CONSTITUTIONAL LIMITATIONS

1. DUE PROCESS OF LAW

 There must be a valid law
 Tax measure should not be unconscionable and unjust as to amount to confiscation of property.
 Tax statute must not be arbitrary as to find no support in the Constitution.

Sec. 1 Art. III 1987 - 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 the laws.

Tan v. Del Rosario, supra – (SNITS);

FACTS: Petitioners challenge the constitutionality of RA 7496 or the simplified income taxation scheme (SNIT)
under Arts (26) and (28) and III (1). The SNIT contained changes in the tax schedules and different treatment in the
professionals which petitioners assail as unconstitutional for being isolative of the equal protection clause in the
constitution. Petitioner contends that the tile of House Bill No. 34314 progenitor of RA 7496, is a misnomer or, at
least, deficient for being merely entitled, “Simplified Net Income Taxation Scheme for the Self-Employed and
Professional Engaged in the Practice of their Profession”.

HELD: Tax law is constitutional. Uniformity of taxation, like the hindered concept of equal protection, merely
require that all subjects or objects of taxation similarly situated are to be treated alike both privileges and
liabilities. Uniformity, does not offend classification as long as it rest on substantial distinctions, it is germane to
the purpose of the law. It is not limited to existing only and must apply equally to all members of the same class.
The due process clause may correctly be invoked only when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax power. No such transgression is evident to us.

Sison v. Ancheta, supra – BP 135

FACTS: Batas Pambansa 135 was enacted. Sison, as taxpayer, alleged that its provision (Section 1) unduly
discriminated against him by the imposition of higher rates upon his income as a professional, that it amounts to
class legislation, and that it transgresses against the equal protection and due process clauses of the Constitution
as well as the rule requiring uniformity in taxation.

Issue: Whether BP 135 violates the due process and equal protection clauses, and the rule on uniformity in
taxation.

HELD: No, there was no violation of the due process and equal protection clause, since petitioner did not made a
case, only allegations.

 The Congress has the power to determine the rates of taxation; thus, the due process clause may be
invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious
example is where it can be shown to amount to the confiscation of property. That would be a clear abuse
of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the
exercise of an authority not conferred. That properly calls for the application of the Holmes dictum.
 It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not
for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to
attack on due process grounds.

2. EQUAL PROTECTION OF THE LAWS

– Right to be treated under like circumstance.
 All persons subject to legislation shall be treated alike under similar circumstances and conditions both in
the privileges conferred and liabilities imposed.
 The doctrine does not require that persons or properties different in fact be treated in law as though they
were the same. What it prohibits is “Class Legislation” which discriminates against some and favors
others.
  As long as there are rational or reasonable grounds for so doing. Congress may group persons or property
to be taxed and it is sufficient if all members of the same class are subject to the same rate and the tax is
administered impartially upon them.

Requisites of a Valid Classification:

1. Must be based on Substantial Distinctions.

2. Germane to the purpose of law
3. Classification must not be limited to existing conditions only but must also apply to future conditions
substantially identical to those of the present.
4. It must apply equally to all members of the same class.

Application
Where the statute or ordinance in question applies alike to all persons, firms, or corporations placed in
similar situations, or differently to persons, firms, or corporations belonging to different classes provided all
those belonging to one class are treated alike, there is no infringement of the constitutional guarantee. What
the Constitution requires is equal treatment under the law and this may involve same or different treatment
depending on the circumstances.

Sison v. Ancheta, supra.

 There is a need for proof of such persuasive character as would lead to a conclusion that there was a
violation of the due process and equal protection clauses. Absent such showing, the presumption of
validity must prevail.
 Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate.
 The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation. Where the differentiation conforms to the practical dictates of justice and equity, similar to the
standards of equal protection, it is not discriminatory within the meaning of the clause and is therefore
uniform.

It suffices then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, he conditions nt being different,
both in the privileges conferred and liabilities imposed.

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 inequalities which result from a singling out of one particular class for taxation,
or exemption infringes no constitutional limitation.

Villegas vs Hiu Chiong Tsai Pao Ho

FACTS: The Municipal Board of Manila enacted Ordinance 6537 requiring aliens (except those employed in the
diplomatic and consular missions of foreign countries, in technical assistance programs of the government and
another country, and members of religious orders or congregations) to procure the requisite mayor’s permit so as
to be employed or engage in trade in the City of Manila. The permit fee is P50, and the penalty for the violation of
the ordinance is 3 to 6 months imprisonment or a fine of P100 to P200, or both.

ISSUE: Whether the ordinance imposes a regulatory fee or a tax.

HELD: The ordinance’s purpose is clearly to raise money under the guise of regulation by exacting P50 from aliens
who have been cleared for employment.

 The amount is unreasonable and excessive because it fails to consider difference in situation among aliens
required to pay it, i.e. being casual, permanent, part-time, rank-and-file or executive.
 The Ordinance was declared invalid as it is arbitrary, oppressive and unreasonable, being applied only to
aliens who are thus deprived of their rights to life, liberty and property and therefore violates the due
process and equal protection clauses of the Constitution.
 Further, the ordinance does not lay down any criterion or standard to guide the Mayor in the exercise of
his discretion, thus conferring upon the mayor arbitrary and unrestricted powers.

Tan v. Del Rosario, supra.

  The said law is not arbitrary; it is germane to the purpose of the law and; applies to all things of equal
conditions and of same class.

 It is neither violative of equal protection clause due to the existence of substantial difference between
one who practice his profession alone and one who is engaged to proprietorship.
 Further, the SC said that RA 7496 is just an amendatory provision of the code of taxpayers where it
classifies taxpayers in to four main groups: Individuals, Corporations, Estate under Judicial Settlement and
Irrevocable Trust. The court would have appreciated the contention of the petitioner if RA 7496 was an
independent law. But since it is attached to a law that has already classified taxpayers, there is no
violation of equal protection clause.

CIR VS. CA AND ALHAMBRA 267 SCRA 557 (1997)

FACTS : Alhambra industries, Inc. (Alhambra) is a domestic corporation engaged in the manufacture and sale
of cigar and cigarette products. On May 7, 1991 private respondent received a letter dated April 26, 1991 from the
Commissioner of Internal Revenue assessing its deficiency Ad Valorem Tax (AVT) in the total amount
of P488,396.62, inclusive of increments, on the removals of cigarette products from their place of production
during the period Nov. 2, 1990 to January 22, 1991.Alhambra filed protest against amount assessed by the CIR,
however, it was denied by the latter at the same time increasing the amount assessed to P520,835.29. Alhambra
filed a petition for review with the CTA, despite payment under protest the amount of P520,835.29. On December
1, 1993, CTA ordered petitioner to refund said amount to Alhambra. CA affirming such decision, hence, this appeal.

