Basic
Principles in
Taxation
11.14.17
Definition of Taxation
– The process by which the sovereign, through its lawmaking body, raises income
to defray the necessary expenses of the government .
– Taxation is inherent in sovereignty
Objectives
– PRIMARY: To raise revenue for the government to defray necessary expenses
– SECONDARY:
> Shifting wealth from the rich and the poor
> Maintaining price stability
> Stimulating economic growth
> Encouraging full employment
State Powers
– Taxation: Power of the State by which the sovereign raises revenue to defray the
necessary expenses for the government
– Eminent Domain: Power of the State to take private property for public use
upon payment of just compensation
– Police Power: The power of the State to enact laws to promote public health,
public morals, public safety and the general welfare of the people.
Aspects of Taxation
– Levying of the tax: The imposition of tax requires legislative intervention. In the
Philippines, it is Congress that levies taxes; and
– Collection of the tax levied: This is essentially an administrative function
Basic Principles of a Sound Tax
System
– Fiscal Adequacy: Sources of revenue are sufficient to meet government
expenditures;
– Equality or theoretical justice: The tax imposed must be proportionate to
taxpayer’s ability to pay; and
– Administrative feasibility: The law must be capable of convenient, just and
effective administration
Limitations on the Power of
Taxation
– Inherent Limitations:
Purpose: Taxes may be levied only for public purpose.
Territoriality: The State may tax persons and persons under its jurisdiction.
International comity: The property of a foreign State may not be taxed by another;
Exemption: Governmental agencies performing governmental functions are exempt
from taxation;
Non-delegation: The power to tax being legislative in nature may not be delegated.
Limitations on the Power of
Taxation
– Constitutional Limitations:
Due process of law: No person shall be deprived of life, liberty or property without
due process of law. Due process mandates that there should be a valid law imposing
a tax to a particular taxpayer. The taxing authority, while implementing the necessary
mandates of its office must give due respect to the established procedures the way it
works in an organized society.
Equal protection of the laws: Equal protection relates to how a particular tax measure
or ordinance is being applied to persons or class of persons similarly situated.
Non-impairment of obligation of contracts: A new tax law shall not be passed in such
a way as to impair or prejudice the obligation of a contracting party by virtue of a
contract entered into with the State.
Limitations on the Power of
Taxation
– Constitutional Limitations:
Non-imprisonment for non-payment of debt or poll tax: While poll tax is a basic
mandate in the Local Government Code, its non-payment does not entitle
imprisonment.
Rule of taxation must be uniform and equitable: Uniformity relates to classification of
taxpayers to be subjected to tax. Equitable on the other hand relates to the ability to
pay the tax of those that belong to the same class.
Limitations on the Power of
Taxation
– Constitutional Limitations:
Exemption from real property tax 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 and
charitable purposes.
Exemption from income taxes, real estate taxes and customs duties of non-stock,
non-profit educational institutions and of improvements being used actually, directly
and exclusively for educational purposes.
Some doctrines in Taxation
– Double Taxation
Direct double taxation, wherein the same subject is taxed twice when it should be
taxed once, in a fashion that both taxes are imposed for the same purpose by the
same taxing authority, within the same jurisdiction or taxing district, for the same
taxable period and for the same kind of character of a tax, becomes legally
objectionable for being oppressive and inequitable.
Indirect double taxation: allowed but as much as possible, avoided so as not to bring
injustice to the taxpayer.
Some doctrines in Taxation
– Set-off of Taxes
Taxes are not subject to set-off or legal compensation under Article 1279 of the Civil
Code.
A person cannot refuse to pay a tax on the grounds that the government owes him
an amount equal to or greater than the tax being collected.
Some doctrines in Taxation
– Escape from Taxation
Tax Avoidance (Tax Minimization or Tax Planning): Happens when the taxpayer
minimizes his liability by taking advantage of legally avoidable tax planning
opportunities.
Tax Evasion (or Tax Dodging): Occurs when the taxpayer resorts to unlawful means to
lessen or to get away with his tax liability.
Some doctrines in Taxation
– Situs of Taxation: the place of taxation. The rule is that the State may rightfully
levy and collect the tax where the subject being taxed has a situs under its
jurisdiction.
– The situs of taxation is determined by a number of factors:
Subject matter – or what is being taxed. He may be a person, property or an activity.
Nature of tax – or which tax to impose. It may be an income tax, an import duty or a
real property tax.
Citizenship of the taxpayer; and
Residence of the taxpayer
Situs of Taxation
– Persons: Residence of the taxpayer
– Real property or tangible personal property: Location of the property.
– Intangible personal property: As a rule, situs is the domicile of the owner unless he
has acquired a situs elsewhere.
– Income: Taxpayer’s residence or citizenship, or place where the income was earned.
– Business, occupation and transaction: Place where business is being operated.
Occupation being practiced and transaction completed.
– Gratuitous transfer of property: Taxpayer’s residence or citizenship, or location of
the property.
End…
Up next…
– Taxes and classification of taxes…
