BMTax - MET 1 (Introduction to Taxation).pdf

INCOME AND BUSINESS TAXATION MET 1: INTRODUCTION TO TAXATION FUNDAMENTALS OF TAXATION DEFINITION DEFINITION OF TAXATION Aban: Taxation is the power by which the sovereign raises revenue to defray the necessary expenses of the government. Black’s Law Dictionary: Taxation is a proces...

INCOME AND BUSINESS TAXATION MET 1: INTRODUCTION TO TAXATION FUNDAMENTALS OF TAXATION DEFINITION DEFINITION OF TAXATION Aban: Taxation is the power by which the sovereign raises revenue to defray the necessary expenses of the government. Black’s Law Dictionary: Taxation is a process or an act imposing a charge by governmental authority on property, individuals, or transactions to raise money for public purposes. De Leon: Taxation is a means by which the State, through its law- making body, raises income to defray the necessary expenses of the government. DEFINITION DEFINITION OF TAXATION Domondon: Taxation o is the inherent power of the sovereign o exercised through the legislature o to impose burdens § upon subjects and objects § within its jurisdiction, o for the purpose of raising revenues o to carry out the legitimate objects of the government. DEFINITION THREE BASIC CONCEPTS OF TAXATION 1. Taxation is a power. It is a power wielded by the State to collect money to spend for public purposes. 2. Taxation is a process. The State prescribes the process from the time the tax law is being made, being enforced, and being collected. 3. Taxation is a means. Taxation is not only a way for the State to collect money, but also for the State to survive. It is a way for the State to endure and survive. NATURE AND CHARACTERISTICS The nature of the state’s power to tax is two-fold (Domondon): 1. It is an INHERENT power; and 2. It is a LEGISLATIVE power. Other authors added another: 3. It is subject to inherent and constitutional LIMITATIONS. NATURE AND CHARACTERISTICS TAXATION IS THE INHERENT POWER OF THE SOVEREIGN. Taxation exists with or without a constitutional provision to that effect. The moment that the state comes into being, the power to tax, along with the other inherent powers, will automatically come out with it. Three (3) inherent powers of the State: 1. Police Power; 2. Power of Eminent Domain; and 3. Power of Taxation. INHERENT LEGISLATIVE NATURE AND CHARACTERISTICS THREE (3) INHERENT POWERS OF THE STATE: 1. Police Power; 2. Power of Eminent Domain; and 3. Power of Taxation. THE POWER TO TAX IS THE MOST POWERFUL It is powerful because the POWER TO TAX is plenary, all encompassing, and unlimited. INHERENT LEGISLATIVE NATURE AND CHARACTERISTICS OBJECTS OF TAXATION: 1. Persons - (e.g. poll tax [community tax certificate]) 2. Property - (e.g. real property tax, to be paid either by the owner or the beneficial possessor or user of the property) 3. Privileges/Rights - (e.g. income tax, excise tax, other business taxes) INHERENT LEGISLATIVE  NATURE AND CHARACTERISTICS Tio v. Videogram Regulatory Board G.R. No. L-75697, June 18, 1987 FACTS: PD 1987 ("An Act Creating the Videogram Regulatory Board”), with powers to regulate and supervise the videogram industry, was enacted. Section 10 thereof provides: SEC 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any provision of law to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or rental rate, as the case may be, for every sale, lease or disposition of a videogram containing a reproduction of any motion picture or audiovisual program. x x x INHERENT LEGISLATIVE  NATURE AND CHARACTERISTICS Tio v. Videogram Regulatory Board G.R. No. L-75697, June 18, 1987 FACTS: Valentin Tio, on his own behalf and purportedly on behalf of other videogram operators adversely affected, assails the constitutionality of PD 1987. It is on the ground that Section 10 thereof, which imposes a tax of 30% on the gross receipts, is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation of the due process clause of the Constitution. INHERENT LEGISLATIVE  NATURE AND CHARACTERISTICS Tio v. Videogram Regulatory Board G.R. No. L-75697, June 18, 1987 HELD: However, it is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. INHERENT LEGISLATIVE  NATURE AND CHARACTERISTICS Tio v. Videogram Regulatory Board G.R. No. L-75697, June 18, 1987 HELD: The tax imposed by PD 1987 is not only a regulatory but also a revenue measure prompted by the realization that earnings of videogram establishments of around P600 million per annum have not been subjected to tax, thereby depriving the Government of an additional source of revenue. It is an end-user tax, imposed on retailers for every videogram they make available for public viewing INHERENT LEGISLATIVE  NATURE AND CHARACTERISTICS Tio v. Videogram Regulatory Board G.R. No. L-75697, June 18, 1987 HELD: It is similar to the 30% amusement tax imposed or borne by the movie industry which the theater-owners pay to the government, but which is passed on to the entire cost of the admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that is imposed uniformly on all videogram operators. INHERENT LEGISLATIVE NATURE AND CHARACTERISTICS LIFEBLOOD THEORY Taxes are the lifeblood of the state, without which the government cannot endure or survive. INHERENT LEGISLATIVE NATURE AND CHARACTERISTICS THE POWER OF TAXATION IS A LEGISLATIVE FUNCTION It is legislative in character. It is the Congress (the Senate and House of Representatives) is tasked to create our tax laws. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. INHERENT LEGISLATIVE NATURE AND CHARACTERISTICS TAX IS A BURDEN Tax power involves the imposition of burdens. The government will unilaterally impose and collect taxes upon its people in order for it to function. On top of that, it is a forced contribution. You pay your taxes otherwise there will be sanctions. You may even go to prison. CAN ONE REFUSE TO PAY THE TAX BECAUSE HE DOES NOT DERIVE ANY BENEFITS FROM IT? NO. The person cannot actually refuse that. It is not even requirement that a person should actually avail of the benefits from the government. Expectation or the right to avail the benefit is enough. JURISDICTION GENERAL RULE: Once the object or subject is already outside the Philippines, it is no longer subject to Philippine taxation. EXCEPTION: If there is a PRIVITY OF RELATIONSHIP between the taxing authority and the tax subject or object. JURISDICTION HOW DO YOU DETERMINE IF THERE IS A PRIVITY OF RELATIONSHIP? There is a privity of relationship between the taxing authority and the tax subject or object if the taxing authority can afford PROTECTION to the tax subject or object. HOW DO YOU DETERMINE IF THE GOVERNMENT CAN AFFORD PROTECTION TO THE TAX SUBJECT OR OBJECT? Three Factors: [C R S] CITIZENSHIP of the tax subject or object; RESIDENCE or LOCATION of the tax subject or object; and SOURCE of the tax subject or object.  JURISDICTION CITIZENSHIP of the tax subject IN RELATION TO INCOME TAX or object; Example: Resident Citizen of Philippines and earning income in the Philippines. RESIDENCE or LOCATION of INCOME HERE TAXABLE IN THE PHILIPPINES. the tax subject It is taxable because there is privity of relationship. He is a or object; and Filipino (citizenship). He resides in the Philippines (residence). His business is in the Philippines (source). SOURCE of the tax subject or object.  JURISDICTION CITIZENSHIP of the tax subject IN RELATION TO INCOME TAX or object; Example: Resident Citizen of Philippines but earning income abroad. RESIDENCE or LOCATION of INCOME ABROAD TAXABLE IN THE PHILIPPINES. the tax subject The fact that he is a Filipino citizen (citizenship) who is or object; and residing here in the Philippines (residence), even his income from abroad are taxable under Philippine laws, because the government can afford protection to him SOURCE of the (source). tax subject or object.  JURISDICTION CITIZENSHIP of the tax subject IN RELATION TO INCOME TAX or object; Example: Non-Resident Alien earning income in the Philippines. RESIDENCE or LOCATION of INCOME HERE IS TAXABLE IN THE PHILIPPINES. the tax subject Even on the absence of two considerations (citizenship or object; and and residence), there is still the source of income. The source of income is in the Philippines. That is why even if she is not a resident and a citizen of the Philippines, the SOURCE of the government can still afford her protection because she tax subject or earns here and she is contributing to the community. object.  JURISDICTION CITIZENSHIP of the tax subject IN RELATION TO INCOME TAX or object; Example: Non-Resident Filipino; Has properties in the Philippines RESIDENCE or LOCATION of INCOME HERE IS TAXABLE IN THE PHILIPPINES. the tax subject Even if the Filipino is not physically here (residence) but or object; and the mere fact that he is a Filipino (citizenship) and the source of my income (source) is here in the Philippines, SOURCE of the then it will be subjected to Philippine taxation. tax subject or object. PUBLIC PURPOSE WHAT IS THE HEART OF TAXATION? Public purpose. The revenues collected from taxation should be devoted to achieve the purposes of government. The expenditure is for private, not a public purpose, if it is intended to promote the interests of individuals, in respect of either property or business, although it may result incidentally in the advancement of the public welfare. If it is for the promotion of the public welfare, although incidentally it may result in that of private interests, the expenditure is essentially public. TAXATION COMPARED WITH THE OTHER STATE POWERS COMPARED WITH OTHER POWERS THREE POWERS OF THE STATE: 1. Police Power; 2. Power of Eminent Domain; and, 3. Power of Taxation. COMPARED WITH OTHER POWERS POLICE POWER, DEFINED It is the power to make, ordain and establish all manner of wholesome and reasonable laws, statutes and ordinances, whether with penalties or without, not repugnant to the Constitution, the good and welfare of the commonwealth, and for the subjects of the same. It is the power of the state to promote public welfare by