CONSTITUTIONAL PROVISIONS OF TAXATION

Section 1, Article III. 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.

How do you describe the constitutional provisions with respect to taxation?

- Constitutional provisions with respect to taxation are not grant of powers but
limitations of the power of the State to tax. Because without constitutional
limitations, the power of the State to tax is comprehensive and limited plenary.
Because of these limitations, there are restrictions, and it does not become and
unlimited and supreme.
- 2 rights are mentioned: due process and equal protection.
- Due process: the right to be heard.
o Substantive due process – the tax itself must be intrinsically valid. The
Congress, in the enactment of tax law, must act within the bounds and
limitations provided under the Constitution and relevant laws.
o Procedural due process – notice and hearing. Notice is the right to be
informed of the nature of the assessment. Example: In cases of assessment. If
the BIR conducted an assessment, you must be informed of the nature of the
assessment, the basis of the assessment, the factual and legal basis of the
assessment. Part of this is your opportunity to be heard through filing of a
reply and through filing a protest.
- Equal protection – Persons similarly situated must be treated alike and persons
differently situated will not be treated alike as to rights and obligations.
- For difference in treatment to be allowed, there must be a classification of
taxpayers:
1. rest on substantial distinctions
2. the classification must be germane to the purpose of law
3. it is not limited to existing conditions
4. apply equally to all members of the same class

- Tiu v. CA: The tax incentives of the corporations inside the special economic zone
were challenged. They questioned why those inside the special economic zone have
many tax perks and tax incentives while corporations outside the special economic
zone have no tax incentive and are paying the regular tax. The SC held that because
there is a valid classification of the corporations located in the special economic zone
and those located outside. And because of the valid classification of tax payer, they
can be treated differently.

Section 5, Article III. No law shall be made respecting an establishment of religion, or

prohibiting the free exercise thereof. The free exercise and enjoyment of religious
profession and worship, without discrimination or preference, shall forever be allowed.
No religious test shall be required for the exercise of civil or political rights.
– This is a non-establishment of religion.
Section 10, Article III. No law impairing the obligation of contracts shall be passed.

– Taxation is inferior to the non-impairment of contracts.

- Impairment of obligation of contract – there are changes on the terms of a legal
contract in the parties Terms such as the performance or mode or imposes new
conditions.
- Purpose: To safeguard the integrity of a contract.
- Under Article 1306 of the CC, the parties are free to agree on the terms, conditions,
conventions in the contract provided they are not contrary to law, morals, good
customs, public policy and public order. The terms and conditions of the agreement
is the force of law between the contracting parties which must be complied in good
faith.
- NO LAW SHALL BE PASSED THAT WOULD IMPAIR THE OBLIGATION OF THE
CONTRACT. But this rule will ONLY apply when the obligation arises from contracts
because a contract is not the only source of an obligation. Article 1157 of the CC
says that obligations arises from law, contracts, quasi-contracts, delict and quasi-
delict.
- Example: Grant of franchise. You have an obligation on that law that grants a
franchise. One of the conditions in a grant of franchise is that the franchise can be
modified, amended, repealed or cancelled or revoked by the Congress. Can you
invoke non-impairment clause under the Constitution on this matter? NO. Because
the obligation arises from a law and not from a contract.

Section 20, Article III. – No person shall be imprisoned for debt or non-payment of a
poll tax.
- Poll tax – an example of a poll tax is a community tax. Pag di ka nagsecure ng
sedula, di ka makukulong.
- Under 2004 Notarial Practice Act, a community tax certificate (sedula) is not a
competent evidence of identity. It has to be a government-issued ID with picture
where the identity of a person appearing before a notary public can be ascertain.
- Wala na daw paggagamitan ng sedula. Wala daw maisip si sir.

Section 24, Article VI. – 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.

The 3 bills mentioned must originate from the House of representatives.

