Taxation Limitations: Inherent And Constitutional Constraints

Taxation is a crucial function of governments, and it is subject to both inherent and constitutional limitations. These limitations are in place to protect taxpayers' rights and ensure fairness, equality, and due process. Inherent limitations arise from the very nature, purpose, and function of taxation, while constitutional limitations are explicitly stated or implied in a country's constitution. This paragraph will explore the inherent and constitutional limitations of taxation, highlighting how these restrictions safeguard taxpayers' rights and shape the taxation policies of nations.

Characteristics and Values of Limitations on Taxation

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Public purpose

Taxation is an essential mechanism for any state to exist and operate. However, the power to tax is not unlimited. Limitations on taxation can be inherent or constitutional. Inherent limitations are those that restrict the power of taxation but are not embodied in the constitution, whereas constitutional limitations are explicitly provided for in the constitution.

The inherent limitation of public purpose also intersects with the constitutional limitation of non-imprisonment for non-payment of poll tax. This constitutional provision, found in Article III, Section 20 of the 1987 Philippine Constitution, prohibits the imprisonment of individuals for debt or failure to pay poll tax. This limitation upholds the principle of fairness and due process, ensuring that taxpayers are treated alike under similar circumstances.

Additionally, the public purpose limitation is linked to the exemption of government entities from taxation. Government agencies performing governmental functions are generally exempt from taxation to ensure that public resources are directed towards the public good. However, this exemption is not absolute, and certain government-owned entities may be subject to specific taxes as per statutory directives or constitutional provisions.

The public purpose inherent limitation on taxation is crucial for maintaining fairness, equity, and transparency in the taxation system, ensuring that taxes are levied for the benefit of the community as a whole.

Territorial jurisdiction

Taxation is an essential mechanism for any state to generate revenue to fund public services, infrastructure, and programs designed to promote the welfare of its citizens. While the power to tax is indeed vast, it is not without limitations. These limitations are in place to ensure that the state's right to collect revenues is balanced with the protection of individual rights.

The principle of territoriality becomes more complex in the context of globalization, where cross-border transactions and multinational corporations are prevalent. In such cases, the baseline principle remains that taxes are imposed on subjects with a sufficient nexus to the taxing jurisdiction. For instance, a country may choose to tax foreign corporations or non-residents on income sourced within its territory. However, it would typically refrain from exerting taxing authority over purely foreign transactions.

To address the challenges of global taxation, countries have adopted various strategies. One approach involves enacting detailed rules that define the source of profits for multinational corporations, including transfer pricing rules and provisions to limit interest deductions between related parties. Another approach is to implement a worldwide taxation system as a backup to territorial taxation, which subjects certain forms of "passive" income, such as interest and dividends, to current taxation.

In conclusion, the principle of territorial jurisdiction serves as an important limitation on the power of taxation, ensuring that taxes are imposed within the boundaries of a state's jurisdiction and promoting fairness in tax collection. However, with the increasing complexity of global economic activities, countries are continuously adapting their tax systems to address challenges like income shifting and base erosion.

International comity

Tax treaties are a significant manifestation of international comity in action. These agreements between countries outline the rules for taxation when there are cross-border transactions or activities. Tax treaties typically address issues such as residency, permanent establishment, tax rates, and the prevention of double taxation. They provide certainty and predictability for taxpayers and help foster a more favorable environment for international business and investment. Treaties also often include provisions for information exchange and administrative assistance, which are crucial for combating tax evasion and ensuring compliance across borders.

Apart from tax treaties, countries may also engage in other forms of international tax cooperation. This includes the sharing of best practices, joint audits, and the development of international standards for transparency and information exchange. By working together, countries can improve the efficiency and effectiveness of their tax systems while respecting each other's sovereignty. International comity further extends to the enforcement of tax laws. Countries may provide mutual assistance in collecting tax debts, serving documents, or obtaining evidence located in another jurisdiction. This cooperation ensures that taxpayers cannot evade their tax obligations by simply moving assets or conducting activities outside their home country.

In conclusion, international comity is a fundamental principle that guides the interaction between nations in the field of taxation. By recognizing and respecting each other's sovereignty, countries can establish a framework for resolving conflicts, preventing double taxation, and promoting international trade and investment. Tax treaties and other forms of international cooperation play a vital role in achieving these objectives. Ultimately, international comity contributes to a more stable and predictable global tax environment, fostering economic growth and mutual understanding among nations.

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Non-delegation of the power to tax

The non-delegation doctrine is the principle that a branch of government cannot authorise another entity to exercise a power or function that it is constitutionally authorised to exercise itself. This is implicit or explicit in all written constitutions that impose a strict separation of powers. The doctrine is most commonly applied to questions of constitutionally improper delegations of powers between the three branches of government, to the administrative state, or to private entities.

The non-delegation doctrine is often used in connection with administrative law and constitutional law. In the context of taxation, the non-delegation doctrine means that Congress may not delegate its power to determine whether taxes should be imposed. For example, in the United States, the Supreme Court has ruled that Congress cannot delegate its legislative powers or law-making abilities to other entities. This prohibition typically involves Congress delegating its powers to administrative agencies or private organisations.

However, the Supreme Court has also recognised that, although Congress may not delegate powers that are "strictly and exclusively legislative", it may delegate "powers which [it] may rightfully exercise itself". This distinction is important, as it allows Congress to delegate some authority while retaining control over the fundamental decision-making power. For instance, in Skinner, the delegation of authority to the Secretary of Transportation to collect "pipeline safety user fees" was upheld as it was subject to "multiple restrictions" that ensured the constitutional requirement of an intelligible standard was met.

The non-delegation doctrine also applies to the executive branch, where it is generally constitutional for executive officials to delegate executive powers to executive branch subordinates. However, there can be improper delegations of powers within an executive branch, as seen in the case of Wayman v. Southard (1825), where it was contended that Congress had unconstitutionally delegated its power to prescribe judicial procedure to the courts.

Overall, the non-delegation doctrine serves as an important check on the power of taxation by ensuring that the authority to impose taxes is not delegated by one branch of government to another entity, but rather remains with the body vested with legislative powers under the constitution.

Exemption of government entities

Taxation is essential for a state to provide essential services and maintain its institutions. However, the power to tax is not unlimited. One inherent limitation on taxation is the exemption of government entities.

The principle of the exemption of government entities is closely related to the public purpose doctrine. Government entities are generally exempt from taxation because the state does not tax itself. Taxation of the state would be a circular process, with funds moving from one government pocket to another. This inherent limitation ensures that public resources are directed towards the public good and not diverted through internal taxation.

This exemption is not absolute and may be subject to statutory directives or constitutional provisions. Certain government-owned or controlled corporations may be subject to specific taxes. However, as a rule, the state refrains from taxing itself in a manner detrimental to public service.

In the United States, for example, federal entities are generally exempt from state and local taxation. This includes entities such as the American National Red Cross, Farm Credit banks, federally chartered credit unions, the Civil Air Patrol, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank, among others.

Additionally, tax-exempt organizations, such as charities, private foundations, business leagues, labor unions, and veterans' organizations, are also exempt from income tax under the Internal Revenue Code. These tax-exempt entities are classified into ten major groups, 26 categories, and over 600 subcategories, demonstrating the complexity of taxation law and the various exemptions that exist for government entities and other organizations.

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