ISSUE: whether private respondent's reliance on a void BIR ruling conferred upon the latter a vested right to apply
the same in the computation of its ad valorem tax and claim for tax refund

HELD: The government is not stopped from collecting taxes legally due because of mistake/errors of its agents,
this admits of exceptions in the interest of justice and fair play, as where injustice will result to the taxpayer. As
regards, petitioner’s argument the private respondent should have made consultations with it before private
respondent used the computation mandated by BIR ruling 473-88 suffice it to state that the BIR ruling was clear
and categorical, there leaving no room for interpretation. The failure of private respondent to consult petitioner
does not imply bad faith on the part of the former.

Tiu v. Court of Appeals, 301 SCRA 278 (1999) – The Subic Special Economic Zone case.

 The Constitutional right to equal protection of the law is not violated by an executive order, issued
pursuant to law, granting tax and duty incentives only to business within the “secured area” of the Subic
Special Economic Zone and denying them to those who live within the Zone but outside such “fenced in”
territory.
 The Constitution does not require absolute equality among residents. It is enough that all persons under
like circumstances or conditions are given the same privileges and required to follow the same
obligations. In short, a classification based on valid and reasonable standards does not violate the equal
protection clause.
 We find real and substantial distinctions between the circumstances obtaining inside and those outside
the Subic Naval Base, thereby justifying a valid and reasonable classification.

Classification based on:

1. Valid & Does not violate
2. Reasonable Standards equal protection
clause

3. UNIFORMITY AND EQUITY IN TAXATION

- same class, same rate
- classification of taxpayers, subject or items to be taxed

 The rule of taxation shall be uniform and equitable (Sec.28 (1), Art. III, 1987 Constitution).
 The tax is uniform when it operates with the same force and effect in every place where the subject
of it is found. "Uniformity" means all property belonging to the same class shall be taxed alike. It does
not signify an intrinsic, but simply a geographic, uniformity (Churchill & Tait vs. Conception, 34 Phil.
969). Uniformity does not require the same treatment; it simply requires reasonable basis for
classification.
  The concept of equality in taxation requires that the apportionment of the tax burden be more or less
just in the light of the taxpayer’s ability to shoulder the tax burden and if warranted, on the basis of
the benefits received from the government. Its cornerstone is the taxpayer’s ability to pay.

Uniformity v. equity in taxation

 The concept of uniformity in taxation implies that all taxable articles or properties of the same class shall
be taxed at the same rate. It requires the uniform application and operation, without discrimination, of
the tax in every place where the subject of the tax is found. It does not, however, require absolute
identity or equality under all circumstances, but subject to reasonable classification.

· The concept of equity in taxation requires that the apportionment of the tax burden be, more or less,
just in the light of the taxpayer’s ability to shoulder the tax burden and, if warranted, on the basis of the
benefits received from the government. Its cornerstone is the taxpayer’s ability to pay.

Tolentino v. Sec. of Finance, supra, -

 Equity and uniformity in taxation means that all the taxable articles or kinds of properties of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement, it is enough that the statute or
ordinance applies equally to all persons, firms, and corporations placed in a similar situation.
 It is inherent in the power to tax that the state be free to select the subjects of taxation & it has been
repeatedly held that the inequalities which result from a singling out of 1 particular class for taxation or
exception infringe no constitutional limitation.

Manila Race Horse v. Dela Fuente – No arbitrary classification

 it was said there is equality and uniformity in taxation if all articles or kinds of property of the same class
are taxed at the same rate.
 The owners of boarding stables for race horses and, for that matter, the race horse owners themselves,
who in the scheme of shifting may carry the taxation burden, are a class by themselves and appropriately
taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in
taxation is generally conceived in terms of ability to pay in relation to the benefits received by the
taxpayer and by the public from the business or property taxed.
 Taking everything into account, the differentiation against which the plaintiffs complain conforms to the
practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution.
 Equity in taxation is generally conceived in terms of liability to pay in relation to the benefits received by
the taxpayer and by the public from the business or property taxed.

Eastern Theatrical Co. Inc., vs. Alfonso

 there is equality and uniformity in taxation if all articles or kinds of property of the same class are taxed at
the same rate. Thus, it was held in that case, that "the fact that some places of amusement are not taxed
while others, such cinematographs, theaters, vaudeville companies, theatrical shows, and boxing
exhibitions and other kinds of amusements or places of amusement are taxed, is not argument at all
against the equality and uniformity of tax imposition."
 The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation.

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs. CITY OF BUTUAN

FACTS: The ordinance imposes taxes for every case of soft drinks, liquors and other carbonated beverages,
regardless of the volume of sales, shipped to the agents and/or consignees by outside dealers or any person or
company having its actual business outside the City.

ISSUE: Does the tax ordinance violate the uniformity requirement of taxation?
HELD: Yes. The tax levied is discriminatory.

 Even if the burden in question were regarded as a tax on the sale of said beverages, it would still be
invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law
therefor, since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales
by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales,
and even if the same exceeded those made by said agents or consignees of producers or merchants
established outside the City of Butuan, would be exempt from the disputed tax.
 It is true that the uniformity essential to the valid exercise of the power of taxation does not require
identity or equality under all circumstances, or negate the authority to classify the objects of taxation.
 The classification made in the exercise of this authority, to be valid, must, however, be reasonable and
this requirement is not deemed satisfied unless:
o (1) it is based upon substantial distinctions which make real differences;
o (2) these are germane to the purpose of the legislation or ordinance;
o (3) the classification applies, not only to present conditions, but, also, to future conditions
substantially identical to those of the present; and
o (4) the classification applies equally to all those who belong to the same class.
Shell Company of P.I, Ltd. Vs. Vano, etc. 94 Phil 387

FACTS: The municipal council of Cordova, Cebu adopted several ordinances among which Ordinance 10 imposing
an annual tax of P150 on occupation or the exercise of the privilege of installation manager. Shell Co., a foreign
corporation, filed suit for the refund of the taxes paid by it on the ground that the ordinance imposing such tax is
ultra vires for being discriminatory and hostile because there is no other person in the locality who exercise such
designation or occupation.
HELD: A tax on “installation manager” is not discriminatory just because at the time said tax was imposed, there
was no other person in the locality who exercised such occupation. The tax is and will be applicable to any person
or firm who exercises such calling or occupation designated as “installation manager”.

CITY OF BAGUIO vs. DE LEON 25 SCRA 938

FACTS: The City of Baguio passed an ordinance imposing a license fee on any person, entity or corporation doing
business in the City. De Leon was assessed for P50 annual fee it being shown that he was engaged in property
rental and deriving income therefrom. The latter assailed the validity of the ordinance arguing that it is ultra vires
for there is no statutory authority which expressly grants the City of Baguio to levy such tax, and that there it
imposed double taxation, and violates the requirement of uniformity.

