Concept, Nature and Characteristics of Taxation and Taxes.

Meaning of Taxation

Taxation is the inherent power of the state, acting through the legislature, to impose and collect revenues to
support the government and its recognized objects. Simply stated, taxation is the power of the State to collect
revenues for public purpose.

Purpose of Taxation

Primary Purpose - is to provide funds or property with which the government discharges its appropriate
functions for the protection and general welfare of the its citizens.

Non Revenue Objectives

Aside from purely financing government operational expenditures, taxation is also utilized as a tool to carry out
the national objective of social and economic development.

to strengthen anemic enterprises by granting them tax exemptions or other conditions or incentives for growth;

to protect local industries against foreign competition by increasing local import taxes;

as a bargaining tool in trade negotiations with other countries;

to counter the effects of inflation or depression;

to reduce inequalities in the distribution of wealth;

to promote science and invention, finance educational activities or maintain and improve the efficiency of local
police forces;

to implement police power and promote general welfare.

Meaning of Taxes

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

Tax in a general sense, is any contribution imposed by the government upon individuals for the use and service
of the state, whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid, supply or other
name. Tax, in its essential characteristics , is not a debt.

Essential characteristics of tax.

1. it is an enforced contribution

2. it is generally payable in money.

3. It is proportionate in character, usually based on the ability to pay
4. it is levied on persons and property within the jurisdiction of the state
5. it is levied pursuant to legislative authority, the power to tax can only be exercised by the law making body or
congress
6. it is levied for public purpose
7. it is commonly required to be paid a regular intervals.

Nature and Scope of the Power of Taxation

NATURE OF THE POWER OF TAXATION

Legislative- this power can only be exercised by the law making body (Congress) not the executive or the
judicial branch of the government, except when delegated by the national legislative body to a local legislative
body or to the executive branch, subject to limitations as may be provided by law;

Inherent in sovereignty- the power exists as an incident or attribute of sovereignty, as it is essential to the
existence of every government. The power can therefore be exercised even without the constitution or any law
expressly conferring such power.

Scope of the Power of Taxation

It is comprehensive, unlimited, supreme and plenary, but subject to constitutional and inherent limitations.

Limitations on The Power of Taxation

The power of taxation, is however, subject to constitutional and inherent limitations.

Constitutional limitations are those provided for in the constitution or implied from its provisions,
while inherent limitations are restrictions to the power to tax attached to its nature.

The following are the inherent limitations.

Purpose. Taxes may be levied only for public purpose;

Territoriality. The State may tax persons and properties under its jurisdiction;

International Comity. the property of a foreign State may not be taxed by another.

Exemption. Government agencies performing governmental functions are exempt from taxation

Non-delegation. The power to tax being legislative in nature may not be delegated. (subject to exceptions)

Constitutional limitations.

Observance of due process of law and equal protection of the laws. (sec, 1, Art. 3) Any deprivation of life ,
liberty or property is with due process if it is done under the authority of a valid law and after compliance with
fair and reasonable methods or procedure prescribed. The power to tax, can be exercised only for a
constitutionally valid public purpose and the subject of taxation must be within the taxing jurisdiction of the
state. The government may not utilize any form of assessment or review which is arbitrary, unjust and which
denies the taxpayer a fair opportunity to assert his rights before a competent tribunal. All persons subject to
legislation shall be treated alike under like circumstances and conditions, both in the privileges conferred in
liabilities imposed. Persons and properties to be taxed shall be group, and all the same class shall be subject to
the same rate and the tax shall be administered impartially upon them.

Rule of uniformity and equity in taxation (sec 28(1)Art VI) All taxable articles or properties of the same class
shall be taxed at the same rate. Uniformity implies equality in burden not in amount. Equity requires that the
apportionment of the tax burden be more or less just in the light of the taxpayers ability to bear the tax burden.

No imprisonment for non-payment of poll tax (sec. 20, Art III) A person cannot be imprisoned for non-payment
of community tax, but may be imprisoned for other violations of the community tax law, such as falsification of
the community tax certificate, or for failure to pay other taxes.

Non-impairment of obligations and contracts, sec 10, Art III . the obligation of a contract is impaired when its
terms and conditions are changed by law or by a party without the consent of the other, thereby weakening the
position or the rights of the latter. IF a tax exemption granted by law and of the nature of a contract between the
taxpayer and the government is revoked by a later taxing law, the said law shall not be valid, because it will
impair the obligation of contract.
Prohibition against infringement of religious freedom Sec 5, Art III, it has been said that the constitutional
guarantee of the free exercise and enjoyment of religious profession and worship, which carries the right to
disseminate religious belief and information, is violated by the imposition of a license fee on the distribution
and sale of bibles and other religious literatures not for profit by a non-stock, non-profit religious corporation.

