LIMITATIONS ON THE EXERCISE OF THE POWER OF TAXATION

• Constitutional Limitations:
a. No taking of private property without just compensation
b. Non-impairment of obligations of contract
c. Presidential power
d. Freedom of religion
e. Law-making process
f. Equality of taxation and uniformity of its application
g. Due process.

• Inherent Limitations
a. Public purpose
b. Exemption of the Government
c. Non-delegability of the taxing power
d. International comity
e. Situs or territoriality

TAX EXEMPTIONS

Article VI, Section 28.

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be
exempt from taxation.

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

Article XIV, Section 4.

(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.
Upon the dissolution or cessation of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by law.

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.
DOUBLE TAXATION

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

• Strict sense (Direct Duplicate Taxation)

The same property must be taxed twice when it should be taxed once;

1. Both taxes must be imposed on the same property or subject matter;

2. For the same purpose;

3. By the same State, Government, or taxing authority;

4. Within the same territory, jurisdiction or taxing district;

5. During the same taxing period; and

6. Of the same kind or character of tax.

• Broad sense (Indirect Duplicate Taxation)

There is double taxation in the broad sense or there is indirect duplicate taxation if any of
the elements for direct duplicate taxation is absent.

It extends to all cases in which there is a burden of two or more pecuniary impositions.
For example, a tax upon the same property imposed by two different states.

Double taxation, standing alone and not being forbidden by our fundamental law, is not
a valid defense against the legality of a tax measure [Pepsi Cola v. Mun. of Tanauan, G.R.
No. L-31156 (1976)]. But from it might emanate such defenses against taxation as
oppressiveness and inequality of the tax.

• Constitutionality of double taxation

There is no constitutional prohibition against double taxation in the Philippines. It is

something not favored, but is permissible, provided some other constitutional requirement
is not thereby violated. [Villanueva v. City of Iloilo, G.R. No. L-26521 (1968)]
 If the tax law follows the constitutional rule on uniformity, there can be no valid objection
to taxing the same income, business or property twice. [China Banking Corp. v. CA, G.R.
No. 146749 (2003)]

Double taxation in its narrow sense is undoubtedly unconstitutional but that in the broader
sense is not necessarily so. [De Leon, citing 26 R.C.L 264-265]. Where double taxation (in
its narrow sense) occurs, the taxpayer may seek relief under the uniformity rule or the
equal protection guarantee. [De Leon, citing 84 C.J.S.138].

• International Double Taxation

Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate double taxation, a tax treaty
resorts to several methods. [CIR v. SC Johnson & Sons, Inc., G.R. No. 127105 (1999)]

The purpose of these international agreements is to reconcile the national fiscal

legislations of the contracting parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. More precisely, the tax conventions are drafted with
a view towards the elimination of international juridical double taxation, which is defined
as the imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods.

The apparent rationale for doing away with double taxation is to encourage the free flow
of goods and services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in creating such a climate.
[CIR v. SC Johnson & Sons, Inc., supra]

ESCAPE FROM TAXATION

• Shifting of tax burden – the transfer of the burden of a tax by the original payer or the
one on whom the tax was assessed or imposed to someone else. What is transferred is
not the payment of the tax but the burden of the tax. All indirect taxes may be shifted;
direct taxes cannot be shifted.

Taxes that can be shifted:

a. VAT
b. Percentage Tax
c. Excise Tax
 • Tax avoidance - 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.

• 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.

Elements of tax evasion:

a. The end to be achieved.
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.

• 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.

DOCTRINES IN TAXATION

• Imprescriptibility Of Taxes

General Rule: Unless otherwise provided by law, taxes are imprescriptible. [CIR v. Ayala
Securities Corporation G.R. No. L-29485 (1980)]

The law on prescription, being a remedial measure, should be liberally construed in order
to afford such protection. As a corollary, the exceptions to the law on prescription should
perforce be strictly construed. [Commissioner v. CA, G.R. No. 104171 (1999)]

Exception: When the laws provide for statute of limitations.

• Prospectivity of Tax Laws

General rule: Tax laws are prospective in operation.

Reason: Nature and amount of the tax under tax laws enacted after the transaction could
not have been foreseen and understood by the taxpayer at the time of the transaction.

Exception: Tax laws may be applied retroactively provided it is expressly declared or it is

clearly the legislative intent (e.g., increase taxes on income already earned) except when
retroactive application would be so harsh and oppressive. [Republic v. Fernandez, G.R.
No. L-9141 (1956)]
 It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is
provided (Art. 4, Civil Code). [Hydro Resources v. CA, G.R. No. 80276 (1990)] The
language of the statute must clearly demand or press that it shall have a retroactive effect.
[Lorenzo v. Posadas, supra]

Exception to the exception: Collection of interest in tax cases is not penal in nature; it is
but a just compensation to the State. The constitutional prohibition against ex post facto
laws is not applicable to the collection of interest on back taxes. [Central Azucarera v. CTA,
G.R. No. L-23236 (1967)]
• Non-Retroactivity of Rules

General Rule: Any revocation, modification or reversal of any of the rules and regulations,
rulings and circulars promulgated by the Commissioner shall not be given retroactive
application if it will be prejudicial to the taxpayers (NIRC, Sec. 246).

Exceptions

a. Where the taxpayer deliberately misstates or commits material facts from his
return or any document;
b. Where the facts subsequently gathered by the BIR are materially different from
the facts on which the ruling is based;
c. Where the taxpayer acted in bad faith (NIRC, Sec. 246).

• Doctrine of Equitable Recoupment

This doctrine of law states that a tax claim for refund, which is prevented by prescription,
may be allowed to be used as payment for unsettled tax liabilities if both taxes arise from
the same transaction in which overpayment is made and underpayment is due (VALENCIA
& ROXAS, supra at 38).

Note: This doctrine is not applicable in our jurisdiction. The reason is that "if allowed, both
the collecting agency and the taxpayer might be tempted to delay and neglect the pursuit
of their respective claims within the period prescribed by law" (VITUG & ACOSTA, supra
at 46, citing Collector of Internal Revenue v. University of Sto. Tomas)

• Compensation and Set-Off

Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other (CIVIL CODE, Art. 1278).

This presupposes mutual obligations between the parties, and that they are mutual
creditors and debtors of each other (CIVIL CODE, Art. 1270(1)).

General Rule: There can be no off-setting of taxes against the claims that the taxpayer
may have against the government (INGLES, supra at 28).
 Reason: Taxes are not in the nature of contracts between the parties but grow out of duty
to and are the positive acts of the government to the making and enforcing of which, the
personal consent of individual taxpayers is not required (Republic v. Mambulao, G.R. No.
L-17725, February 28, 1962).

Exception: If the obligation to pay taxes and the taxpayer's claim against the government
are both overdue, demandable and fully liquidated, compensation takes place by operation
of law and both obligations are extinguished to their concurrent amount (CIR v. Toledo
Power Inc., G.R. No. 183880, January 20, 2014).

There can be legal compensation for tax purposes as long as all the requisites under
Article 1279 of the Civil Code are present (RECALDE, supra at 17).

• Doctrine of Transcendental Importance

Doctrine of Transcendental Importance It is a principle, that the Court, in the exercise of

its sound discretion, brushes aside the procedural barrier and takes cognizance of a
petition (Chamber of Real Estate and Builders' Associations, Inc. CREBA). Energy
Regulatory Commission (ERC) And Manila Electric Company (Meralco), G.R. No. 174697,
July 8, 2010).

In cases of paramount importance where serious constitutional questions are involved,

the standing requirements may be relaxed and a suit may be allowed to prosper even
where there is no direct injury to the party claiming the right of judicial review (Coconut
Oil Refiners Ass'n., Inc. v. Torres, G.R. No. 132527, July 29, 2005)

• Judicial Non-Interference on the Power of Taxation

General Rule: The Supreme Court can review judgments or orders of lower courts in all
cases involving the legality of any tax, impost, assessment, or toll, or any penalty
imposed in relation thereto (CONST. Art. III, Sec. 5(b)).

Exception: The courts cannot inquire into the wisdom of a taxing act, unless there is a
violation of constitutional limitations or restrictions (ABAKADA Guro Partylist v. Ermita,
G.R No. 168056 September 1, 2005).

TAXPAYER’S SUIT

Refers to a case where the act complained of directly involves the illegal disbursement
of public funds derived from taxation. [Kilosbayan v. Guingona, Jr. (1994)]

• Requisites of a Taxpayer’s Suit:

a. Concept of locus standi

 A taxpayer is allowed to sue where there is a claim that public funds are illegally
disbursed, or that the public money is being deflected to any improper purpose,
or that there is wastage of public funds through the enforcement of an invalid or
unconstitutional law. A person suing as a taxpayer, however, must show that the
act complained of directly involves the illegal disbursement of public funds derived
from taxation. He must also prove that he has sufficient interest in preventing the
illegal expenditure of money raised by taxation and that he will sustain a direct
injury because of the enforcement of the questioned statute or contract. In other
words, for a taxpayer’s suit to prosper, two requisites must be met:

a. public funds derived from taxation are disbursed by a political

subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed and

b. the petitioner is directly affected by the alleged act. [Mamba v. Lara,

G.R. No. 165109 (2009)]

b. Doctrine of Transcendental Importance

Recognizing that a strict application of the "direct injury" test may hamper public
interest, this court relaxed the requirement in cases of "transcendental
importance" or with "far reaching implications." being a mere procedural
technicality, it has also been held that locus standi may be waived in the public
interest.

c. Ripeness for Judicial Determination – means that litigation is inevitable or there

is no adequate relief available in any other form or proceeding.

STRICTISSIMI JURIS

Tax laws are construed strictly against the government and liberally in favor of the
taxpayer. [Manila Railroad Co. v. Coll. of Customs, G.R. No. L 30264 (1929)].

Tax statutes offering rewards are liberally construed in favor of informers. [Penid v. Virata,
G.R. No. L 44004 (1983)]

Tax statutes are to receive a reasonable construction or interpretation with a view to

carrying out their purpose and intent. They should not be construed as to permit the
taxpayer easily to evade the payment of tax. [Carbon Steel Co. v. Lewellyn, 251 U.S. 201].
Thus, the good faith of the taxpayer is not a sufficient justification for exemption from the
payment of surcharges imposed by the law for failing to pay tax within the period required
by law
In the construction of tax statutes, exemptions are not favored and are construed
strictissimi juris against the taxpayer. [Republic Flour Mills v. Comm. & CTA, G.R. No. L-
25602 (1970)]

Penal provisions of tax laws must be strictly construed. It is not legitimate to stretch the
language of a rule, however beneficent its intention, beyond the fair and ordinary meaning
of its language. A penal statute should be construed strictly against the State and in favor
of the accused.