Chapter 1 – Taxation in General

A. Definitions:

Taxes Enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty, for the support of government and for all public needs

Compliance Cost Labor cost and other expenses incurred in complying with the tax laws and rules

Hypothecation Levy of a tax on a specified endTaxation Government’s perspective: power by which the

sovereign, through its law making body, raises revenue to defray the necessary expenses of government. Merely a way of apportioning the costs of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens

Taxpayer’s perspective: compulsory transfer of money from private individuals, institutions or groups to the government

Economist’s perspective: non-penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received.

Tax Base Measure upon which the assessment of tax liability is based or wealth within a jurisdiction that is liable to taxation

Tax Rate Describes the burden ratio, usually in percentage at which a person, property, or privileges or occupation is taxed

Marginal Tax Rate: percent levied on each additional peso of taxable income.

Progressive Tax Policy: MTR rises as income increases

Effective TR: rate a TP would be taxed done at a constant rate instead of progressively

Impact of a Tax Person from whom government collects money in first instance. Liability of the tax

Incidence of a Tax Person who bears liability of the taxTax Base Erosion Occurs when traditional taxable components of the

tax base are no longer representative of the economy at large

May result from the use of aggressive tax strategies by taxpayers

Tax Pyramiding Sales taxes are applied to both inputs and outputs, shifting the burden to the ultimate consumer

Some or all of the stages of production are taxed with the accumulation borne by the consumer at the point of sale

Violates the uniformity and neutrality principles of taxation

Neutral Tax Does not cause individuals or firms to shift their economic choices. Example: poll tax / community tax

Revenue Neutral Taxing procedure that allows the government to still receive the same amount of money despite changes in tax laws

Statutory Taxpayer Person on whom tax is imposed by law and who paid the same even if he shifts the burden to another

Extraterritorial Taxation Tax imposed on property/subject outside the StateTax exporting Shifting of a tax burden to non-residents of a given

jurisdiction

B. Relevant Theories / Bases of Taxation

Necessity Theory and Lifeblood Doctrine

Existence of the government is a necessity

It has a right to compel all citizens and property within its limits to pay taxes

Taxes = lifeblood of the nation and greatly needed to support the government and its widely expanding services to the nation

Should be collected without unnecessary hindrance but must be made in accordance with the law

Benefits-Protection Theory/ Theory of Reciprocity/ Symbiotic Relationship

Taxes are what we pay for a civilized society

The government is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral value.

If does not go by procedure the TP may complain and the courts will come to its succor.

Taxation as Government Violation of the Non-aggression Principle and the Social Contract Theory

Viewpoint: government transgresses property rights by enforcing compulsory tax collections

Dismissed by: Social Contract Theory

Government has a social contract with the citizens by exercising taxing power to promote common good and public interest. Since the taxpayer reaps the benefit, he should bear the burden

C. Purposes and Effect of Taxation (6 R’s)

Raise Revenues Primary purpose is revenue/to generate funds or property for the State to finance the needs of the citizens and to advance the common weal

Regulatory Purpose Taxes may be levied with a regulatory purpose covering matters which are affected with public interest as to be within the police power of the state.

Tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed.

Every law enjoys in its favor the presumption of constitutionality

Sumptuary purpose of taxation: nor-revenue / regulatory purpose of taxation

Redistribution of Wealth / Reduction of Social Inequality

Congress is mandated to evolve a progressive system of taxation

Progressivity: Those who are able to pay more should shoulder the bigger portion of the tax burden

Repricing Taxes may be levied to address externalities

Externalities: cost or benefit that is not transmitted through prices and is incurred by a party who was not involved as either a buyer or seller of goods or services causing the cost or benefit

Cost of externality: negative externality / external cost

Benefit of externality: positive externality / external benefit

Resuscitate Economy Used as a first aid measure to resuscitate an economy in distress

Tax Exemptions: granted to entice investments and help the economy

Also used to influence the macroeconomic performance of the economy

Representation More of a consequential effect rather than a purpose

There is no taxation without representation

Without representation, no government will manage and use the taxes to provide goods and services to the citizens

D. Characteristics and Requisites of Taxes

CharacteristicsEnforced contribution Involuntary and does not depend on the

will or compliance of the taxpayer

Taxes are mandatory

Matter of duty and cannot be bargained. Not flexible.

Exacted pursuant to legislative authority

GR: power is exercised only by the legislative department

X: valid delegation of the powerContribution being in the form of money

GR: payable in money

But there is no law prohibition in payment in form of property.

