Bepitel, Breylle L.

Taxation Law Review Notes

(January 27, 2024)

I. General Principles (Concepts, Nature and Characteristics of Taxation and

Taxes)

What is taxation?

Taxation is a means by which the sovereign, through its law-making body, raises revenue to
defray the necessary expenses of the government. It is merely a way of apportioning the costs
of government among those who in some measures are privileged to enjoy its benefits and must
bear its burdens. As a power, taxation refers to the inherent power of the state to demand
enforced contributions for public purpose or purposes.

It is a “symbiotic” relationship between the people and the government. The people pay its
taxes to the government so that the government, in return, will give provide services to the
welfare of its people. The symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

Taxation is a symbiotic relationship, whereby in exchange for the protection that the citizens get
from the government, taxes are paid.

What is the limitation on the power of taxation?

Taxation has constitutional restraints. While taxation is said to be the power to destroy, it is by
no means unlimited. It is equally correct to postulate that the “power to tax is not the power to
destroy while the Supreme Court sits,” because of the constitutional restraints placed on a
taxing power that violated fundamental rights.

A. Power of Taxation as Distinguished from Police Power and Eminent Domain

Taxation Eminent Domain Police Power

Purpose The property (generally in the form of
money) is taken to support the
government. It is to raise revenue so
that the government may provide
services to its people.
To facilitate the taking of
private property for public use
The use of the property is
"regulated" for the purpose of
promoting the general
welfare; it is not
compensable.

If the primary purpose is the regulation

of some particular occupation, calling,
or activity, it is an exercise of police
power even if it incidentally produces
revenue.

Who exercises it? May be exercised only by the May be exercised only by the May be exercised only by the
government; or its political government; or its political government; or its political subdivisions
subdivisions subdivisions or may be
granted to public service
 companies or public utilities

Amount of Generally, there is no limit on the No amount imposed but Amount imposed should just be
imposition amount of tax that may be imposed rather the owner is paid the commensurate to cover the cost of
market value of property regulation, issuance of license or
taken surveillance

Impairment of Contracts may be impaired unless (a)
contract government is party to contract
granting exemption; or (b) involves
franchise
Eminent domain is not
superior to contracts.
The constitutional guarantee of non-
impairment of contracts is limited by the
exercise of the police power of the
State, in the interest of public health,
safety, morals and general welfare.

In the case of NTC v. CA, G.R. No. 127937 (1999), the Court ruled that that it is not the NTC that
imposed such a fee. It is the legislature itself. Since Congress has the power to exercise the State
inherent powers of Police Power, Eminent Domain and Taxation, the distinction between police
power and the power to tax, which could be significant if the exercising authority were mere political
subdivisions (since delegation by it to such political subdivisions of one power does not necessarily
include the other), would not be of any moment when, as in the case under consideration, Congress
itself exercises the power. All that is to be done would be to apply and enforce the law when
sufficiently definitive and not constitutional infirm.

B. Inherent and Constitutional Limitations of Taxation

Inherent Limitation
The following are the inherent limitations of taxation:
a. Public Purpose
b. Inherently Legislative
c. Territorial
d. International Comity
e. Exemption of Government Entities, Agencies, and Instrumentalities

a. Public Purpose
The proceeds of the tax must be used:
- for the support of the State; or
- for some recognized objects of government or directly to promote the welfare of
the community.

In the case of Lutz v. Araneta, G.R. No. L-7859 (1955), the Court ruled that the support of the sugar
industry is a public purpose for which a tax can be levied under the Constitution. As the protection
and promotion of the sugar industry is a matter of public concern, the Legislature may determine
within reasonable bounds what is necessary for its protection and expedient for its promotion. Here,
the legislative discretion must be allowed full play, subject only to the test of reasonableness;
 b. Inherently Legislative
General Rule: The power to tax is exclusively vested in the legislative body and it may
not be re-delegated.

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

Under the new Constitution, however, LGUs are now expressly given the power to
create its own sources of revenue and to levy taxes, fees and charges, subject to such
guidelines and limitations as the Congress may provide which must be consistent with
the basic policy of local autonomy. [Sec 5, Art. X, 1987 Constitution]

c. Territorial
A state may not tax property lying outside its borders or lay an excise or privilege tax
upon the exercise or enjoyment of a right or privilege derived from the laws of another
state and therein exercise and enjoyed.

d. International Comity
Comity – It is the respect accorded by nations to each other because they are sovereign
equals. Thus, the property or income of a foreign state or government may not be the
subject of taxation by another state.

e. Exemption of Government Entities, Agencies, and Instrumentalities

Agencies and instrumentalities of the government are exempt from tax.
Their exemption rests on the State's sovereign immunity from taxation.
The State cannot be taxed without its consent and such consent, being in
derogation of its sovereignty, is to be strictly construed.

