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- the inherent power of the sovereign, exercised through the legislature, to impose burdens upon the subjects and objects within its jurisdiction, for the purpose of raising revenues to carry out the legitimate objects of the government. Taxes Enforced proportional contributions from properties and persons levied by the State by virtue its sovereignty for the support of the government and for public needs.
5. 6. 7.
It is levied on persons or property - a tax may also be imposed on acts, transactions, rights or privileges. It is levied for public purpose or purposes - taxation involves, and a tax constitutes, a burden to provide income for public purposes. It is levied by the State which has jurisdiction over the persons or property - The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.
Basis of Taxation Government necessity Theory of Taxation Reciprocal Duties of Support and Protection a) Support on the part of the taxpayers b) Protection and benefits on the part of the government Necessity Theory Taxes proceed upon the theory that the existence of the government is a necessity; that it cannot continue without the means to pay its expenses; and that for those means, it has the right to compel all citizens and properties within its limits to contribute. Lifeblood Doctrine Taxes are the lifeblood of the nation Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Taxes are the lifeblood of the government and there prompt and certain availability is an imperious need. Taxes are the lifeblood of the nation through which the agencies of the government continue to operate and with which the state effects its functions for the benefit of its constituents Benefits Received Principle
Requisites of a Valid Tax [ PUJDI ] 1) It should be for a public purpose 2) The rule of taxation should be uniform 3) That either the person or property taxed be within the jurisdiction of the taxing authority 4) That the assessment and collection be in consonance with the due process clause 5) The tax must not infringe on the inherent and constitutional limitations of the power of taxation Nature of Taxation [ ILE ] 1) Inherent in sovereignty 2) Legislative in character 3) Attribute of sovereignty and emanates from necessity, relinquishment of which is never presumed BQ!!! (2003) Why is the power to tax considered inherent in a sovereign State? SUGGESTED ANSWER: It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power no sovereign State can exist or endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent state or government. No sovereign State can continue to exist without means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax. Scope of Taxation 1) Comprehensive 2) Unlimited 3) Plenary 4) Supreme Scope of Legislative Taxing Power [ SAPASM ] 1. subjects of Taxation (the persons, property or occupation etc. to be taxed) 2. amount or rate of the tax 3. purposes for which taxes shall be levied provided they are public purposes 4. apportionment of the tax 5. situs of taxation 6. method of collection Principles of a Sound Tax System [ FTA ]
The basis of taxation is the reciprocal duty of protection between the state and its inhabitants. In return for the contributions, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property Despite the natural reluctance to surrender part of ones hard earned income to the taxing authority, every person who is able to must contribute his share in the running of the government. The government is expected to respond in the form of tangible or intangible benefits intended to improve the lives of the people and enhanced their material and moral values In return for his contribution, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. One is compensation or consideration for the other. Protection for support and support for protection.
Fiscal Adequacy – the sources (proceeds) of tax revenue should coincide with and approximate the needs of, government expenditures. Theoretical Justice – the tax system should be fair to the average taxpayer and based upon his ability to pay.
Essential Characteristic of Taxes [ LEMPPPS ]
It is levied by the lawmaking body of the State power to tax is a legislative power which under Constitution only Congress can exercise through enactment of laws. Accordingly, the obligation to taxes is a statutory liability.
the the the pay
It is an enforced contribution - a tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive acts of the government. It is generally payable in money - tax is a pecuniary burden – an exaction to be discharged alone in the form of money which must be in legal tender, unless qualified by law, such as RA 304 which allows backpay certificates as payment of taxes. It is proportionate in character - it is ordinarily based on the taxpayer’s ability to pay.
