SOCSCI031 Discussion/Open Forum 28 July 2021

WHAT IS TAXATION?

Taxation - inherent power by which the sovereign state imposes financial burden
upon persons and property as means of raising revenues to defray the necessary
expenses of the government.

- imposition of financial charges or other levies upon taxpayers by a state such

that failure to pay is punishable by law.

- mode by which government makes exactions in order to support their existence

- most pervasive and strongest of all the inherent powers of government. Taxes are
the lifeblood of the government.

Example: Billions to about a trillion financial assistance or other assistance

related to COVID-19.

Tax - enforced proportional contributions from persons or properties levied by

legislature of the state by virtue of its sovereignty for the support of the
government and all its public needs.

HISTORY OF TAXATION
- First known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC.

- In Biblical times, taxes are already prevalent. Genesis 47:24 states:

But when the crop comes in, give a fifth of it to Pharaoh. The other four-
fifths you may keep for your consumption.

- Earliest taxes in Rome are called portoria were customs duties on imports and
exports

- Caesar introduced inheritance tax to provide retirement funds for military

- In England, taxes were used as emergency measures

HISTORY OF TAXATION IN THE PHILIPPINES

- In pre-colonial era, we were communitarian, so there were no taxes.

- Manila-Acapulco Galleon Trade was main source of income for colony during the
early years. Galleon trade brought silver from Nueva Castilla and silk from China
by way of Manila.

- Polo y servicio is the forced labor for 40 days of men from 16-60 years old
obligated to give personal services to community projects. An exemption is given
however if a falla (1 and 1/2 real) is paid.

- Bandala is a tax to the farmers, from mandala, a round stock of rice stalks to be
threshed.

- Encomienda (Royal, Private, Ecclesiastical) are large lands given for meritorious
acts. Encomenderos were given full authority to manage the encomienda by collecting
tribute from the inhabitants and govern people living on it.

- Tribute was residence tax collected during Spanish times. May be paid in cash or
kind, partly or wholly.

1884 - tribute was replaced by cedula personal or personal identity paper,

equivalent to the present community tax certificate or residence certificate. The
cedula before is not the same as the "cedula" now.

19th Century - Cedula is an ID card to be carried at all times. A person who could
not present his/her cedula to a guardia civil could then be detained for being
"indocumentado"

DEVELOPMENT OF COMMUNITY TAX

Cedula was imposed by Americans on 1/1/1940 when Commonwealth Act No. 465 went into
effect. Payment of tax would be

What is a "cedula"? A residence certificate, a legal identity document in the

Philippines. Issued by cities and municipalities to all persons that have reached
the age of majority and upon payment of a community tax, it is considered a primary
form of identification in the Philippines and is one of the closest single
documents the Philippines has to a national system of identification, like a
driver's license or a passport. There is, however, now a National ID from the
National ID system.

THE FOUR R'S OF TAXATION

Revenue - taxes raise money to spend on armies, roads, schools, hospitals, market
regulations, legal systems, and more.

Redistribution - transferring wealth from richer sections of society to poorer

ones.

Repricing - taxes are levied to address externalities (ex. tobacco is taxed to

discourage smoking; carbon tax discourages use of carbon-based fuels; sin tax
reprices the price of cigarettes, alcohol, etc.)

Representation - "no taxation without representation", rulers tax citizens and

citizens demad accountability from their rulers as the other end of this bargain.

OTHER PURPOSES

Regulation - regulatory purpose in the case of taxes levied on exercises or

privileges like those on tobacco and alcohol, or amusement places like night clubs,
cabarets, cockpits (sabungan), etc.
- rehabilitation and stabilization of threatened industries affected with public
interest like oil industry

Promotion of general welfare - implement of police power in order to promote

general welfare of the people. Salary of traffic enforcers, for one. From such
funds, amounts are drawn to reimburse oil companies when appropriate situations
arise for increases in the cost of crude oil importation.

Reduction of social inequality - progressivity. Those who are able to pay should
shoulder the bigger portion of the tax burden. Present rates of income, estate, and
gift taxes present good examples of progressivity. Large income/estate = Higher
taxes.
Encourage economic growth - tax exemptions and tax reliefs' purpose is to grant
incentives or exemptions in order to encourage investments and thereby promote the
country's economic growth. For example, MEPZ 1, 2.

Protectionism - some important sectors like local industries are protected by

taxes, like protective tariffs customs duties. This is why imported products are
more expensive.