restraining or by regulating the use of liberty or property. It has also been defined as the plenary power vested in the legislature to make statutes and ordinances to promote the health, morals, peace, education, good order or safety and general welfare of the people. COMPARED WITH OTHER POWERS POLICE POWER AND TAXATION We say that police power can go together with power of taxation. Police power involves confiscation of money and of property. Under police power, you can confiscate a property without giving something in return and even without the consent of the owner of such property. COMPARED WITH OTHER POWERS MAIN GUIDING PRINCIPLE TO DIFFERENTIATE TAXATION AND PP The primary reason or principal purpose of the exaction. If the principal purpose of exaction is raising income and regulation is merely incidental, then the exaction is a tax. If the principal purpose is to regulation, even if income generation is incidental, then that is actually an exercise of police power. COMPARED WITH OTHER POWERS CASES: Question to be asked: Is it an exercise of police power? Or an exercise of the power of taxation? Philippine Airlines v. Edu (GR No. L-41383, August 15, 1998) Republic v. Bacolod-Murcia Milling Co. (GR No. L-19824-26, July 9, 1999)  COMPARED WITH OTHER POWERS Philippine Airlines v. Edu G.R. No. L-41383, August 15, 1998 ISSUE: Are the registration fees in the nature of taxes by virtue of which PAL can demand a refund for it was exempt therefrom? YES.  COMPARED WITH OTHER POWERS Philippine Airlines v. Edu G.R. No. L-41383, August 15, 1998 HELD: If the purpose is primarily for revenue, or if revenue, is at least one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees.  COMPARED WITH OTHER POWERS Philippine Airlines v. Edu G.R. No. L-41383, August 15, 1998 HELD: It is quite apparent that vehicle registration fees were originally simple exceptional, intended only for rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modern life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Registration payments as "fees," their nature has become that of "taxes."  COMPARED WITH OTHER POWERS Philippine Airlines v. Edu G.R. No. L-41383, August 15, 1998 HELD: In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program.  COMPARED WITH OTHER POWERS Republic vs. Bacolod-Murcia Milling Co G.R. No. L-19824-26, July 9, 1999 ISSUE: Whether the three sugar centrals may refuse to pay the special assessment. NO.  COMPARED WITH OTHER POWERS Republic vs. Bacolod-Murcia Milling Co G.R. No. L-19824-26, July 9, 1999 HELD: The special assessment or levy for the Philippine Sugar Institute (Philsugin) Fund is NOT so much an exercise of the power of taxation, nor the imposition of a special assessment, but the exercise of police power for the general welfare of the entire country.  COMPARED WITH OTHER POWERS Republic vs. Bacolod-Murcia Milling Co G.R. No. L-19824-26, July 9, 1999 HELD: This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; that it gives employment to thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one, of the important sources to foreign exchange needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. COMPARED WITH OTHER POWERS EMINENT DOMAIN, DEFINED It is the inherent power of the State to take private property for public use after payment of just compensation. 3 REQUISITES FOR VALID EXERCISE OF POWER OF EMINENT DOMAIN: 1. The taking of private property 2. The taking is for public purpose 3. Just compensation must be paid to the property owner.  COMPARED WITH OTHER POWERS TAXATION POLICE POWER EMINENT DOMAIN Purpose To raise public revenue For promoting public For public use welfare through regulations Persons Affected Community or class of Community or class of Owner of the property individuals individuals Amount of Imposition Unlimited Limited No amount imposed (Tax is based on (Imposition is limited to (The government pays just government needs.) cover cost of regulation.) compensation.)  COMPARED WITH OTHER POWERS TAXATION POLICE POWER EMINENT DOMAIN Relationship with the Constitution Inferior to the “Non- Superior to the “Non-Impairment Clause” of the Impairment Clause” of the Constitution Constitution PRINCIPLES OF A SOUND TAX SYSTEM PRINCIPLES OF SOUND TAX SYSTEM PRINCIPLES OF SOUND TAX SYSTEM Synonymous with the Canons of Sound Tax System or Characteristics of Sound Tax System. Keyword is F-A-T 1. Fiscal Adequacy 2. Administrative Feasibility 3. Theoretical Justice PRINCIPLES OF SOUND TAX SYSTEM FISCAL ADEQUACY Fiscal Adequacy means the TAX SYSTEM must be able to provide submission revenues in order to meet the legitimate needs of the government, adequate or sufficient. The sources of income taken as a whole must be sufficient to meet the ever expanding needs or expenditures of the government regardless of conditions, export taxes, and problems of economic adjustments. PRINCIPLES OF SOUND TAX SYSTEM FISCAL ADEQUACY The taxes being collected by the government must be enough to answer the government expenditures – even