Chapter 2  Some recognized object of government or directly

to promote the welfare of the community.

Inherent Limitations on the Power of Taxation
The Power To Tax Has Limits – the power to tax is
subject to limitations inherent upon it and those expressly
provided for by the constitution. Constitutional limitations
are those provided for in the constitution or implied from
its provisions, while inherent limitations are restrictions to
the power to tax attached to its nature
Inherent Limitations – Hereunder are the inherent
limitations of the exercise of power of taxation
1. Levied for public purposes,
2. Non – deligability of the taxing power
3. Territoriality or situs of taxation
4. Tax exemption of the government
5. International comity.
Violation of any or all of the inherent limitation constitutes
taking without due process of law and/or infringement of
the general principles of international law which form part
of the law of the land.
LEVIED FOR PUBLIC PURPOSE
It must promote the public welfare – the amount raised
must therefore inure to the benefit of the public or must
be used for
Thus, to justify any exercise of the power requires that
the expenditure which it is intended to meet shall be for
some public service or some object which concerns the
public welfare.
It is robbery if for private purpose – the legislature is
without power to appropriate public revenues for anything
but a public purpose.
Test to determine public purpose, broad
interpretation – there mere fact that the tax will be
directly enjoyed by a private individual does not make it
invalid so long as some link to the public welfare is
established.
The following tests may be used in determining the
existence of public purpose
1. Duty Test – there is public purpose if the thing to
be furthered by the appropriation of public revenue
is something which is the duty of the state as a
government to provide.
2. Promotion of General Welfare Test - there is
public purpose if the proceeds of the tax will
directly promote the welfare of the community in
equal measure.

 To support of the state

Presumption of Public Purpose – where the purpose of
the tax is not specifically stated, there is a presumption
that it is created for a public purpose. Thus, public
purpose exists in the following
1. Pension paid to war veterans
2. Unemployment relief.
3. Scholarships for poor but deserving students
4. Tax on sugar for rehabilitation and upliftment of
the sugar industry
5. Semi – postal stamp on mail matter to raise funds
for the eradication of tuberculosis.
Time When Public Purpose is determined – public
purpose must exist at the time of the enactment of the
law levying the tax or appropriating the funds.
Thus, if a law is passed appropriating funds for the
maintenance of a private road, the law is invalid because
it is not for public purpose. It is a general rule that the
legislature is without power to appropriate public revenue
for anything but a public purpose. It is the essential
character of the direct object of the expenditure which
must determine its validity as justifying a tax, and not the
magnitude of the interest to be affected nor the degree to
which the general advantage of the community and thus
the public welfare, may be ultimately benefited by their
promotion.
NON – DELIGABILITY
The People as the Primary Source of Power – thus,
the power of the legislature is itself a delegated power
conveyed to it by the people
Origin of Non – Delegation of Legislative Power – to
delegate is to transfer power to someone. The power of
taxation is exclusively legislative and being a delegated
power, it cannot be re – delegated. This is in line with the
legal maxim “delegate potestas non potest delagari”
Effective Demise (transfer) of the Non – Delegability
Doctrine - delegation by congress has long been
recognized as necessary in order that the exertion of
legislative power does not become futility. Our
jurisprudence has been driven by a practical
understanding that in our increasingly complex society,
replete with ever changing and more technical problems,
congress simply cannot do its job absent an ability to
delegate power under broad general directives. Thus,
the delegated power, if at all, therefore is not the
determination of what the law shall be, but merely the
ascertainment of the facts and circumstances upon
which the application of said law is to be predicated.
Thus, the legal maxim “delegate potestas non potest
delegare” has been made to adopt itself to the
complexities of modern government, giving rise to
the adoption, within certain limits, of the principle of
subordinate legislation.
The following are delegable powers:
 Tariff powers – congress may authorize the
president to fix within specified limits and subject
to such limitation and restriction as it may impose,
tariff rates. The reason for this delegation is the
necessity, not to say expediency, of giving the
President the authority to act immediately on
certain matters affecting the national economy lest
delay result in hardship to the people.
 Emergency Power – In times of war or other
national emergency, the congress may, by law,
authorize the President, for a limited period and
subject to such restriction as it may prescribe, to
exercise powers necessary and proper to carry out
a declared national policy.
 Treaty and Executive Agreement Powers – the
president has the power to enter into executive
agreements, and to ratify treaties, which may
contain tax exemption provisions, subject to the
concurrence of at least 2/3 of the members of the
senate.