HELD: No.
 First, RA 329 was enacted amending Section 2553 of the Revised Administrative Code empowering the
City Council not only to impose a license fee but to levy a tax for purposes of revenue, thus the ordinance
cannot be considered ultra vires for there is more than ample statutory authority for the enactment
thereof.
 Second, an argument against double taxation may not be invoked where one tax is imposed by the state
and the other is imposed by the city.
 And third, violation of uniformity is out of place it being widely recognized that there is nothing inherently
obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation,
calling or activity by both the state and the political subdivisions thereof.
 A tax is considered uniform when it operates with the same force and effect in every place where the
object may be found.
Kapatiran vs. Tan
FACTS: EO 273 amended the Revenue Code, adopting the (VAT) effective 1 January 1988. Four petitions assailed
the validity of the VAT Law for being beyond the President to enact; for being oppressive, discriminatory,
regressive, and violative of the due process and equal protection clauses, among others, of the Constitution. The
Integrated Customs Brokers Association particularly contend that it unduly discriminate against customs brokers
(Section 103 [r]) as the amended provision of the Tax Code provides that “service performed in the exercise of
profession or calling(except custom brokers) subject to occupational tax under the Local Tax Code, and
professional services performed by registered general professional partnerships are exempt from VAT.
ISSUE: Whether the E-VAT law discriminates against customs brokers.
HELD: The phrase “except custom brokers” is not meant to discriminate against custom brokers but to avert a
potential conflict between Sections 102 and 103 of the Tax Code, as amended.

 The distinction of the customs brokers from the other professionals who are subject to occupation tax
under the Local Tax Code is based upon material differences, in that the activities of customs brokers
partake more of a business, rather than a profession and were thus subjected to the percentage tax under
Section 174 of the Tax Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and
replaced it with the VAT.

Villanueva vs. City of Iloilo, supra:

The ordinance is not violative of the rule of uniformity in taxation.
 The Supreme Court has already ruled that tenement houses constitute a distinct class of property. It has
likewise ruled that "taxes are uniform and equal when imposed upon all property of the same class or
character within the taxing authority."
 The fact, therefore, that the owners of other classes of buildings in the City of Iloilo do not pay the taxes
imposed by the ordinance in question is no argument at all against uniformity and equality of the tax
imposition.
 Neither is the rule of equality and uniformity violated by the fact that tenement taxes are not imposed in
other cities, for the same rule does not require that taxes for the same purpose should be imposed in
different territorial subdivisions at the same time.
 So long as the burden of the tax falls equally and impartially on all owners or operators of tenement
houses similarly classified or situated, equality and uniformity of taxation is accomplished.

Association of Custom Brokers v. Mun.Board, supra:

Facts: The Association of Customs Brokers, Inc., which is composed of all brokers and public service operators of
motor vehicles in the City of Manila challenge the validity Ordinance No. 3379 on the ground that (1xxx (2) said
ordinance offends against the rule of uniformity of taxation; and (3) xxx.
 The ordinance exacts the tax upon all motor vehicles operating within the City of Manila.
 It does not distinguish between a motor vehicle for hire and one which is purely for private use. Neither
does it distinguish between a motor vehicle registered in the City of Manila and one registered in another
place but occasionally comes to Manila and uses its streets and public highways. This is an inequality
which the Court finds in the ordinance, and which renders it offensive to the Constitution.

4. PROHIBITION AGAINST IMPRISONMENT FOR NON-PAYMENT OF POLL TAX

Section 20, Article III, Constitution. No person shall be imprisoned for debt or non-payment of poll tax.
The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge, but not to
other violations like falsification of community tax certificate and non-payment of other taxes.
Community Tax v. Poll Tax

 Poll tax is a tax of fixed amount imposed on residents within a specific territory regardless of citizenship,
business or profession. Example is community tax.
 Community tax – Cities or municipalities may levy a community tax in accordance with the provisions of
this article. 156 RA 7160.

Section 157. Individuals Liable to Community Tax. - (18) or over who has been regularly employed on a wage or
salary basis for at least thirty (30) consecutive working days, or who is engaged in business or occupation, or who
owns real property with an aggregate assessed value of One thousand pesos (P1,000.00) or more, or who is
required by law to file an income tax return shall pay an annual additional tax of Five pesos (P5.00) and an annual
additional tax of One peso (P1.00) for every One thousand pesos (P1,000.00) of income regardless of whether from
business, exercise of profession or from property which in no case shall exceed Five thousand pesos (P5,000.00).

In the case of husband and wife, the additional tax herein imposed shall be based upon the total property owned
by them and the total gross receipts or earnings derived by them.

Section 158. Juridical Persons Liable to Community Tax. - Every corporation no matter how created or organized,
whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual
community tax of Five hundred pesos (P500.00) and an annual additional tax, which, in no case, shall exceed Ten
thousand pesos (P10,000.00) in accordance with the following schedule:
(1) For every Five thousand pesos (P5,000.00) worth of real property in the Philippines owned by it during the
preceding year based on the valuation used for the payment of real property tax under existing laws, found in the
assessment rolls of the city or municipality where the real property is situated - Two pesos (P2.00); and

(2) For every Five thousand pesos (P5,000.00) of gross receipts or earnings derived by it from its business in the
Philippines during the preceding year - Two pesos (P2.00).

The dividends received by a corporation from another corporation however shall, for the purpose of the additional
tax, be considered as part of the gross receipts or earnings of said corporation.

Section 159. Exemptions. - The following are exempt from the community tax:

(1) Diplomatic and consular representatives; and

(2) Transient visitors when their stay in the Philippines does not exceed three (3) months.

Section 160. Place of Payment. - The community tax shall be paid in the place of residence of the individual, or in
the place where the principal office of the juridical entity is located.

164 (c) The proceeds of the community tax actually and directly collected by the city or municipal treasurer shall
accrue entirely to the general fund of the city or municipality concerned. However, proceeds of the community tax
collected through the barangay treasurers shall be apportioned as follows:

(1) (50%) shall accrue to the general fund of the city or municipality concerned; and

(2) (50%) shall accrue to the barangay where the tax is collected.

5. PROHIBITION AGAINST IMPAIRMENT OF OBLIGATION OF CONTRACTS

No law impairing the obligation of contracts shall be passed. [Section 10, Article III, Constitution]

The power of taxation cannot be exercised in a manner that would impair the obligation of contracts. What is
prohibited is that a taxing statute be passed that would alter the relative rights of the parties with each other.

The mere fact that a tax makes the conduct of a business more expensive or makes an activity more difficult does
not result in the impairment of the obligation of contracts. Contract is impaired only if the relative position of the
parties to a contract (i.e. equality that is assumed when the contract was entered into) is disturbed by the
operation of a taxing statute.

 The obligation of a contract is impaired when its terms or conditions are changed by law or by a party
without the consent of the other, thereby weakening the position or rights of the latter.

 An example of impairment by law is when a later taxing statute revokes a tax exemption based on a
contract. But this only applies when the tax exemption has been granted for a valid consideration.

 A later statute may revoke exemption from taxation provided for in a franchise because the Constitution
provides that a franchise is subject to amendment, alteration or repeal.