WHY TAX?

- Accumulate funds for the functioning of government machineries. Government's

ability to serve the people depending on the taxes collected.

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1. Obenario's question: There are goods exempted from taxation, so what are these?

Answer: As a general rule, if declared as a gift, up to $100 is the amount.

Balikbayan boxes are not taxed and neither are ukay-ukay. Non-stock, non-profit
purchases are also exempt from taxes/tariffs customs duties. Our country can enter
into treaties with other countries through World Trade Organization - advocating
free trade. Exchange of goods without taxes.

Example: The amount of the gift is around GBP 500, so there is no tariff exemption.
The tariff ended up PHP 6000. Tariff of luxury cars as well, like Pacquiao's
Ferrari.

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ESSENTIAL CHARACTERISTICS OF TAX

1. Enforced contribution
2. Payable in money
3. Proportionate in character
4. On persons or property
5. Levied by the state which has jurisdiction over person or property
6. Levied by law-making body
7. Levied for public purpose

Payable in money - Cash or negotiable instruments like checks (in accounting, these
are considered good as cash), treasury bills, or bank transfers (similar to a debit
card), NOT in kind or through goods.

Levied on persons or property - on natural persons (like us) or juridical persons

(like corporations or business establishments). Property - real property (your
house and lot) or personal property (your money or vehicles. Seller pays capital
gain tax supposedly, unless there is an agreement between both seller and buyer).

Levied on state which has jurisdiction over the person or property - does the state
imposing the tax have the authority over that person or property? When the person
is residing/within in its territorial jurisdiction, s/he can be taxed regardless of
citizenship. For property, if the property is in the territorial jurisdiction, the
state can tax it.

If a person is outside the territorial jurisdiction of the country, can the state
can still tax that person?
Example: Pacquiao will fight in Las Vegas, Nevada. He is no longer in the
territorial jurisdiction. Pacquiao will earn around USD 40 million from that fight.
Are the incomes derived by Pacquiao from the US still taxed in the Philippines?

- This is where indirect double taxation happens. In the case of Pacquiao, he will
be taxed in the USA, and he will be taxed here in the Philippines. How is it
possible? Pacquiao is a citizen of a Philippines, the taxation in the Philippines
is still his obligation as a citizen despite Pacquiao being outside the territory.

Resident and non-resident Filipino, Resident and non-resident alien, Foreign and
domestic corporations, et al. all have different policies on tax.

The Embassy is there to see that the rights of Filipinos working abroad are still
protected under our government.

THEORIES OF TAXATION

Lifeblood theory - taxes are the lifeblood of the state. Taxes are important for
the functioning of the state.

Benefits-received principle - reciprocal duties of protection and support between

state and its inhabitants.

Enforcement of law and public order, protection of property, economic

infrastructure, public works, social engineering, war expenditures if needed, and
the operation of government.

Taxes also fund welfare and public services like education systems, healthcare
systems, et al.

Commissioner vs. Algue, Inc. - taxes are what we pay for civilized society. Every
person who is able must contribute his share to running of the government. THe
government is expected to respond in the form of benefits intended to improve the
lives of people. Tax should be exercised reasonably and in accordance with the
prescribed procedure. If it is not, the taxpayer has the right to complain and the
courts will come to his succour.

NATURE
1. Inherent in sovereignty
2. Legislative
3. Subject to constitutional and inherent limitations.

STAGES OF TAXATION
1. Imposition/Levy (legislative)- passing tax laws. Includes: who is taxed, how
much is collected, rate used, how is it collected, what tax exemptions granted. BIR
determines how is the tax law implemented. Train Law - minimum wage earners are
exempted from income tax

2. Assessment/Collection of Tax (Executive)-

3. Payment stage - the actual payment

Legislature can determine the following matters:

1. Who/what is taxed.
2. Why do we tax
3. How much (Amount/rate)
4. How will the tax be collected (Manner/means)

BASIC PRINCIPLES OF SOUND TAX SYSTEM

1. Fiscal Adequancy - revenue sources should be enough to meet the demands of

public expenditures.

2. Equality/Theoretical Justice - tax burden should be in proportion to the

taxpayer's ability to pay. Lawmakers must see to it that the taxpayer(s) CAN pay.

3. Administrative Feasibility - capable of convenient, just, and effective

administration.