*the concurrence of said House of Congress is
required by our law in the making of “treaties”
which are, however, distinct from “executive
agreements”, which may be validly entered into
without such concurrence. Treaties are formal
documents which require ratification with the
approval of 2/3 of the Senate. While Executive
Agreements become binding without the need of a
vote by the Senate or Congress.
 Local Taxing Power – the theory of non –
delegation of legislative power does not apply in
matters of local concern. This delegation is
justified by the necessary implication that the
power to create political corporation for purposes
of local self – government carries with it the power
to confer on such local government agencies the
authority to tax.
 Initiative Referendum – Initiative is the power of
the people to propose and enact legislation without
action by the legislature. On the other hand,
referendum is the power of the people to approve
or reject any act of the legislature, and also to
approve or reject legislation that the legislature
has referred to them. Initiatives and referendum
must be based upon constitutional or legislative
authority to conduct the same. The subject matters
of initiative and referendum are limited by the
provisions granting the powers, and legislation
frequently provides that certain matters are not
subject to initiative and referendum.
 Administrative Matters – with the proliferation of
specialized activities and their attendant peculiar
problems, the national legislature has found it
more and more necessary to entrust to
administrative agencies the power of subordinate
legislation. Delegation is valid as regards; a.
valuation of property pursuant to fixed rules b.
equalization of assessments by a central body; c.
collection of taxes.
Every tax system has two basic compositions: 1.
The elements that enter into the imposition of the
tax; and 2. The steps taken for its assessment and
collection. The first is legislation while the second
is tax administration. In brief, legislation is making
the law, while tax administration is giving effect to
the law. tax administration is always delegable.
The power which congress is prohibited from
delegating are those which are strictly, or
inherently and exclusively legislative. Purely
legislative power, which can never be delegated,
has been described as the authority to make a
complete law.
Thus, the rule is that in order that a court may be
justified in holding a statute unconstitutional as a
delegation of legislative power, it must appear that
the power involved is purely legislative in nature,
that is, one appertaining exclusively to the
legislative department.
In every case of permissible delegation, there must be a
showing that the delegation itself is valid. It is valid only if
the law is
o Is complete in itself, setting forth therein the
policy to be executed by the delegate; and
o Fixes a standard, the limits of which are
sufficiently determinate and determinable to
which the delegate must conform in the
performance of his functions.
This is known as the completeness test and the sufficient
standard test.
Non – Delegable Powers – the following matters cannot
be delegated by congress
1. Selection of property or transaction to be taxed
2. Determination of purpose
3. Rate of taxation
4. Rules of taxation.
However, while determination of rates of tax may not be
delegated, the ascertainment of facts upon which
enforcement and administration of increase in rate is
contingent, may be delegated to the executive.
Prohibition on Executive Legislation – Executive
Orders pertaining to laws are allowed to be carried out
when they clarify or act to further enhance a law enacted
by the legislature.
Prohibition on Judicial Legislation – the judiciary can
make a law through case precedent and enforce
executive and legislative decrees. This, however is
subject to limitation. The courts must not read into the law
what is not there.
TERRITORIALITY OR SITUS OF TAXATION
Situs of Taxation – situs means “situation, location, or
place.” Situs of taxation is the place or authority that has
the right to impose and collect taxes. If no constitutional
provisions are violated, the power of the legislature to fix
situs is undoubted.
General Rule – 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 exercised or
enjoyed.
In other words, taxation can only be exercised within the
territorial jurisdiction of the taxing authority. Such power
is necessarily limited only to persons, property or
business within its jurisdiction.
Within the protection of the state – territoriality
principle is the result of the concept that taxes are paid
for the protection and services provided by the taxing
authority which could not be provided outside the
territorial limits of the taxing state. Thus, a legal situs
cannot be given to property for the purpose of taxation
where neither the property nor the person is within the
protection of the taxing state.
However, tax laws of a state may operate outside of
the territorial jurisdiction provided the same is
imposed on its citizens or subjects who/which, in
view of their attachment, still derive protection from
the state. Thus, under the 1997 National Internal
Revenue Code, resident citizens and domestic
corporation are subject to tax on their income from
sources from both domestic and abroad.
However, a state may not apply its tax laws even within
its territory in matters exempted by treaty obligations and
international comity pursuant to the general principles of
international law.
Determination of Situs – the situs of taxation is
determined through a number of factors, to wit:
1. Subject Matter of the Tax – situs may depend on
what is being taxed: excise/privilege, business,
occupation, person, act or activity.