Note: A latter statue may revoke exemption from taxation provided for in a franchise because the Constitution
provides that a franchise is subject to amendment, alteration or repeal. [Sec. 11 Art. XII]

OPOSA vs. FACTORAN

 Police power prevails over the non-impairment clause

LA INSULAR vs. MANCHUCA
 A lawful tax on a new subject or an increased tax on an old one, does not interfere with a contract or
impairs its obligation.
 The constitutional guarantee of the non-impairment clause can only invoked in the grant of tax
exemption.
RULES:

1. If the exemption was granted for valuable consideration and it is granted on the basis of a contract.
 cannot be revoked
2. If the exemption is granted by virtue of a contract, wherein the government enters into a contract with a
private corporation
 cannot be revoked unilaterally by the government
3. If the basis of the tax exemption is a franchise granted by Congress and under the franchise or the tax
exemption is given to a particular holder or person
can be unilaterally revoked by the government (Congress)
 The non-impairment clause applies only to contracts and not to a franchise.
 The non-impairment clause applies to taxation but not to police power and eminent domain.
 Furthermore, it applies only where one party is the government and the other, a private
individual.
 As a rule, the obligation to pay tax is based on law. But when, for instance, a taxpayer enters into
a compromise with the BIR, the obligation of the taxpayer becomes one based on contract.
Tolentino v. Sec. of Finance, supra:
1 issue that was raised was whether the imposition of the VAT on sales & leases on real estate by virtue of contract
s entered into prior to the efectivity of the law would violate the non-impairment of contracts rule in the
constitution.
HELD:
 It is enough to say that parties to a contract cannot, through the exercise of prophetic discernment, fetter
the exercise of the taxing power of the state.
 For not only are existing laws read into contracts in order to fix obligations as between parties, but the
reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of
the legal order.
 The policy of protecting contracts against impairment presupposes the maintenance of a government
which retains adequate authority to secure the peace & good order of society.

6. PROHIBITION AGAINST INFRINGEMENT OF RELIGIOUS FREEDOM

No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free
exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be
allowed. No religious test shall be required for the exercise of civil or political rights. [Section 5, Article III,
Constitution]
American Bible Society v. City of Manila
FACTS: In the course of its ministry, the Philippine agency of the American Bible Society has been distributing
and selling bibles and/or gospel portions thereof throughout the Philippines and translating the same into several
Philippine dialets. The acting City Treasurer of Manila required the society to secure the
corresponding Mayor’s permit and municipal license fees, together with compromise covering the period
from the 4th quarter of 1945 to the 2nd quarter of 1953. The society paid such under protest, and filed suit
questioning the legality of the ordinances under which the fees are being collected.

HELD: The payment of license fees for the distribution and sale of bibles suppresses the constitutional right of
free exercise of religion.
 A tax ordinance is considered violative of the free exercise of religion when it becomes a prior restraint to
the exercise thereof. In this case, the business permit is a prior restraint to the exercise of one's religion
since the constitutional guaranty of the free exercise and enjoyment of religious profession and worship
carries with it the right to disseminate religious information.
 It is one thing to impose a tax on the income or property of a preacher, and another to exact a tax for him
for the privilege of delivering a sermon.
 The power to tax the exercise of a privilege is the power to control or suppress its enjoyment

7. PROHIBITION AGAINST APPROPRIATION OF PROCEEDS OF TAXATION

Section 29, Article VI, Constitution

1. No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.
2. No public money or property shall be appropriated, applied, paid, or employed directly or indirectly, for the
use, benefit, or support of any church, denomination, sectarian institution or system of religion, or of any
priest, preacher, minister or other religious teacher, or dignitary as such except when such priest,
preacher, minister or dignitary is assigned to the armed forces, or to any penal institution, or government
orphanage or leprosarium.
3. All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for
such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned,
the balance, if any, shall be transferred to the general funds of the government.
Use of tax levied for a special purpose:
Osmena v. Orbos, supra - It seems clear that while the funds collected may be referred to as taxes, they are
exacted in the exercise of the police power of the State. Moreover, that the OPSF as a special fund is plain from the
special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law
refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA.
The Court is satisfied that these measures comply with the constitutional description of a "special fund."

8. Prohibition against taxation of real property actually, directly and exclusively used for religious, charitable
and educational purposes

 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. [Section 28 (3) ,
Article VI, Constitution]
 This is an exemption from real property tax only.

Abra Valley College vs. Aquino

Facts: Abra Valley College rents out the ground floor of its college building to Northern Marketing Corporation
while the second floor thereof is used by the Director of the College for residential purposes. The municipal and
provincial treasurers served upon the College a “notice of seizure” and later a “notice of sale” due to the alleged
failure of the College to pay real estate taxes and penalties thereon. The school filed suit to annul said notices,
claiming that it is tax-exempt.

Issue: Whether the College is exempt from taxes

HELD:
 While the Court allows a more liberal and non-restrictive interpretation of the phrase “exclusively used
for educational purposes,” reasonable emphasis has always been made that exemption extends to
facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.
 While the second floor’s use, as residence of the director, is incidental to education; the lease of the first
floor cannot by any stretch of imagination be considered incidental to the purposes of education.
 The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution.
 “Use” overrides “ownership”.
 If a property is incidentally used for the aforementioned purposes, it is clear from decided cases that tax
exemption still subsist.

9. Prohibition against taxation of the revenues and assets of non-stock, non-profit educational institutions

All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in the manner provided by law. [Section 4, Article
XIV, Constitution]

This exemption from corporate income tax is embodied in Section 30 of the NIRC which includes a non-stock, non-
profit educational institution.
Note: however the last paragraph of Section 30 which states: “Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of the foregoing organizations from any of their property,
real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.”

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. [Section 28 (3) , Article VI, Constitution]

 This is an exemption from real property tax only.

The exemption in favor of property used exclusively for charitable or educational purposes is not
limited to property actually indispensable therefore, but extends to facilities which are incidental
to and reasonably necessary for the accomplishment of said purposes. [Abra Valley College v.
Aquino, 162 SCRA 106]

Department of Finance Order 145-85

 Non-stock, non-profit educational institutions are exempt from taxes on all their revenues and
assets used actually, directly and exclusively for educational purposes.
 However, they shall be subject to internal revenue tax on income from trade, business or other
activity, the conduct of which is not related to the exercise or performance by such educational
institution of its educational purposes or functions.
 Interest income shall be exempt only when used directly and exclusively for educational
purposes. To substantiate this claim, the institution must submit an annual information return
and duly audited financial statement. A certification of actual utilization and the Board resolution
or the proposed project to be funded out of the money deposited in banks shall also be
submitted.

Department of Finance Order 137-87

 An educational institution means a non-stock, non-profit corporation or association duly

registered under Philippine law, and operated exclusively for educational purposes, maintained
and administered by a private individual or group offering formal education, and with an issued
permit to operate by the DECS.
 Revenues derived from and assets used in the operation of cafeteria/canteens, dormitories, and
bookstores are exempt from taxation provided they are owned and operated by the educational
institution as ancillary activities and the same are located within the school premises.