Prohibition against appropriations for religious purposes, sec 29, (2) Art. VI, Congress cannot appropriate funds
for a private purpose, or for the benefit of any priest, preacher or minister or for the support of any sect, church
except when such priest, preacher, is assigned to the armed forces or to any penal institutions, orphanage or
leprosarium.

exemption of all revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes from income, property and donor’s taxes and custom duties (sec. 4 (3
and 4) art. XIV.

Concurrence by a majority of all members of Congress in the passage of a law granting tax exemptions. Sec. 28
(4) Art. VI.

Congress may not deprive the Supreme Court of its jurisdiction to review, revise, reverse, modify or affirm on
appeal or certiorari, final judgments and orders of lower courts in all cases involving the legality of any tax,
impost, assessment or any penalty imposed in the relation thereto.

Classification of taxes

1. As to subject matter or object

A. personal, poll or capitation- tax of a fixed amount on individuals residing within a specified territory, without
regard to their property, occupation or business. Ex. Community tax (basic)

B. property- imposed on property, real or personal, in proportion to its value, or in accordance with some
reasonable method or apportionment. Ex. Real estate Tax

C. Excise- imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an
occupation, profession or business. Ex. Income tax, VAT, Estate Tax, Donor’s Tax

2. As to who bears the burden of the tax

a. Direct- the tax is imposed on the person who also bears the burden thereof
Ex. Income tax, community tax, estate tax

b. Indirect – imposed on the taxpayer who shifts the burden of the tax to another, Ex. VAT, customs duties.

3. As to determination of amount

a. specific – imposed and based on a physical unit of measurement as by head number, weight, length or
volume. Ex. Tax on distilled spirits, fermented liquors, cigars

b. Ad Valorem of a fixed proportion of the value of the property with respect to which the tax is assessed. Ex.
Real estate tax, excise tax on cars, non essential goods.

4. As to purpose
A. general, fiscal, or revenue- imposed for the general purpose of supporting the government. Ex. Income tax,
percentage tax

B. special or regulatory- imposed for a special purpose, to achieve some social or economic objective. Ex.
Protective tariffs or custom duties on imported goods intended to protect local industries.

5. As to scope or authority imposing the tax

a. national- imposed by the national government ex. NIRC, custom duties

b. municipal or local- imposed by municipal corporations or local governments ex. Real estate tax,

6. As to graduation of rates.

a. proportional- based on a fixed percentage of the amount of the property, receipts or on other basis to be taxed
ex. Real estate tax, VAT

b. progressive and graduated- the rate of the tax increases as the tax base or bracket increases ex. Income tax,
estate tax, donor’s tax

c. regressive- the rate of tax decreases as the tax base or bracket increases.

d. degressive- increase of rate is not proportionate to the increase of tax base.

Inherent in the three branches of our government are three core powers granted by the 1987 Philippine
Constitution. The authority to make laws and to alter or repeal them is conferred on the Legislative Department.
The implementation of laws is charged to the Executive Department. The power to interpret laws, to hear and
decide cases when disputes arise, lies with the Judiciary. The existence of these independent co-equal bodies is
a fundamental characteristic of a democratic government.

As part of the Executive Department, the Bureau of Internal Revenue (BIR) is vested with powers to assess and
collect taxes. To some extent, it also exercises quasi-judicial and subordinate legislative functions. The Tax
Code authorizes the Commissioner of Internal Revenue (“Commissioner”) to interpret tax laws, subject to
review by the Secretary of Finance. Government agencies like the BIR also have the power of subordinate
legislation to aid in the implementation of tax laws. In exercising these functions, the Commissioner
recommends the promulgation of Revenue Regulations (RRs) and issues tax rulings and other revenue issuances
such as Revenue Memorandum Circulars (RMCs), Revenue Memorandum Orders (RMOs), Revenue Audit
Memorandum Orders (RAMOs) and Revenue Memorandum Rulings (RMRs), among others.

These issuances have different purposes and functions according to the BIR. RRs are issued by the Secretary of
Finance, upon the recommendation of the Commissioner. They prescribe or define rules and regulations for the
effective enforcement of the provisions of the Tax Code and related statutes. Tax rulings on the other hand, are
official positions of the BIR on inquiries of taxpayers who request clarification on certain provisions of the Tax
Code, other tax laws, or their implementing regulations, usually to seek tax exemptions. RMCs contain
pertinent and applicable portions, as well as amplification of laws, rules, regulations and precedents issued by
the BIR and other agencies/offices. RMOs provide directives or instructions, prescribe guidelines and outline
processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated
policies, objectives, plans and programs of the BIR in all areas of operations, except audit. Lastly, RMRs are
rulings, opinions and interpretations of the Commissioner with respect to the provisions of the Tax Code and
other tax laws, as applied to a specific set of facts, with or without established precedents, and which the
Commissioner may issue from time to time to inform taxpayers of the tax consequences on specific situations.

On the BIR’s power of subordinate legislation, the Supreme Court (SC) has explained that although the power
to legislate is non-delegable and belongs exclusively to Congress, such authority may be delegated to
implement laws and effectuate policies whenever Congress finds it impracticable, if not impossible, to
anticipate situations that may be met in carrying the law into effect. It is required, however, that the regulations
be germane to the objects and purposes of the law, and conform to the prescribed standards of the law.
Although courts usually accord these regulations with great respect, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous.

