TAX REVIEWER GENERAL PRINCIPLES: BY: Rene Callanta DEFINITION OF TAXATION Taxation is 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. BASIS OF TAXATION > GOVERNMENTAL NECESSITY * The existence of the government depends upon its capacity to perform its two (2) basic functions: A.. to serve the people B.. to protect the people THEORY OF TAXATION >RECIPROCAL DUTIES OF SUPPORT AND PROTECTION 1) Support on the part of the taxpayers 2) Protection and benefits on the part of the government BENEFITS RECEIVED PRINCIPLE (CIR vs. ALGUE) 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. However, it does not mean that only those who are able to pay taxes can enjoy the privileges and protection given to a citizen by the government. LORENZO vs. POSADAS > The only benefit to which the taxpayer is entitled is that derived form the enjoyment of the privileges of living in an organized society established and safeguarded by the devotion of taxes to public purpose. The government promises nothing to the person taxed beyond what maybe anticipated from an administration of the laws for the general good. > Taxes are essential to the existence of the government. The obligation to pay taxes rests not upon the privileges enjoyed by or the protection afforded to the citizen by the government, but upon the necessity of money for the support of the State. For this reason, no one is allowed to object to or resist payment of taxes solely because no personal benefit to him can be pointed out as arising from the tax. ESSENTIAL ELEMENTS OF A TAX 1) It is an enforced contribution 2) It is generally payable in money 3) It is proportionate in character 4) It is levied on persons, property, or the exercise of a right or privilege 5) It is levied by the State which has jurisdiction over the subject or object of taxation 6) It is levied by the law-making body of the State 7) It is levied for publics purpose or purposes REQUISITES of a VALID TAX code: [P, U, J, A, N] 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 *> Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But their collection should not be tainted with arbitrariness NATURE OF TAXATION 1) Inherent in sovereignty 2) Legislative in character

SCOPE OF TAXATION 1) Comprehensive 2) Unlimited 3) Plenary 4) Supreme TOLENTINO vs. SEC. Of FINANCE > In the selection of the object or subject of taxation the courts have no power to inquire into the wisdom, objectivity, motive, expediency or necessity of such tax law. (WOMEN) PURPOSES OF TAXATION PRIMARY To raise revenue in order to support the government SECONDARY 1) Used to reduce social inequality 2) Utilized to implement the police power of the State 3) Used to protect our local industries against unfair competition 4) Utilized by the government to encourage the growth of local industries

PAL vs. EDU > It is possible for an exaction to be both a tax and a regulation. License fees and charges, looked to as a source of revenue as well as a means regulation. The fees may properly regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax. CALTEX vs.. CIR > Taxation is no longer a measure merely to raise revenue to support the existence of the government. Taxes may be levied with a regulatory purpose to provide means for rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the State.

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. (CIR vs. ALGUE) > 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

ILLUSTRATIONS OF THE LIFEBLOOD THEORY 1) Collection of the taxes may not be enjoined by injunction 2) Taxes could not be the subject of compensation or set off 3) A valid tax may result in destruction of the taxpayers property 4) Taxation is an unlimited and plenary power

POWER TO TAX AND POWER TO DESTROY * > The power to tax includes the power to destroy if it is used as an implement of the police power (regulatory) of the State. However, it does not include the power to destroy if it is used solely for the purpose of raising revenue. (ROXAS vs. CTA) NOTES: > If the purpose of taxation is regulatory in character, taxation is used to implement the police power of the state > If the power of taxation is used to destroy things, businesses, or enterprises and the purpose is to raise revenue, the court will come in because there will be violation of the inherent and constitutional limitations and it will be declared invalid.

NATURE OF THE TAXING POWER 1) Attribute of sovereignty and emanates from necessity, relinquishment of which is never presumed 2) Legislative in character, and 3) Subject to inherent and constitutional limitations

NECESSITY THEORY > Existence of a government is a necessity and cannot continue without any means to pay for expenses

BENEFITS PROTECTION THEORY > Reciprocal duties of protection and support between State and inhabitants. Inhabitants pay taxes and in return receive benefits and protection from the State SCOPE OF LEGISLATIVE TAXING POWER 1) The persons, property and excises to be taxed, provided it is within its jurisdiction 2) Amount or rate of tax 3) Purposes for its levy, provided it be for a public purpose 4) Kind of tax to be collected 5) Apportionment of the tax 6) Situs of taxation 7) Method of collection ASPECTS OF TAXATION 1) LEVY or IMPOSITION enactment of tax laws legislative in character 2) ASSESSMENT collection administrative in character NOTES: > It is inherent in the power to tax that the State is free to select the object of taxation > The power of the legislature to impose tax includes the power 1) what to tax 2) whom to tax 3) how much to tax