CIR v. Court of Appeals, et.al., 298 SCRA 83 (1998)

FACTS: The Young Men’s Christian Association of the Philippines, Inc. (YMCA) was established as “a welfare,
educational and charitable non-profit corporation.” It conducts various programs and activities that are beneficial
to the public, especially the young people, pursuant to its religious, educational and charitable objectives.

HELD: In this case, the Supreme Court held that the income derived by YMCA from leasing out a portion of its
premises to small shop owners, like restaurant and canteen operators, and from parking fees collected from non-
members are taxable income.

First, the constitutional tax exemption granted to non-stock, non-profit educational institutions does not find
application because YMCA is not an educational institution. The term “educational institution” or “institution of
learning” has acquired a well known technical meaning. Under the Education Act of 1982, such term refers to
schools.

Second, even if it be exempt under Section 30 of the NIRC as a non-profit, non-stock educational corporation, the
income from the rent of its premises and parking fees is not covered by the exemption, according to the last
paragraph of the same section. Section 30 provides that income of whatever kind and character from any of its
properties, real or personal, or from any of its activities for profit are not exempt from income tax.
 Finally, Section 28(3), Article VI of the Constitution does not apply as it extends exemption only from real property
taxes – not from income taxes.

CIR v. CA, CTA, and ATENEO

 The Supreme Court denied the petition and affirmed the assailed Decision of the Court of Appeals. The
Court ruled that the private respondent is not a contractor selling its services for a fee but an academic
institution conducting these researches pursuant to its commitments to education and, ultimately, to
public service.
 For the institute to have tenaciously continued operating for so long despite its accumulation of
significant losses, we can only agree with both the Court of Tax Appeals and the Court of Appeals that
“education and not profit is motive for undertaking the research projects

10. Other Constitutional Limitations

1. Grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of a majority of all Members of
Congress. [Section 28 (4), Article VI, Constitution]

CHAVEZ VS PCGG
 The General and Supplemental Agreement dated December 28, 1993, which PCGG and the Marcos heirs
entered into are hereby declared NULL AND VOID for being contrary to law and the Constitution.
 Under Item No. 2 of the General Agreement, the PCGG commits to exempt from all forms of taxes the
properties to be retained by the Marcos heirs. This is a clear violation of the Construction.
 The power to tax and to grant tax exemptions is vested in the Congress and, to a certain extent, in the
local legislative bodies.
 Section 28 (4), Article VI of the Constitution, specifically provides: "No law granting any tax exemption
shall be passed without the concurrence of a majority of all the Member of the Congress."
 The PCGG has absolutely no power to grant tax exemptions, even under the cover of its authority to
compromise ill-gotten wealth cases. Even granting that Congress enacts a law exempting the Marcoses
form paying taxes on their properties, such law will definitely not pass the test of the equal protection
clause under the Bill of Rights. Any special grant of tax exemption in favor only of the Marcos heirs will
constitute class legislation. It will also violate the constitutional rule that "taxation shall be uniform and
equitable."

2. Veto of appropriation, revenue, or tariff bills by the President

The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill,
but the veto shall not affect the item or items to which he does not object. [Section 27 (2) Article VI, Constitution]

 An item in a bill refers to particulars, details, the distinct and severable parts of a bill. In budgetary
legislation, an item is an individual sum of money dedicated to a stated purpose. [Gonzales v. Macaraig,
191 SCRA 452]

3. Non-impairment of the jurisdiction of the Supreme Court

 Congress cannot take away from the Supreme Court the power given to it by the Constitution as the final
arbiter of tax cases.

Section 5 (2) (b), Article VIII, Constitution - The Supreme Court shall have the following powers:
Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide,
final judgments and orders of lower courts in:
All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto.

CIR v. Santos
  The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the
political departments are valid in the absence of a clear and unmistakable showing to the contrary.
 This is not to say that RTC has no power whatsoever to declare a law unconstitutional, but this authority
does not extend to deciding questions which pertain to legislative policy.
 RTC have the power to declare the law unconstitutional but this authority does not extend to deciding
questions which pertain to legislative policy.
 RTC can only look into the validity of a provision, that is whether or not it has been passed according to
the provisions laid down by law, and thus cannot inquire as to the reasons for its existence.
 RULING ON THE EXTENT OF LEGISLATIVE POWER TO TAX : SC held that it is within the power of the
legislature whether to tax jewelry or not. With the legislature primarily lies the discretion to determine
the nature (kind), object(purpose), extent (rate), coverage (subject) and situs (place) of taxation

San Miguel Corp. v. Avelino

FACTS: City Treasurer, on April 1, 1974, demanded from SMC payment of the made specific tax on the total
volume of beer it produced in the City of Mandaue. SMC on April 8,1974, contested the correction of said specific
tax "on the ground that Section 12(e) (7) in relation to Section 12(e) (1) and (2), Mandaue City Ordinance No. 97, is
illegal and void because it imposed a specific tax beyond its territorial jurisdiction.”
In an opinion the City Fiscal upheld its validity which was reversed by the Secretary of Justice,
saying the ordinance was of “doubtful validity. City of Cebu then filed a suit for collection where it squarely put in
issue the validity of such ordinance.

Issue: Can City’s act of filing suit after the Secretary of Justice’s opinion was rendered be considered "an appeal"
under the Presidential Decree?

HELD: Yes, action by City valid. The writs prayed for, certiorari and prohibition, cannot issue.

 The validity of a statute, an executive order or ordinance is a matter for the judiciary to decide and
whenever in the disposition of a pending case such a question becomes unavoidable then it is not only the
power but the duty of the Court to resolve such a question.
 It is undoubted that under the Constitution, even the legislative body cannot deprive this Court of its
appellate jurisdiction over all cases coming from inferior courts where the constitutionality or validity of
an ordinance or the legality of any tax, impost, assessment, or toll is in question.
 Since it is likewise expressly provided in Section 43 of the Judiciary Act that the original jurisdiction over
all civil actions involving the legality of any tax, impost or assessment appertains to the Court of First
Instance, it takes a certain degree of ingenuity to allege that the lower court was bereft of such authority.
 Both under the Constitution and the Judiciary Act, respondent Judge is vested with jurisdiction to make a
declaration regarding an ordinance’s validity
 It would be therefore premature for the corrective power of this Tribunal to be interposed, just because
he did not grant the motion to dismiss on the allegation that there was lack of jurisdiction. Authorities
support the municipal power to impose specific taxes on beverages manufactured within its territorial
boundaries.

4. Revenue bills shall originate exclusively from the House of Representatives

Section 24, Article VI, Constitution - All appropriation, revenue or tariff bills, bills authorizing an increase of the
public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives,
but the Senate may propose or concur with amendments.

Tolentino v. Secretary of Finance

 The Constitution simply means that the initiative for the filing of bills must come from the House of
Representatives, on the theory that, elected as they are from the districts, the members of the House can
be expected to be more sensitive to the local needs and problems.
 It is not the law – but the revenue bill – which is required by the Constitution to originate exclusively in
the House of Representatives, because a bill originating in the House may undergo such extensive
changes in the Senate that the result may be a rewriting of the whole, and a distinct bill may be produced.
  The Constitution does not also prohibit the filing in the Senate of a substitute bill in anticipation of its
receipt of the bill from the House, as long as action by the Senate is withheld until receipt of said bill.
[Tolentino v. Secretary of Finance]
 Senate can endorse an entirely new bill.

