MODULE 3 - Limitations on the Power of Taxation

1. Limitations classified

De Leon stresses that “the extent of the power to tax is as broad as the purpose for

which it is given,” which is mainly for “the support of the government to enable it to provide for

the general welfare.”

The power to tax: “one so unlimited in force and so searching in extent that the courts

scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in

the discretion of the authority which exercises it.” (Churchill v. Concepcion, 24 Phil. 969 [1916].)

Such power is not without limitations, and it may be classified into:

a. Constitutional – found in the Constitution, or implied from its provisions

b. Inherent – those which restrict the power although they are not found in the

Constitution

2. Enumeration of the limitations

a. Constitutional

i. Due process of law

ii. Equal protection of the laws

iii. Rule of uniformity and equity in taxation

iv. No imprisonment for non-payment of poll tax

v. Non-impairment of obligations of contracts

vi. Non-infringment of religious freedom

vii. No appropriation for religious purposes

viii. Exemption of religious, charitable, and educational entities, non-profit

cemeteries, and churches from property taxation

ix. Exemption of non-stock, non-profit educational institutions from taxation

x. Majority Congressional concurrence on granting of tax exemption

xi. Presidential veto

 b. Inherent

i. Levy must be for public purpose

ii. Non delegation of legislative power to tax

iii. Government exemption from taxation

iv. International comity

v. Territorial jurisdiction

3. Requirement of due process of law

a) Due Process Clause

a. Basis – Article III, Section 1 (Bill of Rights) on non-deprivation of “life,

liberty, or property without due process of law”

b. There can be deprivation of life, liberty or property as long as there is

due process of law. The kinds of due process are the following:

i. Substantive – means that it is allowed by the authority of a law

that remains valid, or from the Constitution itself.

ii. Procedural – presence and compliance of fair and reasonable

methods of procedure prescribed by law.

NOTE: If done for a private purpose, or determined to be beyond the jurisdiction of

government, tax is considered void or invalid. Must give notice. If already paid, should be

refunded on the basis of no one shall unjustly enrich himself at the expense of another

(applicable even to the government.)

4. Requirement of equal protection of the laws

a) Equal Protection Clause

a. “All persons shall be treated alike under the circumstances and

conditions both in the privileges conferred and liabilities imposed.” (1

Cooley 824-825; see Sison, Jr. vs. Ancheta, 130 SCRA 654 [1984].)
 b. Should everyone be treated equally as if everyone is the same? No.

What is prohibited is class legislation, which discriminates some

while favoring others.

c. Those similarly situated or placed must have the same treatment.

NOTE: This can be better understood when applying the understanding of different kinds

or classifications of taxes in Module 1 with regard to:

a. Purpose

i. General, fiscal, or revenue – on a more general sense for the sake of revenue,

when the case provides that a different class of people or property are exempt,

equal protection is sustained.

ii. Special or regulatory – if the intent is to regulate behavior, those who perform or

are more inclined to a certain kind of behavior are the ones subjected to taxation

as opposed to others who do not, equal protection is still upheld.

b. Scope

i. National – more general in scope, so equal protection applies in the exclusion of

a particular class from the general application of tax laws.

ii. Local – when certain local taxes are imposed in specific jurisdictions, those who

enter into the local jurisdiction may be subjected to local taxation by virtue of

equal protection

c. Graduation or rate

i. Proportional – must be applied to all, except for those validly exempted

ii. Progressive – those who have more are accordingly taxed within a specific bracket

while those who have less may be taxed less or may not be taxed at all to safeguard

them from the financial burden of taxation. Equal protection applies.

There is denial of equal protection when tax laws are not properly applied to those belonging in

the same class.

5. Requirement of uniformity and equity in taxation

a) Taxation Shall Be Uniform and Equitable

a. “All taxable articles or properties of the same class shall be taxed at

the same rate” (Tan Kim vs. CTA, 7 SCRA 670)

i. Uniformity of operation throughout tax unit: there should

be uniform application and operation without discrimination of

the tax in every place where the subject of it is found.

(Churchill vs. Concepcion, 34 Phil 696 [1916].)

1. Ex. The uniform application of certain local taxation

made in various local government units, or the uniform

and equal application of the national tax throughout the

country.