BAGATSING vs. RAMIREZ > What cannot be delegated is the legislative enactment of a tax measure but as regards to the administrative implementation of a tax law that can be delegated. > The collection may be entrusted to a private corporation. > The rule that the power of taxation cannot be delegated does not apply to the administrative implementation of a tax law > There is no violation because what is delegated or entrusted is the collection and not the enactment of such laws > The issuance of regulations or circulars by the BIR or the Secretary of Finance should not go beyond the scope of the tax measure

BASIC PRINCIPLES OF A SOUND TAX SYSTEM 1) THEORETICAL JUSTICE 2) FISCAL ADEQUACY 3) ADMINISTRATIVE FEASIBILITY NOTES: FISCAL ADEQUACY VIOLATION VALID > Sources of revenue should be sufficient to meet the demands of public expenditure > Revenues should be elastic or capable of expanding or contracting annually in response to variations in public expenditure >Elasticity may be obtained without creating annually any new taxes or any new tax machinery but merely by changes in the rates applicable to existing taxes > Even if a tax law violates the principle of Fiscal Adequacy , in other words, the proceeds may not be sufficient to satisfy the needs of the government, still the tax law is valid

ADMINISTRATIVE FEASIBILITY VIOLATION VALID > The tax law must be capable of effective or efficient enforcement > Tax laws should be capable of convenient, just and effective administration

> Tax laws should close-up the loopholes for tax evasion and deter unscrupulous officials from committing fraud > There is no law that requires compliance with this principle, so even if the tax law violates this principle; such tax law is valid.

THEORETICAL JUSTICE VIOLATION INVALID > This principle mandates that taxes must be just, reasonable and fair Taxation shall be uniform and equitable > Equitable taxation has been mandated by our constitution, as if taxes are unjust and unreasonable then they are not equitable, thus invalid. > The tax burden should be in proportion to the taxpayers ability to pay (ABILITY TO PAY PRINCIPLE)

DISTINCTIONS: TAXATION vs. POLICE POWER vs. EMINENT DOMAIN 1) As to purpose: Taxation for the support of the government Eminent Domain_- for public use Police Power to promote general welfare, public health, public morals, and public safety. 2) As to compensation: Taxation Protection and benefits received from the government. Eminent Domain 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 lower. Police Power The maintenance of a healthy economic standard of society. As to persons affected: Taxation and Police Power operate upon a community or a class of individuals Eminent Domain operates on the individual property owner. As to authority which exercises the power: Taxation and Police Power Exercised only by the government or its political subdivisions. Eminent Domain may be exercised by public services corporation or public utilities if granted by law. As to amount of imposition: Taxation Generally no limit to the amount of tax that may be imposed. Police Power Limited to the cost of regulation Eminent Domain There is no imposition; rather, it is the owner of the property taken who is just paid compensation. As to the relationship to the Constitution: Taxation and Eminent Domain Subject to certain constitutional limitations, including the prohibition against impairment of the obligation of contracts. Police Power Relatively free from constitutional limitations and superior to the non-impairment provisions thereof.

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TAX DISTINGUISHED FROM LICENSE FEE: a) PURPOSE: Tax imposed for revenue WHILE license fee for regulation. Tax for general purposes WHILE license fee for regulatory purposes only. b) c) BASIS: Tax imposed under power of taxation WHILE license fee under police power. AMOUNT: In taxation, no limit as to amount WHILE license fee limited to cost of the license and expenses of police surveillance and regulation. TIME OF PAYMENT: Taxes normally paid after commencement of business WHILE license fee before. EFFECT OF PAYMENT: Failure to pay a tax does not make the business illegal WHILE failure to pay license fee makes business illegal. SURRENDER: Taxes, being lifeblood of the state, cannot be surrendered except for lawful consideration WHILE a license fee may be surrendered with or without consideration.

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IMPORTANCE OF DISTINCTION BETWEEN TAXES AND LICENSE FEES. It is necessary to determine whether a particular imposition is a tax or a license fee, because some limitations apply only to one and not to the other. Furthermore, exemption from taxes does not include exemption from license fees

TAXES DISTINGUISHED FROM OTHER IMPOSITIONS: 1) toll amount charged for the cost and maintenance of property used; 2) 3) compromise penalty amount collected in lieu of criminal prosecution in cases of tax violations; special assessment levied only on land based wholly on the benefit accruing thereon as a result of improvements of public works undertaken by government within the vicinity. license fee regulatory imposition in the exercise of the police power of the State; margin fee exaction designed to stabilize the currency custom duties and fees duties charged upon commodities on their being imported into or exported from a country; debt a tax is not a debt but is an obligation imposed by law.

