GENERAL PRINCIPLES

OF
TAXATION
Part One
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POWER OF TAXATION

The power of taxation is NOT absolute.

It is subject to certain limitations or restrictions.

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Inherent Limitations – those which spring from the nature of the taxing
power itself although they may or may not be provided in the
Constitution.

Constitutional Limitations – those that are specifically provided in the

Constitution or implied therefrom.
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Inherent Limitations
• Public Purpose
• Non-Delegation of Taxing Power
• Exemption of the Government
• Territoriality / Situs
• International Comity
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Public Purpose
- Purpose affecting the inhabitants of the state or taxing district as a
community and not merely as individuals
- Not longer confined to the traditional notion of use by the public but
held synonymously with public interest, public benefit, public welfare and
public convenience.
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Reasons
- A tax levied for a private, not public purpose constitutes a taking of
property without due process of law as it is beyond the power of the
government to impose.
- Public funds can only be spent for public purpose.
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Instances of Public Purpose
• Financing of educational activities and programs
• Promotion of science
• Building and maintenance of hospitals, roads, bridge and piers
• Aid for victims of a public calamity
• Relief for the poor and the unemployed and to provide for unemployment
benefits
• Payment of pensions and bonuses for services rendered by public officers or
employees.
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Effect of Incidental Benefit to Private Interest
- Still for public purpose
- The test is not as to who receives the money, but the character of the
purpose for which it is expended.
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Taxpayer’s suit
- A case where the law or act complained of directly involves the illegal disbursement of
public funds derived from taxation.
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Non-Delegation of Taxing Power

Principle of Separation of Powers ordains that each of the 3 great

branches of government has exclusive cognizance of and is supreme in matters
falling within its own constitutionally allocated sphere.
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Non-Delegation of Taxing Power

Corollary to the Doctrine of Separation of Powers is the principle of

non-delegation of powers as expressed in the Latin maxim: potestas delegata
non delegari potest which means “what has been delegated, cannot be
delegated.”
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Exceptions:
• Delegation of tariff powers to the President under Section 28 (2) of Article VI
of the Constitution which reads:
“The Congress may, by law, authorize the President to fix within specified limits,
and subject to such limitations and restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the Government.”
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Exceptions:
• Delegation to local governments
Justified by necessary implication that the power to create political
corporations carries with it the power to confer on such local
government agencies the authority to tax
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Exceptions:
• Delegation to local governments
Presently, local government units can exercise taxing power pursuant to a direct
constitutional grant:
“Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to
the local governments. (Section 5, Article X, 1987 Constitution);

and by virtue of a law – Republic Act No. 7160 or The Local Government Code
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Exceptions:
• Delegation to administrative bodies
Delegable powers
• Power to value property for taxation purposes pursuant to fixed rules.
• Power to assess and collect the taxes
• Power to perform any of the innumerable details of computation, appraisement,
and adjustment, and the delegation of such details.
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Exemption of the Government from Taxes
• Reason
To levy a tax upon public property would render necessary new taxes on other
public property for the payment of the tax so laid and thus, government would be
taxing itself to raise money to pay over to itself.

Notwithstanding the immunity of the government from Taxes, the principle is also
well recognized that the government may tax itself as there is no constitutional
prohibition against the government taxing itself.
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Exemption of the Government from Taxes
• Governmental or Sovereign Functions
Those pertaining to the administration of government and are treated
as absolute obligation on the part of the State to perform
Gen. Rule: Tax-Exempt
Exception: Taxable by law
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Exemption of the Government from Taxes
• Proprietary Functions
Those that are undertaken only by way of advancing the general
interest of society and merely optional.
Gen. Rule: Taxable
Exception: Tax-Exempt by law
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Limitation of Territorial Jurisdiction
• Territoriality / Situs or Place of Taxation
• A state may not tax property lying outside its borders or lay an excise or
privilege tax upon the exercise or enjoyment of a right or privilege derived from
laws of another state and therein exercised and enjoyed.
• Protection is a basic consideration that justifies the situs of taxation.
• Exception:
• A person may be taxed where there is between him and the taxing state, a privity of
relationship justifying the levy. In this case, the basis of the power to tax is
dependent upon his relation as a citizen to the state.
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Limitation of International Comity
• International Comity
• Courteous and friendly agreement and interaction between nations.
• A property of a foreign state may not be taxed by another.
• Grounds:
1. Sovereign Equality Among States – one state cannot exercise its sovereign powers
over another.
2. Usage among State – when a state enters the territory of another, state there is an
implied understanding that the former does not intend to degrade its dignity by placing
itself under the jurisdiction of the latter
3. Foreign Government may not be sued without its consent.
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General or Indirect Constitutional Limitations
• Due process clause
• Equal protection clause
• Freedom of the press
• Religious freedom
• Non-impairment clause
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Due Process Clause
Basis: “No person shall be deprived of life, liberty, or property without due process of
law, x x x.” [Sec. 1, Article III, (Bill of Rights), 1987 Constitution]

