Introduction to Taxation

Introduction to Taxation

• Taxation is a state power, a legislative process, and a mode of government cost distribution.
• The necessity for funding the government is the theory of taxation.

Taxation as a State Power

• An inherent power of the State allows it to enforce proportional contributions from its citizens for public purposes.

Taxation as a Process

• Taxation involves levying taxes via the legislature to enforce proportional contributions from its subjects for public purposes.

Taxation as a Mode of Cost Distribution

• Taxation allocates a state's costs or burdens to its subjects who benefit from its spending on defense, safety, health, education, and social protection.

Basis of Taxation

• The government provides public services using funds from the people.
• Mutuality of support between people and the government forms the basis

Receipt of Benefits Presumed

• Every citizen and resident benefits from public services like infrastructure, education, healthcare, and security.
• Taxpayers cannot avoid taxes by claiming non-receipt of benefits; living in a society supported by these services is enough to require tax payment.

Theories of Cost Allocation

• Taxation allocates government costs or burdens to the people.
• Governments exercise their taxation power while taking into account general considerations.

Benefit Received Theory

• The more benefit received from the government, the more taxes should be paid.

Ability to Pay Theory

• Taxation considers the taxpayer's ability to pay.
• Taxpayers contribute based on their capacity to sacrifice for government support.

Aspects of the Ability to Pay Theory

• Vertical Equity: The extent of one's ability to pay is proportional to their tax base; for example, Anna has an income of P200,000, while Beth has P400,000.
• Horizontal Equity: Requires consideration of the taxpayer's particular circumstances; for example, Businessmen A and B both have P300,000 income, but A had expenses of P200,000 while B incurred only P50,000.
• Vertical equity is a gross concept; horizontal equity is a net concept.

Vertical Equity Scenario Example

• Anna earns P10,000 a month and pays P100 towards a birthdaycake.
• Ben earns P50,000 a month and pays P300 towards a birthdaycake.
• Charlie earns P100,000 a month and pays P600 toward a birthday cake.
• Vertical equity demonstrates that those earning more contribute a bigger share, but the cake is shared equally.

Horizontal Equity Scenario Example

• Liza is single with no dependents and earns P50,000 a month.
• Mark is married with two children, higher living expenses, and earns P50,000 a month.
• Liza, with fewer responsibilities, pays P5,000 in taxes.
• Mark, supporting a family, pays only P3,000 in taxes, demonstrating fairness by considering financial obligations.

Inherent Powers of the State

• Taxation Power: Allows the state to enforce proportional contributions from its subjects.
• Police Power: Allows the state to enact laws to protect people's well-being.
• Eminent Domain: Allows the state to take private property with just compensation for public use.

Scope of the Taxation Power

• Generally comprehensive, plenary, unlimited, and supreme.
• Taxation has its own inherent limitations and limitations imposed by the Constitution.

Inherent Limitations of Taxation

• A government can only impose taxes within its territorial jurisdiction.
• Taxing foreign entities outside the country's jurisdiction would violate their sovereignty.
• Taxpayers have to file returns, pay taxes and withhold/remit taxes only within the Philippines.

Territoriality of Taxation Scenario Example

• Juan runs a business in Manila and must file tax returns and withhold/remit taxes to the government.
• Miguel works in the U.S., so the Philippine government cannot impose taxes on his foreign earnings, unless Miguel has income sources within the Philippines (e.g., rental in Manila),.

Exception to the Territoriality Principle

• For income taxation, resident citizens and domestic corporations are taxable on income inside + outside the Philippines.
• For transfer taxation, residents or citizens like resident citizens, nonresident citizens and resident aliens are taxable on transfers of properties regardless of where they are.

Income Taxation Scenario Example

• Maria, a Filipino living and working in the Philippines who also owns a business in the U.S., generates taxable income from both.
• ABC Corporation, based in the Phiippines, earns income from operations within the Philippines and also generates taxable revenue from international customers.