- Franchise is a private bill.
- Appropriation – General Appropriations Act (The national budget)
- Revenue or tariff bills – tax laws
- Bills authorizing increase of public debt and Bills of local applications – example:
naming of a street to a person or a holiday
 - All such originate from the House of Representatives but the Senate may concur
with amendments – (discussed in the case of Arturo Tolentino v. Secretary of
Finance)
- Arturo Tolentino v. Secretary of Finance: In this case, the EVAT law was challenged in
which Ralph Recto was the principal sponsor. It was said in this case that there was a
version of EVAT Bill by the House of Representatives that was passed to the Senate.
The Senate had their own version so they proposed amendments, they concur with
amendments but because the versions of the HOR and Senate’s are different, to
reconcile these 2 versions, there is a bicameral conference. In this bicameral
conference, a third version of the bill may come out. The only requirement for the
bicameral conference version is that it has to be germane to the subject of the
House and Senate bills. This was challenged because they said that the law that was
signed by the President, and later on became the Expanded Value Added Tax Law
(EVAT Law) is substantially the version of the Senate and it was not the version of the
House. So they said that they violated Article 6, Sec. 24 of the Constitution.
The Supreme Court did not sustain the petition because it was stated in Article 6,
Sec. 24 that these bills (appropriation, tariff bills, revenue, etc.) must be initiated by
the House of Representatives. The initiative must not come from the Senate. They
must wait until the HOR passes a bill. The initiative MUST ALWAYS come from the
HOR. If there is no initiative from the HOR, the Senate cannot do anything except to
wait.

Section 28(1), Article VI. – The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.

The basis of the taxpayer to pay

Section 28(2), Article VI. – 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.

- This provision can also be seen in the Tariff and Customs Code. (It is the flexible tariff
clause)
- The Congress is NOT authorizing the President to impose tariff, import and export
quotas. What the Congress authorizes the President is to fix the limit, setting the
limit but not the imposition because the imposition is in the power of the Congress.

Section 28(3), Article VI. - 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.
- What tax is being referred to here?
o Real property tax because the subject matters which are land, buildings and
improvement are real properties.
o Counterpart provision – Sec. 34(a) of the Local Government Code which states
the exemptions of the real property tax.
- Kung real property tax ang pinaguusapan at gusto mo malaman kung exempted yan,
you must consider the USE. The owner is not important, but the use of the
property. (Do you use it actually, exclusively, directly for religious charitable and
educational purposes? IF YES, THEN IT IS EXEMPTED FROM REAL PROPERTY TAX)
- Herrera v. Quezon City Board of Assessment Appeals: This case involves a charitable
hospital that accepts paying and non-paying patients and this hospital sets up a school
(midwifery and nursing) where the students practice in the hospitals. Are they exempted?
Quezon City answered that they are not exempted to real property because their real
properties are no longer actually and directly used for charitable purposes. It must be noted
that this case arose during the effectivity of the 1935 Constitution and under the 1935
Constitution, the only requirement is that the land, buildings and improvement must be
exclusively used.
The Supreme Court held that the term “exclusively used” includes the incidental purpose. In
this case, the SC introduced the incidental purpose doctrine because it was said that the
school is incidental to the purpose of the hospital because it was also used as a training
school by the students. So they were still exempted to real property tax because the exclusive
use includes the incidental purpose.

- Abra Valley College, Inc. v. Juan P. Aquino: This case involves a two-story building owned
by a school. The ground floor was occupied by a private corporation for commercial use
while the second floor was occupied by the Director of the school and his family as their
residence. They were assessed for real property tax. The SC held that the ground floor which
was being used for commercial use is subject to real property tax but the second floor which
is used as a residence was exempted to real property tax because the SC said that the
residence of the Director of the school and his family were incidental to the purpose of the
school. So incidental purpose doctrine was again applied in this case.

