Module 4: Sources, Limitations & Exemptions

Sources of Tax laws

1. Legislation or statutes, including Presidential Decrees and executive Orders on taxation and Tax
Ordinances.
2. Administrative rules and regulations and existing tax laws of the Philippines.
3. National Tax laws, like the National Internal Revenue Code and the Tariff and Customs code.
4. Local Tax Laws, like the provisions of the Local Government code on local and real property
taxation as well as Local Ordinances imposing taxes.
5. Miscellaneous Tax Laws. These are provisions of various laws creating various agencies like
the Land Transportation Office, Videogram Regulatory Board, etc, which imposes regulatory taxes.
General or Indirect Constitutional limitations on the power to taxation
a. Due process clause
b. Equal protection clause
c. Non-Impairment clause
d. Non-establishment clause
e. Presidential power to grant reprieves, commutations and pardons and remit fines and forfeitures
after convictions by final judgment.
Specific or Direct Constitutional limitations on the Power of taxation
a. No imprisonment for non-payment of poll tax
b. Taxation shall be uniform and equitable
c. Congress shall evolve a progressive system of taxation
d. Delegated authority of President to impose tariff rates, import and export qoutas, tonnage and
wharfage dues:
1. Delegation by congress
2. Through a law
3. Subject to congressional limits and restriction
4. Within a framework of national development program
e. Tax exemption of charitable institutions, churches, parsonages, convents, all lands, buildings,
and improvements
1. actually, directly and exclusively used
2. for religious charitable or educational purposes
f. No tax exemption without concurrence of Congress majority
g. No use of public money or property for religious purposes ex cept if priest is assigned to armed
forces, penal institutions, government orphanages or leprosarium.
h. Money collected on tax levied for special purpose to be used only for such purpose, balance if
any, to general funds.
Concepts in the Due Process in Taxation
a. Due process in taxation requires :
1. Tax must be for a public purpose;
2. Imposed within territorial jurisdiction
3. No arbitrariness or oppression in
a. assessment and b. collection
b. Due process in taxation does not require :
1. Determination through judicial inquiry of: a. Property subject to tax
b. Amount of tax to be imposed
c. Notice and hearing as to:
a. Amount of the tax
b. Manner of apportionment Reason:
Lifeblood theory. No due process where a tax statute is so arbitrary that It finds no support in the
Constitution. No violation of due process although tax will result in an injury rather than benefit to a
particular taxpayer.
The taxing authority could select objects of taxation. The basis is lifeblood theory. Due Process
requires hearing before adoption of legislative rules by administrative bodies. A legislative rule is in
the nature subordinate legislation, designed to implement a primary legislation by providing the
details thereof. In the same way that laws must have the benefit of public hearing, it is generally
required that before a legislative rule is adopted there must be a hearing.
In considering a legislative rule a court is free to make three inquiries:
a. Whether the rule is within the delegated authority of the administrative agency:
b. Whether it is reasonable; and
c. Whether it was issued pursuant to proper procedure. But the court is not free to substitute its
judgment as to the desirability or wisdom of the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions to administrative judgments and not to
judicial judgments.
Concepts of Equal Protection and Uniformity Rule
a. The criteria of equal protection and uniformity, used interchangeably. In general they mean the
same.
b. The criteria is met
1. when the laws operate equally and uniformly
a. on all persons
b. under similar circumstances
2. All persons are treated in the same manner
a. the conditions not being different
b. both in privileges conferred and liabilities imposed
c. favoritism and preferences not allowed.
The criteria means that all taxable articles or kinds of property of the same class shall be taxed at
the same rate. The Constitution does not require things which are different in fact to be treated in
law as though they were the same. Hence, the constant reiteration of the view that classification, if
rational in character, is allowable.
The taxing authority has the power to make reasonably and natu ral classifications for purposes of
taxation. The legislature has the inherent power to select the subjects of taxation hence it has the
power to select whom to exempt.
Tax exemptions are not violative of the equal protection clause, so long as there is valid
classification.
Double Taxation
In its general sense, it means taxing the same object twice during the same taxing period. It is
classified into direct duplicate taxation and indirect duplicate taxation. Double taxation is not
specially prohibited in the Philippine Constitution unlike in the United States Constitution. However,
where there is direct duplicate taxation then there may be violation of the constitutional precepts of
equal protection and uniformity in taxation. The absence of any of the elements of direct duplicate
taxation makes it indirect duplicate taxation which is not prohibited.
There is double taxation when additional taxes are laid on the same subject by the same taxing
jurisdiction during the same taxing period and for the same purpose. Thus, if a person's properties
are each taxed separately and thereafter all of them are again taxed, this time collectively, by the
same taxing jurisdiction for the same purpose and during the same taxing period, the second
imposition would constitute double taxation.
Despite the lack of a specific prohibition, however, double taxation I will not be allowed if it results in
a violation of the equal protection clause. Hence, if certain properties are subjected to an additional
tax whereas others similarly situated are not similarly taxed, the owners of the first properties would
have a right to complain.
Kinds of Double Taxation
1. Direct duplicate taxation/obnoxious: Double Taxation in the objec tionable or prohibited sense.
Reason: This constitutes a violation of substantive due process. The same property is taxed twice
when it should be taxed only once.
Elements:
a. the same property is taxed twice when it should only be taxed once.
b. both taxes are imposed on the same property or subject matter for the same purpose.
c. imposed by the same taxing authority.
d. within the same jurisdiction.
e. during the same taxing period; and
f. covering the same kind or character of tax.
2. Indirect double taxation: Not legally objectionable. The absence of one or more of the foregoing
elements of direct double taxation makes the double taxation indirect.
Constitutionality of Double Taxation
Our Constitution does not prohibit double taxation. Hence, it may not be invoked in the following
cases:
a. Where a tax is imposed is imposed by the national government and another by the city for the
exercise of the same occupation or business as the tax is not imposed by the same public authority.
b. Where a tax on a manufacturer's products ( soap, edible oil, margarine) and another tax on the
privilege ( of such manufacturer) of storing exportable copra in warehouses within a municipality are
imposed, as the first tax is different from the second.
c. In view of different places of taxation of property tax and income tax, an inequitable situation may
exist where the taxpayer pays twice the same taxes to two different jurisdictions. Recourse has
been made to treaty stipulations for reciprocal exemption or tax credit in order to avoid the
harshness of this situation. Our tax code allows tax credit or deduction of foreign tax. However, the
SC held that a resident foreigner who derives solely his income from the Philippines is not entitled to
tax credit and deduction of foreign income tax from his income.
However, where double taxation (in its strict sense) occurs, the taxpayer may seek relief under the
uniformity rule or the equal protection guarantee.
Reliefs from Effects of Double Taxation
1. Tax deductions
Example: Vanishing deductions in transfer taxes.
2. Tax credits
Illustrations
For VAT purposes, the tax on inputs or items that go in to the manufacture of finished products
(which are eventually sold) may be credited against or deducted from the output tax or tax on the
finished product.
Foreign income taxes may be credited against the Phil. Income tax, subject to certain limitations, by
citizens, including members of general professional partnerships or beneficiaries of estates or trusts
(pro rata), as well as domestic corporations.
A tax credit is granted for estate taxes, into a foreign country on the estate of citizens and resident
aliens subject to certain limitations.
The donor's tax imposed upon a citizen or a resident shall be credited with the amount of any
donor's tax imposed by the authority of a foreign country, subject to certain limitations.
3. Exemptions
4. Treaties with other states
5. Principle of reciprocity,
Meaning of Public Purpose
It is necessary to show that the proceeds are devoted to a public purpose. Revenues derived from
taxes cannot be used for purely private purposes, or for the exclusive benefit of private persons.
Like public use in eminent domain, the phrase public purpose" as applied to taxation is now given
the broadest interpretation so as to include even indirect public advantage or benefit. The mere fact
that the tax will be directly enjoyed by a private individual does not make it invalid so long as some
link to the public welfare is established.
Unemployment relief, support for the handicapped, and care of the aged, are also allowed as these
matters, if left unattended by the government, are likely to create social problems that will affect the
rest of the community. Scholarships for poor but deserving students, prizes and other incentives for
gifted citizens and subsidies for educational programs are likewise justified under the constitutional
man date for the promotion of the welfare and capabilities of the youth and the development of
culture. The use of tax revenues for the support of particular industries vital to the national
economy, the clearance of slums for the construction of home sites for deserving citizens, and the
payment of retirement or death gratuities to civil servants or their heirs are also considered valid
public purposes. An illustration of public purpose would be such projects as the construction of
roads and bridges, the establishment of schools, museums, parks and play grounds, the erection of
public buildings, and the maintenance of government services in general, all of which inure to the
direct benefit and enjoyment of the people.
Elements of direct duplicate taxation which is violative of the equal protection and uniformity
clauses:
1. The same object or property is taxed twice.
2. By the same taxing authority.
3. For the same taxing purpose.
4. Within the same tax period.
5. Taxing all of the objects or property for the first time without tax ing all of them for the second
time.
Tax Exemption, defined
In broad sense, whenever a tax on property does not apply to all property within the jurisdiction of
the taxing authorities. The property not taxed is said to be exempted.
In a narrow sense, the grant of immunity, expressed or implied, to a particular person or persons or
corporations of a particular class, from a tax upon property or an excise tax which persons or
corporations generally within the same taxing districts are obliged to pay.
Kinds of Tax Exemptions::
a. As to clarity:
1. Express; and
2. Implied.
b. As to extent
1. Total;
2. Partial.
c. According to Intent.
1. Intentional;
2. Accidental or by omission
d. According to source:
1. Constitutional
2. Statutory;
3. Treaty;
4. Contractual;
5. Licensing ordinance.

Statutory Tax Exemptions include:

1. Tax Exemption provisions under Executive Order No. 226. The Omnibus Investments Code of
1987.
2. Tax Exemption provisions under the four (4) basic tax codes:
1. The Tariff and Customs Code, as amended;
2. The National Internal Revenue Code, as amended;
3. The Local Tax Code, as amended; and
4. The Real Property Tax Code; as amended
Tax Exemptions of Schools
1. Non-stock, non-profit educational institutions,
a) All revenues and assets used actually, directly and exclusively for educational purposes shall be
exempt from taxes and duties.
b) Proprietary educational institutions.
1. All revenues and assets used actually, directly and exclusively for educational purposes.
2. maybe entitled to such exemption
3. subject to the limitations provided by law
4. including restrictions on dividends and provisions for reinvestments.
Tax exemption of educational institution within the bounds of Constitutional provisions:
Article XIV, Sec 4(3): "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.
Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to
such exemptions subject to the limitations provided by law including restrictions on dividends and
provisions for reinvestment.
Article XIV, Section 4(4):-"Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, di rectly, and exclusively for educational purposes shall be
exempt from tax.
All schools
1. All donations, grants, endowments or contributions used actually, directly and exclusively for
educational purposes.
a. shall be exempt from tax
b. subject to conditions prescribed by law.
2. All lands, building, and improvements
a. actually, directly and exclusively used
b. for educational purposes.
Tax exemptions of Property, Actually, Directly and Exclusively used for Religious, Charitable and
Educational Purposes.