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Taxation, A Study Guide on a State's Inherent Power

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TAXATION UNDER THE 1987 PHILIPPINE CONSTITUTION

A Comprehensive Study Guide

I. CONSTITUTIONAL FOUNDATION

Article VI, Section 28 - Full Text

Section 28.

  1. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.
  2. The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.
  3. 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.
  4. No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

II. NATURE AND SCOPE OF TAXING POWER

A. Inherent Nature

The power to tax is an inherent power of sovereignty that exists independently of constitutional grant.

Duka Commentary: Duka explains that as a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by the people through their Constitution. Duka notes that our Constitution provides that the rule of taxation shall be uniform and equitable and Congress shall evolve a progressive system of taxation.

Duka emphasizes that taxation is the power by which the State raises revenue to defray necessary expenses of the Government. So potent indeed is the power that it was once opined that "the power to tax involves the power to destroy."

Bernas Commentary: Bernas notes that Section 28 "is not a grant of power but an enumeration of limits on the inherent and otherwise almost unlimited power." The Constitution does not bestow taxing power but restricts what would otherwise be an unlimited sovereign prerogative. Bernas emphasizes that this power existed from the earliest days of Philippine constitutionalism, drawing from Article I, Section 8 of the U.S. Constitution's broad scope: "to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare."

Cruz Commentary: Cruz affirms that the power to tax "is an attribute of sovereignty" and "is the strongest of all powers of government," yet emphasizes it "is not unconfined as there are restrictions." Cruz notes that property rights may invoke due process and equal protection clauses to invalidate revenue measures in appropriate cases.

B. Purposes of Taxation

1. Primary Purpose: Revenue Generation

Duka Commentary: Duka explains that taxation is the power by which the State raises revenue to defray necessary expenses of the Government.

Bernas Commentary: Bernas states the "obvious primary and specific purpose of the power to tax is to raise revenue." This fundamental fiscal function enables government operations and public services.

2. Secondary Purpose: Regulation and Social Policy

Duka Commentary: Duka notes that in recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress, and the protection of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution.

Bernas Commentary: Bernas emphasizes that "from the earliest days of the history of the power of taxation, the power to tax has been recognized as an instrument of national economic and social policy." Taxation serves regulatory functions including:

Cruz Commentary: Cruz concurs, noting that "for the purpose of regulating property, the State can choose to exercise its police power or its power to tax."

C. Extent of Taxing Power

Duka Commentary: Duka notes that the power to tax involves the power to destroy. Verily, taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. Accordingly, tax statutes must be construed strictly against the government and liberally in favor of the taxpayer.

Duka quotes Justice Oliver Wendell Holmes' Dissenting Opinion: "The Court, so often has defeated the attempt to tax in certain ways, can defeat an attempt to discriminate or otherwise go too far without wholly abolishing the power to tax. The power to tax is not the power to destroy while this Court sits."

Bernas Commentary: Bernas describes the power as having "almost endless uses" given the broad scope of "general welfare." As the American Supreme Court stated, the power "is exhaustive and embraces every conceivable power of taxation" and "reaches every subject, and may be exercised at discretion."

Key Limitation - Public Purpose

Duka Commentary: Duka emphasizes that an inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose.

Duka quotes an old United States case: "To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation."

Duka explains that the term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.

Duka notes that while the categories of what may constitute a public purpose are continually expanding in light of the expansion of government functions, the inherent requirement that taxes can only be exacted for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of "public purpose."

Bernas Commentary: Bernas emphasizes: "The power to tax exists for the general welfare. Hence implicit in the power is the limitation that it should be exercised only for a public purpose." He quotes Loan Association v. Topeka: "To lay, with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is none the less a robbery because it is done under the forms of law and is called taxation."

Cruz Commentary: Cruz reinforces that "to sustain a tax, 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."

Bernas Commentary on Judicial Review: Bernas cautions that courts must carefully balance: "the determination of this question can be very crucial especially in dealing with revenue measures which accompany special appropriations." However, he warns against excessive judicial invalidation "otherwise, a state's power to legislate for the public welfare might be seriously curtailed."

Modern Interpretation of Public Purpose

Cruz Commentary: Cruz notes the phrase "public purpose" receives "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." Examples include:

Illustration - Invalid Private Purpose

Bernas Commentary: Bernas cites Planters Products, Inc. v. Fertiphil Corp., where LOI 1465 imposed "a ten peso capital contribution for the sale of each bag of fertilizer 'until adequate capital is raised to make PPI viable.'" PPI was a private corporation. The Court invalidated the imposition as "for private benefit and not for a public purpose." Bernas emphasizes this was invalid "even if seen as an exercise of police power."

