PRINCIPLES OF

TAXATION (Part 2)
Limitation of
Taxing Power
Limitations of Taxation
1. Inherent Limitations
– proceed from the very nature of the taxing power itself. The taxing
power has a very distinct and positive limitations some of which inhere
in its very nature and exist whether declared or not declared in the
written constitution.

2. Constitutional Limitations
– Said to be limitations prescribed in the Constitution.
Inherent Limitations
1. Tax must be for public purpose
– use for the general public
– proceeds may be used for
 Support of the government
 Some of the recognized objects of government
 To promote the welfare of the community

2. Non-Delegation of the Power to Tax

– power of taxation is purely legislative in function, hence cannot be
delegated either to the executive or judicial departments.
Inherent Limitations
3. Exemption of Government Agencies or Instrumentalities from Taxation
– government is exempt from taxes provided not doing proprietary
functions.
 Agencies performing governmental functions are exempted from tax.
 Agencies performing proprietary functions are subject to tax unless expressly
exempted.
 GOCCs performing proprietary functions are subject to tax, however the following are
granted exemptions:
 Government Service Insurance Systems (GSIS)
 Social Security System (SSS)
 Philippine Health Insurance Corporation (PHIC/Philhealth)
 Local Water Districts (RA 10026)
 Philippine Charity Sweepstakes Office (PCSO) – already taxable beginning
January 1, 2018 under Train Law
Inherent Limitations
4. International Comity
– the property of foreign government may not be taxed by another
– a State cannot tax another State based on the Principle of Sovereign
Equality among States, i.e. tax law passed imposing taxes on foreign
ambassadors is not a valid law.

5. Territorial Jurisdiction
– has authority within its boundaries
– the taxing power of a country is limited to the person and property within
and subject to its jurisdiction.
Constitutional Limitations
1. Due Process and Equal Protection of Law:
“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 laws”.

Due process – any deprivation of life, liberty, or property by the

government is with due process provided
Constitutional Limitations
Deprivation is done after compliance with the reasonable
methods of procedures prescribed by law.
Example: Give notice first before selling one’s property at
public auction.

Deprivation is done under the authority of a valid law ( not

contrary to constitution) or of the constitution itself.
Example: Law imposing tax for private purpose is void.
Constitutional Limitations
2. Equal Protection of Law
– all persons subject to legislation shall be treated alike under like
circumstances and conditions both in the privileges conferred and liabilities
imposed.
Constitutional Limitations
3. Uniformity and Equity
“The rule of taxation shall be uniform and equitable. The congress shall
evolve a progressive system of taxation”.

Uniformity in taxation – all taxable articles or properties of the same class

shall be taxed at the same rate.

Equity in Taxation – implies that the amount of tax must be just in the light of
the taxpayer’s ability to pay.
Constitutional Limitations

4. Properties Constitutionally Exempt from Taxation

“ 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”. (Sec. 28 (3), Art. VI)
Constitutional Limitations

5. President’s power to veto separate items in revenue or tariff bill

pocket veto – total
item veto – part/partial

6. Majority of all the members of the Congress granting tax

exemption
Other Doctrines/
Rule in Taxation
Other Doctrines
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.

– not applicable to cases where the taxes involved are totally unrelated.
Other Doctrines
Set-off of taxes
– this doctrine states that taxes are not subject to set-off or legal
compensation because the government and the taxpayer are not mutual
creditor and debtor of each other.

Exceptions to this rule are the following:

1. Where both the claims of the government and the taxpayer against each
other have already become due, demandable and fully liquidated
2. When there is an actual compromise between the taxpayer and the tax
officer.
Other Doctrines
Compromise
– this doctrine provides that compromises are generally allowed and
enforceable when the subject matter thereof is not prohibited from being
compromised and the person entering such compromise is duly authorized
to do so.
Other Doctrines
The law allows the following persons to do compromise in behalf of the
government:
1. Only the BIR Commissioner is expressly authorized by the Tax Code to
enter into compromise for both civil and criminal liabilities subject to
certain conditions.

2. The Collector of Customs is given the power to compromise with respect

to customs duties limited to cases where legitimate authority is
specifically granted, such as in the remission of duties.
Other Doctrines
The law allows the following persons to do compromise in behalf of the
government:
3. The Customs Commissioner, subject to approval by the Secretary of
Finance, has the power to compromise cases involving the imposition of
fines, surcharges and forfeitures, and

4. The Local Government Code has no provision regarding compromise;

however, tax liability (not criminal liability) is not prohibited from being
compromised. Even so, there is no specific authority given to any public
official to execute the compromise so as to render it effective.
Other Doctrines
Power to destroy
– viewed as a power to destroy in the sense that a lawful tax cannot be
defeated just because its exercise would be destructive or would bring
about insolvency to a taxpayer.
Double Taxation
There is no double taxation in the ff. cases:
1. By taxing corporate income and stockholders’ dividends from the same
corporation.

2. A tax imposed by the state and the local government upon the same
occupation, calling or activity.

3. Real estate tax and income tax collected on the same real estate
property leased for earning purposes.

4. Taxes are imposed on the taxpayers’ final product and the storage of raw
materials used in the production of the final product.
Two ways to escape tax:
a) tax evasion – taxpayer uses unlawful means
b) tax avoidance – or tax minimization, reducing or totally escaping payment of
taxes through legal means
How to counteract double taxation
1. Tax exemptions
– denotes a grant of immunity, expressed or implied, to a particular person,
corporation, or to persons or corporations of a particular class, from a tax
upon property or an excise which persons and corporation generally within
the same taxing district are obliged to pay.

2. Reciprocity clause/tax treaty

3. Tax credit
4. Allowance for deductions such as vanishing deduction in estate tax –
eliminated under TRAIN Law.
Forms of tax avoidance
1. Tax option – may use lower tax rates.

2. Shifting – transfer burden to another.

3. Transformation – absorbs the payment of tax to reduce prices and to

maintain market share, recover by improving the process of production.

4. Exemption – grant of immunity, expressed or implied, to a particular

person, corporation, or to persons, corporations of a particular class, from
a tax upon property or an excise which persons and corporations
generally within the same taxing district are obliged to pay