General Principles of Taxation

What is Taxation?

It is the inherent power by which the sovereign states imposes financial

burden upon persons and property as a means of raising revenue in order to defray

the necessary expenses of the government.

Nature of Taxation (2 fold nature of the States power to tax)

1. It is an inherent power because it is being an attribute if a sovereign. There is

no need for a constitutional grant for the state to exercise this power because
without taxes the states very existence would be impaired. No injunction to

enjoin the collection of tax.

2. It is a legislative power

Taxation is a legislative power because it involves the promulgation of

rules. Taxation is a set of rules, who pays the tax, how much is the tax

to be paid, to whom it should be paid, and when the tax be paid.

Characteristics of taxation

1. It is an attribute of sovereignty.

2. Legislative in character.

3. Does not have any retroactive effect. Unless the language of the statute

clearly provides otherwise. (CIR vs. Acosta 2007)

4. It is subservient to the non-impairment clause. The power of taxation could

not be exercised if the exercise would impair the obligations of contracts.

5. Taxation may be exercised jointly with the police power.

6. Power to tax is unlimited.

The power to tax involves the power to destroy Marshall

Power to tax is not the power to destroy Justice Holmes

Reconciliation:

The power to tax involves the power to destroy because being an enforced
contribution the subject is not at liberty to free himself from this burden. However,
this power is not absolute because it is subject to certain inherent and constitutional
limitations. If the exercise of the taxing power exceeds these limitations, then the
court has the duty to declare the same as invalid or unconstitutional, thereby

preventing the destructive nature of the power of taxation.

Purpose of taxation

1. Primary purpose, is to raise revenue in order to satisfy the government needs

2. The other purpose is non-revenue or special or regulatory

A. Regulatory purpose, the states increases taxes on harmful substance

making them more expensive, thus limiting their consumption. It is to
promote the general welfare and protect the health safety or morals of
the inhabitants. It is the joint exercise of the power to taxation and police
power where regulatory taxes are collected. It also regulates the conduct

of business or profession.

B. Compensatory purpose. The power of taxation may be exercised in order

to maintain a high level of employment through acceleration of the
infrastructure projects, farm support activities (financial support for

purchase of fertilizer and other farm inputs.) and etc.

C. Power to tax can also be used to implement the power of eminent

domain. To implement the power of eminent domain such as requiring
business establishment to grant discounts to senior citizens. The granting
establishment could then deduct the discount from their gross income

thus compensating them for the discounts given.

Principles of Sound tax system are

1. Fiscal adequacy. Tax system must be able to provide sufficient revenues in

order to meet the legitimate objects of government.

2. Equity or theoretical justice. Tax should be collected on the basis of ability to

pay through a progressive system of taxation. Thus incidence or burden of

taxation should fall more on those who could afford.

3. Administrative feasibility. Tax must be plain and clear to the taxpayer and

should be capable of efficient enforcement by government officials.

Theory and basis of taxation

1. Lifeblood theory.
 Taxes are the lifeblood of the government for without taxes, the
government can neither exist nor endure, it cannot survive and would be

paralyzed for lack of motive power to activate and operate it.

Note:

a. Collection of taxes may not be enjoined by injunction. No court shall have

the authority to grant an injunction to restrain the collection of any
internal revenue tax, fee or charge imposed by the NIRC. (Angeles City vs.

Angeles Electric Corp.2010.) EXCEPTIONS...infra. :D

b. Taxes could not be subject to compensation and set-off

c. Valid tax may result in destruction of the taxpayers property.

d. Taxation is an unlimited and plenary power.

2. Necessity theory.

The theory behind the exercise of the power to tax emanates from
necessity, without taxes, government cannot fulfill its mandate of promoting

the general welfare and well being of the people.

3. Benefits protection theory (symbiotic relationship).

The state gives protection and for it to continue giving protection it must be

supported by the taxpayers in the form of taxes.

Classification of taxes

1. As to subject mater.

A. Personal (poll or capitation). Tax of a fixed amount imposed on persons

residing within a specified territory, whether citizens or not, without
regard to their property or the occupation or business in which they may
be engaged.

Note:

Taxes of a specified amount imposed upon each person performing a

certain act or engaging in certain business or profession are not however,

poll taxes.

Example:
 Community tax.

B. Property. Tax imposed on property whether real or personal, in proportion

either to its value or in accordance with some other reasonable methods

of apportionment.

Example:

Real Estate Tax

C. Excise Any tax which does not fall within the classification of a poll tax or
property tax. Thus this tax is a charge imposed upon the performance of
an act, the enjoyment of a privilege, or the engaging in an occupation.

Example:

Income tax, VAT, Estate, Donors tax.

2. As to who bears the burden

A. Direct. Tax which is demandable or exacted from the very person who
also shoulders the burden of the tax or tax which the taxpayer is directly

or primarily liable or which he cannot shift to another.

Example:

Corporate and individual income tax; community tax; estate tax

and donors tax.

B. Indirect. Tax which is demandable from, or are paid by, one person in the
expectation and intention that he shall indemnify himself at the expense
of another by passing on the burden to the latter, falling finally upon the

ultimate purchaser or consumer.

Examples:

VAT, Percentage taxes, excise taxes on certain specific goods,

customs duties.

3. As to determination of amount.

A. Specific. Tax of a fixed amount imposed by the head or number, or by

standard of weight or measurement, it requires no assessment other than

listing or classification of the objects to be taxed.

 Examples:

Taxes on distilled spirits, wines and fermented liquor, cigars

and cigarettes and others.

B. Ad valorem. Tax of a fixed proportion of the value of the property with

respect to which the tax is assesse, it requires the intervention of
assessors or appraisers to estimate the value of such property before the
amount due from each taxpayer can be determined. The phrase ad

valorem means literally according to value.

Examples:

Real estate tax, excise taxes on automobile, non-essential

goods such as jewelry and perfumes, and others, customs duties )

except on cinematographic films.

4. As to purpose

A. General, fiscal or revenue. Tax imposed for the general purpose of the
government (to raise revenue).

Example:

Almost all taxes

B. Special or regulatory. Tax imposed for a specific purpose.

Examples:

Protective tariff or customs duties on imported goods to

enable similar manufactured locally to compete with such imports in

the domestic markets.

5. As to scope or authority imposing the tax.

A. National. Tax imposed by the national government.

Examples:

National internal revenue taxes, custom duties and national

taxes imposed by special law.

B. Municipal or local/

Examples:
 Real estate tax, professional tax

6. As to graduation or rate.

A. Proportional. Tax based on a fixed percentage of the amount of the

property, receipts, or other basis to be taxed. The rate of the tax remains
constant for all the levels of the tax base or any given income level, called

flat or uniform tax.

Examples:

Real estate taxes, VAT and other percentage taxes.

B. Progressive or graduated. Tax the rate of which increases as the tax base

or bracket increases.

Examples:

Income tax, estate tax, donors tax

C. Regressive, Tax the rate of which decreases as the tax base or bracket

increases.

Examples:

The tax rate and the tax base move in opposite direction. We

have no regressive taxes.

Tax vs.

1. Toll.

A. A toll is a demand of proprietorship// tax is a demand of sovereignty.

B. A toll is paid for the use of anothers property// paid for support of the

government.

C. The amount of toll depends upon the cost of construction or

maintenance of the public improvement used // generally no limit of tax

that may be impose.

D. A toll may be imposed by the government or private individual // may be

imposed ONLY by the government.

2. License or permit fee.

 A. License fee is the legal compensation or reward of an officer for specific
services // tax is an enforced contribution assessed by sovereign authority

to defray the public expenses.

B. Imposed for regulation // levied for revenue.

C. Involves an exercise of police power // taxing power

D. Its amount should be limited to the necessary expenses of inspection and

regulation // generally no limit on the amount of tax that may be

imposed.

E. It is imposed on the right to exercise a privilege // imposed also on

persons and property.

F. Failure to pay a license fee makes the act or business illegal // does not
necessarily make the act or business illegal.

3. Debt. ( however it is like tax, a liability or obligation)

A. Generally based on contract express or implied // based on law

B. Assignable // cannot generally be assigned.

C. May be paid in kind // payable in money.

D. May be subject of set-off or compensation // generally not.

E. Person cannot be imprisoned for non-payment of debt // imprisonment

for non-payment of taxes (except poll tax).

F. It is govern by ordinary periods of prescription // governed by special

prescriptive period provided for in the tax code.

G. It draws interest when stipulated or when there is default // does not

except only when delinquent.

4. Special assessment.

A. A special assessment levied only on land.

B. It is not a personal liability of the person assessed, i.e., his liability is

limited only to the land involved.

C. It is based wholly on benefits (not necessity); and

 D. It is exceptional both as to the time and place.

5. Penalty.

A. Designed to regulate conduct // raise revenue.

B. May be imposed by private individual or entities // only government.

6. Custom duties. Imposed on goods exported from or imported into a country.

Three inherent powers of the state

1. Taxation. The inherent power of the sovereign state to impose financial

burden on persons and property as a means of raising revenue in order to

defray the necessary expenses of the government.

2. Eminent Domain. Inherent power of the sovereign state to take private

property for public use upon payment of just compensation.

3. Police Power. Inherent power of the sovereign state to enact laws to promote

public health, morals, safety and general welfare of the people.

Similarities of the three inherent powers

1. They all rest upon necessity because there can be no effective government

without them.

2. They all underlie and exist independently of the Constitution although the
conditions for their exercise may be prescribed by the Constitution and by

law.

3. They are ways by which the state interferes with the private rights and

property

4. Hey are legislative in nature and character, although actual exercise of the

powers is given to the executive authorities, national or local; and

5. They all presuppose an equivalent compensation received, directly or

indirectly by the persons affected by the exercise of these powers by the

government.

Distinctions.

1. As to authority which exrcises