Chapter 6

COMMON LIMITATIONS ON THE TAXING

POWERS OF LGUs
A.
Criteria to determine validity of local tax
the provisions of the
ordinances. 1. Conformity with

Constitution. 2.Compliance with the provisions of the

Local Govemment Code and other laws enacted by
Congress which impose guidelines and limitations on
the exercise by local govemment units of their power to
raise their own sources of revenues and to levy taxes,
fees, or other charges. Among such limitations are:
a. Conformity with the authorization requirement;
b. The fundamental principles of local taxation are
not violated;
c. Observance of the common limitations upon
the power to tax of local govemment units.
3. Compliance with the inherent limitations on the
power of taxation.
It should be clear that the above constitute the
limitations upon the local govemment units' power of
taxation the violation of which could nullify a local tax
measure.
NOTES AND COMMENTS: Refer to Volume I, General
Pinciples for a detailed discussion of the inherent limitations on the
power of taxation.

1. The test of a valid ordinance is well established. A

long line of decisigns has held that for an ordinance to be
valid, it must not only be within the corporate powers of the
local govemment unit to enact and pass according to the

168
procedure prescribed by law,it must also conform to the
following substantive requirements:
a..must notcontravena the Constitution or any statute;
b. must not be unfair or oppressive;

168
 C. must not be partial or discriminatory;
d.must not prohibit but may regulate trade;
e. must be general and consistent with public policy;
and
f must not be unreasonable. (White Light Corporation, et al., v. City of
Manila, etc., G. R. No. 122846, January 20,2009 citing City of Manila v: Laguio,
Jr. G.R. 118127,12 April 2005,455 SCRA 308; Tatel v. Municipality of.Virac,
G.R. No. 40243,11 March 1992,207 SCRA 157, 161; Solicitor General v.
Metropolitan Manila Authorty, G.R. No.102782, 11 December 1991, 204 SCRA
837, 845;
Magtajas v.Pryce Properties Corp., Inc.,G.R. No. 111097,20 July 1994,234
SCRA 255,268-267.)

MULTIPLE CHOICE QUESTION:

Which of the following statements is NOT a test of a valid
ordinance?
a. It must not contravene the Constitution or any statute;
b. It must not be unfair or oppressive;
c. It must not be partial or discriminatory;
d. It may prohibit or regulate trade..
SUGGESTED ANSWER:d

2. The classification of the general limitations on the

taxing powers of local govemment units:
a. Constitutional limitations
1) Limitations upon Congress when it provides the
guidelines and limitations on the local govemment units'
power of taxation

2) Limitations upon the exercise by the

local govemment units of their power of
taxation
b. Statutory limitations upon the exercise by the local
government units of their power of taxation.
3. The constitutional limitations upon the authority of
Congress to provide guidelines and limitations on the
local government units power of taxation. It is the
constitutional mandate that Congress should provide
guidelines and limitations for the exercise by local
governments of their power to levy taxes, fees and
169
other charges. (1987 Philippine Constitution, Art. X,
Sec. 5, paraphrasing supplied)
The fundamental law did not intend the grant to local
169
govemments of the power to tax to be absolute and
unconditional,the constitutional objective obviously is
to that, while local govemment units are being
snengthened and made more autonomous, the
legislaung must still see to it that:
a. the taxpayer will not be over-burdened or saddled
with multiple and unreasonable impositions;
b. each local govemment unit will have its fair
share of available resources;
C. the resources of the national govemment will be
unduly disturbed; and
d. local taxation will be fair, uniform and just. (Manila Electric Company
v.Province of Laguna, et al., G.R. No. 131359, May 5, 1999;National Power
Corporation v. City of Cabanatuan, G. R. No. 149110, April 9,2003)

4. The constitutional limitations upon the taxing power

of local government units. It is evident from the
constitutional grant that the power of local govemment
units to create their own sources of revenue and to levy
taxes, fees and other charges shail be:
a. consistent with the basic policy of local
autonomy,
and that
b. such taxes, fees and other charges shail accrue solely to the
benefit of the local govemment unit concemed. (1987 Philippine
Constitution, Art. X, Sec. 5, paraphrasing supplied)

5. Limitations on the taxing power of local govenment

units imposed by Congress. The guidelines and
limitations provided by Congress are those found under
the provisions of Republic Act No. 7160, the Local
Govemment Code, which was enacted by Congress in
pursuance with the provisions of Sec. 3, Article X of the
1987 Philippine Constitution. “The Congress shall
enact a local govemment code which shall provide for a
more responsive and accountable local government
structure xxx." Among the statutory limitations are:
a. The fundamental principles of local taxation.
 169
b. The common limitations.
c. The express authorization limitation. Each
local
govemment unit could not exercise the taxing powers

170
169
granted to others, with the exception of a city. Thus,a
province could not exercise the powers granted to
municipality and vice-versa. However, a city could exercise
the taxing powers of both a province and a municipality.
d. Basic policy of local autonomy.
The above limitations find application to all local
govemment units.
MULTIPLE CHOICE QUESTION:
Congress has imposed certain limitations that restrict
the authority of local govemment units to enact local tax
ordinances. Which of the following is not among the
limitations?
a. Express authorization limitation.
b. The inherent limitations on. the power of taxation.
c. The common limitations.
d. The basic principles of local autonomy. SUGGESTED
ANSWER:b

B. Common limitations on the taxing powers of

LGUs
1. The concept of common limitations on the power of
taxation of local govemment units. The rule on the
imposition of the common limitations is also known as
the “exclusionary rule” or “the rule of preemption in
taxation.”(Victorias Milling Co.,Inc.'v. Municipality of
Victorias, Negros Occidental,L-21183,September
27,1968)
This is the reservation by the National Govemment of certain
taxing powers, for it to exercise. A perusal of the common limitations
would show that local govemment units cannot impose taxes which
are already imposed and collected by the national govemment, such
as income taxes, documentary stamp taxes, etc.

