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Taxation Definition Taxation is the process or means by which the sovereign through its lawmaking body, raises income

to defray necessary expenses of the government. Purposes of Taxation 1. Primary Purpose -provide funds or property with which to promote the general welfare and protection of its citizens and to enable it to finance its multifarious activities. 2. Secondary Purpose a. To strengthen anemic enterprises by giving tax exemptions; b. To protect local industries against foreign competition through imposition of high customs duties on imported goods; c. To reduce inequalities in wealth and income by imposing progressively higher tax rates; d. To prevent inflation by increasing taxes or ward off depression by decreasing them. Scope of Taxation In the absence of constitutional restrictions and subject to the will of the legislative bodies with whom it is entrusted and the discretion of the authorities which exercise it, the power of taxation is unlimited, comprehensive, plenary and supreme, the principal check upon its abuse resting in the responsibility of the members of the legislature to their constituents. Since the power to tax is the strongest of all the powers of the government, the legislature is free to select the subjects or objects to be taxed. They may be persons, whether natural or juridical; property, whether real or personal, tangible or intangible ; businesses, transactions, rights or privileges. It is of course to be admitted for all its plenitude, the power to tax is not without restrictions, (Comm. Vs. Algue, GR No.L-28896, 17February 1988). Despite all its tenacity, taxation is nonetheless subject to established limitations, such as those inherent in the power itself or mandated by the Constitutional precepts. Illustration: After having been informed that some massage parlors are being used as fronts for prostitution, the Sanggunian Panlungsod passed an ordinance subjecting the massage parlors to such onerous taxes that leave them no other choice but to stop operating. Is the ordinance valid?

Answer: Yes. The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and ultimately prohibiting in effect certain things or enterprises inimical to the public welfare. A tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxes. The power to imposed tax is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restriction whatever, except such as rest in the discretion of the authority which exercises it (Tio vs. Videogram Regulatory Board, GR No. 75697, 19 June 1987). Theory of Taxation The power of taxation proceeds upon the theory that the existence of the government is a necessity; that it cannot continue without means to pay its expenses; and that it has a right to compel all its citizens and property within its limits to contribute. Illustration: The government has called upon its residents and citizens to pay taxes and assume monetary burdens so that it can meet its widely expanding services and carry out its other functions. Miss Cory refused to pay taxes. Accordingly, she does not care whether the government shall continue to exist or not, and she wants her millions to remain intact. Is the contention of Miss Cory justified? Answer: No, the continued existence of the government is the responsibility of every citizen. Consequently, they have to pay their taxes religiously. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of ones hard-earned income to the taxing authorities, every person who is able to contribute his share in the running of the government. (Comm. Vs. Algue, Inc. GR No. L-28896, 17 February 1988). Basis of Taxation The basis of taxation is found on the reciprocal duties of protection and support between the State and its inhabitants. The state receives taxes that it may be enabled to carry out its mandates into effect, and perform functions of government and the citizens pay the portion of taxes demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society. This is otherwise known as benefit-received principle. Illustration:

Mr. Maco refuses to pay taxes because according to him, while some people are receiving full protection, he has not been receiving any protection to his life, liberty and property from the government. Is the contention of Mr. Maco tenable? Answer: No. While it may be true that not all taxpayers receive benefits from the government, the theory is that they presumed to have received such benefit even in unequal proportions for uniformity in this respect is impossible of attainment. Nowadays, it is hardly believable to conclude that there are taxpayers who receive no benefits at all from projects sponsored by the government, all of which improvements are used, directly or indirectly by all people or inhabitants. Basic Principles of a Sound Tax System 1. Fiscal Adequacy - the sources of revenue should be sufficient to meet the demands of public expenditures. - This can be obtained by creating new taxes or new tax machinery, or by merely changing the rates applicable to existing taxes so that the revenue would substantially respond to the expanding needs of public expenditures 2. Equality or Theoretical Justice - the tax burden should be proportionate to the taxpayers ability to pay - ability to pay principle 3. Administrative Feasibility - tax laws should be capable of convenient, just and effective administration - each tax should be clear and plain to the taxpayer, capable of uniform enforcement by government officials, convenient as to time, place and manner of payment, and not to unduly burdensome upon, and discouraging to business activity. Characteristics of the States power to tax 1. It is inherent in sovereignty - the power of taxation may be exercised by the State although not expressly granted by the Constitution 2. Legislative in character - it is only the legislature that can enact tax laws 3. Subject to Constitutional and inherent limitations - taxation is not an absolute power that can be exercised by the legislature anyway it pleases. Illustrations:

