Reviewer in Taxation Law 1

May Encarnina P. Gaoiran

GENERAL PRINCIPLES OF TAXATION A. Taxation: Its general concepts a. Taxation as a power 1. Nature of power of taxation  Inherent Power y belong as a matter of right to every independent government y constitutional conferment is not necessary y its relinquishment is never presumed y Basis- the existence of a government is a necessity  Supreme- insofar as the selection of the subject of taxation is concerned; Plenary- it is complete; Unlimited- a tax does not cease to be valid merely because it regulates, discourages or even definitely deters the activities taxed; Comprehensive- it covers persons, business, activities, professions, rights and privileges  Power to destroy vis-a vis Power to Build y The power to tax includes the power to regulate even to the extent of prohibition or destruction. y It includes the power to determine the following: i. who to tax ii. what to tax iii. how much tax is to be imposed y depends upon the degree of vigor which the taxing power may be employed in order to raise revenue y if it is used validly as an implement of police power in discouraging, and in effect, ultimately prohibiting certain things or enterprises, inimical to the public welfare y if the power to tax is used solely for the purpose of raising revenues, it cannot be allowed to confiscate or destroy 2. Importance of Taxation and the Lifeblood Doctrine  Taxation- a mode of raising revenue for public purposes  Taxesy enforced proportional contributions y from persons and property y levied by the state y by virtue of sovereignty y for the support of the government and for all its public needs  Taxation and the Lifeblood Doctrine y ... their prompt and certain availability is an imperious need. y Taxes are what we pay for a civilized society. 3. Justifications for the exercise of the taxing power a) Benefits Received Theory- bases the power of the State to demand and receive taxes on the reciprocal duties of support and protection. y The obligation to pay taxes is involuntary and compulsory, in exchange for the protection and benefits one receives from the government. b) Necessity Theory- It is a necessary burden to preserve the State s sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State s territory and facilities and protection which a government is supposed to provide. c) Doctrine of Symbiotic Relationship (see CIR v. Algue, Inc. case) 4. Objectives of Taxation a) Revenue y principal object of taxation

Reviewer in Taxation Law 1

May Encarnina P. Gaoiran

to enable the State to promote the general welfare and protection of its citizens b) Non-revenue i. Regulation ii. General Welfare iii. Reduction of Social Inequity o progressive system of taxation- the tax rate increases as the tax base increases iv. Protectionism (re Special Duties under the Tariff and Customs Code; RA 8800 re Safeguard Measures Act) b. Taxation as a process 1. Stages in the tax process a) Levy/imposition- refers to the enactment of tax laws or statutes (see Tolentino, et. al v. Sec. of Finance- Dandy s share I guess) b) Assessment and Collection- administrative in character, can be delegated y The tax law must designate which agency will collect the taxes. y The circulars or regulations issued by the Secretary of Finance or the Commissioner of the Internal Revenue must be in accordance with the tax measures imposed by the Congress. c) Payment- signifies an act of compliance by the taxpayer 2. Principles of a Sound Tax System a) Fiscal Adequacy y Sources of revenues must be adequate to meet government expenditures and other public needs. y This is in consonance with the doctrine that taxes are the lifeblood of the government. b) Administrative Feasibility y Tax laws must be capable of effective and efficient enforcement. o They must not obstruct business growth and economic development. y Aims of Vat Law o rationalize the system of taxes on goods and services; o simplify tax administration; and o make the system more equitable to enable the country to attain economic recovery y Article VI, Section 28, Constitution (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. (2) 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, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. (3) Charitable institutions, churches and parsonages or covenants appurtenant thereto, mosques, 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. (4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. o Will a violation of these principles invalidate tax law?  IT DEPENDS. If a tax law runs contrary to the principle of theoretical justice, such violation will render the law y

