Inherent Powers of the State in Taxation Under Philippine Law

Introduction

The power of taxation is one of the most fundamental and inherent attributes of sovereignty in any state, including the Republic of the Philippines. It represents the authority of the government to compel its citizens and residents to contribute to the public coffers for the support of governmental functions and public welfare. Unlike delegated powers, which derive from constitutional provisions or statutes, the power to tax is inherent, meaning it exists independently of any explicit grant in the fundamental law. This inherent nature underscores the state's survival and ability to perform its essential duties, as taxation is often described as the "lifeblood" of the government.

In the Philippine legal framework, this power is exercised within the bounds of the 1987 Constitution, statutory laws, and judicial interpretations. The Supreme Court of the Philippines has consistently affirmed that taxation is not merely a fiscal tool but a mechanism intertwined with the state's broader inherent powers, including police power and eminent domain. This article explores the multifaceted dimensions of the state's inherent power in taxation, delving into its theoretical foundations, constitutional underpinnings, limitations, scope, principles, and practical applications in the Philippine context.

Theoretical Foundations and Nature of the Power of Taxation

Inherent Character

The power of taxation is inherent in the state because it is essential for the government's existence and operation. As early as in the case of Lutz v. Araneta (1955), the Philippine Supreme Court articulated that taxation is an attribute of sovereignty that predates the Constitution. It is not derived from the people but is a necessary incident of statehood. This inherent quality means that even without specific constitutional authorization, the state could exercise this power, though in practice, it is regulated by the Constitution to prevent abuse.

The inherent power stems from the social contract theory, where citizens implicitly agree to contribute to the common good in exchange for protection and services. In Philippine jurisprudence, this is echoed in Commissioner of Internal Revenue v. Algue, Inc. (1988), where the Court emphasized that taxes are the lifeblood of the government, enabling it to discharge its functions without which no government can exist.

Distinction from Other Inherent Powers

Taxation must be distinguished from the state's other inherent powers:

Police Power: This is the authority to enact laws for public health, safety, morals, and welfare. While taxation can serve regulatory purposes (e.g., sin taxes on alcohol and tobacco), its primary aim is revenue generation, unlike police power's focus on regulation.
Eminent Domain: This involves taking private property for public use with just compensation. Taxation, in contrast, is a forced contribution without direct quid pro quo, though both involve compulsion.

In cases like Association of Small Landowners in the Philippines, Inc. v. Secretary of Agrarian Reform (1989), the Court clarified the interplay, noting that taxation can sometimes overlap with these powers, such as in expropriatory taxes.

Constitutional Basis and Framework

Although inherent, the power of taxation is not absolute and is subject to constitutional limitations. The 1987 Philippine Constitution provides the framework for its exercise, primarily under Article VI (Legislative Department) and Article III (Bill of Rights).

Key Constitutional Provisions

Article VI, Section 28: This outlines the legislative power to tax, stating that the rule of taxation shall be uniform and equitable, and Congress shall evolve a progressive system of taxation. It also allows for tax exemptions for charitable institutions, delegation to local governments, and presidential tariff powers.
Article III, Section 1 (Due Process) and Section 9 (Eminent Domain): These impose procedural and substantive limits, ensuring taxes are not confiscatory.
Article II, Section 6: Emphasizes the separation of church and state, influencing tax exemptions for religious properties.
Article XIV, Section 4(3): Provides tax exemptions for educational institutions.

The Constitution does not grant the power but regulates it, as affirmed in Pepsi-Cola Bottling Co. v. Municipality of Tanauan (1976), where the Court held that the power is inherent but must conform to constitutional mandates.

Legislative Monopoly and Non-Delegation

The power to tax is vested in Congress, as the representative body. However, it can be delegated:

To the President for tariff adjustments (Article VI, Section 28(2)).
To local government units (LGUs) under the Local Government Code of 1991 (Republic Act No. 7160), allowing provinces, cities, municipalities, and barangays to impose local taxes within guidelines.

The non-delegation doctrine applies strictly: Congress must provide the law's subject, purpose, and standards. In ABA v. Ermita (2005), the Court upheld the delegation in the Value-Added Tax (VAT) law, as it provided sufficient standards.

Limitations on the Power of Taxation

The inherent power is tempered by limitations to protect individual rights and ensure fairness. These are classified as inherent (inbuilt in the power itself) and constitutional (explicitly provided).

Inherent Limitations

Public Purpose: Taxes must be levied for a public purpose. Private benefit invalidates the tax. In Pascual v. Secretary of Public Works (1960), the Court struck down a tax used for private land improvement.
Territoriality: The state can only tax within its jurisdiction. Exceptions include taxation of citizens abroad on worldwide income under the National Internal Revenue Code (NIRC, Republic Act No. 8424, as amended).
International Comity: Taxes must respect treaties and international law, e.g., exemptions for diplomats.
Non-Delegation: As discussed, core legislative functions cannot be delegated without standards.
Exemption of Government Entities: Government agencies performing governmental functions are exempt, per Maceda v. Macaraig (1991).

Constitutional Limitations

Due Process (Article III, Section 1): Taxes must not be arbitrary or oppressive. Substantive due process requires a valid purpose; procedural ensures notice and hearing, as in Banco Filipino v. Court of Appeals (1991).
Equal Protection (Article III, Section 1): Taxes must apply equally to those similarly situated.
Uniformity and Equity (Article VI, Section 28(1)): Uniformity means the same treatment in like circumstances; equity means burdens proportional to ability to pay. The system should be progressive, as in income taxes under the NIRC.
Non-Impairment of Contracts (Article III, Section 10): Taxes cannot impair obligations, but this is narrowly applied to taxation.
Freedom of Religion (Article III, Section 5): No taxes for religious purposes; exemptions for religious properties.
No Imprisonment for Non-Payment of Poll Tax (Article III, Section 20): But imprisonment for tax evasion is allowed.
Origin of Revenue Bills (Article VI, Section 24): Must originate from the House of Representatives.
Presidential Veto (Article VI, Section 27): Applies to revenue bills.

Principles Governing Taxation

Lifeblood Theory

Taxes are indispensable; without them, government ceases. This justifies strict enforcement, as in Republic v. Mambulao Lumber Co. (1962).

Benefits-Protection Theory

Taxpayers receive protection and benefits, though not directly proportional.

Necessity Theory

Taxation is justified by governmental needs.

Progressive Taxation

The Constitution mandates a progressive system, where higher incomes bear higher rates, as implemented in the TRAIN Law (Republic Act No. 10963).

Uniformity vs. Equality

Uniformity is geographical and operational; equality is in burden distribution.

Scope and Purposes of Taxation

Scope

The power extends to all persons, properties, rights, and activities within jurisdiction, subject to limitations. Under the NIRC, it includes income, estate, donor's, VAT, excise, and other taxes.

Purposes

Revenue: Primary, to fund government operations.
Regulation: Secondary, e.g., higher taxes on harmful goods.
Reduction of Inequality: Through progressive taxes.
Promotion of Welfare: Incentives for investments via tax holidays under the Omnibus Investments Code.

Specific Aspects in Philippine Taxation

Double Taxation

Not prohibited per se, but avoided through credits or treaties. Direct double taxation (same tax twice on same subject) is invalid if lacking uniformity.

Tax Exemptions

Strictly construed against the taxpayer. Constitutional exemptions include charitable, educational, and religious institutions (Article VI, Section 28(3)). Statutory exemptions require clear legislative intent.

Tax Administration

Handled by the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC). Judicial review is available via the Court of Tax Appeals (Republic Act No. 1125, as amended).

Local Taxation

Under the Local Government Code, LGUs have taxing powers, but subject to national supervision. Limitations include no taxes on national government instrumentalities.

International Aspects

The Philippines adheres to tax treaties to avoid double taxation, following the OECD or UN models.

Judicial Interpretations and Landmark Cases

The Supreme Court plays a pivotal role in shaping taxation law:

Tio v. Videogram Regulatory Board (1987): Upheld regulatory taxes.
Tolentino v. Secretary of Finance (1994): Validated VAT expansions.
CREBA v. Romulo (2010): Clarified minimum corporate income tax.
South Dakota v. Wayfair, Inc. influence: Adapted for e-commerce taxation in recent laws.

Recent developments include the CREATE Act (Republic Act No. 11534), rationalizing incentives while maintaining inherent powers.

Conclusion

The inherent power of taxation under Philippine law embodies the delicate balance between state necessity and individual rights. It is a sovereign prerogative essential for governance, yet constrained by constitutional safeguards to ensure justice and equity. As society evolves, so does the application of this power, adapting to economic challenges, technological advancements, and global integrations. Understanding its depths is crucial for policymakers, practitioners, and citizens alike, ensuring that taxation serves as a tool for progress rather than oppression. Through vigilant adherence to principles and limitations, the Philippine state upholds its commitment to a fair and sustainable fiscal system.