International Comity

• The principle of mutual respect and reciprocity among sovereign nations, recognizing that all countries are equal.
• Governments do not tax the income or properties of other governments.
• Treaty obligations take precedence over domestic tax laws.
• Embassies, consular offices, international organizations, and their foreign staff in the Philippines are exempt from some income and property taxes.
• Foreign governments and their state-owned corporations are not subject to Philippine income tax.
• When a country enters into a treaty, they must uphold the agreement, even if it conflicts with local tax laws.

International Comity Scenario Example

• The Philippines does not tax the salary of a Japanese diplomat paid by the Japanese government working at the Embassy of Japan in Manila.
• Tax treaties permit Japan to levy taxes on their diplomat, not the Philippines.

Public Purpose

• Taxation is intended for the common good and cannot be exercised to push forward any private interest.

Public Purpose Scenario Example

• The Philippine government introduces a tax on luxury goods.
• The money raised is used to build public schools, hospitals, and roads.

Public Purpose Application

• Taxes are used to pay for better schools and healthcare to help the common good.
• Taxes do not used for private projects that help only a few people.

Exemption of the Government

• Generally, the government does not tax itself.
• Government properties and income from essential public functions are exempt from taxation, according to the NIRC (National Internal Revenue Code).
• Income from profit-driven activities of government-owned and controlled corporations (GOCCs) can have taxes.

Exemption of the Government Scenario Example

• The Philippine government does not pay property tax on land used for public housing, as this is for public purpose.
• The government is also taxed on profitable income earned at a restaurant run through a government corporation.

Exemption Application

• Land used for public housing is tax-exempt.
• Income from a restaurant operated as a business is taxable.

Non-Delegation of the Taxing Power

• Congress has the power to impose taxes as part of the principle of separation of powers.
• The power to tax cannot be delegated, as it was given by the people to the legislature.

Non-Delegation of the Taxing Power Exceptions

• Local government units (LGUs) can tax to exercise fiscal autonomy.
• The President can adjust tariffs under the Tariff and Customs Code based on trade conditions.
• Delegation may be allowed in certain cases for efficient tax administration.

Non-Delegation Scenario Example

• Congress is responsible for creating tax laws like income tax, and cannot delegate this responsibility.
• A Manila city council (LGU) can impose local taxes like property taxes to support its budget.
• The President can set tariffs on imported goods based on trade needs.
• Tax agencies may be given authority to better handle the collection and enforcement of taxes for better efficiency.

Observance of Due Process of Law

• Tax laws must be fair and not oppressive; no one should lose life, liberty, or property without a fair legal process.

Aspects of Due Process of Law

Substantive Due Process

• Taxes must be for public purposes, based on a valid law, and enforced by the taxing authority.
• Any tax assessment without legal grounds violates due process.

Procedural Due Process

• Tax assessments and collections must be fair.
• Taxpayers have a right to notice, hearing, and specific procedures that must be followed.
• Under the NIRC, assessments must be made within three years, and collections within five years.

Due Process Of Taxation Scenario Example

• Maria receives a tax notice from the BIR saying she owes extra taxes, but the notice doesn't legally justify the tax.
• An agency like the BIR needs to comply with due process rules for issuing tax assessments. The valid law must back the tax assessment, and Maria needs have the chance to respond. An assessment must be issued within 3 years and the tax collected within 5, or its a violation.

Equal Protection of the Law

• Taxpayers are treated equally under the law, and Congress cannot tax sellers of "penoy" but exempt sellers of "balot."

Equal Protection Scenario Example

Case 1

• A municipality taxes vehicles, but exempts EV's, violating equal protection under that the tax law.

Case 2

• A local government taxes restaurants, but exempts fast food chains from the business tax.

Uniformity Rule in Taxation

• Taxes are fair and applied consistently.
• Taxpayers in similar situations are taxed the same.
• When there are relevant differences, they may face different tax rates.

Uniformity Rule Scenario Example

• Ana runs a local coffee shop, and Ben owns a big restaurant chain.
• Ana might pay less tax because her shop is smaller, and Ben pays more because his restaurant chain is larger.
• One cafe will pay the same tax as another cafe, just as one restaurant in the chain pays the same tax

Progressive System of Taxation

• Tax rates increase as a person's income or wealth rises, taxing people based on their ability to pay.
• It is designed to take more from the wealthy and less from the poor, to achieve a fair distribution of wealth.

Progressive System Scenario Example

• Maria earns P20,000 a month and will pay a lower tax rate.
• Juan earns P100,000 a month and will pay a higher tax rate.

Non-Imprisonment for Non-Payment of Debt or Poll Tax

• If unable to pay, nobody can be jailed for being unable to pay debts or taxes due to poverty.
• Criminal offenses, such as bad faith, can lead to a punishable by imprisonment.

Taxes vs Debts

• Taxes are for the public; debts arise from private contracts.
• The nonpayment of tax is more serious and is treated as a crime.
• The nonpayment of debt only affects private interests.

Kinds of Poll Tax

• Basic community tax: non-payment is not punishable by imprisonment
• Additional community tax: non-payment is considered tax evasion and it punishable by imprisonment

Non-Payment of Tax vs Debt Scenario Example

Case 1

• Juan owes P10,000 personal debt and is unable to pay. he will not be jailed unless it was created in bad faith.

Case 2

• Maria does not pay poll tax. Only is she will be jailed if she does not pay the additional community tax.

Non-Impairment of Obligation and Contract

• The government must act honorably and keep its word on contracts and obligations.
• The State should respect agreements and cannot change tax exemptions granted under these contracts

Non-Impairment Scenario Example

• ABC Corp signs a contract with the government for a tax exemption for 5 years, and government decides to cancel the exemption after 3 years.
• The government cannot cancel the contract after 3 years, because there's an agreement for 5 years.

Free Worship Rule

• Practice religion without taxation interference.  
• Religious properties and revenues like tithes and offerings are exempt.

Taxable Worship Rule Example

• A cafe owned in the church is subject to tax because its part of the commercial activities or properties used for business purposes by religious institutions.

Free Worship Rule Scenario Example

Case 1

• A church receives tithes and donations from the members. These funds are not taxed because it is part of the practice.

Case 2

• A cafe that earns money and owned by a church is taxed because that is part of their commercial activity.

Exemption of Religious, Charitable or Educational entities

• In the Philippines, religious, charitable, and educational entities are exempt from property taxes if their properties are exclusively used for certain activities.

Religious, Charitable or Educational entities Scenario Examples

Case 1

• A church for worship services is exempt from property tax if the intention is exclusively religious

Case 2

• The church renting the building for parties is not tax exempt due to commercial purposes.

Non-Appropriation of Public Funds for Religious Purposes

• The separation of religion and state because of separation of funding.
• Payments to ministers working in public institutions like the military, prisons, or orphanages are not appropriation.

Non-Appropriation of Funds for Religious Example

Case 1

• The government cannot give money to the church to support its activities because it could cause favor between others.

Case 2

• A priest in the hospital can be paid because its for public service and not for religious promotion.

Exemption from Taxes of Non-Profit

Case 1

• A non-profit uses all its income to improve the school facilities and scholarships. Since the funds are used for education this makes the university tax exempt.

Case 2

• A university runs a coffee shop. The use of tax in commercial, make it subject to to pay because its being use for education not income.

Concurrence of Congress

Case 1

• Members of congress agree on approving to exempt farmers from tax to support agriculture with the vote of more than half.

Case 2

• The government remove the tax due to revenue needs. A simple majority is all it needs to agree.

NON-DIVERSIFICATION

Case 1

• Road building and school hospitals that taxes are collected for

Case 2

• Official trying to use the tax money to fund a private businesses.

POWER OF TAXATION

Case 1

• Government agency like is not to create a new tax on its own

Case 2

• The revenue regulation has to be collected as a process but needs further clarification of the rules and tax.

SUPREME COURT TAX CASE

Case 1

• Has disagreements with a tax assessment made by the Bureau of Internal Revenue (BIR) with the final say on how the CTA is being wrong.

Case 2

• appeal the decision with not appeal the decision where the court of appeal has the final ruling.

APPROPRIATIONS

Case 1

• taxation to be involved the increase must be made in the house.

Case 2

• change has to be made but approved the final version and agreed before approval.

THE NATIONAL TAXES NATIONAL TAXES: ALLOCATION.

CASE 1

• taxes generate revenue for the services

CASE 2

• government tax funding by protecting the local taxing