Meaning of Due Process – no precise definition

Substantive due process – under the authority of a law that is valid or
of the Constitution itself.
Procedural due process – after compliance with fair and reasonable
methods of procedure prescribed by law.
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Equal Protection Clause
Basis: “X x x, nor shall any person be denied the equal protection of the laws.” {Sec. 1,
Article III, (Bill of Rights), 1987 Constitution]

Meaning – All persons subject to legislation shall be treated alike under like
circumstances and conditions both in the privileges conferred and liabilities
imposed.
It does not demand absolute equality.
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Equal Protection Clause
Requisites of a Valid Classification under Equal Protection Clause
1. Rests on substantial distinctions
2. Germane to the purpose of the law
3. Not limited to existing conditions only
4. Applies equally to all members of the same class.
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Freedom of the Press
Basis: “No law shall be passed abridging the freedom of speech, of expression, or of
the press, or the right of the people peaceably to assemble and petition the
government for redress of grievances. [Sec. 4, Article III, (Bill of Rights), 1987
Constitution]
Religious Freedom
• Basis: “No law shall be made respecting an establishment of religion, or prohibiting
the free exercise thereof. The free exercise and enjoyment of religious
profession and worship, without discrimination or preference, shall forever be
allowed. No religious test shall be required for the exercise of civil or political
rights. [Sec. 5, Article III, (Bill of Rights), 1987 Constitution]
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Imposition of License Fee
Unconstitutional because it is actually in the nature of a condition
or permit for the exercise of the right or lays a prior restraint on the
said right.

Imposition of Tax
Constitutional as it is imposed purely for revenue purposes.
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Non-Impairment Clause
Basis: “No law impairing the obligation of contracts shall be passed.
[Sec. 10, Article III, (Bill of Rights), 1987 Constitution]

Meaning of Impairment of Obligation of Contract

The 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, thereby weakening the position or rights of the latter.
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Non-Impairment Clause

Application: If contract is changed or revoked by law –

Unconstitutional
If franchise is revoked by law – Constitutional as franchise
is subject to amendment, alteration or repeal” by
Congress (Sec. 11, Article XII, 1987 Constitution)
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Specific or Direct Constitutional Limitations
• Taxation shall be uniform and equitable
• Progressive system of taxation
• Non-imprisonment for non-payment of poll tax
• Origin of revenue or tariff bills
• Delegated authority of the President to impose tariff rates, import and export quotas,
tonnage and wharfage dues
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Specific or Direct Constitutional Limitations
• Tax exemption of religious, charitable and educational entities
• Grant of authority to local government units
• Tax exemption granted to non-stock non-profit educational institutions
• Voting requirement with respect to tax exemption
• Power of the president to veto any particular item or items in a revenue or tariff bills
• Non-impairment of jurisdiction of the Supreme Court in tax cases
• Non-appropriation of public funds for religious purposes.
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Taxation shall be uniform and equitable.
• Basis: “ The rule of taxation shall be uniform and equitable. x x x. [Sec. 28 (1), Article VI,
(Legislative Department), 1987 Constitution]

Meaning of Uniformity in Taxation

All taxable articles or properties of the same class shall be taxed at the
same rate.
The rule requires the uniform application and operation, without
discrimination, of the tax in every place where the subject of it is found.
Uniformity implies equality in burden, not equality in amount.
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Taxation shall be uniform and equitable.

Meaning of Equity in Taxation
It requires that the apportionment of tax burden be more or less just
in the light of the taxpayer’s ability to shoulder the tax burden (in
terms of property, wealth and income).
Its cornerstone is the ability to pay.
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Progressive System of Taxation.
• Basis: “ X x x. The Congress shall evolve a progressive system of taxation. [Sec.
28 (1), Article VI, (Legislative Department), 1987 Constitution]

Interpretation
Direct taxes are to be preferred and as much as possible, indirect taxes
should be minimized.
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Progressive System of Taxation.
• Basis: “ X x x. The Congress shall evolve a progressive system of taxation. [Sec.
28 (1), Article VI, (Legislative Department), 1987 Constitution]

Interpretation
Direct taxes are to be preferred and as much as possible, indirect taxes
should be minimized.
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Non-imprisonment for Non-Payment of Poll Tax
• Basis: “No person shall be imprisoned for debt or non-payment of a poll
tax. [Sec. 20, Article III, (Bill of Rights), 1987 Constitution]

Application
It applies only to poll tax or tax of a fixed amount imposed on persons
residing within a specified territory, whether citizens or not, without regard to
their property, occupation or business. An example of a poll tax is community
tax.
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Non-imprisonment for Non-Payment of Poll Tax

Application
Imposition of surcharge in the form of interest is allowed. The
interest is 2% per month or 24% per annum.
In case of falsification of community tax certificate, penalty of
imprisonment may be imposed.
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Origin of Revenue/Tariff Bills
• Basis: “All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.” [Sec. 24, Article
VI, (Legislative Department), 1987 Constitution]

General Rule: If it is an ordinary bill, it may originate either in the House of

Representatives or the Senate.
Exception: Sec. 24, Article VI, (Legislative Department), 1987 Constitution
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Tax Exemption of Religious, Charitable and Educational Entities
• Basis: “Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be
exempt from taxation.” [Sec. 28 (3), Article VI, (Legislative Department), 1987
Constitution]

Application
Coverage - Property tax only (real property tax)
Test of Exemption – Use of property and not ownership
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Tax Exemption of Religious, Charitable and Educational Entities

Application
Nature of Use – the real property must be actually, directly
and exclusively used for religious, charitable or
educational purposes. Solely is synonymous with exclusively.
The exemption also applies to incidental use. (e.g. a vegetable
garden adjacent to a convent)
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Grant of Authority to Local Government Units

• Basis: “Each local government unit shall have the power to create
its own sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local
governments. (Section 5, Article X, 1987 Constitution)”
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Tax Exemption Granted to Non-Stock Non-Profit Educational
Institutions
• Basis: “All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes and
duties. Upon the dissolution or cessation of the corporate existence of such institutions,
their assets shall be disposed of in the manner provided by law.” (Section 4 (3), Article
XIV, 1987 Constitution)
• Requirements
1. It is a non-stock non-profit educational institution
2. Income, whether from educational activities or not, is used actually, directly and exclusively for
educational purposes.
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Tax Exemption Granted to Non-Stock Non-Profit

Educational Institutions
Proprietary Educational Institutions – subject to 10% income tax. If
the gross income from unrelated trade, business or other activity
exceeds 50% of the total gross income derived by such educational
institutions, the 30% income tax shall be imposed on their taxable
income.
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Voting Requirement with respect to Tax Exemption
• Basis: “No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress. [Section 28
(4), Article VI (Legislative Department), 1987 Constitution]
Application
General Rule: Relative majority is required (Majority of those present
provided there is a quorum.)
Exception: Tax Exemption – Absolute majority or majority of all
members of Congress.
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Power of the President to Veto any Particular Item or Items in Revenue
or Tax Bills
• Basis: “The President shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object. [Section 27 (2), Article VI
(Legislative Department), 1987 Constitution]

Application
General Rule: If the President exercises his veto power, the entire bill is rejected.
Exception: Item veto is allowed in appropriation, revenue or tariff bill.
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Non-impairment of Jurisdiction of Supreme Court in Tax Cases
• Basis: “The Congress shall have the power to define, prescribe and apportion
the jurisdiction of the various courts but may not deprive the Supreme
Court of its jurisdiction over cases enumerated in Section 5 hereof. [Section
2, Article VIII (Judicial Department), 1987 Constitution]
• The Supreme Court has the following powers: Review, revise, reverse, modify
or affirm on appeal or certiorari as the law or the Rules of Court may
provide, final judgements and orders of lower courts in: All cases involving the
legality of any tax, impost, assessment or toll or any penalty imposed in
relation thereto. [Section 5 (2b), Article VIII (Judicial Department), 1987
Constitution]
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Non-Appropriation of Public Funds for the Benefit of any Church, Sect or System of
Religion
• Basis:
General Rule: “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,
Exception:
except when such priest, preacher, minister, or dignitary is assigned to the armed
forces, or to any penal institution, or government orphanage or leprosarium. [Section
29 (2), Article VI (Legislative Department), 1987 Constitution]
THE END