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Special assessment v. tax 1. 2. 3. 4. 5. A special assessment tax is an enforced proportional contribution from owners of lands especially benefited by public improvements A special assessment is levied only on land. A special assessment is not a personal liability of the person assessed; it is limited to the land. A special assessment is based wholly on benefits, not necessity. A special assessment is exceptional both as to time and place; a tax has general application.

Republic v. Bacolod, 17 SCRA 632 A special assessment is a levy on property which derives some special benefit from the improvement. Its purpose is to finance such improvement. It is not a tax measure intended to raise revenues for the government. The proceeds thereof may be devoted to the specific purpose for which the assessment was authorized, thus accruing only to the owners thereof who, after all, pay the assessment.

Some Rules: An exemption from taxation does not include exemption from a special treatment. The power to tax carries with it a power to levy a special assessment.

Toll v. tax 1. Toll is a sum of money for the use of something. It is the consideration which is paid for the use of a road, bridge, or the like, of a public nature. Taxes, on the other hand, are enforced proportional contributions from persons and property levied by the State by virtue of its sovereignty for the support of the government and all public needs. Toll is a demand of proprietorship; tax is a demand of sovereignty. Toll is paid for the used of anothers property; tax is paid for the support of government. The amount paid as toll depends upon the cost of construction or maintenance of the public improvements used; while there is no limit on the amount collected as tax as long as it is not excessive, unreasonable, or confiscatory. Toll may be imposed by the government or by private individuals or entities; tax may be imposed only by the government.

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Tax v. penalty 1. Penalty is any sanction imposed as a punishment for violation of law or for acts deemed injurious; taxes are enforced proportional contributions from persons and property levied by the State by virtue of its sovereignty for the support of the government and all public needs. Penalty is designed to regulate conduct; taxes are generally intended to generate revenue. Penalty may be imposed by the government or by private individuals or entities; taxes only by the government.

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Obligation to pay debt v. obligation to pay tax 1. 2. A debt is generally based on contract, express or implied, while a tax is based on laws. A debt is assignable, while a tax cannot generally be assigned.

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A debt may be paid in kind, while a tax is generally paid in money. A debt may be the subject of set off or compensation, a tax cannot. A person cannot be imprisoned for non-payment of tax, except poll tax. A debt is governed by the ordinary periods of prescription, while a tax is governed by the special prescriptive periods provided for in the NIRC. A debt draws interest when it is so stipulated or where there is default, while a tax does not draw interest except only when delinquent.

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Requisites of compensation 1. 2. That each one of the obligor be bound principally, and that he be at the same time a principal creditor of the other. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind and also of the same quality if the latter has been stated. That the two (2) debts be due. That they be liquidated and demandable. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtors.

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Rules re: set off or compensation of debts General rule: A tax delinquency cannot be extinguished by legal compensation. This is so because the government and the tax delinquent are not mutually creditors and debtors. Neither is a tax obligation an ordinary act. Moreover, the collection of a tax cannot await the results of a lawsuit against the government. Finally, taxes are not in the nature of contracts but grow out of the duty to, and are the positive acts of the government to the making and enforcing of which the personal consent of the taxpayer is not required. (Francia v. IAC, 162 SCRA 754 and Republic v. Mambulao Lumber, 4 SCRA 622) Exception: SC allowed set off in the case of Domingo v. Garlitos [8 SCRA 443] re: claim for payment of unpaid services of a government employee vis--vis the estate taxes due from his estate. The fact that the court having jurisdiction of the estate had found that the claim of the estate against the government has been appropriated for the purpose by a corresponding law shows that both the claim of the government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation therefore takes place by operation of law.

Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998) Philex Mining Corporation was to set off its claims for VAT input credit/refund for the excise taxes due from it. The Supreme Court disallowed such set off or compensation. Survey of Philippine Taxes A. 1. 2. Internal Revenue taxes imposed under the NIRC. Income tax Transfer taxes a) Estate tax b) Donors tax Percentage taxes a) Value Added Tax b) Other Percentage Taxes Excise taxes Documentary stamp tax Local/ Municipal Taxes Tariff and Customs Duties Taxes / Tax Incentives under special laws

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4. 5. B. C. D.