CHAPTER 2INHERENT LIMITATIONS ON THE POWER OF TAXATION

A. THE POWER TO TAX HAS LIMITS The power to tax is an inherent power but such power must still be exercised in accordance with the inherent and constitutional

limitations If there exists conflicting interest between the taxing authorities and taxpayers, it must be resolved in favor of the real purpose of

taxation, which is, promotion of common good.

2 Kinds of Limitations:o Constitutional Limitation – those provided for in the Constitutiono Inherent Limitations – restrictions to the power to tax attached to its nature

B. THE INHERENT LIMITATIONS (Le-N-T-Ex-Ice)1. (Le) Levied for a public purpose2. (N) Non-delegability of the taxing power3. (T) Territoriality or situs of taxation4. (Ex) Tax exemptions of the Government5. (Ice) International Comity

Violation of any or all of the above is a. equal to taking without due processb. infringement of the general principles of int’l law which form part of the law of the land

C. LEVIED FOR A PUBLIC PURPOSE Amount raised must

o Inure to the benefit of the publico Used for

Support of the state Some recognized object of the Government Public service

You cannot use public funds to promote an individual’s interest, even if it may incidentally result to the benefit of the public Rationale: tax can be levied against one class of individuals in favor of another class; you can ruin one class while favoring the other If it is for a private purpose, it is robbery because government takes property of another and then gives it in favor of another person. “public purpose” includes “indirect public advantage”

o if an individual directly enjoys the tax, it is still valid as long as there is a link to public purpose

Test to determine existence of Public Purposeo Duty test – if it is the duty of the government to provide such thingo Promotion of General Welfare Test – if proceeds will directly promote the public’s welfare

Purposes of levying tax: o regulatory purposeo raise government revenueo support government existenceo rehabilitate/stablize a threatened industry, which is affected with public interest

If purpose of the tax is not stated, it is presumed that it is created for a public purpose Examples (presumption of public purpose)

o Pensions of war veterans assurance that a person’s patriotism will be acknowledged and rewardedo Unemployment reliefo Support for the handicappedo Care for the agedo Scholarships for poor but deserving citizenso Tax on sugar o Oil Price Stabilization Fund oil industry is imbued with public interest, and a dramatic increase in oil prices will result to

economic crisis

The public purpose must exist at the time the law was enacted.o Government may only use public funds for a public purposeo The existence of public purpose determines its validity, not the incidental benefit to the public

D. NON DELEGABILITY OF TAXING POWER

Source of Power People Delegation Transferred from the people to Congress Basis: delegata potestas non potest delegari.

Theories that justify the delegation:o Power to fill up the details- subjects of less interest in which general provision may be made, thus those who are to act under such

general provision, has the power to fill up the details.o Power of Contingent Legislation- what is delegated is the task of ascertaining the facts that bring its declared policy into

operation.

Delegable Powers: (Ta-Em-Trea-LIA)a. (Ta) Tariff Powers-reason for its delegation is necessity.b. (Em) Emergency Power- President can exercise this power in times of war or other national emergency, as authorized by Congress

through law. (Sec23(2) ArtVI, 1987 Constitution)c. (Trea) Treaty and Executive Agreement Powers-Power of President to enter in to executive agreements, and to ratify treaties. (Sec21,

ArtVII, 1987 Constitution)d. (L) Local taxing power- Theory of non-delegation of legislative power does not apply in local units. Reason- LGU not sovereign

entities.e. (I) Initiative and Referendum-

o Initiative- power of the people to propose and enact legislation without action by the legislature.

o Referendum- power of the people to approve or reject any act of the legislature, and also to approve or reject legislation that

the legislature has referred to them.f. (A) Administrative Matters:

o Valid as regards:

i. Valuation of property pursuant to fixed rulesii. Equalization of assessments by a central bodyiii. Collection of taxes

Test to determine permissible delegation: a. Completeness test- The law must be complete in itself, setting forth therein the policy to be executed, carried out, or implemented by

the delegateb. Sufficiency standard test -The law must fix a standard. The limits of which are sufficiently determinate and determinable to which

the delegate must conform in the performance of his functions.

Non-Delegable Powers:a. Selection of property or transaction to be taxedb. Determination of purposesc. Rate of taxationd. Rules of taxation

Prohibition on Executive Legislation and Judicial Legislationo Based on separation of powers of state.o Law-making power-legislative brancho Law-executing power- executive brancho Law-interpreting power- judicial branch

E. TERRITORIALITY OR SITUS OF TAXATION

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

Taxation is an act of sovereignty which could only be exercised within state’s territorial boundaries. Taxes are paid for the protection and services provided by the taxing authority which could not be provided outside the territorial limits

of the taxing power. Situs of taxation: situs is latin term which means “situation,” “location or place.”

Determination of situs: (S-NCR-L)o (S) Subject matter of the tax- Situs may depend on what is being taxed: excise/privilege, business, occupation, person, act or activity.

o (N) Nature/kind/ classification of the tax- situs may depend on what tax is being levied: income tax, import duty, sales tax or real property tax.

o (C) Citizenship of the tax payer- situs may depend on which state the taxpayer is a citizen of, or probably an alien, dual citizen, stateless or refugee.

o (R) Residenxe of the taxpayer- situs may depend on the residence of the taxpayer: resident, non- resident. o (L) Location of the property- situs may depend on the palce the thing or property is located: within the Philippines or outside the

Philippines.

F. GOVERNMENT EXEMPTION

It is a matter of public policy. o Property belonging to the State or any of its political division intended for government use and purposes is generally exempt

from taxation.o express provision of law needed to satisfy the rule.

Always remember that “Exemption is the rule and taxation is the exception.”

Reasons for exemption (A-Nore-So-Re)o (A) Avoid transferring money from one pocket to another.o (Nore) No revenue.o (So) So as not to unduly impede govt functions.o (Re) Reduce amount of money to be handled.

Exception to the (General Rule) Exemption o The rule on the exemption of government is not absolute.o The government may tax itself. Clearly, exemption applies only to government entities which immediately and directly exercise

its government powers.o GOCCs, agencies, or instrumentalities are subject to taxation under the NIRC and LGC. However, only income from

proprietary activities and not from essential governmental functions are taxable.

Definition of Terms

o RP (Republic of the Philippines) – corporate government entity through which the functions of government are exercised throughout the Philippines.

o NG (National Government) – entire machinery of the central government as distinguished from different forms of local government

o GOCC (Government-Owned and Controlled Corporations) – any agency organized as a stock or non-stock corporation o GA (Government Agency) – any of the various units of the government including a department, bureau, office, instrumentality,

or GOCC, or LGU or a distinct unit therein.

G. INTERNATIONAL COMITY

DSE (Doctrine of Sovereign Equality) o In par parem non habet imperium or “as between equals there is no sovereign”o Foreign sovereign does not subject itself to another.

DSI (Doctrine of Sovereign Immunity)o The State cannot be sued without its consent. o The State can do no wrong.o Based on practicality because of the difficulty of enforcing tax laws.

IC (Incorporation Clause)o The Philippines adopts the generally accepted principles on international law as part of the law of the land.o The Philippines adheres to the policy of peace, equality, justice, freedom,

cooperation, and amity with all nations.