Quezonian educational college inc.

College department

“Taxation”

Submitted by:
Jan joseph V. Ugkieng
-Bsed filipino i-a

Submitted to:
Ms. Nornida nerier
-Taxation instructor

a. classification of limitations
Taxation has been defined as the power of the sovereign to impose burdens or charges upon persons,
property or property rights for the use and support of the government to be able to discharge its functions,
but, the power of taxation has also its limit. And there are two classification of taxation’s limitation;
Constitutional Limitation and Inherent Limitation.
A. constitutional limitation on the power of taxation
The 1987 Philippine Constitution sets limitations on the exercise of the power to tax.

1. Requirement of Due Process (Article III, Section 1)

-When the state exercises the power of taxation, the taking of the property should be subject to
due process. -There must be a basis for the taking.
-If the state exercises its power outside of its territory or when it tax another sovereign, it is also a
violation of due process.

2. Equal Protection of the Laws (Article III, Section 1)

3. Uniformity and Equity in Taxation (Article VI, Section 21)

- There is no more distinction between equality and uniformity in taxation
- Equitability or Equity in Taxation – based on one’s ability to pay
- Valid and reasonable classification
a. The classification must be based on substantial distinctions which make real differences.
b. It must be germane to the purpose of the law or of the legislation.
c. It must apply not only to present conditions but also to future conditions substantially identical
to those present.
d. It must apply equally to all those who belong to the same class wherever they may be found
within the jurisdiction of the taxing authority.

 Sison vs. Ancheta (130 SCRA 654)

BP 135 was enacted providing for an imposition of the system of net income taxation upon
the income arising from the exercise of profession while retaining the gross system of income
taxation for salaried individual taxpayers. Petitioner complains that he would be unduly discriminated
against by such imposition.
The SC held that it is a valid exercise of taxation power. It is enough that the classification
must rest upon substantial distinctions that make real differences. There is a real distinction between
professionals and purely fixed income earners. For the professionals and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. For the purely fixed income
earners, there is practically no overhead expense.  These taxpayers are not entitled to make
deductions for income tax purposes because they are in the same situation more or less.
The discernible basis of classification is the susceptibility of the income to the application of
generalized rules removing all deductible items for all taxpayers within the class and fixing a set of
reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income
are set apart as a class.
Apparently, what misled petitioner is his failure to take into consideration the distinction
between a tax rate and a tax base. It would not be just to disregard the disparities by giving all of them
zero deduction and indiscriminately impose on all like the same tax rates on the basis of gross
income. There is ample justification to adopt the gross system of income taxation to compensation
income, while continuing the system of net income taxation as regards professional and business
income.
Dictum of Chief Justice Marshall that “the power to tax involves the power to destroy
(Graves v New York).
Justice Holmes: “The power to tax is not the power to destroy while this Court sits.” So it is
in the Philippines.-Chief Justice Fernando.
Equality and uniformity in taxation means that all taxable articles or kinds or property of the
same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation.

4.     Rule on Progressive Taxation (Article VI, Section 21)

-While it is found in the Constitution, this is not a mandatory requirement to be imposed upon
Congress.  This is just a directive to Congress.  When the State imposes more indirect taxes than
direct taxes, you could not compel Congress that it should devolve a progressive system of
taxation.

 Tolentino vs. Secretary of Finance (Aug. 25, 1994)

 -RA 7716 or the Expanded Value-Added Tax Law (E-VAT Law) seeks to widen the tax base
of the existing VAT system and enhance its administration by amending the National Internal
Revenue Code.
-The broad argument against the VAT is that it is regressive and that it violates the
requirement that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve a
progressive system of taxation."
-The SC held that E-VAT may not be questioned on that ground that it is a regressive
tax.  What Congress is required by the Constitution to do is to "evolve a progressive system of
taxation." This is a DIRECTIVE TO CONGRESS, These provisions are put in the Constitution as
moral incentives to legislation, NOT AS JUDICIALLY ENFORCEABLE RIGHTS.

