INCOME TAXATION

Taxation - mode of raising revenue for public purposes

Taxes

a. enforced contributions

b. proportional (based on one's ability to pay)

c. levied by authority of the law

— Legislative Power (has the power to imposed taxes)

d. support of the gov't & all its public needs

BASIS OF TAXATION

a. Taxation & the Life Blood Doctrine

— sovereign raises power to defray the necessary expenses of the gov't

— gov't can neither exist nor endure w/o taxation

— taxes are what we pay for a civilized society

b. Theories on Taxation

— a power predicated upon necessity

• Benefits Protection Theory

–> power of the state to demand & receive taxes on the reciprocal duties of support & protection.

–> obligation to pay taxes (involuntary & compulsary) = for the protection and benefits one received
from the gov't

• DOCTRINE OF SYMBIOTIC THEORY

c. Liabilities Involved

— Taxes are personal to the tax payer

 • tax debts of a corporatiom are not directly enforceable against. its stockholders UNLESS
a corporation dissolves & assets end up in the hands of its stockholders (they may be responsible for the
unpaid taxes)

• not paying taxes (civil liability); intentionally refuse/fail to pau taxes (result in criminal
liability)

NATURE OF THE TAXING POWER

a. Taxation as an Inherent Attribute of Sovereignty

— it doesn't need of constitutional confernment

— never presumed

b. Taxation as Legislative in Character

— Stare is free to select the object of taxation (such power being exclusively vested in the LEGISLATURE,
except the Constitution provides otherwise).

aspects, process, phases of taxation

a. Levy/Imposition

— refer to the enactment of tax laws or statutes.

scope of the legislarice power to tax

1. discretion as to purposes for which taxes shall be levied

— legislature (provided the purposes are public)

2. discretion as to subjects of taxation

— within the territorial jurisdiction of the taxing state (legislature has unlimited scope)

3. discretion as to amount of rate of tax

— legislature has the right to finally determine the amount/rate of a tax (in absence of constitutional
probibitions).
— it may levy a tax of any amount it sees fit.

4. discretion as to manner, means, & agencies of collection of taxes

— property tax, excise, license or occupation tax, a poll or capitation tax, franchise tax, income tax,
inheritance tax, stock transfer tac, etc.

IS THE POWER TO TAX THE POWER TO DESTROY

PURPOSES OF TAXATION

a. To raise revenues (primary purposes)

b. Secondary/ Non-revenue purposes

• Reduction of Social Inequality

— progressive system of taxation

• Encourage the Growth of Local Industries

• Protect our Local Industry Against Unfair Competition

— tarrif & custom code (imposition of certain taxes upon goods/articles to further protect our local
industry)

• As an Implement of the Police Power of the State (Regulatory Measure)

— it may be used as an implement of the police power of the State thru the impositiom of taxes w/ the
end in view of REGULATING a particular activity.

EXTENT OF THE TAXING POWER

• COMPREHENSIVE - covers persons, businesses, activities, professions, rights & privileges.

• UNLIMITED

• PLENARY

• SUPREME — strongest of all the powers of the gov't (it can't be interpreted that it's
superior to the other inherent powers of the gov't)

–> It's supreme insofar as the selection of the subject of taxation is concerned.
PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal Adequacy - must be adequate to meet the gov't expenditures.

2. Theoretical Justice - a sound tax system must take into consideratiom the taxpayers'
abiliy to pay; reasonable, just, fair, conscionable; taxation is progressive when its rate goes up on the
resources of the person affected.

3. Administrative Feasibility - must be capable of effective & efficient enforcement; must

not obstruct business growth & economic dev't

TAXATION DISTINGUISHED FROM OTHER a INHERENT POWERD & IMPOSITIONS

LIMITATIONS ON THE TAXING POWER

a. Inherent Limitations on the Power to Tax

1. PUBLIC PURPOSE

— Taxes are exacted only for a public purpose

— Public money may now be used for the relocatiom of illegal settled, low-cost housing, & urban or
agrarian reform

• Who may determine public purpose?