- In the 1973 and 1987 Constitution, the words added were “actually” and
“directly”

- Lung Center of the Philippines v. Quezon City: The compound of the Lung Center of the
Philippines included a portion were a building was situated. It was said that it accepted
paying and non-paying patients. Another building was being rented by the doctors as their
clinic and there was another portion of the property that was being rented by private
companies and private entities. The QC said that the Lung Center of the Philippines lost its
character as a charitable organization because they receive paying patients. In addition, Lung
Center of the Philippines has properties that are being occupied by private persons for
commercial purpose so the property is no longer actually, directly and exclusively used for
charitable purpose. The SC held that Lung Center of the Philippines maintains its charitable
character and remains to be exempt from real property tax because the SC held that if you
want to find out if an entity is a charitable institution, you look at the charter that created it,
 you look at the law that created the organization. In short, you look at the incorporation
papers of this corporation. In this case, it is clear that Lung Center of the Philippines was
established as a charitable institution. Second, on the issue that they accept paying patients,
the SC held that it is not enough that Lung Center of the Philippines receives payment to lose
its charitable character. As long as the payments received by Lung Center of the Philippines
are being used to further the purpose of the hospital then it remains to be a charitable
institution. As to the portion being occupied by the private companies for commercial
purpose, the SC held that they are liable to real property tax. There is in need for specific
identification of the properties being used for charitable purposes and properties being used
for non-charitable purposes. Incidental purpose doctrine is no longer applicable in this case
because such doctrine arose from the 1935 Constitution which requires the property to be
“exclusively” used but now under the 1987 Constitution, the requirement must be it must be
actually, directly and exclusively used for charitable purposes.

Section 28(4), Article VI. – No law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of the Congress.

- This is tax exemption and the requirement is concurrence of a majority of all the
members. NOT THE MAJORITY OF QUOROM
- Kunwari 250 ang members ng HOR, ano ang quorum niyan? 126 para magkaroon ng
quorum. So ang kailangan mo is majority of 250 kasi ang nakalagay ay majority of all
members of the congress.

Section 5, Article X. – Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.

- The power to tax is no longer a delegated power of the Congress but a direct grant
of the Constitution by virtue of Article X, Sec. 5.

Section 4(3)(4), Article XIV. - 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.
- Commission of International Revenue v. DLSU: November 2016 case. Justice Brion,
ponente.
- This involves the cafeteria and bookstore inside DLSU. They were subject to income
tax and VAT by the BIR because there were concessionaires who were renting there
and they said that they are only catering to students and not to the general public of
DLSU. The SC held that no, because DLSU is a non-stock, non-non-profit educational
institution and as long as they provide proof that the revenues are being used
actually, directly and exclusively for educational purposes then they are exempt from
income tax.

- Education Institution may be categorized into two:

o government educational institution – exempt from income tax
o private educational institution – may be categorized into two:
 proprietory educational institution – Sec. 27(b) of the Tax Code will
apply. 10% preferential rate on its taxable income will apply, provided
not more than 50% of the gross income will come from unrelated
activities. EXAMPLE: Kunwari San Sebastian, assuming that this is a
proprietory educational institution, may total income na 20 million. 16
million came from the tuition fee while the remaining 4 million came
from the sale of cigarettes. So the sale of cigarettes is unrelated but
the related activity is 60% so the 10% preferential rate will apply. But if
the unrelated activities’ sale is more than 50%, the regular rate of 30%
will now apply.
 If naka 10% preferential rate ka, you are not subject to MCIT.
(Minimum corporate income tax)
 If naka 30% preferential rate ka, you are subject to MCIT.
 non-stock, non-non-profit – exempt on income tax. In fact, in all taxes
because it is stated in Section 3, Article XIV that all revenues and
assets shall be exempt from taxes, provided you must show proof that
the revenues and assets of the non-stock, non-profit educational
institution are actually, directly and exclusively used for educational
purposes.
 YOU MUST LOOK AT THE USE OF THE PROPERTY.