Taxation Law: General Principles

Taxation Law

General Principles

Tax principles are basic concepts by which a government is meant to be guided in designing and implementing a tax system.
Adam Smith, the 18th century economist and philosopher, in his famous book "The Wealth of Nations" described these as canons of taxation consisting of numerous rules and principles upon which a good taxation system should be built.
They are considered as the foundation of discussion on the principles of taxation.

I. Taxation Defined

Taxation is a mode of raising revenue for public purposes.

Taxes, on the other hand, are:

enforced proportional contributions
from persons and property
levied by the state
by virtue of its sovereignty
for the support of the government and for all its public needs.

They are not arbitrary exactions but contributions levied by authority of law, and by some rule of proportion which is intended to insure uniformity of contribution and a just apportionment of the burdens of government.
Thus:

Taxes are enforced contributions.

Taxes are obligations created by law.
Taxes are never founded on contract or agreement, and are not dependent for their validity upon the individual consent of by the persons taxed.

Taxes are proportional in character, since taxes are on one's ability to pay.
Taxes are levied by authority of the law.

The power to impose taxes is a legislative power; it cannot be imposed by the executive department nor by the courts.

Taxes are for the support of the government and all its public needs.

II. Basis of Taxation

1. Taxation and the Lifeblood Doctrine

Taxation has been defined as the power by which the sovereign raises revenue to defray the necessary expenses of government.
It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy the benefits and must therefore bear its burdens.
The power of taxation is essential because the government can neither exist nor endure without taxation.
Taxes are the lifeblood of the government and prompt and certain availability is an imperious need.

The collection of taxes must be made without hindrance if the state is to maintain its orderly existence.
Government projects and infrastructures are made possible through the availability of funds provided through taxation.
The government's ability to serve and protect the people depends largely upon taxes.

Taxes are what we pay for a civilized society.
Elsewise stated, taxes are the sinews of the state - vectigalia nervi sunt rei publicae.

2 . Theories on Taxation

Necessity Theory

Taxation is a power predicated upon necessity.
It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State's territory and facilities and protection which a government is supposed to provide.

Benefits-Protection Theory

The power of the State to demand and receive taxes is based on the reciprocal duties of support and protection.
The citizen supports the State by paying th portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society.
Thus, the taxpayer cannot question the validity of the tax law on the ground that payment of such tax will render him impoverished, or lessen his financial or social standing, because the obligation to pay taxes is involuntary and compulsory, in change for the protection and benefits from the government.

Doctrine of Symbiotic Relationship

CIR v. Algue, Inc., 158 SCRA 17:

Taxes are what we pay for civilized society. 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 one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the burden of naming the government.
The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values.

3. Liabilities Involved

Taxes are personal to the taxpayer.
A corporation's tax delinquency cannot, for instance, be enforced against its stockholders because not only would this run counter to the principle that taxes are personal, but it would also not be accord with the rule that a corporation is vested by law with a personality that is separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related.
Nevertheless, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears that the corporate assets have passed into their hands. (Doctrine of Piercing the Corporate Veil)
A tax creates:

civil liability

on the part of the delinquent taxpayer although the non-payment thereof (due to failure or refusal to pay)

criminal liability

which could be the subject of criminal prosecution under existing laws.

To sum, in taxation, it is one's failure to comply with the civil liability to pay taxes which gives rise to the criminal liability.

Cases:

Commissioner of Internal Revenue v. Algue, Inc., G.R. No. L-28896, February 17, 1988

The Commissioner of Internal Revenue contends that the claimed deduction was properly disallowed because it was not an ordinary, reasonable or necessary business expense.
The Court of Tax Appeals, however, agreed with Algue, Inc. in holding that the said amount had been legitimately paid by Algue, Inc. as promotional fees for their work in the formation of Vegetable Oil Investment. Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Corporation.
Ruling in favor of Algue, Inc., the Supreme Court held that Algue, Inc. has proved that the payment of fees was necessary and reasonable in the light of efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos.
This was no mean feat and should be, as it was, sufficiently recompensed.
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.
On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is, therefore, necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

The Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue, 13 SCRA 775, G.R. No. L-22074, April 30, 1965

The defense of reliance in good faith on rulings of the CIR requiring no withholding of the tax due on reinsurance premiums may free the taxpayer from the payment of surcharge or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate in from liability to pay such withholding tax. The Government is not estoppel from collecting taxes by the mistakes or errors of its agents.

Commissioner of Internal Revenue v. Bank of the Philippine Islands, 521 SCRA 373, G.R. No. 134062, April 17, 2007

The public will suffer if taxpayers will not be held liable for the proper taxes assessed against them.
Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.

Lorenzo v. Posadas, 64 Phil 353, G.R. No. L-43082, June 18, 1937

The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance, devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made effective by his death.
Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary.

Republic v. Patanao, G.R. No. L-22356, July 21, 1967

To sum, in taxation, it is one's failure to comply with the civil liability to pay taxes which gives rise to the criminal liability.
Tax is a civil liability. A person is criminally liable in taxation only when he fails to satisfy his civil obligation to pay taxes.

III. Nature of the Taxing Power

A. Taxation as an Inherent Attribute of Sovereignty

The power of taxation is an incident of sovereignty as it is inherent in the State, belonging as a matter of right to every independent government.
It does not need of constitutional conferment.

Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power.
No attribute of sovereignty is more pervading and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it.

Taxation being an attribute of sovereignty, its relinquishment is never presumed.
It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty.
Without this power, no sovereign State can exist nor endure.

The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent State or government.
No sovereign State can continue to exist without the means to pay its expenses; and that for those means, it has the right to comply all citizens and property within its limits to contribute, hence, the emergence of the power to tax.

B. Taxation as Legislative in Character

The power to tax is inherent in the State, and the State is free to select the object of taxation, such power being exclusively vested in the legislature, except where the Constitution provides otherwise. (Art. VI, Sec. 28[2]; Art. X, Sec. 5)

This is based upon 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."

Taxation is an inherent attribute of sovereignty.

It is a power that is purely legislative.
Essentially, this means that in the legislature primarily lies the discretion to determine the:

nature (kind)
object (purpose)
extent (rate)
coverage (subject) and
situs (place) of taxation.

It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within it jurisdiction.
In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.

IV. Aspects, Processes, Phases of Taxation

A. Levy/Imposition

The term "levy" or "imposition" refers to the enactment of tax laws or statutes.

Tolentino, et al. v. Secretary of Finance:

Courts have no power to inquire into or interfere in the wisdom, objective, motive or expediency in the passage of a tax law, as this is purely legislative in character.
To do so would be tantamount to a violation of both the letter and the spirit of the organic laws by which the Philippine Government was brought into existence to invade a coordinate and independent department of the Government, and to interfere with the legitimate powers and functions of the Legislature."

Scope of the Legislative Power to Tax

Discretion as to purposes for which taxes shall be levied

The sole arbiter of the purposes for which taxes shall be levied is the legislature, provided the purposes are public.
The courts may review the levy of the tax to determine whether the purpose i s a public one but once that is determined, the courts can make no other inquiry as to the purpose of the tax, as it affects the power to impose it.

Discretion as to subjects of taxation

The legislature has unlimited scope as to the persons, property or occupation to be taxed, where there are no constitutional restrictions, provided, the property is within the territorial jurisdiction of the taxing state.
Walter Lutz v. Antonio Araneta:

Plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C.A. No. 567 which provided for an increase of the existing tax on the manufacture of sugar.
Held: It is inherent in the power to tax that a state be free to select the subject of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.

Discretion as to amount or rate of tax

The legislature has the right to finally determine the amount or rate of a tax, in the absence of constitutional prohibitions. It may levy a tax of any amount it sees fit. Not only is the power to tax unlimited in its reach as to subjects, but in its very nature, it acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus becoming in its exercise a power to destroy.

Discretion as to the manner, means and agencies of collection of taxes

The discretion of the legislature in imposing taxes extends to the mode, method or kind of tax. As to the kind of taxes which may be imposed, the legislature ha power to levy one or more of the following: Property tax, excise, license or occupation tax, a poll or capitation tax, franchise tax, income tax, inheritance tax, stock transfer tax, etc.

Is the Power to Tax the Power to Destroy?

Justice Malcolm believed that the power to tax is an attribute of sovereignty. It is the strongest of all the powers of government.
This led Chief Justice Marshall of the U.S. Supreme Court, in the celebrated case of McCulloch v. Maryland to declare: "The power to tax involves the power to destroy."
This might well be construed to mean that the power to tax includes the power to regulate even to the extent of prohibition or destruction since the inherent power to tax vested in the legislature includes the power to determine who to tax, what to tax and how much tax is to be imposed.
However instead of being regarded as a blanket authorization of the unrestrained use of the taxing power for any and all purposes, it is more reasonable to say that the maxim "the power to tax is the power to destroy" is to describe not the purposes for which the t a x i ng power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue.
The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare.
But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully a attacked as an inordinate and unconstitutional exercise o f the discretion that is usually vested exclusively in t h e legislature in ascertaining the amount of the tax.
It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise. Taxpayer, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate business.
As aptly held in Roxas, et al. v. CTA, et al.: "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the propriety rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the golden egg.' "
Philippine Health Care Providers, Inc. v. CIR, 600 SCRA 413, G.R. No. 167330, September 18, 2009:

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counter productive and ultimately subversive of the nation's thrust towards a better economy which will ultimately benefit the majority of our people.

In a separate opinion in Graves v. New York, Justice Frankfurter, after referring to it as an "unfortunate remark", characterized it as "a flourish of rhetoric'' (attributable to) the intellectual fashion of the times (allowing) a free use of absolutes.
This is merely to emphasize that it is not and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Homes' pen: ''The power of tax is not the power to destroy while this Court sits."

Judicial Review of Taxation

While taxation is said to be destroy, it is by no means unlimited.
When legislative body having the power to tax a certain subject matter actually imposes such burdensome tax as effectually to destroy the right to perform the act or to use the property subject to the tax, the validity of the enactment depends upon the nature and character of the right destroyed.
If so great an abuse is manifested as to destroy natural and fundamental rights which no free government could consistently violate, it is the duty of the judiciary to hold such an act unconstitutional.

Hence, the modification: "The power to tax is not a power to destroy while the Supreme Court sits." So it is in the Philippines.

Sison v. Ancheta, et al., 130 SCRA 654, G.R. No. L-59431, July 25, 1984:

The Constitution as the fundamental law overrides any legislative or executive act that runs counter to it. In any case, therefore, where it an be demonstrated that the challenged statutory provision fails to abide by its command, then the court must so declare and adjudge it null.

In the exercise of such a delicate power, however, the admonition of Cooley on inferior tribunals is well-worth remembering.

Thus: "It must be evident to any one that the power to declare a legislative enactment void is one which the judge, conscious of the fallibility of the human judgment, will shrink from exercising in any case where he can conscientiously and with due regard to duty and official oath and decline the responsibility."
While it remains undoubted that such a power to pass on the validity of the ordinance alleged to infringe certain constitutional rights of a litigant exists, still it should be exercised with due care and circumspection, considering not only the presumption of validity but also the relatively modest rank of a city court in the judicial hierarchy.

B. Assessment and Collection

The act of assessing and collecting taxes is administrative in character, and therefore can be delegated.
Nonetheless, the legislative body has laid down certain rules governing the assessment and collection of taxes in order to prevent its abuse.

The tax law must designate which agency will collect the taxes.

Usually, the Bureau of Internal Revenue and/or the Secretary of Finance wield this power.

The circulars or regulations issued by the Secretary of Finance or the Commissioner of the Internal Revenue must be in accordance with the tax measures imposed by Congress.

Note: The power of taxation should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."

C. Payment

This signifies an act of compliance by the taxpayer

V. Purposes of Taxation

A. The Primary Purpose of Taxation is to Raise Revenues

Judge Cooley said that the purpose of taxes is for the support of government and for all public needs.
And so it has been widely believed that the primary purpose of taxation is to raise funds or property to enable the State to promote the general welfare and protection of its citizens.
Hon. Ramon Bagatsing, et al. v. Hon. Pedro Ramirez:

The tax ordinance enacted by the Municipal Board of Manila was assailed as not being a "tax ordinance," because the imposition of rentals, permit fees, tolls and other fees is not strictly a taxing power but a revenue raising function.
The Supreme Court observed that the pretense bore its own marks of fallacy. Precisely, the raising of revenues is the principal object of taxation.

B. Secondary or Non-Revenue Purposes

But, must an imposition, in order to be a tax, be levied solely for the purposes of revenue? NO.
Other than to answer the ever-present need for revenues, taxation also seeks to:

reduce social inequality
encourage the growth of local industries
protect our local industries against unfair competition
implement the police power of the state (regulatory purpose).

(1) Reduction of Social Inequality

Our present tax system has adopted the progressive system of taxation, i.e., the tax rate increases as the tax base increases.
This system aims at reducing the inequality in the distribution of wealth by preventing its undue concentration in the hands of a few individuals.
Illustration:

An estate tax is imposed upon the property left by the decedent.
The proceeds of that tax will be used to finance the projects of the government such as building low-cost houses for the less privileged.

CIR v. Central Luzon Drug Corporation (456 SCRA 414):

In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth.

(2) Encourage the Growth of Local Industries

It is a settled rule that the power to tax carries with it the power to grant tax exemptions.
Tax exemptions and tax reliefs serve as incentives to encourage investment in our local industry and thereby promote economic growth.

(3) Protect our Local Industry against Unfair Competition

The Tariff and Customs Code allows the imposition of certain taxes (countervailing and dumping duties) upon imported goods or articles to further protect our local industry.
Republic Act No. 8752 (Anti-Dumping Act) imposes stricter conditions.

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

The power of taxation may be used as an implement of the police power of the State through the imposition of taxes with the end in view of regulating a particular activity.
Tio v. Videogram Regulatory Board:

The Supreme Court maintained the validity of the challenged statute (P.D. No. 1987 entitled "An Act Creating the Videogram Regulatory Board"), seeing the need to impose taxes upon the video industry as a regulatory measure, considering "the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government due to the drop in theatrical attendance."

Manila Race Horse Trainers Association v. De La Fuente:

The Court upheld the validity of an ordinance taxing boarding stables of race horses because "Race horses are devoted to gambling, if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision."

Lutz v. Araneta:

Issue: Constitutionality of Sections 2 and 3, C.A No. 567, providing for an increase in the existing tax on the manufacture of sugar in issue.
Held: The tax is levied with a regulatory purpose to provide means for the rehabilitation and stabilization of the threatened sugar industry.
As the protection and promotion of the sugar industry is a matter of public concern, the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion.
Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power.

But it must be stressed that the power of taxation, sometimes also called the "power to destroy," should be exercised with caution to minimize injury to the proprietary rights of a taxpayer.
Antonio Roxas, et al. v. CTA, 23 SCRA 276:

It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."

Ferrer, Jr. v. Bautista, 760 SCRA 652:

It is settled that the socialized housing tax (SHT) is not a pure exercise of taxing power or merely to raise revenue; it is levied with a regulatory purpose.
The levy is primarily in the exercise of the police power for the general welfare of the entire local government unit.
It is greatly imbued with public interest. Removing slum areas is not only beneficial to the underprivileged and homeless constituents but advantageous to the real property owner as well.
The situation will improve the value of their property investment , fully enjoying the same in view of an orderly, secure and safe community, and will enhance the quality of life of the poor, making them law-abiding constituents and better consumers of business products. (

Along this grain, property rights of individuals may be subjected to restraints and burdens in order to fulfill the objectives of the government in the exercise of police power.

Police power, which flows from the recognition that salus populi; est suprema lex (the welfare of the people is the supreme law), is 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.
In this jurisdiction, it is well-entrenched that taxation may be made the implement of the state's police power.

May the power of taxation be used as an implement of the power of eminent domain? YES.

CIR v. Central Luzon Drug Corporation, 456 SCRA 414:

Tax measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth.
While it is declared commitment under Section 1 of Republic Act No. 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled t o protection. The social justice consecrated in our Constitution is not intended to take away rights from a person and give them to another who is not entitled thereto.
For this reason, a just compensation for income that is taken away from respondent becomes necessary.
It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter the fact."
Incidentally, Republic Act Nos. 9257 and 9994 treat the 20% discount granted to senior citizens as tax deduction.

Manila Memorial Park, Inc. v. Secretary of the DSWD, 711 SCRA 302:

The 20% senior citizen discount is an exercise of police power.
In holding so, the Court explained that the 20% discount is intended to improve the welfare of senior citizens who, at their age, are 1ess likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic commodities.
The 20% discount may be properly viewed as belonging to the category of price regulatory measures which affect the profitability of establishments subjected thereto. On this face, therefore, the subject regulation is a police power measure.

VI. Extent of Taxing Power

The power of taxation reaches to every trade or occupation; to every object of industry, use, enjoyment; to every species of possession, and it imposes a burden which in case of failure to discharge the same may be followed by seizure, confiscation or forfeiture of the property.
Taxation is said to be:

Comprehensive

It covers persons, businesses, activities, professions, rights, and privileges.

Unlimited

The taxing power's reign is illustrated in the case of Tio v. Videogram Regulatory Board, where the Supreme Court upheld the constitutionality of a law, ruling 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.

Plenary

It is complete.
Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes. (This shall be discussed in a separate chapter on Remedies.)

Supreme

Taxation, although referred to as the strongest of all the powers' of the government, cannot be interpreted to mean that it is superior to the other inherent powers of the government.
It is supreme insofar as the selection of the subject of taxation is concerned.

VII. Canons of Taxation

1. Canon of Equality or Ability.

By equality is meant equality of sacrifice - people should pay taxes in proportion to their ability to pay.

This principle adheres to progressive taxation which states that the tax rate increases as the tax base increases.
Hence, rich people should pay more taxes and the poor pay less.
It brings not only social equality or justice but also equal distribution of wealth in an economy.
Upon this point, Adam Smith enunciates: "The subjects of every State ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State."

2. Canon of Certainty.

This means that the taxpayer should have full knowledge about his tax payment which includes the:

amount to be paid
mode it should be paid
date of payment

If the taxpayer is definite and certain about the amount of the tax and its time of payment, he can adjust his income to his expenditure.

In other words, everything should be made clear, simple and absolutely certain for the benefit of the taxpayer.
Since it is a very important guiding rule in formulating tax law and procedures, it indeed minimizes tax evasion.

This finds underpinning in Adam Smith's words of wisdom:

"The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person."

3. Canon of Convenience.

This requires that the time of payment and the mode of tax payment should be convenient to the taxpayer.
Convenient tax system will encourage people to pay tax and will increase tax revenue. In this regard, Adam Smith articulates: "Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it."

4. Canon of Economy.

This simply implies that there should be economy in tax administration.
The expenses of collection of taxes should not be excessive, that is, the cost of tax collection should be lower than the amount of tax collected.
Corollarily, efficient tax administration will generate revenues to pay for the expenditures of government.
On this score, Adam Smith declares:

"Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.""

To attune to the changing times, modem economists expanded Smith's principles as they formulated five equally important canons/ principles of taxation. They are concisely explained as follows:

1. Canon of Productivity

It is also known as the canon of fiscal adequacy.
According to this principle, the tax system should be able to yield enough revenue for the treasury and the government should have no need to resort to deficit financing.
This is a good principle to follow in a developing economy.

2. Canon of Elasticity

According to this canon, every tax imposed by the government should be elastic in nature.
In other words, the income from tax should be capable of increasing or decreasing according to the requirement of the country.
For example, if the government needs more income at the time of crisis, the tax should be capable of yielding more income through increase in its rate.

3. Canon of Flexibility

It should be easily possible for the authorities to revise the tax structure both with respect to its coverage and rates to suit the changing requirements of the economy.
With the changing time and fit conditions, the tax system needs to be changed without such difficulty.
It must be flexible and not rigid.

4. Canon of Simplicity

The tax system should not be complicated.
If it is difficult to understand and administer, problems of interpretation and disputes may arise.

5. Canon of Diversity

The principle states that the government should collect taxes from different sources rather than concentrating on a single source of tax.
It is not advisable for the government to depend upon a single source of tax as it may result in inequity to certain sectors of the society.
If the tax revenue comes from diversified source, then any reduction in tax revenue on any account of any one cause is bound to be small.

VIII. Principles of a Sound Tax System

A. Fiscal Adequacy

Chavez v. Ongpin, G.R. No. 76778, June 6, 1990:

Sources of revenues must be adequate to meet government expenditures and other public needs.

This is in consonance with the doctrine that taxes are the lifeblood of the government.
Adam Smith's Canon of Taxation (1776):

Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the State.

B. Theoretical Justice

A sound tax system must take into consideration the taxpayers' ability to pay.
Our laws mandate that taxes must be reasonable, just, fair, and conscionable.
Under Article VI, Section 28(1) of the Constitution, the rule of taxation must be uniform and equitable.

The State must evolve a progressive system of taxation.

Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected.

C. Administrative Feasibility

Tax laws must be capable of effective and efficient enforcement.
They must not obstruct business growth and economic development.

Kapatiran ng mga Naglilingkod sa Pamahalaan v. Tan:

In upholding the validity of the VAT law, held that the law "is principally aimed to rationalize the system of taxes on goods and services; simplify tax administration, and make the system more equitable to enable the country to attain economic recovery."
The principle requires that each tax should be clear and plain to the taxpayers, capable of enforcement by a n adequate and well-trained staff of public officials, convenient as to time and manner of payment, and not duly burdensome upon or discouraging to business activity.

A violation of the principle of a sound tax system may or may not invalidate a tax law.

A tax law will retain its validity even if it is not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so.
These principles are only designed to make our tax system sound.
However, if a tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. (Sec. 28[1], Art. VI, 1987 Constitution)
Diaz v. Secretary of Finance, 654 SCRA 96:

The petitioners argued that the VAT on tollway operations is not administratively feasible.
However, the Supreme Court ruled that even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution.

Tax Fairness — Principles Horizontal Equity and Vertical Equity Compared

Horizontal equity yields the following maxim: like-situated taxpayers should be taxed the same.

This in effect bolsters the tax equity, equal sacrifice principles and ability to pay principle.

Vertical equity lays down this maxim: differently situated people should be taxed differently.

In a sense:

horizontal equity is what fairness demands in the treatment of people at the same levels
vertical equity is what fairness demands in the treatment of people at different levels of income.

Adam Smith, "The Wealth of Nations":

When the carriages which pass over a highly or a bridge, and the lighters which sail upon a navigate canal, pay toll in proportion to their weight or their tunnage, they pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them.
It seems scare possible to invent a more equitable way of maintaining such works.

IX. Taxation Distinguished from

Other Inherent Power and Impositions

A. Taxation Distinguished from Police Power

As to Purpose

Taxation

levied for the purpose of raising revenues;

Police power

exercised to promote public welfare through regulation.

As to Amount of Exaction

Taxation

the amount gathered contemplates of no limits;

Police power

the exaction is limited to the cost of regulation, issuance of the license, or surveillance.

As to the Benefits Received by the Taxpayer

Taxation

no special or direct benefit is received by the taxpayer other than the fact that the government secures to the citizen that general benefit resulting from the protection of his person and property and the welfare of all;

Police power

no direct benefits are received, yet a healthy economic standard of society is maintained

As to Superiority of Contracts

Taxation

recognizes the obligations imposed by contracts;

Police power

limitation does not apply.

As to Transfer of Property Rights

Taxation

the taxes paid form part of the public funds;

Police power

allows merely the restraint on the exercise of property rights.

B. Taxation Distinguished from the Power of Eminent Domain

As to Purpose

Taxation

exercised in order to raise public revenue;

Eminent Domain

the taking of property for public use.

As to Compensation

Taxation

payment of taxes accrue to the general benefit of the citizens of the taxing state;

Eminent Domain

just compensation is given the owner of the expropriated property.

As to the Persons Affected

Taxation

applies to all persons, property and excises that may be subject thereto;

Eminent Domain

only particular property is comprehended.

C. Taxes Distinguished from Other Imposition

Tax and Special Assessment

A special assessment is in the nature of a tax upon property levied according to benefits conferred on the property.
The whole theory of a special assessment is based on the doctrine that the property against which it is levied derives some special benefit from the improvement.
Distinctions:

a special assessment can be levied only on land;
a special assessment cannot, as rule, be made made a personal liability of the persons assessed;
a special assessment is based wholly on benefits; and
a special assessment is exceptional both as to time and locality.

The imposition of a charge on all property, real and personal, in a prescribed area, is a tax, not an assessment, although the purpose is to make a local improvement on a street or highway.
A charge imposed only on property owners benefited is a special assessment rather than a tax.
The power to levy such assessments undoubtedly an exercise of the taxing power, but the exercise of the taxing power in imposing an assessment does not necessarily make the assessment a tax.

Tax and License

Definition:

levied in the exercise of the taxing power;

License fees

emanate from the police power of the state;

Purpose:

generate revenues;

License fees

imposed for regulatory purposes.

