Principles of Taxation

• Taxation involves state power, legislative process, and government cost distribution.
• A system of funding is required for governments to exist, this need defines the theory of taxation.
• The basis of taxation is the mutuality of support where people fund the government through taxes in exchange for public services.

Theories of Cost Allocation

• Benefit received theory suggests a correlation between the benefit received from the government and the amount of taxes paid.
• Ability to pay theory states taxation should consider the taxpayers' capacity to pay, contributing based on their means.

Aspects of the Ability to Pay Theory

• Vertical equity proposes one's ability to pay is directly proportional to their tax base level.
• Horizontal equity requires consideration of the taxpayer's individual circumstances.

The Lifeblood Doctrine

• Taxes are essential for the government's existence, without them, it would be paralyzed, according to CIR vs. Algue.
• Prompt tax availability is crucial for the government to serve the people, as noted in Vera vs. Fernandez.

Implications of the Lifeblood Doctrine are:

• Tax imposition without a constitutional grant.
• Strict construction against taxpayers for tax exemption claims.
• The government's right to choose taxation objects.
• Courts are not allowed to interfere with tax collection.

The Inherent Powers of the State

• Taxation power enables the state to enforce proportional contributions from its subjects to sustain itself.
• Police power is the state's general power to enact laws for public well-being.
• Eminent domain allows the state to take private property for public use with just compensation.

Differences between Taxation, Police Power, and Eminent Domain:

• Exercising Authority: Taxation and police power are executed by the government, while eminent domain can be by the government and private utilities.
• Purpose: Taxation supports the government, police power protects public welfare, and eminent domain is for public use.
• Persons Affected: Taxation and police power affect the community, while eminent domain affects the property owner.
• Amount of Imposition: Taxation is unlimited, police power is limited, and eminent domain involves no amount imposed beyond compensation.
• Importance: Taxation is most important, police power is most superior, and eminent domain is important.
• Relationship with the Constitution: Taxation is inferior, while police power and eminent domain are superior to the "Non-impairment Clause."
• Limitation: Taxation involves constitutional and inherent limits, police power requires public interest and due process, and eminent domain requires public purpose and just compensation.

Similarities taxation, police power, and eminent domain:

• Necessary attributes of sovereignty.
• Inherent to the state.
• Legislative in nature.
• State interferes with private rights and properties.
• Exist independently of the constitution.

Scope of the Taxation Power:

• Comprehensive.
• Unlimited.
• Plenary.
• Supreme.

Limitations of the Taxation Power that are Inherent

• Territoriality of taxation: the government can only demand tax obligations within its jurisdiction. Two-fold obligation:
  • Filing of returns and paying taxes.
  • Withholding of taxes on expenses and remittance to government.
• International comity: all nations are deemed equal.
• Governments do not tax the income and properties of other governments.
• Governments prioritize treaty obligations over domestic tax laws.
• Public purpose: taxation must be for public purposes only.
• Exemption of the government: government properties and income from essential public functions are not subject to taxation.
• Non-delegation of the taxing power: the legislative taxing power is exclusively vested in congress.

Limitations of the Taxation Power that are Constitutional

• Due process of law: no deprivation of life, liberty, or property without due process. Aspects of due process:
  • Substantive due process: assessments must have a legal basis.
  • Procedural due process: taxpayers have the right to notice and hearing.
• Assessment should occur within three years from the due date of filing or the return/actual filing date, while collection should occur within five years from assessment.
• Equal protection of the law: equal application of the law to taxpayers under the same conditions.
• Uniformity rule in taxation: taxpayers under dissimilar circumstances should not be taxed the same with each class taxed differently.
• Progressive system of taxation: tax rates increase as the tax base increases.
• Non-imprisonment for non-payment of debt or poll tax: imprisonment is prohibited for poverty or inability to pay debt, only subjected to taxes in imprisonment.
• Non-impairment: the state should set an example of good faith.
• Free worship rule: religious practices are exempt from taxation.
• Government schools are exempt from taxes, while private schools pay minimal taxes.
• Law granting tax exemption passage requires concurrence or a majority will of Congress.
• Tax exemption requires a majority vote of all members of Congress (50+).
• Withdrawal of tax exemption requires the relative majority or quorum majority.
• The supreme court can review tax cases.
• Appropriations, revenue, or tariff bills originate exclusively in the House but can be amended by the Senate.
• Non-diversification of Tax collections
• Non-delegation of the power of taxation
• Each local government unit shall execise the power to create ite own sources or revenue and shall have a just share in the national taxes.
• Stages of the exercise of taxation power
• Situs of taxation is the place of taxation.