One person from a certain municipality may not pay the

same rate of taxation for similar activities with another

person in another municipality which may have

different tax rates.

ii. Equality in burden: not equality of amount. If there is a single

tax imposed on all persons, properties, or transactions, it might

result in inequality because not all are similarly situated.

b. Equity of taxation requires that apportionment be more or less just in

the light of taxpayer’s ability to shoulder the tax burden (usually

measured in terms of wealth or property, and income). Tax can be

uniform but inequitable where the amount of tax imposed is excessive

or unreasonable. Such case may lead to tax avoidance or even tax

evasion.
 b) Progressive System of Taxation

a. “Tax laws shall place emphasis on direct rather than indirect taxation,

with ability to pay as the principal criterion” (De Leon)

b. Example: Income tax is direct and progressive because it looks into

the capacity of individuals based on their business and professional

income, and tax them according to the particular levels they belong.

c. This is opposed to indirect taxation where often businesses which are

supposed to be the subject of the tax pass on the burden to

consumers who purchase goods from them at a certain price set.

NOTE: Taxes should be applied with the circumstances of various persons in mind, so as to

ensure that equity and fairness is best approximated.

6. Prohibition against imprisonment for non-payment of poll tax

a) Non-Imprisonment for Non-Payment of Poll Tax

a. A person cannot be sent to prison for failure to pay the community tax.

Surcharges may be applied in the form of interest to penalize non-

payment, as it is then added to the unpaid amount until paid.

b. Someone can however be imprisoned for violations of the community

tax law in cases other than non-payment of tax (falsification).

7. Prohibition against impairment of obligation of contracts

a) Non-Impairment Clause

a. Obligation of a contract is impaired when its terms or conditions are changed by

law or by a party without the consent of the other, compromising and weakening

the position of the other party.

The prohibition on law includes executive orders or instructions made by the

President, administrative orders and circulars made by heads of departments

and other government offices, as well as ordinances by LGUs.

Interestingly, when a tax exemption based on a contract is later revoked by a taxing statute, it can be seen as
an impairment by law. But when the tax exemption is provided for in a franchise, while seen as an exemption

based on a contract, may be revoked as the Constitution sees a franchise to be “subject to amendment,

alteration, or repeal” by Congress.

8. Prohibition against infringement of religious freedom

a) Religious Freedom

i. American Bible Society vs. City of Manila, (101 Phil. 386 [1957]): The

imposition of license fees on the distribution and sale of bibles and other

religious literature not for the purpose of profit by a non-stock, non-profit

religious corporation violates the constitutional guarantee of the free

exercise and enjoyment of religious profession and worship which

necessarily includes the right to disseminate religious beliefs and

information.

ii. This prohibition does not include imposing a generally applicable tax on

the sale of religious materials by a religious organization. (Tolentino vs.

Secretary of Finance, 235 SCRA 630 [1994].)

9. Prohibition against appropriation for religious purposes

a. Taxes can only be levied for a public purpose, and therefore Congress cannot

appropriate funds for a private purpose like the construction on lands owned by

private persons.

b. “Public property may be leased to a religious group provided that such lease will

be totally under the same conditions as to a private person, especially to the

amount of rent and that no discrimination as to the kind of religious sects or

denominations be done. They must be accorded with the same privilege and

opportunity to lease similar property under identical terms for religious purposes

should they so desire.” (De Leon)

c. Constitutional prohibition is on the use of public money or property for

 benefit of any religious entity.

10. Prohibition against taxation of religious charitable, and educational entities, etc.

a) Tax Exemption of Religious, Charitable, and Educational Entities

i. The exemption only covers the property taxes and not other taxes (Lladoc

v. Comm., 14 SCRA 292 [ 1965].)

ii. Use of property not ownership; a property leased by owner to another

using it exclusively for religious purposes is exempt from property tax but

owner is subject to income tax on rents received.

iii. Tax on transfer of ownership of, or title to, real property applies to

property acquired by the religious sect even if religious sect uses the

property for religious purposes because tax exemption is strictly

construed against the taxpayer.

iv. Tax exemption applies when property is actually, directly, and exclusively

used for religious purposes. “Exclusively” here to mean “primarily”

instead of “solely.”

v. Exemption is not limited to property actually indispensable for religious,

charitable or educational purposes. It extends to facilities which are

incidental to, or reasonably necessary for the accomplishment of said

purposes such as hospitals, schools for training nurses, a nursing home,

property for housing, and recreational facilities, etc.

vi.

11. Other constitutional limitations

a. There has to be a concurrence of a majority of all members of the Congress

(one half, plus one), voting separately.

b. The equal protection of laws, and the rule of taxation mandating that it

taxes be uniform and equitable.

 c. Presidential veto of appropriation, revenue, or tariff bills, and may do so in

part without affecting the items which he does not object to.

d. The Supreme Court having “the power to review, revise, reverse, modify or

affirm on appeal or certiorari final judgments and orders of lower courst in

all cases involving the legality of tax, impost, assessment, or toll, or any

penalty imposed in relation thereto.” So, Congress cannot take away the

Supreme Court’s power to be the final arbiter of tax cases.

