INHERENT LIMITATIONS

2. INTERNATIONAL COMITY
Basis of this Rule
Under Section 2, Article II of our Constitution, the
Philippines "adopts the generally accepted principles
of international law as part of the law of the land,
and adheres to the policy of peace, equality, justice,
freedom, cooperation, and amity with all nations."
One principle of international law which has attained
wide recognition is the principle of Sovereign Equality
Among States. According to this principle, "states are
juridically equal, enjoy the same rights, and have equal
capacity in their exercise. The rights of each one do not
depend upon the power which it possesses to assure
its exercise, but upon the simple fact of its existence
as a person under international law."50 This principle,
in turn, finds its roots in the rule of par in parem non
habet imperium, where even the strongest state cannot
assume jurisdiction over another state, no matter how
weak, or question the validity of its acts in so far as
they are made to take effect within its own territory. All
states, including the smallest and least influential, are
also entitled to their dignity and the protection of their
honor and reputation.
To illustrate: If a tax law is passed imposing taxes
on the income of foreign ambassadors or imposing
real property tax upon foreign embassies, this is NOT
a valid law because the imposition is in violation of
the universal principles of international law. Under
international laws, foreign embassies are considered
extensions of the territoriality of the foreign states; to
impose taxes upon them would be tantamount to an
exercise of jurisdiction over these foreign states.
3. TERRITORIALITY
Since laws cease to operate beyond a country's
jurisdictional limits, the taxing power of a country is
likewise limited to person and property within and
subject to its jurisdiction. This same rule applies to the
taxing power of a territory.
Rules Observed in Fixing Tax Situs
1. POLL/CAPITATION/COMMUNITY TAX
Poll or capitation, or community taxes are
based upon the residence of the taxpayer, regardless
of the source of income or location of the
property of the taxpayer.
2. PROPERTY TAX
Real Property, where taxable
Real estate is subject to taxation in the state or
country where it is located, regardless of whether
the owner is a resident or a non-resident. (First
National Bank v. Maine, 284 U.S. 312. 77 ALR 401)
Personal property, where taxable
On the other hand, the situs of personal property,
wherever it was actually kept or located, was
held to be at the domicile of its owner, following
the age-old doctrine of mobilia sequuntur personam.
Domicile
The domicile of a person is the place which
constitutes the principal seat of his residence, his business, his
pursuits, his connections, his
attachments and his political relations. It embraces
the fact of residence at a place with the intent to
regard it and make it a home and live there for
an indefinite time. To establish a domicile, the act
and the intent must concur. There must be the fact
of living in a place with the intent to make it one's
home. (26 R.C.L., pp. 274-275)
Mobilia Sequuntur Personam"
Movables follow the person. Although a mere
fiction of law, without any constitutional foundation,
it is nevertheless applied when convenient, provided
it is not inconsistent with express provisions of the
law, or when its application would result in injustice,
or unless such property has acquired an actual situs
elsewhere. To acquire a situs in a state other than the
domicile of the owner, tangible property must have a
definite location there, accompanied by some degree of
permanency; mere temporary or transient presence in
the state is not sufficient. (26 R.C.L. pp. 278-279; 51 Am.

Jur. 466-468; Union Trust v. Collector)

Thus, in cases of shares of stock, its situs for
the purposes of taxation is the state in which they
are permanently kept regardless of the domicile of
the owner or the state in which the corporation was
organized. (51 Am. Jur. 502) This is best illustrated
in the case of Wells Fargo Bank v. Collector-1 where the
Supreme Court ruled that the shares of stock left
by a non-resident alien decedent in an anonymous
partnership in the Philippines are subject to Philippine
inheritance tax notwithstanding the mobilia rule.
According to the Court, the mobilia rule should yield to
reason. The shares of stock are also taxable in the situs
of their actual location, i.e., the Philippines.
NOTE:
Section 104, Republic Act 8424 enumerates certain
properties which have acquired actual situs in the
Philippines, viz.:
a. franchise exercised in the Philippines;
b. shares of stock, obligations, bonds issued by
domestic corporations organized and constituted
in accordance with Philippine laws;
c. shares, obligations, bonds issued by a foreign
corporation where 85% of its business is located
in the Philippines. It is subject to donor's tax and
estate tax;
d. Shares, obligations, bonds issued by foreign
corporations which has acquired business situs,
when such have been used in the furtherance of
the business of the foreign corporation;
e. Shares/rights in a partnership business or industry
established in the Philippines.
These properties are considered as situated, thus
taxed, in the Philippines; the residence of their owners
is immaterial.
Thus, the RULE: Irrespective of the owner,
donor's tax or estate tax can be imposed upon these
properties.
EXCEPT where the foreign country grants
exemption or does not impose taxes on intangible properties
of Filipino citizens.
EXCISE TAX
Income Tax (Section 23, R.A. 8424)
(CRITERIA: PLACE, NATIONALITY, RESIDENCE)
Place applied to
a. Non-resident alien
b. Non-resident foreign corporations
c. Non-resident citizen
taxed upon sources of income derived from
within the Philippines.
Nationality applied to
a. Resident citizen
b. Domestic corporation
taxed upon sources of income derived from
within and without the Philippines
Residence applied to
a. Resident alien
b. Resident Foreign Corporation
taxed upon income derived from sources
within the Philippines
NON-DELEGATION OF THE POWER TO TAX
The power to tax is exclusively vested in the
legislative body.
Exceptions
A. Article VI, Section 28(2) of the Constitution
The Congress may, by law, authorize the
President to impose tariff rates, import and
export quotas, etc. [custom duties], subject to the
limitations and guidelines as the Congress may impose,
consistent with the national development
program of the government.
B. Article X, Section 5 of the Constitution
Each local government unit shall have the
power to create its own sources of revenue, fees,
charges, subject to such guidelines and limitations
as the Congress may provide consistent with the
basic policy of local autonomy. Such taxes, fees

and other charges shall accrue exclusively to the

local government
For a valid delegation of power, it is essential that
the law delegating the power must be (1) complete in
itself, that is, it must set forth the policy to be executed
by the delegate and, (2) it must fix a standard limits
of which are sufficiently determinate or determinable
to which the delegate must conform.
EXEMPTION FROM TAXATION OF GOVERNMENT
AGENCIES/INSTRUMENTALITIES
Properties of the national government as well as
those of the local government units are not subject to
tax, otherwise it will result in the absurd situation of
the government "taking money from one pocket and
putting it in another."
May the government tax itself?
The Constitution is silent on whether Congress is
prohibited from taxing the properties of the agencies
of the government. However, Chief Justice Hilario G.
Davide, Jr. has stated that "nothing can prevent Congress
from decreeing that even instrumentalities or agencies of
the government performing governmental functions may be
subject to tax."'*
Agencies performing governmental functions and
proprietary functions distinguished
A distinction has been made between agencies
performing governmental functions and those
performing proprietary functions. As a rule, agencies
performing governmental functions are tax-exempt unless
expressly taxed. On the other hand, agencies performing
proprietary functions are subject to tax unless expressly
exempted.
Government-owned and -controlled corporations
perform proprietary functions; hence, they are subject
to taxation. However, certain corporations have been
granted exemption under Section 27(C) of R.A. 8424 as
amended by R.A. 9337 which took effect on 1 July 2005,
to wit:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
Instrumentality of the National Government is
exempt from local taxation
In Manila International Airport Authority
SEC. 2. General Terms Defined.- x x x
(13) Government-owned orcontrolled 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 Government directly or through its
instrumentalities either wholly, or, where applicable as
in the case of stock corporations, to the extent of at least
fifty-one (51) percent of its capital stock: Provided, That
government-owned or controlled corporations may
further be categorized by the Department of Budget,
the Civil Service Commission, and the Commission on
Audit for the purpose of the exercise and discharge of
their respective powers, functions and responsibilities
with respect to such corporations.
The fact that two terms have separate definitions
means that while a government "instrumentality" may
include a "government-owned or controlled corporation,"
there may be a government "instrumentality"
that will not qualify as a "government-owned or controlled
corporation."
PEPSI COLA V. TANAUAN 69 SCRA
Taxation Delegation to Local Governments Double Taxation
Pepsi Cola has a bottling plant in the Municipality of Tanauan,
Leyte. In September 1962, the Municipality approved Ordinance
No. 23 which levies and collects from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for
every bottle of soft drink corked.

In December 1962, the Municipality also approved Ordinance No.