in cases where there will be a deficit despite a 100% collection on the internal revenue taxes. PRINCIPLES OF SOUND TAX SYSTEM ADMINISTRATIVE FEASIBILTY From the word itself feasible. Feasible meaning doable. A tax measure should be easily implemented in order to assure the smooth flow into the treasury the fiscally adequate amounts. To put it simply, this means that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Administrative feasibility requires easy tax collection on the part of the government and easy tax payment of the tax. PRINCIPLES OF SOUND TAX SYSTEM THEORETICAL JUSTICE The tax should be collected on the basis of ability to pay through a progressive system of taxation. Thus, the incidence or burden of taxation should fall more on those who could afford. This is termed as the Ability-to-Pay Theory, those who have more should pay more and those have less should pay less. PRINCIPLES OF SOUND TAX SYSTEM Does non-observance of the principles of sound tax system will make a tax law unconstitutional? NO. Even if we have these kinds of principles of a sound tax system, even if a certain tax law will violate these, it does not necessarily mean that the tax law will automatically be unconstitutional. DOUBLE TAXATION DOUBLE TAXATION PRINCIPLE OF DOUBLE TAXATION Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing the same person twice by the same jurisdiction for the same thing.” Double taxation is also called Duplicate taxation. TWO FORMS OF DOUBLE TAXATION: 1. Direct Double Taxation / Direct Double Taxation 2. Indirect Double Taxation / Indirect Double Taxation DOUBLE TAXATION DIRECT DOUBLE TAXATION Direct Double Taxation means that the same property is taxed twice when it should be taxed only once; and that both taxes are imposed on the same property or subject matter for the same purpose, by the same State, Government, or taxing authority within the same jurisdiction or taxing district during the same taxing period and covering the same kind or character of tax. This is ILLEGAL. Another term for it is Obnoxious Double Taxation. DOUBLE TAXATION INDIRECT DOUBLE TAXATION Indirect Double Taxation, which is LEGAL or allowable by law, if any of the elements for direct double taxation is absent – The taxpayer is taxed twice, when he should be only taxed once and the TAX is: 1. For the same subject matter; 2. For the same purpose; 3. For the same taxing authority; 4. Within the same jurisdiction; 5. During the same taxing period; and 6. The taxes are of the same kind and character.  DOUBLE TAXATION CITY OF MANILA v. COCA-COLA G.R. No. 181845, August 4, 2009 HELD: There is indeed double taxation if Coca-Cola is subjected to the taxes under both Secs. 14 and 21 of TO No. 7794, since these are being imposed: on the same subject matter – the privilege of doing business in Manila; for the same purpose – to make persons conducting business within Manila contribute to city revenues; by the same taxing authority – City of Manila; within same taxing jurisdiction – within the territorial jurisdiction of Manila; for the same taxing periods – per calendar year; and of the same kind or character – a local business tax imposed on gross sales or receipts of the business. LIMITATIONS OF TAXATION POWERS LIMITATIONS OF TAXATION POWERS TWO KINDS OF LIMITATIONS OF TAXING POWERS: 1. Inherent Limitations - These are part and parcel of the power of taxation and originate from the very nature of taxation 2. Constitutional Limitations - These are the restrictions imposed by the constitution While the power to tax is plenary and unlimited, there are inherent and constitutional limitations to the power of taxation in order to prevent abuse in the exercise of the otherwise plenary and unlimited power of taxation. LIMITATIONS OF TAXATION POWERS INHERENT LIMITATIONS The inherent limitations on the power of taxation which are also known as the elements, tenets or characteristics of taxation are: 1. Public Purpose 2. Inherently Legislative 3. Territorial 4. International Comity 5. Exemption of Government Entities LIMITATIONS OF TAXATION POWERS PUBLIC PURPOSE Public purpose is the heart of taxation. The power of taxation may be exercised only for a public purpose. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. (Planters Products v. Fertiphil, G.R. No. 166006, March 14, 2008) LIMITATIONS OF TAXATION POWERS Expanded Concept of Public Purpose (Pambansang Koalisyon v. Executive Secretary, G.R. Nos. 147036-37, April 10, 2012) There is no hard-and-fast rule for determining what constitutes public purpose. It is an elastic concept that could be made to fit into modern standards. Public purpose, for instance, is no longer restricted to traditional government functions like building roads and school houses or safeguarding public health and safety. Public purpose has been construed as including the promotion of social justice. Thus, public funds may be used for relocating illegal settlers, building low-cost housing for them, and financing both urban and agrarian reforms that benefit certain poor individuals. LIMITATIONS OF TAXATION POWERS INHERENTLY LEGISLATIVE General Rule: Non-delegation. There should be no improper delegation of legislative authority to tax. The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue vs. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008). LIMITATIONS OF TAXATION POWERS INHERENTLY LEGISLATIVE Exceptions: 1. Delegation to the President 2. Delegation to the LGUs 3. Delegation to the Administrative Bodies 4. Delegation to the people at large 5. Emergency Powers LIMITATIONS OF TAXATION POWERS TERRITORIAL General Rule: Territorial in nature. This inherent limitation means that the power of taxation could be exercised only within the territorial boundaries of the taxing authority. This is in consonance with the precept that protection could only be given within the territorial boundaries of the taxing authority. LIMITATIONS OF TAXATION POWERS TERRITORIAL Exception: There is a privity of relationship between the tax authority and the tax subject or object. There is such privity (so as to be covered by tax jurisdiction) if the taxing authority can afford protection to the tax subject or object. 3 Factors to Determine if Government Can Afford Protection 1. Citizenship of the tax subject or object 2. Residence or location of the tax subject or object; and 3. Source of the tax subject or object LIMITATIONS OF TAXATION POWERS INTERNATIONAL COMITY International Comity, Defined Comity is the respect accorded by nations to each other because they are sovereign equals. LIMITATIONS OF TAXATION POWERS INTERNATIONAL COMITY Limitation of International Comity on the Power of Taxation The property or income of a foreign state or government may NOT be the subject of taxation by another. The principle is based on public grounds: Concept of Sovereign Equality. The Latin maxim, In par parem non habet imperium which means as between equals, there is no sovereign. The power of taxation is an act of sovereignty. Out of respect for equal sovereign nations, the Philippines does not tax the incomes of foreign governments earned in the Philippines. LIMITATIONS OF TAXATION POWERS EXEMPTION OF GOVERNMENT ENTITIES With respect to the government, exemption is the rule and taxation is the exception. General Rule: Government Entities are exempt from Taxation Government is usually exempt from taxation in order to reduce the amount of money that the government is handling. For the government to tax itself is like getting money from one pocket (paying taxes) and placing it in another pocket (collecting taxes). LIMITATIONS OF TAXATION POWERS EXEMPTION OF GOVERNMENT ENTITIES Exception: State May Tax Itself It does not preclude the government from promulgating a law which taxes a government instrumentality or agency especially when this government agency is proprietary in nature. LIMITATIONS OF TAXATION POWERS EXEMPTION OF GOVERNMENT ENTITIES Exception: State May Tax Itself EXAMPLE 1: PUBLIC MARKETS. The public market (e.g. in Agdao) are being rented. Taxes applicable to it are paid by the Davao LGU to the BIR. EXAMPLE 2: PAGCOR. It is a GOCC. While it is true that PAGCOR is exempt from income taxes, it is liable for: franchise taxes of all its income from its gambling operations regular corporate income tax on its income outside its gambling operations (30% based on the net taxable income) LIMITATIONS OF TAXATION POWERS CONSTITUTIONAL LIMITATIONS 1. Due Process 2. Equal Protection 3. Uniformity and Equity in Taxation 4. Progressive Taxation 5. Origin of Appropriation, Revenue, and Tariff Bills (HR) 6. Voting Requirements for Tax Exemptions 7. Delegation to President to fix Tariff Rates, etc. 8. President’s Veto Power on Appropriation, Revenue, Tariff 9. Taxes Levied for Special Purpose 10.Grant to LGUs to create its Own Source of Revenue 11.Flexible Tariff Clause 12.Exemption from Real Property Taxes LIMITATIONS OF TAXATION POWERS CONSTITUTIONAL LIMITATIONS 13.Tax Exemption of Revenues, Assets, Including Donations to Educational Institutions 14.Non-Impairment of Supreme Court’s Jurisdiction in Tax Cases 15.Non-Imprisonment for Non-Payment of Poll Tax 16.Freedom of Speech and of the Press 17.Religious Freedom (“Free Worship Rule”) 18.Non-Impairment of Contracts LIMITATIONS OF TAXATION POWERS CONSTITUTIONAL LIMITATIONS Constitutional Restrictions Constitutional restrictions are not truly limitations on the power of taxation. They have been placed in the constitution to afford protection to the people against any abuses that may be committed against them when legislative department imposes taxes and when the executive imposes tax. LIMITATIONS OF TAXATION POWERS DUE PROCESS Article III, Section 1 of the 1987 Philippine Constitution No person shall be deprived of life, liberty, or property without due process of law x x x. The provision does not say anything about taxation, yet it used as a basis for the limitation of such power. This is because taxation is an enforced contribution to raise