TAX NOTES

Meaning of Taxation

- Is the act of laying a tax, a process or means by which the sovereign through its law making
body, raises income to defray the necessary expenses of the government.
- It is merely a way of apportioning the cost of the government among those who is some
measure are privileged to enjoy its benefits and therefore also must bear its burden.

As the Power of Taxation

- It is an inherent power of the State to demand enforce contributions for public purpose or
purposes.

Purpose, Scope and Rationale of taxation

Purpose:

- To provide funds or property with which to promote the general welfare and protection of its
citizens.
- Aside from raising revenue for governmental needs, may ALSO be exercised to attain various
needs and economic (non-revenue) objectives.

Scope:

- Includes every imposition of charge or burden by the sovereign power upon persons, property
or property rights for the use and support of the government and enable it to discharge its
appropriate functions.

Rationale:

- Without taxes, the government would be paralyzed for the lack of motive power to activate
and operate it.

Taxes

- Enforced proportional and pecuniary contributions from persons and property levied by the law
making body of the state having jurisdiction over the subject of the burden for the support of
the government and all public needs.

Essential Characteristics of Tax:

1. It is an enforced contribution. - Is not a voluntary payment or donation and no way dependent

upon the will or assent, open or implied, of the person taxed.
2. Proportionate in character. – It is ordinarily based on the ability to pay. Wherein some people
pay very high taxes while others on a very small amounts or none at all.
3. Generally payable in money. – Must be in legal tender.
4. Levied on persons or property. – may be imposed also on acts, transactions, rights or privileges.
5. It is levied by the State which has jurisdiction over the person or property. The object to be
taxed must be subject to the jurisdiction of the taxing State.
 6. It is levied by the law making body of the State. – the power to tax is a legislative power which
under the Constitution only the Congress can exercise through the enactment of statutes.

- The power to tax is no longer vested exclusively on Congress. Local legislative body [municipal
governments] are given authority to levy taxes, fees and other charges pursuant to the
Constitution subject to such guidelines and limitations as may be provided by law.

7. It is levied for public purpose or purposes. – A charge or burden imposed to provide income for
public purposes, the support of the government, the administration of law, or the payment of
public expenses.

Theory and Basis of Taxation

1. Existence of the government – it is a necessity, that it cannot continue without the means to
pay its expenses and for these means it has a right to compel all its citizens and property within
its limits to contribute.
2. Reciprocal duties of State and Inhabitants. – It is the basis of the protection and support
between them. The taxpayer in return receives the general advantages and protection which
the government affords the taxpayers and his property. “Benefits Received Principle”,
compensation or consideration for the other; protection for support and support for protection.
3. Public purpose requirement for lawful taxation. – The protection is not only limited to those
who are able to pay taxes but also extends to those who do not.

Nature of the power of taxation

1. Inherent in sovereignty – being essential to the existence of every government. Constitutional

provisions relating to the power of taxation do not operate as grants of the power to the
government. They merely constitute limitations upon a power which would otherwise be
practically without limit.
2. Legislative in character – The power to tax is no longer vested exclusively on Congress. Local
legislative body are given authority to levy taxes, fees and other charges pursuant to the
Constitution subject to such guidelines and limitations as may be provided by law.
3. Subject to constitutional and inherent limitations – the power to tax is not absolute. It is
subject to certain limitations or restrictions.

Aspects of Taxation

1. Levying or imposition of the tax which is a legislative act

2. Collection of the tax levied which is essentially administrative in character.
Extent of the legislative power to tax.

1. Subject or objects to be taxed. – refers to the coverage and the kind or nature of the tax. They
may be persons, whether natural or juridical; property, whether real or personal, tangible or
intangible; business, transactions, rights, or privileges.
2. The Purpose or object of the tax as long as it is a public purpose. – Its determination on the
question of what is a public purpose is not conclusive. The courts can inquire into whether the
purpose is really public or private.
- Judicial action is limited only to a review where it involves:
a. The determination of the validity of the tax in relation to constitutional precepts or
provisions.
b. The determination in an appropriate case of the application of a tax law.
3. The amount or rate of the tax. – The General Rule: the legislature may levy a tax of any amount
or rate it sees fit. If the taxes are oppressive or unjust, the only remedy is the ballot box and the
election of new representatives.
- Chief Justice John Marshall
“The power to tax involves the power to destroy.” – Thus, even if a tax should destroy a
business, such fact alone court not invalidate the tax. As long as the power is exercised within
the bounds of the constitutional limitation, a tax cannot be held invalid merely because the
power which is manifested is the power to destroy.

- Incidentally our Constitution mandates that the rule of taxation shall be uniform and equitable.

4. The manner, means and agencies of collection of the tax. – This refers to the administration of
the tax or implementation of tax laws.
- The legislature must possess the mode or method by which the tax shall be collected and to
designate the officers through whom it will shall be enforced.

Non-revenue objectives of taxation

1. Can strengthen anemic enterprises or provide incentive to greater production through grant of
tax exemptions or the creation of conditions conducive to their growth.
2. Taxes on imports may be increased to protect local industries against foreign competition or
decreased to encourage foreign trade.
3. May also be used as a bargaining tool by a country by setting tariff rates.
4. Halt inflation or lowered in periods of slump to expand business and ward off depression.
5. Taxes may be levied to reduce inequalities in wealth and incomes. [ex. The estate, donor’s and
income taxes, their payers being recipients of unearned wealth or mostly in the higher income
brackets.
6. To promote science and invention or finance education activities or to improve efficiency of
police forces in the maintenance of peace or order through grant of subsidy.
7. To be made as an implement of the police power to promote the general welfare.
8. Low income individuals pay little or no income taxes through a system of exclusions,
exemptions, deductions and tax credits.
9. Tax provisions may provide incentives for certain desirable activities to encourage investments
in productive assets or facilities that will lead to increased employment. [ex. Smoking]
Basic principles of a sound tax system.

1. Fiscal adequacy – sources of revenue be sufficient to meet the demands of public expenditure.
2. Equality or theoretical justice – the tax burden should be distributed in proportion to the
taxpayer’s ability to pay. “Ability to pay principle”
3. Administrative feasibility – the tax law should be capable of convenient, just and effective
administration or enforcement at a reasonable cost.

Errors on the part of tax officials

- Do not bind the government or prejudice its right to collect the taxes legally due from
taxpayers. The government is never estopped by the mistakes or errors on the part of its agents
or unauthorized or illegal acts of public officials.

Classifications of taxes

1. As to subject matter or object:

a. Personal, poll or capitation – tax of a fixed amount imposed on persons residing within a
specified territory, citizens or not, without regard to their property or the occupation or
business in which they may be engaged. [ex. Community (formerly residence) tax.
b. Property – tax imposed on property, whether real or personal property, in proportion either
to its value, or in accordance with some other reasonable methods of apportionment. [ex.
Real estate tax]
c. Excise – a charge imposed upon the performance of an act, the enjoyment of a privilege or
the engaging in an occupation, profession or business. The obligation to pay is based on the
voluntary action of the person taxed. [ex. Income tax, VAT, estate tax, donor’s tax]

2. As to who bears the burden:

a. Direct – which is demanded or exacted from the very person who also shoulders the burden
of the tax. [ex. Corporate and individual income taxes, community tax, estate tax, donor’s
tax.
b. Indirect – which is demanded from, or paid by, one person in the expectation and intention
that he shall indemnify himself at the expense of another by passing the burden to the
latter. [ex. VAT, percentage taxes, excise taxes on certain specific goods and custom duties.