Administrative Feasibility – the tax system should be capable of being properly and efficiently administered by the government and enforced with the least inconvenience to the taxpayer. The non-observance of these canons, which are merely intended to make the tax system sound, will not render the tax impositions by the taxing authority invalid, except to the extent that specific constitutional or statutory limitation are impaired. Is the Power to Tax the Power to Destroy? In the case of Churchill, et al. vs Concepcion (34 Phil 969) it has been ruled that: The power to impose taxes is one so unlimited in force and so searching in extent so that the courts scarcely venture to declare that it is subject to any restriction whatever, except such as rest in the discretion of the authority which exercise it. No attribute of sovereignty is more pervading, and at no point does the power of government affect more constantly and intimately all the relations of life than through the exaction made under it. And in the notable case of McCulloch vs Maryland, Chief Justice Marshall laid down the rule that the power to tax
involves the power to destroy. According to an authority, the above principle is pertinent only when there is no power to tax a particular subject and has no relation to a case where such right to tax exists. This opt-quoted maxim instead of being regarded as a blanket authorization of the unrestrained use of the taxing power for any and all purposes, irrespective of revenue, is more reasonably construed as an epigrammatic statement of the political and economic axiom that since the financial needs of a state or nation may outrun any human calculation, so the power to meet those needs by taxation must not be limited even though the taxes become burdensome or confiscatory. To say that “the power to tax is the power to destroy” is to describe not the purposes for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue While taxation is said to be the power to destroy, it is by no means unlimited. It is equally correct to postulate that the “power to tax is not the power to destroy while the Supreme Court sits,” because of the constitutional restraints placed on a taxing power that violated fundamental rights. In the case of Roxas, et al vs CTA (April 26, 1968), the SC reminds us that although the power of taxation is sometimes called the power to destroy, in order to maintain the general public’s trust and confidence in the Government, this power must be used justly and not treacherously. The Supreme Court held: “The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the ‘hen that lays the golden egg’. And, in order to maintain the general public’ trust and confidence in the Government this power must be used justly and not treacherously.” The doctrine seeks to describe, in an extreme, the consequential nature of taxation and its resulting implications, to wit: a. The power to tax must be exercised with caution to minimize injury to proprietary rights of a taxpayer; b. If the tax is lawful and not violative of any of the inherent and constitutional limitations, the fact alone that it may destroy an activity or object of taxation will not entirely permit the courts to afford any relief; and c. A subject or object that may not be destroyed by the taxing authority may not likewise be taxed. (e.g. exercise of a constitutional right) BQ!!! (2000) Justice Holmes once said: The power to tax is not the power to destroy while this Court (the Supreme Court) sits." Describe the power to tax and its limitations. (5%) SUGGESTED ANSWER: The power to tax is an inherent power of the sovereign which is exercised through the legislature, to impose burdens upon subjects and objects within its Jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. The underlying basis for its exercise is governmental necessity for without it no government can exist nor endure. Accordingly, it has the broadest scope of all the powers of government because in the absence of limitations, it is considered as unlimited, plenary, comprehensive and supreme. The two limitations on the power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited power. It is the Court's role to see to it that the exercise of the power does not transgress these limitations. Taxation vs Police Power vs Eminent Domain [ TPE ] Taxation Police Power to promote for the support general As to purpose of the welfare, [ SPP ] government public health, public morals, and public safety
As to persons affected [ CCI ] As to authority which exercises the power [ GGP ] As to amount of imposition [ LCN ]
Operate upon a community or a class of individuals Exercised only by the government or its political subdivisions Generally no limit to the amount of tax that may be imposed; limitless Subject to certain constitutional limitations, including the prohibition against impairment of the obligation of contracts taxes paid become part of public funds affects all persons, property and excise
Operate upon a community or a class of individuals Exercised only by the government or its political subdivisions
lower Operates on the individual property owner May be exercised by public services corporation or public utilities if granted by law There is no imposition; rather, it is the owner of the property taken who is just paid compensation Subject to certain constitutional limitations, including the prohibition against impairment of the obligation of contracts property is taken by the gov’t upon payment of just compensation affects only the particular property comprehended