Constitutional limitations

a. Due process clause

Due process in taxation requires the following:
- The tax must be for a public purpose;
- It must be imposed within taxing authority's territorial jurisdiction; and
- The assessment and/or collection is not arbitrary or oppressive.

The due process clause may be invoked where a taxing statute is so arbitrary that it finds no
support in the Constitution, as where it can be shown to amount to the confiscation of
property.

b. Equal protection clause

This is accomplished when the burden of the tax falls equally and impartially upon all the
persons in the same class under similar circumstance.
 c. Uniformity and equity
Uniformity: All articles or properties of the same class taxed at the same rate.

Equality: Apportionment must be more or less just in the light of taxpayer’s ability to
shoulder tax burden

The equal protection clause refers to like treatment in like circumstances. The uniformity
and equality clause refers to the proper relative treatment for tax purposes of persons in
like circumstances. Section 28 (1), Art. VI provides that Congress shall evolve a
progressive system of taxation. Hence, the Constitution does not really prohibit a
regressive system of taxation. A progressive system of taxation means that as resources
of the taxpayer become higher, the tax rate

d. Non-impairment of obligations of contracts

Non-impairment of obligations of contracts (Sec. 10, Art. III, Constitution) Applies only
when government is party to the contract granting exemption

Exception: In case of franchise tax. The Constitution provides that franchise is subject to
amendment, alteration, or repeal by Congress.

e. Prohibition against imprisonment for non-payment of poll tax

Prohibition against imprisonment for non-payment of poll tax (Sec. 20, Art. III,
Constitution)

No person will be imprisoned for non-payment of poll tax. However, the taxpayer can still
be made to pay fines and penalties for non-payment.

Poll tax: cedula/residence tax

f. Prohibition against taxation of religious, charitable and educational

entities/Exemption from real property taxes (Sec. 28 [3], Art. VI, Constitution)

Exemption under Sec. 28(3), Art. VI pertains only to real property tax (RPT).

Non-stock non-profit educational Revenues Exempt as long as it is used actually, directly and exclusively (ADE)
institutions for educational purposes, regardless of its source. (Sec. 4[3], Art. XIV,
Constitution;

Assets Exempt from RPT as long as they are used ADE for educational
purposes.

Non-stock non-profit hospitals Revenues Exempt from income tax if they are organized and operated
exclusively for charitable purposes and no part of its net income or
asset inures to the benefit of any member, organizer, etc. (Sec. 30[E],
NIRC)

Income from real or personal properties or from activites conducted

for profit, regardless of the disposition made of such income, shall be
subject to income tax. (Sec. 30, last par., NIRC)
 Assets
Exempt from RPT as long as they are used ADE for charitable
purposes. (Sec. 28[3], Art. VI, Constitution)

Other non-stock non-profit charitable Revenues

institutions Exempt provided that is organized and operated exclusively for
charitable purposes and no part of its net income or asset inures to
the benefit of any member, organizer, etc. (Sec. 30[E], NIRC).

Income from real or personal properties or from activities conducted

for profit, regardless of the disposition made of such income, shall
be subject to income tax. (Sec. 30, last par., NIRC)
Assets
Exempt as long as the property is it ADE used for charitable
purposes. (Sec. 28[3],Art. VI, Constitution)

Propriety non-profit hospital and Revenues

educational institutions Exempt from income tax if they are organized and operated
exclusively for charitable purposes and no part of its net income or
asset inures to the benefit of any member, organizer, etc. (Sec.
30[E], NIRC).

If the non-profit hospital/education institution earns income from its

for- profit activities, it will retain its tax exemption for its charitable
activities, but the income from for-profit activities will be subject to
the preferential rate of 10% under Section 27 (B), NIRC, provided
that its gross income from unrelated trade, business or activity does
not exceed 50% of its total gross income.
Assets
Exempt as long as the property is it ADE used for charitable
purposes. (Sec. 28[3],Art. VI, Constitution)

RPT exemption covers charitable institutions, churches, and parsonages or convents

appurtenant thereto, mosques and non-profit cemeteries and all lands, buildings and
improvements actually, directly and exclusively used for charitable, religious and educational
purposes

Definition of Terms:
•Charitable institution – essentially provide for free goods and services to the public (to an
indefinite number of persons) which would otherwise falls on the shoulders of the government.

•Exclusive - is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as enjoying a
privilege exclusively.' . . The words ‘dominant use’ or ‘principal use’ cannot be equated with
‘used exclusively’

In the case of CIR v. St. Luke’s, G.R. No. 203514, 2017, As for the income tax exemption of
charitable institutions under the NIRC, a charitable institution does not lose its character as such
and its exemption from taxes simply because it derives income from paying patients, whether
outpatient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution