LIMITATIONS ON THE EXERCISE OF TAXING POWER

a. Inherent Limitations
1. Enumerate the four (4) inherent limitations on taxation. Explain each item
briefly. (2009 Bar)

SUGGESTED ANSWER : The inherent limitations on the power to tax are:

1. Taxation is for a public purpose– The proceeds of the tax must be used (a) for
the support of the State or (b) for some recognized objective of the government
or to directly promote the welfare of the community.
2. Taxation is inherently legislative– Only the legislature has full discretion as to
the persons, property, occupation or business to be taxed provided these are all
within the State’s territorial jurisdiction. It can also finally determine the amount or
rate of tax, the kind of tax to be imposed and the method of collection. (1 Cooley
176184)
3. Taxation is territorial– Taxation may be exercised only within the territorial
jurisdiction of the taxing authority (61 Am. Jur. 88). Within the territorial
jurisdiction, the taxing authority may determine the place of taxation” or “tax
situs."
4. Taxation is subject to international comity– This is a limitation which is
founded on reciprocity designed to maintain a harmonious and productive
relationships among the various states. Under international comity, a state must
recognize the generally-accepted tenets of international law, among which are
the principles of sovereign equality among states and of their freedom from suit
without their consent, that limit the authority of a government to effectively
impose taxes on a sovereign state and its instrumentalities, as well as on its
property.

2. Q: An ordinance of Quezon City on the operation of market stalls and the

collection of market stall fees created a market committee “to formulate,
recommend and adopt subject to the ratification of the Sangguniang
Panglungsod regulations in the operations of the market stalls.” It also
entrusted the collection of the market stall fees to a private corporation.
Does the entrusting of the collection of the market stall fees destroy the
“public purpose” of the ordinance? (1989 Bar)

SUGGESTED ANSWER: Yes, because a portion of the fees collected would be

diverted as fees to private corporation. Entrusting of the collection of the market
stall fees violates the limitation that local government units shall in no case let to
any private person the collection of local taxes, fees, charges and other
impositions. [Sec. 130 (c), R.A. No. 7160, The Local Government Code] As a
result of this prohibition, public funds are therefore utilized for a private purpose,
which is to pay the private corporation for its services.
3. Guidant Resources Corporation, a corporation registered in Norway, has a
50 MW electric power plant in San Jose, Batangas. Aside from Guidant's
income from its power plant, which among the following is considered as
part of its income from sources within the Philippines? (2011 Bar)

a. Gains from the sale to an Ilocos Norte power plant of generators bought from
the United States.
b. Interests earned on its dollar deposits in a Philippine bank under the Expanded
Foreign Currency Deposit System.
c. Dividends from a two-year old Norwegian subsidiary with operations in Zambia
but derives 60% of its gross income from the Philippines.
d. Royalties from the use in Brazil of generator sets designed in the Philippines
by its engineers.

SUGGESTED ANSWER: (A) Gains from the sale to an Ilocos Norte power plant
of generators bought from the United States.

4. Triple Star, a domestic corporation, entered into a Management Service

Contract with Single Star, a non-resident foreign corporation with no
property in the Philippines. Under the contract, Single Star shall provide
managerial services for Triple Star’s Hongkong branch. All said services
shall be performed in Hongkong. Is the compensation for the services of
Single Star taxable as income from sources within the Philippines?
Explain. (2014 Bar Question)

SUGGESTED ANSWER : No. Pursuant to the case of Commissioner of Internal

Revenue v. Baier-Nickel (G.R. No. 153793, August 29, 2006), the factor which
determines the source of income for personal services is the place where the
services were actually rendered. Since Single Star, a non-resident foreign
corporation, will perform all the managerial services for Triple Star’s branch in
Hong Kong, all compensation income arising from the performance of such
services will be considered income from sources outside the Philippines, and
therefore not subject to Philippine income tax.

5. The Secretary of Finance, upon recommendation of the Commissioner of

Internal Revenue, issued a Revenue Regulation using gross income as the
tax base for corporations doing business in the Philippines. Is the Revenue
Regulation valid? (1994 Bar)

SUGGESTED ANSWER: The regulation establishing gross income as the tax

base for corporations doing business in the Philippines (domestic as well as
resident foreign) is not valid. This is no longer implementation of the law but
actually it constitutes legislation because among the powers that are exclusively
 within the legislative authority to tax is the power to determine -the amount of the
tax. (See 1 Cooley 176-184). Certainly, if the tax is limited to gross income
without deductions of these corporations, this is changing the amount of the tax
as said amount ultimately depends on the taxable base.

6. Taxes are assessed for the purpose of generating revenue to be used for
public needs. Taxation itself is the power by which the State raises revenue
to defray the expenses of government. A jurist said that a tax is what we
pay for civilization.

Justify your answer or choice briefly. In our jurisdiction, which of the

following statements may be erroneous. (2004 Bar)
a. Taxes are pecuniary in nature.
b. Taxes are enforced charges and contributions.
c. Taxes are imposed on persons and property within the territorial
jurisdiction of a State.
d.Taxes are levied by the executive branch of the government.
e. Taxes are assessed according to a reasonable rule of apportionment.

SUGGESTED ANSWER: d. Taxes are levied by the executive branch of

government. This statement is erroneous because levy refers to the act of
imposition by the legislature which is done through the enactment of a tax law.
Levy is an exercise of the power to tax which is exclusively legislative in nature
and character. Clearly, taxes are not levied by the executive branch of
government. (JVPC v. Albay, 186 SCRA 198 [1990])

7. Sure Arrival Airways (SAA) is a foreign corporation, organized under the

laws of the Republic of Nigeria. Its commercial airplanes do not operate
within Philippine territory, or service passengers embarking from
Philippine airports. The firm is represented in the Philippines by its general
agent, Narotel. SAA sells airplane tickets through Narotel, and these tickets
are serviced by SAA airplanes outside the Philippines. The total sales of
airplane tickets transacted by Narotel for SAA in 2012 amounted to
₱l0,000,000.00. The Commissioner of Internal Revenue (CIR) assessed SAA
deficiency income taxes at the rate of 30% on its taxable income, finding
that SAA's airline ticket sales constituted income derived from sources
within the Philippines. SAA filed a protest on the ground that the alleged
deficiency income taxes should be considered as income derived
exclusively from sources outside the Philippines since SAA only serviced
passengers outside Philippine territory. It, thus, asserted that the
imposition of such income taxes violated the principle of territoriality in
taxation. Is the theory of SAA tenable? Explain. (2016 Bar)
 SUGGESTED ANSWER: No. The activity which gives rise to the income is the
sale of ticket in the Philippines, hence, the income from sale of tickets is an
income derived from Philippine sources which is subject to the Philippine income
tax. Accordingly, there is no violation of the principle of territoriality in taxation (Air
Canada v. CIR, G.R. No. 169507, January 11, 2016, 778 SCRA 131).

8. ABCD Corporation (ABCD) is a domestic corporation with individual and

corporate shareholders who are residents of the United States. For the 2nd
quarter of 1983, these U.S.- based individual and corporate stockholders
received cash dividends from the corporation. The corresponding
withholding tax on dividend income — 30% for individual and 35% for
corporate non-resident stockholders — was deducted at source and
remitted to the BIR. On May 15,1984, ABCD filed with the Commissioner of
Internal Revenue a formal claim for refund, alleging that under the RP-US
Tax Treaty, the deduction withheld at source as tax on dividends earned
was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the
withholding tax due on the cash dividends given to its non-resident
stockholders in the U.S. the Commissioner denied the claim. On January
17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA)
reiterating its demand for refund. Is the contention of ABCD Corporation
correct? Why or why not? (2009 Bar)

SUGGESTED ANSWER: Yes. The provision of a treaty must take precedence

over and above the provisions of the local taxing statute consonant with the
principle of the international comity. Tax treaties are accepted limitations to the
power of taxation. Thus, the CTA should apply the treaty provision so that the
claim for refund representing the difference between the amount actually
withheld and paid to the BIR and the amount due and payable under the treaty,
should be granted (Hawaiian-Philippine Company v. CIR, CTA Case No. 3887,
May 31, 1988).

