TAXATION

MODULE 3 - LIMITATION OF THE TAXING POWER

1. Inherent Limitations on the Taxing Power

a. Public Purpose
Pascual vs Secretary of Public Works and Communications
FACTS:
In 1953, Republic Act No. 920 was passed. This law appropriated P85, “for the
construction, reconstruction, repair, extension and improvement of the Pasig feeder
road terminals”. Wenceslao Pascual, then governor of Rizal, assailed the validity of
the law. He claimed that the appropriation was actually going to be used for private
use for the terminals sought to be improved were part of the Antonio Subdivision.
The said Subdivision is owned by Senator Jose Zulueta who was a member of the
same Senate that passed and approved the same RA. Pascual claimed that Zulueta
misrepresented in Congress the fact that he owns those terminals and that his
property would be unlawfully enriched at the expense of the taxpayers if the said
RA would be upheld. Pascual then prayed that the Secretary of Public Works and
Communications be restrained from releasing funds for such purpose. Zulueta, on
the other hand, perhaps as an afterthought, donated the said property to the City of
Pasig.

ISSUE:
Whether or not the appropriation is valid.

RULINGS:
No, the appropriation is void for being an appropriation for a private purpose. The
subsequent donation of the property to the government to make the property public
does not cure the constitutional defect. The fact that the law was passed when the
said property was still a private property cannot be ignored. “In accordance with the
rule that the taxing power must be exercised for public purposes only, money raised
by taxation can be expanded only for public purposes and not for the advantage of
private individuals.” Inasmuch as the land on which the projected feeder roads were
to be constructed belonged then to Zulueta, the result is that said appropriation
sought a private purpose, and, hence, was null and void.

b. Non-Delegability
Osmena vs Orbos
DISCUSSION ON NON-DELEGABILITY:
The SC finds that the provision authorizing the ERB to impose additional amounts on
petroleum products provides a sufficient standard. Furthermore it allows the ERB to
augment the resources of the Fund.

What is involved in this case is much like power of taxation as police power because
the overriding consideration is to enable the delegate to act with expediency in
carrying out the objecting of the law

Having a limit is contrary to what the law intends to aim which is to allow the ERB to
immediately respond.

For a valid delagation there must be: (1) complete and (2) it must have a fix
standard.

This Court thus finds no serious impediment to sustaining the validity of the
legislation; the express purpose for which the imposts are permitted and the
general objectives and purposes of the fund are readily discernible, and they
constitute a sufficient standard upon which the delegation of power may be
justified.

c. Situs of Taxation (Territoriality)

Philippine Guaranty Co vs CIR
FACTS:
Philippine Guaranty Co is a domestic insurance company it had reinsurance
contracts with foreign insurance companies not doing business in the Philippines.
The agreement was that Phil Guaranty would cede to the foreign reinsurers a porton
of the premiums on insurance in the Philippines and Phil Guaranty would also be
liable on an equivalent portion of the risks.
The foreign reinsurers would pay the amount of taxes on insurance premiums
The foreign reinsurers would administer their affairs
Conflicts would be arbitrated in Manila
The contract shall be construed by the laws of the Philippines
The premiums of 1953 and 1954 were excluded from Phil Guaranty's gross income
when it filed its income tax returns.
The CIR assessed Phil Guaranty on the reinsurance premiums on an amount of
P230k
Philippine Guaranty protested the assessment on the grounds that the premiums
were ceded to foreign companies not doing business in the Philippines hence is not
subject to witholding tax. The protest was denied hence an appeal was filed with the
CTA.
CTA rendered judgement in favor of CIR

RULINGS:
Phil Guaranty Co maintains that the premiums did not constitute income from the
Philippines because the foreign insurers was not in the Philippines.

The contracts shows that the activities that constituted the undertakings was
performed in the Philippines. Phil Guaranty had a register in Manila, the entries in
the register bound the foreign reinsurers. Taxes on premiums were payable to the
fireng reinsurers. The foreign reinsurers paid Phil Guaranty in consideration for
administration and management by Phil Guaranty of the affairs in the Philippines.
Disputes were settled in the Philippines. The contracts were signed in the
Philippines except for the Swiss company but still the contract had the intention to
follow Philippines law. There was a clear intention of the parties to subject
themselves to Philippine law.

Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philipines. Sources means is the activity or undertaking. Clearly
the undertaking of the foreign reinsurers took place in the Philippines.

The place of business should not be confused with their place of activity. An activity
may happen outside the place of business. Section 24 does not require the
foreigners to engage in the Philippines. It is fine if they are doing business activities
in the Philipines. What is controlling is the activity not the place of business.

Phil Guaranty contends that reinsurance premiums are not income from sources in
the Philippines because they were not mentioned in Section 37. This provision
however is not all-inclusive, it does not require that other kinds of income should
not be considered.

The power to tax is an attribute of sovereignty. It emanates from necessity. This is a

necessary burden to ensure safety and development for the enjoyment of the
citizenry. Since the reinsurance relies on the protection of the State such
reinsurance premiums should share the burden of preserving the State.

Reagan vs CIR
FACTS:
Petitioner, a citizen of the United States and an employee of Bendix Radio, Division
of BendixAviation Corporation, which provides technical assistance to the United
States Air Force, wasassigned at Clark Air Base, Philippines, on or about July 7, 1959
Nine (9) months thereafter and before his tour of duty expired, petitioner imported
on April 22,1960 a tax-free 1960 Cadillac car with accessories valued at
$6,443.83, including freight,insurance and other charges.
On July 11, 1960, more than two (2) months after the 1960 Cadillac car was
imported into thePhilippines, petitioner requested the Base Commander, Clark Air
Base, for a permit to sell the car,which was granted provided that the sale was
made to a member of the United States ArmedForces or a citizen of the United
States employed in the U.S. military bases in the Philippines.Wherefore, deed of sale
was executed in the Clark Air Base, Pampanga.
Petitioner’s contention said that in legal contemplation the sale was made
outside Philippineterritory and therefore beyond our jurisdictional power to
tax. He seeks that an amount ofP2,979.00 as the income tax paid by him be
refunded.

ISSUES:
Whether the deed of sale made on a foreign military base is excluded from tax

RULINGS:
No. In the light of the above, the first and crucial error imputed to the Court of
TaxAppeals to the effect that it should have held that the Clark Air Force is
foreign soil or territory forpurposes of income tax legislation is clearly without
support in law. As thus correctly viewed, petitioner'shope for the reversal of the
decision completely fades away. There is nothing in the Military
BasesAgreement that lends support to such an assertion. It has not become
foreign soil or territory. Thiscountry's jurisdictional rights therein, certainly not
excluding the power to tax, have been preserved. As tocertain tax matters, an
appropriate exemption was provided for.Nothing is better settled than that the
Philippines being independent and sovereign, its authority may beexercised over its
entire domain. There is no portion thereof that is beyond its power. Within its limits,
itsdecrees are supreme, its commands paramount. Its laws govern therein, and
everyone to whom it appliesmust submit to its terms. That is the extent of its
jurisdiction, both territorial and personal. Necessarily,likewise, it has to be exclusive.
If it were not thus, there is a diminution of its sovereignty

d. Exemption of Government From Taxes

SSS vs City of Bacolod
FACTS:
SSS had a building in Bacolod City. For failure to pay the 1968-1970 realty taxes, the
City of Bacolod levied the land and declared it forfeited in its favor.

SSS argued that they are a GOCC and therefore exempt from taxation.

Hence SSS filed a case.

RULINGS:
Section 29 of CA 326 provids exemption from taxation and the SC restricted the
scope of the exemption contemplated to government agencies, entities and
instrumentalities exercising governmental or sovereign functions.

The issue in this case is not whether government ministrant and proprietary
function is exempt but whether the properties in question which is undoubtedly
owned by the government are exempt from real taxes.

It seems clear that there is nothing in the section that provides a qualification on
whether that land is owned by the Philippines or not. When the exemption of lands
and buildings owned by the government intended was a broad application
regardless of whether it is governmental or proprietary purposes.

What is decisive is that the properties by the SSS although private are in fact owned
by the government of the Philippines. As such exempt from realty taxes.

e. International Comity
Sec 159 of Local Government Code
2. Constitutional Limitations on the Taxing Power
a. Due Process of Law (Sec 1, Art 3, 1987 Constitution)
Province of Abra vs Hernando
FACTS:
RULINGS:

b. Equal Protection of the Law (Sec 1, Article 3, 1987 Constitution)

Tiu vs CA
Sison vs Ancheta
Ormoc Sugar vs Treasurer of Ormoc City

c. Freedom of Speech and of the Press

American Bible Society vs City of Manila
Lladoc vs CIR

d. Non-Infringement of Religious Freedom (Sec 5, Article 3, 1987 Constitution)

e. Non-Impairment of Contracts (Sec 10, Article 3 and Sec 11, Article 12, 1987
Constitution)
Casanovas vs Hord
Meralco vs Prince of Laguna
Cagayan Electric Power and Light vs CIR

f. Non-Imprsonment for Debt or Non-Payment of Poll Tax (Sec 20, Article 3, 1987
Constitution)

g. Origin of Appropriation, Revenue and Tariff Bills

h. Uniformity, Equitability and Progressivity (Sec 28(1), Article 6, 1987 Constitution)

Villegas vs Hiu Chiong Tsai Pao Hao
Association of Customs Brokers vs Municipal Board of Manila

i. Non-Delegation of Legislative Power

Abakada Guro vs Ermita

j. Delegation of Legislative Authority to Fix Tariff Rates, Import and Export Quotas

k and l. Tax Exemption of Properties Actually, Directly and Exclusively Used for
Religious, Charitable and Educational Purposes
Abra Valley College vs Aquino
CIR vs CA and YMCA

m. Voting Requirements in Connection with the Legislative Grant of Tax Exemption

(Section 24 and Section 28(4), Article 6, 1987 Constitution)

n. Tax Exemption of Revenues and Assets, including Grants, Endowments, Donations

or Contributions to Educational Institutions (Sec 4(3) Article XIV, 1987 Constitution
and Sec 28(3), Article 6, 1987 Constitution)

3. Double Taxation and Tax Exemptions

a. Defined
Victorias Milling Co vs Municipality of Victorias
b. Elements (3)
Villanueva vs City of Iloilo
Procter and Gamble vs Municipality of Jagna
c. Kinds
d. Means Employed to Avoid Double Taxation (4)
e. Tax Avoidance, Tax Evasion and Tax Fraud
Delpher Trades Corp vs IAC
CIR vs Estate of Benigno Toda Jr.