revenue. Since it is enforced, there must be a basis for the taking of property or deprivation of property. LIMITATIONS OF TAXATION POWERS KINDS OF DUE PROCESS 1. Substantive Due Process - requires the intrinsic validity of the law in interfering with the rights of the person to his life, liberty, or property 2. Procedural Due Process - consists of the two basic rights of notice and hearing, as well as the guarantee of being heard by an impartial and competent tribunal Due process presupposes that: 1. There is a valid law; and 2. There is a valid procedure. LIMITATIONS OF TAXATION POWERS EQUAL PROTECTION Article III, Section 1 of the 1987 Philippine Constitution 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 the laws. LIMITATIONS OF TAXATION POWERS Equal protection of the laws prohibits discrimination other than instances where there is valid classification. Meaning, persons who are similarly situated, or who belong to the same class, should be given by law the same protection and privileges as well as imposed the same burdens. LIMITATIONS OF TAXATION POWERS UNIFORMITY Article VI, Section 28(1) of the 1987 Philippine Constitution The rule of taxation shall be uniform and equitable. The Congress shall develop a progressive system of taxation. LIMITATIONS OF TAXATION POWERS [2-3] EQUAL PROTECTION / UNIFORMITY The tax laws should operate uniformly in all persons under similar circumstance and all persons are treated the same manner in both the privileges conferred and the liabilities imposed. There is some sort of a discrimination, i.e. one class will be taxed, and the other class will not be taxed. While there is this discrimination, what the law allows is that there will be a reasonable classification between the taxable object. The State can make a classification as to the taxability of persons or property, as long as the classification is reasonable and based on real and substantial differences.  LIMITATIONS OF TAXATION POWERS FERRER v. BAUTISTA G.R. No. 210551, June 30, 2015, En Banc FACTS: The City of Quezon passed two ordinances: 1. Socialized Housing Tax (SHT) Ordinance, allowing the imposition of special assessment (1/2 of the assessed valued of land in excess of P100k). 2. Garbage Fee Ordinance, imposing fees depending on the amount of the land or floor area.  LIMITATIONS OF TAXATION POWERS FERRER v. BAUTISTA G.R. No. 210551, June 30, 2015, En Banc FACTS: Jose FERRER, as a property in Quezon City questioned the validity of the city ordinances, saying that: The SHT violates the right of property owners to equal protection of the laws, since it favors informal settlers who occupy property of not their own and pay no taxes over law-abiding property owners who pay realty taxes. The Garbage Fee is also discriminatory since it collects garbage fee only from domestic households and not from restaurants, food courts, fast food chains and other commercial dining places that spew garbage much more than residential property owners.  LIMITATIONS OF TAXATION POWERS FERRER v. BAUTISTA G.R. No. 210551, June 30, 2015, En Banc ISSUE 1: Does the Socialized Housing Tax violate the equal protection clause? NO.  LIMITATIONS OF TAXATION POWERS FERRER v. BAUTISTA G.R. No. 210551, June 30, 2015, En Banc HELD: For the purpose of undertaking a comprehensive and continuing urban development and housing program, the disparities between a real property owner and an informal settler as two distinct classes are too obvious and need not be discussed at length. The differentiation conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution.  LIMITATIONS OF TAXATION POWERS FERRER v. BAUTISTA G.R. No. 210551, June 30, 2015, En Banc HELD: Notably, the public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one over another. It is inherent in the power to tax that a State is free to select subjects of taxation. Inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. Further, the reasonableness of Ordinance No. SP-2095 cannot be disputed.  LIMITATIONS OF TAXATION POWERS FERRER v. BAUTISTA G.R. No. 210551, June 30, 2015, En Banc ISSUE 2: Does the Garbage Fee Ordinance violate the equal protection clause? YES.  LIMITATIONS OF TAXATION POWERS FERRER v. BAUTISTA G.R. No. 210551, June 30, 2015, En Banc HELD: For the purpose of garbage collection, there is, in fact, no substantial distinction between an occupant of a lot, on one hand, and an occupant of a unit in a condominium, socialized housing project or apartment, on the other hand. Most likely, garbage output produced by these types of occupants is uniform and does not vary to a large degree; thus, a similar schedule of fee is both just and equitable. LIMITATIONS OF TAXATION POWERS PROGRESSIVE SYSTEM OF TAXATION Article VI, Section 28(1) of the 1987 Philippine Constitution The rule of taxation shall be uniform and equitable. The Congress shall develop a progressive system of taxation. A progressive system is one where the system of taxation of a country is more inclined with direct taxes. It has more direct