CHAPTER II: LIMITATIONS ON THE TAXING POWER Exceptions:

1. Under the Constitution, Congress may expressly authorize the

INHERENT LIMITATIONS President to fix within specified limits, and subject as such
Inherent limitations are so called because they proceed from the very limitations and restrictions as it may impose, tariff rates, import
nature of the taxing power itself. As stated by an authority on taxation, and export quotas, tonnage and wharfage dues, and other duties
the taxing power has very distinct and positive limitations some of which as imposts within the framework of the national development
inhere in its very nature and exist whether declared or not declared in the program of the Government.
written constitution. 2. Another exception is in the case of the local taxing power. The
Constitution on this point states: “Each local government unit
a. PUBLIC PURPOSE OF TAXES shall have the power to create its own sources of revenues and to
levy taxes, fees and charges subject to such guidelines and
It is the first requisite of lawful taxation that the purpose for which it is limitations as the Congress may provide, consistent with the basic
laid shall be a public purpose. Public purpose in taxation is important policy of local autonomy. Such taxes, fees, and charges shall
because of all the powers of government, that of taxation is said to be the accrue exclusively to the local governments.” (Section 5, Article X,
strongest as it can be readily employed against one class of individuals in 1987 Constitution)
favor of another so as to ruin one class and give unlimited wealth and
property to another, if there is no implied limitation on the uses for which  Whenever delegation of legislative power is the issue, it is
such taxing power may be exercised. important to know the distinction between tax legislation and tax
administration. This is so because if what is delegated is tax
Tests to determine the public purpose of a tax: legislation, the delegation is invalid; but if what is involved is only
1. Whether the thing to be furthered by the appropriation of public tax administration, the non-delegability rule is not violated.
revenue is something which is the duty of the State, as a
government, to provide. Every system of taxation consists of two parts:
2. Whether the proceeds of the tax will directly promote the welfare 1) the elements that enter into the imposition of the tax; and
of the community in equal measure. (2) the steps taken for its assessment and collection. One is legislation,
the other is tax administration.
b. NON-DELEGABILITY OF TAXING POWER
Non-delegable legislative powers (cannot be delegated to administrative
In the distribution of the powers of government into three departments, agencies):
namely, legislative, executive and judicial, the power of taxation is (a)selection of the property to be taxed;
exclusively legislative. Consequently, the taxing power as a general rule (b) determination of the purposes for which. taxes shall be levied;
may not be delegated. (c) fixing of the rate of taxation; and
(d) rules of taxation in general

1
 situs and the requisite legislative jurisdiction exists. The maxim
Delegable powers (not legislative): applies to the taxation of personal property.
a) the power to value property for taxation in pursuance of fixed rules; 4. Legislative Power to Fix Situs– it has been opined that if no
(b) the equalization of assessments by a central body; and constitutional provisions are violated, the power of the legislature
(c) collection of taxes to fix situs is undoubted.

c. TERRITORIALITY OR SITUS OF TAXATION Intangible properties which are considered as properties with a situs in
the Philippines (Section 104, 1997 NIRC):
The Situs Principle in General - Territoriality or the situs of taxation, which 1. Franchise which must be exercised in the Philippines;
means "place of taxation," is a limitation on the taxing power. This is so 2. Shares, obligations or bonds issued by any corporation or
because the principle is well-recognized that, however broad the power soceidad anonima organized or constituted in the Philippines in
of taxation maybe as to its character and no matter how searching it is in accordance with its laws;
its extent, such power is necessarily limited only to persons, property or 3. Shares, obligations, or bonds issued by any foreign corporation
businesses within its jurisdiction; that is to say, to subjects within its 85% of the business of which is located in the Philippines;
jurisdiction, or over which it can exercise dominion. 4. Shares, obligations, or bonds issued by any foreign corporation if
such shares, obligations, or bonds have acquired a business situs
Some Basic Considerations Affecting Situs of Taxation: in the Philippines; and
1. Protection – Protection is a basic consideration that justifies the 5. Shares or rights in any partnership, business or industry
situs of taxation. One authority opines that a legal situs cannot be established in the Philippines.
given to property for the purpose of taxation where neither the
property nor the person is within the protection of the taxing The law further provides, however, that no tax shall be collected under
state. Title III of the Code in respect of intangible personal property:
2. Double Taxation and the Situs Limitation – Double taxation is (a) if the decedent at the time of his death, or the donor at the time of
never invalid where it is imposed by different states. In the donation, was a citizen and resident of a foreign country which at the
determining situs, it is of no importance that the property has time of his death or donation did not impose a transfer tax of any
already been taxed or is subject to tax in another state. character, in respect of intangible personal property of citizens of the
3. The Maxim of Mobilia Sequuntur Personam, and Situs of Philippines not residing in that foreign country, or
Taxation– In English, this maxim means "movables follow the (b) if the laws of the foreign country of which the decedent or donor was
person.” According to this maxim, the situs of personal property is a citizen and resident at the time of his death or donation allows a similar
the domicile of the owner. This is merely a fiction of law intended exemption from transfer or death taxes of every character or description
for convenience and not to be controlling where justice does not in respect of intangible personal property owned by citizens of the
demand it. As stated, the doctrine is not allowed to stand in the Philippines not residing in that foreign country.
way of taxation of personalty in the place where it has its actual

2
  The Situs or Territoriality Principle as Applied in the Philippine c) An individual citizen of the Philippines who is working and
Setting—Broadly speaking, for Philippine tax purposes, the deriving income from abroad as an overseas contract worker is
following may be the factors that could interplay in a given legal taxable only on income from sources within the Philippines:
situation where situs or territoriality is the focal question: Provided, that a seaman who is a citizen of the Philippines and
who receives compensation for services rendered abroad as a
1. Kind or classification of the tax being levied; member of the complement of a vessel engaged exclusively in
2.Situs of the thing or property taxed; international trade shall be treated as an overseas contract
3.Domicile or residence of the person taxed; worker;
4. Citizenship or nationality of the person taxed; d) An alien individual, whether a resident or not of the Philippines, is
5. Source of the income taxed; and taxable only on income derived from sources within the
6. Situs of the excise, privilege, business or occupation Philippines;
being taxed. e) A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and
(a) Property Tax- In considering the place at which property is f) A foreign corporation, whether engaged or not in trade or
taxable and the governmental unit which may rightfully levy and business in the Philippines, is taxable only on income derived
collect the property tax, the basic factor is the situs of the from sources within the Philippines.
property in question. This is true whether such property is owned
by the residents of the taxing state or by non-residents thereof. (d) Excise or Privilege Taxes- Where the tax that is being imposed is a
(b) Tax on Persons- The rule is well-settled that a State may levy a tax upon the performance of an act, enjoyment of a privilege, or
personal tax upon persons subject to the jurisdiction of its engaging in an occupation, or what is sometimes known as an
sovereignty. excise or privilege tax, the situs of taxation is the place in which
(c) Income Tax- In general, the crucial factors that go into the situs the act is performed or where the occupation is engaged in.
problem in taxation when it involves income tax are (1) nationality
or citizenship of the taxpayer, (2) his residence or domicile, and d. TAX EXEMPTION OF THE GOVERNMENT
(3) source of the income.
It seems that as a matter of public policy, property of the State and of its
General Principles of Income Taxation in the Philippines: municipal subdivisions devoted to government uses and purposes is
"Except when otherwise provided in this Code: generally deemed to be exempt from taxation although no express
a) A citizen of the Philippines residing therein is taxable on all provision in the law is made therefor. Tax exemption of government
income derived from sources within and without the Philippines; entities and the political subdivisions of the State seems to be a well
b) (B)A nonresident citizen is taxable only on income derived from settled principle. It is significant to note that the Constitution does not
sources within the Philippines; contain any provision granting tax exemption to the Government.
Obviously, the reason for this is that the Government’s exemption from