Duka Commentary on Planters Products: Duka notes that when a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of "public purpose."

D. Lifeblood Theory

Duka Commentary: Duka explains that taxes are the lifeblood of government and their prompt and certain availability is an imperious need. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

Duka emphasizes that since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting the exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

III. WHO MAY EXERCISE THE POWER OF TAXATION

A. Primary Vesting in Congress

Duka Commentary: Duka explains that the power to tax is primarily vested in the Congress. Taxation is generally exercised by the legislature, but it may also be delegated to:

  1. Lawmaking bodies of LGUs (Section 5, Article X)
  2. The President, under Section 28(2), Article VI of the Constitution or as an incident of emergency powers that Congress may grant to him under Section 23(2), Article VI

Duka notes that in our jurisdiction, the taxing power may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. The LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for the exercise by local government units of their power to tax, the scope thereof or its limitations, and the exemptions from taxation. Section 133 of the LGC prescribes the common limitations on the taxing powers of local government units.

B. Local Government Units - Direct Constitutional Grant

Duka Commentary: Duka explains that taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees, and other charges pursuant to Article X, Section 5 of the 1987 Constitution:

Section 5. -- Each Local Government unit shall have the power to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local Governments.

Duka explains that this paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country's highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders. The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services and confer them sufficient powers to generate their own sources for the purpose.

Duka notes that the Constitution provides for local government taxation (Article X, Sections 5 and 6). The Local Government Code provides that all local government units are granted general tax powers, as well as other revenue-raising powers like the imposition of service fees and charges, in addition to those specifically granted to each of the local government units. But no such taxes, fees and charges shall be imposed without a public hearing having been held prior to the enactment of the ordinance. The levy must not be unjust, excessive, oppressive, confiscatory or contrary to a declared national economic policy. Further, there are common limitations to the grant of the power to tax to the local government, such that taxes like income tax, documentary stamp tax, etc., cannot be imposed by the local government.

IV. CONSTITUTIONAL LIMITATIONS ON TAXING POWER

A. Uniformity and Equality

1. Constitutional Requirement: "Uniform and Equitable"

The 1935 Constitution required taxation be "uniform." The 1987 Constitution (like the 1973 Constitution) requires it be "uniform and equitable."

Bernas Commentary: Bernas asks: "Are the two notions, uniformity and equitableness, distinct limitations on the power to tax?" He traces uniformity to Article I, Section 8 of the U.S. Constitution prescribing "all duties, imposts and excises shall be uniform throughout the United States." Bernas notes Philippine jurisprudence interprets uniformity the same way despite broader Philippine application to all taxes, not just indirect taxes.

Bernas confesses inability "to find any meaning which 'equitable' can add to the uniformity rule and to the equal protection clause except to say that it is also another way of expressing 'progressive system of taxation.'"

Cruz Commentary: Cruz distinguishes two concepts:

2. Geographical Uniformity vs. Intrinsic Uniformity

Key Principle from Churchill v. Concepcion (Bernas & Cruz):

Bernas Commentary: Bernas quotes: "uniformity in the Constitution does 'not signify an intrinsic, but simply a geographical uniformity... A tax is uniform, within the Constitutional requirement, when it operates with the same force and effect in every place where the subject of it is found.'"

Cruz Commentary: Cruz similarly notes uniformity "means that the tax operates with the same force and effect in every place where the subject may be found."

Critical Implication:

Bernas Commentary: Bernas explains: "since the uniformity rule requires merely geographical and not intrinsic uniformity, a levy of a tax is not unconstitutional simply because it is not intrinsically equal and uniform in its operation upon individuals." Therefore, "the uniformity rule does not prohibit classification for purposes of taxation. The taxing power may be made to fall more heavily upon some than upon others."

3. Valid Classification Under Equal Protection

Bernas Commentary: Bernas emphasizes: "When this happens, the test of constitutionality is not just the uniformity rule, a rule that is easy to obey, but also the equal protection clause and the notion of 'progressive system of taxation.'"

Requirements for Valid Classification (Bernas):

The requirements for valid classification under equal protection are:

  1. The classification must be based upon substantial distinctions which make real differences
  2. It must be germane to the purpose of the law
  3. It must apply not only to present conditions but also to future conditions substantially identical to those of the present
  4. It must apply equally to all those who belong to the same class

Bernas Commentary: Bernas cites Tan v. del Rosario's formulation that uniformity means: "(1) the standards that are used therefore are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class."