171
 Thus, it may also be referred to as the "reservation'
principle."
2. Application of the common limitations. The
common limitations find application to the revenue
creation and the power of the local govemment units to
levy taxes,
171
 fees and other charges.
ine common limitations do not limit the other powers
of
he local govemment units: the police power and the pos er
ofeminent domain.
3.Common limitations in the taxing powers of IGus.
"Common Limitations on the Taxing Powers of Local
Govamment Unlts. -Uniess otherwise provided provided
herein,the exercise of the taxing powers of
provinces,cities, municipalities,and barangays shall not
extend to the levy of the following:
(a)Income tax, except when levied on banks and
other financial institutions;
(b) Documentary stamp tax;
(c)Taxes on estates, inheritance, gifts, legacies and
other acquisitions mortis causa, except as otherwise
provided herein;
(d) Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues, and all other
kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by
the local govemment unit concerned;
(e) Taxes, fees and charges and other
impositions upon goods carried into or out of, or
passing through, the territorial jurisdictions of local
govemment units in the guise of charges for wharfage,
tolls for bridges or otherwise, or other taxes, fees or
charges in any form whatsoever upon such goods or
merchandise;
()Taxes, fees or charges on agricultural and aquatic
products when sold by marginal farmers or fishermen;
(g) Taxes on business enterprises certified to
by the Board of Investments as pioneer or non-pioneer
for a period of six (6) and four (4) years,respectively
from the date of registration;
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(h) Exciso taxes on articles enumerated undar

the National Intemal Revenue Code, as amended,and
(i) taxes,fees or charges on petroleum products;
Percentage or value-sdded tax (VAT) on sales,

172
172
or services except as otherwise provided herein;
() Taxes on the gross receipts of transportation contractors
and persons engaged in the transportation of passengers or
freight by hire and common carriers by air, land or water, except
as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or
retrocession;
(1) Taxes, fees or charges for the registration of motor
vehiclos and for the issuance of all kinds of licenses or
permits for the driving thereof, except tricycles;
(m) Taxes, fees, or other charges on Philippine
products actuallyexported, except as otherwise provided
herein;
(n) Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and cooperatives duly
registered under R.A. No. 6810 and Republic Act
Numbered Sixty-nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperatives Code of
the Philippines" respectively;and
(0) Taxes,fees or charges of any kind on the National
Govenment, its agencies and
instrumentalities, and local govemment units." (LGC. Sec 133)
Outline summary of the common limitations on the
taxing powers of local government units OR taxes, fees or
charges that may not be levied by local government units:
a. Income tax. Exception: when levied on banks and
financial
institutions;
b. Documentary stamp tax:
c. Taxes on
1) estates,
2) inheritance,
3) gifts legacies and
4) other acquisitions mortis causa.
Exception: tax on transfer of real property ownership.
d. Customs duties.
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1) registration fees of vessels and

173
173
 2) wharfage on wharves,
3) tonnage dues and
4) all other kinds of customs fees, charges and
dues.
Exception: Wharfage on wharyes constructed
and maintained by the local govemment unit.
e. Taxes,fees and charges and other imposition
upon oods:
1) camied into or
2) out of,or
3) passing through the territcrial jurisdiction of the
local govemment unit in the guise of
a) charges of wharfage, tolls for bridges or
otherwise,
b) or other taxes or charges in any form
whatsoever upon such goods or merchandise.
f. Taxes, fees or charges on agricultural and
acquatic roducts when sold by marginal farmers or
fishermen.
9. Taxes on business enterprises
1) certified to by the Board of Investments as pioneer
or non-pioneer
2) for a period of six (6) and four (4) years a)from the
date of registration respectively.
h. Excise taxes on articles under the National
Intemal
evenue Code.
Taxes, fees or charges on petroleum products. j.
Percentage or Value Added Tax (VAT)
1) On sales, barters or exchanges or similar
transactions on goods or services
 2) Exception: as provided in the Code

174

k. Taxes on gross receipts of

1) transportation contractors and
2) persons_engaged in the transportation of
passengers or freight by hire and
3) common carners by air,land or water 4)
Exception: as provided in the Code.
1
trocession, Taxes on premiums paid by.way of
reinsurance or
m.Taxes,fees or charges
1) for the registration of motor vehicles and
174
 2) for the issuance of all kinds of license or permits
for the operation thereof
3) Exception: tricycles
n. Taxes, fees or other charges on
1) Philippine products actually exported therefrom
2) Exception: as provided in the Code
o. Taxes, fees or charges on
1) Countryside and Barangay Business
Enterprises
2) Cooperatives. (LGC, Sec. 133, arrangement and
numbering supplied) ESSAY QUESTIONS:
1) Give five (5) examples of taxes which a municipality
cannot impose under existing laws. (BAR: 1969)
2) The City of Manila enacted an ordinance, imposing a
5% tax on gross receipts on rentals of space in privately-owned
public markets. BAT Corporation questioned the validity of the
ordinance stating that the tax is an income tax, whích cannot be
imposed by the city govemment. Do you agree with the position of
BAT Corporation ? Explain. (BAR: 2008)
SUGGESTED ANSWER: No. The tax imposed is not an income tax but-a
license tax or fee for the regulation of the business in which the taxpayers are
engaged, that is the leasing of spaces in privately-owned public markets.
(Progressive Development Corporation v. Quezon City, 172 SCRA 629[1989D. The
income tax imposed under the National Internal Revenue Code which preempts the
imposition by the city is one which is imposed on the privilege enjoyed by a taxpayer
in earning income and not a tax on business.