3
taxes is an inherent limitation on the State's taxing power. finds no support in the Constitution. An obvious example is where the
Notwithstanding the immunity of the Government from taxes, the same can be shown to amount to confiscation of property.
principle is also well recognized that the Government may tax itself.
b. EQUAL PROTECTION OF LAW
e. INTERNATIONAL COMITY
The Constitution does not only speak of non-deprivation of due process
More often than not, states find it mutually advantageous for themselves but in Sec. 1, Art. III thereof, it also emphatically ordains that " x› nor shall
to create self-imposed restraints on their taxing powers especially with any person be denied the equal protection of the laws."
reference to the properties of foreign governments within their territorial
domains. Reciprocity lies at the root of this limitation for it cannot be With particular reference to taxation, it has been aptly stated that the
denied that with reciprocity located at the bottom line, harmonious and power of the State to make reasonable and natural classifications for the
productive relationships among the various states can be maintained. purposes of taxation is unquestioned and such classifications may relate
to the subject of taxation, the kind of property, the rates to be levied or
CONSTITUTIONAL LIMITATIONS the amounts to be raised, and the methods of assessment, valuation and
collection. Such power to classify in matters of taxation is said to be
a. DUE PROCESS OF LAW broader than some other exercises of legislative power, entitled to
presumption of validity and will not, as a rule, be interfered with by the
Sec. 1, Art. III of the Constitution provides in part that "(n)o person shall judiciary in the absence of a clear showing of unreasonableness,
be deprived of life, liberty, or property without due process of law." In the discrimination or arbitrariness.
tax sphere, there have been occasions when the Supreme Court ruled on
the constitutionality of certain taxing measures where due process of law The equality of taxation rule, therefore, is not violated if classifications or
was the focal question. In the case, for instance, of Kapatiran ng mga distinctions are made as long as the same are based on reasonable and
Naglilingkod sa Pamahalaan ng Pilipinas U. Tan, etc. (G.R. Nos. substantial differences.
81311,81820, 81921 and 82152, June30,1988), the Court ruled that due
process was not violated when the VAT law (E.O. 273) was promulgated c. FREEDOM OF SPEECH AND OF THE PRESS
because there was no grave abuse of discretion incident to its
promulgation. The Court also pointed out that petitioners failed to show Sec. 4, Art. III of the Constitution provides: “No law shall be passed
that E.0. 273 was issued capriciously and whimsically or in an arbitrary or abridging the freedom of speech, of expression, or of the press, or the
despotic manner by passion or personal hostility since it appears that a right of the people peaceably to assemble and petition the government
comprehensive study of the VAT was made before E.O. 273 was issued. for redress of grievances.”

In one case, the Court ruled that the due process clause in the To epitomize, the Supreme Court held in its decision on the “Tolentino E-
Constitution may be invoked where a tax statute is so arbitrary that it VAT” case, supra, that there is curtailment of press freedom and freedom