taxes than indirect taxes. LIMITATIONS OF TAXATION POWERS ORIGIN OF APPROPRIATION, REVENUE & TARIFF BILLS Article VI, Section 24 of the 1987 Philippine Constitution All appropriation, revenue or tariff bills, bills authorizing 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. LIMITATIONS OF TAXATION POWERS VOTING REQUIREMENTS FOR TAX EXEMPTIONS Article VI, Section 28 (4) of the 1987 Philippine Constitution No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the CONGRESS. LIMITATIONS OF TAXATION POWERS DELEGATION TO PRESIDENT TO FIX TARIFF RATES, ETC. PRESIDENT’S VETO POWER ON APPROPRIATION, REVENUE, TARIFF TAXES LEVIED FOR SPECIAL PURPOSE GRANT TO LGUs TO CREATE ITS OWN SOURCE OF REVENUE FLEXIBLE TARIFF CLAUSE LIMITATIONS OF TAXATION POWERS EXEMPTION FROM REAL PROPERTY TAXES Article VI, Section 28(3) of the 1987 Constitution 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. LIMITATIONS OF TAXATION POWERS PROPERTIES COVERED All lands, buildings, and improvements. It does NOT refer to income out of the said real properties. SUBJECTS/INSTITUTIONS COVERED [exclusive] 1. Charitable institutions; 2. Churches, personages, or convents appurtenant thereto, mosques (meaning religious institutions); and 3. Non-profit cemeteries. LIMITATIONS OF TAXATION POWERS KIND OF TAX COVERED/EXEMPTED It covers REAL PROPERTY TAXES ONLY. REQUIREMENT TO AVAIL OF REAL PROPERTY TAX EXEMPTION The requirement is that all lands, buildings, and improvements are ACTUALLY, DIRECTLY, and EXCLUSIVELY USED for o educational, o charitable, or o religious purposes. [ADEU-ECR]  LIMITATIONS OF TAXATION POWERS MEANING OF “ACTUALLY, DIRECTLY, AND EXCLUSIVELY USED” Two Interpretations: (1) Liberal meaning (old cases) – even if the property is not directly used for ECR purposes, but the facilities are incidental to, or are reasonably necessary for the accomplishment of the main purpose (ECR), then they are covered in the exemption. (2) Restrictive meaning (new cases) – if you are not actually using them for ECR, then they are NOT tax exempt. LIMITATIONS OF TAXATION POWERS TAX EXEMPTION OF REVENUES, ASSETS, INCLUDING DONATIONS TO EDUCATIONAL INSTITUTIONS Article XIV, Section 4 (3 and 4) of the 1987 Constitution (3) All revenues and assets of 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. LIMITATIONS OF TAXATION POWERS TAX EXEMPTION OF REVENUES, ASSETS, INCLUDING DONATIONS TO EDUCATIONAL INSTITUTIONS Article XIV, Section 4 (3 and 4) of the 1987 Constitution Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment. LIMITATIONS OF TAXATION POWERS TAX EXEMPTION OF REVENUES, ASSETS, INCLUDING DONATIONS TO EDUCATIONAL INSTITUTIONS Article XIV, Section 4 (3 and 4) of the 1987 Constitution (4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. LIMITATIONS OF TAXATION POWERS PROPERTIES COVERED Assets and revenues KIND OF TAX COVERED/EXEMPTED Real Property Tax, Income Tax, Customs Duties SUBJECTS/INSTITUTIONS COVERED Educational Institutions; 2 Types: 1.Non-Stock, Non-Profit (NSNP) Educational Institutions; or 2.Proprietary Educational (PE) Institutions  LIMITATIONS OF TAXATION POWERS ART. VI, SEC. 28(3) ART. XIV, SEC. 4(3&4) Properties Covered All lands, buildings and improvements Revenues and assets Subject/Institutions Covered Educational*, charitable, religious NSNP *Both PE and NSNP Taxes Exempted Real property tax Income tax, Customs duties, Real property tax Requirement to Avail Tax Exemption ADEU-ECR ADEU-E  LIMITATIONS OF TAXATION POWERS EXAMPLE: AdDU leases space for Mercury Drug and derives non-tuition income therein in the form of rentals: [a] If the rental income is directly used back for educational purposes, then the rent income is EXEMPT from taxation. [b] If the rental income, however, is invested to an outside source, and the income derived from the investment is applied for educational purposes, then the rent income is NOT COVERED by the tax exemption. [c] If the income from the investment that is actually, directly and exclusively used for educational purposes, then that income is EXEMPT from taxation. LIMITATIONS OF TAXATION POWERS NON-IMPAIRMENT OF SUPREME COURT JURISDICTION IN TAX CASES Article VIII, Section 5 of the 1987 Constitution The SUPREME COURT shall have the following powers: x x x 2. 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: b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. LIMITATIONS OF TAXATION POWERS NON-IMPAIRMENT OF SUPREME COURT JURISDICTION IN TAX CASES Judicial Power of the Supreme Court The Supreme Court shall have the power to decide tax cases especially involving the legality of any tax, impost, assessment or toll or any penalty in relation thereto. The judicial power to adjudicate disputes is constitutionally vested only in the Supreme Court, and as such, it is the court of last resort. LIMITATIONS OF TAXATION POWERS NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX Article III, Section 20 of the 1987 Constitution No person shall be imprisoned for debt or non-payment of a poll tax. Extent of the