MULTIPLE CHOICE QUESTIONS:

1) Which among the following is a valid imposition by a
local govemment unit?
a. Documentary stamp tax.
b. Customs duties.
c. Value-added taxes on sales.
d. Toll fees.
175
SUGGESTED ANSWER:d
2) The City of Manila enacted an ordinance,imposing a

175

175
% tax on gross receipts on rentals of space in privately
owmed public markets.The imposition is an income
tax,which cannot be imposed by the city
a. government.
b. license fee for the regulation of the business of leasing.
c. a charge for use of property, the privately-owned public
markets.
d. a percentage tax on the value-added imposed on the
lessor of the property.
SUGGESTED ANSWER:b
5. Local government units cannot levy Income taxes.
“ Common Limitations on the Taxing Powers of Local
Government Authorities.- Unless otherwise provided therein,
the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of
the following:
(a) Income tax, except when levied on banks and other
financial institutions; xxx xxx. ” [LGC, Sec. 133 (a),
paraphrasing supplied)]
a. Income tax, defined. A tax on the yearly profits
arising from property, professions, trades and offices.
(Fisher v.Trinidad,43 Phil.981)
It is a tax imposed on the privilege to eam ·gains derived
from capital, from labor, or both combined, provided it be
understood to include profit gained through a sale or
conversion of capital assets. (Ibid., paraphrased)
NOTES AND COMMENTS: An income tax as defined above is
different from a business tax which is one imposed on the privilege to
be regularly engaged in trade or commercial activity, as a means of
livelihood or with aview to profit.
b. Rationale for the prohibition. This is to prevent the
taxpayer from being burdened with multiple pecuniary
impositions on the same subject or object because
income
176
taxes are already collected by the national govemment
under the provisions of the National Intemal Revenue
Code of 1997.

176

176
c. Exception: Instance where local government units
may levy income taxes. A city or a municipality may
levy business taxes on banks and other financial
institutions.
NOTES AND COMMENTS: As worded, the law provides, “Unless
otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:
(a) Income tax, except when levied on banks and other
financial institutions; xxx" [Sec. 133 (a), LGC,paraphrasing
supplied]
The RRI LGC, Rule XXX, Article 221, is worded,“Unless
otherwise provided in this Rule, the exercise of the taxing and other
revenue raising powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions as provided in Article 232 (f) of this Rule." Article 232 (f) of the
Rules refers to business taxes imposed on banks and other financial
institutions.
It is clear from the above that there is a misnomer in the law. There
is no true exception because what is allowed to be imposed is a
business tax and not an income tax.

1) Banks and other financial institutions, defined.

The term includes
a) non-bank financial intermediaries,
b) lending investors,
c) finance and investment companies,
d) pawńshops.
e) money shops,
f)insurance companies,
g) stock markets,
h) stockbrokers and
i) dealers in securities and foreign exchange as
defined under applicable laws, or rules and regulations.
thereunder. [LGC, Sec. 131 (e) arrangement and
numbering supplied]、
 177

2) Cities and municipalities may impose

business taxes on banks and other financial
institutions. Citias or municipalities may impose
business taxes on
177

177
 banks and other financial institutions,
a) b) at a rate not exceeding fifty percent(50%) of one
percent(1%)on the gross recaipts of the preceding
calendar year derived from
(1) interest, commissions and discounts
from lending activities,
(2) income from financial leasing,
(3) dividends,
(4) rentals on property and
(5) profit from exchange or sale of
property.
(6) insurance premium. [LGC,Sec.143
(f),in relation to Sec. 151, numbering and
arrangement suppied]
NOTES AND COMMENTS: A province and a barangay could not
impose business taxes on banks and other financial institutions.

MULTIPLE CHOICE QUESTION:

Taxing power of local government units shall NOT extend
to the following taxes, except one:
a) Income tax on banks and other financial institutions;
b) Taxes of any kind on the national govemment,its
agencies
and instrumentalities, and local government units;
c)Taxes on agricukural and aquatic products when sold by
the marginal farmers or fishermen;
d) Excise taxes on articles enumerated under the
National Internal Revenue Code. (BAR: 2012)
SUGGESTED ANSWER: a)
6.Local government units cannot levy documentary stamp
taxes. “ Common Limitations on the Taxing Powers of
Locai Government Authorities. - Unless otherwise provided
therein, the exercise of the taxing powers of provinces,
cities, municipalities,and barangays shall nof extend to the
levy of the following:
XXX XXX XXX

178

(b) Documentary stamp tax; xxx xxx." [LGC,Sec.133

(b).paraphrasing supplied)
&. Documentary stamp tax,defined. An excise upon
he pivilege,opportunity or facility offered at exchanges for
178
transaction of the business. It is an excise upon the facilities used
in the transaction of a business. (Commissioner of Intemal
Revenue v. Heald Lumber Co., 10 SCRA 372)
b. Rationale for the prolilbition. This is toprevent the
taxpayer from being burdened with multiple pecuniary
impositions on the same subject or object because
documentary siamp taxes are alresdy collected by the
national govenment under the provisions of the National
Intemal Revenue Code of 1997.
7. Local government units cannot levy taxes on estates,
'Inheritance, gifts, legacies and other acquisitions mortis
causa. “Common Limitations on the Taxing Powers of
Local Govemment Authorities. -Unless otherwise provided
therein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to
the levy of the following:
XXX
XXX XXX

(c) Taxes on estates, inheritance, gifts, legacies and other

acquisitions mortis causa, except as otherwise provided
herein; xxx xxx.” [LGC, Sec. 133 (c), paraphrasing,
supplied)
a.General Rule:Local govemment units cannot impose
taxes on estates, inheritance, gifts, legacies, and other
acquisitions mortis causa.
Exception: Local govemment units (provinces and cities),
could impose a tax on transfer of real property ownership.
[LGC,Sec. 133(C)]
b. Rationale for the prohibition. This is to prevent the
taxpayer from being burdened with multiple pecuniary
impositions on the same subject or object because the
provisions of the National Intemal Revenue Code of 1997
already imposes estate taxes on acquisitions mortis
causa and donor's taxes on acquisitions inter vivos.
c. Estate tax, defined. A tax levied upon the privilege of
transferring, mortis causa, the net estate of a decedent to
his heirs. (NIRC of 1997,Sec.84)
178
 NOTES AND COMMENTS: An estate tax should be
distinguished from an inheritance tax.

d. Inheritance tax,defined.An imposition created by

law on the privilege to receive property. (Vera

v.Navamo,79 SCRA 434)There is no inheritance tax

presently imposed by law.Only estate taxes are

imposed.