Distraint and Levy of Non-cash properties are remedies available to the government in case of tax delinquency

Imposed, levied and collected for the purpose of raising revenue

To generate funds

Used for public or governmental purpose

Cannot be used for private purposes otherwise it will result to perversion of the taxing power and will be UNCONSTITUTIONAL

Levied by authority which has jurisdiction over the person, property, transaction, rights, and privileges

Cannot go beyond its jurisdiction

RequisitesPerson/Property taxed should be within the jurisdiction of the taxing authorityAssessment and collection of certain kinds of taxes guarantee against injustice to individuals, especially by providing notice and opportunity of hearingFor public purposeRule on taxation must be uniform and equitableMust not impinge on the inherent and Constitutional limitations on the power of taxation

E. Nature of the Taxing Power

Two-fold NatureInherent Legislative

Being an attribute of sovereignty Subject to constitutional limitationsGR: power to tax is an incident of sovereignty and is unlimited in range.

1. It can be imposed even in the absence of a constitutional grant

2. Injunction is not generally available to enjoin collection of taxes

3. Taxes cannot be the subject of set-off or compensation

4. It is an unlimited or plenary power

5. It is inherent in the power to tax that the State be free to select the subject of taxation

LGU = taxing not inherent because they are not sovereign units

Legislature primary lies the discretion to determine the nature, object, extent, coverage, and situs of taxation.

Scopes:

1. The purposes provided they are lawful and public

2. Person, property, privileges or occupation to be taxed

3. Amount or rate

4. Kind of tax

5. Apportionment of the tax

6. Situs of taxation

7. Mode or method of collection

- power not granted in the constitution, but merely constitutes limitations upon the power

- not a contract between the state and the citizenso obligations arising from law not contractso Taxation lacks the element of consent

- Not political in nature- Taxes are personal

o Rights are transmissible but obligations are not- unlimited in range- Imprescriptible

o Assessment and collection of taxes are imprescriptible since it is the lifeblood of the government

o Statutes may provide prescription period for collection of certain taxes

F. Aspects of Taxation

Aspect of TaxationLevy Determination of the persons, property or

exercises to be taxed, amount to be raised, rate to be imposed and the manner of implementation

Exercised by legislatureAssessment and Collection Manner of enforcing the obligation of

taxes already levied upon the taxpayer

Exercised by the Executive DepartmentPayment / Exercise of Remedies Compliance and / or resistance by the

taxpayer.

Initially by eh E/L through suffrage or initiative/referendum and ultimately through the Judiciary

Note: Power to tax includes also the power to grant exemptions

G. Sound Tax System

Canons of TaxationEquity Every person should pay to the

government depending on the ability to pay

Taxes should be proportional to incomeCertainty Tax to be paid must be certain and not

arbitraryConvenience Mode and timing of tax payment should

be convenient to the taxpayersEconomy There should be economy in tax

administration

Cost of tax collection must be lower than the amount of tax collected

Productivity Tax when levied should produce sufficient revenue to the government

Elasticity Tax system should be fairly elastic so if the government need more funds then it could increase its financial resources without incurring any additional cost of collection

Simplicity Simple, plain and intelligible to the taxpayer so as to not lead to corruption

Diversity Should include a number taxes which are economical

Basic Principles of STSFiscal Adequacy Sources of revenues must be adequate

to meet the government expenditures and their variations

Violation of this principle: still VALID and Constitutional

Theoretical Justice Taxes must be based on the TP ability to pay and proportional to the relative value of the property

Taxation must be uniform and equitable and the State must evolve a progressive system of taxation

Violation of this principle: law unsound, invalid and unconstitutional

Administrative Feasibility Taxes should be capable of being effectively enforced

Violation of this principle: law unsound, VALID, and constitutional

H. Taxes are Not Subject to Compensation

- Government and TP are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract, or judgment as if allowed to be set-off

DEBT TAXDue to the government in its corporate capacity

Due to the government in its sovereign capacity

Sum of money due upon contract Levied by the governmentObligation created by contract Does not proceed from contractMay be subject of set-off Cannot be the subject of set offArise out of acts of private individuals Can only be imposed of public

authorityCan be assigned Cannot be assignedPaid in money, property and services Paid generally in money

- no offsetting of taxes against the claim that the taxpayer may have against the government

- GR: compensation had been the practice in the past can set no valid precedent.

- Exceptions:

o Domingo vs. Garlitos Both the claim of the Government for the inherent tax and

the claim of the estate for services rendered have already become overdue and demandable and fully liquidated

An amount for the claim of the estate had already been appropriated by the Government

o CIR vs Esso Standard Eastern Solutio Indebiti

I. Doctrine of Equitable Recoupment

- legal principle that grants a right to a creditor to recover debt - it is a legal principle that the creditor loses the right to recover a debt if the

creditor illegally posses some of the debtor’s property

Applied to taxation: - allows a taxpayer to set off previously overpaid taxes due, even though the

taxpayer is time-barred from claiming refund on the previous taxes- allows the government to set-off those taxes that has not been collected

from a taxpayer against current claim for refund - applicable only if the statute of limitations has created an inequitable result.- Defensive remedy which helps in the mitigation of damages- Usually practiced in common law countries but has been rejected in our

jurisdiction.

