INTRODUCTION TO LAW

TAXATION
Taxation

✤ The inherent power of the sovereign, exercised

through the legislature, to impose burdens upon
subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the legitimate
objects of government.

✤ A means by which governments finance their

expenditure by imposing charges on citizens and
corporate entities.
Taxes

✤ Are the enforced proportional contributions from

persons and property levied by the law-making body
of the State by virtue of its sovereignty for the support
of the government and all public needs.
Lifeblood Theory

✤ The life blood theory constitutes the theory of

taxation, which provides that the existence of
government is a necessity; that government cannot
continue without means to pay its expenses; and that
for these means it has a right to compel its citizens and
property within its limits to contribute.
Commissioner of Internal Revenue
v. Algue, Inc.
✤ Facts: The BIR assessed Algue a total amount of
delinquency taxes of Php 83,183.85 for the years 1958
and 1959. It contends that the company's claimed
deduction of Php 75,000 in the form of promotional
fees is disallowed because it was not ordinary
reasonable or necessary business expenses. Algue filed
a protest.

✤ Issue: Whether the BIR correctly disallowed the

deduction.
✤ Ruling: Private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business requiring
millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed. It is well-settled that taxes are the lifeblood of the
government and so should be collected without unnecessary hindrance On
the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself. It is
therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is
the promotion of the common good, may be achieved. But even as we
concede the inevitability and indispensability of taxation, it is a requirement
in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to
complain and the courts will then come to his succor. For all the awesome
power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not been observed.
Principles of a Sound Tax System

✤ Fiscal Adequacy- The sources (proceeds) of tax revenue should

coincide with and approximate needs of government
expenditures. The sources of revenue should be sufficient and
elastic to meet the demands of public expenditures;

✤ Theoretical Justice- The tax system should be fair to the average

taxpayer and based upon his ability to pay.

✤ Administrative Feasibility- The tax system should be capable of

being properly and efficiently administered by the government
and enforced with the least inconvenience to the taxpayer.
Inherent Limitations of Taxation

✤ Taxation is for a public purpose

✤ A tax levied for a private purpose constitutes a taking of property

without due process of law.

✤ The essential point is that the purpose of the tax affects the
inhabitants as a community and not merely as inhabitants.

✤ Test in determining public purpose:

✤ for the support of the government

✤ some of the recognized objects of government

✤ to promote the welfare of the community

Pascual v. Secretary of Public Works

✤ Facts: Governor Wenceslao Pascual of Rizal instituted this action for

declaratory relief, with injunction, upon the ground that RA No. 920, which
apropriates funds for public works particularly for the construction and
improvement of Pasig feeder road terminals. Some of the feeder roads,
however, as alleged and as contained in the tracings attached to the petition,
were nothing but projected and planned subdivision roads, not yet
constructed within the Antonio Subdivision, belonging to private respondent
Zulueta, situated at Pasig, Rizal; and which projected feeder roads do not
connect any government property or any important premises to the main
highway. The respondents' contention is that there is public purpose because
people living in the subdivision will directly be benefitted from the
construction of the roads, and the government also gains from the donation of
the land supposed to be occupied by the streets, made by its owner to the
government.
✤ Issue: Should incidental gains by the public be considered "public
purpose" for the purpose of justifying an expenditure of the
government?

✤ Ruling: No. It is a general rule that the legislature is without power to

appropriate public revenue for anything but a public purpose. It is the
essential character of the direct object of the expenditure which must
determine its validity as justifying a tax, and not the magnitude of the
interest to be affected nor the degree to which the general advantage
of the community, and thus the public welfare, may be ultimately
benefited by their promotion. Incidental to the public or to the state,
which results from the promotion of private interest and the
prosperity of private enterprises or business, does not justify their aid
by the use public money.    The test of the constitutionality of a statute
requiring the use of public funds is whether the statute is designed to
promote the public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage to individuals
might incidentally serve the public.
✤ Taxation in inherently legislative

✤ Exceptions:

✤ Delegation to the President - The power

granted to Congress under this constitutional
provision to authorize the President to fix
within specified limits and subject to such
limitations and restrictions as it may impose,
tariff rates and other duties and imposts
include tariffs rates even for revenue purposes
only. Customs duties which are assessed at the
prescribed tariff rates are very much like taxes
which are frequently imposed for both
revenue-raising and regulatory purposes.
✤ Delegations to the Local Government - it
has been held that the general principle
against the delegation of legislative
powers as a consequence of the theory of
separation of powers is subject to one
well-established exception, namely, that
legislative power may be delegated to
local governments. The theory of non-
delegation of legislative powers does not
apply in maters of local concern.
✤ Delegation to administrative agencies -
Certain aspects of the taxing process that
are not really legislative in nature are
vested in administrative agencies. In these
cases, there really is no delegation, to wit:
a) power to value property; b) power to
assess and collect taxes; c) power to
perform details of computation,
appraisement or adjustment; among
others.
✤ Taxation is territorial

✤ The taxing power of a country is limited to

persons and property within and subject to its
jurisdiction.

✤ Taxation is subject to international comity

✤ A State must recognize such generally accepted

tenets of International Law that limit the
authority of the government to effectively
impose taxes upon a sovereign State and its
instrumentalities.
Sources of Revenue

✤ Income Tax

✤ Estate and donor's taxes

✤ Value-added tax

✤ Other percentage taxes

✤ Excise taxes

✤ Documentary stamp taxes

✤ Such other taxes as are or hereafter may be imposed and collected by the Bureau of
Internal Revenue



Income

✤ All wealth which flows in the taxpayer other than a

mere return of capital. It includes all income
specifically described as gain or profit including gain
derived from the sale or disposition of capital asset.

✤ It also means gains derived from (1) capital, (2) labor,

or (3) both labor and capital including gains derived
from the sale or exchange of capital asset.
Source of Income

✤ Where the money is coming from.

Income Tax

✤ Is a tax that governments impose on financial income

generated by all entities within their jurisdiction.

✤ A tax on all yearly profits arising from property,

profession, trade or business, or a tax on person’s
income, emoluments, profits and the like.
Functions of Income Tax

✤ Provide large amounts of revenue

✤ Offset regressive sales and consumption taxes

✤ Mitigate the evils arising from the inequality in the

distribution of income and wealth which are
considered deterrents to social progress, by a
progressive scheme of taxation
Schedular Tax Treatment

✤ The various types or items of income (compensation,

business or professional income) are classified
accordingly and are accorded different tax treatments,
in accordance with schedules characterized by
graduated tax rates. Since these types of income are
treated separately, the allowable deductions shall
likewise vary for each type of income.
Global Tax Treatment

✤ All income received by the taxpayer are grouped

together, without any distinction as to the type or
nature of the income, and after deducting therefrom
expenses and other allowable deductions, are
subjected to tax at a fixed rate.
Gross Income

✤ Is an individual's total pay before accounting for taxes

or other deductions.

✤ All income derived from whatever source.

Inclusion in Gross Income
✤ Compensation for services

✤ Gross income from trade or business or the exercise of a profession

✤ Gains derived from dealings in property

✤ Interests

✤ Rents

✤ Royalties

✤ Dividends

✤ Annuities

✤ Prizes and winnings

✤ Pensions

✤ Partner’s distributive share from the net income of the general professional partnership