Cruz Commentary: Cruz provides the same four-part test and adds: "Higher taxes may be imposed on commercial or industrial lands than on residential lands, or on practitioners in urban centers than in rural areas, or on luxury items than on prime commodities, or on non-useful enterprises than on useful enterprises, or on persons with high income than on those with low income. But taxes cannot be based on, say, differences in the color of one's skin or ethnic origin as these are not regarded as substantial distinctions."

4. Legislative Freedom in Classification

Bernas Commentary: Bernas quotes the landmark principle: "in the field of taxation, more than in other areas, the legislature possesses the greatest freedom in classification. The reason for this is that traditionally, classification has been a device for fitting tax programs to local needs and usages in order to achieve an equitable distribution of the tax burden."

Bernas notes courts have stated that reasonable relation between classification and legislative purpose "has no application to a measure whose sole purpose is to raise revenue."

Bernas cites key precedent: "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 infringe no constitutional limitation."

B. Due Process Limitations

Duka Commentary: Duka explains that due process is usually violated where the tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such taxpayer.

Duka notes that due process does not require that the property subject to the tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law.

Bernas Commentary: Bernas quotes Sison v. Ancheta: "The power to tax is an attribute of sovereignty. In fact, it is the strongest of all the powers of government. But for all its plenitude, the power to tax is not unconfined as there are restrictions. Adversely affecting as it does property rights, both due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure."

Cruz Commentary: Cruz similarly states the due process clause may be invoked "where a taxing statute is so arbitrary that it finds no support in the Constitution."

Grounds for Due Process Challenges (Bernas & Cruz):

  1. Amounts to confiscation of property - Bernas quotes Tan v. del Rosario: "where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional prescriptions."

  2. Beyond jurisdiction of the state - Extraterritorial taxation

  3. Not for a public purpose - As discussed above

  4. Retroactive statutes that are harsh and unreasonable - Cruz notes retroactive taxes "would be tyrannical and unrealistic, as the property might not yet have been then in the possession of the taxpayer nor, presumably, would he have acquired it had he known of the tax to be imposed on it."

  5. "Tax on knowledge" - Cruz cites Grosjean v. American Press Co., stating a tax "imposed on any periodical that exceeds a maximum number of copies per issue, would also be unconstitutional as an unauthorized impairment of liberty in violation of due process and freedom of expression."

Procedural Due Process:

Cruz Commentary: Cruz explains: "due process does not require previous notice and hearing before a law prescribing fixed or specific taxes on certain articles may be enacted. But where the tax to be collected is to be based on the value of the taxable property, the taxpayer is entitled to be notified of the assessment proceedings and to be heard therein on the correct valuation to be given the property."

Burden of Proof:

Bernas Commentary: Bernas cites Sison v. Ancheta: "Where the due process and equal protection clauses are invoked, there is a need for proof of such persuasive character as would lead to a conclusion of unconstitutionality. Absent such showing, the presumption of validity must prevail."

C. Progressive System of Taxation

Constitutional Mandate:

Section 28(1), second sentence: "The Congress shall evolve a progressive system of taxation."

Bernas Commentary: Bernas defines: "A tax is progressive when the rate increases as the tax base increases." He emphasizes that "this is not to say that, absent this provision, the Congress cannot adopt a progressive system of taxation. The existing system of income taxation, in fact, is progressive and there was nothing in the old law which could prevent the legislature from adopting a progressive system of taxation."

Bernas explains the purpose: "The explicit mention of progressive taxation in this provision reflects the wish of the Convention that the legislature, following the social justice command should use the power of taxation as an instrument for a more equitable distribution of wealth."

Cruz Commentary: Cruz notes: "A tax system is progressive when the rate increases as the tax base increases. The explicit mention of progressive taxation in the Constitution reflects the wish of the Commission that the legislature should use the power of taxation as an instrument for a more equitable distribution of wealth."

V. DOUBLE TAXATION

Constitutional Status

Cruz Commentary: Cruz states: "There is no provision in the Constitution specifically prohibiting double taxation. Our Supreme Court has not categorically held that double or multiple taxation is prohibited in our jurisdiction."

Cruz quotes Justice Holmes: "double taxation is no more prohibited than doubled taxation, as when a thing is taxed once at P250.00 and taxed again at another P250.00 while a similar thing is taxed only once at P500.00. 'The power to tax twice,' it has been said, 'is the power to tax once.'"

Definition

Duka Commentary: Duka explains that double taxation happens when additional taxes are laid:

  1. On the same subject
  2. By the same taxing jurisdiction
  3. During the same taxing period
  4. For the same purpose

Cruz Commentary: Cruz provides the technical definition: "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."

