Nature, scope, classification, and essential characteristics

A. Nature
I. Inherent
1. Taxation
 Impose a charge or burden
 To raise revenue
2. Police Powers
 To regulate people, property, or liberty/excise
 For the general welfare of the public
3. Eminent Domain
 Taking of private property for public use
 With just compensation
 Expropriation
a. Involuntary sale of the private property
4. Power to Tax = Power to Destroy
 Unavoidable cost from income
 Enforced contribution
5. Power to Tax does not equal Power to Destroy until this court stands
 Pending cases leads to the no unavoidable cost due to evasion
II. Legislative
1. Law must be set to not impose, but to limit taxation

B. Scope
I. Comprehensive
1. Covers persons, businesses, activities, professions, rights, and privileges.
II. Unlimited
1. Power of tax is unlimited in the absence of limitations prescribed by Law or the
constitution.
III. Plenary
1. As it is complete
2. BIR may avail of certain remedies to ensure the collection of taxes
IV. Supreme
1. So far as the selection of the subject of taxation

C. Classification
I. As to the scope
1. National: Imposed by the national government
2. Local: Imposed by local government
II. As to subject matter or object
1. Personal, poll, or capitation
 Fixed amount
  Imposed upon individuals, whether citizens or not, residing within a
specified territory without regard to their property or the occupation in
which he may be engaged
2. Property
 Tax imposed on property, whether real or personal, in proportion to its
value
3. Excise
 Taxes imposed for the exercise of a privilege, transfer of a property,
entering into a business, and entering into a business
 Any tax which does not fall within the classification of poll tax or a property
tax
III. As to who bears the burden
1. Direct
 Taxes, which is demanded from the person who also shoulders the burden
of the tax or tax, which taxpayers cannot shift to another.
 Examples:
a. Income tax
b. Estate tax
c. Donor’s tax
2. Indirect
 Taxes, which is demanded from one person in the expectation and intention
that he shall indemnify himself at the expense of another
a. Indemnify: to compensate that party for losses that that party has
incurred or will incur as related to a specified incident.
 Examples
a. Business taxes such as VAT
b. Percentage tax
c. Excise tax
IV. As to determination of amount
1. Specific
 Tax of fixed amount imposed by the head or number
2. Ad Valorem
 According to value
 Tax fixed proportion of the value of the property with respect to which the
tax is assessed
 In proportion to the estimated value of the goods or transaction concerned.
V. As to purpose
1. Primary, Fiscal, or Revenue Purpose
 Tax imposed generally for government
2. Secondary, Regulatory, Special, or Sumptuary Purpose
 Tax imposed for a specific
VI. As to graduation or rate
1. Proportional
 Tax based on a fixed percentage
 2. Progressive or graduated
 Tax the rate of which increases as the tax base
3. Regressive
 Tax rate of which decreases as the tax base
VII. As to taxing authority
1. National
 Taxes imposed under the National Internal Revenue Code
2. Local
 Taxes imposed by local government units

D. Essential Characteristics
I. Enforced Contribution
 Tax is not voluntary and its imposition is in no way dependent upon the will or consent
of the person being taxed
II. Proportionate in character
 The share of the taxpayer on the public burden is essentially based on one’s ability to
pay
III. Levied by the law-making body of the state
 The power to tax is vested unto the Congress or the House of Representatives from
which the tax bill is introduced and the senate
 The congress determines:
i. Who to tax
ii. What to tax
iii. How the tax shall be collected
NOTE: They are not involved in the collection therefor
IV. Levied for public purpose or purposes
 Taxes are spent to support government
 Not supposed to be used for private purposes
V. Generally payable in money
 The government, in the exercise of its civil remedy in collecting the tax due may, by
distraint of personal property or by levy of real property, take the same to satisfy the tax
liability if the taxpayer has no money
i. Distraint: The seizure of someone’s property in order to obtain payment of
money owed
VI. Levied on persons and property
 By the state which has jurisdiction

Principles of sound tax system

I. Fiscal Adequacy
 The source of revenue should be sufficient to meet the demands of public expenditure
 The reason for government budget appropriations
II. Theoretical Justice
  The burden should be in proportion of the taxpayer’s ability to pay
III. Administrative feasibility
 Should be capable of being enforced
 Not burdensome
 Convenient as to time and manner of payment

Stages, aspects, or processes of Taxation

I. Levy
 It is the legislative act that determines that a tax of a certain amount or of a certain
percentage shall be imposed on the persons, properties, or acts subject thereto.
II. Assessment
 It is the official action of an officer authorized by law in ascertaining the amount of tax
due under the law from a taxpayer
i. Ascertaining: to make certain or to establish with certainty, by the finding and
judgment or decree of the court.
III. Collection
 It is the getting by the concerned government agencies of the taxes imposed

