Philippine Law on Taxation under the Fundamental Powers of the State

Taxation is one of the three inherent and fundamental powers of the State, alongside Police Power and Eminent Domain. These three powers exist to ensure the welfare and survival of the State. Taxation, in particular, is an indispensable tool for raising revenue to fund the functions and services of government, from public infrastructure and defense to social welfare programs.

The power of taxation in the Philippines is grounded in Political Law and Public International Law, which provides a comprehensive legal framework governing the imposition, collection, and management of taxes by the State.

Below is an extensive discussion of the relevant concepts, principles, limitations, and case laws related to taxation in the Philippines:

1. Concept and Definition of Taxation

Definition:

Taxation is the power by which the sovereign, through its legislative body, imposes burdens upon persons, property, or rights to raise revenues for government support and services.

Nature of Taxation:

Inherent Power: Taxation exists as an inherent power of the State; it does not need to be expressly conferred by the Constitution or any statute.
Legislative in Character: Only the legislature has the power to impose taxes, though it can delegate administrative aspects of tax collection to the executive branch.
Exercised for Public Purpose: Taxation can only be exercised for the public benefit and not for private purposes.
Compulsory: Payment of taxes is a legal obligation, enforced through penalties for non-compliance.

2. Characteristics of the Power of Taxation

Unlimited (subject to inherent limitations): The power of taxation is generally unlimited, except as qualified by certain principles and constitutional limitations.
Plenary and Comprehensive: Taxation covers all persons, properties, privileges, and activities that may be subject to it. However, it must always be for public purposes.
Territorial: The jurisdiction to tax is confined to persons, properties, and activities within the territory of the State.
Prospective: Tax laws, unless specifically stated, apply prospectively and not retroactively.

3. Purposes of Taxation

Revenue Generation: The primary purpose of taxation is to generate funds to support government expenditures, such as the building of infrastructure, provision of public services, and maintenance of law and order.
Regulatory and Compensatory: Taxation may also be used to regulate certain activities (e.g., “sin taxes” on alcohol and tobacco) and to compensate for social costs associated with certain behaviors or industries.
Redistributive Function: Taxes can be a means to redistribute wealth within society, promoting equality and social justice (e.g., progressive income tax systems).

4. Basic Principles of a Sound Tax System

A sound tax system in the Philippines should adhere to the following principles:

Fiscal Adequacy: The tax system must generate sufficient revenue to meet government expenditures.
Administrative Feasibility: The system should be easy to administer and collect, with minimal costs.
Theoretical Justice (Equality and Equity): The system should be fair, meaning taxpayers should be taxed according to their ability to pay. This principle manifests in the use of progressive taxation (higher income, higher tax rate).
Uniformity and Equitability: Taxation should be applied uniformly within the same class, and it should not discriminate arbitrarily against specific groups.

5. Limitations on the Power of Taxation

Though the power of taxation is broad, it is subject to constitutional and inherent limitations:

A. Constitutional Limitations

Due Process Clause: Tax laws must not violate the due process rights of taxpayers. Taxation must not be arbitrary, oppressive, or confiscatory.
Equal Protection Clause: Taxation should apply uniformly to similarly situated persons and properties.
Rule of Taxation Shall be Uniform: Under the Philippine Constitution, taxes must be uniform and equitable, meaning they should be applied uniformly to all persons or entities within the same class.
Prohibition on Double Taxation: While not expressly prohibited by the Constitution, the principle against double taxation (taxing the same person or property for the same purpose twice) is generally followed.
Non-impairment of Contracts: Taxation should not impair the obligations of contracts, as provided by the non-impairment clause in the Constitution.
Exemptions: The Constitution grants specific tax exemptions, such as for charitable, educational, and religious organizations, as well as exemptions for non-stock, non-profit institutions.

B. Inherent Limitations

Public Purpose: Taxes must be imposed for public purposes only and not for private interests.
Non-delegation of Taxing Power: The legislative power to tax cannot be delegated to other bodies, except for the power to levy taxes by local governments, which is authorized by law (Local Government Code).
Territoriality: The power of taxation is territorial in scope. The State can only impose taxes on persons, properties, or activities within its territory or jurisdiction.
Exemptions from Taxation: Certain properties, individuals, and institutions may be exempt from taxation by law or constitutional provisions.

6. Types of Taxes in the Philippines

Taxes in the Philippines can be classified based on the following:

A. As to Subject or Object

Personal or Poll Taxes: Levied on individuals residing within the State (e.g., community tax).
Property Taxes: Imposed on property ownership or value (e.g., real property tax).
Excise Taxes: Taxes on the privilege of engaging in an activity or exercising a right (e.g., income tax, business taxes).

B. As to Who Bears the Burden

Direct Taxes: The taxpayer and the tax bearer are the same (e.g., income tax, property tax).
Indirect Taxes: Taxes where the burden is shifted from one party to another (e.g., Value-Added Tax).

C. As to Purpose

General Taxes: Imposed for general revenue purposes (e.g., income tax, VAT).
Special Taxes: Imposed for specific purposes (e.g., road users' tax).

7. Tax Exemptions

Tax exemptions can be granted by the Constitution or by statute. They are strictly construed against the taxpayer and in favor of the government.

Examples of Tax Exemptions:

Charitable Institutions: Properties used exclusively for religious, charitable, or educational purposes.
Government Entities: Government instrumentalities engaged in essential government functions.
Non-Profit Educational Institutions: Non-stock, non-profit educational institutions are exempt from taxes under the Constitution.

8. Doctrines in Taxation

Several legal doctrines have developed under Philippine jurisprudence regarding taxation:

A. Lifeblood Doctrine

Taxes are the lifeblood of the government, essential for its continued existence. Without taxes, the government would cease to function, hence the necessity of taxation.

B. Doctrine of Progressive Taxation

This doctrine supports the idea that taxation should take into account a taxpayer’s ability to pay, leading to the imposition of higher taxes on those who earn more (progressive tax systems).

C. Doctrine of Taxation by Necessity

Taxation is exercised because it is necessary to sustain the government’s operations. The government has the authority to impose taxes to meet its obligations.

9. Remedies and Procedures

The Philippine tax system includes a set of legal remedies available to both the government and the taxpayer. These include:

A. For the Government:

Tax Collection: The government, through the Bureau of Internal Revenue (BIR) or local government units (LGUs), can enforce tax collection through administrative or judicial means.

B. For the Taxpayer:

Administrative Protest: A taxpayer can file a protest before the BIR for any disputed tax assessments.
Judicial Action: If unresolved, a taxpayer may elevate the matter to the courts, particularly the Court of Tax Appeals (CTA).

10. Recent Legal Developments

The taxation system continues to evolve, especially with recent legislation such as the Tax Reform for Acceleration and Inclusion (TRAIN) Act and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. These laws introduce significant reforms aimed at simplifying the tax system, reducing the tax burden on low- and middle-income earners, and attracting foreign investments through better tax incentives.

Conclusion

Taxation is a fundamental power of the Philippine State, indispensable for its survival and functioning. Guided by constitutional and inherent limitations, it ensures that revenues are raised in a fair, efficient, and equitable manner. This body of law evolves with the needs of society, playing a crucial role in public governance and economic stability.