e. Gifts, defined. A gratuitous transfer of property real

or personal, premised upon a pure act of liberality,
totake place while the giver (donor) and the recipient
(done)are both alive.
f. Legacy, defined. A gift of personal property, usually
money,by will.
g. Acqulsitions mortis causa,defined. These are
transfer of property ownership (whether real, personal or
mixed) that takes place upon the death of the transferor.
8. Local government units cannot levy customs
duties, registration fees of vessels, wharfage,
tonnage duties and other kinds of customs fees,
charges and dues. “Common Limitations on the
Taxing Powers of Local Government Authorttles.-
Unless otherwise provided therein,the exercise of the
taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the
following:
XXX XXX XXX
 (d) Customs duties, registration fees of vessel and
wharfage on wharves, tonnage dues and other kinds of
customs fees, charges and dues except wharfage on
wharves construoted and' maintained. by the local
180

govemment unit concemed; xxx xxxx." [LGC,Sec. 133 (d).

paraphrasing,and ernphasis supplied]
a. General Rule:Local goveinment units cannot impose
1) customs duties,
2) registralion fees of vessels and
3) wharfage on wharvés,
180
 4) tonnage dues and
5) all other kinds of customs fees, charges and
dues. Exception: Local govemment units
1) could impose wharfage
2) on wharves
3) constructed and maintained by the local
govemment unit. [LGC, Sec. 133 (d), arrangement and
numbering supplied]

b. Rationale for the prohibition. This is to prevent the taxpayer

from being burdened with multiple pecuniary impositions on
the same subject or object because national laws such as
the Tariff and Customs Code, the Maritime Industry
Authority Law, etc., already imposes these taxes, fees and
charges.
c Customs duties, defined. Taxes imposed by the national
govemment, under authority of the Tariff and Customs Code
and other laws, upon goods that are imported into or exported
from the Philippines.
The term is synonymous to tariff duties.
d. Registration fees of vessels, defined. These are the fees
charged for the regulation of every type of boat, craft, or other
type of artificial contrivance used, or capable of being used, as
a means of transportation on water, to ensure the safety of the
users.
e. Wharfage, defined. A fee assessed against the cargo of a
vessel engaged in foreign or domestic trade based on quantity,
weight, or measure received and/or discharged by vessel.
[LGC,Sec.131(y)]
f. Tonnage dues, defined. These are the fees paid the
owner, agent, operator or master of a vessel engaged in
foreign trade, based on the net tonnage of the vessel or weight
of the articles discharged or laden. (TCC, Sec 3201)

ESSAY QUESTION:

181
 A coastal town passod an ordinance Imposing wharfage
wharf. Is this ordinance valld ? (BAR: 1972)
MULTIPLE CHOICE QUESTION:

A coastal town passed an ordinance imposing wharfage

dues on vessels for mooring or berthing at its municipal
wharf. Is the ordinance valid?
a. No. Local govenment units cannot impose wharfage
on wharves because such a power was reserved by ational
govemment for it to impose.
b. Yes. Local govemmant units have the power to aise
their
own sources of revenues and to lavy taxes, fees or ther charges.
c. No. Only provinces have the power to impose
wharfage dues. The powers of provinces are exclusive to
hem and may not be exercised by municipalities.
d. Yes. A local govemment unit could impose wharfage
dues on wharves it has constructed and maintains. n this
case it owns the wharf.
SUGGESTED ANSWER:o

9. Local govemment units cannot levy upon goods

carried into, leaving or passing through its territorial
boundaries. “Common Limitations on the Taxing
Powers of Local Govemment Authortties.-Unless
otherwise provided therein, the exercise of the taxing
powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
XXX XXX XXX

(e) Taxes, fees and charges, and other impositions upon

goods carried into or out of, or passing through the territorial
jurisdictions of the local government units in the guise of charges
for wharfage, tolls for bridges or otherwise, or other taxes or
charges in any form
Whatsoever upon such goods or merchandise;xxx
xXx."[LGC,Sec.133 (b),paraphrasing supplied] a.General rule:
Local govemment units impositions not impose taxes,fess
and charges,and other

182
 2) upon goods carried into or out of, or passing through
the temitorial jurisdictions of the local govemment units
a) in the guise of charges for
(1) wharfage,
(2) tolls for bridges
(3). or otherwise,
3) or other taxes or charges in any form whatsoever a)
upôn such goods or merchandise. [LGC,Sec. 133 (e),
arrangement and numbering supplied]
Exception:The above prohibition does not find
application if the power exercised is police power or the power
of eminent domain. The prohibition limits only the exercise of
the revenue raising power and the power of taxation.
b.Rationale for the prohibition. The above prohibition is in
line with the fundamental principle of local govemment
taxation that the exercise of the taxing and other revenue
raising powers of local govemment units shall not be in
restraint of trade [LGC, Sec.130(b)(4),paraphrasing supplied)
ESSAY QUESTIONS:
1) As a measure of police power, in order to avert an
Impendlng famine and high prices, may a town validly imposø
a tax on the sale of its agricultural products to other towns ?
Roasons.(BAR:1971)
SUGGESTED ANSWER:Yes. The power of taxation may be exercieed co-
jointly with the police power. The tax in the form of license fee could promote the
general welfare of the members of the community who are threatened by famine and
resulting high prices.

2) The municipallty of "X" passed an ordinance

Imposing a tax of ten centavos (P0.10) on evary pair of shoes
taken out of the municipality. Is the tax valid? Reason. (BAR:
1976)
 SUGGESED ANSWER: No. Municipality of "X' being a local govenment unit is
prohibited trom imposing taxes,tees and charges upon gocds being carried into or
out of, or passing through the territorial jurisdiction of Baid local govarnment unit.

3) A province in Central Luzon passed an ordinance

183
the ordinance valid? Explain. (BAR: 1984)
SUGGESTED ANSWER:Yos,because it is a police measure intended to
protect the health safety of the populace through the inspection which
results in seeing to it that that only healthy hoga and chickens are
transported out of the province for sale.

4) Assume that a Santa Barbara Ordinance Imposas a tax

on the business of buying and/or selllng animals,like cattle, horses,
pigs and goats, based on the market value of the animals purchased
or sold. The Mayor and the Treasurer, In implementing the ordinance,
requlred the payment of tho tax on all animals passing through the
town lImits destined for the animal markets of its nølghboring towns.
a) As a businessman affected by the ordlnance, on
what grounds can you challenge the collection of the tax?
Explain.
(BAR: 1987)
SUGGESTED ANSWER: I shail chalienge the ordinance on the ground that it
violates the common limitation that local government units cannot impose taxes,
fees and charges, and other imposition upon goods camied into or out cf, or
passing through the territorial jurisdiction of the local govemment units in the guise
of charges for wharfage, tolls for bridges or otherwise, or other fees or charges in
any form whatsoever upon such goods or merchandise. [LGC,Sec.133(e)]

b) As the Municipal Attomey, explain how you will

meet
the challenge.. (BAR: 1987)
SUGGESTED ANSWER: I would that the ordinance was In the exercise of
police power. Local Government units are prohibited from imposing fees upon
goods that pass through its territorial boundaries if the same was an exercise of
the power of taxation and other revenue raising powers.Since the ordinance is an
exercise of police power the prohibition does not apply.

MULTIPLE CHOICE QUESTION:

Assume that a Santa Barbara Ordinance,after the
requisite public hearing and publication, was passed
imposing a tax on the business of buying and/orselling the
payment of the tax onall animals passing through the town
limitsdestined for the animal markets of its neighboring
towms.
beforeprescription has set,'a businessman affected by the
After following all the procedural requirements,and

184
ordinance challenges the validity of the Ordinance.
As the Municipal Attomey, explain how will you meet the
challenge?
a. I would rely upon the power of local govemment
units
to raise their own sources of revenue and to levy taxes, fees
and other charges.
b. I would raise the defense that there was
uniformity and valid classification. The tax is imposed with
the same force and.effect upon all traders of animals without
discrimination.
c. The enactment is a valid exercise of police power
intended to protect the health and safety of the inhabitants
because it regulates the movement of animals which may
transmit diseases.
d. 'The businessman is estopped from impugning
the validity of the Ordinance because he participated during
the public hearing without raising any objections as to
validity. SUGGESTED ANSWER:c
10.Local government units cannot levy on agricultural and
acquatic products sold by marginal farmers or fishermen.
“Common Limitations on the Taxing Powers of Local
Government Authorities. - Unless otherwise provided therein,
the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of
the following:
XXX
XXX

(f) taxes, fees or charges on agricultural and acquatic

products when sold by marginal farmers or fishermen; xxx xxx.
” . [LGC, Sec. 133 (1), paraphrasing, and emphasis supplied)

a. Rationale for the prohibition. The above prohibition

is in line with the fundamental principle of local
government taxation that the exercise of the taxing and
other revenue raising powers of local govemment units
shall not be contrary to public policy. [LGC, Sec.130 (b)
(4), paraphrasing supplied)

184

A salutary public policy is to assist marginal farmers and

fishemen in their economic plight so' they shouid not be
burdened with taxes on their agricultural and acquatic

185
185
products.
b. Agricultural producte,defned. Includes yield of the
soil, such as
1)com,
2) rice,
3) wheat,
4) rye, 5) hay,.
6) coconuts,
7) sugarcane,
8)tobacco, 9)
root crops.
10) vegetables.
11) fruits;
12) flowers,
a) and their by-products,
13) ordinary salt;
14) all kinds of fish;
15) poultry and
16) livestock
a) and animal products,
17) whether in their original form or not. [LGC,Sec.131
(a), arrangement and numbering supplied]
c. “Whether in their original form or not,” defined.
'The phrase “whether in their original form or not'
refers “to the transformation of said products by the
farmer, fisherman, producer or owner through the
application of processes to preserve or otherwise to
prepare said products for the market such as freezing,
drying, salting, smoking, or stripping for purposes of
preserving or otherwise preparing said products for the
market.”
186

[LGC,Sec.131 (a) 2na par., arrangement and numb

supplied]
d. Acquatic products, defined. These are the
products of fresh and salt waters.
e.Marginalfarmer or fisherman, defined. An
individual
a. engaged in subsistence famning or fishing
186
 b. which shall be limited to the sale, barter, or exchange of
agricultural or marine products
c. produced by himself and his immediate family, [LGC, Sec.
131 (p), arrangement and numbering supplied]
d. and whose annual net income from such farming or
fishing
1) does not exceed Fifty Thousand Pesos
(P50,000.00)
2) or the poverty line
a) established by NEDA for the particular region
or locality,
b) whichever is higher. [IRR LGC,Art 220 (p).
arrangement and numbering supplied] ESSAY
QUESTIONS:
1) May a city legally tax the sale of lumber, which is a forest
product ? Reasons. (BAR: 1971)
SUGGESTED ANSWER: Yes, because it is not an agricultural or an
acquatic product
2) On December 29, 2012, the Sangguniang Panlungsod of
Olongapo City approved Ordinance No. 25, series of 2012,
which imposes a tax of one fifth (P0.20) centavo for every
board foot of logs which are sold locally by the
concessionairss. Miguel Aguirre, a forest concesslonaire and
sawmill owner, filed an action before the Regional Trial Court
of Zambales and Olongapo City to annul Ordinance No. 25.
Will the action prospər? Explain briefly your answer. (BAR:
1979, date supplied and reworded) .
SUGGESTED ANSWER: No,because Miguel Aguirre is not a
marginal farmer and logs are not agricultural or aquatic products.

11.Local government units cannot levy upon pioneer or

nonpioneer buslness enterprises for a certaln period. Codal
provision, Local Govemment Code of 1991. “ Common
Limitations on the Taxing Powers of Local Govemment
Authoritles. - Unless otherwise provided therein, the exercise of
186

the taxing powers of provinces, cities, municipalities, and

barangays shall not axtend to the levy of the following:
XXX
XXX XXX

187
186
 (8) taxes on business enterprises certified to by he Board of
Investments as pioneer or non-pioneer for period of six (6) and four
(4) years, respectively from he date of registration;xxx xxx. ”
[LGC,Sec.133 (g), araphrasing supplied]

2.Local 'government units cannot levy articies ubject to

excise taxes under the NIRC of 1997, or pon
petroleum products. “Common Limitations on he
Taxing Powers of Local Govemment Authorities. -
Jnless otherwise provided therein, the exercise of the
axing powers of provinces, cities, municipalities, and
arangays shall not extend to the levy of the following:
XXX XXX XXX

