A.

Inherent Limitations on the Taxing Power

a. Public Purpose of Taxes

 The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objects of
government or directly to promote the welfare of the community.

Test: whether the statute is designed to promote the public interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might incidentally serve the public. [Pascual v. Secretary of Public
Works (1960)]
 The protection and promotion of the sugar industry is a matter of public concern; the legislature may determine
within reasonable bounds what is necessary for its protection and expedient for its promotion. [Lutz v Araneta
(1955)]
 The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax
was to favor one industry over another. [Tio v. Videogram (1987)]

Tests in Determining Public Purpose:

(1) Duty Test - Whether the thing to be furthered by the appropriation of public revenue is something which is the duty
of the State as a government to provide.
(2) Promotion of General Welfare Test - Whether the proceeds of the tax will directly promote the welfare of the community
in equal measure.
(3) Character of the Direct Object of the Expenditure – it is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax and not the magnitude of the interests to be affected
nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited
by their promotion. Incidental advantage to the public or to the State, which results from the promotion of private
enterprises or business, does not justify their aid with public money. [Pascual v. Sec. of Public Works, G.R. No. L-
10405, December 29, 1960]

Pascual v Secretary of Public Works and Communications, et.al G.R. No. L-10405 December 29, 1950

"It is a general rule that the legislature is without power to appropriate public revenue for anything but a public
purpose. . . . It is the essential character of the direct object of the expenditure which must determine its validity as
justifying a tax, and not the magnitude of the interests to be affected nor the degree to which the general advantage of
the community, and thus the public welfare, may be ultimately benefited by their promotion. Incidental advantage to the
public or to the state, which results from the promotion of private interests and the prosperity of private enterprises
or business, does not justify their aid by the use of public money.
"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. The test of the constitutionality
of a statute requiring the use of public funds is whether the statute is designed to promote the public interests, as
opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally
serve the public.

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The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon events
occupying, or acts performed, subsequently thereto, unless the latter consist of an amendment of the organic law, removing,
with retrospective operation, the constitutional limitation infringed by said statute.

b. Non-Delegability of the Taxing Power

INHERENTLY LEGISLATIVE
Stated in another way, taxation may exceptionally be delegated, subject to such well-settled limitations as –
(1) The delegation shall not contravene any constitutional provision or the inherent limitations of taxation;
(2) The delegation is effected either by the Constitution or by validly enacted legislative measures or statute; and
(3) The delegated levy power, except when the delegation is by an express provision of the Constitution itself, should
only be in favor of the local legislative body of the local or municipal government concerned. [Vitug and Acosta]

General Rule: Delegata potestas non potest delegari. The power to tax is exclusively vested in the legislative body and
it may not be re-delegated.

Judge Cooley enunciates the doctrine in the following oft-quoted language: "One of the settled maxims in constitutional
law is that the power conferred upon the legislature to make laws cannot be delegated by that department to any other
body or authority. Where the sovereign power of the state has located the authority, there it must remain; and by the
constitutional agency alone the laws must be made until the Constitution itself is charged.” [People v. Vera, G.R. No. L-
45685, November 16, 1937]

Legislature has the power to determine the:

(1) nature (kind),
(2) object (purpose),
(3) extent (rate),
(4) coverage (subjects) and
(5) situs (place) of taxation.

Exceptions
(1) Delegation to local governments - This exception is in line with the general principle that the power to create
municipal corporations for purposes of local self-government carries with it, by necessary implication, the power
to confer the power to tax on such local governments.

This is logical for after all, municipal corporations are merely instrumentalities of the state for the better
administration of the government in respect to matters of local concern. [Pepsi-Cola Bottling Co. of the Phil. Inc.
v. Mun. of Tanauan, 69 SCRA 460, 1976]. Under the new Constitution, however, LGUs are now expressly given the power
to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations
as the Congress may provide which must be consistent with the basic policy of local autonomy. [Art X, Sec 5, 1987
Constitution]
(2) Delegation to the President
(a) to enter into Executive agreements, and
(b) To ratify treaties which grant tax exemption subject to Senate concurrence.

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 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. [Art. 6, Sec. 28 (2),
1987 Constitution]
(3) Delegation to administrative agencies - Limited to the administrative implementation that calls for some degree of
discretionary powers under sufficient standards expressed by law or implied from the policy and purposes of the
Act.
(a) There are certain aspects of the taxing process that are not legislative and they may, therefore, be vested in
an administrative body.
The powers which are not legislative include:
(1) the power to value property for purposes of taxation pursuant to fixed rules;
(2) the power to assess and collect the taxes; and
(3) the power to perform any of the innumerable details of computation, appraisement, and adjustment, and the
delegation of such details.
(b) The exercise of the above powers is really not an exception to the rule as no delegation of the strictly legislative
power to tax is involved.
(c) The powers which cannot be delegated include the determination of the subjects to be taxed, the purpose of the
tax, the amount or rate of the tax, the manner, means, and agencies of collection, and the prescribing of the necessary
rules with respect thereto.

TERRITORIAL
Rule: 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 the laws of another state and therein exercise and enjoyed. (51 Am.Jur.
87-88).
Reasons:
(1) Tax laws (and this is true of all laws) do not operate beyond a country’s territorial limits.
(2) Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for
which a tax is supposed to be a compensation.

Note: Where privity of relationship exists. - It does not mean, however, that a person outside of state is no longer
subject to its taxing powers. The fundamental basis of the right to tax is the capacity of the government to provide
benefits and protection to the object of the tax. A person may be taxed where there is between him and the taxing
state, a privity of the relationship justifying the levy. Thus, the citizen’s income may be taxed even if he resides
abroad as the personal (as distinguished from territorial) jurisdiction of his government over him remains. In this
case, the basis of the power to tax is not dependent on the source of the income nor upon the location of the property
nor upon the residence of the taxpayer but upon his relation as a citizen to the state. As such citizen, he is entitled,
wherever he may be, inside or outside of his country, to the protection of his government

Osmena v. Orbos, Etc., Etal, supra

With regard to the alleged undue delegation of legislative power, the Court finds that the provision conferring the
authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by which the
authority must be exercised. In addition to the general policy of the law to protect the local consumer by stabilizing
and subsidizing domestic pump rates, § 8(c) of P.D. 1956 expressly authorizes the ERB to impose additional amounts to
augment the resources of the "Fund.

3
For a valid delegation of power, it is essential that the law delegating the power must be
(1) complete in itself, that is it must set forth the policy to be executed by the delegate and
(2) it must fix a standard—limits of which are sufficiently determinate or determinable—to which the delegate must conform.

c. Situs of Taxation

Situs of taxation literally means the place of taxation. 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. Within the territorial jurisdiction, the taxing authority may
determine the situs.
Factors that Determine Situs:
(1) Nature of the tax;
(2) Subject matter of the tax (person, property, act or activity);
(3) Possible protection and benefit that may accrue both to the government and the taxpayer;
(4) Citizenship of the taxpayer;
(5) Residence of the taxpayer;
(6) Source of income.

Philippine Guaranty Co., Inc. V. Commissioner of Internal Revenue, L-22074

Where the reinsurance contracts show that the activities that constituted the undertaking to reinsure a domestic insurer
against losses arising from the original insurances in the Philippines were performed in the Philippines, the reinsurance
premiums are considered as coming from sources within the Philippines and are subject to Philippine Income Tax.

Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting
its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is
controlling, therefore, is not the place of business but the place of activity that created an income

Reagan v. Commissioner of Internal Revenue, G.R. No. L-26379, December 27, 1969

The Clark Air Force Base is not a foreign soil or territory for purposes of income tax legislation. There is nothing in
the Military Bases Agreement that lends support to such assertion, It has not become foreign soil or territory. The
Philippine's jurisdictional rights therein, certainly not excluding the power to tax, have been preserved. As to certain
tax matters, an appropriate exemption was provided for.

The exemption clause in the Military Bases Agreement by virtue of which a "national of the United States serving in or
employed in the Philippines in connection with the construction, maintenance, operation or defense of the bases and
residing in the Philippines only by reason of such employment" is not to be taxed on his income "unless derived from
Philippine sources or sources other than the United States sources," does not apply to income derived in the bases which
are clearly derived in the Philippines. For income tax purposes, the Clark Air Force Base is not outside Philippine
territory.

d. Exemption of Government from Taxes

If the taxing authority is the National Government:

4
General Rule: Agencies and instrumentalities of the government are exempt from tax.
Note: Unless otherwise provided by law, the exemption applies only to government entities through which the government
immediately and directly exercises its sovereign powers. With respect to government-owned or controlled corporations
performing proprietary (not governmental) functions, they are generally subject to tax in the absence of tax exemption
provisions in their charters or the law creating them.

Reasons for the exemption:

(1) 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, the government would be taxing itself to raise money to pay over for itself.
(2) This immunity also rests upon fundamental principles of government, being necessary in order that the functions of
government shall not be unduly impeded. (1 Cooley 263).
(3) The practical effect of an exemption running to the benefit of the government is merely to reduce the amount of money
that has to be handled by the government in the course of its operations: For these reasons, provisions granting exemptions
to government agencies may be construed liberally in favor of non-tax liability of such agencies. [Maceda v. Macaraig,
Jr., 197 SCRA 771, 1991]

Exception: When it chooses to tax itself. Nothing can prevent Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions may be subject to tax. [Mactan Cebu Airport v Marcos, G.R.
No. 120082 September 11, 1996] There is no constitutional prohibition against the government taxing itself. [Coll. v.
Bisaya Land Transportation, 105 Phil. 338, 1959].

If the taxing authority is the local government unit: RA 7160 expressly prohibits LGUs from levying tax on the National
Government, its agencies and instrumentalities and other LGUs. [Local Government Code, Sec. 133 (o)]

Social Security System vs. City of Bacolod et.al., G.R. No. L-35726, July 21, 1982

What is decisive is that the properties possessed by the SSS, albeit devoted to private or proprietary purpose, are in
fact owned by the government of the Philippines. As such they are exempt from realty taxes. It is axiomatic that when
public property is involved, exemption is the rule and taxation, the
exception. In connection with the issue at hand, it would not be amiss to state that Presidential Decree No. 24, which
amended the Social Security Act of 1954, has already removed all doubts as to the exemption of the SSS from taxation.

e. International Comity

International Comity
Comity - respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a
foreign state or government may not be the subject of taxation by another state.
Reasons:
(1) In par in parem non habet imperium. As between equals there is no sovereign (Doctrine of Sovereign Equality among
states under international law). One state cannot exercise its sovereign powers over another.)
(2) In international law, a foreign government may not be sued without its consent→ useless to impose a tax which could
not be collected.

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(3) Usage among states that when a foreign sovereign enters the territorial jurisdiction of another, there is an implied
understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the
other.
(4) Rule in international law that a foreign government may not be sued without its consent so that it is useless to
assess the tax anyway since it cannot be collected.

Section 159, Local Government Code

Section 159. Exemptions. - The following are exempt from the community tax:

(1) Diplomatic and consular representatives; and

(2) Transient visitors when their stay in the Philippines does not exceed three (3) months.

B. Constitutional Limitations on Taxing Power

a. Due Process of Law

Art III, Sec 1, 1987 Constitution – No person shall be deprived of life, liberty, or property without due process of law,
nor shall any person be denied the equal protection of the laws.
(1) Substantive Due Process – An act is done under the authority of a valid law or the Constitution itself.
(2) Procedural Due Process – An act is done after compliance with fair and reasonable methods or procedure prescribed by
law.

Due Process in Taxation requirements:

(1) public purpose
(2) imposed within taxing authority’s territorial jurisdiction
(3) assessment or collection is not arbitrary or oppressive

The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution,
as where it can be shown to amount to the confiscation of property. [Sison v. Ancheta, 130 SCRA 654,1984]
Instances of violations of the due process clause:
(1) If the tax amounts to confiscation of property;
(2) If the subject of confiscation is outside the jurisdiction of the taxing authority;
(3) If the tax is imposed for a purpose other than a public purpose;
(4) If the law which is applied retroactively imposes just and oppressive taxes.
(5) If the law violates the inherent limitations on taxation.

Province of Abra vs. Hernando, G.R. NO. L 49336, August 31, 1981

Province of Abra is therefore fully justified in invoking the protection of procedural due process. If there is any case
where proof is necessary to demonstrate that there is compliance with the constitutional provision that allows an
exemption, this is it. Instead, respondent Judge accepted at its face the allegation of private respondent. All that was
alleged in the petition for declaratory relief filed by private respondents, after mentioning certain parcels of land
owned by it, are that they are used "actually, directly and exclusively" as sources of support of the parish priest and
his helpers and also of private respondent Bishop. In the motion to dismiss filed on behalf of petitioner Province of

6
Abra, the objection was based primarily on the lack of jurisdiction, as the validity of a tax assessment may be questioned
before the Local Board of Assessment Appeals and not with a court. There was also mention of a lack of a cause of action,
but only because, in its view, declaratory relief is not proper, as there had been breach or violation of the right of
government to assess and collect taxes on such property. It clearly appears, therefore, that in failing to accord a
hearing to petitioner Province of Abra and deciding the case immediately in favor of private respondent, respondent Judge
failed to abide by the constitutional command of procedural due process.

b. Equal Protection of the Law

Art III, Sec 1, 1987 Constitution - No person shall be deprived of life, liberty, or property without due process of law,
nor shall any person be denied the equal protection of the laws.

All persons subject to legislation shall be treated alike under similar circumstances and conditions both in the privileges
conferred and liabilities imposed. [1 Cooley 824-825; See Sison v. Ancheta,1984]
The doctrine does not require that persons or properties different in fact be treated in laws as though they were the
same. Indeed, to treat them the same or alike may offend the Constitution. What the Constitution prohibits is class
legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for
so doing, Congress may, therefore, group the persons or properties to be taxed and it is sufficient “if all of the same
class are subject to the same rate and the tax is administered impartially upon them.” [1 Cooley 608].
The equal protection clause is subject to reasonable classification.

Tiu v Court of Appeals, G.R. No. 127410, January 20, 1999

The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable classification. If
the groupings are characterized by substantial distinctions that make real differences, one class may be treated and
regulated differently from another. The classification must also be germane to the purpose of the law and must apply to
all those belonging to the same class.

Classification is valid as long as:

(1) classification rests on substantial distinctions which make real differences,
(2) classification is germane to achieve the legislative purpose,
(3) the law applies, all things being equal, to both present and future conditions, and
(4) the classification applies equally well to all those belonging to the same class.

Sison vs. Ancheta, G R. No.L-59431, July 25, 1984

It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support
in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be
a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise
of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that
where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a
retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds.

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Uniformity in taxation quite similar to the standard of equal protection.

Taxpayers may be classified into different categories where it rests on real differences.—

Ormoc Sugar vs. Treasurer of Ormoc City, G.R. No. L-23794, February 17, 1968

When the taxing ordinance was enacted, Ormoc Sugar Co., Inc. was the only sugar central in the City. A reasonable
classification should be in terms applicable to future conditions as well. The taxing ordinance should not be singular
and exclusive as to exclude any subsequently established sugar central from the coverage of the tax. A subsequently
established sugar central cannot be subject to tax because the ordinance expressly points to Ormoc Sugar Company, Inc. as
the entity to be levied upon.

c. Freedom of Speech and of the Press

American Bible Society v. City of Manila, April 30, 1957

The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the
right to disseminate religious information. Any restraints of such right can only be justified like other restraints of
freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has
the right to prevent"

It is true the price asked for the religious articles was in some instances a little bit higher than the actual cost of
the same, but this cannot mean that plaintiff was engaged in the business or occupation of selling said "merchandise" for
profit. For this reasons, the provisions of City Ordinance No. 2529, as amended, which requires the payment of license
fee for conducting the business of general merchandise, cannot be applied to plaintiff society, for in doing so, it would
impair its free exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination of
religious beliefs.

It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if applied to plaintiff
Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not applicable to plaintiff-appellant and
defendant-appellee is powerless to license or tax the business of plaintiff Society involved herein for, as stated before,
it would impair plaintiff's right to the free exercise and enjoyment of its religious profession and worship, as well as
its rights of dissemination of religious beliefs, We find that Ordinance No. 3000, as amended is also inapplicable to
said business, trade or occupation of the plaintiff.

-Lladoc vs. Commissioner of Internal Revenue, June 16, 1965

Section 22(3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches and parsonages
or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious purposes. The
exemption is only from the payment of taxes assessed on such properties enumerated, as property taxes, as contra-
distinguished from excise taxes.

8
A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the
imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the
Constitution.

d. Non-Infringement of Religious Freedom

Art III, Sec 5, 1987 Constitution – No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof. (non-establishment clause)

The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever
be allowed. (free exercise clause)
No religious test shall be required for the exercise of civil or political rights.

The free exercise clause is the basis of tax exemptions.

The imposition of license fees on the distribution and sale of bibles and other religious literature by a non-stock, non-
profit missionary organization not for purposes of profit amounts to a condition or permit for the exercise of their
right, thus violating the constitutional guarantee of the free exercise and enjoyment of religious profession and worship
which carries with it the right to disseminate religious beliefs and information. [American Bible Society v. City of
Manila, L-9637 April 30, 1957]It is actually in the nature of a condition or permit for the exercise of the right. This
is different from a tax in the income of one who engages in religious activities or a tax on property used or employed in
connection with those activities. It is one thing to impose a tax on the income or property of a preacher. It is quite
another thing to exact a tax for the privilege of delivering a sermon. [American Bible Society v. City of Manila]
The Constitution, however, does not prohibit imposing a generally applicable tax on the sale of religious materials by a
religious organization. [Tolentino v. Secretary of Finance, 235 SCRA 630,1994].

e. Non-Impairment of Contracts

Art III, Sec 10, 1987 Constitution – No law impairing the obligation of contracts shall be passed.

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate,
or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress
when the common good so requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to
their proportionate share in its capital, and all the executive and managing officers of such corporation or association
must be citizens of the Philippines.

The Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only
where a tax exemption has been granted for a valid consideration. [Tolentino v. Secretary of Finance (1994)]

-Casanovas v. Hord, 8 Phil. 125, March 22, 1907

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Section 134 of the Internal Revenue Law of 1904 (Act No. 1189) is void because it impairs the obligation of the contracts
contained in the concessions of mines made by the Spanish Government.

-Meralco v. Province of Laguna, G.R. No. 131359

A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution.
Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions,
is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such
privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.

While the Court has referred to tax exemptions contained in special franchises as being in the nature of contracts and a
part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being strictly
contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of
the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained
in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in
its private capacity, sheds its cloak of authority and waives its governmental immunity. Tax exemptions of this kind may
not be revoked without impairing the obligations of contracts. However, they are not to be confused with tax exemptions
granted under franchises.

-Cagayan Electric Power and Light Co. V. Commissioner of Internal Revenue

The Tax Court acted correctly in holding that the exemption was restored by the subsequent enactment on August 4, 1969 of
Republic Act No. 6020 which reenacted the said tax exemption. Hence, the petitioner is liable only for the income tax for
the period from January 1 to August 3, 1969 when its tax exemption was modified by Republic Act No. 5431.

However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The Commissioner at the
outset was not certain as to petitioner’s income tax liability. It had reason not to pay income tax because of the tax
exemption in its franchise. For this reason, it should be liable only for tax proper and should not be held liable for
the surcharge and interest.

f. Non-Imprisonment for Debt or Non-Payment of Poll Tax

Art III, Sec 20, 1987 Constitution- No person shall be imprisoned for debt or non-payment of a poll tax.

g. Origin of Appropriation, Revenue and Tariff Bills

h. Uniformity, Equitability and Progressivity of Taxation

Uniformity and equality of taxation

Art VI, Sec 28(1), 1987 Constitution- The rule of taxation shall be uniform and equitable. Congress shall evolve a
progressive system of taxation.

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  Uniformity- All taxable articles or properties of the same class shall be taxed at the same rate. [City of Baguio
v. de Leon, 25 SCRA 938]. (1) Uniformity of operation throughout tax unit - The rule requires the uniform
application and operation, without discrimination, of the tax in every place where the subject of it is found.
This means, for example, that a tax for a national purpose must be uniform and equal throughout the country and a
tax for a province, city, municipality, or barangay must be uniform and equal throughout the province, city,
municipality or barangay. (2) Equality in burden – Uniformity implies equality in burden, not equality in amount
or equality in its strict and literal meaning. The reason is simple enough. If legislation imposes a single tax
upon all persons, properties, or transactions, an inequality would obviously result considering that not all
persons, properties, and transactions are identical or similarly situated. Neither does uniformity demand that
taxes shall be proportional to the relative value or amount of the subject thereof. Taxes may be progressive.
 Equity –
1) Uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under
the Constitution must be equitable. “Equitable” means fair, just, reasonable and proportionate to the taxpayer’s
ability to pay. Taxation may be uniform but inequitable where the amount of the tax imposed is excessive or
unreasonable.
(2) The constitutional requirement of equity in taxation also implies an approach which employees a reasonable
classification of the entities or individuals who are to be affected by a tax. Where the “tax differentiation is
not based on material or substantial differences,” the guarantee of equal protection of the laws and the uniformity
rule will likewise be infringed.
 Taxation does not require identity or equality under all circumstances, or negate the authority to classify the
objects of taxation. –Classification to be valid, must, be reasonable and this requirement is not deemed satisfied
unless:
(a) it is based upon substantial distinctions which make real differences;
(b) these are germane to the purpose of the legislation or ordinance;
(c) the classification applies, not only to present conditions, but, also, to future conditions substantially
identical to those of the present; and
(d) the classification applies equally to all those who belong to the same class. [Pepsi-Cola v. Butuan City, 24
SCRA 789]
 The progressive system of taxation would place stress on direct rather than indirect taxes, on non-essentiality
rather than essentiality to the taxpayer of the object of taxation, or on the taxpayer’s ability to pay. Example
is that individual income tax system that imposes rates progressing upwards as the tax base (taxpayer’s taxable
income) increases. A progressive tax, however, must not be confused with a progressive system of taxation.

 While equal protection refers more to like treatment of persons in like circumstances, uniformity and equity refer
to the proper relative treatment for tax purposes

Villegas vs. Hiu Chiong Tsai Pao Hao, G.R. No. L-29646, November 10, 1978

The P50.00 fee is unreasonable not only because it is excessive but because it fails to consider valid substantial
differences in situation among individual aliens who are required to pay it. Although the equal protection clause of the
Constitution does not forbid classification, it is imperative that the classification should be based on real and
substantial differences having a reasonable relation to the subject of the particular legislation. The same amount of

11
P50.00 is being collected from every employed alien whether he is casual or permanent, part time or full time or whether
he is a lowly employee or a highly paid executive

Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion. It
has been held that where an ordinance of a municipality fails to state any policy or to set up any standard to guide or
limit the mayor's action, expresses no purpose to be attained by requiring a permit, enumerates no conditions for its
grant or refusal, and entirely lacks standard, thus conferring upon the Mayor arbitrary and unrestricted power to grant
or deny the issuance of building permits, such ordinance is invalid, being an undefined and unlimited delegation of power
to allow or prevent an activity per se lawful.

Association of Customs Brokers, Inc. Vs. Municipal Board of Manila et. Al

It is also our opinion that the ordinance infringes the rule of the uniformity of taxation ordained by our Constitution.
Note that the ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It does not distinguish
between a motor vehicle for hire and one which is purely for private use. Neither does it distinguish between a motor
vehicle registered in the City of Manila and one registered in another place but occasionally comes to Manila and uses
its streets and public highways. The distinction is important if we note that the ordinance intends to burden with the
tax only those registered in the City of Manila as may be inferred from the word "operating" used therein. The word
"operating" denotes a connotation which is akin to a registration, for under the Motor Vehicle Law no motor vehicle can
be operated without previous payment of the registration fees. There is no pretense that the ordinance equally applies to
motor vehicles who come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute
in no small degree to the deterioration of the streets and public highway. The fact that they are benefited by their use
they should also be made to share the corresponding burden. And yet such is not the case. This is an inequality which we
find in the ordinance, and which renders it offensive to the Constitution.

i. Non-delegation of legislative power

-Abakada Guro Party List v. Ermita, G.R.168056, October 30, 1995

, the general rule barring delegation of legislative powers is subject to the following recognized limitations or
exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution; (2) Delegation
of emergency powers to the President under Section 23 (2) of Article VI of the Constitution; (3) Delegation to the people
at large; (4) Delegation to local governments; and (5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if
the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the
delegate and (b) fixes a standard the limits of which are sufficiently determinate and determinable to which the delegate
must conform in the performance of his functions.

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts
upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire

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operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. No discretion
would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in
the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion. Where the law is clear and unambiguous, it must be taken to
mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed. Thus, it is the
ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified
by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall,
the exercise of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate
when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening
of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other
than the legislature itself.

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

Grant by Congress of authority to the President to impose tariff rates

Delegation of Tariff powers to the President under the flexible tariff clause [Art VI, Sec 28(2)], 1987 Constitution],
which authorizes the President to modify import duties. [Sec. 401, Tariff and Customs Code]

k. Tax Exemption of Properties Actually, Directly and Exclusively Used for Religious, Charitable and Educational Purposes

Prohibition against taxation of religious, charitable entities, and educational entities

Art VI, Sec 28(3), 1987 Constitution:
(a) Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and
all lands, buildings, and improvements,
(b) actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.
(c) The tax exemption under this constitutional provision covers property taxes only and not other taxes [Lladoc v.
Commissioner, 14 SCRA 292, 1965].

In general, special assessments are not covered by the exemption because by nature they are not classified as taxes.
[Apostolic Prefect v. City Treasurer of Baguio]

To be entitled to the exemption, the petitioner must prove that:

(1) it is a charitable institution
(2) its real properties are actually, directly and exclusively used for charitable purposes.
Revenue or income from trade, business or other activity, the conduct of which is not related to the exercise or performance
of religious, educational and charitable purposes or functions shall be subject to internal revenue taxes when the same
is not actually, directly or exclusively used for the intended purposes. [BIR Ruling 046-2000]

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Test: whether an enterprise is charitable or not: whether it exists to carry out a purpose recognized in law as charitable
or whether it is maintained for gain, profit, or private advantage.

A charitable institution does not lose its character as such and its exemption from taxes simply because it derives income
from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no
money inures to the private benefit of the persons managing or operating the institution.

“Exclusive" - possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; "Exclusively"
- "in a manner to exclude; as enjoying a privilege exclusively.”
If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is
subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. [Lung Center of the
Philippines v. Quezon City (2004)]

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Note: Lung Center did not necessarily overturn the case of Abra Valley College v. Aquino (1988). Lung Center just provided
a stricter interpretation. In Abra Valley, the court held: The primary use of the school lot and building is the basic
and controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof. Under the
1935 Constitution, the trial court correctly held that the school building as well as the lot where it is built, should
be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes
(incidental to its educational purpose), but because the first floor thereof is being used for commercial purposes.
However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned
to the school involved.

Abra Valley College y. Aquino, June 15, 1988

It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase
"exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot
for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of
the main building in the case at bar for residential purposes of the Director and his family, may find justification under
the concept of incidental use, which is complimentary to the main or primary purpose—educational, the lease of the first
floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to
the purpose of education.

Commissioner of Internal Revenue v. Court of Tax Appeals and YMCA

The term educational institution or institution of learning has acquired a well-known technical meaning, of which the
members of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such term refers to
schools. The school system is synonymous with formal education, which refers to the hierarchically structured and
chronological graded learnings organized and provided by the formal school system and for which certification is required
in order for the learner to progress through the grades or move to the higher levels. The Court has examined the Amended
Articles of Incorporation and By-Laws of the YMCA, but found nothing in them that even hints that it is a school or an
educational institution.

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

SECTION 24. 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.

SECTION 28. (4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of the Congress.

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n. Tax Exemption of Revenues and Assets, including Grants Endowments, Donations orContributions to Educational Institutions

Art. XIV, Sec. 4, 1987 Constitution

xxx
(3) 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.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions
subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment.
(4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly,
and exclusively for educational purposes shall be exempt from tax.

This provision covers only non-stock, non-profit educational institutions

The exemption covers income, property, and donor’s taxes, custom duties, and other taxes imposed by either or both the
national government or political subdivisions on all revenues, assets, property or donations, used actually, directly and
exclusively for educational purposes. (In the case of religious and charitable entities and non-profit cemeteries, the
exemption is limited to property tax.)
The exemption does not cover revenues derived from, or assets used in, unrelated activities or enterprise.
Similar tax exemptions may be extended to proprietary (for profit) educational institutions by law subject to such
limitations as it may provide, including restrictions on dividends and provisions for reinvestment. The restrictions are
designed to insure that the tax-exemption benefits are used for educational purposes.
Lands, buildings, and improvements actually, directly and exclusively used for educational purposes are exempt from
property tax [Sec. 28[3], Art. VI, 1987 Constitution], whether the educational institution is proprietary or non-profit.

Art. VI Sec.28, 1987 Constitution

xxx
(4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the
Congress.

Basis: The inherent power of the state to impose taxes carries with it the power to grant tax exemptions.
Exemptions may be created by:
(1) the Constitution or
(2) statute subject to constitutional limitations

Vote required for the grant of exemption: Absolute majority of the members of Congress (at least ½ + 1 of ALL the members
voting separately)
Vote required for withdrawal of such grant of exemption: Relative majority is sufficient (majority of the quorum).
The provision guaranteeing equal protection of the laws and that mandating the rule of taxation shall be uniform and
equitable likewise limit, although not expressly, the legislative power to grant tax exemption.
Grants in the nature of tax exemptions:
(1) Tax amnesties
(2) Tax condonations
(3) Tax refunds
Note:
(1) Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such
terms and conditions as they may deem necessary. [Sec. 192, LGC]

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(2) The President of the Philippines may, when public interest so requires, condone or reduce the real property tax and
interest for any year in any province or city or a municipality within the Metropolitan Manila Area. [Sec. 277, LGC]

C. Double Taxation and Tax Exemptions

a. Double Taxation Defined

DOUBLE TAXATON
Means taxing twice the same taxpayer for the same tax period upon the same thing or activity, when it should be taxed but
once, for the same purpose and with the same kind of character of tax.

Victorias Milling Co., Inc. V. Municipality of Victorias, G.R. NO. L-21183

Double taxation has been otherwise described as "direct duplicate taxation." For double taxation to exist, "the same
property must be taxed twice, when it should be taxed but once." Double taxation has also been "defined as taxing the
same person twice by the same jurisdiction for the same thing."

With the foregoing precepts in mind, we find no difficulty in saying that plaintiff's argument on double taxation does
not inspire assent. First. The two taxes cover two different objects. Section 1 of the ordinance taxes a person operating
sugar centrals or engaged in the manufacture of centrifugal sugar. While under Section 2, those taxed are the operators
of sugar refinery mills. One occupation or business is different from the other. Second. The disputed taxes are imposed
on occupation or business. Both taxes are not on sugar. The amount thereof depends on the annual output capacity of the
mills concerned, regardless of the actual sugar milled. Plaintiff's argument perhaps could make out a point if the object
of taxation here were the sugar it produces, not the business of producing it.

b. Elements of Double Taxation

a. Subject matter is taxed twice when it should be taxed only once

b. Both taxes are levied for the same purpose
c. Imposed by the same taxing authority within the same jurisdiction, during the same taxing period and covering the same
kind of tax

-Villanueva v. City of lloilo, G.R. No. L-26521, December 28, 1968

In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed
twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for the
same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district,
during the same taxing period, and they must be the same kind or character of tax."23 It has been shown that a real
estate tax and the tenement tax imposed by the ordinance, although imposed by the sametaxing authority, are not of
the same kind or character.

At all events, there is no constitutional prohibition against double taxation in the Philippines. 24 It is something not
favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the
requirement that taxes must be uniform."

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Procter and Gamble Philippines Manufacturing Corp. V. Municipality of Jagna, G.R. No. L-24265, December 28, 1979

Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question does not amount to
double taxation. For double taxation to exist, the same property must be taxed twice, when it should be taxed but once.
Double taxation has also been defined as taxing the same person twice by the same jurisdiction for the same thing. 9
Surely, a tax on plaintiff's products is different from a tax on the privilege of storing copra in a bodega situated
within the territorial boundary of defendant municipality.

c. Kinds of Double Taxation

1. Direct Double Taxation

2. Indirect Double Taxation

3. International Juridical Double Taxation

d. Means Employed to Avoid Double Taxation

1. Tax Credits

amounts subtracted from the computed tax in order to arrive at taxes payable.

2. Tax Deductions

Deductions are items or amounts which the law allows to be deducted from the gross of income of a taxpayer in order to
arrive at taxable income.
In general, deductions or allowable deductions are business expenses and losses incurred which the law allows to reduce
gross business income to arrive at net income subject to tax. [Sec. 65, Rev. Reg. No. 2].
Deductions are in the nature of an exemption from taxation; they are strictly construed against the claimant, who must
point to a specific provision allowing them and who has the burden of proving that they falls within the purview of such

18
provision. Thus, all deductions must be substantiated, except when the law dispenses with the records, documents or
receipts to support the deductions.
If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of the exemption by
clear legislative intent [Commissioner of Customs v. Philippine Acetylene Co., G.R. No. L-22443 May 29, 1971]

However, if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear
legislative intent, the rule on strict construction will not apply. [Commissioner v. Anoldus Caprentry Shop, G.R. No.
71122 March 25, 1988]

The purpose of deductions from gross income is to provide the taxpayer a just and reasonable tax amount as the basis of
income tax. It is because many taxpayers spend adequate expenditures in order to obtain a legitimate income.

3. Tax Exemptions

The grant of immunity to particular persons or corporations or to person or corporations of a particular class from a tax
which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity
or privilege; it is freedom from a financial charge or burden to which others are subjected. It is strictly construed
against the taxpayer.
Taxation is the rule; exemption is the exception. He who claims exemption must be able to justify his claim or right
thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to be misinterpreted.” If not
expressly mentioned in the law, it must at least be within its purview by clear legislative intent.

4. Tax Treaties

c. Tax Avoidance, Tax Evasion and Tax Fraud

Tax avoidance (Tax Minimization)

The exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or
income in order to avoid or reduce tax liability. It is politely called “tax minimization” and is not punishable by law.
Example: A person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental
taxation or to lower his tax bracket for a taxable year.

Transformation
TRANSFORMATION – method of escape in taxation whereby the manufacturer or producer upon whom the tax has been imposed
pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of
products at a lower cost. The taxpayer escapes by a transformation of the tax into a gain through the medium of production.
Tax evasion (Tax Dodging)

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Tax Evasion - is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is
also known as “tax dodging.” It is punishable by law.
Example: Deliberate failure to report a taxable income or property; deliberate reduction of income that has been received.
Elements of Tax Evasion
(a) The end to be achieved. Example: the payment of less than that known by the taxpayer to be legally due, or in paying
no tax when such is due.
(b) An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate and not accidental.”
(c) A course of action (or failure of action) which is unlawful.
Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of
the case. Thus:
(1) The failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for
two consecutive years has been held as an indication of his fraudulent intent to cheat the government of its due taxes.
[Republic v. Gonzales, 13 SCRA 633, 1965]
(2) The substantial underdeclaration of income in the income tax returns of the taxpayer for four (4) consecutive years
coupled with his intentional overstatement of deductions justifies the finding of fraud. [Perez v. CTA and Collector, 103
Phil. 1167, 1958]

Delpher Trades Corporation v. Intermediate Appellate Court et. al., G.R. No. L 69259, January 26, 1988

The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot be doubted."

-Commissioner of Internal Revenue vs. Estate of Benigno Toda Jr., G.R. No. 147188, September 14, 2004

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is
the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at
arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it
usually subjects the taxpayer to further or additional civil or criminal liabilities.

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying
state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and (3) a course
of action or failure of action which is unlawful.

All these factors are present in the instant case.

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