5.     Prohibition against impairment of obligation and contract s (Article III, Section 10)
-Taxing power cannot alter or revoke existing rights and obligations under valid contracts.  When
a taxpayer enjoys a contractual tax exemption, then, it is protected by the non-impairment clause.  If there
is a later law which taxes that activity and that person has been granted contractual tax exemption, then,
that person affected can invoke the non-impairment clause.  He could not be subject to that new tax law. 
-But when one enjoys an exemption or a lesser tax    rate by virtue of a franchise, then, the non-
impairment clause cannot be invoked.  A franchise, under Article XII, Section 11 of the Constitution, is
subject to amendment, alteration or repeal by Congress when public interest requires.

 Tolentino vs. Secretary of Finance (Aug. 25, 1994)

One of petitioners was PAL.  PAL invoked the non-impairment clause.  PAL was
enjoying a franchise and subject to a lesser tax.  When RA 7716 took effect, the common carriers
were now subject to the VAT. 
The SC held that the non-impairment clause is not applicable to a franchise because a
franchise is subject to amendment, alteration or repeal by Congress. 
The non-impairment clause is also not applicable on the imposition of tax on existing
contracts so as to increase the debt of one party or lessen the security of another or impose additional
burdens upon one class and release the burden of another.  It does not impair the obligations and
contracts.
Example:  You have contract where the vendor will supply to the buyer these products
for 10 years at a specific price, tax included.  Later, the tax rate to that activity to which the vendor
was engaged was increased (e.g VAT increased to 12% from 10%).  He now charges the buyer
additional.  The buyer cannot invoke the non-impairment clause.
     The non-impairment clause is superior to the power of taxation.

6.     Prohibition against imprisonment for non-payment of poll tax (Article III, Section 20)

7.    Non-impairment of the jurisdiction of the Supreme Court to review final decisions on tax matters.
(Article VIII, Section 5(2))
-Congress cannot make a law that the decision of the BIR is appeable to the CTA and the decision
of the CTA   is final and executory and cannot be appealed, even by certiorari.  That is not valid.

8.     The free exercise of religious profession and worship is superior to the power of taxation  (Article
III, Section 5)

9.     No public money or property shall be appropriated for the use of religious
purposes, exempt in payment for services rendered as mentioned therein  (Article VI, Section 29 (2))

10. Exemption from real property taxation on properties which are used for
religious, charitable institutions and educational purposes. (Article VI,
Section 28 (3))
               - The basis of the exemption is actual use.  It is not    ownership but the purpose or use for
which the properties are being utilized.  The scope of the exemption does not         only cover the actual
use of the properties but also those which are incidental to the purpose.
                -Example: Charitable hospital providing      facilities/quarters for their medical staff – This is
exempted because it is incidental to its charitable purpose.
                -The exemption provisions in the Constitution do not require any legislative action. Congress
need not enact a law for purposes of granting the exemptions. The exemptions in the Constitution are self-
executory. The Executive Department, through the Department of Finance, will just promulgate the
necessary rules and regulations for the implementation of the constitutional tax exemptions.

 Abra Valley College vs. Aquino (162 SCRA 106)

The ground floor of Abra Valley College was used for commercial purposes.  The second
floor was used as the residence of the School Director.  The third and the upper floors were used as
classrooms.  Are the properties exempted?
As to the third and upper floors, they are exempted because they are used for educational
purposes.  The ground floor, which is being used for commercial purposes, is not covered by
exemption.  They are part of the school building but since they are not used for educational purpose
but for a commercial purpose, then, they are not exempted.  They will be subject to real property tax.
The second floor is covered by the exemption because the use, even though it is not actually,
directly, and exclusively used for religious, charitable or educational purposes, it includes those
which are incidental to those.
 Lung Center vs. Quezon City (June 29, 2004)
In the case of Lung Center, some parts of its premises were used as clinics of the medical
practitioners in the exercise of their profession.  Some parts of its premises were used as hospitals and
other purposes of Lung Center.  Quezon City assessed Lung Center of real property tax.  Is Lung
Center is liable?
You segregate.  In this case of Lung Center, the real property will be exempted for as long as
they are used for charitable purposes, including the buildings.  But those portions of the buildings
beings used as clinics, in the exercise of the profession of these medical practitioners, then, they will
not be exempted. They will be subject to the real property tax.
Even if the petitioner is a charitable institution those portions of its real property that are
leased to private entities are not exempt from real property taxes as these are not actually, directly and
exclusively used for charitable purposes.
The tax exemption under Sec 28 (30, Art 6) covers property taxes only. What is exempted is
not the institution itself those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes.
Accordingly, the portions of the land leased to private entities as well as those parts of the
hospital leased to private individuals are not exempt from such taxes. On the other hand, the portions
of the land occupied by the hospital and portions of the hospital used for its patients, whether paying
or non-paying, are exempt from real property taxes.

