Seminars Schedules

Understanding Taxes

As commonly defined, taxes refers to the enforced proportional contribution levied by the law-making body of the State for raise revenue to finance the various government expenditures. For easy understanding of its concept, the saying I first heard from my grandfather in my elementary days may be considered:

“Government is the people, for (not poor) the people and by (not buy) the people”.

From this saying, we can inter-relate the following nature and characteristics of the tax.

a. Public purpose – This has to be the case because it came from each and every citizen. If government is the people, then collections coming from the people should goes back to them in terms of benefits and services. Accordingly, the purpose with which the revenue from taxes should be used must be for public.

As to the extent of public purpose, it does not admit of a literal meaning that everyone from among the public must have a direct benefit. In one case when the Sugar Adjustment Act was enacted imposing a tax for the benefit of the sugar industry, the same was question for not having been intended for public purpose because it is limited to sugar industry only, and not all industries. It was held to be still for public purpose because of the benefits that our economy will derive if the sugar industry would flourish. Notably, sugar industry that time was a major contributor to the economy.

b. Legislative in character – This means that the exercise of the power is through the legislature and that taxes imposed should be based on law or ordinances enacted by Congress. No law imposing a tax, no tax to be imposed and collected. This is similar to the doctrine in criminal law, nullum crimen nulla poene sine legis (no crime when there is no law imposing a crime). Taxes collected out of a void law are equivalent an illegal exaction.

c. Enforced contribution – Taxes being imposed by law or ordinances has the force and effect of a law. A law, is defined as a “rule of conduct having the obligatory effect imposed by a legitimate authority for the common observance and benefit”. As such, tax laws must be enforced and must be observed by those required to comply, whether one likes it or not. In Philippine setting, we are on voluntary compliance basis, and pay-as-you-file basis so compliance initially depends upon the taxpayers, but subject to the right of the tax authority for verification and examination for correctness and accuracy of tax payments.

d. Proportional contribution – Has something to do with taxpayer’s ability to pay. Taxes imposed should be based on the taxpayer’s ability to pay to make sense. When the legislature enacts a law, they must look at the reasonableness of the tax rates for the tax legislation to be meaningful and realistic because taxes that are imposed beyond taxpayer’s capacity to pay will surely not yield so much compliance. Thus, it would be a useless legislation and a waste of time to legislate and to administer.

e. Revenue purpose – This is the primary purpose of imposing a tax, to raise government revenues for its various operational expenditures for capital outlays, salaries and benefits for personal services of government employees, maintenance and other operating expenses.

Inherent limitations

Inherent limitations are those which are inherent with the power itself and which could be deduced from its very nature.

1. Public purpose. This requires that the purpose of imposing a particular tax must be for public. Public does not necessarily means direct benefits of the entire citizenry but maybe indirect only, though direct to particular industry.

2. Territoriality. This means that taxes imposed is binding only within the territorial jurisdiction of the Philippines because of the implications of the international arena where each estate has to give due respect to the sovereignty of other estates. This is because, outside the territorial jurisdictions of the Philippines, tax laws of other countries with separate jurisdictions apply and our tax laws do not take into effect. Territoriality however is not limited to physical location of the taxpayer because if the Philippines has tax situs or place of taxation over the object, then, by all means it shall be taxable regardless of the location of the owner. Example, income of a non-resident alien in the Philippines stock trading is taxable because it involves shares of Philippine company. Estate of a non-resident decedent is likewise taxable if located in the Philippines because our country has the situs or place of taxation.

3. Exemption of government entity. Government entity is not subject to tax with respect to the performance of its governmental functions to the citizenry because it is the core of its main obligation to the citizenry. This is most appropriate in the Philippines under the budgetary system where budget of government agencies came from taxes so that taxing them in the performance of their functions will not result in new money as thus funds from taxes will simply be reverted to the budget. However, is generally taxable in performing proprietary functions.

4. No double taxation. Double taxation is taxing twice an object of taxation with the same tax type, for the same purpose, for the same taxable year by the same taxing authority. This is not allowed and in Philippine setting, this violates the constitutional right to due process.

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Limitations on power of taxation

As earlier said, power of taxation is an inherent power where there is no need for an express grant from the Constitution. Such power exists with the existence of the State and need not be granted for it to exist.

The power is so broad that the State through the Legislative department can tax on anything, at any time, and at any amount. To prevent the abuse of the power, two noted limitations are in place:

a. Inherent limitation; and

b. Constitutional limitations.

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