5. Infringement of Press Freedom

 This limitation does not mean that the press is exempt from taxation.
 Taxation constitutes an infringement of press freedom when it operates as a prior restraint to the
exercise of this constitutional right.
 When the tax is imposed on the receipts or the income of the press it is a valid exercise of the sovereign
prerogative.

Tolentino v. Sec. of Finance, supra

 Petitioners claim that the R.A. violates their press freedom and religious liberty, having removed them
from the exemption to pay VAT. Suffice it to say that since the law granted the press a privilege, the law
could take back the privilege anytime without offense to the Constitution. By granting exemptions, the
State does not forever waive the exercise of its sovereign prerogative.

6. Grant of franchise

Tax exemptions included in the grant of a franchise may be revoked by another law as it is specifically provided in
the Constitution that the grant of any franchise is always subject to amendment, alteration, or repeal by the
Congress when the common good so requires.

 Petitioners claim that the R.A. violates their press freedom and religious liberty, having removed them
from the exemption to pay VAT. Suffice it to say that since the law granted the press a privilege, the law
could take back the privilege anytime without offense to the Constitution. By granting exemptions, the
State does not forever waive the exercise of its sovereign prerogative. [Tolentino v. Sec. of Finance]

C. SITUS OF TAXATION & DOUBLE TAXATION

 Meaning of Situs – The source of the tax, or the place of taxation. Literally, situs of taxation means place
of taxation. It is the State or political unit which has jurisdiction to impose a particular tax.
 The determination of the situs of taxation depends on various factors including the:
1. Nature of the tax;
2. Subject matter thereof (i.e. person, property, act or activity;
3. Possible protection and benefit that may accrue both to the government and the taxpayer;
4. Residence or citizenship of the taxpayer; and
5. Source of the income.

A. Situs of tax on persons (poll tax)

 Poll tax may be properly levied upon persons who are inhabitants or residents of the State, whether or
not they are citizens.

B. Situs of tax on real property

 Situs is where the property is located pursuant to the principle of lex rei sitae. This applies whether or not
the owner is a resident of the place where the property is located.
 This is so because the taxing authority has control over the property which is of a fixed and stationary
character.
 The place where the real property is located gives protection to the real property, hence, the owner must
support the government of that place.
  Lex rei sitae - This is a principle followed in fixing the situs of taxation of a property. This means that the
property is taxable in the State where it has its actual situs, specifically in the place where it is located,
even though the owner resides in another jurisdiction.
 With respect to property taxes, real property is subject to taxation in the State where it is located and
taxable only there. Lex rei sitae has also been adopted for tangible personal property under Article 16 of
the Civil Code. A different rule applies to intangible personal property, specifically, mobilia sequuntur
personam.

C. Situs of tangible personal property

 It is taxable in the State where it has actual situs although the owner resides in another jurisdiction.
 As stated above, lex rei sitae has also been adopted for tangible personal property under Article 16 of
the Civil Code.

D. Situs of taxation of intangible personal property

 General rule: Situs is the domicile of the owner pursuant to the principle of mobilia sequuntur personam.
This rule is based on the fact that such property does not admit of any actual location and that such
property receives the protection and benefits of the law where they are located.
 Exceptions:

1. When it is inconsistent with the express provisions of the statute.

2. When the property has acquired a business situs in another jurisdiction.

Mobilia sequuntor personam

 This Latin maxim literally means that the property follows the person. Thus, the place where the
owner is found is the situs of taxation under the rule that movables follow the person. This is
generally where the owner resides.
 In taxation, this principle is applied to intangible personal property the situs of which is fixed by the
domicile of the owner. The reason is that this type of property rarely admits of actual location.
 However, there are two exceptions to the rule. One is when it is inconsistent with the express
provisions of a statute. Two, when the interests of justice demand that it should not be applied, i.e.
where the property has in fact a situs elsewhere.

Theories re: Situs of Income tax

1. Domicilliary theory

The location where the income earner resides is the situs of taxation. This is where he is given protection,
hence, he must support it.

2. Nationality theory

The country of citizenship is the situs of taxation. This is so because a citizen is given protection by his
country no matter where he is found or no matter where he earns his income.

3. Source law

The country which is the source of the income or where the activity that produced the income is the situs
of taxation.

Wells Fargo v. Collector, 70 Phil 325

 This case involves the collection of inheritance taxes on shares of stock issued by the Benguet Consolidated
Mining Corporation and owned by Lillian Eye. Said shares were already subjected to inheritance taxes in
California and are now being taxed by Philippine authorities.

Originally, the settled law in the United States is that intangibles have only one situs for the purpose of
inheritance tax – the domicile of the decedent at the time of death. But this rule has, of late, been relaxed. The
maxim mobilia sequuntur personam, upon which the rules rests, has been decried as a mere fiction of law
having its origin in considerations of general convenience and public policy and cannot be applied to limit or
control the right of the State to tax property within its jurisdiction. It must yield to established fact of legal
ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in
inescapable and patent injustice.

The relaxation of the original rule rests on either of two fundamental considerations:

1. Upon the recognition of the inherent power of each government to tax persons, properties and rights
within its jurisdiction and enjoying the protection of its laws; or

2. Upon the principle that as to intangibles, a single location in space is hardly possible, considering the
multiple, distinct relationships which may be entered into with respect thereto.

The actual situs of the shares of stock is in the Philippines, the corporation being domiciled therein. And
besides, the certificates of stock have remained in this country up to the time when the deceased died in
California, and they were in the possession of the secretary of the Benguet Corporation. The secretary had the
right to vote, collect dividends, among others. For all practical purposes, the secretary had legal title to the
certificates of stock held in trust for Eye. Eye extended in the Philippines her activities re: her intangible
personal property so as to avail herself of the protection and benefits of the Philippine laws.

E. Income – Income tax may properly be exacted from persons who are residents or citizens in the taxing
jurisdiction and even from those who are neither residents nor citizens provided the income is derived from
sources within the taxing state.
F. Business, occupation and transaction – The general rule is that the power to levy an excise tax depend upon
the place where the business is done, or the occupation is engaged in, or the transaction took place.
G. Gratuitous transfer of Property – The transmission of property from a donor to a done or from a decedent to
his heirs may be subject to taxation in the state where the transferor is or was a citizen or resident, or where
the property is located.

Commissioner vs. British Overseas Airways Corp.

 The source of an income is the property, activity or service that produced the income.
 For the source of income to be considered as coming from the Philippines, it is sufficient that the income
is derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity
that produced the income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency.
 The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the Philippine Government. In
consideration of such protection, the flow of wealth should share the burden of supporting the
government.
 PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income from
Philippine sources.

CIR v. Japan Airlines

 Citing the case of CIR v BOAC, the court reiterated that the source of an income is the property, activity or
service that produced the income.
 For the source of income to be considered as coming from the Philippines, it is sufficient that the income
is derived from activity within the Philippines.
 The absence of flight operations to and from the Philippines is not determinative of the source of income
or the situs of income taxation.
  The test of taxability is the source, and the source of the income is that activity which produced the
income. In this case, as JAL constitutes PAL as its agent, thesales of JAL tickets made by PAL is taxable

Wells Fargo Bank v. Collector

 It is the identity or association of intangibles with the person of their owner at his domicile which gives
jurisdiction to tax.
 But when the taxpayer extends his activities with respect to his intangibles, so as to avail himself of the
protection and benefit of the laws of another state, in such a way as to bring his person or property within
the reach of the tax gatherer there, the reason for a single place of taxation no longer obtains.
 In this case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled
therein. The owner residing in California has extended her activities with respect to her intangibles so as
to avail herself of the protection and benefit of the Philippine laws

3. MULTIPLICITY OF SITUS

 Multiplicity of situs, or the taxation of the same income or intangible subject in several taxing
jurisdictions, arises from various factors:

1. The variance in the concept of domicile for tax purposes;

2. Multiple distinct relationships that may arise with respect to intangible personal property; or

3. The use to which the property may have been devoted all of which may receive the protection of the laws of
jurisdictions other than the domicile of the owner thereto.

 The remedy to avoid or reduce the consequent burden in case of multiplicity of situs is either to:

1. Provide exemptions or allowance of deduction or tax credit for foreign taxes; or

2. Enter into tax treaties with other States.

Collector v. De Lara

 The Supreme Court did not subject to estate and inheritance taxes the shares of stock issued by Philippine
corporations which were left by a non-resident alien after his death. Considering that he is a resident of a
foreign country, his estate is entitled to exemption from inheritance tax on the intangible personal
property found in the Philippines. This exemption is granted to non-residents to reduce the burden of
multiple taxation, which otherwise would subject a decedent’s intangible personal property to the
inheritance tax both in his place of residence and domicile and the place where those properties are
found.
 This is, therefore, an exception to the decision of the Supreme Court in Wells Fargo v. Collector. This has
since been incorporated in Section 104 of the NIRC.
 As to the shares of stocks issued by Philippine corporations, an exemption was granted to the estate by
virtue of Section 122 of the Tax Code, which provides as follows:. . ."And Provided, however, That no tax
shall be collected under this Title in respect of intangible personal property (a) if the decedent at the time
of his death was a resident of a foreign country which at the time of his death did not impose a transfer
tax or death tax of any character in respect of intangible personal property of citizens of the Philippines
not residing in that country, or (b) if the laws of the foreign country of which the decedent was resident at
the tune of his death allow a similar exemption from transfer taxes or death taxes of every character in
respect of intangible personal property owned by citizen, of the Philippine not residing in that foreign
country.

4. Double Taxation

 In its strict sense, referred to as direct duplicate taxation, double taxation means:

1. taxing twice;

2. by the same taxing authority;

3. within the same jurisdiction or taxing district;

 4. for the same purpose;

5. in the same year or taxing period;

6. some of the property in the territory.

 In its broad sense, referred to as indirect double taxation, double taxation is taxation other than direct
duplicate taxation. It extends to all cases in which there is a burden of two or more impositions.

Constitutionality of double taxation

 Unlike the United States Constitution, our Constitution does not prohibit double taxation.
 However, while it is not forbidden, it is something not favored. Such taxation should, whenever possible,
be avoided and prevented.
 In addition, where there is direct double taxation, there may be a violation of the constitutional precepts
of equal protection and uniformity in taxation.

CIR v. S.C. Johnson and Son, Inc.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the
avoidance of double taxation.

The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions.

More precisely, the tax conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods.

The apparent rationale for doing away with double taxation is of encourage the free flow of goods and services
and the movement of capital, technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies.

Double taxation usually takes place when a person is resident of a contracting state and derives income from, or
owns capital in, the other contracting state and both states impose tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of
the state of source or situs and of the state of residence with regard to certain classes of income or capital. In
some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items
of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the
state of source is limited.

b. Double Taxation in its broadest sense.

In its broad sense, referred to as indirect double taxation, double taxation is taxation other than direct duplicate
taxation. It extends to all cases in which there is a burden of two or more impositions.

Villanueva v. City of Iloilo, 265 SCRA 528

 An ordinance imposing a municipal tax on tenement houses was challenged because the owners already
pay real estate taxes and also income taxes under the NIRC.
 The Supreme Court held that there was no double taxation.
 The same tax may be imposed by the National Government as well as the local government.
 There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same
occupation, calling, or activity by both the State and a political subdivision thereof.
 Further, a license tax may be levied upon a business or occupation although the land used in connection
therewith is subject to property tax.

In order to constitute double taxation in the objectionable or prohibited sense:

1. the same property must be taxed twice when it should be taxed once;

2. both taxes must be imposed on the same property or subject matter;

 3. for the same purpose;

4. by the same State, Government, or taxing authority;

5. within the same jurisdiction or taxing district;

6. during the same taxing period; and

7. of the same kind or character of tax.

C. Constitutionality of Double Taxation

 Unlike the United States Constitution, our Constitution does not prohibit double taxation.
 However, while it is not forbidden, it is something not favored. Such taxation should, whenever possible,
be avoided and prevented.
 In addition, where there is direct double taxation, there may be a violation of the constitutional precepts
of equal protection and uniformity in taxation.

City of Baguio v. De Leon, 25 SCRA 938

 The argument against double taxation may not be invoked where one tax is imposed by the State and the
other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the
requirement that license fees or taxes be exacted with respect to the same occupation, calling, or activity
by both the State and a political subdivision thereof.
 And where the statute or ordinance in questions applies equally to all persons, firms and corporations
placed in a similar situation, there is no infringement of the rule on equality.

Pepsi-Cola Bottling Co. vs. City of Butuan

The Ordinance, as amended, is discriminatory since only sales by “agents or consignees” of outside dealers would
be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the
volume of their sales , and even if the same exceeded those made by said agents or consignees of producers or
merchants established outside the city, would be exempt from the tax. The classification made in the exercise of
the authority to tax, to be valid must be reasonable, which would be satisfied if the classification is based upon
substantial distinctions which makes real differences; these are germane to the purpose of legislation or
ordinance; the classification applies not only to present conditions but also to future conditions substantially
identical to those of the present; and the classification applies equally to all those who belong to the same class.
These conditions are not fully met by the ordinance in question.

Sanchez v. Collector

Sanchez has an accessoria building which she leases out as an apartment. Searate tax levied upon a business or
occupation and the property used therein does not amount to double taxation. Income tax and real estate
dealer’s tax are different taxes.

Double taxation may not be invoked as a defense against the validity of a tax law as where the real estate dealer’s
tax is imposed for engaging in the business of leasing real estate in addition to the real estate tax on the property
leased and the income tax on the income derived as it is a different kind of tax.

