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Lecture 1: GENERAL PRINCIPLES I. Inherent Powers of the State 1. Police Power – power to make and implement laws for the general welfare 2. Taxation Power – power to enforce contribution to raise government funds; it is an inherent power by which the sovereign through its law-making body raises revenue to defray the necessary expenses of the government. 3. Eminent Domain Power – power to take private property for public use with just compensation II. Similarities and Differences POLICE TAXATION EMINENT DOMAIN Power to MAKE and IMPLEMENT laws for the general welfare Power to ENFORCE contribution to raise government funds Power to TAKE private property for public use with just compensation Broader in application Plenary, comprehensive, and supreme BUT NOT ABSOLUTE Merely to take private property Property is taken or destroyed to promote general welfare Money is taken to support the government Property is taken for public use Can be expressly delegated Cannot be delegated, if delegated, it should be to the legislative department of the LGU (e.g. to make ordinances) Can be expressly delegated Limited to the cost of regulation, license and other necessary expense Generally, amount No imposition as to amount, instead, it is the Government which is to compensate the property taken. Relatively FREE from Constitutional limitations Subject to Constitutional and Inherent limitations Superior to Non-Impairment Clause Inferior Clause to NO limit on Superior to and may override Constitutional impairment provision Non-Impairment III. Concept of Taxation 1. Principles or Canons of a Sound Taxation System (FEA) a. Fiscal Adequacy – sufficiency to meet government expenditures and other public needs (Government Budget Balance). This is in consonance of the Lifeblood Theory. a.1. Budget Deficit = Government Revenues < Government Expenditures a.2. Budget Surplus = Government Revenues > Government Expenditures b. Equality or Theoretical Justice – based on the taxpayer’s ability to pay; must be progressive c. Administrative Feasibility – capability of being effectively enforced. Tax laws should not obstruct business growth and economic development. 2. Purpose a. Primarily, to raise revenue b. To regulate (inflation, economic and social stability, social control, etc.) c. To compensate the benefits provided by the government to the people 3. Characteristics (ILS) a. Inherent power of the state. b. Exclusively lodged with the legislative body c. Subject to inherent and constitutional limitations 4. Nature a. Plenary – full and complete in all respect b. Comprehensive – it covers persons, businesses, activities, professions, rights and privileges. c. Supreme – it is supreme ONLY insofar as the selection of the subject of taxation is concerned d. Not Absolute – it is subject to limitations 5. Limitations in Taxation Power a. Inherent Limitations (PENTI) a.1. Public purpose a.2. Exemption of the Government a.3. Non-delegability of the power to tax Lecture 1: GENERAL PRINCIPLES a.4. Territoriality a.5. International Comity b. Constitutional Limitations b.1. Due process clause b.2. Equal protection clause b.3. Freedom of speech and of the press b.4. Non-impairment of contracts b.5. Rule requiring that appropriations, revenue and tariff bills shall originate exclusively from the House of Represenatatives (Congress) b.6. Uniformity, equality, and progressivity of taxation b.7. Tax exemption of the properties actually, directly and exclusively used for religious, charitable and educational purposes. b.8. Voting requirement (2/3) in connection with the legislative grant of tax exemption b.9. Non-impairment of the jurisdiction of the Supreme Court in tax cases b.10. Exemption from taxes of the revenues and assets of educational institutions, including grants, endowments, donations and contributions b.11. Power of the Presidentto veto any particular item (item veto) or items in an appropriation, revenue or tariff bill (pocket veto). b.12. Necessity of an appropriation before money may be paid out of the public treasury b.13. Non-appropriation of public money or property for the use, benefit or support of any sect, church or system of religion IV. Double Taxation - It is taxing the same property twice when it should be taxed once. 1. Direct Duplicate Taxation – double taxation in the objectionable or prohibited sense; not allowed in the Philippines. This constitutes a violation of substantive due process. Elements: i. Same property or subject matter is taxed twice ii. Same purpose iii. Same taxing authority iv. Same jurisdiction v. Same taxing period vi. Same kind or character of tax 2. Indirect Duplicate Taxation – legal/permissible. The absence of one or more of the above-mentioned elements. V. Theories of Taxation 1. Necessity Theory (Theory of Taxation) – the power to tax is an attribute of sovereignty emanating from necessity (national defense, health, education, public facilities, etc.). 2. Lifeblood Theory (Importance of Taxation) – without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. 