— This is a legislative prerogative (CONGRESS).

— It makes its own judgement & reasoning.

• Cases of Public Purpose

a. Public Improvement

b. Unemployment relief

c. Buildings and roads / Infrastructure

d. Local police forces (subsidies) under R.A. 6141

e. Industries classified as indispensable under P.D. 1987

f. Construction of home sites

g. Promotion of science and invention

h. Upliftment of the underprivileged

i. Rehabilitation of the sugar industry

j. Pensions to deserving retirees

k. Oil industry's protection

l. Socialized housing

m. Educational subsidy

2. International Comity (Sec. 2, ARTICLE II)

— we follow international law (equality of states)

— "par in parem non habet imperium", "an equal has no power over an equal"

— No country is superior to another regardless of its size & power

3. TERRITORIALITY

— the taxing power of a country is limited to person & property within & subject to its jurisdiction.

1. Poll/Capitation/Community Tax — This tax is based on where a person lives, regardless

of their income or property location.

2. Property Tax

• Real Property: Taxed where it's located, no matter if the owner lives there or not.

• Personal Property: Taxed where the owner lives, following the idea that movable
property follows the person.

• Domicile: The place where a person primarily lives and intends to stay for an indefinite
time.

–> Mobilia Sequuntur Personam (Movables Follow the Person): A legal concept where movable property
is taxed where the owner lives unless it has a permanent locationelsewhere.
–> Shares of Stock Taxation: Shares of stock are taxed where they're permanently kept, regardless of the
owner's domicile or where the corporation is based.

—> Certain properties are considered to have a tax situs in the Philippines, regardless of the owner's
residence.

These include:

• Franchise exercised in the Philippines

• Shares of stock, bonds, etc., issued by Philippine corporations.

• Shares, bonds, etc., issued by foreign corporations mostly doing business in the
Philippines.

• Shares, bonds, etc., used in the business of foreign corporations that have acquired
business situs in the Philippines.

• Shares/rights in a partnership established in the Philippines.

These properties are considered as situated, thus taxed, in the Philippines; the residence of their owners
is immaterial.

Thus, the RULE: Irrespective of the owner, donor's tax or estate tax can be imposed upon these
properties.

EXCEPT where the foreign country grants exemption or does not impose taxes on intangible properties of
Filipino citizens.

3. EXCISE TAX

— imposed on the exercise of a right/privilege

a. income tax

b. donor's tax

c. estate tax

d. value added tax

4. NON DELEGATION OF THE POWER TO TAX

— The power to tax is exlusively vested in the Legislative body. EXCEPT:

 • Article VI, Section 28 (2): Congress can let the President set tariffs, import/export limits,
etc., but only within Congress's rules and the national development plan.

• Article X, Section 5: Each local government can make its own taxes and fees, but they
must follow guidelines set by Congress and respect local autonomy. The money from these taxes goes
exclusively to the local government.

MAY THE GOV'T TAX ITSELF?

"As a rule, agencies performing governmental functions are tax-exempt unless expressly taxed. On the
other hand, agencies performing proprietary functions are subject to tax unless expressly exempted"

• GOCC perform propriety functions (so they're subject to taxation) EXCEPT:

⁃ GSIS

⁃ SSS

⁃ PHIC

⁃ PCSO

• Instrumentality of the National Government is exempt from local taxation.

Instrumentality — This refers to any national government agency with special functions or powers
granted by law. It's not part of any department, has its own funds, and operates independently, usually
with its own charter. This includes regulatory agencies, chartered institutions, and government-owned or
controlled corporations.

Government-Owned or Controlled Corporation (GOCC) — This refers to an agency organized as a stock or

non-stock corporation, serving public needs whether governmental or business-related. It's owned by
the government directly or through its instrumentalities, typically at least 51% of its capital stock.
However, some instrumentalities may not fit the definition of a GOCC.