4
of thought and expression if a tax is levied in order to suppress this basic Sec. 10, Art. III of the Constitution provides that "(no law impairing the
right of the people under the Constitution. obligations of contracts shall be passed." The nature of this limitation is
aptly discussed, as follows:
d. NON-INFRINGEMENT OF RELIGIOUS FREEDOM "To impair is to weaken- to deprive of strength. Hence, to impair the
obligation of a contract is to alter or change the terms or effect of the
Sec. 5, Art. III of the Constitution provides that "(n)o law shall be made contract, and thus in contemplation of law, to weaken the position or
respecting an establishment of religion or prohibiting the free exercise rights of one or all of the parties to it. A law, which changes the terms of
thereof. The free exercise and enjoyment of religious profession and the contract by making new conditions, or changing those in the contract,
worship without discrimination or preference shall forever be allowed. No or
religious test shall be required for the exercise of civil or political rights." dispenses with those expressed impairs its obligations. It is not important
that the impairment is but slight, if it exists at all, if there is any
In the case of American Bible Society vs. City of Manila (101 Phil. 386), the impairment, the provision of the Constitution is violated and the courts
Supreme Court ruled that a municipal license tax on the sale of bibles and will interfere. (Matic, Taxation in the Philippines, Vol. 1, p. 6)
religious articles by a non-stock, non-profit missionary organization at a
little profit constitutes a curtailment of religious freedom and worship f. NON-IMPRISONMENT FOR DEBT OR NON-PAYMENT OF POLL
which is guaranteed by the Constitution. The Court held that an ordinance TAX
of the City of Manila, which imposed a license fee on those engaged in
the business of general merchandise could not be applied to the Sec. 20, Art. III of the Constitution provides that"(n)o person shall be
appellant's sale of bibles and other religious literature. The Court relied imprisoned for debt or non-payment of a poll tax."
on Murdock v. Pennsylvania, ante, in which it was held that as a license
fee is fixed in amount and unrelated to the receipts of the taxpayer, the A poll tax (or personal or capitation tax) is a tax of a fixed amount on
license fee when applied to a religious sect was actually being imposed as individuals residing within a specified territory, whether citizens or not,
a condition for the exercise of the sect's right under the Constitution. For without regard to their property or the occupation in which they may be
that reason, it was held that the license fee, "restrains in advance those engaged. The residence tax (now, the community tax certificate) is in the
constitutional liberties of press and religion, and inevitably tends to nature of a poll tax. The prohibition against imprisonment for non-
suppress their exercise.” payment of poll tax is dictated by a sense of humanity and sympathy for
the plight of the poorer elements of the population who cannot even
Note, however, that as in press freedom, a license tax would constitute a afford to pay their cedula or poll tax (i.e., community tax certificate).
restraint on the freedom of worship as guaranteed in the Constitution.
g. ORIGIN OF APPROPRIATION, REVENUE AND TARIFF BILLS
e. NON-IMPAIRMENT OF CONTRACTS
Sec. 24, Art.VI of the Constitution provides that "(a)ll appropriation,
revenue or tariff bills, bills authorizing the increase of the public debt, bills

5
of local application and private bills shall originate exclusively in the Progressivity of taxation- is also mandated in the Constitution. Our
House of Representatives but the Senate may propose or concur with income tax system is one good example of such progressivity because it is
amendments.” built on the principle of the taxpayer's ability to pay. Taxation is
progressive when its rate goes up depending on the resources of the
A bill originating in the House may undergo such extensive. changes in the person affected.
Senate that the result may be a rewriting of the whole. At this point, what
is important to note is that, as a result of the Senate action, a distinct bill i. DELEGATION OF LEGISLATIVE AUTHORITY TO FIX TARIFF RATES,
may be produced. To insist that a revenue statute - and not only the bill IMPORT, AND EXPORT QUOTAS
which initiated the legislative process culminating in the enactment of the
law - must substantially be the same as the House bill would be to deny Sec. 28(2), Art. VI of the Constitution provides that "(t)he Congress may,
the Senate's power not only to "only concur with amendments" but also by law, authorize the President to fix within specified limits, and subject to
"o propose amendments." It would be to violate the co-equality of such limitations and restrictions as it may impose, tariff rates, import and
legislative power of the two houses of Congress, and in fact make the export quotas, tonnage and wharfage dues, and other duties or imposts,
House superior to the Senate.” within the framework of the national development program of the
Government.”
h. UNIFORMITY, EQUITABILITY AND PROGRESSIVITY OF TAXATION
It has been held that the President-may increase tariff rates as authorized
Sec. 28(1), Art. VI of the Constitution provides: "The rule of taxation shall by law even for revenue purposes only.
be uniform and equitable. The Congress shall evolve a progressive system
of taxation." j. TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY, AND
EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE, AND
Uniformity in taxation- means that all taxable articles or kinds of property EDUCATIONAL PURPOSES
of the same class shall be taxed at the same rate. It does not mean that
lands, chattels, securities. income, occupations. franchises, privileges, Sec. 28(3), Art. VI, of the Constitution provides: "Charitable institutions,
necessities and luxuries shall be assessed at the same rate. Different churches and parsonages or convents appurtenant thereto, mosques,
articles mav be taxed at different amounts provided that the rate is non-profit cemeteries and all lands, buildings and improvements actually,
uniform on the same class everywhere with all people at all times. directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation."
Uniformity in taxation is further defined in one case as that in which the
tax levied "operates with the same force and effect in every place where To what kind of tax does this exemption apply?
the subject of it is found. Uniformity means that all property belonging to
the same class shall be taxed alike". In the case of Lladoc v. Commissioner of Internal Revenue, et al. (L-19201,
June 16, 1965), wherein petitioner assailed the donor's and donee's gift