Applying this well-settled principle, over the past few years, the SC had overruled the Commissioner’s
issuances and interpretations of the law because such were found to be erroneous.

In a 2013 case on availment of tax treaty benefits, the SC highlighted the time-honored international law
principle of pacta sunt servanda which requires both parties to comply with their treaty obligations in good
faith, since treaties have the force and effect of law in our jurisdiction. (G.R. 188550, 19 August 2013.) In that
case, the taxpayer filed a claim for refund on its overpayment of branch profit remittance tax (BPRT) on the
basis of a preferential tax treaty rate of 10% (instead of the 15% rate that the taxpayer used). However, it failed
to timely file a tax treaty relief application (TTRA) as required by RMO No. 1-2000.

The SC disagreed with the BIR that the timely filing of a TTRA is necessary for availing of tax treaty benefits.
Further, it held that failure to strictly follow the requirement for a TTRA should not operate to divest
entitlement to the relief in violation of the pacta sunt servanda doctrine. Therefore, the BIR must not impose this
additional requirement when the tax treaty does not provide for said prerequisite.

With this development, subsequent decisions of the Court of Tax Appeals (CTA) have been in favor of the
taxpayer notwithstanding the non-filing or belated filing of the TTRA. Notwithstanding, the BIR still requires
the filing of TTRA although they are no longer strict as to the period of filing (i.e., before the first taxable event
as required under RMO No. 72-2010, which subsequently amended RMO No. 1-2000).

Another instance of overturned administrative issuances would be BIR Ruling Nos. 370-2011 and 378-2011. In
January 2015, the SC invalidated these tax rulings which covered the imposition of a 20% final withholding tax
(FWT) on the interest income from the issuance of Poverty Eradication and Alleviation Certificates (PEACe)
Bonds by the Bureau of Treasury for being deposit substitutes (G.R. No. 198756, 13 January 2015). The Tax
Code defines deposit substitutes as “an alternative form of obtaining funds from the public (the term ‘public’
means borrowing from twenty [20] or more individual or corporate lenders at any one time), other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own
account.”

In striking down these issuances, the SC applied the 20-lender rule (i.e., 20 or more lenders at any one time) to
determine whether a debt instrument is considered a deposit substitute, subject to 20% FWT. The SC found that
these rulings disregarded the 20-lender rule by considering all treasury bonds, regardless of the number of
purchasers/lenders at the time of origination/issuances, to be deposit substitutes. As a result, the SC ruled that
the BIR’s interpretation created a distinction between government debt instruments and private bonds where
there was none in the tax law.

The SC further explained that the phrase ‘at any one time’, for purposes of determining the 20-lender rule,
would refer to every transaction executed in the primary or secondary market relative to the purchase or sale of
the securities. The SC also ruled that there is a deemed public borrowing and the bonds are considered deposit
substitutes when funds are simultaneously obtained from 20 or more lenders through any of the transactions
connected in the issuance/trading of the government bonds (e.g., issuance by the Bureau of Treasury;
sale/distribution of government dealers; and trading in the secondary market).

As a result, there is currently a temporary restraining order on implementing RR No. 1-2014 and RMC No. 5-
2014. These issuances required disclosure of recipients of income, including investors who receive income
payments and dividends, and disallowed listed companies to name a Philippine Central Depositary nominee as
payee of the income.

Likewise, taxpayers are now questioning the implementation of RR No. 4-2011. This RR provides that a bank
may deduct only those costs and expenses attributable to the operation of its Regular Banking Unit (RBU) to
arrive at its taxable income. Any cost or expense related to or incurred in the operation of its foreign currency
deposit unit (FCDU)/expanded FCDU (EFCDU) or offshore banking unit (OBU) is not allowed as deduction
from the RBU’s taxable income.

To safeguard taxpayers from the implications of erroneous administrative rulings, the non-retroactivity rule
under Section 246 of the Tax Code provides that modifications or reversals of any BIR rules, regulations and
rulings shall not be given retroactive application if it will be prejudicial to the taxpayers, subject to certain
exceptions (e.g., deliberate omission of certain facts, taxpayers acted in bad faith, and material facts
subsequently gathered by the BIR are different from the facts presented in its ruling). It is derived from a
statutory presumption that all laws should be interpreted to have only future effects unless expressly stated
otherwise.

The collective efforts of the BIR to source needed funds for public welfare are commendable, but its powers
should be exercised judiciously and consistently with its legislative purpose and within the procedural standards
of the law. As an administrative agency, the BIR must act within the limits of its delegated power of
subordinate legislation and its limited adjudication power with deference to the courts. Such fundamental
principles cannot be ignored. Without restraint of their powers, taxing authorities would be left unchallenged.
And more regrettably, taxpayers may find themselves having to pay more than their fair share