27 which levies and collects on soft drinks produced or
manufactured within the territorial jurisdiction of this
municipality a tax of one centavo P0.01) on each gallon of
volume capacity.
Pepsi Cola assailed the validity of the ordinances as it alleged
that they constitute double taxation in two instances: a) double
taxation because Ordinance No. 27 covers the same subject
matter and impose practically the same tax rate as with
Ordinance No. 23, b) double taxation because the two
ordinances impose percentage or specific taxes.
Pepsi Cola also questions the constitutionality of Republic Act
2264 which allows for the delegation of taxing powers to local
government units; that allowing local governments to tax
companies like Pepsi Cola is confiscatory and oppressive.
The Municipality assailed the arguments presented by Pepsi
Cola. It argued, among others, that only Ordinance No. 27 is
being enforced and that the latter law is an amendment of
Ordinance No. 23, hence there is no double taxation.
ISSUE: Whether or not there is undue delegation of taxing
powers. Whether or not there is double taxation.
HELD: No. There is no undue delegation. The Constitution even
allows such delegation. Facts: The case is a petition filed by
petitioner on behalf of videogram operators adversely affected
by Presidential Decree No. 1987, An Act Creating the Videogram
Regulatory Board with broad powers to regulate and supervise
the videogram industry.
A month after the promulgation of the said Presidential Decree,
the amended the National Internal Revenue Code provided that:
SEC. 134. Video Tapes. There shall be collected on each
processed video-tape cassette, ready for playback, regardless of
length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to
sales tax.
Section 10. Tax on Sale, Lease or Disposition of Videograms.
Notwithstanding any provision of law to the contrary, the
province shall collect a tax of thirty percent (30%) of the
purchase price or rental rate, as the case may be, for every sale,
lease or disposition of a videogram containing a reproduction of
any motion picture or audiovisual program.
Fifty percent (50%) of the proceeds of the tax collected shall
accrue to the province, and the other fifty percent (50%) shall
accrue to the municipality where the tax is collected; PROVIDED,
That in Metropolitan Manila, the tax shall be shared equally by
the City/Municipality and the Metropolitan Manila Commission.
The rationale behind the tax provision is to curb the proliferation
and unregulated circulation of videograms including, among
others, videotapes, discs, cassettes or any technical
improvement or variation thereof, have greatly prejudiced the
operations of movie houses and theaters. Such unregulated
circulation have caused a sharp decline in theatrical attendance
by at least forty percent (40%) and a tremendous drop in the
collection of sales, contractors specific, amusement and other
taxes, thereby resulting in substantial losses estimated at P450
Million annually in government revenues.
Videogram(s) establishments collectively earn around P600
Million per annum from rentals, sales and disposition of
videograms, and these earnings have not been subjected to tax,
thereby depriving the Government of approximately P180 Million
in taxes each year.
The unregulated activities of videogram establishments have
also affected the viability of the movie industry.
Issues:
(1) Whether or not tax imposed by the DECREE is a valid
exercise of police power.

(2) Whether or nor the DECREE is constitutional.

