Lectures in Taxation 1

Basis of Taxation

Three Inherent Powers of the State

1. Police Power is the inherent power of the state to promote, regulate and enforce laws for the protection and preservation of public health, public order, public morals, education, and Salus Populi Est Suprema Lex (the general welfare of the people is the supreme law).

2. The Power of Imminent Domain is the inherent power of the state to appropriate private property to particular uses to promote public welfare.

3. Power of Taxation is the inherent power of the state exercised by congress by enacting tax laws to collect revenues from its subjects to defray the necessary expenses of the government for public purpose.

Taxation is both a power and a process

Taxation as a Power

1. It is an inherent power of the state. if there is no state, there is no taxation.2. Taxation is exercised by congress. Who exercise the power to tax? legislative department. How? congress exercise the power to tax by enacting tax laws. Who helps the congress in implementing tax laws? the executive department. Who helps the president? the department of finance. Who helps the department of finance? the Bureau of Customs and Bureau of Internal Revenue. What is the act involved? it is to collect revenue3. What is the power to tax? to collect revenues from its subjects to defray the necessary expenses of the government for public purpose.

Situation 1: There is a law enacted by the Congress giving the President the power to raise revenue from 12% to 15% after considering some factors. Q: WON the congress validly exercised the power to tax.A: Yes, the congress validly exercise the power to tax because to exercise the power to tax, the legislative department should enact tax laws. In the case at bar, the congress and not the President who enacted the tax law. Therefore, the congress validly exercised the power to tax.

Situation 2: The congress enacted a law that appropriated funds for the President to have his own palace after he retires.Q: WON it is a valid exercise of the power to tax.A: No. It is not a valid exercise of the power to tax. The power to tax is for public purpose. In this case, the palace is not for public purpose.

Test of the purpose of the law1. Is it an equivalent of public purpose? 2. Is it necessary? Necessary means that the government cannot run without it.3. Is it for public purpose? Public purpose means for the general good of the people.

Situation 3: Senator A owns a private land. He donated the land to company 1. The land was then appropriated by the government and Senator A got the compensation from the government as payment for the property which was converted into a public road.Q: Is there a valid exercise of power to tax?A: Yes, there is a valid exercise of the power to tax. The power to tax is to defray the necessary expenses of the government for public purpose. In this case, the fund for the private property converted into a public road is for public purpose.

Aspects of taxation

1. Enactment of law2. Assessment how taxes are computed3. Collection of taxes

2 types of assessment

1. Self-assessment taxpayer make their own computation2. Tax assessment the BIR, BOC, local treasurer makes the computation

3 principles of a sound tax system.

1. Fiscal Adequacy the government should collect enough revenue to defray the necessary expenses of the government for public purpose.2. Administrative Feasibility the government must manage the tax system effectively and efficiently.3. Theoretical Justice the imposition of taxes is based on the ability of the taxpayer to pay.

2 Theories and basis of taxation

1. The life-blood theory taxes are the life-blood of the government. Without which the government cannot exist nor endure. Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government.2. The golden egg theory when the government exercises the power to tax, the government should observe the rights of the taxpayers. It must be exercised fairly, equally and uniformly, lest the tax collector kills the hen that lays the golden egg.

Limitations of the power to tax

1. General or Indirect Constitutional limitationsA. Due Process Clause (Art. III, Sec. 1, 1987 Constitution) Requisites: a. The interests of the public as distinguished from those of a particular class require the intervention of the State. (Substantive limitation) b. The means employed must be reasonably necessary to the accomplishment of the purpose and not unduly oppressive. (Procedural limitation)

The constitutionality of a legislative taxing act questioned on the ground of denial of due process requires the existence of an actual case or controversy.

B. Equal Protection Clause (Art. III, Sec. 1, 1987 Constitution Requisites of a Valid Classification: a. based upon substantial distinctions b. germane to the purposes of the law c. not limited to existing conditions only d. apply equally to all members of the class

C. Freedom Of Speech And Of The Press (Art. III, Sec. 4, 1987 Constitution) There is curtailment of press freedom and freedom of thought and expression if a tax is levied in order to suppress this basic right and impose a prior restraint.