12. Requirement of public purpose

a) Public Purpose

a. Synonymous with “governmental purpose, ” which may affect the

inhabitants of the state or taxing district as a community and not

merely as individuals (51 Am. Jur. 378.) – collectively affecting the

country or a specific part of it.

b. Serving a public purpose means that it responds to the needs of

the time, and the new social conditions which proactively require

government to act, or respond to.

c. Proceeds of the tax must be used in the following:

i. Support of the government

ii. Any of the recognized objects of government

iii. To promote the welfare of the community

d. Public money spent only for a public purpose, not bestowed upon

certain or favored private individuals.

e. Instances of public purpose:

i. Financing of educational activities and programs

ii. Promotion of science

iii. Erection and maintenance of roads, bridges and piers.

 iv. Aid for victim of a public calamity

v. Relief for the poor and unemployed, and provide for

unemployment benefits

vi. Payment of pensions and bonuses for service rendered by

public officers and employees

vii. Construction of experimental stations to seek increase of

efficiency in sugar production and the improvement of living

and working conditions in sugar mills or plantations (Lutz vs.

Araneta, 98 Phil. 148 [1955].)

f. The benefit to private individuals or private interest should only be

incidental and not direct. The test is not who receives money but the

character of the purpose for expending it; not immediate result of the

expenditure, but rather the ultimate.

g. Taxpayers (not just individuals directly affected) have ability to inquire

into the nature of spending public funds, and may question through

the proper courts as to how it is spent in the interest of preventing its

illegal expenditure. However, the taxpayer is not relieved from the

obligation of paying taxes should he believe that public funds are

misappropriated. Taxpayer has no legal standing to question

executive acts that do not involve the use of public funds.

13. Prohibition against delegation of taxing power

a) Non-delegation of Taxing Power

a. President is allowed by Congress through our Constitution “to fix

within specific limits, and subject to such limitations and restrictions as

it may impose, tariff rates, import or export quotas, tonnage and

wharfage dues, and other duties or imposts” for the sake of

 practicality and expediency to respond to the demands of ever-

changing economic and global situations.

b. However, congress is prohibited from abdicating its law-making

power. The delegation of power must have limitations and restrictions

and specify the maximum and minimum

c. Local governments – the power to create municipal corporations

necessarily carries with it the power to confer the power of taxation on

local governments, as they are instrumentalities of the state for better

administration of the government with respect to local concerns. Local

Government Code builds on Constitutional guarantee for local

taxation.

d. Tax administration and non-legislative powers may be vested in

administrative agencies such as:

i. The power to value property for the purposes of taxation

pursuant to fixed rules

ii. Power to assess an collect taxes

iii. Power to perform any of the innumerable details of

computation appraisement, and adjustment and the delegation

of such details.

e. Determination as to subject, purpose, amount or rate, manner, means,

and agencies of collection, and rules cannot be delegated.

14. Exemption of government agencies or instrumentalities

a) Exemption of the Government

i. Government taxing itself to raise money to pay

over to itself? Ridiculous.

ii. Functions of government shall not be duly

 impeded.

b) Taxability of Government Agencies

i. The exemption applies only to government

entities through which government immediately

and directly exercises its sovereign powers

such as the Armed Forces of the Philippines.

c) Taxability of GOCCs

a. Government-owned or –controlled corporations performing proprietary

(not governmental) functions are generally subject to tax if their

charters or special laws creating them do not have any tax exemption

provisions. They are considered private and not public corporations

like local government units.

15. Limitation of international comity

a. International comity provides that the property of a foreign state or government

may not be taxed by another, based on the following grounds:

i. PAR IN PAREM NON HABET IMPERIUM (equals have no sovereignty

over each other), the sovereign equality among states justify that one

state cannot exercise its sovereign powers over another.

ii. When one state enters the territory of another, implied in their

understanding that the former does not intend to degrade its dignity by

placing itself under the jurisdiction of the latter.

iii. Foreign governments may not be sued without their consent, rendering

the assessment of the tax useless as it cannot be collected.

b. These generally accepted principles of international law are adopted as part of

the law of our country. (1987 Constitution, Art. II, Section 2.)
16. Limitation of territorial jurisdiction

a. States may not tax property lying outside its borders, or lay an excise or privilege

tax upon the rights enjoyed from the laws of other states outside its jurisdiction.

b. A person may be taxed where there is a privity of relationship between him and

the taxing state which justifies the levy even when he is abroad. Vinculum juris,

a binding civil obligation in law between State and citizen.