Example: Excise or Privilege (e.g. performance of
an act or the engaging in an occupation) – based
on the place where the act is performed or
occupation is engaged in and not upon the
domicile of the person subject to the excise nor
upon the physical location of the property in
connection with the act or occupation taxed.
 An example of excise or privilege tax is a
contractor’s tax which is a tax imposed upon the
privilege of engaging in business. It generally in
the nature of an excise tax on the exercise of a
privilege of selling services or labor rather than a
sale on products. Being an excise tax, it can be
levied by the taxing authority only when the acts,
privileges, or business are done or performed
within the jurisdiction of said authority.
2. Nature/Kind/Classification of the Tax – situs
may depend on what tax is being levied; income
tax, import duty, sales tax or a real property tax.
Example: a. Income Tax may be based on
citizenship of the taxpayer, residence or domicile
of the taxpayer, and source of the income.
Incidentally, the present income tax law, in levying
the tax, adopts the most comprehensive tax situs
of nationality and residence of the taxpayer that
renders citizens, regardless of residence and
resident aliens subject to income tax liability on
their income from all sources and of the generally
accepted and internationally recognized income
taxable base that can subject non-resident aliens
and foreign corporations to income tax on their
income from Philippine sources.
Donor’s tax or the tax on the transmission of
property from a donor to a done, and estate tax or
the tax on the transmission of property from a
decedent to his heirs may be subject to taxation in
the state where the transferor is (was) a citizen or
resident, or where the property is located in case
of non – resident.
As a general rule, the VAT systems uses the
destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed
only in the country where they are consumed.
Thus, exports are zero – rated, while imports are
taxed. Under this criterion, the place where the
services is rendered determines the jurisdiction to
impose the VAT.
3. Citizenship of the taxpayer – situs may depend
on which state the taxpayer is a citizen of, or
probably an alien, dual citizen, stateless or
refugee. In case of refugee or stateless persons,
conventions/treaties/bilateral agreements
generally apply. In the absence thereof, the
receiving state, in its discretion, may impose taxes
or grant exemptions to refugees or stateless
persons.
4. Residence of the Taxpayer – situs may depend
on the residence of the taxpayer: resident, non –
resident.
 Example: poll, capitation or community taxes are
based on the residence of the taxpayer, regardless
of the source of income or location of the property
of the taxpayer.
5. Location of the Property – situs may depend on
the place the thing or property is located: within
the Philippines or outside the Philippines
Examples: a. taxability of real property depends
on where the property is located b. taxability of
tangible personal property depends on where the
property is physically located regardless of the
residence or location of the owner c. taxability of
intangible personal property depends on the
domicile of the owner except when the property
has acquired a business situs in another
jurisdiction; or the law itself provides for the
situates of the subject of tax.
ILLUSTRATION
 Premiums paid for an insurance contract
executed outside the Philippines
covering properties situated in the
Philippines are subject to Philippine Tax
since the properties subject of the
contract receive protection from
Philippine government.
 Only those properties situated within the
Philippines are subject to real property
tax.
 A resident Filipino who owns properties
situated in the Philippines and abroad is
taxable on his income from these
properties. On the other hand, a non –
resident (either Filipino or alien) and a
resident alien who owns properties in
the Philippines and abroad are taxable
only on their income from properties
within the Philippines.
TAX SITUS UNDER THE 1997 NATIONAL
INTERNAL REVENUE CODE (NIRC)
The NIRC provides for the following rules:
1. A citizen of the Philippines residing therein is
taxable on all income derived from sources within
and without the Philippines.
2. A non-resident citizen is taxable only on income
derived from sources within the Philippines
3. An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on
income from sources within the Philippines:
Provided, that a seaman who is a citizen of the
Philippines and who receives compensation for
services rendered abroad as a member of the
 complement of a vessel engaged exclusively in
international trade shall be treated as an overseas
contract worker.
4. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines.
5. A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
6. A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only
on income derived from sources within the
Philippines.
Note: If pursuant to the laws of the foreign country,
natural – born citizens were naturalized as such, they
have not lost their citizenship despite taking oath of
allegiance to the Republic of the Philippines, may they
choose the citizenship beneficial to them for tax
purposes? - the answer of the Atty. Dizon is that they
are taxable as such. Under the Philippine laws, they
are citizens of the Philippines and therefore they are
taxable as such. As Filipino citizens, they are subject
to duties and other obligations imposed on other
Filipinos, such as paying the necessary community
tax and other tax liabilities in accordance with the tax
laws of the Philippines subject to residency rules.