6
taxes on the cash donation for the church building, the Supreme Court To be entitled to tax exemption under the Constitution, is proof of actual
ruled that the abovementioned constitutional provision which grants tax use for the tax-exempt purpose necessary?
exemption applies only to property or realty taxes assessed on such
properties used directly, actually and exclusively for religious, charitable In the case of Province of Abra v. Hernando, etc., et al. (L-49336,
and educational purposes. Aug. 31, 1981), the Supreme Court ruled that actual use is necessary.
According to the Court, to be exempt under the 1973 Constitution, lands,
It would seem, however, that under existing law, gifts made in favor of buildings and improvements of religious and charitable institutions must
religious, charitable or educational organizations would nevertheless not only be exclusively but also actually and directly used for religious and
qualify for donor's gift tax exemption in light of the provisions of Sec. charitable purposes. This is the difference between the 1973Constitution
94(a) (now, Sec. 101(AJ[3], 1997 NIRC) which reads, as follows: and the 1935Charter which requires only that the property be exclusively
used for the purposes indicated.
"Sec. 101. Exemption of Certain Gifts. • The following gifts or donations
shall be exempt from the tax provided for in this Chapter: It is important to note also that for purposes of tax exemption, "use"
overrides "ownership" such that if property, although actually owned by a
"(A) In the Case of Gifts Made by a Resident.- religious, charitable or educational institution, is actually used for a non-
exempt purpose, the exemption from tax of said property vanishes.
(3) Gifts in favor of a n educational and/or charitable, religious, cultural or
social welfare corporation, institution, accredited nongovernment k. VOTING REQUIREMENTS IN CONNECTION WITH THE
organization, trust or philanthropic organization or research institution or. LEGISLATIVE GRANT OF TAX EXEMPTIONS
organization: Provided, however, that not more than thirty percent (30%)
of said gifts shall be used by such donee for administration purposes. For Sec. 28(4), Art. VI of the Constitution provides: "No law granting any tax
the purpose of this exemption, a 'non-profit educational and/or charitable exemption shall be passed without the concurrence of a majority of all
corporation, institution, accredited nongovernment organization, trustor the members of Congress.
philanthropic organization and/or research institution or organization, is a
school, college or university and/or charitable corporation, accredited Suppose a law authorizes the refund of a tax already collected or grants
nongovernment organization, trust or philanthropic organization and/or the deduction of certain items of expenses for income tax purposes.
research institution or organization, incorporated as a nonstock entity, Considering that refunds of taxes and deductions partake of the nature
paying no dividends, governed by trustees who receive no compensation, of exemptions, is this voting requirement applicable?
and devoting all its income, whether students' fees or gifts, donations,
subsidies or other forms of philanthropy, to the accomplishment and It is a settled rule that refunds partake of the nature of exemptions.
promotion of the purpose enumerated in its Articles of Incorporation. Condonation of taxes already paid or yet unpaid are also in the nature of
tax exemptions.