Limited to the cost of regulation
As to the relationship to the Constitution [ SFS ]
Transfer of property rights [ PNG ]
Scope [ AAO ]
Basis [ NSN ] (all public necessity)
Relatively free from constitutional limitations and superior to the nonimpairment provisions thereof no transfer but only restraint on the exercise of property right exists affects all persons, property, privileges, and even rights public necessity and the right of the state and the public to self-protection and selfpreservation
public necessity, private property is taken for public use
Power of Judicial Review in Taxation The courts cannot review the wisdom or advisability or expediency of a tax. The court’s power is limited only to the application and interpretation of the law. Judicial action is limited only to review where involves: [ CA ] 1. The determination of validity on the tax in relation to constitutional precepts or provisions. 2. The determination, in an appropriate case, of the application of the law. Limitation of Taxation [ IC-DI ]
Eminent Domain for public use
Inherent limitations Constitutional limitations
a. b. 1) 2) 3) 4) 5)
Provisions directly affecting taxation Provisions indirectly affecting taxation
Inherent Limitations [ PITSE ] Just compensation, not to exceed the market value declared by the owner or administrator or anyone having legal interest in the property, or as determined by the assessor, whichever is Taxation is for public purpose Taxation is inherently legislative Taxation is territorial Taxation is subject to international comity
Taxation is for a public purpose
As to compensatio n [ BMJ ]
Protection and benefits received from the government
The maintenance of a healthy economic standard of society
Exemption of the Government from taxes A violation of these inherent limitations can amount to taking of property without due process of law; hence, in this sense, it can be said that any tax law contravening any limitation of taxation, in effect, will likewise be unconstitutional.
The proceeds of tax must be used: [ SO ] For some recognized objects of government or directly to promote the welfare of the community The mere fact that a particular taxpayer receives no special or immediate benefit is of no moment for it is the general good that matters in taxation. The symbiotic relationship between the taxing authority and the subject of taxation is enough to justify the imposition. The public purpose of a tax may legally exist even if the motive which impelled the legislative to impose the tax was to favor one industry over another. It is inherent in the power to tax that a state be free to select the subject of taxation and it has been repeteadly held that “inequities which result from singling out of one particular class for taxation or exemption infringes no constitutional limitation.” Taxation has been made the implement of the state’s police power.
For the support of the State
2) Where the taxpayer is a national of 3) Where he has his residence In the selection of the appropriate criteria, t eh taxing authority is given wide latitude; among the circumstances often considered are the nature of the tax, the extent of the benefit that may be derived by the taxpayer and equity principles. Taxation is subject to international comity The Philippine Constitution, indeed, has expressly adopted the generally accepted principles of international law as 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 of 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. Exemption of the Government from Taxes Reasons for Exemptions: 1) To levy tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over to itself; 2) In order that the functions of the government shall not be unduly impede; and 3) To reduce the amount of money that has to be handed by the government in the course of its operations. Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers (Infantry Post Exchange vs Posadas, 54 Phil 866) Notwithstanding the immunity, the government may tax itself in the absence of any constitutional limitations. Government-owned or controlled corporations, when performing proprietary functions are generally subject to tax in the absence of tax exemption provisions in their charters or law creating them. Constitutional Limitations
Taxation is 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 a legislative prerogative. The legislative taxing power includes the authority: [ DGS ]
a) b) c)
To determine the nature (kind), object (purpose), extent (amount of rate), coverage (subjects and objects) and situs (place) of tax imposition To grant tax exemptions and condonations To specify or provide for the administrative, as well as judicial, remedies that either the government or the taxpayer may avail themselves of in proper implementation of tax measure.
Being thus legislative in nature, the power to tax may not be delegated , except: [ LCA ]
a) To the local governments (to be exercised by the local legislative bodies thereof) or political subdivisions
When 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
When allowed by the Constitution
Taxation, being inherent in sovereignty, need not be clothed with any constitutional authority for it to be exercised by a sovereign state. Instead, constitutional provisions are meant and intended more to regulate and define, rather than grant, the power emanating therefrom.
