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Definition and Concept of Taxation

-Mode by which governments make exactions for revenue in order to support their
existence and carry out for their legitimate objectives.
- it is indispensable and inevitable price for civilized society ;without which the government
would be paralyzed.

Basis of Taxation
1.Necessity-government cannot exist and function without the means to pay its
Expenditures.
2. Reciprocal Duties – protection and support between the state and its inhabitants.

.Nature of taxation (2 fold)

1.Inherent –co-existing with the state.no legislation is necessary to exercise the power of
Taxation.
2. Legislative - only the legislature can make tax law.Subject to constitutional limitation
The legislative taxing power includes the authority (a) to determine the
nature, object, extent, coverage and situs of tax imposition (b) to grant tax
exemptions or condonations (c) to specify to provide for the
administrative, as well as the judicial, remedies that either the
government or the tax payer may avail themselves of in the proper
implementation of the tax measure.

Limitations of Taxation
1. Taxation is for public purpose- the proceeds of the tax must be used for the support
of the state or for some recognized objects of government or to directly promote the
welfare of the community.
2. Taxation is inherently legislative- inherent power of sovereignty

3.Taxation is territorial- exercised only within territorial jurisdiction of the taxing

Authority.

A.Tax Situs Criteria

a. poll taxes-residence of taxpayer
b. property tax- where the property is situated
c.excise tax – where the privilege is exercised, taxpayer is a national of, and his
residence .

4.Subject to international comity-State must recognize he generally accepted tenets of

international law among which are the principles of
sovereign equality among states and their freedom
from suit without their consent.
.Characteristics of Tax
1.It is an enforced contribution
2.It is exacted pursuant to legislative authority
3.It involves the exercise of the taxing power
4.It is a contribution in money
5.It is for the purpose of raising revenue
6.It is used for governmental purposes.

Aspect of Taxation

1. Levy- refers to the legislative act of imposing the tax and is exercised by congress
2. Collection – administrative act of collecting the tax and is exercised by the executive
branch of the government

. Power of taxation compared with other powers

1.Taxation is the inherent power of the sovereign state to impose financial burden on
persons and property as a means of raising revenue in order to defray the necessary expenses of
the government.

2.Police power- inherent power of the sovereign state to enact laws to promote public
health, public morals.public safety and the general welfare of the people.

3.Eminent domain- inherent power of the sovereign state to take private property for
public use upon payment of just compensation.

AMOUNT:
Taxation-no limit so as long as it is not confiscatory
Police power- should only cover the cost of the regulation (issuance of a license)
Eminent domain- the amount depends on the value of property needed

COMPENSATION
T-general benefit to all inhabitants
P-intangible altruistic feeling of having done something good
E- just compensation

PROPERTY TKEN
T-generally money
P-property including money which is the source, implements, or proceeds of the danger to
health, safety or morals
E- property other than money and chooses in action

SCOPE
T & E- interfere only with property rights although violation of tax laws may result to
imprisonment
P-regulates both liberty and property.
Purpose of Taxation
1.Revenue raising-to support purposes of government, to finance the needs of the citizen
and to advance the common well

2.Non Revenue/Special or regulatory-taxes may be levied with a regulatory purpose to

provide means for the rehabilitation and stabilization of a threatened
industry which is affected with public interest as to be within the police
power of the state.
- Reduce social inequality, encourage the growth of local industries,
protect local industries against unfair competition and implement police
power of the state.

Principles of Sound Tax System

1.Fiscal Adequacy- the sources(proceeds) of tax revenue should coincide with and
approximate the needs of government expenditure. Neither an excess
or a deficiency of revenue vis-à-vis the needs of government would be in
keeping with the principle.

- sources of revenue should be sufficient to meet the expanding

expenditures of the government

2. Administrative feasibility- the tax system should be capable of being properly and
efficiently administered by the government and enforced with the
least convenience to the taxpayer.
- Tax must be plain and clear to the taxpayer and should be capable
of efficient enforcement by government officials.

3. Theoretical justice – tax system should be fair to the average taxpayer and based upon
his ability to pay.
- equitable
- proportionate to the ability of taxpayer.

.Theory and Basis of Taxation

1.Life Blood Theory-taxes constitute the lifeblood of the nation and are greatly needed to
support the government and its widely expanding services to the people.

Application of lifeblood
-must be collected with unnecessary hindrance
-claims for refund or tax credit should be exercised within the time fixed
by law
-government agencies continue to operate and with which the state effects
 functions for the welfare of its constituents
-court must be similarly sensitive of its responsibility to apply principles of
justice,equity and fairness as its guide in its difficult tasks of weighing the
evidence and of deciding cases.

2.Necessity Theory- Government has the right to compel all its citizens and property within
its limits to pay taxes since its existence is a necessity.

3.Benefits-Protection Theory(Symbiotic relationship)- A citizen pays from his property the

portion demanded in order that he may be secured in the
enjoyment of of the benefits of the organized society. A Tax is
not imposed on the basis of a special or particular benefit
accruing to each citizen in proportion to the tax paid.

-one must surrender a part of his hard earned income to the

taxing authority,every person 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 values.

4.Jurisdiction over subject and objects

.Doctrines in Taxation

1.Prospectivity of Tax Laws

- taxes may b imposed retroactively but, unless so expressed by such law it must be
imposed prospectively.
-neither political nor penal in nature and deemed laws of occupied territory rather
than of occupying enemy.

2.Imprescribility of taxes- taxes are imprescriptible.

- NIRC provides for statutes of limitation
- secs 203 AND 222
- prescriptive period were considered to be applicable only to
those taxes that were thereunder required to be reported or
returned by the taxpayer for tax purposes.

-Tax law provides limitations in collection of taxes to safeguard

taxpayers from any unreasonable examination, investigation or
assessment.
-RA 9135 amended the Tariff and Customs Code making the
prescriptive period for payment of customs duties into 3 years.
 -LGU provides prescriptive period for the assessment(5years) and
collection (5 yrs) of taxes

3.Double Taxation
-taxing for the same taxing period the same thing or activity twice
when it should be taxed but once, for the same purpose with the
same kind of character of tax.

Constitutionality

Double Taxation in its stricter sense isundoubtedly unconstitutional but that in the
broader sense is not necessarily so.

General Rule:

Our Constitution does notprohibit double taxation; hence, it may not be invoked as a defense
against the validity of taxlaws.

a.Where a tax is imposed by the NationalGovernment and another by the city for theexercise of
occupation or business as the taxesare not imposed by the same public authority(
City of Baguio vs De Leon, Oct. 31, 1968)

b.When a Real Estate dealer’s tax is imposedfor engaging in the business of leasing real estatein
addition to Real Estate Tax on the propertyleased and the tax on the income desired as theyare
different kinds of taxc.Tax on manufacturer’s products andanother tax on the privilege of storing
exportablecopra in warehouses within a municipality areimposed as first tax is different from the
secondd.Where, aside from the tax, a license fee isimposed in the exercise of police power.

Exception:
Double Taxation while not forbidden,is something not favored. Such taxation, it hasbeen held,
should, whenever possible, be avoidedand prevented.a.Doubts as to whether double taxation
hasbeen imposed should be resolved in favor of thetaxpayer. The reason is to avoid injustice
andunfairness.b.The taxpayer may seek relief under theUniformity Rule or the Equal
Protectionguarantee

Direct Double Taxation-taxing twice by the same public authority for the same
purpose during the same taxing period some of the property in the territory in which the
tax is laid without taxing all of them a second time

Indirect duplicate taxation-permissible double taxation

-taxes are of different nature or character imposed by
different taxing authority.

C. Constitutionality of Double Taxation

(Manufacturers Life v. Meer, GR L-2910, June 29,1951)
 NO constitutional prohibition

D.Modes of Eliminating Double Taxation

-Treaty provisions against double taxation
-Reciprocity provisions
-Tax credit provisions

TAX TREATY AS A MODE OF ELIMINATING

DOUBLE TAXATION:

1)EXEMPTION METHOD – the income or capitalwhich is taxable in the state of source

or situs isexempted in the state of residence, although insome instances it may taken into
account indetermining the rate of tax applicable to the taxpayer’s remaining income or
capital (ex. TaxSparing Credit scheme)

2)CREDIT METHOD – the tax paid in the state ofsource is credited against the tax levied
in thestate of residence

4. Escape from taxation

A.Shifting of tax burden- transfer of the burden of tax by original payer or the one on
whom the tax was assessed or imposed to another or someone else who bears it
1.Ways of Shifting Tax Burden
a.Forward shifting- transfer of tax from a factor of production through the
factors of distribution until the burden finally rest on the
consumer.

b.Backward shifting- transfer the tax from the point of consumption

through the factors of distribution to the factors of
production.
Ex. the consumer may shift the tax to the retailer by refusing to
purchase unless the price is reduced.

c.Onward shifting- tax is transferred two or more times through the factors
of distribution or production.(maybe forward or backward)

2.Taxes that can be shifted-.

It is only possible in connection with a price transaction, whether of
goods, services or of the factors of production.

3.Meaning of impact and incidence of taxation

- transfer of the burden of tax by original payer or the one on whom the tax
was assessed or imposed to another or someone else who bears it
 B. Tax Avoidance - use of the taxpayer of legally permissible methodsto reduce his tax
Liability.
-must be used in good faith and arm length
-proper use of depreciation methods in claiming deductible
expenses to lessen income taxes.
C.Tax Evasion-use of the taxpayer of illegal means to avoid or minimize payment of tax
Deliberate understatement of revenues or overstatement of expenses
to lessen taxes.

5. Exemption from taxation

A.Tax exemption- privilege of not being imposed financial burden to which
other may be subject.Strictly construed against the taxpayer and
liberally construed in favor of the government.

B.Nature of exemption- public policy and expediency

1 . It is merely a personal privilege of thegrantee2. It is generally revocable
by thegovernment unless the exemption is founded ona contract which is protected
from impairment,but the contract must contain the other essentialelements
of contracts, such as, for example, avalid cause or consideration.3. It implies a waiver
on the part of thegovernment of its right to collect what otherwisewould be due to it,
and in this sense is prejudicialthereto.4. It is not necessarily discriminatory so longas the
exemption has a reasonable foundation orrational basis

C.Kinds of Tax exemption

1.Express-provisions in the constitution, statutes, treaties or similar legislative acts
2.implied- by omission,equity is a basis of statutory exemption
3.contractual-agreed by taxing authority in contracts lawfully entered into.

AS TO SOURCE:
i. constitutional
ii.statutory

AS TO MANNER OF GRANT
iii.express
iv. implied

AS TO SCOPE
v. total
vi. partial

D.Grounds for exemption

1.Contract- binding upon succeeding legislature because the legislature is
supposed to have surrendered it. It is binding upon the state
and irrevocable during the term for which it purports to be
granted, only if it is supported by a valuable consideration
sufficient to uphold a contract between individuals.
 2. Public Policy- such might justify a pension or donation of a public funds
on some general rule of which all who come within it may
have the benefit, or such makes the public at large
interested in encouraging or favoring the class or interest in
whose behalf the exemption is made.

Grounds for Tax Exemptions

1. May be based on a contract in which
case,the public represented by the Government is supposed to receive a full
equivalent therefore
2. May be based on some ground of public policy, such as, for example, to
encourage new and necessary industries.
3. May be created in a treaty on grounds of reciprocity or to lessen the rigors of
international double or multiple taxation which occur
wherethere are many taxing jurisdictions, as in thetaxation of income and
intangible personalproperty

E.Revocation of Tax exemption

-exemption which does not constitute a contract but merely spontaneous
concession by the legislature ,not connected with any service or duty imposed is
revocable by the power which made the grant. A State may withdraw an exemption
which is a mere gratuity possessing no element of contract.
Tax exemption is subject to modification, repeal in the legislative discretion

SOURCES OF EXEMPTION
1.Constitution
2.Statutes
3.Treaties
4.Ordinances
5.Franchises
6.Contracts

6. Compensation and Set off-( taxes are not subject to set-off or legal comensation)
-there were taxes and taxpayer’s claim are fully
liquidated,due and demandable,legal compensation under
art 1279 of the Civil Code can take place by operation of law
and both debts are extinguished to the concurrent amount.

-there can be no offsetting of taxes against the claims that

the tax payer may have against the government. A Person
cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than
 the tax being collected.(PHILEX MINING CORP
vs.Commissioner of Internal Revenue,GR no.125704)

Requisites of compensation
1.That each one of the obligor be bound principally, and that he be at the same
time a principal creditor of the other.

2.That both debts consist in a sum of money, or if the things due areconsumable, they
be of the same kind and also of the same quality if thelatter has been stated.

3.That the two (2) debts be due.

4.That they be liquidated and demandable.

5.That over neither of them there be any retention or controversy, commenced

by third persons and communicated in due time to the debtors.

Rules re: set off or compensation of debts

•General rule: A tax delinquency cannot be extinguished by legal

compensation. This is so because the government and the tax delinquent arenot
mutually creditors and debtors. Neither is a tax obligation an ordinary act.Moreover,
the collection of a tax cannot await the results of a lawsuit againstthe government.
Finally, taxes are not in the nature of contracts but grow outof the duty to, and are the
positive acts of the government to the making andenforcing of which the personal
consent of the taxpayer is not required.

(Francia v. IAC, 162 SCRA 754 and Republic v. Mambulao Lumber, 4 SCRA 622)

•Exception : SC allowed set off in the case of Domingo v. Garlitos [8 SCRA 443]
re: claim for payment of unpaid services of a government employee vis-à-visthe estate
taxes due from his estate. The fact that the court havingjurisdiction of the estate had
found that the claim of the estate against thegovernment has been appropriated for the
purpose by a corresponding lawshows that both the claim of the government for
inheritance taxes and theclaim of the intestate for services rendered have already
become overdue anddemandable as well as fully liquidated. Compensation therefore
takes place byoperation of law.

Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)

Philex Mining Corporation was to set off its claims for VAT input
credit/refundfor the excise taxes due from it. The Supreme Court disallowed such set
off orcompensation.

7.Compromise-allowed and enforceable when the subject matter thereof is not prohibited
 from being compromised and the person entering into it is duly
authorized to do so.
- Civil and criminal liability

8.Tax liability
A.meaning
B.Distinguished from tax exemption

9.Construction and interpretation of

A. GR,.tax law-consideration is the legislative intent
-when doubt exists in determining that intent,the doubt must be resolved
liberally in favor of taxpayers and strictly against taxing authority.

-A Statute will not be construed as imposing tax unless it does so clearly,

expressly, and unambiguously.

EX..does not extend to cases involving the issue of the validity of the tax law itself
which is presumed valid.
-the government is not estopped from collecting taxes because of mistakes
or errors on the part of its agents.

B.Tax exemption and exclusion

GR..not presumed and when granted, are strictly construed against the
grantee.
EX.

C.Tax rules and Regulations

GR.

D.Penal Provisions of Tax Law

E,Non Retroactive application to tax payers

-may be prejudicial to taxpayers
-
EX.
-taxpayer deliberately misstates or omits material facts from his return or any
document required of him by BIR
 - facts subsequently gathered by BIR are materially different from the facts on
which ruling is based

-taxpayer acted in bad faith