1. Assuming that the Constitution drafted by a Constitutional Convention and ratified by the people failed to provide for the enactment of law imposing taxes, may the Congress created by the same constitution enact tax laws. Answer: Yes, the power to tax is an inherent power of the state and can be exercised by the legislative without a previous constitutional authority; it is not merely a constitutional grant.

2. The President of the Philippines and the Prime Minister of Japan entered into

an executive agreement in respect of a loan facility to the Philippines from Japan whereby it was stipulated that interest on loans granted by private Japanese financial institutions in the Philippines shall not be subject to Philippine income taxes. Is the exemption valid? Answer: No. The President of the Philippines is not empowered to grant tax exemption as this power is lodged solely with Congress. Taxation being legislative in character can be exercised only by the lawmaking body. This rule is also true to the granting of exemption. What one cannot impose, one can not condone

3. A law is passed requiring all real property owners to pay real property tax
retroactive 50 years back. The governments justification is that the power of taxation is unlimited, comprehensive, plenary and supreme. Is the Justification tenable?

Answer: No, because the power of taxation is subject to constitutional and inherent limitations. Any tax law that may be passed by the legislature should not go beyond these limitations. Requiring the real property owners to pay said taxes violates the constitutional limitation on due process because the justification made by the government is inferior to constitutional and inherent limitations. Limitations on the Power of Taxation 1. Constitutional Limitations those restrictions found in the constitution or implied from its provisions. 2. Inherent Limitations those which restricts the power although they are not embodied in the constitution. Constitutional Limitations 1. Due Process No person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied the equal protection of law. (Sec. 1, Art.3,NC) Illustration:

A law is passed requiring all Filipino income earners to pay an income tax of 80% of their gross income. Is the law valid? Answer: No. Taxes which are excessive and beyond the paying capacity of the taxpayers are confiscatory, oppressive and could be unquestionably struck down as deprivation of the taxpayers property without due process. 2. Equal Protection of Laws Illustration: Gonzales, a copra dealer claims that he should be exempt from payment of taxes considering that coconut farmers and producers are exempt. After all, he said, they both sell copra in its original state. Should Gonzales be given the same exemption? Answer: No. There is substantial difference between copra producers on one hand, and traders on the other. There is no violation of the equal protection clause here because there could only be denial of the equal protection of the law if there is discrimination that finds to support in reason. In this case, the former produces and sells copra while the latter merely sells them. (Misamis Association of Coco Tradesrs, Inc. vs Sec. of finance, et. Al., GR No. 108524, Nov. 10, 1994)

3. Rule of Uniformity and Equity in Taxation the rule of taxation shall be


uniform and equitable. The Congress shall evolve a progressive system of taxation. (Sec. 28, Art. 6) Illustration: A municipal council passed an ordinance imposing an occupation tax on the profession and occupation of installation manager. Manny is the only salaried person with such occupation in the municipality. Can he successfully challenge the validity of the ordinance as discriminatory since he is the only one adversely affected? Answer: No. Because the occupation tax could be imposed on all installation managers who may come within the jurisdiction of the municipality. What the ordinance taxes is the occupation itself and not the person. Hence, the number of persons exercising the occupation is not material. (Shell vs. Vano, 94 Phil 382) Uniformity of taxation means that all the taxable persons or property of the same class shall be taxed at the uniform or same rate. There is uniformity of taxation when the tax operates with the same force and effect on this subject wherever found. (Churchill vs. Concepcion, 24 Phil 969)