11.   Exemption on the non-stock, non-profit educational institutions (Article

XIV, Section 3-4)
-The revenue and assets of these institutions are exempted from tax.  The extent of this
exemption includes the other operations of non-stock, non-profit educational institutions.  The exemption
will include bookstores or bank accounts where interest income is earned.
-When you have a proprietary educational institution, they are not covered by the exemption.
-Of those were granted exemptions, it will only cover the direct taxes.  If the non-stock, non-
profit educational institution will purchase hardware items/supplies, then, they could not invoke the
exemption. They are subject to whatever VAT or any percentage taxes (indirect taxes) passed on to them.
-This also does not require legislation. 

12.   Ratification requirement on tax exemptions (Article VI, Section 28 (4)

  -This requires the concurrence of the majority of all the members of the Congress to grant tax
exemptions.  This is not majority constituting a quorum, but majority of all members of Congress.  It
should be a majority of the members of the Congress, voting separately.

13.   Tax measures, revenue and tariff bills shall originate in the House of
Representatives
        -Tax measures, revenue and tariff bills shall originate in the House of Representatives.  This does
not mean that the House is more superior than the Senate.  The appropriation, revenue and tariff bills shall
originate in the House of Representatives because it is in the House of Representatives where we have the
representation of the people.  It is the legislative department where we have representatives voted by the
people who will represent the sovereign. 
       - But this does not mean that the Senate could not make its own version.  For as long as there is a bill
similar one to the House, Senate can make its own version – a similar piece of legislation.   A revenue
measure, on its own, cannot proceed at the instance of the Senate without a corresponding version from
the House.  When a revenue measure originates in the House, it does not follow that the Senate has
another version. 
        -When the revenue measure reaches the bicameral and the final bill is totally different from the
House or Senate version, there is no third bill.

 Tolentino vs. Secretary of Finance (Aug. 25, 1994)

In the bicameral conference, the final draft of the EVAT lLaw was totally different from the
Senate and the House of Representatives.  So, it was challenged that it did not originate from the
House of Representatives.  Is that contention correct?
A bill originating in the House may undergo such extensive changes in the Senate that the result
may be a rewriting of the whole.  As a result of the Senate action, a distinct bill may be produced. To
insist that a revenue statute — and not only the bill 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 the
Senate's power not only to "concur with amendments" but also to "propose amendments." It would be
to violate the coequality of legislative power of the two houses of Congress and in fact make the
House superior to the Senate. the revenue bills in question actually originated from the House of
Representatives and were amended by the Senate only after they were transmitted to it. Perhaps, if the
factual circumstances in those cases were exactly the same as the ones at bench, then the subject
revenue or tariff bill may be upheld in this jurisdiction on the PRINCIPLE OF SUBSTANTIAL
COMPLIANCE, as they were in the United States, except possibly in instances where the House bill
undergoes what is now referred to as "AMENDMENT BY SUBSTITUTION," for that would be in
derogation of our Constitution which vests solely in the House of Representatives the power to
initiate revenue bills. A Senate amendment by substitution simply means that the bill in question did
not in effect originate from the lower chamber but from the upper chamber and not disguises itself as
a mere amendment of the House version.
While Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively in
the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure.

 ABAKADA vs. ERMITA (469 SCRA 1)

        The rulings here (as to the RVAT law) are the same as those held in Tolentino vs. Secretary of
Finance, with regard to VAT law, which is in connection with the constitutional requirement that revenue
measures should originate in the House.  Even if the final bill is totally different from the House bill, the
fact that there is a similar bill initiated by the House, that satisfies a substantial compliance of that
constitutional requirement that revenue measures should emanate or originate from the House.

14.   Tax money collected for a special purpose shall be treated as a special

fund

b. Inherent limitations

INHERENT LIMITATIONS – these are limitations or restrictions that spring from its very own
power.  While the power of taxation is inherent in sovereignty, there are also limitations or safeguards
which spring from its own inherent power.