J. Classification of Taxes

As to Subject MatterPersonal, Capitation or Poll Fixed amount for a certain class without

regard to the property, occupation or business of those belonging to the class

Property Imposed on a certain valuation of property

Amount of property owned by TP on a given day and not on the total amount owned by him during the year.

Excise or Privilege Imposed for exercise of privileges or doing business

Custom duties Commodities being imported or exported

As to PurposeGeneral, Fiscal, or Revenue Designed to raise revenue for the general

or ordinary purpose of the GovernmentSpecial or Regulatory Achieve social or economic goals

irrespective of whatever revenue is actually raised or not

As to who bears the burdenDirect Tax is imposed and absorbed by the

same person

Both the incidence of or liability for the payment of the tax as well as the impact or burden of the tax falls on the same person and cannot be shifted

Indirect Tax paid by a person other than the one whom it is imposed

Example: VAT

As to rate or graduationProportional Fixed rate regardless of tax baseProgressive / Graduated Tax rate and tax base are directly

proportional

Rate or amount of tax increases as the amount of earning or income increases

Regressive Tax rate and tax base are inversely proportional

Tax rate decreases as the amount of income or earning to be taxed increases.

As to taxing authorityNational Imposed by CongressLocal Imposed by legislative bodies

As to scopeGeneral Imposed throughout the State or civil

division for raising revenue for the general purpose on the ground of general public interest

Special Levied for a special purpose for the benefit of a part of a body politic resting upon the supposition that a portion of the public is specially benefited in the increase of the value of the property

As to basis of amountSpecific Fixed amount by head or number or by

some standard of weight or measurement

Ad Valorem (Value) Fixed portion of the value of the property

Require intervention of assessors or appraisers to estimate the value of the property

OthersConsumption Tax Imposed on consumable commodity and

services

Sumptuary Tax Government levy on goods considered socially undesirable

Ex. Alcohol and TobaccoFlat Tax Tax rate that is charged no matter how

much the value. Does not change.

K. Other Sources of Revenue / Funds and Impositions

a. License Fees Paid for the right granted by some competent authority to do an act

which, without authority would be illegal

TAX LICENSE FEEPower of taxation of the State Police power of the StatePrimary purpose: generate revenue, regulation is incidental

More on regulation to promote public welfare

Amount of tax not subject to limitations provided that it is NOT harsh, oppressive, and confiscatory

Limited to the cost of regulation

Normally paid when business is on operation

Paid BEFORE the commencement of the business

Cannot be bargained away except for lawful consideration

May be bargained away with or without consideration

Non-payment does not make the business illegal. Ground for criminal prosecution

Non-payment makes the business illegal

b. Special Assessment An exaction on property levied in accordance with the benefits

conferred upon that property

TAX SPECIAL ASSESSMENTLevied on land, persons, property, income, business, etc.

Levied on land

Personal liability of TP Cannot be made a personal liability of the person assessed of the same

Based on necessity and partially on benefits derived

Based solely on benefits derived

General application Special application only as to a particular time or place

c. Fines paid in cases of violation of the law

d. Penalty Is a punitive sanction for compelling timely action

TAX PENALTYEnforced proportional contributions from persons and property

Punishment for violation of law or acts deemed injurious

Imposed to raise revenue Imposed to regulate and rectify conductOnly government may impose taxes Government and private individuals may

impose a penalty

e. Toll Payment or fee exacted by the authorities for some right or privilege

TAX TOLLDemand of sovereignty for the purpose of raising public revenue

Compensation for the use by one of another’s property

Amount of tax is determined by the State Amount is based on the cost of the property or of the improvement being used

Impose by the State Imposed by Government or Private Individual or entity

f. Tariff / Custom Duty Impost upon goods transported from one political jurisdiction to

another

g. Subsidy Grant of money in aid of a private enterprise deemed to promote

the public welfare

h. Compromise Penalty Amount imposed in case of a compromise involving violations of tax

laws

i. Revenue Money which comes to a person or entity from any source or

sources which includes money which comes to a government from taxes

L. Taxation, Police Power, and Eminent Domain

Taxation Police Power Eminent DomainPurpose Revenue Promotion of

general welfarePublic purpose

Amount No limit as long as it is not confiscatory

Only cover cost of regulation

Depends on the value of property needed

Compensation General benefit to all inhabitants

Intangible altruistic feeling of having done something good

Just compensation

Benefits Received

No special or direct benefit received by TP but just general benefits

Healthy economic standard of society is attained

Direct benefit in the form of just compensation to the property owner

Non-impairment of Contracts

May not be impaired UNLESS TP gave to consideration of government tax franchise

May be impaired May be impaired

Property Taken Money Property including money

Property other than money and choses in action

Scope Interfere only with property rights

Regulates both liberty and property

Interfere only with property rights

M. Judicial Review

- Courts cannot review the wisdom of or advisability or expediency of a taxo The courts does not have any concern with the policy of legislation

as long in imposing tax it does not violate applicable constitutional limitations or restrictions