– > While a government "instrumentality" may include a "government-owned or controlled corporation,"

there may be a government "instrumentality" that will not qualify as a "government-owned or controlled
corporation".
CONSTITUTIONAL LIMITATIONS ON THE POWER TO TAX

1. Due Process of Law (ARTICLE III, Sec 1.)

— "notice & hearing"

The following situations are illustrative of violations of the due process clause:

• If the tax amounts to a confiscation of property;

• If the subject of confiscation is outside the jurisdiction of the taxing authority;

• If the law is imposed for a purpose other than a public purpose;

• If the law which is applied retroactively imposes unjust and oppressive taxes;

• Where the law is in violation of inherent limita-tions.

2. Equal Protection of the Law ( ARTICLE III, Section 1)

— In taxation, constitution requires uniformity, not equality.

clause: Equal protection doesn't require equal rates of taxation so long as it's not based upoon arbitrary
classification. It merely requires that all prrsons subjected to such legislation shall be treated alike, under
like circumstances & conditions, both the privileges conferred & in the liabilities imposed.

3. Uniformity of Taxation (ARTICLE VI, Sec. 28.)

— It means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.
It does not mean that lands, chattels, securities, occupations, franchises, privileges, necessities and
luxuries shall all be taxed or assessed at the same rate.

— Different articles may be taxed at different amounts provided that the rate is uniform on the same
class ev-erywhere, with all people and at all times.

— A tax is uniform when it operates with the same form and effect in every place where the subject of it
is found.

4. Progressive Taxation (Article VI, Sec. 28 (1))

— Congress shall evolved a progressive system of taxation

— Taxation is progressive when its rate goes up depending on the resources of the person affected.

5. Non-Impairment Clause (ARTICLE III, SEC 10)

— No law shall be passed imparing the obligations of contract.

— The obligation of a contract is the law which binds the partie/ to perform their agreement.

— Any law that changes the intention of the parties impairs the contract itself.

tax exemption is revocable

6. Non-Imprisonment for Non-payment of poll tax (ARTICLE III, Sec 20.)

7. Bills to originate from the house of representatives (Art. III, Section 24)

— All appropriation, revenue or tariff bills, bills authorizing the increase of the public debt, bills of local
application and private bills, shall originate exclusively in the House of Representatives, but the Senate
may propose or concur with amendments.

— Both Houses of Congress may initiate bills, but only the Lower House may propose tax measures.

8. VETO POWER OF THE PEESIDENT (ARTICLE VI, Sec. 27 (2))

— 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.

— The item or items vetoed shall be returned to the Lower House of Congress together with the
objections of the President.

— If after a reconsideration 2/3 of all the members of such House shall agree to pass the bill, it shall be
sent, together with the objection, to the other House by which it shall likewise be reconsidered, and if
approved by 2/3 of all the Members of that House, it shall become a law.

9. President's Power to Tax

10. Taxation and Freedom of the Press (Article III, Sec 4.)

— No law shall be passed abridging the freedom of speech, of expression, or of the press
 11. Taxation and Freedom of Religion (Article III, Sec. 5)

— No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof.
The free exercise and enjoyment of religious profession and worship without discrimination or
preference shall forever be allowed. No religious test shall be required for the exercise of civil or political
rights.

12. TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY AND EXCLUSIVELY USED FOR RELIGIOUS,
CHARITABLE AND EDUCATIONAL PURPOSES (Article VI, Section 28[3])

— Charitable institutions, churches and parsonages 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.

13. Tax exemption granted to non stock, non profit educational institutions (Article XIV, Sec.
4[3])

14. Appropriation of Public Money (Article VI, Sec. 29)

15. Grant of Tax Exemptions (Article VI, Sec. 28[3])

16. Local Taxation (Article X, Sec. 5)