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BA 127 Tax Accounting

INHERENT AND CONSTITUTIONAL LIMITATIONS
I.

Inherent Limitations
A. Situs of Taxation
Situs of taxation literally means place of taxation. The general rule is that the taxing
power cannot go beyond the territorial limits of the taxing authority. Basically, the state
where the subject to be taxed has a situs may rightfully levy and collect the tax; and the
situs is necessarily in the state which has jurisdiction or which exercises dominion over the
subject in question.
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. Thus, resident citizens and
domestic corporation are taxable on all income derived from sources within or without the
Philippines. A non-resident citizen is taxable on all income derived from sources within the
Philippines. An alien whether a resident or not of the Philippines and a foreign corporation,
whether engaged or not in trade or business in the Philippines are also taxable only from
sources within the Philippines.
The taxable situs will depend upon the nature of income as follows;
1)
Interests- Interest income is treated as income from within the Philippines if the
debtor or lender whether an individual or corporation is a resident of the Philippines.
2) Dividends- Dividends received from a domestic corporation are treated as income
from sources within the Philippines. Dividends received from a foreign corporation are
treated as income from sources within the Philippines, unless 50% of the gross income of
the foreign corporation for the three-year period preceding the declaration of such
dividends was derived from sources within the Philippines; but only in an amount which
bears the same ratio to such dividends as the gross income of the corporation for such
period derived from sources within the Philippines bears to its gross income from all
sources.
3)
Services- Services performed in the Philippines shall be treated as income from
sources within the Philippines.
4) Rentals and Royalties- Gain or income from property or interest located or used
in the Philippines is treated as income from sources within the Philippines.
5)
Sale of Real Property- Gain from sale of real property located within the
Philippines is considered as income within the Philippines.
6)
Sale of Personal Property- Gain, profit or income from sale of shares of stocks
of a domestic corporation is treated as derived entirely from sources within the Philippines,
regardless of where the said shares are sold Gains from sale of other personal property
can be considered income from within or without or partly within or partly without
depending on the rules provided in Section 42 E of the Tax Code.
The following situs of taxation applies:
a. Persons – residence of the taxpayer
b. Real property or tangible personal property – location of the property
* Lex loci rei sitae (Latin for "law of the place where the property is situated")
c. Intangible personal property – As a rule, situs is the domicile of the owner unless has
acquired a situs elsewhere
*Mobilia sequuntur personam: Movables follow the person
d. Income – taxpayer’s residence or citizenship or place where the income was earned
e. Business, occupation and transaction – place where the business is being operated,
occupation being practiced and transactions completed

certificate. 3. Due process clause Section 1. 1987 Constitution: No law impairing the obligation of contracts shall be passed. B. mosques. In such case. Gratuitous transfer of property – taxpayer’s residence or citizenship or location of the property The taxing power of a state does not extend beyond its territorial limits. Non-imprisonment for non-payment of poll tax Section 20. I. “In par parem. directly and exclusively used for religious. non-profit cemeteries and all lands. Rule of taxation shall be uniform and equitable Section 28(1). 1987 Constitution: No person shall be deprived of life. liberty of property without due process of law. or business.f. Prohibition against taxation of real property of charitable institutions. 1987 Constitution: No franchise. Non-impairment of contracts Section 10. at least sixty per centum of whose capital is owned by such citizens. nor shall any person be denied the equal protection of the laws. personages or convents. 4. The State shall encourage equity participation in public utilities by the general public. 1987 Constitution: No person shall be imprisoned for debt or nonpayment of poll tax. a taxpayer is at risk of failing to declare income which is properly taxable in one jurisdiction or else declaring an income that is not taxable. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment. liberty or property without due process of law. churches and personages or convents appurtenant thereto. The Congress shall evolve a progressive system of taxation. Article VI. nor shall any person be denied the equal protection of the laws. Article III. This adheres to some amount of submission and compliance of certain international rules and covenants for mutual benefits and enjoyment of the states and its inhabitants. certificate. 5. property. conventions and international treaties fall under this category. 6. 3. but within such limits it may tax persons. nor shall such franchise. knowledge of the situs of a particular income is crucial to ensure that only income taxable in a particular jurisdiction is declared and assessed properly. 1987 Constitution: No person shall be deprived of life. mosques and non-profit cemeteries Section 28(3). Equal protection clause Section 1. or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines. charitable or educational purposes shall be exempt from taxation. Article III. or repeal by the Congress when the common good so requires. income. or authorization be exclusive in character or for a longer period than fifty years. churches. Constitutional Limitations 1. Section 11. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital. 2. Article XII. The property of a foreign may not be taxed by another. Article III. It has something to do with the friendly interaction and participation of different estates. 1987 Constitution: Charitable institutions. Without proper knowledge on situs of taxation. and all the executive and managing officers of such corporation or association must be citizens of the Philippines. non habet imperium” – An equal has no power over an equal. alteration. Article III. Article VI. . Bilateral agreements. buildings and improvements actually. 2. International comity 1. 1987 Constitution: The rule of taxation shall be uniform and equitable.

10. . modify or affirm on appeal or certiorari as the law or the Rules of Court may provide. or toll or any penalty imposed in relation thereto. Prohibition against taxation of non-stock non-profit educational institutions Section 4(3). Upon the dissolution or cessation of the corporate existence of such institutions. final judgements and orders of lower courts in: . Passage of tax bills Section 24. Proprietary educational institutions. .Judicial power to review legality of tax Section 5(2) (b) Article VIII. educational institutions used actually. revenue or tariff bill but the veto shall not affect the item or items to which he does not object. Article VI. (b) All cases involving the legality of any tax. 1987 Constitution: No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. their assets shall be disposed of in the manner provided by law. 1987 Constitution: All appropriations. . including those cooperatively owned. revenue or tariff bills. (H) A non-stock and non-profit educational institution 8. 11. (2) Review. 1987 Constitution: The President shall have the power to veto any particular item or items in an appropriation. impost. . . 1987 Constitution: All revenues and assets of non-stock. assessment. 1987 Constitution: The Supreme Court shall have the following powers: .7. bills authorizing increase of the public debt. 9. Section 30(H). Article XIV. directly and exclusively for educational purposes shall be exempt from taxes and duties.Veto power of the president Section 27(2) Article VI. may likewise be entitled to such exemptions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment. Granting of tax exemption Section 28(4) Article VI. reverse. . NIRC: Exemptions from tax on corporations – The following organizations shall not be taxed under this Title in respect to income received by them as such: . nonprofit. . revise. bills of local application and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments.