GENERAL PRINCIPLES OF TAXATION

GENERAL PRINCIPLES OF TAXATION

FUNDAMENTAL PRINCIPLES IN TAXATION

Taxation

• Taxation is the inherent power of the sovereign, exercised through the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government.

• It is also defined as the act of levying a tax, i.e. the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. It is a method of apportioning the cost of government among those who, in some measure, are privileged to enjoy its benefits and must therefore bear its burdens.

• It is a mode of raising revenue for public purposes, [Cooley]

Taxes

• Taxes are the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of the government and all public needs, [Cooley]

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

Thus:

a.     Taxes are enforced contributions

Taxes are obligations created by law. [Vera v. Fernandez, L-31364, March,30, 1979]. Taxes are never founded on contract or agreement, and are not dependent for their validity upon the individual consent of the person taxed.

b.     Taxes are proportional in character, since taxes are based on one’s ability to pay.

c.     Taxes are levied by authority of law.

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

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

ESSENTIAL ELEMENTS OF A TAX

1.             It is an enforced contribution.

2.             It is generally payable in money.

3.             It is proportionate in character.

4.             It is levied on persons, property, or the exercise of a right or privilege (Excise tax).

5.             It is levied by the State which has jurisdiction over the subject or object of taxation.

6.             It is levied by the law-making body of the State.

7.             It is levied for public purpose or purposes.

PURPOSES OF TAXATION

1.             Revenue of fiscal: The primary purpose of taxation on the part of the government is to provide funds or property with which to promote the general welfare and the protection of its citizens and to enable it to finance its multifarious activities.

2.             Non-revenue or regulatory: Taxation may also be employed for purposes of regulation or control. e.g.:

a)    Imposition of tariffs on imported goods to protect local industries.

b)    The adoption of progressively higher tax rates to reduce inequalities in wealth and income.

c)     The increase or decrease of taxes to prevent inflation or ward off depression.

PAL v. Edu, 164 SCRA 320     

The legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and, to a much lesser degree, pay for the operating expenses of the administering agency. It is possible for an exaction to be both a tax and a regulation. License fees are charges, looked to as a source of revenues as well as means of regulation. The fees may properly be regarded as taxes even though they also  serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax.

Tio v. Videogram, 151 SCRA 208

PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax on the gross receipts payable to the local government. SC upheld the validity of the law ruling that the tax imposed is not only a regulatory but also a revenue measure prompted by the realizations that earnings of videogram establishments of around P600 million annually have not been subject to tax, thereby depriving the government of an additional source of revenue. It is a user tax imposed on retailers for every video they make available for public viewing. The 30% tax also served a regulatory purpose: to answer the need for regulating the video industry, particularly the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes.

Caltex v. Commissioner, 208 SCRA 755

Taxation is no longer a measure merely to raise revenue to support the existence of government. Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the State. The oil industry is greatly imbued with public interest as it vitally affects the general welfare.

SUMPTUARY PURPOSE OF TAXATION

• More popularly known as the non-revenue or regulatory purpose of taxation. While the primary purpose of taxation is to raise revenue for the support of the government, taxation is often employed as a devise for regulation by means of which certain effects or conditions envisioned by the government may be achieved.

• For example, government may provide tax incentives to protect and promote new and pioneer industries. The imposition of special duties, like dumping duty, marking duty, retaliatory duty, and countervailing duty, promote the non-revenue or sumptuary purpose of taxation.

THEORY AND BASIS OF TAXATION

• The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for these means, it has a right to compel all its citizens property within its limits to contribute.

• The basis of taxation is found in the reciprocal duties of protection and support between the State and its inhabitants. In return for his contribution, the taxpayer received benefits and protection from the government. This is the so called “Benefits received principle”.

• 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 burden, [51 Am. Jur. 34].

• The power of taxation is essential because the government can neither exist nor endure without taxation. “Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need”, [Bull v. United States, 295 U.S. 247, 15 APTR 1069, 1073]. The collection of taxes must be made without any 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, [Commissioner v. Algue, 158 SCRA 9].

LIFEBLOOD DOCTRINCE

• The lifeblood theory constitutes the theory of taxation, which provides that the existence of government is a necessity; that government cannot continue without means to pay its expenses; and that for these means it has a right to compel its citizens and property within its limits to contribute.

• In Commissioner v. Algue, the Supreme Court said that taxes are the lifeblood of the government and should be collected without necessary hindrance. They are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. 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 moral and material values.

• By enforcing the tax lien, the BIR availed itself of the most expeditious way to collect the tax. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need, [CIR v. Pineda, 21 SCRA 105].

• The government is not bound by the errors committed by its agents. In the performance of its governmental functions, the State cannot be estopped by the neglect of its agents and officers. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the state effects its functions fro the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopardize the government’s financial position, [CIR v. CTA, 234 SCRA 348].

• The BIR is authorized to collect estate tax deficiency through the summary remedy of levying upon the sale of real properties of a decision without the cognition and authority of the court sitting in probate over the supposed will of the decedent, because the collection of the estate tax is executive in character. As such, the estate tax is exempted from the application of the statute on non-claims, and this is justified by the necessity of government funding, immortalized in the maxim “Taxes are the lifeblood of the government and should be made in accordance with law, as any arbitrariness will negate the very reason for government itself, [Marcos II v. CA, 273 SCRA 47].

• Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Philex’s claim that it had no obligation to pay the excise tax liabilities within the prescribed period since it still has pending claims for VAT input credit/refund with the BIR is untenable, [Philex Mining Corporation v. CIR, 294 SCRA 687]

Illustrations of Lifeblood theory

1.             Collection of taxes cannot be enjoined by injunction.

2.             Taxes could not be the subject of compensation or set off.

3.             A valid tax may result in the destruction of the taxpayer’s property.

4.             Taxation is an unlimited and plenary power.

NECESSITY THEORY

• Taxation as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner [13 SCRA 775], 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 RECEIVED PRINCIPLE

• This theory bases the power of the State to demand and receive taxes on the reciprocal duties of support and protection. The citizen supports the State by paying the 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 exchange for the protection and benefits one receives from the government.

• In return for his contribution, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. One is compensation or consideration for the other; protection for support and support for protection.

• However, it does not mean that only those who are able to and do pay taxes can enjoy the privileges and protection given to a citizen by the government.

• In fact, from the contribution received, the government renders no special or commensurate benefit to any particular property or person. The only benefit to which the taxpayer is entitled is that derived from the enjoyment of the privilege of living in an organized society established and safeguarded by the devotion of taxes to public purpose. The government promises nothing to the person taxed beyond what may be anticipated from an administration of the laws for the general good, [Lorenzo v. Posadas].

• Taxes are essential to the existence of the government. The obligation to pay taxes rests not upon the privileges enjoyed by or the protection afforded to the citizen by the government, but upon the necessity of money for the support of the State. For this reason, no one is allowed to object to or resist payment of taxes solely because no personal benefit to him can be pointed out as arising from the tax, [Lorenzo v. Posadas].

DOCTRINE OF SYMBIOTIC RELATIONSHIP

• This doctrine is enunciated in CIR v. Algue, Inc. [158 SCRA 9], which states that “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 must contribute his share in the burden of running 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.”

What is the scope of the power to tax?

            The power of taxation is the most absolute of all powers of the government [Sison v. Ancheta 130 SCRA 654]. It has the broadest scope of all the powers of government because in the absence of limitations, it is considered as unlimited, plenary, comprehensive and supreme.

            However, the power of taxation should be exercised with caution to minimize injury to the proprietary rights of the taxpayer. It must be exercised fairly, equally, and uniformly, lest the tax collector kill “the hen that lays the golden egg” [Roxas v. CTA, 23 SCRA 276].

When is taxation considered as an implement of police power?

            In Walter Lutz v. J. Antonio Araneta, 98 Phil 148, the SC upheld the validity of the tax law increasing the existing tax on the manufacture of sugar. “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. If objective and methods alike are constitutionally valid, there is no reason 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.”

            In Tio v. Videogram Regulatory Board, 151 SCRA  208, the levy of a 30% tax under PD1987, was imposed primarily for answering the need for regulating the video industry, particularly the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic videotapes, and is therefore valid. While the direct beneficiaries of the said decree is the movie industry, the citizens are held to be its indirect beneficiaries.

What is the concept of fiscal adequacy?

            That the sources of revenues must be adequate to meet government expenditures,             [Chavez v. Ongpin, 186 SCRA 331].