- Requirements for questioning constitutionalityo There must be an actual controversy

Involves a conflict of legal rights, and assertion of opposite legal claims susceptible of judicial adjudication

Need to be definite and concrete Question must be ripe for adjudication Locus standi

Right of appearance in a court of justice on a given question

Party’s personal and substantial interest in a case such that he has sustained or will sustain direct injury as a result of the governmental act being challenged.

o Petitioners have to raise a question of constitutionalityo The constitutional question must be raised at the earliest

opportunity o Decision of the constitutional question must be necessary to the

determination of the case itself

Presumption: acts of the political departments are valid, absent clear and unmistakable showing to the contrary.

- Moot and Academic Caseo One that ceases to present a justiciable controversy by virtue of

supervening events, so that a declaration thereon would be of no practical use or value

o The moot and academic principle is not a magical formula that can automatically dissuade the courts in resolving a case.  Courts will decide cases, otherwise moot and academic, if: 

first, there is a grave violation of the Constitution

second, the exceptional character of the situation and the paramount public interest is involved;

third, when constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and the public and

fourth, the case is capable of repetition yet evading review.

- Judicial Proceedings not requiredo Because it is upon taxation that the government chiefly relies to

obtain means to carry on its operationo Taxpayers and state are not prohibited from seeking remedies from

the court

- Quantum of Evidenceo Preponderance of evidence

- No estoppel against the governmento Not estopped by the mistakes and errors of its agentso This rule may be relaxed in the interest of justice and fair play, as

where injustice will result to the taxpayer

N. Taxpayer’s Suit

- Citizen and Taxpayer’s Suito Plaintiff in TP suit: affected by expenditure of public fundso Plaintiff in Citizen’s suit: mere instrument of the public concern

CITIZEN’S SUIT TP SUITRight and not the duty of every citizen to interfere and see that a public offence be properly pursued and punished, and a public grievance be remedied

Right of a citizen and TP to maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be denied

- Brushing aside Technicalitieso Thus, the Court has adopted a rule that even where the petitioners

have failed to show direct injury, they have been allowed to sue under the principle of transcendental importance.

o Pertinent are the following cases:

(1) Chavez v. Public Estates Authority: where the Court ruled that the enforcement of the constitutional right to information and the equitable diffusion of natural resources are matters of transcendental importance which clothe the petitioner with locus standi;

(2) Bagong Alyansang Makabayan v. Zamora,wherein the Court held that given the transcendental importance of the issues involved, the Court may relax the standing requirements and allow the suit to prosper despite the lack of direct injury to the parties seeking judicial review of the Visiting Forces Agreement;

o (3) Lim v. Executive Secretary, while the Court noted that the petitioners may not file suit in their capacity as taxpayers absent a showing that Balikatan 02-01 involves the exercise of Congress taxing or spending powers, it reiterated its ruling in Bagong Alyansang Makabayan v. Zamora, that in cases of transcendental importance, the cases must be settled promptly and definitely and standing requirements may be relaxed.

o By way of summary, the following rules may be culled from the cases decided by this Court.   Taxpayers, voters, concerned citizens, and legislators may be accorded standing to sue, provided that the following requirements are met:

(1) the cases involve constitutional issues; (2) for taxpayers, there must be a claim of illegal

disbursement of public funds or that the tax measure is unconstitutional;

(3) for voters, there must be a showing of obvious interest in the validity of the election law in question;

(4) for concerned citizens, there must be a showing that the issues raised are of transcendental importance which must be settled early; and for legislators, there must be a claim that the official action complained of infringes upon their prerogatives as legislators.

o Significantly, recent decisions show a certain toughening in the Court’s attitude toward legal standing.  

- Questioning the Validity and Constitutionality of Statutes by a TPo Validity of a statute may be contested only by one who will sutain a

direct injury in consequence of it’s enforcemento Requisites of a TP suit:

Public funds derived from taxation are disbursed by political subdivision/instrumentality and in doing so, a law is violated or some irregularity is committed

Petitioner is directly affected by the alleged acto TP need not be the party to the contract to challenge it’s validity, as

long as taxes are involved, people have a right to question contracts entered into by the government.

- Transcendental Importanceo Character of the funds or other assets involved in the caseo Presence of a clear case of disregard of a constitutional or statutory

prohibition by the public respondent agency or instrumentality of the government

o Lack of any other party with a more direct and specific interest in raising the questions being raised

- President = improper to implead as respondento There are other remedies such as Impeachment if he is unable to

fulfill his duties