Amount

License fees

must only be of sufficient amount to include expenses of issuing a license; cost of necessary inspection or police surveillance.

Primary purpose/Incidental Purpose

its primary purpose is to generate revenue, and regulation is merely incidental;

License fees

regulation is the primary purpose, the fact that incidental revenue is also obtained does not make the imposition a tax;

Gerochi v, Department of Energy, 527 SCRA 696:

In exacting the Universal Charge through Section 34 of the Electric Power Industry Reform Act of 2001 (EPIRA), the State's police power, particularly its regulatory dimension is invoked.
Such can be deduced from Section 34 which enumerates the purposes for which the Universal Charge is imposed and which can be amply discerned as regulatory in character.
From the said purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power.

Cojuangco, Jr. v. Republic 686 SCRA 472:

The coconut levy funds partake of the nature of taxes and can only be used for public purpose, and importantly, for the purpose for which it was exacted, i.e., the development, rehabilitation and stabilization of the coconut industry. They cannot be used to benefit—whether directly or indirectly—private individuals, be it by way of a commission, or as the subject Agreement interestingly words it, compensation.

Angeles University Foundation v, City of Angeles, 675 SCRA 359:

It has been held that a building permit is a regulatory imposition.
For one, in processing an application for a building permit, the Building Official shall see to it that the applicant satisfies and conforms with the approved standard requirements on zoning and land use, lines and grades, structural design, sanitary and sewerage, environmental health, and electrical mechanical safety.
For another, clearances from various government authorities exercising and enforcing regulatory functions affecting buildings/structures may be required before a building permit may be issued.

Ferrer, Jr. v. Bautista, 760 SCRA 652:

The Supreme Court ruled that garbage fee is not a tax.
Reason: The fee imposed for garbage collections under Ordinance No, SP-223J is a charge fixed for the regulation of an activity. Thus, regulation is the primary purpose of the imposition.

Tax and Toll

Toll

demand of proprietorship, an amount charged for the cost and maintenance of the property used;

a demand of sovereignty for the purpose of raising public revenues.

Tax and Penalty

a civil liability
a person is criminally liable in taxation only when he fails to satisfy his civil obligation to pay taxes.

Penalty

a punishment for the commission of a crime.

Tax and Debt

A tax is not a debt for the reason that a tax does not depend upon the consent of the taxpayer and there is no express or implied contract to pay taxes.
Taxes:

are not contracts between the parties, either expressed or implied; but they are the positive acts of t he government through its various agents, binding upon the inhabitants, and to the making and enforcing of which their personal consent individually is not required;
cannot be assigned as debts, or be proved in bankruptcy as such; nor, if uncollected, are the assets which can be seized by attachment or other judicial processes, and subjected to t h e payment of municipal indebtedness;
are not the subject of set-off either on behalf of the state or the municipality for which they are imposed, or of the collector, or on behalf of the person taxed, as against such state, municipality or collector;
do not draw interest, as do sums of money owing upon a contract.

Judge Cooley:

the proceedings to collect taxes are not barred by the ordinary statutes of limitation; the law abolishing imprisonment for debt has no application to taxes and the remedies for their collection may include an arrest if the legislature so provides.

Taxes Are Not Subject of Set Off; Exceptions

General Rule: Taxes cannot be subject to compensation because the government and the taxpayer are not creditors and debtors of each other.
Exception: The Supreme Court allowed the offsetting of taxes under the following exceptional cases:

Commissioner of Internal Revenue v. Court of Tax Appeals, 234 SCRA 34:

The Court allowed offsetting of taxes in a tax refund case because there was an existing deficiency income and business tax assessment again the tax ayer.
The Court said that "[t]o award such refund despite the existence of that deficiency assessment is an absurdity and polarity in conceptual effects" and that "to grant the refund without d termination of the proper assessment and the tax due would inevitably result in multiplicity of proc dings or suit."

South African Airways v. Commisioner of Internal Revenue, 612 SCRA 665:

The Court permitted the offsetting of taxes because the correctness of the return filed by the taxpayer was put in issue.

SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue, 739 SCRA 691:

The Court also allowed offsetting because there was a need for the court to determine if a taxpayer claiming refund of erroneously paid taxes is more properly liable for taxes other than that paid.
The Court explained t h at the determination of the proper category of tax that should have been paid is not an assessment but is an incidental issue that must be resolved in order t o determine whether there should be a refund.
However, the Court clarified that while offsetting may b e allowed, the BIR can no longer assess the taxpayer for deficiency taxes in excess of the amount claimed for refund if prescription has already set in.

In all these cases, the Supreme Court allowed offsetting of taxes only because the determination of the taxpayer's liability is intertwined with the resolution of the claim for tax refund of erroneously or illegally collected taxes under Section 229 of the NIRC.

Cases:

CIR v. ESSO Standard Eastern, Inc., 172 SCRA 364, G.R. Nos. L-28502-03, April 18, 1989

The fact is that, as respondent Court of Tax Appeals has stressed, as early as July 15, 1960, the Government already had in its hands the sum of P221,033.00 representing excess payment. Having been paid and received by mistake, as petitioner Commissioner subsequently acknowledged, that sum unquestionably belonged to ESSO, and the Government had the obligation to return it to ESSO. That acknowledgment of the erroneous payment came some four (4) years afterwards in no wise negates or detracts from its actuality.
The obligation to return money mistakenly paid arises from the moment that payment is made, and not from the time that the payee admits the obligation to reimburse. The obligation of the payee to reimburse an amount paid to him results from the mistake, not from the payee's confession of the mistake or recognition of the obligation to reimburse.
In other words, since the amount of P221,033.00 belonging to ESSO, was already in the hands of the Government as of July, 1960, although the latter had no right whatever to the amount and indeed was bound to return it to ESSO, it was neither legally nor logically possible for ESS thereafter to be considered a debtor

Francia v. Intermediate Appellate Court, et al., 162 SCRA 753, G.R. No. L 67649, June 28, 1988

Government and taxpayer "'are not mutually creditors and debtors of each other"' under Article 1278 of the Civil Code and a "claim for taxes such a debt, demand, contract or judgment is not allowed to be set-off."

Domingo v. Garlitos, 8 SCRA 443, G.R. No. L-18994, June 29, 1963
Philex Mining Corporation v. CIR, 294 SCRA 687,

There is material distinction between a tax and a debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its a sovereign capacity.
In the instant case, the claim of Philex for VAT refund is still pending litigation, and still has to be determined by the CTA. A fortiori, the liquidated debt of Philex to the government cannot, therefore, be set-off against the unliquidated claim which Philex conceived to exist in its favor.

Meaning of doctrine of equitable recoupment.

The doctrine of equitable recoupment means that when the refund of a tax illegally or erroneously or collected or overpaid by a taxpayer is barred by the statute of limitations and a tax is being presently assessed against said taxpayer, said present tax may be recouped or set off against the tax, the refund of which has been barred.
The same thing would be true where the Government has failed to collect a tax within the period of limitation and said collection is already barred, and the taxpayer has to his credit a tax illegally or erroneously collected or overpaid, whose refund is not yet barred.
The Government need not make refund of all the illegally or erroneously collected tax, but it may set off against the tax whose collection is barred b y the statute of limitations.
CIR v. UST (104 Phil. 1062):

This doctrine is not applicable in this jurisdiction, ratiocinating in this wise:

We are not prepared, neither are we inclined to accept and introduce the same as a legal principle which the courts may invoke and apply in the course of interpreting and applying the tax laws.
With this doctrine enforced and available to both parties, the tax collecting agency would be tempted to delay and neglect the collection of taxes within the period set by the law, confident that when it finally wakes up from its lethargy, it could still recover the tax it failed to collect by having it set off or recouped against any tax which it may have illegally collected from the taxpayer.
As regards the taxpayer, he may also be tempted to delay and neglect the filing of the corresponding suit for refund of a tax illegally or erroneously collected, trusting that he can always recover or be credited with the same or part thereof by refusing to pay a valid tax assessed against him and compelling the Government to set off the same again ta tax payment he could no longer recover.

Search This Blog

sic itur ad astra

Taxation Law: General Principles

Comments

Post a Comment

Popular posts from this blog

Equality and Human Rights: The United Nations and Human Rights System (September 16, 2023)

Commercial Laws 1: R.A. No. 11057 — Personal Property Security Act

Land Title and Deeds: Chapter 1 — What Lands are Capable of Being Registered