D. Non-Infringement Of Religious Freedom And Worship (Art. III, Sec. 5, 1987 Constitution) - A license tax or fee constitutes a curtailment of religious freedom if imposed as a condition for its exercise. (American Bible Society vs. City of Manila, GR No. L-9637, April,30, 1957)

E. Non-Impairment Of Contracts (Art. III, Sec. 10, 1987 Constitution) No law impairing the obligation of contract shall be passed. (Sec. 10, Art. III, 1987 Constitution) The rule, however, does not apply to public utility franchises or right since they are subject to amendment, alteration or repeal by the Congress when the public interest so requires. (Cagayan Electric & Light Co., Inc. v. Commissioner, GR No. 60216, September 25, 1985)RULES:a. When the exemption is bilaterally agreed upon between the government and the taxpayer it cannot be withdrawn without violating the non-impairment clause.b. When it is unilaterally granted by law, and the same is withdrawn by virtue of another law no violation.c. When the exemption is granted under a franchise it may be withdrawn at any time thus, not a violation of the non-impairment of contractsF. Presidential power to grant reprieves, commutations and pardons and remit fines and forfeitures after conviction (ART. VII, SEC. 19, 1987 CONSTITUTION)

2. Specific or direct Constitutional limitationsA. Non-Imprisonment For Debt Or Non Payment Of Poll Tax (Art. III, Sec. 20, 1987 Constitution)B. Rule Requiring That Appropriations, Revenue And Tariff Bills ShallOriginate Exclusively From The House Of Representatives (Art. VI, Sec. 24, 1987 Constitution)C. Uniformity, Equitability And Progressivity Of Taxation (Art. VI,Sec. 28(1), 1987 Constitution) Uniformity all taxable articles or kinds of property of the same class are taxed at the same rate.Equitability the burden falls to those who are more capable to pay.Progressivity rate increases as the tax base increases.Q: Is a tax law adopting a regressive system of taxation valid?A: Yes. The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. The Constitutional provision means simply that indirect taxes shall be minimized. The mandate to Congress is not to prescribe, but to evolve, a progressive tax system. (EVAT En Banc Resolution, Tolentino, et al vs Secretary of Finance, October 30, 1995)D. Limitations On The Congressional Power To Delegate To ThePresident The Authority To Fix Tariff Rates, Import And Export Quotas, Etc. (Art. VI, Sec. 28(2), 1987 Constitution)E. Tax Exemption Of Properties Actually, Directly And ExclusivelyUsed For Religious, Charitable And Educational Purposes. (Art. VI, Sec.28(3) 7, 1987 Constitution)F. Voting Requirement In Connection With The Legislative Grant Of Tax Exemption (Art. VI, Sec. 28(4), 1987 Constitution)G. Non-Impairment Of The Jurisdiction Of The Supreme Court In Tax Cases (Art. VIII, Sec. 2 And 5(2)(B), 1987 Constitution)H. Exemption From Taxes Of The Revenues And Assets Of Educational Institutions, Including Grants, Endowments, Donations And Contributions. (Art. XIV, Sec. 4(3) And (4), 1987 Constitution)

OTHER SPECIFIC TAX PROVISIONS IN THE CONSTITUTIONA. Power of the President to veto any particular item or items in an appropriation, revenue, or tariff bill. (Art VI, Sec. 27(2), 1987 Constitution)B. Necessity of an appropriation before money may be paid out of the public treasury. (Art. VI, Sec. 29 (1), 1987 Constitution)C. Non-appropriation of public money or property for the use, benefit, or support of any sect, church, or system of religion. (Art. VI, Sec. 29 (2), 1987 Constitution)D. Treatment of taxes levied for a special purpose. (Art. VI, Sec. 29 (3), 1987 Constitution)E. Internal revenue allotments to local government units. (Art. X, Sec. 6, 1987 Constitution)

3.Inherent LimitationA. Purpose Taxes may be levied only for public purpose.B. Territoriality The state may tax persons and properties under its jurisdiction.C. International Comity the property of a foreign state may not be taxed by another state.D. Exemption Government agencies performing government functions are exempt from taxE. Non-delegation the power to tax being legislative in nature may not be delegated.Assignment: All Kinds of Taxes.1.Personal or Community tax - Residence or domicile of the taxpayer2.Real property tax - Location of property (Lex rei sitae)3.Personal property tax - tangible: where it is physically located or permanently kept (Lex rei sitae)- intangible: subject to Sec. 104 of the NIRC and the principle of mobilia sequuntur personam.4.Business tax - Place of business5.Excise or Privilege tax - Where the act is performed or where occupation is pursued6.Sales tax - Where the sale is consummated7.Income Tax Consider:(1) citizenship,(2) residence, and(3) source of income (Sec. 42, 1997 NIRC)8.Transfer tax - Residence or citizenship of the taxpayer or location of property9.Franchise Tax - State which granted the franchise

KINDS OF INCOME TAXES UNDER THE NIRC1. Net Income Tax2. Optional Corporate Income tax3. Minimum Corporate Income Tax4. Improperly Accumulated Earnings Tax5. Preferential Rates or Special Rates of Income Tax6. Gross Income Tax7. Final Income Tax8. Fringe Benefits Tax9. Capital Gains Tax