LIMITATIONS ON THE POWER OF TAXATIONS

Constitutional Limitations
- Due process
- Equal protection
- Uniformity and equity
- No imprisonment for non-payment of a poll tax
- Non-infringement of religious freedom
- Exemption of religious, charitable, and educational entities, non-profit
cemeteries, and churches from property tax.
- No appropriation for religious purposes
- Exemption of non-stock, non-profit educational institutions from taxation.

No imprisonment for non-payment of poll tax

- Poll tax is imposed based on residence. The community tax certificate is an
example of this. Nonpayment of VAT, income tax, and other taxes, however, ARE
penalizable by imprisonment. Tax evasion is a criminal act, but does not include
poll tax.

Court of Tax Appeal - court where tax cases are heard.

- Annual income/1000 + 5 pesos is the community tax.

Was there a case before that this principle was violated?

- None.

Non-infringement of religious freedom

- Government cannot legislate a law that would hinder or stop the person in the
exercise of his/her religious freedom. We CANNOT ask someone to pay whenever s/he
prays.

Exemption of religious, charitable, and educational entities, non-profit

cemeteries, and churches from property tax
- Properties owned by the Church are NOT subject to real property tax.
- Honasan actually proposed to tax churches because of their high revenue, but was
junked.

No appropration for religious purposes

- The revenue from tax cannot be collected for religious purposes. We cannot
appropriate taxes for, say, maintenance of religious buildings. If they declare it
as a National Heritage, and the NHC has its own budget to take care of those
places/infrastructures, it can be appropriated, but as a historical site rather
than as a religious site.

Exemption of non-stock, non-profit educational institution from taxation

- CIT-U will be paying income tax, but it will NOT be paying property tax.

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2. Fabroa's question: How would the introduction of the tax value method affect
small businesses?

Answer: Imposition of tax should be intended to implement economic growth. If we

look for a higher revenue that we impose higher tax to businesses, it could affect
local or foreign businessmen such that they will no longer invest in those
businesses. The government looks into how they will implement taxes and balance the
economic growth and ability to pay.
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INHERENT LIMITATIONS
- For public purpose
- Non-delegation of legislative power to tax: The power to tax is the legislative's
power ALONE, and cannot be delegated to the other two.
- Exemption of government entities: Government agencies like DOH, DOT, DND, and
LGUs are exempted from taxation.
- International comity: Equality among states under international law. States are
of equal rank.
- Territorial jurisdiction: Only in the territory except in privity of
relationship.

Privity of relationship may exist due to citizenship. For example, Manny Pacquiao's
case.

Occupation Tax - where the person works, so a person working in Cebu City can
impose occupation tax to, say, a resident of Talisay who is working in Cebu City.

Double taxation- taxing twice during the same period

- Direct
- Indirect

Direct: (1) Same object or property is taxed twice (2) by the same authority (3)
for the same purpose (4) within the same period.

In Pacquiao's case, the taxing authorities are different.

Indirect: If any of authority or purpose is different.

Example 1: The same person is taxed twice within the same period and for the same
purpose by DIFFERENT TAXING AUTHORITIES.

Example 2: The same person is taxed twice by the same authority within the same
period but FOR DIFFERENT PURPOSES.

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3. Obenario's next question: Is there a consequence for neglect of payment of
property tax?

Answer: Surcharges, and in the case of neglect of notices from the Office of the
Treasurer, possible confiscation

Follow-up: What happens to confiscated properties?

Answer: Public auction

4. Diaz's question: What about native tribes? Do they have to pay taxes?

Answer: Yes, depending on the kind of tax.

Follow-up: In the case of isolated communities?

Answer: There are brackets of income tax and property can be declared as tax-
exempt. Excise tax and VAT will still be paid by these people though, as stores are
VAT-registered. The 12% VAT is automatically collected by the administration.

5. Albarracin's question: How would the tax value method reduce administration
costs, sir?

Answer: Depends on which administration costs. Revenue of imposition is higher than

administration.

6. Flores's question: Why are donors subjected to 6% tax?

Answer: There are rich people who want to avoid tax by giving it as gifts, but are
not actually gifts. There are donations exempted from taxation, though. For
example, dummy donations - the donor is obligated to pay the tax.

7. Bautista's question: Regarding Hidilyn Diaz, does she pay tax for her prizes?

Answer: There is already a law that the incentives from Sports Commission are tax-
exempt and gifts from others are subject to donor tax.
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