4. Non-imprisonment for non-payment of poll tax No person shall be


imprisoned for debt or non-payment of a poll tax (Sec 20, Art 3) Illustration: Evander refused to pay basic community tax of P5.00 and the additional tax of P1.00 for every P1,000 of his income from business. Can he be imprisoned for non-payment? Answer: He cannot be imprisoned for the non-payment of the basic tax of P5.00. However, imprisonment is a sanction for his failure to pay the additional community tax because it is not a poll tax.

5. Non-impairment of the obligations of contracts No law impairing the


obligations of contracts shall be passed (Sec 10, Art 3) Illustration: The government entered into a contract with Abala Lines. The condition provides that Abala Lines shall carry government mails. In return, the former shall be exempt from payment of income tax. Can the Congress later on pass a law revoking such exemption? Answer: No. Since the granting of tax exemption is based on a valid contract, its withdrawal would impair the obligation of contracts. The obligation of contracts is impaired when its terms and conditions are changed by law or by treaty without the consent of the other, thereby weakening the position of the latter. (Edwards vs. Kearney, 96 US 607)

6. Non-infringement of religious freedom No law shall be made respecting the


establishment of religion, or prohibiting the free exercise thereof. The free exercise of religious profession and worship, without discriminating or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. (Sec 5, Art 3) Illustration: A religious group engaged in the sale of bibles and other religious articles was required to pay taxes on the sale of merchandise. Is the imposition of tax valid? Answer: No. To require such religious group to pay taxes would impair its free exercise and enjoyment of religious freedom and worship, as well as its rights and dissemination of religious belief. (American Bible Society vs. City of Manila, 101 Phil 396)

7. No appropriation for religious purposes No public money or property shall

be appropriated, applied, paid or employed, directly or indirectly for the use,

benefit, or support of any religious sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or other religious teacher, or dignitary as such, except when such priest, preacher, minister or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. (Sec. 29, Art 6) Illustration: The Barangay Council of May-Ogob appropriated and spent part of its development fund in the 1998 barangay budget for the construction of the barangay chapel. Is the action valid? Answer: No. The Constitution strictly prohibits public money from being appropriated, applied, paid or used, directly or indirectly, for the use, benefit or support of any sect, church, denomination, sectarian institution, or system of religion.

8. Exemption

of religious, charitable or educational entities, non-profit cemeteries, and churches from taxation Charitable institutions, churches and personages or convents 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. (Sec. 28, Art 6) Illustration: The Roman Catholic Church is the owner and possessor of a parcel of land: a. The eastern side of which is occupied by the church itself, the priests house and a vegetable garden. b. On the western side, a dormitory building used by the visitors and the parish priest and the people who participate in religious activities during fiestas. Is the entire land subject to real property tax? Answer: The piece of land occupied by the church and the priests house are exempt from tax because they are actually, directly and exclusively used for religious purposes. The adjacent ground or vegetable garden is destined to the incidental use of the parish priest in his ordinary life. Exemptions in favor of property used exclusively for charitable, religious or educational purposes is not limited to property actually indispensable therefore, but extends to facilities that are incidental to and reasonably necessary for the accomplishment of said purposes.