City of Manila v. Interisland Gas Service

The City of Manila collects deficiency municipal tax from interisland for liquefied flammable gas taxed as
merchandise. Fees aid for storage, installation, use and transportation of compressed inflammable gas are
charged by way of license fees in the exercise of police power of the state.

Double Taxation may not be invoked as a defense against the validity of a tax law as where aside from the tax, a
license fee is imposed in the exercise of police power. Here the license fee is imposed for a different purpose, i.e,
as a regulatory measure.

Compana General de Tabacos v. City of Manila, supra;

Both a license fee and a tax may be imposed on the same business or occupation for selling the same article and
this is not in violation of the rules against double taxation.

Means of Avoiding or Minimizing the Burden of Taxation:

1. Shifting - is the transfer of the burden of a tax by the original payer or the one on whom the tax was
assessed or imposed to someone else.

It should be borne in mind that what is transferred is not the payment of the tax but the burden of the tax.

Only indirect taxes may be shifted; direct taxes cannot be shifted.

Ways of shifting the tax burden

a. Forward shifting - When the burden of the tax is transferred from a factor of production through
factors of distribution until it finally settles on the ultimate purchaser or consumer.
i. Example: Manufacturer or producer may shift tax assessed to wholesaler, who in turn
shifts it to the retailer, who also shifts it to the final purchaser or consumer.
b. Backward shifting - when the burden of the tax is transferred from the consumer or purchaser
through the factors of distribution to the factor of production.
i. Example: Consumer or purchaser may shift tax imposed on him to retailer by purchasing
only after the price is reduced, and from the latter to the wholesaler, and finally to the
manufacturer or producer.
c. Onward shifting - when the tax is shifted two or more times either forward or backward.
i. Thus, a transfer from the seller to the purchaser involves one shift; from the producer
to the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again
to the purchaser by the retailer, we have three shifts in all.

Persons Liable (Sec. 105) - Any person who, in the course of trade or business, sells barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax
(VAT)imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax
may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Republic Act No.7716.

Impact and incidence of taxation

 Impact of taxation is the point on which a tax is originally imposed. In so far as the law is concerned, the
taxpayer is the person who must pay the tax to the government. He is also termed as the statutory
taxpayer – the one on whom the tax is formally assessed. He is the subject of the tax.
 Incidence of taxation is that point on which the tax burden finally rests or settle down. It takes place when
shifting has been effected from the statutory taxpayer to another.

Statutory taxpayer - The statutory taxpayer is the person required by law to pay the tax or the one on whom the
tax is formally assessed. In short, he or she is the subject of the tax.

 In direct taxes, the statutory taxpayer is the one who shoulders the burden of the tax while in indirect
taxes, the statutory taxpayer is the one who pay the tax to the government but the burden can be passed
to another person or entity.

Relationship between impact, shifting, and incidence of a tax

 The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the
result. Thus, the impact in a sales tax (i.e. VAT) is on the seller (manufacturer) who shifts the burden to
the customer who finally bears the incidence of the tax.
  Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the setting or
coming to rest of the tax.

2. Tax Evasion

 Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a
tax. It is also known as “tax dodging.” It is punishable by law.

 Tax evasion is a term that connotes fraud through the use of pretenses or forbidden devices to lessen or
defeat taxes. [Yutivo v. Court of Tax Appeals, 1 SCRA 160]
 Example: Deliberate failure to report a taxable income or property; deliberate reduction of income that
has been received.

Elements of tax evasion:

1. The end to be achieved.

 Example: the payment of less than that known by the taxpayer to be legally due, or in
paying no tax when such is due.
2. An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate and
not accidental.”
3. A course of action (or failure of action) which is unlawful.

Evidence to prove evasion

 Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the
circumstances of the case.

Republic v. Gonzales [13 SCRA 633]

 SC affirmed the assessment of a deficiency tax against Gonzales, a private concessionaire engaged in the
manufacturer of furniture inside the Clark Air Base, for underdeclaration of his income. SC held that the
failure of the taxpayer to declare for taxation purposes his true and actual income derived from his
business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government if
its due taxes.

SEC. 254. Attempt to Evade or Defeat Tax. - Any person who willfully attempts in any manner to evade or defeat
any tax imposed under this Code or the payment thereof shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine not less than Thirty thousand (P30,000) but not more than One hunderd
thousand pesos (P100,000) and suffer imprisonment of not less than two (2) years but not more than four (4)
years: Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil
suit for the collection of taxes.

3. Tax Avoidance

 Tax avoidance is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income in order to avoid or reduce tax liability. It is politely called “tax
minimization” and is not punishable by law.

Delphers Traders Corp. v. IAC[157 SCRA 349],

 SC upheld the estate planning scheme resorted to by the Pacheco family in converting their property to
shares of stock in a corporation which they themselves owned and controlled. By virtue of the deed of
exchange, the Pachecho co-owners saved on inheritance taxes. The Supreme Court said the records do
not point to anything wrong and objectionable about this estate planning scheme resorted to. The legal
 right of the taxpayer to decreased the amount of what otherwise could be his taxes or altogether avoid
them by means which the law permits cannot be doubted.
 What they really did was to invest their properties and change the nature of their ownership from
unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of
their properties and at the same time save on inheritance taxes. The "Deed of Exchange" of property
between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale.
 There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family
merely changed their ownership from one form to another. The ownership remained in the same hands.
Hence, the private respondent has no basis for its claim of alight of first refusal under the lease contract.

Yutivo v. CTA

Facts: Yutivo Sons Hardware Co. bought a number of cars and trucks from General Motors Overseas Corporation.
As importer, GM paid sales tax prescribed by sections 184, 185and 186 of the Tax Code on the basis of its selling
price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to
the public. Southern Motors, Inc. was organized to engage in the business of selling cars, trucks and spare parts.
After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars
and trucks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the
Visayas and Mindanao.

Issue: Whether or not Southern Motors, Inc. was organized as a tax evasion device.

Held: NO.
 SM was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up
to June 30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold to
Yutivo, which, in turn resold them to SM.
 During that period, it is not disputed that GM as importer, was the one solely liable for sales taxes.
Neither Yutivo or SM was subject to the sales taxes on their sales of cars and trucks.
 The sales tax liability of Yutivo did notarize until July 1, 1947 when it became the importer and simply
continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized
purposely as a tax evasion device runs counter to the fact that there was no tax to evade
 Intention to minimize taxes used in the context of fraud, must be proved by clear and convincing evidence
amounting to more than mere preponderance and cannot be justified by mere speculation. Fraud is
never presumed.

4. Exemption from Taxation

 It is the grant of immunity to particular persons or corporations or to persons or corporations of a

particular class from a tax which persons and corporations generally within the same state or taxing
district are obliged to pay.

 It is an immunity or privilege; it is freedom from a financial charge or burden to which others are
subjected.

 Exemption is allowed only if there is a clear provision therefor.

 It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.

5. Transformation

6. Avoidance