Taxation may exceptionally be delegated, subject to such well-settled limitations as: [ NEL ]
a) b) c)
The delegation shall not contravene any constitutional provision or the inherent limitations of taxation The delegation is effected either by the constitution or by validly enacted legislative measures or statute
The delegated levy power; except when the delegation is by an express provision of the constitution itself, should only be in favor of the local legislative body of the local or municipal government concerned. The power of taxation, it has been said, may be delegated to local governments in respect of matters of local concern. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax. Local governments may be permitted to tax subjects, which for the reason of public policy the State has not deemed wise to tax for general purposes.
Provisions Directly Affecting Taxation 1) No person shall be imprisoned for non-payment of a poll tax (Art 3, Sec 20) 2) Taxation shall be uniform and equitable. The congress shall evolve a progressive system of taxation (Art 6, Sec 28 par 1) 3) The congress may, by law, authorize the president to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates, imports and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government (Art 6 Sec 28 par 2)
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” In fixing the tax situs, the following criteria are observed: a) For poll taxes, the possible tax situs is the residence of the tax payer b) For property taxes, the tax situs can only be where the property is situtated c) For excise taxes, the tax situs can be the place : 1) Where the privilege is exercised
Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit cemeteries and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation (Art 6 Sec 28 par 3) No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of congress (Art 6 Sec 28 par 4) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance if any, shall be transferred to the general funds of the government. (Art 6 Sec 29 par 3) The president shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object. (Art 6 Sec 27 par 2) The Supreme Court shall have the power to “review, revise, reverse, modify or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of the lower courts in x x x all cases involving the legality of any
tax, impost, assessment, or toll or any penalty imposed in relation thereto” (Art 8 Sec 5 par 2[b])
Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments (Art 10 Sec 5). Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them. (Art 10, Sec 6) 10) All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Propriety educational institutions, including those cooperatively-owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restriction on dividends and provisions for reinvestment. (Art 14 Sec 4) • In number 1, a poll tax is one levied on persons who are residents within the territory of the taxing authority without regard to their property, business or occupation. The prohibition is against “imprisonment” for “non-payment of the tax.” Hence, an imposition of a fine (but no subsidiary imprisonment), or even imprisonment for any violation other than non-payment would not be unconstitutional.
The City of Manila, in order to solve the traffic problem in its business districts, decided to impose a tax, to be paid by the driver, on all private cars entering the city during peak hours from 8:00 a.m. to 9:00 a.m. from Mondays to Fridays, but exempts those cars carrying more than two occupants, excluding the driver. Is the ordinance valid? SUGGESTED ANSWER: The ordinance is in violation of the Rule of Uniformity and Equality, which requires that all subjects or objects of taxation, similarly situated must be treated alike in equal footing and must not classify the subjects in an arbitrary manner. In the case at bar, the ordinance exempts cars carrying more than two occupants from coverage of the said ordinance. Furthermore, the ordinance only imposes the tax on private cars, and exempts public vehicles from the imposition of the tax, although both contribute to the traffic problem. There exists no substantial standard used in the classification by the City of Manila. Another issue is the fact that the tax is imposed on the driver of the vehicle and not on the registered owner of the same. The tax does not only violate the requirement of uniformity, but the same is also unjust because it places the burden on someone who has no control over the route of the vehicle. Provisions Indirectly Affecting Taxation
In number 2, the term uniformity (equality or “equal protection of laws) requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing both in privileges and liabilities. Classification is permitted: [ RGCE ]
Police power and eminent domain subordinate the provisions of the Constitution except those that directly affect, and are precisely intended by it to regulate, the exercise of those inherent powers. Taxation however is subject to and subordinated by constitutional provisions and precepts, hence , such set of rules as those a) on due process, b) church-state separation and c) non-impairment clause may also affect, although indirectly, taxation.
1) 2) 3) 4)
If the standards used therefor are not arbitrary but reasonable and substantial If the classification is germane to achieve the purpose of the legislation If that classification applies to both present and future conditions, other circumstances being equal
Aspects of Taxation The rule on taxation embraces the following aspects (also referred to as steps in taxation) [ LAP ]
Levy – the act of imposition by the legislature such as by its enactment of the law. The term is understood to include not only the mandate on when and how the tax is imposed but also, whenever it may be appropriate, the grant of tax exemptions, tax amnesties or tax condonations. Assessment or Collection – the act of administration and implementation of the tax law by the executive through its administrative agencies. Assessment here means notice and demand for payment of tax liability. Payment – the act of compliance by the taxpayer, including such options, schemes or remedies as may be legally open or available to him.
if the classification applies equally to all those belonging to the same class Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. In number 4, the tax exemption covers property taxes only. Special levies or assessments, not being taxes, are not covered by the exemption. The term “exclusively” means primarily, not solely. Thus, where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes on the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character. The exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually “indispensible” therefor, but extends to facilities which are “incidental to and reasonably necessary for” the accomplishment of said purposes. A portion of school building used as the residence of the school director and his final is exempted from Real Property tax but the portion which is being leased to a marketing firm for commercial purpose is being subjected to the said tax.
Classification of Taxes
According to Subject Matter or Object [ PPE ]
a) b) c) 2)
Personal, capitation or poll taxes – taxes of fixed amounts upon residents or persons of a certain class without regard to their property or business (ex. basic community tax) Property taxes – taxes assessed on things or property of certain class (ex. real estate taxes) Excise or license taxes – taxes on privilege, occupation or business not falling within the classification of poll or property taxes. (ex. internal revenue taxes and customs duties) Direct taxes – taxes which are demanded from persons who are primarily burdened to pay them (ex. income tax) Indirect taxes – taxes levied upon transactions or activities before the articles subject matter thereof reach the consumers to whom the burden of the tax may ultimately be charged or shifted (ex. value-added tax) Specific taxes – taxes imposed per head, unit or number, or by weight or volume and which require no assessment beyond a listing and classification of the subjects or articles to be taxed.
According to Burden and Incidence [ DI ]
a) b) 3)
According to purpose [ GS ]
General or fiscal – taxes imposed for the general purposes of the government
The test for exemption in number 4 is use, thus an idle land or property let to others for unlike purposes although owned by religious, educational and charitable institutions could be subject to real estate tax. The issue of title of ownership is not relevant. A piece of real property that is leased for a consideration by a religious entity, which is then used by the latter actually, directly and exclusively for religious, educational or charitable purposes, would be exempt from property taxes. • In number 5, the provision requires the concurrence of a majority not of the attendees constituting a quorum but of all the members of the congress. BQ!!! (2003)
According to Determination of Amount [ SA ]
Ad valorem taxes – taxes based upon the value of the article subject to tax
b) 5) 6) a) b) a) b) c) d)
Special, regulatory or Sumptuary – taxes imposed for a particular legitimate object of the government. National – taxes imposed by the national government Municipal or local – taxes imposed by local governments Progressive – the tax rate increases as the tax base increases Regressive – the tax rate decreases as the tax bases increase Mixed – the tax rates are party progressive and partly regressive Proportionate – the tax rates are fixed(in amounts or percentage) on a flat tax base
lawful consideration Taxation vs Toll Tax demand of sovereignty paid for the support of the government generally, no limit as to amount imposed imposed only by the government Taxation vs Special Assessment Toll demand of proprietorship paid for the use of another’s property amount depends on the cost of construction or maintenance of the public improvement used imposed by the government or private individuals or entities
According to Scope or Authority Imposing the Tax [ NM ]
According to Gradation [ PRMP ]
BQ!!! (2003) Among the taxes imposed by the Bureau of Internal Revenue are income tax, estate and donor’s tax, value added tax, excise tax, other percentage taxes, and documentary stamp tax. Classify these taxes into direct and indirect taxes, and differentiate direct from indirect taxes. SUGGESTED ANSWER: Income tax, estate tax and donor’s tax are considered as direct taxes. On the other hand, value added tax, excise tax, other percentage taxes, and documentary stamp tax are indirect taxes. Direct taxes are demanded from the very person who, as intended, should pay the tax which he cannot shift to another; while an indirect tax is demanded in the first instance from one person with the expectation that he can shift the burden to someone else, not as a tax but as a part of the purchase price.