Example (Cruz): "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."

Case Illustration: Punzalan v. Municipal Board

Cruz Commentary: Cruz discusses this leading case: The defendant levied an additional P25.00 tax on professionals practicing in Manila who were already paying the P50.00 occupation tax under the Revised Internal Revenue Code. Petitioners challenged this as double taxation.

Ruling: The Supreme Court held against petitioners, observing "the two taxes had been imposed by different jurisdictions, one by the national government and the other by the city government."

Additional Issue: Petitioners contended discrimination because other professionals elsewhere were not subjected to the additional tax. The Court disagreed, "holding that there was a substantial distinction between them and the other professionals as practitioners in Manila could expect a more lucrative income than those in other parts of the country."

When Double Taxation Violates Equal Protection

Duka Commentary: Duka explains that double taxation, in general, is not forbidden by our fundamental law, since we have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the city or municipality.

Cruz Commentary: Cruz explains the key exception: "Despite the lack of a specific prohibition, however, double taxation 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."

Elimination of Double Taxation Through Treaties

Duka Commentary: Duka explains that 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 of 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. The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation.

VI. DELEGATION OF TAXING POWER

A. General Rule: Non-Delegability

As already established under the non-delegation doctrine, Congress generally may not delegate its law-making authority, including the power to tax.

B. Constitutional Exception - Section 28(2)

Text: "The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government."

Bernas Commentary: Bernas explains: "This rule, however, is not absolute and one exception to it is that the power may be delegated in the instances where the Constitution itself specifically authorizes the delegation. One such instance of allowable delegation is what is provided for in Section 28(2)."

Bernas notes the provision substantially reproduces Article VI, Section 22(2) of the 1935 Constitution, which Marc Donnelly and Associates v. Agregado interpreted as "allowing the delegation of a specific legislative power."

Bernas emphasizes: "the President is bound by the conditions set by Congress. This is one exception to the rule of non-delegability of legislative power."

Cruz Commentary: Cruz concurs: "This delegation of the taxation power by the legislative to the executive is authorized by the Constitution itself. At the same time, the Constitution also grants the delegating authority (Congress) the right to impose restrictions and limitations on the taxation power delegated to the President. The restrictions and limitations imposed by Congress take on the mantle of a constitutional command, which the executive branch is obliged to observe."

C. "Within the Framework of the National Development Program"

This phrase was added by the 1987 Constitution.

Bernas Commentary: Bernas clarifies: "It is, however, a limit not on the President but on the legislature's authority to impose limits on what it delegates."

Bernas quotes Commissioner Monsod's explanation:

"The reason I am proposing this insertion is that an economic program has to be internally consistent. While it is directory to the President—and it says 'within specified limits'—there are situations where the limits prescribed to the President might, in fact, be distortive of the economic program.

If I may give an example: When you are setting tariff rates there must be a certain consistency among the tariffs for finished goods, intermediate inputs, and basic materials. Once you distort this and put a low limit on the raw materials or intermediate goods then we encourage assembly at the end of the production cycle. This we did in earlier years—very high tariffs for finished products—and what we got was industry that was only engaged in assembly and packaging operations. On the other hand, an economic program would naturally rationalize the system of tariffs in order to make sure that we have a good industrial structure.

We are not taking away any power from Congress. We are just saying that as a frame of reference, the authority and the limits prescribed should be consistent with the economic program of government which the legislature itself approves."

D. Revenue Measures Under Delegated Authority

Bernas Commentary: Bernas clarifies that Garcia v. Executive Secretary established: "Section 24 does not prevent Congress from exercising this delegating authority. Nor does it invalidate the delegated authority even if it involves authority to create revenue measures."

This refers to the requirement that revenue bills originate in the House of Representatives (Section 24)—delegation to the President under Section 28(2) is valid despite this requirement.

[To be continued in Part 2 - will cover Tax Exemptions, Landmark Jurisprudence, and other remaining sections]# TAXATION UNDER THE 1987 PHILIPPINE CONSTITUTION

A Comprehensive Study Guide - Part 2

VII. TAX EXEMPTIONS

A. Corollary to Taxing Power

Duka Commentary: Duka emphasizes that since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting the exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

Duka notes that a claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the course of its operation.

Bernas Commentary: Bernas states: "A corollary to the power to tax is the power to exempt from taxation. And the same general and specific limitations on the power to tax apply to the power to create exemptions. The exemptions, therefore, must be for a public purpose, uniform and equitable, and in conformity with the equal protection clause."

B. Constitutional Exemptions - Section 28(3)

Full Text: "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."