3. Benefits – Protection Theory/ Reciprocal Duties (Basis of Taxation) – there is a symbiotic relationship between the State and the citizens whereby in exchange of the protection and benefits that the citizens received from the State, taxes are paid. VI. Aspects of Taxation (shared by both executive and legislative body) 1. Levy – the imposition or making of tax laws 2. Assessment – similar to audit 3. Collection – enforcement of tax Note: a. Levy is often called as tax legislation. b. Assessment and collection are collectively termed as tax administration. c. Levy and assessment comprise the impact of taxation, while tax collection comprises the incidence of taxation. d. An impact of taxation is a point on which tax is originally imposed. e. An incident of taxation is a point on which the tax burden finally rests or settles down. VII. Doctrines of Taxation 1. May the court interfere with tax legislation? Answer: As long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or restrictions, it is not within the province of the courts to inquire into the wisdom or policy of the exaction, the motives behind it, the amount to be raised or the persons, property or other privileges to be taxed. The court’s power is limited only to the application and interpretation of the law. Lecture 1: GENERAL PRINCIPLES 2. Is the doctrine of equitable recoupment followed in the Philippines? Answer: No. A tax presently being assessed against a taxpayer may not be recouped or set-off against an overpaid tax, the refund of which is already barred by prescription. 3. May a tax be subject of compensation or set-off? Answer: Generally, no. Taxes cannot be the subject of compensation or set-off. Taxes are not contractual obligations but one arising out of duty to the government. 4. What is a taxpayer suit? Answer: It is a case fied by a bona fide taxpayer impugning the validity, legality or constitutionality of a tax law or its implementation. 5. What is the nature of our tax laws? Answer: Internal revenue laws are not political in nature. In times of war, they are deemed to be the laws of the occupied territory and not of the occupying enemy. Tax laws are civil and not penal in nature, although there are penalties provided for their violation. 6. A tax statute is construed against the government, liberally in favor of the taxpayer; while tax exemptions are construed against the taxpayer and liberally in favor of the government. 7. Tax laws are special laws which prevail over a general law. 8. Tax laws operate prospectively unless the purpose of the legislature is to give a retrospective effect. VIII.Concept of a Tax 1. It is an enforced proportional contribution from the persons and property levied by the law-making body of the State. 2. Taxation vs. Tax a. Taxation is the process or means of imposing and enforcing contributions. b. Tax is the enforced contribution, itself, which generally payable in money. 3. Characteristics of Taxes a. Forced charge b. Generally payable in money c. Exclusively levied by the legislative body d. Assessed in accordance with some reasonable rule of apportionment (ability-to-pay principle) e. Imposed by the State within its jurisdiction f. Levied for public purpose 4. Classification of Taxes a. As to subject matter: i. Personal tax – imposed upon persons of certain class with fixed amount (e.g. Community tax or poll tax) ii. Property tax – assessed on property of certain class (e.g. Real Property tax) iii. Excise tax – imposed on the exercise of privilege (e.g. income tax, donor’s tax, estate tax, etc.) iv. Custom duties – charged upon the commodities being imprted into or exported from a country (e.g. tariffs) b. As to burden: i. Direct tax – both incidence or liability for the payment of tax as well as the impact or burden of the tax falls on the same person (e.g. income tax) ii. Indirect tax – the incidence or liability for the payment of tax falls on one person but the impact or burden of the tax falls on another person (e.g. VAT) c. i. ii. As to purpose General tax – levied for the general or ordinary purposes of the government Special tax – levied for special purpose d. As to measure of application i. Specific tax – imposes a specific sum by the head or number or by some standard of weight or measurement (e.g. excise tax on cigarettes) ii. Ad Valorem tax – tax upon the value of the article or thing subject to taxation (e.g. VAT of 12% regardless of the value of sales) e. As to taxing authority i. National tax – levied by the National Government (e.g. income tax, business taxes, transfer taxes) ii. Local tax – imposed by the Local Government (e.g. Poll tax, real property taxes) f. As to rate Lecture 1: GENERAL PRINCIPLES i. ii. iii. Progressive tax – rate or amount of tax increases as the amount of income increases (e.g. normal/tabular/schedular tax of 5% - 32%, tabular tax for donor’s tax and estate tax) Regressive tax – rate dcreases as the amount of income to be taxed increases (not applicable in the Philippines) Proportionate tax – based on fixed proportion or rate of the value of the property assessed (e.g. VAT of 12%) 5. Impositions Other Than Tax a. Toll – charged for the cost and maintenance of the property used b. Penalty – punishment for the commission of a crime c. Compromise Penalty – amount collected in lieu of criminal prosecution in cases of tax violation d. Special Assessment – levied on land based entirely on the benefit accruing thereon as a result of the improvements or public