1.  Limitation on public purpose –

It is an essential characteristic of the power of taxation that the tax is imposed is for a public purpose, and
not for a private purpose. It should be for a governmental purpose – for the public welfare or the common
good.

2.  Limitation on territorial jurisdiction – 

The power of taxation is limited only within the boundary or territory of the state.  The state cannot
exercise its power of taxation outside its territory.  If the subject of taxation is found abroad, then, the
state could not anymore tax that. By way of exception to territorial jurisdiction, the state may exercise
personal jurisdiction.  Even if the subject of taxation is outside the territory, the state can still impose its
power of taxation by invoking personal jurisdiction.  Before the exemption of the non-resident citizens,
like the OFWs, we used to tax the income of non-resident citizens or the OFWs because we invoked then
personal jurisdiction.

3.  Non-delegation of the legislative power of taxation –

As a nature of the power of taxation, it is legislative in character.   That power cannot be delegated to
others. When the State grants taxing power to another agency, then that is a violation of the inherent
limitation. However, this non-delegation admits exceptions:

a.     Article VI, Section 28 (2) -involves the delegation to the President to fix tariff rates, import
and export quotas, tonnage and wharfage dues and another duties and imposts.

b.     Article X, Section 5 - This is the power of taxation of LGUs to create their own sources of
revenues, levy taxes, fees and charges.  The power of taxation of LGUs is not inherent.  It may be
granted either by the Constitution or by legislation.  In our structure, the grant of the taxing power
to the LGU is by Constitutional grant. 

c.     Delegation to administrative agencies – in the implementation or tax administration

d.     People’s initiative and referendum under RA 6735

4.  International comity- 

The power of taxation is imposed only within the state.  The state could not tax another sovereign, under
the principles of international law of which we adhere.  This is on the basis of Article II, Section 2. 

5.  Exemption of government agencies –

Government immunity from tax.  This is a self-imposed practical limitation that the government does not
tax itself.  The government exercising governmental/sovereign functions is not taxed.  But when the
government agency exercises proprietary function, taxation is the rule. 

b. application of limitations
applied to taxation
 3 Inherent Powers of the State:
1. Police Power;
2. Power of Eminent Domain or Power of Expropriation; and
3. Power of Taxation

Purpose:
1. for public good or welfare - Police Power 
2. for public use - Power of Eminent Domain
3. for revenue - Power of Taxation
  
1. POLICE POWER is the power of promoting the public welfare by restraining and regulating the use
of both liberty and property of all the people. It is considered to be the most all-encompassing of the three
powers. It may be exercised only by the government. The property taken in the exercise of this power is
destroyed because it is noxious or intended for a noxious purpose.
It lies primarily in the discretion of the legislature. Hence, the President, and administrative boards as well
as the lawmaking bodies on all municipal levels, including the barangay may not exercise it without a
valid delegation of legislative power. Municipal governments exercise this power by virtue of the general
welfare clause of the Local Government Code of 1991. Even the courts cannot compel the exercise of this
power through mandamus or any judicial process.

Requisites of a valid police measure:

(a.) Lawful Subject – the activity or property sought to be regulated affects the public welfare. It requires
the primacy of the welfare of the many over the interests of the few.
(b.) Lawful Means – the means employed must be reasonable and must conform to the safeguards
guaranteed by the Bill of Rights.

2. POWER OF EMINENT DOMAIN affects only property RIGHTS. It may be exercised by some
private entities. The property forcibly taken under this power, upon payment of just compensation, is
needed for conversion to public use or purpose.

The taking of property in law may include:

- trespass without actual eviction of the owner;
- material impairment of the value of the property; or 
- prevention of the ordinary uses for which the property was intended.
 
    The property that may be subject for appropriation shall not be limited to private property. Public
property may be expropriated provided there is a SPECIFIC grant of authority to the delegate. Money and
a chose in action are the only things exempt from expropriation.
Although it is also lodged primarily in the national legislature, the courts have the power to inquire the
legality of the right of eminent domain and to determine whether or not there is a genuine necessity
therefore.