(h) Excise taxes on articles enumerated under the

ational Intemal Revenue Code, as amended, and xes,
fees or charges on petroleum products; xxx xxx.”
GC,Sec. 133 (h), paraphrasing supplied]
. Rationale for the prohibition. This is to prevent the
xpayer from being burdened with multiple pecuniary
mpositions on the same subject or object because the
rovisions of the National Intemal Revenue Code of
1997 ready imposes these taxes.
Articles subject to excise taxes under the ational
Internal Revenue Code, as amended:
1) Distilled spirits (NIRC of 1997,Sec.141);
(2)Wines (lbid., Sec.142);
3) Fermented liquor (Ibid.,Sec.143);
4) Tobacco products (Ibid., Sec.144);
5)Cigars and cigarettes (Ibid., Sec. 145);
6) Manufactured oils and other fuels (Ibid., Sec. 148)
7) Miscellaneous-articles
a) Automobiles (Ibid.,Sec.149);
b) Non-essential goods
 188

(1) Jewelry, opera glasses and lorgnettes [/bid.,

Sec.150(a)):
(2) Perfumes and toilet waters lorgnettes [ibid.
Sec.150(b)],
(3) Yachts and other vessels intended for
188
 .pleasure or sports lorgnettes [/bid., Sec. 150(c)];
8) Mineral products(Ibid.,Sec.151);
ESSAY QUESTION:
An ordinance imposes a. tax for the “ selling and
disposition of refined and manufactured oils, based on the
monthly allocátion actually delivered and distributed for sale
and intended for sale." Is the ordinance valid? Reasons.
(BAR:1982)
SUGGESTED ANSWER: No, if the refined and manufactured oils are
petroleum products. This constitutes an excise tax on petroleum products
which is among the common limitations on the power of local govemment
units to impose. [LGC, Sec. 133(h)]

13. Local government units cannot levy percentage of

value added taxes..“Common' Limitations on the Taxing
Powers of Local Government Authorities. -Unless otherwise
provided therein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
XXX XXX XXX

(i) Percentage or value added taxes on sales, barters or

exchanges or similar transactions on goods and services,
except as otherwise herein provided; xxx xxx.” [LGC, Sec.
133 (i), paraphrasing supplied)

a. General Rule: Local Govemment units cannot

impose percentage or value added taxes on sales,
barters or exchanges or similar transaction's on goods
and services. [LGC, Sec. 133 (1), paraphrasing
supplied] Exception:
Local government units may impose the prohibited taxes if
provided for under the Local Govemment Code.
EXAMPLES:
The province may impose taxes
1) on the business of printing and publications
(LGC, Sec.136);
2) franchise tax (Ibid., Sec.137).
189
 3) and amusement tax (Ibid., Sec 140), at
rates dependent upon certain percentages.
The tax on business on which municipalities are allowed

189

189
1o Impose under Sec. 144,LGC is also dependent upon
cortain percentages.
b. Rationale for the prohibition.This is to prevent the taxpayer
from being burdened with multiple pecuniary impositions on the
same subject or object because the provisions of the National
Intemal Revenue Code of 1997 already imposes these taxes.
c. Value-added tax, defined. A tax which is imposed only on
the increase in the worth, ment or importance of goods,
properties or services, and not on the total value of the goods
or services being sold or rendered.
1) Sale, defined. By the contract of sale one of the
contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent. (Civl Code
of the Philippinos,Article 1458)
2) Barter, defined. By the contract of barter or
exchange one of the parties binds himself to give one thing in
consideration of the other promises to give another thing.
(Civil Code of the
Philippines,Artcle 1638)

NOTES AND COMMENTS: If the consideration of the contract consists

partly in money, and partly in another thing,the transaction shall be

characterized by the manifest intention of the parties. If such intention does

not clearly appear, it shall be considered a barter if the thing given as a part of

the consideration exceeds the amount of the money or its equivalent;

otherwise, it is a sale.(Civil Code of the Philippines,Article 1468)

d.Taxes considered as percentage taxes on sales Which are

prohibited to be imposed.
1)For purposes of the limitation with respect to the imposition of
thepercentage tax on sales, a municipal ordinance whichprescribes
a set ratio between the amount ate ax andvolume of sale of the
taxpayer imposes a sales tax and is nulland void for being outside
190

of the power of the municipality to enact. (Pepsi-Cola Bottling

Company v. Muncipaly of Tanauan,Leyte,69 SCRA 460)
190
190
 2) A percentage tax is one imposed on a fixed ratio between the
gross sales or receipts and the burden imposed upon the taxpayer. (City
of Manila v. Inter-island Gas Service,Inc, 99 Phil.847)

1) Taxes not considered as percentage taxes on

sale which are allowed to be imposed.
a) A fixed tax of P0.30 per sack of cassava starch
shipped out of municipality is not a percentage tax on sales of
any other fom of tax based on sales. It is a fixed tax on each
sack of cassava starch "shipped out" of the municipality and not
based on sales. (Matalin Coconut Co.,Inc.v. Municipal Council
of Malabang, Lanao Del Sur,143 SCRA 404)
NOTES AND COMMENTS: The above imposition mạy fall
under the common limitations hence invalid.
b) “A tax of one centavo (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity on all soft drinks
produced or manufactured. .." does not partake of the nature of
a percentage tax on sales, or other taxes in any form based
thereon. The tax is levied on the produce (whether sold or not)
and not on the sales. The volume capacity of the taxpayer's
production of softdrinks considered solely for purposes of
determining the tax rate on the products, but there is no set ratio
between the volume of sales and amount of the tax. ” (Pepsi-
Cola Bottling Company v.Municipality of Tanauan, Leyte, 69
SCRA 460,468)
c) A levy on tobacco redrying plants based on the
quantity of leaf tobacco being redried is not a percentage tax on
sale. (Northem Philippine Tobacco Corp., v. Municipality of
Agoo, et al.,L-26447,January 30,1970)

ESSAY QUESTIONS:
1) Maya municipality impose percentage taxes? Why?
(BAR:1968)
SUGGESTED ANSWER: A municipality may not impose percentage
or value-added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services [LGC, Sec. 133 (I)]. as the same is
among the common limitations on the taxing power of the local
govemment unit.

191
 An exception to this common limitation is where the Local Government
Code itself allows the municipality to impose a percentage tax, as in the case of
some percentage taxes on business allowed under

191

191
rate notexceedinghify(50%) percent of one (1%) percent on gross
receipts /LGC,Sec. 143(7)

2) The City of Bacolod enacted an ordinance imposing

another ordinance imposing annual municipal license tax upon all

cement factories according to the maximum annual outout capacity of

the factory. The sales tax on liquor was assalled on the ground that it

constituted double taxation because the beverage firm was also

subject to a business license tax of P600.00 per annum. Thecement

tax was questioned on the ground that it was the nature of a

percentage or sales tax which a city had no authority to impose.

Decide the case. (BAR: 1975)

SUGGESTED ANSWER:There is no double taxation because the

subject of sales tax on liquor is different from the business license tax It is to
be noted that if the sales tax is a percentage tax, then it is invalid.

On the other hand,the tax cn the cement factories is not a percentage

sales tax because it is based on the output not on sales.

3) On January 3, 2013, “X" municipality enacted

Ordinance No. 1, imposing a producer tax of P0.10 per case of
softdrinks produced or manufacturod by bottlers and manufacturers of
softdrinks within its termitorial limits. Later, on January 4, 2013, “X"
municipality enacted Ordinance No. 347,similarly imposing on bottlers
and manufacturers of softdrinks a producers tax of P0.10 per every 8
ounces of softdrinks bottled instead of P0.10 per case under
Ordinance No.1.ABC Bottling Company challenges the
constitutionality of the two ordinances, maintalning that (1) The tax
Imposed partakes of the nature of a sales tax beyond the power of
the municipality to impose; (2) The imposition constitutes double
taxation, is unfair and unjust because it aIready pays the proper tax
for its income in the manufacture and sale of Its softdrinks, and -(3)A
tax on softdrinks is a specific tax, outside the taxing powor of "X"
municipality. If you were the Judge,how would you rasolve the case?
Reasons.(BAR: 1976,dates supplied)
 SUGGESTED ANSWER:I would rule for the validity of the tax(1) snota
tax on sales because t is based on output,not sales.(2)There purposes.
(3)The tax is not a specinc tax because there is no specific tax imposed by
the NIRC on softdrinks.
 4) An ordinance imposes a graduated license tax based on
the quarterly sales.. Is the tax imposed by said ordinance a sales
tax and, therefore, not within the power of local government to
impose pursuant to Section 133 of the Local Govemment Code?
State the reasons for your answer. (BAR;1982)
SUGGESTED ANSWER:No, because this is in the nature of a
license fee imposed under the police power not under the power of
taxation.

5) Åfter a public hearing, the Sangguniang Bayan of

Teresa, Rizal, enacted an ordinance Imposing a tax of P0.01 per
liter of softdrinks manufactured and sold within the municipality. Is
the ordinance valid? Why? (BAR: 1983)
SUGGESTED ANSWER:Yes. There is no direct relation between the tax and
the sale hence, the tax is not a percentage tax on sale which is prohibited to be
imposed by a municipality.

There is no percentage tax on sale if the tax is imposed on a

quantity or unit of measure.

6) Water Unlimited Inc., a private company engaged

primarily in digging artesian wells, have been authorized to operate
a water suppíy system in the Municipality of Nabua, Camarines Sur
through which systems it sells water to consumers drawn from its
various artesian wells deriving a lucrative income therefrom. Lately,
it received an assessment for the payment of "water rentals." .
As counsel retained by the said company, what will your legal
advice on the issue be ? State your reasons therefore. (BAR: 1985)
SUGGESTED ANSWER:I would advise the company to impugn the
validity of the tax for being a percentage tax on sales which local govemment
units are prohibited to impose.

14.Local government units cannot levy upon transportation

contractors and common carriers. “Common Limitations on the
Taxing Powers of Local Govemment Authorities. - Unless otherwise
provided therein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of
the following:
XXX XXX XXX

()Taxes on the gross receipts of transportation contractors

and persons engaged in the transportation

193
a.Goneral Rule: Local Govemment units cannot taxes
on the gross receipts of transportation
impose
nractors and persons engaed in the transportation of
aussongers or frelght by hina and common camiers by air
and or water.[LGC,Sec. 133(I),paraphrasing supplied]

Excaption: Local govemment units may impose

the
prohibited taxes if provided for under the Local Govemment
Code.
The tax on business on which municipalities are allowed
to impose under the LGC, Sec. 143, may be imposed upon
transportation contractors and common camiers.
b. Rationale for the prohibition. This is to prevent the
taxpayer from being burdened with multiple pecuniary
impositions on the same subject or object because the
provisions of the National Intemal Revenue Code of 1997
already imposes these taxes.
c. Common carriers, defined."Common carriers are
persons,corporations, firms or associations engaged in the
business of carrying or transporting passengers or goods
or both by land, water, or air, for compensation, offering
their services to the public.”(Civil Code of the
Philippines,Article 1732)

15.Localgovernment units cannot levy upon

premlums paid by way of reinsurance or
retrocession "Common Limitations on the Taxing
Powers of Local Govermmant Authorities.- Unless
therwise provided therein,the exercise of the taxing
powers of provinces, cities, municipalities, and XXX

194
(k) Taxes onpremiums paid by way of reinsurance XXX
XXXor retrocession;xxx xxx."
[LGC,Sec. 133 (k),paraphrasing supplied)
194 194
16.Local government units cannot levy upon registration of
motor vehicles and permits for driving. “ Common
Limitations on the Taxing Powers of Local Govemment
Authorities. - Unless otherwise provided therein, the
exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy
of the following:
XXX
XXX XXX

(1) Taxes, fees or charges for the registration of motor

vehicles and for the issuance of all kinds of licenses or permits
for the driving thereof, except tricycles; xxx xxx." [LGC, Sec.
133
(1), paraphrasing supplied)
a. General Rule: Local Govemment units cannot impose
taxes, fees or charges for the registration of motor vehicles
and for the issuance of all kinds of licenses or permits for
the driving thereof. [LGC, Sec. 133 (I),paraphrasing
supplied]
Exception: Local govemment units may impose the
prohibited taxes, fees or charges on tricycles.
b. Rationale for the prohibition. This is to prevent the
taxpayer from being burdened with multiple pecuniary
impositionson the same subject or object because of the
provisions of the Land Transportation Code.
c. Motor vehicles, defined. "Motor vehicle" means any
vehicle propelled by motors. [LGC, Sec. 131 (q)]
17.Local govemment units cannot levy upon Philippine
products actually exported therefrom. “ Common
Limitations on the Taxing Powers of Local Govemment
Authorities. - Unless otherwise provided therein, the
exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy
of the following:
XXX XXX XXX

(m) Taxes, fees. or charges on Philippine products actually

exported therefrom, except as otherwise provided therein ; xxx
xxx." [LGC, Sec. 133 (m),paraphrasing supplied]
194
 General Rule: Local Government units cannot impose
taxes,fees,or charges on Philippine products actually
exported therefrom.ILGC,Sec.133(m),paraphrasing
supplied]

Exception: Local govemment units may impose

the prohibited taxes if provided for under the Local
Govemment Code.
The tax on business on which municipalities are allowed
to impose under the LGC, Sec. 143, may be imposed upon
exporters computed on the basis of their gross revenues
from Philippine products actually exported.

b. Rationale for the prohibition. Among tne fundamental

principles of local govemment taxation is that the
imposition must nat be contrary to national economic
policy ĮLGC, Sec. 130 (b) (4)] such as the promotion of
exports of Philippine products.
18.Local government unlts cannot levy upon CBBEs ard
cooperatives. “ Common Limltations on the.Taxing
Powers of Local Governiment Authoritles. -Unless
otherwise.providéd therein, the exercise of the taxing
powers of provincas, cities, municipalities, and
barangays shail not extend to the levy of the following:
XXX XXX
(n) Taxes, fees or charyes on Countryside and Barangay
Enterprises and cooperatives duly registered under R.A.
6819 and Republic Act Numbered Sixty-nine hundred thirty-
eight (R.A. No. 6938) otherwise known as the "Cooperatives
Code of the Philippines" respectively ;xxx xxx."
[LGC, Sec. 133 (n),paraphrasing,supplied)
a. Rationale for the prohibition. Among the fundamental
principles of local govemment taxation is that he
imposition must not be contrary to national economic
policy ILGC,Sec.130(b)(4)] such as the promotion of
exports of Philippine products.
196
19.Localgovernment units cannot levy taxøs, feos or
charges of anykind.on the Natlonal Govern-

196

196
ment, its agencies and instrumentalities, and local
government units. "Common Limitations on the Taxing Powers
of Local Government Authorities. -Unless otherwise provided
therein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of
the following:
XXX
XXX XXX

(0) Taxes, fees or charges of any kind on the National

Govemment, its agencies and instrumentalities, and local
govemment units." [LGC, Sec. 133 (0), paraphrasing supplied)
a. National Govenment, defined. "National Govemment
refers to the entire machinery of the central govemment, as
distinguished from the different forms of local govemments."
[Administrative Code of 1987. Introductory Provisions,
Sec.2(2)]
1) A local govemment unit 'could not impose
taxes on the national govemment. POEA purchased a lot
and building from Delta Motors Corporation (DMC)and
occupied the same. POEA was considered exempted,
although it was the buyer, because an LGU could not
impose taxes of any kind on the National Government.
(DOF 1" Indorsement dated May 3, 1993 to the
Treasurer.Mandaluyong)
b. Agency of the Government, defined. “ Agency of the
Govemment refers to any of the various units of the
Govemrnent, including a department, bureau, office,
instrumentality. or government-owned or controlled
corporation, or a local govemment or a distinct unit therein."
[Administrative
Code of 1987,Introductory Provisions,Sec.2(4)]
c. Government-owned or controlled corporation, defined.
"Govemment-owned or controlled corporation refers to any
agency organized as a stock or non-stock corporation, vested
with functions relating to public needs whether governmental
or proprietary in nature, and owned by the Govemment directly
or through its instrumentalities either wholly, or, where
applicable as in the case of stock

196
corporllons, to tho extont of at loast fifty-one () er cot partment of
Budget tho Civil Bervice Commizsion,and the Commission on Audit
for purposes of the exorcias and discharge of their respective
powers, functions end responsibilities with rospect to such
corporations" (Administrative Code of 1967,Introductory
Provimions,Sec,2(13)]

d. Instrumentallty, defined.“Instrumentality refers to any

agency of the Natianal Govemment, not integrated within
the department frarnework, veated with special functions or
jurisdiction by lavy, endowed with some if not all corporate
powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This tem
includes regulatory agencies, chartered institutions and
govemment-owned or controlled
corporations. Administrative Code of 1987, Introductory
Proviaions, Sec. 2(10)]
1) An instrumentallty of the govemment could
not be subject to tax by a local govemment unit. A
local govemment unit could not impose a tax on
PAGCOR because it is an instrumentality of the
govemment tasked to regulate gambling. (Basco v.
Philippine Amusement and Gaming Corporation, 197
SCRA 52)
2) Instance where agency or instrumentality
may be subject to tax. if the agency,and
instrumentality of the National Govemment, is a
business entity,it could be subject to tax by the local
government unit because of the withdrawal of all tax
exemptions under the provisions of the Local
Govemrnent Code.(National Power Corporation v.City
of Cabanatuan, G.R. No.149110,Apnil 9,2003)
 190

e.Local govemment,úefined. "Local Govemment refers to

the political subdivisions established by or in accordance
with the Constitution."[Administrative Code of 1987.
Introductory Provisions,Sec.2(3)
1) Political subdivislons. "The teritorial and poltical
subdivisions of the'Rcpublic of the Philippines are
190
the provinces, cities, municipalities, and barangays.
There shall be autonomous regions in Muslim Mindanao
and the Cordilleras as hereinafter provided." (1987
Philippine Constitution,Article X,Sec.1)
199

199