An incidental property is a part of the principal and if the latter is exempt, the former is likewise exempt. Hence, it is also exempt from property tax. (Bishop of Nueva Segovia vs. Provincial Board of Ilocos Norte, 51 Phil 352) Illustration: Hanap Taypa Co. , a non-stock corporation which owns and operates a memorial park, contests the real estate assessment made by Municipality of Polangui. Sued by the municipality, Hanap Taypa Company contends that burial grounds are exempt from real estate tax. It appears that two years prior to the assessment, Hanap Taypa Company had declared dividends to stockholders. Is the company justified in disputing the assessment? Answer: No. Only non-profit cemeteries are exempt from the real property tax. One of the requisites for a non-profit institution is that it must declare no dividends. The fact that the company declared dividends to its stockholders clearly show that it is a profit oriented company. Moreover, the lot must also be used actually, directly and exclusively for religious or charitable purposes. Considering that these requisites are not satisfied, it is not included within the exemptions. He who claims exemptions must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implication otherwise state revenues will suffer.

9. Exemptions of revenues and assets of non-stock, non-profit educational


institutions and donations for educational purposes from taxation All revenues and assets on non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law, including restriction on dividends and provisions for reinvestment. (Sec. 4, Art 6) Illustration: The Bicol School of Business and Arts is a non-stock, non-profit educational institution. It owns a 5-hectare lot. One-half of which is used as its school campus while the other one-half is vacant. The school plans to do the following effective January 1, 1999: a. Rent out to Supermarkets, Inc. the vacant portion of the lot for P1 million a year;

b. Increase tuition fees by 6% in accordance with government regulations; and c. Import 100 computers for use in its computer courses. Is the school subject to real estate tax on its 5-hectare lot for calendar years 1998 and 1999? Will the school be subject to income tax on its rental income from Supermarkets, Inc.? If the increase in tuition fees results in net income from school operations in 1999, will the school be subject to income tax on the same income? Is the importation of computers subject to tax? Answer: Only the one-half portion which is vacant and was subsequently rented out to Supermarket, Inc. Since the basis for real property taxation is used not ownership, the portion which is not directly and exclusively used for educational purposes is subject to real property tax. No, so long as the rental income and the income from the increase in tuition fees are derived from an educational purpose, it is exempt from tax. The constitution does not distinguish the source of income for purposes of exemption. What is important is that the same is actually, directly and exclusively derived from educational sources. No, the provision of the constitution is clear that all assets of nonprofit educational institutions are exempt from tax. Hence, they are also exempt from taxes or duties on importation.

10. Concurrence of all the majority of all the members of the Congress for the
passage of law granting any tax exemption No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress. (Sec.28, Art.6)

11. Power of the President to veto any particular item or items in a revenue or
tariff bill The President shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill, but the veto shall not affect the item or items to which he does not object. (Sec.27, Art 6)

12. Non-impairment of the jurisdiction of the Supreme Court in tax cases The
Supreme Court shall have the power to review, revise, reverse, modify or affirm on appeal or certiorari as the law or the Rules of Court may provide, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. (Sec. 5, Art 8) Illustration:

The Congress passed a law declaring that the decisions of the Court of Tax Appeals shall be final and non-appealable for purposes of improving the tax collection of the government. Is the law valid? Answer: No, such law shall violate the constitutional limitation that the Supreme Court may not be deprived of its power to review, revise, modify final judgments and order of lower courts in all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto. Inherent Limitations on the Power to tax 1. Requirement that levy must be for a public purpose. Illustration: A law is passed imposing a tax of P5.00 on every citizen for the purpose of raising funds to be given as loans to earthquake victims in Mindanao. The victims are required to give collateral for the loans and to pay interest. Is the tax valid? Answer: The tax is valid because raising funds for earthquake victims is for public purpose. The true test of what is public purpose for purposes of taxation are that which requires that the work shall be essentially public and for the general good of all the inhabitants of the taxing body. This does not mean, however, that a tax is not for public purpose unless the benefits from the funds to be raised are to be spread equally over the whole community or a large portion thereof. A use may be public although it is of benefit primarily to the inhabitants of a small and restricted community. 2. Non-delegation of the legislative power to tax. The rule is potestas delegate nondelegare potest what has been delegated cannot be delegated. The people created a legislative department for the exercise of legislative power 3. 1