the same class
shall be taxed at the same rate. A tax is uniform when it operates with
the same force and effect in every place where the subject of it is
found.
Equitability: Taxation is said to be equitable when its burden falls to
those better able to pay.
Progressivity: Rate increases as the tax base increases.
Non-impairment of Contracts (Art. III, Sec. 10 of the Constitution)
Rules: Party Granting Exemption Effect
Government Violation
Law No violation
Franchise May be revoked
Non-imprisonment for Non-payment of Poll Tax (Art. III, Sec. 20
of the Constitution)
Taxpayer may be imprisoned for non-payment of other kinds of taxes where
the law expressly provides.
Origin of Appropriation, Revenue, and Tariff Bills (Art. VI, Sec. 24
of the Constitution)
Exclusively from the House because they are more sensitive to local needs.
Delegation of Legislative Authority to the President to Fix Tariff
Rates, Import and Export Quotas (Art. VIII, Sec. 28(2) of the
Constitution)
Delegated authority of the President to impose tariff rates, import and export
quotas, tonnage and wharfage dues:
Delegated by the Congress
Thru law
Subject to limits and restrictions
Within the framework of national development program
Non-infringement of Religious Freedom and Worship (Art. III,
Sec. 24 of the Constitution)
Activities simply and purely for propagation of faith are exempt.
Tax is unconstitutional if it operates as prior restraint is unconstitutional.
Income of religious organizations conducted for profit is taxable.
Tax Exemption of Properties Actually, Directly, and Exclusively
Used for Religious, Charitable and Educational Purposes ( Art.
VI, Sec. 28(3) of the Constitution)
Tax Exemption of Revenues and Assets of, including Grants,
Endowments, Donations, or Contributions to, Educational
Institutions (Art. XIV, Secs. 4(3) and (4) of the Constitution)
Majority Vote of all Members of Congress Required in Case
of a Legislative Grant of Tax Exemptions (Art. VI, Sec. 28 (4)
of the Constitution)
Other Provisions :
Power of the President to veto item or items in an
Appropriation, Revenue, or Tariff Bill (Art. VI, Sec. 27 (2))
Pocket veto – disapproves in totality; Item veto – objects to
certain items
Necessity of an a Appropriation before Money may be paid
out of the Public Treasury (Art. VI, Sec. 29 (1))
Non-appropriation of Public Money or Property for the
benefit of any Church, Sect, or System of religion. (Art. VI, Sec.
29(2)
Treatment of Taxes Levied for a Special Purpose.(Art.VI, Sec.
29 (3))
Internal Revenue Allotments to Local Government Units.
(Art. X, Sec.6)
 Consequence for violation of
limitations
inherent constitutional
Popular discontent Law is null and void
Civil disobedience
Passive reaction
Pay damages
Loss of credibility
Armed revolution
National embarrassment
war
-end-