Exemption of Government
The concept of exemption, a matter of public policy –
the property of the state, its agencies and subdivisions
devoted to government uses and purposes, is generally
exempt from taxation even in the absence of an express
provision of law. It is axiomatic that when public property
is involved, exemption is the rule and taxation is the
exception.
Reasons for exemptions
1. On the theory that such taxation would merely
have the effect of taking money out of one pocket
and putting it in another.
2. Taxing such property would no serve, in the final
analysis, the main purpose of taxation (revenue)
what is more, it would tend to defeat it, on account
of the paper work, time and expense it would
entail.
3. So that the functions of the government shall not
be unduly impeded.
4. To reduce the amount of money that has to be
handled by the government in the course of its
operation.
Example: R.A 7160 the Local Government Code
expressly prohibits local government units from levying
tax on the national government, its agencies and
instrumentalities and other local government units.
Nonetheless, the government may tax itself – the
constitution is silent on whether congress is prohibited
from taxing the properties of the agencies of the
government.
Government – owned or controlled corporation,
agencies or instrumentalities are subject to tax under
the National Internal Revenue Code and the Local
Government Code except the GSIS, SSS, Local
Water District (LWD) Philippine Health Insurance
Corporation (PHIC) and the PCSO – Note that only the
income from proprietary activities are taxable. Those from
essential governmental function remain to be exempt. In
taxing government – owned or controlled corporation, the
state suffer no loss.
On the other hand, Local Government code withdrew the
tax exemptions of government – owned or controlled
corporations the primary reason is that such privilege
resulted in serious tax base erosion and distortions in the
tax treatment of similarly situated enterprise.
Exemption of Donation to the Government, GOCC
and Agency
Distinction Between Republic and National
Government, GOCC and Agency - The Republic of the
Philippines is broader which the Administrative Code of
1987 defines as the corporate governmental entity
through which the functions of government are exercised
through the Philippines. On the other hand, National
Government refers to the entire machinery if the central
government which is composed of the 3 great
departments, executive, legislative, and judicial.
GOCC refers to any agency organized as stock or non –
Stock Corporation, vested with functions relating to public
needs whether governmental or proprietary in nature, and
owned by the government directly or through its
instrumentalities. On the other hand, agency of the
government refers to any of the various units of the
government, including a department, bureau, office,
instrumentality or government – owned or controlled
corporations or a local government or a distinct unit
therein. On the other hand, instrumentality refers to any
agency of the national government, not integrated within
the department framework vested with special functions
or jurisdiction by law, endowed with some if not all
corporate powers usually through a charter.
International Comity
International comity – international obligations
concomitant with our acceptance of the principles of
international law as part of our law demand that certain
representative of foreign states stationed and property of
such foreign states within our territory be exempted from
taxation.
There are 2 doctrines behind this theory
 1. Doctrine of Sovereign Equality – as between
equals there is no sovereign. When a foreign
sovereign enters the territorial jurisdiction of
another, it does not subject itself to the jurisdiction
of the other.
2. Doctrine of Sovereign Immunity – it is a
principle that the state or its government cannot be
sued without its consent which has its root in the
juridical and practical notion that the state can do
no wrong. Thus, if the Philippines imposes tax and
the foreign sovereign does not pay, the latter
cannot be sued for non – payment without its
consent and even if the foreign sovereign
consents to the suit and is adjudged liable,
collectability of the assessed tax will be a different
issue and will require another consent.
Illustration:
1. Diplomatic and consular representative are
exempt from the community tax;
2. Petroleum products sold to exempt entities or
agencies covered by tax treaties, conventions and
other international agreements for their use or
consumption are exempt from excise tax.
Provided, however, that the country of said
foreign international carrier or exempt entities
exempts similar taxes petroleum products sold to
Philippine carriers, entities or agencies
3. Social security benefits, retirement gratuities,
pensions and other similar benefits received by
resident or non – resident citizens of the
Philippines or aliens who come to reside
permanently in the Philippines from sovereign
government agencies private or public are not
taxable.
4. Income derived by Foreign Government from
investment in the Philippines in loans, stocks,
bond or other domestic securities or from interest
on deposits in banks in the Philippines by:
a. Foreign government
b. Financing institution owned, controlled or
enjoying refinancing from foreign
governments and
c. International or regional financial
institutions established by foreign
governments are not taxable
d. Donations to foreign institutions or
international organizations which are fully
deductible in pursuance of or in compliance
with agreements, treaties or commitments
entered by the government of the
Philippines and the foreign institutions or
international organizations or in pursuance
of special laws are allowable deduction the
gross income of the donor.