ANOTHER SUGGESTED ANSWER: The contention of ABCD Corporation that it

overpaid the withholding tax is correct provided it can establish: (1) The
existence of RP-US Tax Treaty is imposing a lower rate of tax of 25%; (2) the
said tax treaty is applicable to its case; and (3) its payment with the BIR of a tax
based on a higher rate of 30% and 35%, respectively.

9. Kenya International Airlines (KIA) is a foreign corporation, organized under

the laws of Kenya. It is not licensed to do business in the Philippines. Its
commercial airplanes do not operate within Philippine territory, or service
passengers embarking from Philippine airports. The firm is represented in
 the Philippines by its general agent, Philippine Airlines (PAL), a Philippine
corporation.

KIA sells airplane tickets through PAL, and these tickets are serviced by
KIA airplanes outside the Philippines. The total sales of airline tickets
transacted by PAL for KIA in 1999 amounted to P2,968,156.00. The
Commissioner of Internal Revenue assessed KIA deficiency income taxes
at the rate of 35% on its taxable income, finding that KIA’s airline ticket
sales constituted income derived from sources within the Philippines.

KIA filed a protest on the ground that the P2,968,156.00 should be

considered as income derived exclusively from sources outside the
Philippines since KIA only serviced passengers outside Philippine territory.
Is the position of KIA tenable? Reasons. (2009 Bar)

SUGGESTED ANSWER:

Yes. KIA is a non-resident foreign corporation which is taxable only on income

from within. The income of KIA as an international air carrier is derived from the
sale of transportation services. Compensation for services is an income from
within if the services are performed in the Philippines (Section 42(A)(3), NIRC).
The origination of the flight is determinative of the source of the income of the
international air carrier. If the flight originates in the Philippines to a foreign
destination, the income is an income from within; if it originates in a foreign
country to any destination, the income is from without. In the case at bar, no flight
will originate from the Philippines because KIA is not licensed to do business
here. Hence, the income is not taxable in the Philippines (Section 28(A)(3)(a),
NIRC).

b. Constitutional Limitations

10. Explain the requirement of uniformity as a limitation in the imposition

and/or collection of taxes.

SUGGESTED ANSWER:
Uniformity in the imposition and/or collection of taxes means that all taxable
articles, or kinds of property of the same class shall be taxed at the same rate.
The requirement of uniformity is complied with when the tax operates with the same
force and effect in every place where the subject of it is found. Different articles
may be taxed at different amounts provided that the rate is uniform on the same
class everywhere with all people at all times. Accordingly, singling out one
 particular class for taxation purposes does not infringe the requirement of
uniformity.

11. May a person be imprisoned for nonpayment of tax?

SUGGESTED ANSWER:
GR: A person may be imprisoned for nonpayment of internal revenue taxes, such
as income tax as well as other taxes that are not poll taxes if expressly provided
by law.
XPN: A person cannot be sent to prison for failure to pay the community tax.

12. Does the 20% Sales Discount for Senior Citizens and Persons with
Disabilities violates the constitutional right of equal protection clause?

SUGGESTED ANSWER:
NO. The equal protection clause is not infringed by legislation which applies only
to those falling within a specified class. If the groupings are characterized by
substantial distinctions that make real differences, one class may be treated an
regulated differently from another.

13. Does the Constitution prohibit regressive taxes?

SUGGESTED ANSWER:

NO, the Constitution does not really prohibit the impostion of regressive taxes.
What it simply provides is that Congress shall evolve a progressive
system of taxation.

14. What is the coverage of tax exemption?

SUGGESTED ANSWER:
It covers real property taxes only. Accordingly, a conveyance of such exempt
property can be subject to transfer taxes.
 15. Is Revenue Memorandum Circular No. 47-91 classifying copra as an
agricultural non-food product discriminatory and violative of the equal
protection clause?

SUGGESTED ANSWER:
NO. It is not violative and not discriminatory because there is a material or
substantial difference between coconut farmers and copra producers, on one
hand, and copra traders and dealers, on the other. The former produce and sell
copra, the latter merely sells copra. The Constitution does not forbid the
differential treatment of persons, so long as there is reasonable basis for classifying
them differently (Misamis Oriental Association of Coco Traders Inc. v. Secretary of
Finance, G.R. No. 108524, November 10, 1994).

16. An E.O. was issued pursuant to law, granting tax and duty incentives only
to businesses and residents within the “secured area” of the Subic
Economic Special Zone, and denying said incentives to those who live
within the zone but outside such “secured area:” Is the Constitutional right
to equal protection of the law violated by the Executive Order?

SUGGESTED ANSWER:
NO. Equal protection of the law clause is subject to reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be
germane to thepurpose of the law; (3) not be limited to existing conditions only, (4)
apply equally to all members of the same class. There are substantial differences
between big investors being enticed to the “secured area” and the business
operators outside that are in accord with the equal protection clause that does
not require territorial uniformity of laws.

17. Is the imposition of fixed license fee a prior restraint on the freedom of the
press and religious freedom?\

SUGGESTED ANSWER:
YES. As a license fee is fixed in the amount and unrelated to the receipts of the
taxpayer, the license fee, when applied to a religious sect, is actually being
imposed as a condition for the exercise of the sect’s right under the Constitution.

18. Is a municipal license tax on the sale of bibles and religious articles by a
non-stock, non-profit missionary organization at minimal profits valid?
 SUGGESTED ANSWER:
NO. Such imposition of license tax constitutes curtailment of religious freedom
and worship which is guaranteed by the Constitution.

19. Is VAT registration restrictive of religious and press freedom?

SUGGESTED ANSWER:
NO. The VAT registration fee, although fixed in amount, is not imposed for the
exercise of a privilege but only for defraying part of the cost of registration.

20. Is Double Taxation Prohibited in the Philippines?

SUGGESTED ANSWER:
No. There is no constitutional prohibition against double taxation. It is not favored
but permissible.

21. The Roman Catholic Church owns a 2 hectare lot in a town in Tarlac
province. The southern side and middle part are occupied by the church
and a convent, the eastern side by the school run by the church itself. The
south eastern side by some commercial establishments, while the rest of
the property, in particular, the northwestern side, is idle or unoccupied.
May the church claim tax exemption on the entire land?

SUGGESTED ANSWER:
No. The portion of the land occupied and used by the church, convent and school
run by the church are exempt from real property taxes while the portion of the
land occupied by commercial establishments and the portion, which is idle, are
subject to real property taxes. The “usage” of the property and not the “ownership”
is the determining factor whether or not the property is taxable.
22. Non-imprisonment of non-payment of poll tax.
Can a person be imprisoned for debt or non-payment of poll tax?

SUGGESTED ANSWER:
 “No person shall be imprisoned for debt or non-payment of a poll tax.” (Sec. 20,
Art. III, 1987 Constitution)
23. Non-impairment clause.
What is the non-impairment clause?

SUGGESTED ANSWER:
“No law impairing the obligation of contracts shall be passed.” (Sec.10, Art. III,
1987 Constitution)
24. . Tax exemption of non-stock, non-profit educational institutions.
Situation: Mugiwara Foundation is a non-stock, non-profit association duly
organized for religious, charitable and social welfare purposes. Last
January 3, 2000 it sold a portion of its lot used for religious purposes
and utilized the entire proceeds for the construction of a building to
house its free Day and Night Care Center for children of single
parents. In order to subsidize the expenses of the Day and Night
Care Center and to support its religious charitable and social welfare
projects, the Foundation release the 300 square meter area of the
second and third floors of the building for use as a boarding house.
The foundation also operates a canteen and a gift shop within the
premises, all the income from which is used actually, directly, and
exclusively for the purposes for which the Foundation was organized.
Question: Considering the constitutional provision granting tax exemption to
non-stock corporations such as those formed exclusively for
religious, charitable or social welfare purposes, explain the meaning
of the last paragraph of said Sec 30 of the 1997 Tax Code which
states that “Income of whatever kind and character of the foregoing
organization organizing from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the
disposition made of such income shall be subject to tax imposed
under this Code”

SUGGESTED ANSWER:
The exemption contemplated in the Constitution covers real estate tax
on real properties actually, directly and exclusively used for religious,
charitable or social welfare purposes. It does not cover exemption
from the imposition of the income tax which is within the context of
Section 30 of the Tax Code. As a rule, non-stock non-profit
corporations organized for religious, charitable or social welfare
 purposes are exempt from income tax on their income received by
them as much. However, if these religious charitable or social welfare
corporations derive income from their properties or any of their
activities conducted for profit, the income tax shall be imposed on said
items of income irrespective of their disposition. (Sec. 30, NIRC; CIR
v. YMCA, GR. No. 124043, 1998).
25. Flexible Tariff Clause
What is the flexible tariff clause?

SUGGESTED ANSWER:
The flexible tariff clause is a provision in the TCC which implements
the constitutionally delegated power to the Congress to further
delegate to the President of the Philippines, in the interest of national
economy, general welfare, and/or national security upon
recommendation of the NEDA:
a. Increase, reduce or remove existing protective rates of import
duty, provided that the increase should not be higher than 100% ad
valorem
b. Establish import quota or to ban imports of any commodity
c. To impose additional duty on all imports not exceeding 10% ad
volorem, whenever necessary.
26. Non-impairment of SC’s Jurisdiction
Can the Congress take away SC’s Jurisdition in tax cases?
No. The congress cannot take away from the Supreme Court the
power given to it by the Constitution as the final arbiter of tax cases.
The Supreme Court shall have the following powers:
a. Review, revise, reverse, modify, or affirm on appeal or certiorari,
as the law or the Rules of Court may provide, final judgments and
orders of the lower courts in:
i. All cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation
thereto. (Section 5(2)(b), Art. VIII, 1987 Constitution)
27. Taxation by LGUs
What is the legal basis of the grant of local taxing power under the Local
 Government Code?

SUGGESTED ANSWER:
Section 129. Power to Create Source of Revenue - Each local
government unit shall exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges subject to the provisions
herein, consistent with the basic policy of local autonomy. Such taxes,
fees, and charges shall accrue exclusively to the local government
units.
c. Taxpayer’s suit
28. What is a taxpayer’s suit and its requisites (for taxpayer’s to
have locus standi to sue)?

SUGGESTED ANSWER:
A taxpayer’s suit is a case where the act complained of directly involves the
illegal
disbursement of public funds derived from taxation.
As laid down in ANTI-GRAFT LEAGUE V. SAN JUAN [260 SCRA
251], the requisites of a taxpayer’s suit are:
1. Public funds are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some
irregularity is committed; and
2. Petitioner is directly affected by the alleged ultra vires act.
Hence, in LOZADA V. COMELEC [120 SCRA 337], it was held that
the petitioner’s action for mandamus to compel the COMELEC to
hold a special collection is not considered a taxpayer’s suit because
it does not involve public expenditure. Further, there is no allegation
that tax money is spent illegally. Also, in JOYA V. PCGG [225
SCRA 568], the Supreme Court held that such was not a taxpayer’s
suit because the case did not involve a misapplication of public
funds. In fact, the paintings and antique silverware alleged to have
been public properties were acquire from private sources and not
with public money.
d. The Doctrine of Judicial Non-interference
29. What is Doctrine of judicial stability or Judicial Non-interference?
SUGGESTED ANSWER:
The doctrine of judicial stability or non-interference in the regular
orders or judgments of a co-equal court is an elementary principle in
the administration of justice: no court can interfere by injunction with
the judgments or orders of another court of concurrent
jurisdiction having the power to grant the relief sought by the
injunction. The rationale for the rule is founded on the concept of
jurisdiction: a court that acquires jurisdiction over the case and renders
judgment therein has jurisdiction over its judgment, to the exclusion of
all other coordinate courts, for its execution and over all its incidents,
and to control, in furtherance of justice, the conduct of ministerial
officers acting in connection with this judgment.