Evolution from 1935 Constitution

Bernas Commentary: Bernas notes the 1935 Constitution (Article VI, Section 22(3)) stated: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or educational purposes shall be exempt from taxation."

The 1987 Constitution added:

Scope: Property Taxes Only

Bernas Commentary: Bernas cites Lladoc v. Commissioner of Internal Revenue: "The exemption is only for taxes assessed as property taxes, as contradistinguished from excise taxes."

This means religious/charitable organizations remain subject to income tax, sales tax, and other non-property taxes despite Section 28(3).

Cruz Commentary: Cruz explains why religious and charitable institutions receive exemption: "because they give considerable assistance to the State in the improvement of the morality of the people and the care of the indigent and the handicapped."

The Three-Part Test: Actually, Directly, and Exclusively

The words "actually, directly, and exclusively" create a conjunctive three-part test. All three must be satisfied:

Courts apply this strictly. A church that rents portions of its building for commercial purposes loses exemption for those portions.

Other Constitutional Exemptions

Bernas and Cruz note Article XIV, Section 4(3 & 4) provides additional exemptions for educational institutions.

C. Statutory Exemptions - Section 28(4)

Text: "No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress."

This increases the voting requirement beyond the ordinary majority of members present needed for regular legislation.

Bernas Commentary: Bernas explains this as a constitutional limit on the power to create exemptions through ordinary legislation.

D. Tax Exemptions Strictly Construed

Cruz Commentary: Cruz states a fundamental principle: "Tax exemptions are either constitutional or statutory." Both are subject to strict construction.

As the Commissioner v. S.C. Johnson case emphasizes: "Tax refunds are in the nature of tax exemptions and are regarded as in derogation of sovereign authority. They must be construed strictissimi juris against the person claiming the exemption. The burden of proof is upon him who claims the exemption and he must justify his claim by the clearest grant of organic or statute law."

VIII. TAXATION DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN

Duka Commentary: Duka provides a comprehensive comparison:

Police Power and Taxation

Duka explains that police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order to promote the general welfare, while the power of taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful subjects" and "lawful means" tests are used to determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.

Summary Comparison (Duka):

ASPECT POLICE POWER TAXATION EMINENT DOMAIN
Scope Regulates both liberty and property Affects only property rights Affects only property rights
Who Exercises Government, generally through legislative department Exercised only by the Government May be exercised by private entities
Basis Public necessity and the right of the state and of the public to self-preservation and self-protection Public necessity Public necessity for the use of private property
Property Involved Property intended for a noxious purpose is taken and destroyed Property is wholesome and is devoted to public use or purpose Property is wholesome and is devoted to public use or purpose
Compensation Intangible and altruistic feeling that the individual has contributed to public good Protection and public improvements instituted by the government for the taxes paid Full and fair equivalent of the property taken
Effect on Contracts Contracts may be impaired by the exercise of police power Contracts may not be impaired by the exercise of the power of taxation Contracts may be impaired by the exercise of eminent domain

IX. TAX VS. LICENSE FEE

Duka Commentary: Duka explains that distinction must be made between the grant of a license or permit to do business and the issuance of a license to engage in the practice of a particular profession. The first is usually granted by the local authorities and the second is issued by the Board or Commission tasked to regulate the particular profession. A business permit authorizes the person, natural or otherwise, to engage in business or some form of commercial activity. A professional license, on the other hand, is the grant of authority to a natural person to engage in the practice or exercise of his or her profession.

Comparison (Duka)

Tax:

  1. Based on the power of taxation in order to raise revenue
  2. The limitations as to rate or amount to be collected are unlimited provided not confiscatory
  3. As to object imposed on persons or property
  4. As to effect of non-payment of business or activity does not become illegal

License Fee:

  1. Based on the police power of the state
  2. Its cost is limited by: (a) issuing the license and (b) necessary inspection or police surveillance
  3. The object of payment is the privilege of doing something but such privilege is revocable
  4. The effect of non-payment is that the exercise of the privilege becomes illegal

X. LANDMARK JURISPRUDENCE

A. Sison v. Ancheta (1984) - Classification, Due Process, and Equal Protection

Facts: Petitioner challenged Section 1 of Batas Pambansa Blg. 135 imposing different tax rates on (a) taxable compensation income and (b) taxable net income from business/profession. For compensation, rates ranged from 0% (≤P2,500) to 35% (>P500,000). For business/professional income, rates ranged from 5% (≤P10,000) to 60% (>P500,000).

Petitioner alleged this discriminated against professionals, constituting arbitrary class legislation that violated due process, equal protection, and uniformity requirements.

Issue: Whether imposing higher tax rates on taxable net income from business/profession than on compensation income violates constitutional requirements.

Ruling: No. The classification rests upon substantial distinctions and is reasonable.

Legal Principles:

On Nature of Tax Power: The Court emphasized: "The power to tax is an attribute of sovereignty and is the strongest of all powers of government. However, it is not unconfined. The Constitution sets forth limits, and property rights may invoke the due process and equal protection clauses to invalidate revenue measures in appropriate cases."

On Due Process: "The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, such as when it amounts to confiscation of property, is beyond the jurisdiction of the state, is not for a public purpose, or in case of retroactive statutes, is so harsh and unreasonable."

On Equal Protection: "The applicable standard is whether the governmental act was inspired by the attainment of the common weal or was prompted by the spirit of hostility or discrimination that finds no support in reason. Laws must operate equally and uniformly on all persons under similar circumstances."

On Classification: "Classification if rational in character is allowable. It is inherent in the power to tax that a state be free to select the subjects of taxation, and inequalities which result from singling out one particular class for taxation or exemption infringe no constitutional limitation."

On Uniformity: "The constitutional requirement of uniformity in taxation means that the tax operates with the same force and effect in every place where the subject may be found. Equality and uniformity means that all taxable articles or kinds of property of the same class shall be taxed at the same rate."

Application:

The Court found petitioner "failed to demonstrate with factual foundation the arbitrary character of the assailed provision. A mere allegation does not suffice."

Distinction Between Tax Rate and Tax Base: "There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate."

Rational Basis for Classification: "The discernible basis of classification in the gross income taxation embodied in Batas Pambansa Blg. 135 is the susceptibility of the income to the application of generalized rules."

Conclusion: "There is ample justification for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income. This is not a suspect classification and rests on substantial distinctions."

Key Principles from Sison:

  1. Power to tax is strongest power of government but not unconfined
  2. Due process and equal protection may invalidate revenue measures
  3. Classification must rest on substantial distinctions
  4. Burden is on challenger to prove unconstitutionality with factual foundation
  5. Mere allegations insufficient to overcome presumption of validity
  6. Legislature has great freedom in tax classifications

B. Pepsi-Cola v. City of Butuan (1968) - Invalid Local Tax Ordinance

Facts: Pepsi-Cola maintained a warehouse in Butuan City for storing products shipped from Cebu before distribution. City Ordinance No. 110 (amended by No. 122) imposed P0.10 per case tax on "any agent and/or consignee" of persons engaged in selling soft drinks.

Section 3-A defined "consignee or agent" as persons receiving no less than 1,000 cases per month for resale. The tax was computed from cargo manifest or bill of lading showing cases received (not sold).

Pepsi-Cola paid P14,177.03 under protest and sued for recovery, claiming the ordinance: (1) partakes of import tax nature, (2) amounts to double taxation, (3) is excessive/oppressive/confiscatory, (4) is unjust and discriminatory, (5) involves unconstitutional delegation.

Issues:

  1. Whether the ordinance is a prohibited import tax
  2. Whether it violates uniformity through discriminatory classification

Ruling: The ordinance is invalid on both grounds.

Legal Principles:

On Double Taxation: "Double taxation, in general, is not forbidden by the fundamental law. The Philippine Constitution has not adopted the injunction against double taxation found in the Constitution of the United States and some States of the Union."

On Delegation to Local Governments: "The general principle against delegation of legislative powers is subject to one well-established exception: legislative powers may be delegated to local governments in respect of matters of local concern, to which the theory of separation of powers does not apply."

On Prohibition of Import Taxes: "Local governments are expressly prohibited by law from imposing taxes partaking of the nature of import duties."

On Uniformity and Classification: "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. However, the classification made in the exercise of this authority must be reasonable."

Four Requirements for Valid Classification:

  1. Must be based upon substantial distinctions which make real differences
  2. These must be germane to the purpose of the legislation or ordinance
  3. The classification applies not only to present conditions but also to future conditions substantially identical
  4. The classification applies equally to all those who belong to the same class

Application:

On Import Tax Nature: "The tax is based and computed from the cargo manifest or bill of lading showing the number of cases received, not sold, by the taxpayer. This demonstrates the intention to limit the application of the ordinance to soft drinks brought into the City from outside thereof. Viewed from this angle, the tax partakes of the nature of an import duty, which is beyond defendant's authority to impose by express provision of law."

On Discriminatory Classification: "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."

Analysis of Classification Defect: "If its purpose were merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales by dealers other than agents or consignees of producers or merchants established outside the City of Butuan should be exempt from the tax. The classification lacks substantial distinctions germane to the purpose of the legislation."

On Tax Amount: The Court found P0.10 per case (less than P0.0042 per bottle) was "manifestly too small to be excessive, oppressive, or confiscatory."

Disposition: Ordinance annulled. City ordered to refund amounts paid under protest with interest.

Key Principles from Pepsi:

  1. Local governments cannot impose import taxes
  2. Classification must have substantial distinctions germane to purpose
  3. Exempting similarly situated taxpayers violates equal protection
  4. Courts examine substance over form in determining tax nature
  5. Discriminatory classifications are invalid even if rates are reasonable

C. Commissioner v. S.C. Johnson (1999) - Tax Treaties and Most Favored Nation Clause

Facts: S.C. Johnson (Phil.) paid royalties to S.C. Johnson (USA) and withheld 25% tax. It later claimed refund arguing the RP-US Tax Treaty's most favored nation clause entitled it to the 10% rate under the RP-West Germany Tax Treaty.

Article 13(2)(b)(iii) of RP-US Treaty: Philippine tax on royalties "shall not exceed the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State."

Article 12(2)(b) of RP-Germany Treaty: 10% tax on royalties if contract approved by Philippine authorities.

However, Article 24 of RP-Germany Treaty allowed crediting 20% of gross royalties against German income tax. RP-US Treaty had no similar matching credit provision.

Issue: Whether private respondent is entitled to 10% MFN rate despite absence of matching tax credit in RP-US Treaty.

Ruling: No. Taxes are not paid under "similar circumstances" when treaty provisions on tax relief differ.

Legal Principles:

On Tax Treaty Purpose: "The purpose of tax treaties is to reconcile the national fiscal legislations of contracting parties to help taxpayers avoid simultaneous taxation in two different jurisdictions. Tax conventions are drafted to eliminate international juridical double taxation."

On Double Taxation Elimination: Two methods: (1) Setting respective rights to tax with exclusive or limited rights, (2) Relief mechanisms through exemption method or credit method.

On Most Favored Nation Clause: "The most favored nation clause is intended to establish the principle of equality of international treatment by providing that citizens or subjects of contracting nations may enjoy the privileges accorded by either party to those of the most favored nation."

On Tax Exemption/Refund Claims: "Tax refunds are in the nature of tax exemptions and are regarded as in derogation of sovereign authority. They must be construed strictissimi juris against the person claiming the exemption. The burden of proof is upon him who claims the exemption and he must justify his claim by the clearest grant of organic or statute law."

Application:

Interpretation of "Similar Circumstances": "The phrase 'paid under similar circumstances' in Article 13(2)(b)(iii) of the RP-US Tax Treaty refers to payment of taxes, not payment of royalties."

Rationale Based on Treaty Purpose: "The underlying rationale for reducing tax rate is that the Philippines gives up part of the tax in expectation that the tax given up is not taxed by the other country. The phrase 'royalties paid under similar circumstances' necessarily contemplates circumstances that are tax-related."

Critical Distinction: "The RP-US and RP-Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty expressly allows crediting against German income and corporation tax of 20% of gross amount of royalties paid under Philippine law. Article 23 of the RP-US Tax Treaty does not provide for similar crediting."

Policy Rationale: "If rates are lowered by the state of source, there should be concomitant commitment by the state of residence to grant tax relief. Otherwise, tax which could have been collected by the Philippines will simply be collected by another state, defeating the object of the tax treaty."

Equality Principle: "The entitlement of U.S. firms to the 10% rate despite absence of matching credit would derogate from the design behind the most favored nation clause to grant equality of international treatment, since the tax burden laid upon income of the investor is not the same in the two countries."

Disposition: Petition granted. Refund claim denied.

Key Principles from S.C. Johnson:

  1. Tax treaties aim to eliminate double taxation
  2. MFN clauses ensure equal total tax burden, not just equal source rates
  3. "Similar circumstances" in MFN clause refers to tax circumstances
  4. Complete treaty structure must be examined, not isolated provisions
  5. Tax exemptions construed strictly against claimant
  6. Burden of proof on party claiming exemption

XI. SYNTHESIS AND EXAMINATION STRATEGIES

A. Key Constitutional Principles

The 1987 Constitution establishes an integrated taxation framework:

  1. Broad Grant of Power - Inherent sovereignty (not enumerated)
  2. Specific Limitations - Uniformity, equitability, progressivity, public purpose
  3. Procedural Requirements - Bills originate in House (Art. VI, Sec. 24)
  4. Authorization for Delegation - Presidential tariff authority (Sec. 28(2))
  5. Exemption Authority - Constitutional exemptions (Sec. 28(3)) and statutory exemptions requiring majority concurrence (Sec. 28(4))