Special Assessment imposed on persons, property and excise personal liability of the person assessed based on necessity as well as on benefits received general application (see Apostolic Prefect vs Treas. Of Baguio, 71 Phil 547)
Taxation vs Debt
Tax levied only on land not a personal liability of the person assessed, i.e. his liability is limited only to the land involved based wholly on benefits exceptional both as time and place
Other Kinds of Exactions
based on law generally, cannot be assigned generally payable in money generally not subject to set-off or compensation imprisonment is a sanction for non-payment of tax except poll tax governed by special prescriptive periods provided for in the Tax Code does not draw interest except only when delinquent based on contracts, express or implied Assignable may be paid in kind may be subject to set-off or compensation no imprisonment for nonpayment of debt governed by the ordinary periods of prescriptions draws interest when so stipulated, or in case of default
License fee – imposed for the regulation of a lawful business or occupation in the exercise of police power, the amount of which is invariably limited to cover the expenses of issuing the license and cost of the necessary surveillance, inspection or supervision by the government. If unpaid, the business or activity itself subject to the license fee can become illegal, unlike, generally, that of the non-payment of tax. Toll – sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge of the like, of a public nature Special assessment or levy- a demand for contribution to help defray the cost of improvement on real property owners of a particular locale directly benefited by such improvement. Debt or ordinary obligation – based upon a juridical tie, created by law, contracts, quasi-contracts, delicts or quasidelicts, between parties for their private interest or resulting from their own acts or omissions. Margin Fee – a currency measure designed to stabilize the currency.
Taxation vs License Fee Taxation PURPOSE BASIS AMOUNT for revenue power of taxation no limit as to amount normally paid after commencement of business Failure to pay does not make the business illegal being lifeblood of the state, cannot be surrendered except for License Fee for regulation police power limited to cost of the license and expenses of police surveillance and regulation normally paid before commencement of business Failure to pay makes the business illegal may be surrendered with or without consideration
Interpretation and Construction of Tax Statutes Where doubts exist in determining the legislative intent, the doubt must be resolved liberally in favor of taxpayers and strictly against taxing authority When there is doubt with regards to the validity of the tax law, the presumption is towards validity The government is never estopped from collecting taxes because of mistakes or errors on the part of its agents Tax exemptions (or equivalent provisions such as tax amnesties and tax condonations) are not presumed and when granted are strictly construed against the grantee. He who claims tax exemption must be able to justify his claim or right. The exemption cannot be established by mere implication but it must be clearly expressed.
TIME OF PAYMENT
A statute will not be construed as imposing a tax unless it does so clearly, expressly and ambigiously Tax statutes offering rewards are liberally construed in favor of awardees Tax statutes offering amnesty are also liberally construed in favor of the taxpayer.
Exemptions from certain taxes granted circumstances to special classes of persons
EFFECT OF PAYMENT
When tax exemptions are construed liberally in favor of grantee [LSGT]
When the law so provides for such liberal construction
3) 4) 1) 2) 3)
Exemptions in favor of the subdivisions or instrumentalities
government, its political
Exemptions to traditional exemptees, such as those in favor of religious and charitable institutions
Classification of Tax Exemptions [ EIC ] Express – by exemption provisions in the Constitutions, statutes, treaties, franchises or similar legislative acts Implied or by Omission – there is no tax by silence but, where the law levies a tax, so also must the tax exemption be explicit in the law Contractual – those agreed to by the taxing authority in contracts lawfully entered into by them by enabling laws.
