Introduction
The power of taxation is one of the most fundamental attributes of sovereignty in any state, including the Philippines. It enables the government to raise revenues necessary for public welfare, infrastructure, defense, and other essential functions. However, this power is not absolute. It is subject to both inherent limitations—those that arise from the very nature of the taxing authority—and constitutional limitations, which are explicitly or implicitly provided in the 1987 Philippine Constitution. These safeguards ensure that taxation remains fair, just, and aligned with democratic principles, preventing abuse by the state.
In the Philippine legal framework, the power to tax is vested in Congress as the legislative body, with certain delegations to the President, local government units (LGUs), and administrative agencies. The Supreme Court, through judicial review, plays a crucial role in enforcing these limitations, as seen in landmark cases such as Pepsi-Cola Bottling Co. v. Municipality of Tanauan (1976) and Lutz v. Araneta (1955). This article comprehensively explores these limitations, drawing from established jurisprudence, statutory provisions, and doctrinal principles in Philippine tax law.
Inherent Limitations on the Power of Taxation
Inherent limitations stem from the intrinsic characteristics of the state's sovereign power to tax. These exist independently of the Constitution and are rooted in principles of government, international law, and public policy. They ensure that taxation serves the common good without overstepping fundamental boundaries.
1. Taxation Must Be for a Public Purpose
The primary inherent limitation is that taxes must be levied solely for public purposes. Revenue raised through taxation cannot be used for private interests or personal gain. This principle is derived from the social contract theory, where citizens surrender a portion of their property to the state in exchange for protection and public services.
In Philippine jurisprudence, this is exemplified in Gaston v. Republic Planters Bank (1988), where the Supreme Court invalidated a levy that primarily benefited a private entity. Taxes must promote general welfare, such as funding education, healthcare, or infrastructure. If a tax measure is found to serve predominantly private ends, it may be struck down as an invalid exercise of police power disguised as taxation. The determination of public purpose is initially legislative but subject to judicial scrutiny if challenged.
2. Territorial Jurisdiction
The state's taxing authority is confined to persons, properties, and activities within its territorial boundaries. This limitation respects sovereignty and prevents extraterritorial application of tax laws. For instance, the Philippines cannot impose income taxes on foreign-sourced income of non-residents unless there is a sufficient nexus, such as business conducted within the country.
Under the National Internal Revenue Code (NIRC) of 1997, as amended, taxation follows the principles of source and residency. Philippine residents are taxed on worldwide income, while non-residents are taxed only on Philippine-sourced income. This aligns with international comity and avoids conflicts with other nations' tax regimes. Violations of this limitation could lead to double taxation or diplomatic disputes.
3. Non-Delegation of the Taxing Power
The power to tax is inherently legislative and cannot be delegated to private individuals or entities. This stems from the principle that taxation involves policy-making, which is the domain of elected representatives accountable to the people.
However, exceptions exist: Congress may delegate tariff powers to the President under Article VI, Section 28(2) of the Constitution (though this is more constitutional than inherent). Delegation to LGUs is allowed under the Local Government Code (Republic Act No. 7160), enabling provinces, cities, and municipalities to impose local taxes within statutory limits. Administrative delegation for rule-making and implementation is also permissible, as long as it does not involve fixing tax rates or subjects. In Pepsi-Cola Bottling Co. v. Municipality of Tanauan, the Court upheld municipal taxation but emphasized that delegations must be within congressional guidelines.
4. Exemption of Government Entities and Instrumentalities
Government agencies and instrumentalities performing essential functions are inherently exempt from taxation to prevent the absurd scenario of the state taxing itself. This limitation ensures efficient public administration.
Under Section 133 of the Local Government Code, LGUs cannot tax national government instrumentalities unless expressly allowed. However, government-owned or controlled corporations (GOCCs) engaged in proprietary functions, such as the Philippine Amusement and Gaming Corporation (PAGCOR), may be taxable if not explicitly exempted. The Supreme Court in Maceda v. Macaraig (1991) clarified that exemptions apply only to entities performing governmental functions.
5. International Comity
The principle of international comity prohibits taxing foreign governments, their embassies, or diplomats, as it could infringe on sovereign equality. This is codified in treaties like the Vienna Convention on Diplomatic Relations, which the Philippines has ratified.
In practice, this means exemptions for foreign diplomatic missions from value-added tax (VAT) or excise taxes on imports for official use. Reciprocal exemptions are often extended based on bilateral agreements.
6. Prohibition Against Impairment of Contracts (Inherent Aspect)
While primarily constitutional, the non-impairment clause has an inherent dimension in taxation, ensuring that tax laws do not arbitrarily abrogate valid contracts. However, tax exemptions granted by contract can be revoked if not irrevocable, as taxes are essential to state survival.
Constitutional Limitations on the Power of Taxation
The 1987 Philippine Constitution provides explicit checks on the taxing power, primarily under Article VI (Legislative Department), Article III (Bill of Rights), and Article X (Local Government). These provisions ensure due process, equal protection, and fiscal responsibility.
1. Uniformity and Equitability (Article VI, Section 28(1))
"The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation."
Uniformity requires that all persons or things in similar circumstances be treated alike, both in privileges and burdens. It prohibits arbitrary classifications. Equitability demands that taxes be based on the taxpayer's ability to pay, favoring a progressive system where higher earners pay more proportionally.
In Tolentino v. Secretary of Finance (1994), the Court upheld the VAT system's uniformity despite exemptions, as classifications were reasonable. Progressivity is evident in the income tax brackets under the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963), where rates increase with income levels. Violations occur if classifications are capricious, as in Ormoc Sugar Co. v. Treasurer of Ormoc City (1968), where a tax targeting a single entity was invalidated.
2. Exemptions for Specific Entities (Article VI, Section 28(3) and (4))
Charitable institutions, churches, parsonages, mosques, non-profit cemeteries, and lands/buildings used exclusively for religious, charitable, or educational purposes are exempt from property taxes. This promotes social welfare and religious freedom.
Additionally, non-stock, non-profit educational institutions are exempt from taxes on revenues and assets used for educational purposes. In Commissioner of Internal Revenue v. De La Salle University (2016), the Court clarified that exemptions apply only to income directly used for education, not commercial activities.
All revenues and assets of proprietary educational institutions are taxable unless exempted by law.
3. Requirement for Majority Concurrence in Tax Exemptions (Article VI, Section 28(4))
"No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress."
This ensures exemptions are not granted lightly, as they reduce public revenue. Franchises or special privileges may include tax exemptions but require this absolute majority vote.
4. Due Process and Equal Protection (Article III, Sections 1 and 5)
Tax laws must not deprive persons of life, liberty, or property without due process. This includes procedural due process (notice and hearing in assessments) and substantive due process (reasonableness of the tax).
Equal protection prohibits unreasonable discrimination. In Sison v. Ancheta (1984), progressive income taxation was upheld as it rationally distinguished based on income levels.
The non-impairment of contracts clause (Article III, Section 10) limits retroactive tax laws that burden existing obligations, though tax exemptions are generally revocable unless contractual.
5. No Appropriation for Religious Purposes (Article VI, Section 29(2))
No public money or property shall be appropriated for religious sects or purposes, indirectly limiting tax expenditures or exemptions that favor specific religions.
6. Presidential Veto Power (Article VI, Section 27(2))
The President may veto any provision in revenue or tariff bills, preventing unconstitutional or unwise tax measures from becoming law.
7. Local Government Taxation Powers (Article X, Sections 5-6)
LGUs have the power to create their own sources of revenue, but this is limited by national laws and the Constitution. They cannot impose taxes on articles already taxed nationally (e.g., income tax) or violate uniformity. The Local Government Code outlines these powers, with oversight from the Department of Finance.
8. Prohibition Against Double Taxation
Though not explicitly stated, double taxation—taxing the same subject twice for the same purpose by the same authority—is prohibited under equal protection and uniformity principles. Jurisdictional double taxation (by different authorities) is allowed if not oppressive, as in international contexts mitigated by tax treaties.
9. Freedom of the Press (Article III, Section 4)
Taxes cannot be used to suppress free speech. In Tolentino v. Secretary of Finance, a VAT on print media was upheld as it was general and not targeted at the press.
10. Judicial Review and Other Safeguards
The Supreme Court can review tax laws for constitutionality. Tax amnesties, refunds, and compromises are regulated to prevent abuse.
Interplay Between Inherent and Constitutional Limitations
Inherent and constitutional limitations often overlap, reinforcing each other. For example, uniformity is both inherent and constitutional. In cases like Philippine Airlines v. Commissioner of Internal Revenue (2006), the Court applied both to invalidate excessive taxes.
Conclusion
The inherent and constitutional limitations on taxation in the Philippines embody a balance between state necessity and individual rights. They ensure taxation is a tool for progress, not oppression. As the economy evolves—with reforms like the Comprehensive Tax Reform Program—adherence to these principles remains vital. Policymakers, taxpayers, and courts must vigilantly uphold them to foster a just fiscal system.