Prohibition The prohibition refers to a “poll tax” which is a tax imposed on a per head basis. The present “poll tax” is the community tax (community tax certificate). A person may be imprisoned for non-payment of internal revenue taxes, such as income tax, as well as other taxes that are not “poll taxes.” LIMITATIONS OF TAXATION POWERS FREEDOM OF SPEECH AND OF THE PRESS Article III, Section 4 of the 1987 Constitution No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people peaceably to assemble and petition the government for redress of grievances. NON-IMPAIRMENT OF CONTRACTS LIMITATIONS OF TAXATION POWERS RELIGIOUS FREEDOM (”FREE WORSHIP RULE”) Article III, Section 5 of the 1987 Constitution 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. LIMITATIONS OF TAXATION POWERS RELIGIOUS FREEDOM Free Worship Rule The Philippine government adopts free exercise of religion and does not subject its exercise to taxation. Consequently, the properties and revenues of religious institutions (e.g., offerings) are not subject to tax. This exemption, however, does not extend to income from properties or activities of religious institutions that are proprietary or commercial in nature. ESCAPE FROM TAXATION ESCAPE FROM TAXATION ESCAPE FROM TAXATION Escape from taxation refers to the means employed by a taxpayer, whether legal or illegal, so as not to pay or absorb the burden of a tax that is imposed. MEANS EMPLOYED TO ESCAPE TAXATION 1. Tax Shifting 2. Tax Avoidance 3. Tax Evasion  ESCAPE FROM TAXATION ESCAPE FROM TAXATION TAX EXEMPTIONS Definition It is the taxpayer’s employment of These are the laws promulgated by any means regardless of its legality the Congress wherein the taxpayer to reduce or to altogether avoid the will not suffer the burden of taxation. payment of taxes. View Point of the Party Who Initiates It It is the taxpayer who resorts it. It is the State that exercises the prerogative not to collect taxes. ESCAPE FROM TAXATION TAX SHIFTING Shifting the burden of taxation means transferring the economic burden from the one who pays the tax to another. ESCAPE FROM TAXATION WAYS OF SHIFTING THE TAX BURDEN 1. Including the tax as part of the purchase price; or EXAMPLE: Attorneys Fee (P100,000) already included in it is the 3% Percentage Tax 2. Adding the tax on your selling price EXAMPLE: Bill it separately. ESCAPE FROM TAXATION TAXES THAT CAN BE SHIFTED As a general rule, only the burden of indirect taxes may be shifted. Most business taxes are indirect taxes. Among such business taxes are the following: 1.Franchise Tax; 2.Contractor’s Tax; 3.Value-Added Tax (VAT); 4.Documentary Stamp Tax (DST); 5.Excise Tax; and 6.Percentage Tax. ESCAPE FROM TAXATION IMPACT vs. INCIDENCE OF TAXATION In indirect taxation, there is a need to distinguish between the liability for the tax (impact of the tax) and the burden (incidence) of the tax. In indirect taxation, the burden can be shifted to another person. It is because in indirect taxes, the impact and the incidence of taxation may be split.  ESCAPE FROM TAXATION IMPACT OF TAXATION INCIDENCE OF TAXATION It refers to the liability of the payment It refers to the burden of paying the of tax. tax. ILLUSTRATION: The supposed selling price is P100. Because of the VAT, the seller will charge P112 to the buyer. Who will bear the tax? It is actually the buyer.  ESCAPE FROM TAXATION IMPACT OF TAXATION INCIDENCE OF TAXATION It refers to the liability of the payment It refers to the burden of paying the of tax. tax. Suppose the buyer will not pay the tax (VAT; the additional P12). Does that mean the seller will not longer be liable to the government? NO, because at the end of the day, the impact of taxation falls on the seller, and he will be the one who will remit the VAT to the government. ESCAPE FROM TAXATION TAX AVOIDANCE (“TAX MINIMIZATION”) The exploitation by the taxpayer of legally permissible alternative rates or methods of assessing taxable property or income in order to reduce or entirely avoid tax liability. To put it simply, the taxpayer merely exploits a legal loophole in order for him to avoid the payment of taxes. ESCAPE FROM TAXATION TAX AVOIDANCE (“TAX MINIMIZATION”) EXAMPLES: Availing of all deductions allowed by law. Refraining from engaging in activities subject to tax. Estate planning. Now in the TRAIN Law, the tax rates of estate tax and donors tax are the same. But before the TRAIN law, the rates for donor taxes are actually lower especially if you donate it to a relative. ESCAPE FROM TAXATION TAX EVASION (“TAX DODGING”) A scheme used outside of lawful means and when availed of, usually subjects the taxpayer to further or additional civil or criminal liabilities. A term that connotes fraud through the use of pretenses and forbidden devises to lessen or defeat taxes. ESCAPE FROM TAXATION TAX AMNESTY Tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. TAX CONDONATION (“TAX REMISSION”) Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. END OF MET 1: INTRODUCTION TO TAXATION