Reviewer in Taxation Law 1

May Encarnina P. Gaoiran

unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. B. The Concept and Characteristics of Taxes a. Enforced b. Proportionate Contribution c. Levied by law-making body d. Having territorial jurisdiction e. Personal in nature f. Purpose- raising money and other public needs C. Limitations of the exercise of the taxing power a. Inherent Limitations 1. Public Purpose  If the public advantage or benefit is merely incidental in the promotion of a particular enterprise, such defect shall render the law invalid. A provision that the land shall thereafter be donated to the government does not cure the defect (Pascual v. Secretary of Public Works, 110Phil331).  see Lutz v. Araneta and Gomez v. Palomar cases 2. Inherently legislative  GR: The power to tax is exclusively vested in the legislative body. y Exceptions: i. Article VI, Sec. 28 (2): 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, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. ii. Article X, SEC. 5 of the Constitution: 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. a) Coverage, Object, Nature, Extent, Situs o see Pepsi v. Municipality of Tanuan and Pepsi v. City of Butuan cases b) Exceptions to non-delegation i. LGUs ii. Allowed by the Constitution iii. Purely Administrative Functions 3. Territoriality  The taxing power of a country is limited to person and property within and subject to its jurisdiction.  Rules Observed in Fixing Tax Situs y Poll/Capitation/Community Tax - based upon the residence of the taxpayer, regardless of the source of income or location of the property of the taxpayer y Property Tax i. Real Property, where taxable - state or country where it is located, regardless of whether the owner is a resident or a non-resident ii. Personal Property, where taxable - wherever it was actually kept or located, at the domicile of the owner, mobilia sequuntur personam - Domicile: place which constitutes the principal seat of his residence, his business, his pursuits, his connections, his attachments and his political relations; Requisites- 1) act, 2) intent

Reviewer in Taxation Law 1

May Encarnina P. Gaoiran

Mobilia Sequuntur Personam: movables follow the person Requisites in Acquisition of Situs in a State other than the domicile of the owner i. tangible property must have a definite location; ii. accompanied by some degree of permanency - shares of stock: state which they are permanently kept; taxable in the situs of their actual location  Sec. 104, RA 8424- PROPERTIES WHICH HAVE ACQUIRED ACTUAL SITUS IN THE PHILIPPINES: i. franchise exercised in the Philippines ii. shares of stock, obligations, bonds issued by domestic corporations organized and constituted in accordance with the Philippine laws; iii. shares, obligations, bonds issued by a foreign corporation where 85 % of its business is located in the Philippines- subject to donor s tax and estate tax; iv. shares, obligations, bonds issued by foreign corporations which has acquired business situs, when such have been used in the furtherance of the business of the foreign corporation; and v. shares/rights in a partnership business or industry established in the Philippines. o residence of their owners is immaterial o GR: irrespective of the owner, donor s tax or estate tax can be imposed upon the properties; Except: where the foreign country grants exemption or does not impose taxes on intangible properties of Filipino citizens. o GR: donations of shares of stocks made by a foreign corporation are not subject to tax; Except: 4, 5 y Excise Tax- taxes imposed on the exercise of a right or privilege o Income Tax (Sec. 23, RA 8424)  Criteria: 1) Place, 2) Nationality, 3) Residence  Place- applied to a) non-resident alien b) non-resident foreign corporations c) non-resident citizen - taxed upon the source income derived from within the Philippines  Nationality- applied to a) resident citizen b) domestic corporation - taxed upon sources of income derived from within and without the Philippines  Residence- applied to a) resident alien b) resident foreign corporation - taxed upon the income derived from sources within the Philippines o Donor s Tax (Secs. 98, 104, RA 8424)  Place a) non-resident alien - tax based upon properties situated within the Philippines  Nationality a) resident and non-resident citizen - tax based upon properties wherever situated

Reviewer in Taxation Law 1

May Encarnina P. Gaoiran

 Residence a) resident alien - tax based upon properties wherever situated Estate tax (Secs. 85, 104, RA 8424)  Place a) non-resident aliens - are taxed on the properties situated within the Philippines  Nationality a) resident and non-resident citizen - are taxed upon their properties wherever situated  Residence a) resident alien - taxes imposed upon properties wherever situated Value Added Tax (Sec. 105, RA 8424)  its tax situs is the place where the transaction is made  Phil- foreign country: exempt from VAT; w/in the Phils.: 10% VAT

4. International Comity  Art. II, Sec. 2- The Philippines adopts the generally accepted principled of international law as part of the law of the land and adheres to the policy of peace, equality, justice, freedom, cooperation and amity with all nations.  Principle of Sovereign Equality Among States- States are judicially equal, enjoy the same rights, and have equal capacity in their exercise.  ar in parem non habet imperium- where even the strongest state cannot assume jurisdiction over another state  foreign embassies- considered extensions of the territoriality of the foreign states, hence exempted from tax 5. Exemption from Taxation of Government Agencies/Instrumentalities  May the government tax itself? The Congress cannot be prevented from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax.  Agencies performing governmental functions- tax exempt unless expressly taxed; agencies performing proprietary functions- subject to tax unless expressly exempted.  GR: GOCCs perform proprietary functions; hence they are subject to taxation y Exceptions (Sec. 27 (c) of RA 8424) i. GSIS ii. SSS iii. PHIC iv. PCSO  see LRTA v. CBAA, MCIAA v. Marcos, MIAA v. Paranaque and MIAA v. Pasay City cases b. Constitutional Limitations 1. Due Process Clause