Situs rules examples:

• Business tax situs: businesses are taxed where they operate.
• Income tax situs on services: service fees are taxed where the services are rendered.
• Income tax situs on sale of goods: the gain on sale is taxed at the place of sale.
• Property tax situs: properties are taxed at their location.
• Personal tax situs: persons are taxed at their place of residence.

Other Fundamental Doctrines in Taxation:

• Marshall doctrine: the power to tax can destroy.
• Holme's doctrine: taxation power doesn't imply destructive power while the court sits.
• Prospectivity of tax laws: tax laws are generally prospective.
• Non-compensation or set-off: taxes cannot be automatically set off or compensated.
• Non-assignment of taxes: contracts by taxpayers don't hinder the government's right to collect.
• Imprescriptibility in taxation: prescription is the lapsing of a right over time.
• Doctrine of estoppel: misrepresentation made by one party, if relied upon in good faith, binds the misrepresenting party.
• Judicial non-interference: courts cannot issue injunctions against government tax collection.
• Strict construction of tax laws: taxation is the rule, exemption is the exception.
• Vague tax laws are construed against the government and for the taxpayer.
• Vague exemption laws are construed against the taxpayer and for the government.
• Double taxation occurs when the same taxpayer is taxed twice by the same jurisdiction for the same thing.

Elements of double taxation:

• Primary element: same object.
• Secondary elements:
• Same type of tax.
• Same purpose of tax.
• Same taxing jurisdiction.
• Same tax period.

Types of double taxation:

• Direct double taxation: all elements of double taxation exist for both impositions.
• Indirect double taxation: at least one secondary element is not common to both impositions.

Minimizing double taxation can happen by using:

• Provisions of tax exemption: one tax law exempts the object from another.
• Allowing foreign tax credit: tax payments made in a foreign tax law are deductible against the tax due to the domestic tax law.
• Allowing reciprocal tax treatment: reduced tax rates or exemptions are offered if the foreign taxpayer's country reciprocates.
• Entering into treaties or bilateral agreements: countries may stipulate lower tax rates for their residents.
• Escapes from taxation are ways taxpayers can limit or avoid tax impacts.

Categories of Escapes from Taxation:

• Those that result in loss of government revenue:
• Tax evasion (tax dodging): illegally reducing or avoiding tax payment.
• Tax avoidance (tax minimization): legally reducing or escaping taxes.
• Tax exemption (tax holiday): immunity from a tax others are subject to
• Those that do not result in loss of government revenue:
• Shifting: transferring the tax burden to other taxpayers.
• Capitalization: adjusting asset value due to tax rate changes.
• Transformation: eliminating wastes or losses to offset tax imposition or increase.

Forms of Shifting

• Forward shifting: tax shifts with the normal flow of distribution.
• Backward shifting: tax shifts in reverse.
• Onward shifting: tax shifts through the distribution channel.
• Shifting is common with business taxes imposed on business revenue, which is shifted or passed on to customers.

Tax Amnesty vs. Tax Condonation

• Amnesty: a general pardon by the government, giving erring taxpayers a chance to reform.
• Tax Condonation: forgiveness of a tax obligation under justifiable grounds, also known as tax remission. Because they deprive the government of revenues, tax exemption, tax refund, tax amnesty, and tax condonation are construed against the taxpayer and in favor of the government.
• Amnesty covers both civil and criminal liabilities, condonation covers only civil liabilities.
• Amnesty is retrospective, forgiving past violations; condonation applies prospectively to any unpaid balance. Amnesty is conditional upon payment. Condonation requires no payment.