10th Week - Taxation
Fernandez, L-31364, March,30,
• What is taxation?
- Taxation is a mode by which
governments make exactions for
revenue in order to support their
existence and carry out their legitimate
objectives. The term may refer to either
or both the power to tax or the act or
process by which the taxing power is
exercised.
- Taxation is a mode of raising revenue
for public purposes.
- power by which the sovereign through
its law-making body raises revenue to
defray the necessary expenses of
government from among those who in
some measure are privileged to enjoy its
benefits and must bear its burdens.
• Define taxes
- Taxes are the enforced proportional
contributions from persons and property
levied by the lawmaking body of the
State by virtue of its sovereignty for the
support of the government and all public
needs.
- They are not arbitrary exactions but
contributions levied by authority of law,
and by some rule of proportion which is
intended to ensure uniformity of
contribution and a just apportionment of
the burdens of government.
Thus:
a. Taxes are enforced contributions
Taxes are obligations created by law.
[Vera v.
1979]. Taxes are never founded on
contract or agreement, and are not
dependent for their validity upon the
individual consent of the person taxed.
b. Taxes are proportional in character,
since taxes are based on one’s ability to
pay.
c. Taxes are levied by authority of law.
The power to impose taxes is a
legislative power; it cannot be imposed
by the executive department nor by the
courts.
d. Taxes are for the support of the
government and all its public needs.
• What is the lifeblood theory?
- The lifeblood theory constitutes the
theory of taxation, which provides that
the existence of government is a
necessity; that government cannot
continue without means to pay its
expenses; and that for these means it
has a right to compel its citizens and
property within its limits to contribute.
- 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
Philippine Economy
- Consumer driven
- Infrastructure
*Filipino workers
• Discuss the principles of a sound
tax system
1) Fiscal Adequacy - sources of
revenues must be adequate to meet
government expenditures and other
public needs. This is in consonance with
the doctrine that taxes are the lifeblood
of the government.
- Sufficiency to meet government
expenditures and other public needs.
*foreign debt servicing
2) Theoretical Justice - a sound tax
system must take into consideration the
taxpayers’ ability to pay. Our laws
mandate that taxes must be reasonable,
just, fair, and conscionable. Under
Article VI, Section 28(1) of the
Constitution, the rule of taxation must be
uniform and equitable. The State must
evolve a progressive system of taxation.
Taxation is said to be equitable when its
burden falls on those better able to pay:
taxation is progressive when its rate
goes up depending on the resources of
the person affected.
- based on the taxpayer‘s ability to pay;
must be progressive.
*more money means more burden to tax
payers because more contribution is
expected
3) Administrative Feasibility - tax laws
must be capable of effective and
efficient enforcement. They must not
obstruct business growth and economic
development.
- Capability of being effectively
enforced.
- Least of inconveniences
*convenient administration
• Discuss the inherent limitations on
the power of taxation
1) Taxation is for a public purpose -
the proceeds of the tax must be used (a)
for the support of the State or (b) for
some recognized objects of government
or directly to promote the welfare of the
community.
(1) TESTS IN DETERMINING PUBLIC
PURPOSE a. Duty Test – 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.
b. Promotion of General Welfare Test –
whether the proceeds of the tax will
directly promote the welfare of the
community in equal measure.
2) Taxation in inherently legislative -
along with police power (for public good
or welfare) and eminent domain (for
public use), taxation (for revenue) is an
inherent power of sovereignty. It follows
that it is also legislative in character and
legislative prerogative. The powers are
not inherent in, but merely delegated by
constitutional mandate or by law to,
local governments.
- the legislative taxing power includes
the authority: (a) to determine the nature
(kind), object (purpose), extent (amount
or rate), coverage (subjects and objects)
and situs (place) of the tax imposition,
(b) to grant tax exemptions or
condonations, and (c ) to specify or
provide for the administrative, as well as
judicial, remedies that either the
government or the taxpayers may avail
themselves of in the proper
implementation of the tax measure.
- (2) NON-DELEGABILITY OF THE
TAXING POWER
General Rule: The power of taxation is
peculiarly and exclusively exercised by
the legislature. (See Scope of
Legislative Taxing Power, supra)
- refers to tax legislation.
*there has to be rules to be followed
- Discuss exceptions to this limitation
Being thus legislative in nature, the
power to tax may not be delegated,
except;
a) To local governments (to be
exercised by the local legislative bodies
thereof) or political subdivisions
*given power to impose taxes
b) When allowed by the Constitution
c) Where the delegation relates merely
to administrative implementation that
may call for some degree of
discretionary powers under a set of
sufficient standards expressed by law or
implied from the policy and purpose of
the Act.
- Exceptions to Non-delegability: 1.
Flexible Tariff Clause: Authority of the
President to fix tariff rates, import and
export quotas, tonnage and wharfage
dues, and other duties or imposts. (Art.
VI, Sec.28(2), 1987 Constitution) 2.
Power of local government units to levy
taxes, fees, and charges. (Art. X, Sec.
5, 1987 Constitution) 3. Delegation to
administrative agencies for
implementation and collection. - merely
refers to tax administration or
implementation
3) Taxation is territorial - taxation may
be exercised only within the territorial
jurisdiction of the taxing authority. Within
the territorial jurisdiction, the taxing
authority may determine the “place of
taxation” (tax situs)
In fixing the tax situs, the following
criteria are generally observed,
a) For poll taxes, the possible tax situs
is the residence of the taxpayer; for
instance, it would be violative of the rule
of the territoriality for the Philippine poll
tax to be imposed even on its non-
resident citizens.
b) For property taxes, the tax situs can
only be where the property is situated;
thus, the real property tax under the
Real Property Tax Code cannot be
imposed on the real property located
abroad, although owned by Filipino
citizens.
c) For excise taxes, the tax situs can be
the place (1) where the privilege is
exercised; (2) where the taxpayer is a
national of; or (3) where he has his
residence. In this selection of the
appropriate criteria, the taxing authority
is given wide latitude; among the
circumstances often considered are the
nature of the tax, the extent of benefit
that may be derived by the taxpayer and
equity principles. But, unless otherwise
stated, the tax situs is deemed to be the
place where the privilege is exercised.
Under the National Internal Revenue
Code, all three criteria (nationality,
residence, and place of the exercise of
privilege) are used in the levy of income
tax, as well as estate and gift taxes, but
not of business taxes.
- (3) SITUS OR TERRITORIALITY OF
TAXATION - The power to tax is limited
only to persons, property or businesses
within the jurisdiction or territory of the
taxing power.
4) Taxation is subject to international
comity - The Philippine Constitution,
indeed, has expressly adopted the
generally accepted principles of
international law a part of the law of the
land. Under international comity, a state
must recognize the generally accepted
tenets of international law, among which
are the principles of sovereign equality
among states and their freedom from
suit without their consent, that limit the
authority of a government to effectively
impose taxes on a sovereign state and
its instrumentalities, as well as on its
property held, and activities undertaken,
in that capacity. Even when one enters
the territory of another, there is an
implied understanding that the former
does not thereby submit itself to the
authority jurisdiction of the latter.
- (5) INTERNATIONAL COMITY These
principles limit the authority of the
government to effectively impose taxes
on a sovereign state and its
instrumentalities, as well as on its
property held and activities undertaken
in that capacity. Even where one enters
the territory of another, there is an
implied understanding that the former
does not thereby submit itself to the
authority and jurisdiction of the other.
• What are the sources of revenue
under the Tax Code?
- Republic Act 8424, Section 21 –
Sources of Revenue – the following
taxes, fees, and charges are deemed to
be national internal revenue taxes:
a) Income tax
b) Estate and donor’s tax
c) Value-added tax
d) Other percentage taxes
e) Excise taxes
f) Documentary stamp taxes; and
g) Such other taxes as are or hereafter
may be imposed and collected by the
Bureau of Internal Revenue
• Define income
- In broad sense, income means all
wealth that flows into the taxpayer other
that as a mere return of capital. It
includes the forms of income specifically
described as gains and profits including
gains derived from sale or other
disposition of capital assets
. on the kind of category of taxable
• Define source of income
- Property (capital)
- Labor (service)
- Sale/Exchange of capital asset and
activity
Source of income is any property,
activity or service that produced the
income. It may also be in the form of
proceeds from sales of transport
documents.
• What is income tax?
- It is a tax on all yearly profits arising
from property, profession, trades or
offices or as a tax on a person’s income,
emoluments, profits and the like.
- It is based on income, either gross or
net, realized in one taxable year.
• What are the functions of income
tax?
a) to provide large amount of revenues;
b) to offset regressive sales and
consumption taxes;
c) to mitigate the evils arising from the
inequalities in the distribution of income
and wealth which are considered
deterrents to social progress, by a
progressive scheme of taxation,
• What is schedular tax treatment?
- System in law where the income tax
treatment varies and made to depend
income of a taxpayer.
- A system which itemizes the different
incomes and provides for varied
percentages of taxes, to be applied
thereto.
*follows schedule of rates
Ex. Income tax
• What is global tax treatment?
- A system employed where the tax
system views indifferently the tax base
and generally treats in common all
categories of taxable income of the
individual.
- A system which taxes all categories of
income except certain passive incomes
and capital gains. It prescribes a unitary
but progressive rate for the taxable
aggregate incomes and flat rates for
certain passive incomes derived by
individuals.
*follows uniform tax rate
Ex. Tax rate for corporations
• What is Gross Income?
- In narrow sense, gross income means
all income derived from whatever
source.
- In a broad sense, gross income means
income less income which by statutory
definition or the otherwise, is exempt
from the tax imposed by law, Stated
otherwise, gross income means all
items of income less exclusions.
- Income, gain, or profit subject to net income of the general professional
income tax. partnership

• What is included in Gross Income?

- Republic Act 8424, Section 32. Gross
Income

(A) General Definition. - Except when

otherwise provided in this Title, gross
income means all income derived from
whatever source, including (but not
limited to) the following items:

(1) Compensation for services in

whatever form paid, including, but not
limited to fees, salaries, wages,
commissions, and similar items;

(2) Gross income derived from the

conduct of trade or business or the
exercise of a profession;

(3) Gains derived from dealings in

property;

(4)Interests;

(5)Rents;

(6)Royalties;

(7)Dividends;

(8) Annuities;

(9) Prizes and winnings;

(10) Pensions; and

(11) Partner's distributive share from the