Certain Doctrines in Taxation 1) Prospectivity of Tax Laws • Taxes may be imposed retroactively by law but unless so expressed by such law, these taxes must only be imposed prospectively 2) Imprescriptibility of Taxes • Unless otherwise provided by the tax law itself, taxes are imprescriptible 3) Double Taxation • Means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, for the same purpose and wit the same kind of character of tax. • Double taxation is not a valid defense against the validity of a tax measure
leased and the tax on the income desired as they are different kinds of tax c) Tax on manufacturer’s products and another tax on the privilege of storing exportable copra in warehouses within a municipality are imposed as first tax is different from the second d) Where, aside from the tax, a license fee is imposed in the exercise of police power. Exception: Double Taxation while not forbidden, is something not favored. Such taxation, it has been held, should, whenever possible, be avoided and prevented. Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer. The reason is to avoid injustice and unfairness. The taxpayer may seek relief under the Uniformity Rule or the Equal Protection guarantee.
Two (2) Kinds of Double Taxation [ OD-PI ]
Obnoxious or Direct Duplicate Taxation (Double taxation in its strict sense) - In the objectionable or prohibited sense means that the same property is taxed twice when it should be taxed only once. • Requisites: a) Same property is taxed twice b) Same purpose c) Same taxing authority d) Within the same jurisdiction e) During the same taxing period f) Same kind or character of tax
BQ!!! (1996) X, a lessor of a property, pays real estate taxes on the premises, a real estate dealer’s tax based on rental receipts and income tax on the rentals. X claims that this is double taxation. Decide. SUGGESTED ANSWER: There is no double taxation. Double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same kind and character of tax. The real estate tax is a tax on property; the real estate dealer’s tax is a tax on the privilege to engage in business; while the income tax is a tax on the privilege to earn an income. The taxes are imposed by different taxing authorities and are essentially of different kind and character. (Villanueva vs. City of Iloilo. 26 SCRA 578) BQ!!! (1997) When an item of income is taxed in the Philippines and the same income is taxed in another country, is there a case of double taxation? SUGGESTED ANSWER: Yes, but it is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are imposed by different taxing authorities. BQ!!! (1997) What are the usual methods of avoiding the occurrence of double taxation? SUGGESTED ANSWER: [ RTAR ] The usual methods of avoiding the occurrence of double taxation are: 1. Allowing reciprocal exemption either by law or by treaty; 2. Allowance of tax credit for foreign taxes paid; 3. Allowance of deduction for foreign taxes paid; and 4. Reduction of the Philippine tax rate BQ!!! (1997) Is double taxation a valid defense against the legality of a tax measure? SUGGESTED ANSWER: No, double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality of a tax measure. However, if double taxation amounts to a direct duplicate taxation, [ SPJPK ] 1. in that the same subject is taxed twice when it should be taxed but once 2. in a fashion that both taxes are imposed for the same purpose 3. by the same taxing authority, within the same jurisdiction or taxing district, 4. for the same taxable period and 5. for the same kind or character of a tax then it becomes legally objectionable for being oppressive and inequitable. 4) Escape from Taxation Six Basic Forms of Escape from Taxation [ CESTAE ] 1. Shifting 2. Capitalization 3. Transformation 4. Evasion 5. Avoidance 6. Exemption
Permissive or Indirect Duplicate Taxation (Double taxation in its broad sense) – This is the opposite of direct double taxation and is not legally objectionable. The absence of one or more of the foregoing requisites of the obnoxious direct tax makes it indirect. Instances of Double Taxation in its Broad Sense 1) A tax on the mortgage as personal property when the mortgaged property is also taxed at its full value as real estate; 2) A tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares; 3) A tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares; 4) A tax upon depositions in the bank for their deposits and a tax upon the bank for their property in which such deposits are invested 5) An excise tax upon certain use of property and a property tax upon the same property; and 6) A tax upon the same property imposed by two different states. Constitutionality
Double Taxation in its stricter sense is undoubtedly unconstitutional but that in the broader sense is not necessarily so. General Rule: Our Constitution does not prohibit double taxation; hence, it may not be invoked as a defense against the validity of tax laws. a) Where a tax is imposed by the National Government and another by the city for the exercise of occupation or business as the taxes are 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 imposed for engaging in the business of leasing real estate in addition to Real Estate Tax on the property
Shifting – Transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else Impact of taxation – is the point at which a tax is originally imposed. Incidence of Taxation – is the point on which a tax burden finally rests or settles down. Relations among Shifting, Impact and Incidence of Taxation – the impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result. Kinds of Shifting: a. Forward Shifting – the burden of tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer b. Backward Shifting – effected when the burden of tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production c. Onward Shifting – this occurs when the tax is shifted two or more times either forward or backward Capitalization – the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay Transformation – The method whereby the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, 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. Tax Evasion – is the use of the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax.