Held: Taxation has been made the implement of the states
police power. The levy of the 30% tax is for a public purpose. It
was imposed primarily to answer the need for regulating the
video industry, particularly because of the rampant film piracy,
the flagrant violation of intellectual property rights, and the
proliferation of pornographic video tapes. And while it was also
an objective of the DECREE to protect the movie industry, the
tax remains a valid imposition.
We find no clear violation of the Constitution which would justify
us in pronouncing Presidential Decree No. 1987 as
unconstitutional and void. While the underlying objective of the
DECREE is to protect the moribund movie industry, there is no
question that public welfare is at bottom of its enactment,
considering the unfair competition posed by rampant film
piracy; the erosion of the moral fiber of the viewing public
brought about by the availability of unclassified and unreviewed
video tapes containing pornographic films and films with brutally
violent sequences; and losses in government revenues due to
the drop in theatrical attendance, not to mention the fact that
the activities of video establishments are virtually untaxed since
mere payment of Mayors permit and municipal license fees are
required to engage in business.
WHEREFORE, the instant Petition is hereby dismissed. No
costs.Legislative powers may be delegated to local governments
in respect of matters of local concern. By necessary implication,
the legislative power to create political corporations for purposes
of local self-government carries with it the power to confer on
such local governmental agencies the power to tax. Under the
New Constitution, local governments are granted the
autonomous authority to create their own sources of revenue
and to levy taxes. Section 5, Article XI provides: Each local
government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be
provided by law. Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond the sphere of the
legislative power to enact and vest in local governments the
power of local taxation.
There is no double taxation. The argument of the Municipality is
well taken. Further, Pepsi Colas assertion that the delegation of
taxing power in itself constitutes double taxation cannot be
merited. It must be observed that the delegating authority
specifies the limitations and enumerates the taxes over which
local taxation may not be exercised. The reason is that the State
has exclusively reserved the same for its own prerogative.
Moreover, double taxation, in general, is not forbidden by our
fundamental law unlike in other jurisdictions. Double taxation
becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity or by the same
jurisdiction for the same purpose, but not in a case where one
tax is imposed by the State and the other by the city or
municipality.
TAXATION DEFINITION
TIO V. VRB
Facts: The case is a petition filed by petitioner on behalf of
videogram operators adversely affected by Presidential Decree
No. 1987, An Act Creating the Videogram Regulatory Board
with broad powers to regulate and supervise the videogram
industry.
A month after the promulgation of the said Presidential Decree,
the amended the National Internal Revenue Code provided that:
SEC. 134. Video Tapes. There shall be collected on each
processed video-tape cassette, ready for playback, regardless of
length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to
sales tax.
Section 10. Tax on Sale, Lease or Disposition of Videograms.
Notwithstanding any provision of law to the contrary, the

province shall collect a tax of thirty percent (30%) of the

purchase price or rental rate, as the case may be, for every sale,
lease or disposition of a videogram containing a reproduction of
any motion picture or audiovisual program.
Fifty percent (50%) of the proceeds of the tax collected shall
accrue to the province, and the other fifty percent (50%) shall
accrue to the municipality where the tax is collected; PROVIDED,
That in Metropolitan Manila, the tax shall be shared equally by
the City/Municipality and the Metropolitan Manila Commission.
The rationale behind the tax provision is to curb the proliferation
and unregulated circulation of videograms including, among
others, videotapes, discs, cassettes or any technical
improvement or variation thereof, have greatly prejudiced the
operations of movie houses and theaters. Such unregulated
circulation have caused a sharp decline in theatrical attendance
by at least forty percent (40%) and a tremendous drop in the
collection of sales, contractors specific, amusement and other
taxes, thereby resulting in substantial losses estimated at P450
Million annually in government revenues.
Videogram(s) establishments collectively earn around P600
Million per annum from rentals, sales and disposition of
videograms, and these earnings have not been subjected to tax,
thereby depriving the Government of approximately P180 Million
in taxes each year.
The unregulated activities of videogram establishments have
also affected the viability of the movie industry.
Issues:
(1) Whether or not tax imposed by the DECREE is a valid
exercise of police power.
(2) Whether or nor the DECREE is constitutional.
Held: Taxation has been made the implement of the states
police power. The levy of the 30% tax is for a public purpose. It
was imposed primarily to answer the need for regulating the
video industry, particularly because of the rampant film piracy,
the flagrant violation of intellectual property rights, and the
proliferation of pornographic video tapes. And while it was also
an objective of the DECREE to protect the movie industry, the
tax remains a valid imposition.
We find no clear violation of the Constitution which would justify
us in pronouncing Presidential Decree No. 1987 as
unconstitutional and void. While the underlying objective of the
DECREE is to protect the moribund movie industry, there is no
question that public welfare is at bottom of its enactment,
considering the unfair competition posed by rampant film
piracy; the erosion of the moral fiber of the viewing public
brought about by the availability of unclassified and unreviewed
video tapes containing pornographic films and films with brutally
violent sequences; and losses in government revenues due to
the drop in theatrical attendance, not to mention the fact that
the activities of video establishments are virtually untaxed since
mere payment of Mayors permit and municipal license fees are
required to engage in business.
WHEREFORE, the instant Petition is hereby dismissed. No costs.
DEFINITION:
The public purpose of a tax may legally exist even if the motive
which impelled the legislature to impose the tax was to favor
one industry over another. 11
It is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that
"inequities which result from a singling out of one particular
class for taxation or exemption infringe no constitutional
limitation". 12 Taxation has been made the implement of the
state's police power.