7
 l. NON-IMPAIRMENT OF THE SUPREME COURT’S JURISDICTION IN "(4) Subject to conditions prescribed by law, all grants, •endowments.
TAX CASES donations or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax.”
Sec. 2, Art. VIII: "The Congress shall have the power to define, prescribe,
and apportion the jurisdiction of the various courts but may not deprive Supposing income from tuition is invested for an unrelated purpose like
the Supreme Court of its jurisdiction over cases enumerated in Sec. 5 placements in the money market, is the invested income taxable?
hereof."
The invested income is not taxable, but the earnings realized thereon, like
Sec. 5, Art. VIII: "The Supreme Court shall have the following powers: interest on the placement, is the one that is taxable.
"(2) Review, revise, reverse, modify or affirm on appeal or certiorari as the
law or the Rules of Court may provide, final judgments and orders of OTHER CONSTITUTIONAL PROVISIONS RELATED TO TAXATION
lower courts in:
(b) all cases involving the legality of any tax, impost, assessment or toll, or 1. Constitutional Requirement on the Subject and Title of Bills
any penalty imposed in relation thereto.
Sec. 26(1), Art. VI of the Constitution provides: "Every bill passed by
m. TAX EXEMPTION OF REVENUE AND ASSETS, INCLUDING GRANTS, Congress shall embrace only one subject which shall be expressed in the
ENDOWMENTS, DONATIONS OR CONTRIBUTIONS TO title thereof."
EDUCATIONAL INSTITUTIONS
2. Power of the President to Veto Items in an Appropriation
Sec. 4(3) and (4), Art. XIV of the constitution provides: Revenue, or Tariff Bill
"(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational Sect. 27(2), Article VI of the Constitution provides that: “The President
purposes shall be exempt from taxes and duties. Upon the dissolution or shall have the power to veto any particular item or items in an
cessation of the corporate existence of such institutions, their assets shall appropriation, revenue, or tariff bill but the veto shall not affect the item
be disposed of in the manner provided by law. or items to which it does not object.”

"Proprietary educational institutions, including those cooperatively 3. Necessity of an Appropriation Made Before Money May be Paid
owned may likewise be entitled to such exemptions, subject to the Out of the Treasury
limitations provided by law, including restrictions on dividends and
provisions for reinvestments. Section 29(1). Article VI of the Constitution provides: “No money shall be
paid out of the Treasury except in pursuance of an appropriation made by
law.”

8
 4. The Provision Against the Appropriation of Public Money or Sec. 6, Art. X of the Constitution provides: "Local government units shall
Property for the Benefit of Any Church, Sect, or System of have a just share, as determined by law, in the national taxes which shall
Religion be automatically released to them."

Section 29 (2), Article VI of the Constitution provides: “No public money

or property shall be appropriated, applied, paid or employed, directly, or
indirectly for the use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of religion or of any priest,
preacher, minister, or other religious teacher or dignitary as such except
when such priest, preacher, minister or dignitary is assigned to the armed
forces or to any penal institution. or government orphanage or
leprosarium."

5. The Constitutional Provision on Taxes Levied for a Special

Purpose

Sec. 29(3), Art. VI of the Constitution provides: "All money collected or

any tax levied for a special purpose shall be treated as a special fund and
paid out for such purpose only. If the purpose for which a special fund
was created has been fulfilled or abandoned,
the balance, if any, shall be transferred to the general funds of the
Government.

A good illustration of a special fund under this provision is the Oil Price
Stabilization Fund, or OPSF, created under P.D. 1956 to stabilize the prices
of imported crude oil. In a decided case, it was held that where under an
executive order of the President (E.O. 1024), this special fund is
transferred from the general fund to a "trust liability account," the
constitutional mandate is not violated. The OPSF, according to the Court,
remains as a special fund subject to COA audit.

6. Allotments to Local Governments