Limitations on the power of taxation

Inherent limitations: Restrictions on the power to tax attached to its nature

I. Purpose
 Taxes may be levied only for public purpose
II. Territorial jurisdiction
 The state may tax persons and property under its jurisdiction
 If the subject of taxation is outside the territory, the state can still impose its power of
taxation by invoking personal jurisdiction.
III. Internality Comity
 The property of a foreign state may not be taxed by another
IV. Exemption
 Government agencies performing governmental functions are exempt from taxation
 Taxed when the government agency exercises proprietary functions
i. Proprietary Functions: May be performed by a private entity and is not uniquely
for the benefit of the general public
V. Non-Delegation
 The power to tax being legislative in nature may not be delegated
 Exemptions:
i. Article VI, Sec. 28
 Involves the delegation to the president to:
a. Fix tariff rates: Tax on goods and services imported into a
country
 b. Import and export quotas
c. Tonnage
d. Wharfage dues and another duties and imposts
ii. Article X, Sec. 5
 This is the power of taxation of LGUs to create their own source or
revenue, levy taxes, fees and charges
a. Not Inherent
b. May be granted by the constitution or by legislation
iii. Delegation to administrative agencies
 In the implementation or tax administration
iv. People’s initiative and referendum under RA 6735

Constitutional Limitations: provided in the constitution or implied from its provisions

I. Requirement of Due Process

a. (Article III, Sec. 1)
b. When the state exercises the power of taxation, the taking of the property should be
subject to due process.
c. There must be a basis for the taking
d. Includes the exercise of its powers outside of its territory or when it tax another
sovereign
i. Sovereign: The one who exercises power without limitation.
II. Equal Protection of the Law
a. (Article VI. Sec 21.)
b. No person shall be denied the equal protection of the law
c. Taxpayers should be treated equally both in terms of rights conferred and obligations
imposed
III. Uniformity rule in taxation
a. (Article VI, Sec 21)
b. In taxation, Equality = Uniformity
c. Uniformity: all taxable articles or kinds of property of the same class are taxed at the
same rate.
d. Equitability or equity: Based on one’s ability to pay
e. Progressivity: rate increases as the tax base increases.
f. Dissimilar circumstances should not be taxed the same
g. Valid and reasonable classification
i. Must be based on substantial distinctions, which make real differences.
ii. Must be germane to the purpose of the law or of the legislation
 Germane: being at once relevant and appropriate
ii. Must apply not only to present conditions, but also the future conditions
substantially identical to those present
iii. Must apply equally to all those who belong to the same class wherever they
may be found within the jurisdiction of the taxing authority
h. Q: Is a tax law adopting a regressive system of taxation valid?
 A: Yes. The Constitution does not really prohibit the imposition of indirect taxes, which,
like the VAT, are regressive. The Constitutional provision means simply that indirect
taxes shall be minimized. The mandate to Congress is not to prescribe, but to evolve, a
progressive tax system.
IV. Rule on progressive Taxation
a. (Article VI, Sec. 21)
b. Progressive system: tax rates increases as the tax base increases
c. Found in the constitution but not a mandatory requirement to be imposed by the
congress
i. Only a directive
d. The congress cannot be compelled to devolve a progressive system when as the state
impose more indirect taxes than direct taxes
V. Prohibition against impairment of obligations and contracts
a. (Article III, Sec. 10)
b. Taxing powers cannot alter or revoke existing rights and obligations under valid
contracts.
c. It should not set aside its obligations from contracts by the exercise of its taxation
power.
d. When a tax payer enjoys a contractual tax exemption, then, it is protected by the non-
impairment clause.
e. Not applicable to exemptions or a lesser tax rate by virtue of a franchise
f. Non- Impairment clause is superior to the power of taxation
VI. Prohibition against imprisonment of non-payment of poll tax
a. (Article III, Sec. 20)
b. No one shall be imprisoned because of his poverty, and no one shall be imprisoned for
mere inability to pay debt
i. Exemption: This constitutional guarantee applies when the debt is acquired by
the debtor in good faith
 Acquired in bad faith = Estafa
VII. Non-impairment of the jurisdiction of the supreme court to review final decisions on tax matters
a. (article VIII, Sec. 5 (2))
b. Notwithstanding the existence of the Court of Tax Appeals, which is a special court, all
cases involving taxes can be raised to and be finally decided by the Supreme Court of
the Philippines.
VIII. The free exercise of religious profession and worship is superior to the power of taxation
a. (Article III, Sec 5)
b. Free exercise of religion and does not subject its exercise to taxation.
i. Exemptions
 Religious, charitable or educational entities, non-profit cemeteries,
churches and mosques, lands, buildings, and improvements from
property taxes.
IX. No public money or property shall be appropriated for the use of religious purposes, exempt in
payment for services rendered as mentioned therein
a. (Article VI, Sec 29 (2))
 b. Separation of Church and State
c. The government should not favor any particular system of religion by appropriating
public funds or property in support thereof.
X. Exemption from real property taxation on properties, which are used for religious, charitable
institutions and educational purposes.
a. (Article VI, Sec. 28 (3))
b. Basis of this exemption is actual use and those which are incidental to the purpose
i. Not the ownership but the purpose or use for which the property is being
utilized
XI. Exemption on the non-stock, non-profit educational institutions
a. (Article XIV, Section 3-4)
b. Revenue and assets of these institutions are exempted from DIRECT TAXES
i. Not exempted from indirect taxes such as VAT or any percentage taxes
c. Proprietary educational institutions are not covered by this exemption
XII. Ratification requirement on tax exemptions
a. (Article VI, Sec 28 (4))
b. This requires the concurrence of the majority of all the members of the Congress to
grant tax exemptions.
c. This is not majority constituting a quorum, but majority of all members of Congress.
XIII. Tax measures, revenue and tariff bills shall originate in the House of Representatives.
a. Tax measures, revenue and tariff bills shall originate in the House of Representatives.
b. The origination of a bill by Congress does not necessarily mean that the House bill must
become the final law.
i. It was held constitutional by the Supreme Court when Senate changed the
entire house version of a tax bill.
XIV. Tax money collected for a special purpose shall be treated as a special fund

