Chapter 1: Introduction to Taxation

Objectives:

At the end of this module, the learner must be able to discuss the following topics:

1. Inherent Powers of the State

2. Concept, Doctrines and Theories surrounding Taxation
3. Scope and Limitation of Taxation Power
4. Double Taxation
5. Escapes from Taxation

Introduction
The main objective of every nation is to ensure the general welfare of its citizen; their
support and coordination make or break a government. It is only when a nation can cultivate the
citizen and provide peace and order that it can guarantee self-preservation. Hence, the goal is
to provide sustainable services to the citizen so a state can exist in the longest time possible.

The concept is easy to understand as we are already part of an established nation. We

already have a functioning government that are supported by majority of our citizen. But imagine
a nation that will be born soon, how can they give the necessary services in the start?

As of date, there are 195 countries in the world and they already answered the question
above. Whenever a nation or state is created, its own government already have 3 powers to
ensure self-preservation. No government can sustain or effectively operate without these
powers. Therefore, the exercise of these powers is presumed understood and acknowledged by
the people.

The Inherent Powers of the State

1. POWER TO TAX - The act of levying a tax. It's the process or means by which the
sovereign (independent State), through its law-making body (legislative branch), raises
income to defray the necessary expenses of the government. It is the power by which
the State raises revenue to defray the necessary expenses of the government.

2. POLICE POWER - it is the power of the state of promoting public welfare by restraining
and regulating the use of liberty and property. It may be exercised only by the
government. The property taken in the exercise of this power is destroyed because it is
noxious or intended for a noxious purpose.

3. EMINENT DOMAIN - it is the power to take private property for public purpose upon
payment of just compensation.

STATE
 POWER TO POLICE EMINENT
Distinctions among the three (3) inherent powers of the state
TAX POWER DOMAIN
Taxation Police Power Eminent Domain

NATURE Power to enforce Power to make and Power to take private

contributions to raise implement laws for the property for public use
gov't funds. general welfare. with just compensation.
AUTHORITY Government only Government only May be granted to
service/utility companies
PURPOSE For the support of the Promotion of general The taking of private
government welfare through property for public use.
regulation
PERSONS Community or a class Community or a class of On an individual as the
AFFECTED of individuals. individuals. owner of personal
Applies to all persons, Applies to all persons, property.
property and excises property and excises that Only particular property is
that may be subject may be subject thereto comprehended.
thereto
EFFECT Contribution becomes No transfer or title. There There is a transfer of title
part of may just be a restraint on to property.
public fund the property.
RIGHTS Property right Property right and liberty Property right
AFFECTED
IMPORTANCE Most Important Most superior Important
BENEFITS In form of protection No direct and immediate Market value of property
RECEIVED and benefit but only such as taken
benefits received from may arise from the
government maintenance of a healthy
economic standard of
society.
AMOUNT OF No limit Sufficient to cover cost of No imposition. The owner
IMPOSITION the license and the is paid equivalent to the
necessary expenses of fair value of his property.
police surveillance and
regulation

Similarities of the three powers of the State

1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and properties.
5. They all exist independently of the Constitution and are exercisable by the government
even without Constitutional grant. However, the Constitution may impose conditions or
limits for their exercise.
6. They all presuppose an equivalent form of compensation received by the persons
affected by the exercise of the power.
7. The exercise of these powers by the local government units may be limited by the
national legislature.
 But our main focus for the whole semester is to learn the concepts and principles
surrounding the Taxation Power of the state. Let’s get started!

What is Taxation?

Taxation may be defined as a State power, a legislative process, and a mode of

government cost distribution

As a state power
Taxation is an inherent power of the State to enforce a proportional contribution
from its subjects for public purpose.

As a process
Taxation is a process of levying taxes by the legislature of the State to enforce
proportional contributions from its subjects for public purpose.

As a mode of cost distribution

Taxation is a mode by which the State allocates its costs or burden to its subjects
who are benefited by its spending.

Theories and Basis of Taxation

The power of taxation proceeds upon the theory that the existence of government is a
necessity; that it cannot continue without means to pay its expenses; and that for these means,
it has a right to compel all its citizens’ property within its limits to contribute.

The basis of taxation is found in the reciprocal duties of protection and support between the
State and its inhabitants. In return for his contribution, the taxpayer received benefits and
protection from the government. This is the so called “Benefits received principle” and
spawned the Doctrine of Symbiotic Relationship which means, taxes are what we for a civilize
society.

Tax

People Government

Services

.
Taxes are essential and indispensable to the continued subsistence of the government.
Without taxes, the government would be paralyzed for lack of motive power to activate or
operate it. (CIR vs. Algue)

Taxes are the lifeblood of the government, and their prompt and certain availability are
an imperious need. Upon taxation depends the government's ability to serve the people for
whose benefit taxes are collected. (Vera vs. Fernandez)
Purpose of Taxation

1. Primary Purpose - To raise revenues/funds to defray the necessary expenses of the

government (also called Revenue or Fiscal Purpose).

2. Secondary Purpose:

a. Regulatory Purpose - Taxation is employed as a devise for regulation or control

(to implement the police power of the State for the promotion of the general
welfare) by means of which certain effects or conditions envisioned by the
government may be achieved.

b. Compensatory Purposes
 Reduction of Social Inequality
 Economic Growth
 Protect local industries against unfair competition

Other Doctrines related to taxation

A. Marshall Doctrine - The power to tax involves the power to destroy." Taxation power can
be used as an instrument of police power. It can be used to discourage or prohibit
undesirable activities or occupation. As such, taxation power carries with it the power to
destroy. However, the taxation power does not include the power to destroy if it is used
solely for the purpose of raising revenue. (Roxas vs. CTA)

B. Holme's Doctrine - "Taxation power is not the power to destroy whilethe court sits."

Taxation power may be used to build or encourage beneficial activities or industries by

the grant of tax incentives. While the Marshall Doctrine and the Holme's Doctrine appear to
contradict each other, both are actually employed in practice. A good manifestation of the
Marshall Doctrine is the imposition of excessive tax on cigarettes while applications of the
Holme's Doctrine include the creation of Ecozones with tax holidays.

Nature and Characteristics of Taxation

1. Inherent Power - may be exercised although not expressly granted by the constitution.
2. Essentially a legislative function - only the legislative can impose taxes.
3. Subject to inherent and constitutional limitations - not an absolute power.
4. For public purpose
5. The strongest of all the inherent powers of the State.
6. Subject to international treaty or comity
7. Generally payable in money
8. Territorial in scope

In the absence of inherent and constitutional limitations, the power to tax is comprehensive,
plenary, supreme and unlimited. It is so comprehensive that in the words of Justice Marshall,
the power to tax includes the power to destroy
Theories of Cost Allocation

1. Benefit received theory

The benefit received theory presupposes that the more benefit one receives from
the government, the more taxes he should pay

2. Ability to pay theory

The ability to pay theory presupposes that taxation should consider the
taxpayer's ability to pay. Taxpayers should be required to contribute based on their
relative capacity to sacrifice for the support of the government

In short, those who have more should be taxed more even if they benefit less
from the government. Those who have less shall contribute less even if they receive
more of the benefits from the government.
Aspects of the Ability to Pay Theory

a. Vertical equity (gross concept)- proposes that the extent of one's ability to pay is
directly proportional to the level of his tax base.
b. Horizontal equity (net concept) - requires consideration of the particular circumstance
of the taxpayer.

Scope of the Taxing Power of the Legislative

The Supreme Court held that the power of taxation is the most absolute of all powers of
the government. It has the broadest scope of all the powers of the government because in the
absence of limitations, it is considered as comprehensive, unlimited, plenary and supreme (130
SCRA 654). The matters within the competence of the legislature include the determination of
the following:
1. The subject or object (person, property, or excises/privileges) to be taxed. Excises or
privileges to be taxed.
2. The purpose of the tax as long as it is a public purpose.
3. The amount or rate of the tax.
4. Kind of tax
5. Apportionment of the tax (.e., whether the tax shall be general or limited to a
particular locality or partly general and partly local)
6. Situs of taxation
7. The manner or method of collection

Limitations on the Taxing Power

A. Inherent Limitations- inherent limitations proceed from the very nature of the taxing power
itself. The taxing power has very distinct and positive limitations some of which inhere in its
very nature and exist whether declared or not declared in the written constitution.

PINES
1. Public purpose
Proceeds from tax must be used for:
a. Support of the government.
b. Some of the recognized objects of government.
c. To promote the welfare of the community (not individuals).

2. International comity or treaty - a State cannot tax another State based on the principle of
Sovereign Equality among States. i.e. tax law passed imposing taxes on foreign
ambassadors is not a valid law.

3. Non-delegation of the taxing power - Power of taxation is purely legislative, hence the
power cannot be delegated either to the executive or judicial departments. The limitation
arises from the doctrine of separation of powers among the three branches of the
government.

Exceptions to the Rule against Delegation:

a. Delegation to the President, subject to some limitations and restrictions, to fix within
specified limits, tariff rates and tonnage or wharfage duties and other duties and
imposts.
b. Delegation to local governments the power to create its own sources of revenues
and to levy taxes, subject to such limitations as may be provided by law.
c. Delegation to administrative agencies certain aspects of the taxing process that are
not legislative such as:
 the power to fix value of property for purposes of taxation pursuant to fixed rules
 the power to assess and collect taxes.

4. Exemption of the government

The taxation power is broad. The government can exercise the power upon
anything including itself. However, the government normally does not tax itself as this
will not raise additional funds but will only impute additional costs.

a. Agencies performing governmental functions are tax exempt unless expressly taxed
b. Agencies performing proprietary functions are subject to tax unless expressly
exempted.
c. GOCCs performing proprietary functions are subject to tax, however the following
are granted exemptions!
 Government Service Insurance System (GSIS)
 Social Security System (555)
 Philippine Health Insurance Corporation (PHIC)
 Local Water Districts (RA 10026)
 Philippine Charity Sweepstakes Office (PCSO) - already taxable
 beginning Jan. 1, 2018 under the TRAIN Law

5. Situs of taxation or territoriality - the taxing power of a country is limited to person and
property within and subject to its jurisdiction.

Place of Taxation
 a. The state where the subject to be taxed has a situs may rightfully levy and collect the
tax.
b. The situs is necessarily in the State which has jurisdiction or which exercises
dominion over the subject in question.

Factors to consider in determining Situs of Taxation

a. Subject matter (person, property, or activity)
b. Nature of the tax
c. Citizenship
d. Residence of the taxpayer

Application of Situs of Taxation

Subject Matter Situs
Persons Residence of the taxpayer
Real Property Location
Tangible Personal Property Location
Intangible Personal Property Domicile of the owner
Income Residence, citizenship, source of income
Business Place of business
Gratuitous Transfer of Property Residence or citizenship of the transferor or
location of property

B. Constitutional Limitations on the Taxing Power- the following provisions may be said to
be limitations prescribed in the Constitution on the taxing power of the government.

1. Observance of due process of law

2. Equal protection of law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment of poll tax
6. Non-impairment of the obligations of contracts
7. Free worship clause
8. Exemption of charitable institutions, churches, parsonages, or convents appurtenant
thereto, mosques, and non-profit cemeteries, and all lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes.
9. Exemption from taxes of the revenues and assets of non-profit, non-stock educational
institutions including grants, endowments, donations contributions for educational
purposes.
10. Non-appropriation of public funds or property for the benefit of any church, sect or
system of religion, etc.
11. No money shall be paid out of the Treasury except in pursuance of an appropriation
made by law.
12. Concurrence of a absolute majority (50% +1) of all members of congress for the
passage of a law granting tax exemption
13. Non-diversification of tax collections
 14. The President shall have the power to veto any particular item(s) in an appropriation,
revenue or tariff, but the veto shall not affect the item(s) to which no objection has been
made.
15. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
16. Appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments.
17. Each local government unit shall exercise the power to create its own sources of
revenue and shall have a just share in the national taxes.

Stages/Aspects of Taxation (LAP)

1. Levying or Imposition (Impact of taxation) - This process involves the passage of tax
laws or ordinances through the legislature (Senate and Congress).

2. Assessment and Collection (incidence of taxation) - This process involves the act of
administration and implementation of tax laws by the executive through its administrative
agencies such as the Bureau of Internal Revenue or Bureau of Customs.

3. Payment of Tax - This process involves the act of compliance by the taxpayer in
contributing his share to pay the expenses of the government.

Double Taxation
Taxpayer is taxed twice by the same tax jurisdiction for the same thing

Kinds of Double Taxation

1. Direct Duplicate Taxation, this is objectionable and prohibited because it violates the
constitutional provision on uniformity and equality. It means:
- Taxing twice
- By the same taxing authority
- Within the same jurisdiction or taxing district
- For the same purpose
- In the same year or taxing period
- Same kind or character of tax
-
2. Indirect Duplicate Taxation is not legally objectionable. It extends to all cases in which
there is a burden of two or more pecuniary imposition but imposed by different taxing
authorities.

Escapes from Taxation

1. Evasion or Dodging, the taxpayer uses unlawful means to evade or lessen the payment
of tax.

2. Avoidance, also called tax minimization, it is the reduction or totally escaping payment

3. Shifting, basically, it is the transfer of tax burden to another. The imposition of tax is
transferred from the statutory taxpayer to another without violating the law.
- Impact is the point at which a tax is originally imposed.
- Incidence is the point at which the tax burden finally rests or settles down.
 3 Kinds of Shifting
a. Forward shifting
b. Backward shifting
c. Onward shifting

4. Capitalization, the seller is willing to lower the price of the commodity provided the taxes
will be shouldered by the buyer.

5. Transformation, the manufacturer absorbs the additional taxes imposed by the

government without passing it to the buyers for fear of lost of his/its market. Instead, he/it
increases quantity of production, thereby turning their units of production at a lower cost
resulting to the transformation of the tax into a gain through the medium of production.

6. Exemption, it is an immunity, privilege or freedom from payment of a charge or burden to

which others are obliged to pay.