B. Analytical Framework for Taxation Issues

When analyzing taxation problems, follow this structure:

Step 1: Identify the Constitutional Limitation at Issue

Step 2: State the Applicable Test

Step 3: Apply Facts to Test

Step 4: Address Burden of Proof

Step 5: Reach Conclusion

C. Common Examination Patterns

Pattern 1: Classification Challenges

Identify: What classification does the tax create?
Test: Does it satisfy four-part Pepsi/Sison test?
Analyze: Substantial distinctions? Germane to purpose? Apply equally?
Conclude: Valid or invalid classification

Pattern 2: Due Process Challenges

Identify: Which due process ground? (confiscatory, not public purpose, beyond jurisdiction, unreasonably retroactive)
Test: Burden of proof on challenger; need factual foundation
Analyze: Has challenger met burden? Or mere conclusory allegation?
Conclude: Presumption of validity prevails or overcome

Pattern 3: Delegation Issues

Identify: What power delegated? To whom?
Test: Constitutional authorization? (Sec. 28(2)) Sufficient limits?
Analyze: Within specified limits? Framework of national development program? Conditions set by Congress?
Conclude: Valid delegation or excessive

Pattern 4: Exemption Claims

Identify: What exemption claimed? Constitutional or statutory?
Test: Strict construction; burden on claimant
Analyze: Does claimant meet exact requirements? (for Sec. 28(3): actually, directly, exclusively used?)
Conclude: Exempt or not exempt

D. Key Principles to Remember

  1. Nature of Taxing Power:

    • Inherent power of sovereignty
    • Strongest power of government
    • Not unconfined - subject to constitutional limitations

  2. Uniformity vs. Equal Protection:

    • Uniformity = geographical consistency
    • Classification allowed if based on substantial distinctions
    • Legislature has great freedom in tax classifications

  3. Due Process:

    • May challenge if confiscatory, beyond jurisdiction, not public purpose, or unreasonably retroactive
    • Burden on challenger to prove with factual foundation
    • Presumption of validity

  4. Progressive Taxation:

    • Mandatory constitutional command
    • Rate increases as base increases
    • Instrument for equitable wealth distribution

  5. Double Taxation:

    • Not generally prohibited
    • Invalid only if violates equal protection
    • Treaties can eliminate through tax credits/exemptions

  6. Tax Exemptions:

    • Taxation is rule, exemption is exception
    • Construed strictly against taxpayer
    • Burden on claimant to show clear entitlement
    • Constitutional exemptions require actually, directly, exclusively used

E. Citation Format

Constitutional Provisions:

Commentary:

Cases:

F. Integration with Other Constitutional Principles

Taxation issues often implicate other constitutional provisions:

Article III (Bill of Rights):

Article VI (Legislative Department):

Article XIV (Education, Science, Arts, Culture, Sports):

Cross-reference these provisions when relevant to demonstrate comprehensive understanding.

XII. FINAL SYNTHESIS

The Constitutional Tax System as a Whole

The 1987 Constitution establishes a comprehensive taxation framework that balances:

Duka's Approach: Recognize that taxation is the lifeblood of government requiring prompt collection, but such collection must be made in accordance with law as arbitrariness negates the very reason for government itself. The real purpose of taxation is the promotion of the common good.

Bernas's Approach: Begin with presumption of broad legislative power, then identify specific constitutional restrictions. Construe restrictions to protect fundamental rights while preserving fiscal sovereignty.

Cruz's Approach: Emphasize taxation as "strongest power of government" but subject to clear constitutional limits protecting individual property rights.

Synthesized Framework for Analysis

  1. Acknowledge broad legislative discretion in tax policy
  2. Apply rational basis review to classifications (with heightened scrutiny for suspect classifications or fundamental rights)
  3. Enforce specific textual requirements (uniformity, progressivity mandate)
  4. Protect against arbitrary confiscation through due process
  5. Construe exemptions strictly
  6. Ensure taxes serve public purposes

Professional Tax Analysis Requires

  1. Mastering technical doctrine
  2. Understanding economic reality
  3. Applying constitutional principle
  4. Respecting legitimate governmental interest
  5. Protecting individual rights
  6. Balancing competing values

END OF TAXATION STUDY GUIDE

Prepared with integrated commentary from Duka, Bernas, and Cruz and comprehensive analysis of Sison v. Ancheta, Pepsi-Cola v. City of Butuan, and Commissioner v. S.C. Johnson and Son, Inc.