Set-off of Taxes • Taxes are not subject to set-off or legal compensation. The government and the taxpayer are not creditors and debtors or each other. Obligations in the nature of debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity
A taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. 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. The collection of tax cannot await the results of a lawsuit against the government
Indication of Fraud in Taxation a. Failure to declare for taxation purposes true and actual income derived from business for two consecutive years, and b. Substantial underdeclaration of income tax returns of the taxpayer for four consecutive years coupled with overstatement of deduction. Evasion of the tax takes place only when there are no proceeds. Evasion of Taxation is tantamount, fiscally speaking, to the absence of taxation.
BQ!!! (1996) X is the owner of a residential lot situated at Qurino Avenue, Pasay City. The lot has an area of 300 square meters. On June 1, 1994, 100 square meters of said lot owner by X was expropriated by the government to be used in the widening of Quirino Avenue, for Php300,000 representing the estimated assessed value of said portion. From 1991 to 1995, X, who is a businessman, has not been paying his income taxes. X is now being assessed for the unpaid income taxes in the total amount of Php150,000. X claims the income tax liability has already been compensated by the amount of Php300,000 which the government owes him for the expropriation of his property. Decide. SUGGESTED ANSWER: The income tax liability of X cannot be compensated with the amount owed by the Government as compensation for his property expropriated. Taxes are of distinct kind, essence and nature than ordinary obligations. Taxes and debts cannot be the subject of compensation because the Government and X are not mutually creditors and debtors of each other and a claim for taxes is not a debt, demand, contract, or judgment as is allowable to be set-off. (Francia vs. IAC. GR No. 76749. June 28, 1988) 6) Taxpayer suit • May be allowed only when an act complained of, which may include a legislative enactment, directly involves the illegal disbursement of public funds derived from taxation. Compromises
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willful," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful • Tax Avoidance – is the use by the taxpayer of legally permissible alternative tax rates or method of assessing taxable property or income in order to avoid or reduce tax liability. Tax Avoidance is not punishable by law, a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid by means which the law permits. BQ!!! (1996) Mr. Pascual's income from leasing his property reaches the maximum rate of tax under the law. He donated one-half of his said property to a non-stock, non-profit educational institution whose income and assets are actually, directly and exclusively used for educational purposes, and therefore qualified for tax exemption under Article XIV, Section 4 (3) of the Constitution and Section 30 (h) of the Tax Code. Having thus transferred a portion of his said asset, Mr. Pascual succeeded in paying a lesser tax on the rental income derived from his property. Is there tax avoidance or tax evasion? Explain. SUGGESTED ANSWER: There is tax avoidance. Mr. Pascual has exploited a fully permissive alternative method to reduce his income tax by transferring part of his rental income to a tax exempt entity through a donation of one-half of the income producing property. The donation is likewise exempt from the donor's tax. The donation is the legal means employed to transfer the incidence of income tax on the rental income.
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