Double Taxation

 The imposition of taxes on the same income, assets, or financial transactions at two different
points of time
 Can be economic
o Taxing of shareholder dividends after taxation as corporate entity
 First taxation is on the whole corporation
 Second taxation is on the shareholder dividends
 Legal
o Two countries consider that a single person is a tax resident
o Example: Manny Paquiao won a boxing match in the United States.
 First taxation: In the United States, where he gained the revenue
 Second taxation: In the Philippines, where he resides

Impact and Incidence of taxation

 I. Impact
 The immediate result of or original imposition of the tax
 The impact of tax is on the person on whom it is imposed first
o The person whom is Habile to pay the tax to the government bears its impact
 Habile: having the general skill
 Denotes the impact of impinging
o Impinging: to affect something in a way that is unwanted
II. Incidence
 The final resting place of a tax
 On the person who ultimately bears the money burden of the tax
III. Impact vs Incidence
1. Impact: Initial burden
Incidence: Ultimate Burden
2. Impact: Point of imposition
Incidence: Point of settlement
3. Impact: Tax falls upon the person from whom the tax is collected
 Producers as they are liable to pay taxes to the government
Incidence: Tax falls upon the person who pays the tax eventually
 Consumers pay for the producers’ taxes by paying for the
product plus the tax of the product being produced
4. Impact: May be shifted in some instances
 Tax Shifting: the redistribution of tax burden
i. Producers shift their taxes to the consumers
Incidence: Cannot be shifted

Fee

 Operates for purposes of police power or for regulation

 Cannot exceed the reasonable cost for regulation
 Can be imposed only on legal businesses
 Failure to pay would make the business illegal
 Kinds of fees
1. To regulate useful occupation
 The amount of fees that is to be imposed for purpose of regulation should be
reasonable in amount to cover the cost of inspection, surveillance, or regulation.
2. To regulate non-useful occupation
 Could go over and above the requirement of reasonableness
 In order to discourage people from going into a non-useful occupation

Income

 Any inflow of wealth

Escape from Taxation

I. Shifting
 The transfer of the tax burden by the person on whom it is imposed by law to another
person
 Only applicable to indirect taxes
 Types
i. Forward shifting: Producer to Consumer
ii. Backward shifting: Consumer to Producer
iii. Onwards shifting: Series of shifts (two or more forward or backward shifts)
II. Tax Capitalization
 A form of backward shifting
 Real taxes on property sold are capitalized at the time of purchase and deducted in
lump sum from the selling price.
III. Transformation
 Effected through the process of production
 The producer on whom the tax is imposed, fearing the loss of his market if he adds the
tax to the price, takes the tax and recovers his additional expense by improving his
method of production thereby turning out units at lesser costs.
IV. Tax Evasion
 The use of illegal means to defeat of lessen the payment of tax
 Tax dodging
V. Tax Avoidance
 Legally permissible method to reduce tax payment
 Tax minimization
VI. Tax exemption
 Immunity to a particular person, corporation, or persons of a particular class from a tax
 Must be in the same principles of power to tax
i. Legislative in character
ii. Public purpose
iii. Subject to territorial restrictions
iv. Constitutional limitations
v. Due process
vi. Equality
vii. Uniformity
 Equality is not a ground for tax exemption
 Strictly constructed against the tax payer
 Most important basis: Public Interest
i. Public interest must be sufficient to offset the monetary loss entailed in the
grant of the exemption
 Grounds for tax exemption
i. Granted on the basis of contracts
ii. May be curtained in the charter or the law creating the corporation or entity
iii. Public Interest
 iv. Tax treaties or agreements between two states on the basis of reciprocity
VII. Tax amnesty
 Full Immunity
 Operates as a condonation of tax liabilities
i. Condonation: voluntary overlooking or pardon of an offense
 Given to taxpayers with delinquent accounts