3. POWER OF TAXATION affects only property rights and may be exercised only by the government.
The property taken under this power shall likewise be intended for a public use or purpose. It is used
solely for the purpose of raising revenues, to protect the people and extend them benefits in the form of
public projects and services (I hope so). Hence, it cannot be allowed to be confiscatory, except if it is
intended for destruction as an instrument of the police power.
It must conform to the requirements of due process. Therefore, taxpayers are entitled to be
notified of the assessment proceedings and to be heard therein on the correct valuation to be given the
property. It is also subject to the general requirements of the equal protection clause that the rule of
taxation shall be uniform and equitable.

SITUS of Taxation
a. definition
Situs of taxation literally means place of taxation.  The general rule is that the taxing power
cannot go beyond the territorial limits of the taxing authority.  The basic rule is that the state where the
subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in the
state which has jurisdiction or which exercises dominion over the subject in question.  
Although there are situs rules that are generally recognized, one may find differences in tax rules
legislated in each taxing jurisdiction.  The taxable situs, as legislated, will depend upon various factors
including the nature of the tax and the subject matter thereof (which may be a 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.

b. situs of subjects of taxation

In the Philippines, we may find the situs rules of taxation of various taxes applied as follows:
1. PERSON (poll tax)
May be properly levied upon the persons who are inhabitants or residents of the state , whether or not
they are citizens.
2. Real Property
In the Philippines, real property taxes are imposed only  by the Local Governments on real property
situated within their jurisdiction.  The real estate is subject to taxation in the state in which it is located
whether or not the owner is a resident of the said jurisdiction.  This is the rule of lex rei sitae ( the law of
the situation of the thing) which enunciated in Article 16 of the Civil Code.  The Local Government Code
and its implementing regulations provide for a definition of “real property”, such as lands, buildings,
machinery and other improvements affixed or attached to real property that are subject to the tax,
notwithstanding the definitions under the Civil Code.  Income from sale or lease of real property is,
likewise, generally taxable in the jurisdiction where the property is located.
3. Tangible personal property
The modern rule is that it is taxable in the state where it is physically located notwithstanding that the
owner resides in another jurisdiction.  The Philippines has also adopted this rule of lex rei sitae for
personal property such that personal property is also subject to the law of the country where it is situated”.
There are no taxes on ownership of tangible personal property but income from sale or lease of tangible
property is generally taxable in where the property is physically located.
4. Intangible personal property
Intangible personalty such as credits, bills receivable, bank deposits, bonds, promissory notes, mortgage
loans, judgements and corporate stocks, does not admit of actual location, and as to such property,
taxation is at the domicile of the owner.This is in accordance with the principle of mobilia sequuntur
personam- that the situs of personal property is the domicile of the owner. Income from intangible
personal property, however, is generally taxable where the obligation arises.   Hence, income of a non-
resident foreigner from shares of stock in a domestic corporation, whether as dividends or as gains from
sale, are taxable in the Philippines.  The reason is that said shares receive the protection and benefit of our
laws.  In the same manner, interest income  from a loan is taxable in the state where the loan obligation
arises.
5. Income
Under Philippines rules, resident citizens and domestic corporation are taxable on all income derived
from sources within or without the Philippines.  A non-resident citizen, an alien whether or not a resident
of the Philippines and a foreign corporation, whether engaged or not in trade or business in the
Philippines,  are taxable only from sources within the Philippines.
 

c. Business, occupation and transaction

As far as the situs of business, occupation, or transaction is concerned, the general rule is that the
power to levy an excise tax depends upon the place where the business is done, or the occupation is
engaged in, or the transaction took place.  In the Philippines, the taxes on business, occupation and
transaction are the  VAT, Percentage Tax and Excise Tax.  
The Supreme Court in a 1936 decision has clearly summed up the situs rules.  The taxing power of a
state does not extend beyond its territorial limits, but within such limits it may tax persons, property,
income, or business.  If an interest in property is taxed, the situs of either the property or interest must be
found within the state.  If an income is taxed, the recipient thereof must have a domicile within the state
or the property or business out of which the income issues must be situated within the state so that the
income may be said to have a situs therein.  Personal property may be separated from its owner and he
may be taxed on its account at the place where the property is although it is not a citizen or resident of the
state which imposes the tax. 

 d. Gratuitous Transfer of Property

Donor’s Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between
two or more persons who are living at the time of the transfer. It shall apply whether the transfer is in trust
or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or
intangible.