works undertaken by the government within the vicinity e. License or Fee – regulatory imposition in the exercise of the police power f. Margin Fee – exaction designed to stabilize the currency g. Debt – a sum of money due upon contract or one which is evidenced by judgment h. Subsidy – a legislative grant of money in aid of a private enterprise deemed to promote the public welfare i. Custom Duties and fees – duties charged upon commodities on their being transported into or exported from the country. j. Impost – in general sense, it signifies any tax, tribute or duty; in limited sense, it means a duty on imported goods and merchandise k. Tithe – contributions given to a church or sect l. Tribute – imposed by a monarch. IX. Escape from Taxation 1. Tax Avoidance (Tax Planning) – legal and permissible means a. Shifting – the process by which the tax burden is transferred from the statutory taxpayer to another without violating the law. b. Transformation – the manufacturer or producer pays the tax imposed upon him and endeavors to recoup himself by improving his process of production, thereby turning out his units of production at a lower cost. c. Capitalization – a mere increase in the value of the property is not an incoem but merely an unrealized increase in capital. d. Tax-exemption – a grant of immunity to a particular persons or corporations from the obligation to pay taxes 2. Tax Evasion (Tax Dodging) – the use of illegal or fraudulent means to defeat or lessen the payment of tax X. Tax Laws, BIR Rulings and Revenue Regulations 1. Tax laws - A tax law is a set of rules that provide means for the State to raise revenues. - All revenue bills must originatefrom the House of Representatives (Congress). After passing 3 readings by a majority vote in technical committee, it shall be elevated to the Senate which needs to pass the same 3 readings. The President’s signature is necessary so that the bill becomes a law. - In case of doubt, tax statutes are construed against the Government in favor of the taxpayer. - In case of doubt, tax exemptions are construed against the taxpayer in favor of the Government. 2. Revenue Regulations - These are interpretations of an administrative body (BIR) intended to clarify or explain the tax laws and carry into effect its general provisions by providing details of administration and procedure. - It is promulgated (made) by the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue (quasi-legislative function). - It must be reasonable, within the authority conferred, not contrary to laws, must be published and prospective in application. 3. BIR Rulings - The BIR issues a general interpretation of tax laws usually upon a requrest of a taxpayer to clarify a provision of law. TRUE OR FALSE: 1. 2. 3. 4. 5. A taxpayer has a right to question illegal expenditures of public funds. One of the essential characteristics of tax is that it is unlimited in amount. A person may refuse to pay a tax on the ground that he receives no personal benefit from it. The point on which a tax is imposed is impact of taxation. Police power regulates both liberty and property while the power of eminent domain and taxation power affect only the property rights. Lecture 1: GENERAL PRINCIPLES 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. A state has the power to tax even if not granted by the constitution. Due process of law in taxation under the constitution is a grant of power. In the Philippines, there may be double taxation. Special assessment is imposed regardless of public improvements. The President is superior to Congress as he can veto any bill even if already approved by the Congress. The power to tax is always a power to destroy. Under the necessity theory, without taxes a government would be paralyzed for lack of power to activate and operate, resulting in its destruction. The Congress passed a law imposing on income earned out of a particular activity that was not previously taxed. The law is valid when it taxed incomes already earned within the fiscal year when the law took effect. Money collected from taxation shall not be paid to any religious dignitary except when the religious dignitary is assigned to the Philippine Army. Under the inherent limitation, no power shall be imprisoned for debt or non-payment of tax. Value-added tax is an example of a progressive tax. Administrative Feasibility principle states that “the more income earned by the taxpayer, the more tax he has to pay”. Taxation is generally payable in money and it is not based on contract. One of the two aspects of taxation is that it is an inherent power of the sovereign state. Tax avoidance is an escape from taxation where the producer or manufacturer pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. The power to tax generally includes the power to destroy. For the exercise of the power of taxation, the state can tax anything at any time. Tax exemptions are strictly construed against the government. When the tax law is not clear and there is doubt whether he is taxable or not, the doubt shall be settled against the government. The principal purpose of taxation is to raise revenues for governmental needs. No appropriation of public money for religious purposes is a constitutional limitation on the power of taxation.