MODULE 4 - Situs of Taxation and Double Taxation

1. Meaning of situs of taxation

a. Territoriality or Situs of Taxation

De Leon elaborates on the situs of taxation to literally mean place of taxation; the state

where the subject to be taxed has a situs may rightfully levy and collect the tax. The situs is

necessarily in the state which has jurisdiction or exercises dominion over the subject in

question.

2. Situs of subjects of taxation

a. Taxable situs will depend on the nature of tax, the subject matter (whether

person, property, act, or activity), the possible protection and benefit that may

accrue both to the government and the taxpayer, the residence or the citizenship

of the taxpayer, and source of income among other various other factors.

i. Persons. – poll tax on inhabitants or residents of the state, citizen or not.

ii. Real property – where real property is located, whether owner is resident

or non-resident, taxable only there.

iii. Tangible personal property – where it is physically located, even if owner

is in another jurisdiction. Lex rei sitae applies for personal property. NCC

(Art. 16): “Real property as well as personal property is subject to law of

the country where it is situated.”

iv. Intangible personal property – credits, bank deposits, bonds, etc. –

 domicile of the owner (mobilia sequuntur personam)

If it is a domestic corporation share owned by non-resident foreigner, situs

is here because it receives benefit and protection of our laws.

v. Income – exacted from persons who are residents or citizens in the taxing

jurisdiction, even when neither are residents nor citizens as long as it is

derived from sources within taxing state.

vi. Business, occupation, and transaction – power to levy an excise tax

depends on where the business is done, or the occupation is engaged in,

or where transaction took place.

vii. Gratuitous transfer of property – transmission of property from a donor to

a done or from decedent to his heirs may be subject to taxation in the

state where the transferor is (was) a citizen or resident, or where the

property is located.

3. Multiplicity of situs

a. Variance in concept of “domicile” for tax purposes, and multiple distinct

relationships arising with respect to intangible personal property (debtor,

creditor, trustee, etc.) where property may have been devoted, all receive

protection of the laws of jurisdiction other than the domicile of the owner thereto,

the same income or intangible may be subject to taxation in several taxing

jurisdictions.

b. To remedy this, or reduce the burden, taxing jurisdiction may:

i. Provide for exemptions or allowance of deductions or tax credit for foreign

taxes

ii. Enter into treaties with other states (with regard to income tax for

example, in Philippine American Military Bases Agreements).

4. Meaning of doubles taxation

 a) Double Taxation means, in its strict sense:

i. Taxing twice

ii. By the same authority

iii. Within the same jurisdiction or taxing district or locality

iv. For the same purpose

v. In the same year, or taxing period

vi. Some of the property in the territory

Both taxes may be imposed on the same property or subject matter.

b. In its broad sense (known as indirect duplicate taxation or indirect double

taxation) double taxation is taxation other than direct duplicate. Two or more

pecuniary impositions burden the subject.

5. Instances of double taxation in its broad sense

i. A tax on mortgage as personal property when mortgaged property is also

taxed at its full value as real estate

ii. Tax on corporation for its property and upon shareholders for their shares

iii. Tax on corporation for its capital stock as a whole and upon shareholders

for their shares

iv. Tax upon depositors in a bank or for their deposits, and tax upon bank for

property in which such deposits are invested.

v. Excise tax upon certain use of property and property the same property

vi. Tax upon same property imposed by two different states (Can it be on

subjects that are not governed by any treaty agreement?)

6. Constitutionality of double taxation

a. In its narrow sense, unconstitutional. But as to broader sense? Not really.

b. Generally: No Constitutional prohibition on double taxation, and may not

be invoked as defense against the validity of a tax law as:

 i. National government and city impose tax for exercise of the same

occupation or business as it is not imposed by the same public authority

(National may be general, local may be revenue or regulating?)

ii. Real estate dealer’s tax is imposed for engaging in the business of

leasing real estate in addition to the real estate tax on the property

leased and income tax on the income derived as it is a different kind of

tax.

iii. Where tax on a manufacturer’s products and another tax on the privilege

(of such manufacturer) of storing exportable copra in warehouses within

a municipality are imposed, as the first tax is different from the second.

iv. Where aside from tax, a license fee is imposed in the exercised of police

power. License fee is imposed for a different purpose (regulatory

measure)

c. Doubts as to double taxation should be resolved in favor of taxpayer to avoid

injustice or unfairness.

d. Taxpayer may seek relief under uniformity rule or equal protection guarantee.