1|Page Chapter 2
CHAPTER 2. does not transgress the inherent and
SCOPE OF AND LIMITATIONS UPON THE
POWER OF TAXATION
I. Scope of the Power of Taxation
1. What is the scope of the power of taxation?
As a general rule, the power of taxation is
an incident of sovereignty. It is plenary and
unlimited in its range, acknowledging in its very
nature no limits, so that the principal check
against its abuse is to be found only in the
responsibility of the Legislature (which imposes
the tax) to its constituency who are to pay it. 1
But although the power of taxation is the
broadest of all the powers of the State, it is subject
to both the inherent and Constitutional
limitations. It is the Court’s role to see to it that
the exercise of the power does not transgress
these limitations.2
II. Limitations upon the Power of Taxation
2. What are the limitations upon the exercise of
the power of taxation?
No matter how broad and encompassing
the power of taxation is, it is still subject to two
kinds of limitations, namely:
(1) The Inherent Limitations – those
limitations which exist despite the absence of an
express Constitutional provision thereon; and
(2) The Constitutional Limitations - those
limitations expressly provided in the Constitution.
These two limitations are intended to
prevent abuses on the exercise of the otherwise
unlimited and supreme power of taxation.
3. What is the meaning of “the power to tax is
not the power to destroy while this court sits”?
What is the role of the judiciary in the State’s
exercise of the power of taxation?
When Justice Holmes3 said that “the
power to tax is not the power to destroy while this
Court (referring to the Supreme Court) sits,”4 what
he meant was – it is the Supreme Court’s role to
see to it that the exercise of this supreme power
1
ANPC v. BIR, G.R. 228539, June 26,
2019 [Per J. Perlas-Bernabe, Second Div.]
2
Tridharma Marketing Corp. v. CTA, GR
215950, June 20, 2016 [Per J. Bersamin, First Div.]
3
Justice Oliver Wendell Holmes, Jr. was an
American jurist and Associate Justice of the Supreme
Court of the U.S.A. from 1902 to 1932 and was often
called “The Great Dissenter” who we also quote to
have first said that “Taxes are the price we pay for a
civilized society.”
4
This is the Holmes Doctrine.
Constitutional limitations. The Court could nullify
and invalidate a tax law so that it could not be the
source of the power to destroy.
The role of the judiciary is to be the
sympathetic or vigilant court which would check
injustices or abuses of the legislative and
administrative agents of the State in their exercise
of the power of taxation. The Court will not shirk
from such responsibility. It must at all times
protect the rights of the people to exist and
subsist despite taxes.5
Legitimate enterprises enjoy the
Constitutional protection not to be taxed out of
existence. Incurring losses because of a tax
imposition may be an acceptable consequence but
killing the business of an entity is another matter
and should not be allowed. It is counterproductive
and ultimately subversive of the nation's thrust
towards a better economy which will ultimately
benefit the majority of our people. 6
A. Inherent Limitations Upon the
Power of Taxation
4. Why is the power to tax considered inherent in
a sovereign State?
The power to tax is considered inherent
in a sovereign State because it is a necessary
attribute of sovereignty. Without this power, no
sovereign State could exist nor endure. The power
to tax proceeds upon the theory that the existence
of a government is a necessity and this power is an
essential and inherent attribute of sovereignty,
belonging as a matter of right to every
independent state or government. No sovereign
state can continue to exist without the means to
pay its expenses and that for those means, it has
the right to compel all citizens and property within
its limits to contribute, hence, the emergence of
the power to tax.7
5. So, what are these so-called “inherent
limitations upon the power of taxation”?
The inherent limitations upon the power
of taxation are as follows:
(1) Taxation should be levied only for
public purpose. – The power to tax exists for the
general welfare of the community in equal
measures. 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
5
CIR v. Puregold Duty Free, Inc., GR
202789, June 22, 2015 [Per J. Velasco, Jr., Third Div.]
6
Roxas v. CTA, GR L-25043, April 26, 1968
[Per J. Bengzon, En Banc]
7
CREBA. v. Romulo, GR 160756, March 9,
2010 [Per J. Corona, En Banc]
1
 2|Page Chapter 2
private purpose. Public purpose is the heart of the
tax law.
However, public purpose is an elastic
concept that can be hammered to fit modern
standards. It does not only pertain to those
purposes which are traditionally viewed as
essentially governmental functions,8 such as
building roads and delivery of basic services, but
also includes those purposes designed to promote
social justice. While the categories of what may
constitute a public purpose are continually
expanding in the light of the expansion of
government functions, the inherent requirement
that taxes can only be exacted for a public purpose
still stands. Simply, the proceeds of the tax must
be used (i) for the support of the State, or (ii) for
some recognized objectives of the government, or
(iii) to directly promote the welfare of the
community.9
(2) The power to tax is inherently
legislative. – In general, the power of taxation is
inherent in the State, hence, the Legislature can
enact laws to raise revenues in the absence of a
Constitutional provision granting said body the
power to tax. It can only be performed by the
Legislature upon consideration of policy, necessity
and public welfare. It belongs to that department
to determine what measures shall be taken for the
public welfare, and to provide the revenues for
the support and due administration of the
government. The legislature wields the power to
define WHAT tax shall be imposed, WHY it should
be imposed, HOW MUCH tax shall be imposed,
AGAINST WHOM it shall be imposed and WHERE it
shall be imposed, provided these are all within the
State’s territorial jurisdiction.10
Thus, it is well-settled rule that the power
to tax, being inherently legislative, cannot be
delegated to or exercised by the executive or
judicial department of the government without
infringing upon the theory of separation of
powers. However, the Constitution, being also a
form of limitation upon this supreme power of the
State to tax, has authorized three (3) recognized
EXCEPTIONS to this rule, viz:
(a) Delegation to the President of the
Philippines. - By express provision of the
8
‘Essential governmental functions’ are
those pertaining to the administration of government,
and as such, are treated as absolute obligation on
the part of the State to perform, while proprietary
functions are those that are undertaken only by way
of advancing the general interest of society, and are
merely optional on the government. MWSS v. Local
Government of Quezon City, G.R. 194388, Nov. 7,
2018 [Per J. Leonen, Third Div.]
9
La Suerte Cigar and Cigarette Factory v.
CA, GR 125346, Nov. 11, 2014 [Per J. Leonen, En
Banc]
10
FDCP v. City of Cebu and SM Prime
Holdings, Inc., GR 203754/204418, June 16, 2015
[Per J. Velasco, Jr., En Banc]
Constitution, 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 or export quotas,
tonnage and wharfage dues, and other duties and
imposts within the framework of the national
development program of the Government.11
(b) Delegation to Local Government Units.
– Although the power to tax does not inhere to
the local government units (LGUs), as they are not
the sovereign but merely territorial and political
subdivisions of the State, it is a recognized
principle that the power to create local
governments or political subdivisions carries with
it the power to clothe them with the power to tax
since no LGU may successfully operate without
any taxing power. That is why LGUs are now
empowered to create their own sources of
revenue, subject to Congressional guidelines and
limitations, ‘consistent with the basic policy of
local autonomy.12
(c) Delegation to Administrative Agencies.
- While the exercise of the taxing power may not
be delegated, some aspects or elements thereof
may, without violation of the doctrine of
separation of powers, be vested in an
administrative body, provided that a sufficient
guide or standard is laid down by Congress for the
guidance of the administrative officers in the
implementation and administration. The executive
exercises exclusive discretion in matters pertaining
to the implementation and execution of tax laws
thru the promulgation of implementing rules and
regulations.13
(3) The power to tax is limited within the
territorial jurisdiction of the taxing authority. - It
only means that a State may lay a personal tax
upon persons subject to the jurisdiction of its
sovereignty, a property tax upon properties
located within its territory, and an excise tax upon
acts done therein; but, however broad the power
of taxation in its character and searching in its
extent, it is necessarily limited to persons,
property, or business within its jurisdiction, to
subjects within its jurisdiction, or over which it can
exercise dominion. The financial exigencies of the
state afford no justification for sustaining a tax on
a transaction beyond the borders of the state.
Within the territorial jurisdiction, the taxing
authority may determine the “place of taxation”
or what is known as the “tax situs.” The basic rule
is that 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
11
Art.VI, Sec. 28(2), Constitution and also
Sec. 102(u), CMTA.. This is the ‘flexible tariff clause.’
12
Art. X, Sec. 5, 1987 Constitution;
Demaala v. COA, GR 199752, Feb. 17, 2015 [Per J.
Leonen, En Banc]
13
Maceda v. Macaraig, GR 88291, May 31,
1991 [Per J. Gancayco, En Banc]
2
 3|Page Chapter 2
jurisdiction or which exercises dominion over the
subject in question. This is based on the theory
that the tax laws of a state can have no
extraterritorial operation. 14
(4) The National Government and the
LGUs cannot tax each other. - There is no point in
national government and local governments taxing
each other, unless a sound and compelling policy
requires such transfer of public funds from one
government pocket to another.
The local governments cannot tax the
National Government and its instrumentalities for
rendering essential governmental functions or
public service to inhabitants of local governments.
The only exception is when the Legislature clearly
intended to tax government instrumentalities for
the delivery of essential public services for sound
and compelling policy considerations. But there
must be express language in the law empowering
local governments to tax national government
instrumentalities. Any doubt whether such power
exists is resolved against the local governments. 15
(5) The power to tax is subject to
international comity. - This limitation which is
founded on the principle of reciprocity is designed
to maintain a harmonious and productive
relationships among the various states.
"International comity" refers to the respect
afforded by one state to another state by virtue of
the principle of sovereign equality among states
and of their freedom from suit without their
consent, that limits the authority of a government
to effectively impose taxes on a sovereign state
and its instrumentalities, as well as on its property
held, and activities undertaken in that capacity. It
is admitted that the generally accepted principles
of international law are binding upon nations. One
of the settled principles of international law is that
the property of a foreign government may not be
taxed by another. The binding effect of this
principle has also been recognized and has found
its way in our Constitution which provides that the
generally accepted principles of international law
shall form part of the law of the nation. 16
B. Constitutional Limitations Upon the
Power of Taxation
6. What is the nature of the provisions of the
Constitution relating to taxation?
The provisions of the Constitution relating
to or affecting taxation are not considered as
grants of power, but they operate merely as
14
Quezon City and the City Treasurer of QC
v. ABS-CBN Broadcasting Corp., GR 166408, Oct. 6,
2008 [Per J. Reyes, Third Div.]
15
MIAA v. Court of Appeals, GR 155650,
July 20, 2006 [Per J. Carpio, En Banc]
16
CIR v. Pilipinas Shell Petroleum Corp., GR
188497, Feb. 19, 2014 [Per J. Villarama,, Jr., First
Div.]
limitations or restrictions on an otherwise
unlimited power of taxation.
(1) Due Process and Equal Protection Clauses
“ART. III, SEC. 1. No person shall
be deprived of life, liberty, or
property without due process of
law, nor shall any person be
denied the equal protection of
the laws.”
7. What do the terms "Due Process Clause" and
"Equal Protection Clause" mean in relation to
taxation?
The following terms, in relation to
taxation, shall have the following meanings:
(1) Due process clause. – It is an
elementary rule enshrined in the Philippine
Constitution that no person shall be deprived of
property without due process of law. In balancing
the scales between the power of the State to tax
and its inherent right to prosecute perceived
transgressors of the law on one side, and the
Constitutional rights of a citizen to due process of
law and the equal protection of the laws on the
other, the scales must tilt in favor of the
individual, for a citizen’s right is amply protected
by the Bill of Rights under the Constitution. Thus, if
the tax authority has determined that a taxpayer
has deficiency taxes which should be paid, it is a
requirement that the taxpayer has to be given due
notice first before he could be penalized for non-
payment thereof.
The exercise of the power of taxation
constitutes a deprivation of property under the
due process clause, and the taxpayer's right to due
process is violated when arbitrary or oppressive
methods are used in assessing and collecting
taxes.17
(2) Equal protection clause. - Equal
protection merely requires that all persons or
things of the same class should be treated alike,
under like circumstances and conditions, both as
to privilege conferred and responsibilities
imposed. Similar subjects, in other words, should
not be treated differently, so as to give undue
favor to some and unjustly discriminate against
others. The guarantee means that no person or
class of persons shall be denied the same
protection of laws which is enjoyed by other
persons or other classes in like circumstances. The
"equal protection of the laws is a pledge of the
protection of equal laws." It limits governmental
discrimination.
17
First E-Bank Tower Condo Corp v. BIR, GR
215801, Jan. 15, 2020 [Per J. Lazaro-Javier, First
Div.]
3
 4|Page Chapter 2
8. When can a taxpayer invoke the due process
and equal protection clauses to invalidate a
revenue measure?
Yes. A taxpayer whose property rights
had been adversely affected may invoke the due
process and equal protection clauses to invalidate
a revenue measure. But, where the due process
and equal protection clauses are invoked,
considering that they are not fixed rules but rather
broad standards, there is a need for proof of such
persuasive character as would lead to such a
conclusion. Absent such a showing, however, the
presumption of validity must prevail.
The Constitutional safeguard of due
process is embodied in the fiat "[no] person shall
be deprived of life, liberty or property without due
process of law." The Supreme Court held that the
due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue
measure when it amounts to a confiscation of
property. But in the same case, it also explained
that it will not strike down a revenue measure as
unconstitutional (for being violative of the due
process clause) on the mere allegation of
arbitrariness by the taxpayer. There must be a
factual foundation to such an unconstitutional
taint. This merely adheres to the authoritative
doctrine that, where the due process clause is
invoked, considering that it is not a fixed rule but
rather a broad standard, there is a need for proof
of such persuasive character.18
9. What is the ‘rational basis test’ for purposes of
the equal protection of the law clause? Explain
briefly.
The "rational basis test" is a test applied
to gauge the constitutionality of an assailed law in
the face of an equal protection challenge. It has
been held that "in areas of social and economic
policy, a statutory classification that neither
proceeds along suspect lines nor infringes
constitutional rights must be upheld against equal
protection challenge if there is any reasonably
conceivable state of facts that could provide a
rational basis for the classification.” Briefly, it
states that under the rational basis test, it is
sufficient that the legislative classification is
rationally related to achieving some legitimate
State interest.
A legislative classification that is
reasonable does not offend the constitutional
guaranty of the equal protection of the laws. The
requisites of a valid and reasonable classification
are as follows:
(1) It is based on substantial distinctions
which make the real difference;
18
CS Garments, Inc. v. CIR, GR 182399,
March 12, 2014 [Per C. M. Sereno, First Div.]
(2) It is germane to the purposes of the
law or ordinance;
(3) It is not limited to existing conditions
only; it also applies to future conditions;
(4) It applies equally to all those who
belong to the same class.19
BQ2017
Heeding the pronouncement of
the President that the
worsening traffic condition in
the metropolis was a sign of
economic progress, the
Congress enacted RA 10701,
also known as An Act Imposing
a Transport Tax on the Purchase
of Private Vehicles.
Under RA 10701, buyers of
private vehicles are required to
pay a transport tax equivalent
to 5% of the total purchase
price per vehicle purchased. RA
10701 provides that the LTO
shall not accept for registration
any new vehicles without proof
of payment of the 5% transport
tax. RA 10701 further provides
that existing owners of private
vehicles shall be required to pay
a tax equivalent to 5% of the
current fair market value of
every vehicle registered with
the LTO. However, RA 10701
exempts owner of public utility
vehicles and the Government
from the coverage of the 5%
transport tax.
A group of private vehicle
owners sue on the ground that
the law is unconstitutional for
contravening the Equal
Protection Clause of the
Constitution.
Rule on the constitutionality
and validity of RA 10701.20
19
British American Tobacco v. Camacho and
Parayno, GR 163583, Aug. 20, 2008 [Per J. Ynares-
Santiago, En Banc]
20
RA 10701 is unconstitutional and not
valid. The law is in violation of the rule of uniformity
and equitability, which requires that all subjects or
objects of taxation similarly situated must be treated
alike in equal footing and must not classify the
subjects in an arbitrary manner. In the case at bar,
the law exempts owners of public utility vehicles and
the Government from the coverage of the 5%
transport tax but only imposes the tax on private cars
although both contribute to the traffic problem. In
this case, there exists no substantial standard used in
the classification of the taxpayers. Art. VI, Sec. 28(1) ,
1987 Constitution; British American Tobacco v.
Camacho and Parayno, GR 163583, Aug. 20, 2008
[Per J. Ynares-Santiago, En Banc]
4
 5|Page Chapter 2
BQ2000
An EO was issued pursuant to
law, granting tax and duty
incentives only to businesses
and residents within the
“secured area” of the Subic
Economic Zone, and denying
said incentives to those who
live within the Zone but outside
such “secured area.” Is the
constitutional right to equal
protection of the law violated
by the EO? Explain.21
(2) Uniformity and Equitability in Taxation
and Progressive System of Taxation
“ART. VI, SEC. 28. (1) The rule of
taxation shall be uniform and
equitable. The Congress shall
evolve a progressive system of
taxation.”
10. Distinguish the requirements of uniformity
and equitability as limitations in the imposition
and/or collection of taxes.
Uniformity and equitability as limitations
in the imposition and/or collection of taxes means
that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. 22 
The concept of uniformity requires that
all subjects of taxation similarly situated should
be treated alike and placed in equal footing. The
requirement of uniformity is complied with when
the tax operates with the same force and effect in
every place where the subject of it is found. 23
Different articles may be taxed at different rates
provided that the rate is uniform on the same
class everywhere with all people at all times.
Accordingly, singling out one particular class for
taxation purposes does not infringe the
requirement of uniformity. The rule of uniform
taxation does not deprive Congress of the power
21
No. There was no violation of the equal
protection clause. There are substantial differences
between big investors being enticed to the “secured
area” and the business operators outside that are in
accord with the equal protection clause that does not
require territorial uniformity of laws.
classification applies equally to all the resident
individuals and businesses within the “secured area.”
The residents, being in like circumstances to
contributing directly to the achievement of the end
purpose of the law are not categorized further.
Instead, they are similarly treated, both in privileges
granted and obligations required. Art. III, Sec. 1, 1987
Constitution; British American Tobacco v. Camacho
and Parayno, GR 163583, April 15, 2009 [Per J.
Ynares-Santiago, En Banc]
22
City of Baguio v. de Leon, GR L-24756,
Oct. 31, 1968 [Per J. Fernando, En Banc]
23
Phil. Trust Co. v. Yatco, GR L-46256, Jan.
23, 1940 [Per J. Laurel, En Banc]
to classify subjects of taxation, and only demands
uniformity within the particular class.
On the other hand, equitability requires
that the burden of the tax should consider the
taxpayer’s ability to shoulder the tax burden.
“Equitable” means fair, just, reasonable and
proportionate to the taxpayer’s ability to pay.
Thus, taxation may be uniform but
inequitable where the amount is excessive or
unreasonable.
11. What is the meaning of “progressive system
of taxation”?
“Progressive system of taxation” only
means that the rate of tax to be levied to
taxpayers should be in accordance with the
taxpayer’s ability to pay. Taxation is progressive
when its rate goes up depending on the resources
of the person affected. When the taxable income
of an individual taxpayer becomes higher, his tax
rate likewise increases. This system is based on the
implementation of social justice principle that the
more affluent should contribute more for the
community’s benefit and is best exemplified by
the increase of income tax rates as the taxable
income increases. This is the income tax system
being used in the case of individual taxpayers
under the Tax Code.
BQ2014
Choose the correct answer. Tax
laws
A. may be enacted for the
promotion of private
enterprise or business for
as long as it gives incidental
advantage to the public or
the State.
B. are inherently legislative;
therefore, may not be
delegated.
C. are territorial in nature;
hence, they do not
recognize the generally
accepted tenets of
international law.
D. adhere to uniformity and
The equality when all taxable
articles or kinds of property
of the same class are
taxable at the same rate. 24
(3) Free Exercise of Religious Profession and
Worship
24
Abakada Guro Party List v. Ermita, GR
168056, Sept. 1, 2005 [Per J. Austria-Martinez, En
Banc]
5
 6|Page Chapter 2
“ART. III, SEC. 5. No law shall be
made respecting an
establishment of religion, or
prohibiting the free exercise
thereof. The free exercise and
enjoyment of religious
profession and worship, without
discrimination or preference,
shall forever be allowed. No
religious test shall be required
for the exercise of civil or
political rights.“
12. Can the LGU impose a business/license tax on
a religious organization on the alleged business
of distribution and selling of Bibles and/or gospel
portions and translating the same into several
Philippine dialects to the people of the
Philippines? BQ2009
No. Article III, Sec. 5 of the Constitution
guarantees the freedom of religious profession
and worship. "Religion has been spoken of as a
profession of faith to an active power that binds
and elevates man to his Creator." 25 It has
reference to one's views of his relations to His
Creator and to the obligations they impose of
reverence to His being and character, and
obedience to His Will. The Constitutional guaranty
of the free exercise and enjoyment of religious
profession and worship carries with it the right to
disseminate religious information. Any restraints
of such right can only be justified like other
restraints of freedom of expression on the
grounds that there is a clear and present danger of
any substantive evil which the State has the right
to prevent. In the case at bar, the license fee
herein involved is imposed upon appellant for its
distribution and sale of bibles and other religious
literature.
The power to impose a license tax on the
exercise of this freedom is indeed as potent as the
power of censorship which the Court has
repeatedly struck down. It is not a nominal fee
imposed as a regulatory measure to defray the
expenses of policing the activities in question. It is
in no way apportioned. It is flat license tax levied
and collected as a condition to the pursuit of
activities whose enjoyment is guaranteed by the
Constitutional liberties of press and religion and
inevitably tends to suppress the exercise thereof,
that is almost uniformly recognized as the
inherent vice and evil of this flat license tax.
In view thereof, the Court ruled that the
LGU is powerless to license or tax the business of
American Bible Society involved herein for it
would impair its right to the free exercise and
enjoyment of its religious profession and
25
Aglipay v. Ruiz, GR Ll-45459, March 13,
1937 [Per J. Laurel, En Banc]
worship, as well as its rights of dissemination of
religious beliefs.26
(4) Non-Impairment of Obligation of Contracts
“ART. III, SEC. 10. No law
impairing the obligation of
contracts shall be passed.”
13. What would constitute as an impairment of
the obligation of contracts as a limitation upon
the taxing power of Congress?
It is ingrained in jurisprudence that the
Constitutional prohibition on the impairment of
the obligation of contracts does not prohibit every
change in existing laws. To fall within the
prohibition, the change must not only impair the
obligation of the existing contract, but the
impairment must be substantial. A law which
changes the terms of a legal contract between
parties, either in the time or mode of
performance, or imposes new conditions, or
dispenses with those expressed, or authorizes for
its satisfaction something different from that
provided in its terms, is a law which impairs the
obligation of a contract and is therefore null and
void.
Moreover, to constitute impairment, the
law must affect a change in the rights of the
parties with reference to each other and not with
respect to non-parties.
14. Briefly summarize the application of the non-
impairment clause.
When the tax exemption is bilaterally
agreed upon between the government and the
taxpayer, it cannot be withdrawn without violating
the non-impairment clause.
When the exemption is unilaterally
granted by law and the same is withdrawn by
virtue of another law, there is no violation of the
non-impairment clause.
When the exemption is granted under a
franchise, the same may be revoked because
under the Constitution, a franchise is subject to
amendment, alteration, or repeal by Congress
when the common good so requires.
The tax exemptions protected by the non-
impairment clause are contractual tax exemptions,
not those granted by franchises or licenses.
Contractual tax exemptions are: (1) those entered
into by the taxing authority; (2) lawfully entered
into them under enabling laws; and (3) wherein
the government acts in its private capacity and
sheds its cloak of authority and immunity.
26
American Bible Society v. City of Manila,
GR L-9637, April 30, 1957 [Per J. Felix, En Banc]
6
 7|Page Chapter 2
BQ2004
A law was passed granting tax
exemption to certain industries
and investments for a period of
five years. But three years later,
the law was repealed. With the
repeal, the exemptions were
considered revoked by the BIR,
which assessed the investing
companies for unpaid taxes
effective on the date of the
repeal of the law.
NPC and KTR companies
questioned the assessments on
the ground that, having made
their investments in full reliance
with the period of exemption
granted by the law, its repeal
violated their constitutional
right against the impairment of
the obligations and contracts. Is
the contention of the
companies tenable or not?
Reason briefly.27
(5) Non-payment of a Poll Tax
ART. III, SEC. 20. No person shall
be imprisoned for debt or
non-payment of a poll tax
15. What is the meaning of the above
provision?
This provision prohibits the enactment of
a law criminalizing non-payment of debt or poll
tax. However, creditors can still bring the debtor
to court to demand and enforce payment of his
debts but he could be imprisoned if fraud is
involved. In the case of People v. Ambrosio
Linsangan, GR L-43290, December 31, 1936 [Per J.
Abad Santos, En Banc], regarding the nonpayment
of a poll tax, the Supreme Court ruled as follows:
“It seems too clear to require
demonstration that Sec. 2718 of the Revised
Administrative Code is inconsistent with Sec. 1,
clause 12, of Article III (Now Art. III, Sec. 20) of the
27
No. A repeal of a law which granted
unilateral tax exemption and incentives to a group of
taxpayers shall not be considered as violating the
constitutional right of the said taxpayers that no law
shall be passed impairing the obligation of contracts.
The Constitution provides that when the tax
exemption given to them was spontaneous on the
part of the legislature and no service or duty or other
remunerative conditions have been imposed on the
taxpayers receiving the exemption, any tax
exemption unilaterally granted can be withdrawn at
the pleasure of the taxing authority without violating
the Constitution. What constitutes an impairment of
the obligation of contracts is the revocation of an
exemption which is founded on valuable
consideration because it takes the form and essence
of a contract.
Constitution, in that, while the former authorizes
imprisonment for nonpayment of the poll or
cedula tax, the latter forbids it. It follows that
upon the inauguration of the Government of the
Commonwealth, said Sec.2718 of the Revised
Administrative Code became inoperative, and no
judgment of conviction can be based thereon.”
(6) Franchise for the Operation of a Public Utility
Subject to Amendment, or Repeal by Congress
When the Common Good so Requires
“ART. XII, SEC. 11. No franchise,
certificate, 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, at least
sixty per centum of whose
capital is owned by such citizens;
nor shall such franchise,
certificate, or authorization be
exclusive in character or for a
longer period than fifty years.
Neither shall any such franchise
or right be granted except under
the condition that it shall be
subject to amendment,
alteration, or repeal by the
Congress when the common
good so requires. The State shall
encourage equity participation in
public utilities by the general
public. The participation of
foreign investors in the
governing body of any public
utility enterprise shall be limited
to their proportionate share in
its capital, and all the executive
and managing officers of such
corporation or association must
be citizens of the Philippines.”
16. What is the nature of a franchise? When may
a franchise granted by Congress be repealed?
A franchise partakes the nature of a
grant, which is beyond the purview of the non-
impairment clause of the Constitution. Indeed,
Article XII, Section 11 of the 1987 Constitution, like
its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except
under the condition that such privilege shall be
subject to amendment, alteration or repeal by
Congress as and when the common good so
requires.
While the Court has, not too infrequently,
referred to tax exemptions contained in special
franchises as being in the nature of contracts and
a part of the inducement for carrying on the
7
 8|Page Chapter 2
franchise, these exemptions, nevertheless, are far
from being strictly contractual in nature.
Contractual tax exemptions, in the real sense of
the term and where the non-impairment clause of
the Constitution can rightly be invoked, are those
agreed to by the taxing authority in contracts, such
as those contained in government bonds or
debentures, lawfully entered into by them under
enabling laws in which the government, acting in
its private capacity, sheds its cloak of authority
and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked
without impairing the obligations of contracts.
However, those contractual tax
exemptions are not to be confused with tax
exemptions granted under franchises because it is
explicit in the Constitution that no franchise for
the operation of a public utility shall be granted
except under the condition that such privilege
shall be subject to amendment, alteration or
repeal by Congress as and when the common
good so requires.
(7) Appropriation, Revenue or
Tariff Bills to
Originate Exclusively
in the House of Representatives
“ART. VI, SEC. 24. All
appropriation, revenue or tariff
bills, bills authorizing increase of
the public debt, bills of local
application, and private bills,
shall originate exclusively in the
House of Representatives, but
the Senate may propose or
concur with amendments”.
17. Would the Constitutional requirement that
all revenue bills should originate from the House
of Representatives be violated if the Senate, after
receiving a copy of the House Bill, introduced its
own version of the bill which originated in
Congress?
No. Just like when the original bill of the
E-VAT Law which originated in the House of
Representatives was amended by the Senate,
there was no violation of the constitutional
requirement that all revenue bills should originate
exclusively from the House of Representatives.
What is prohibited by the Constitution is for the
Senate to enact revenue measures on its own
without a bill originating from the House. But
once the revenue bill is passed by the House and
sent to the Senate, the latter can pass its own
version and can make extensive changes even if it
may result to the rewriting of the whole on the
same subject matter consonant with the latter’s
power to propose or concur with amendments.
This follows the principle of co-equality of the two
chambers of Congress.
The Constitution simply meant that the
initiative for filing the bills must come from the
House, on the theory that, elected as they are
from the districts, the members of the House can
be expected to be more sensitive to the local
needs and problems of their constituents.28
(8) Grant by Congress of
Authority to the President
to Fix Tariff Rates
“Art. VI, Sec. 28(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.”
18. Explain the “flexible tariff clause.”
The term “flexible tariff clause” refers to
the power given to the President of the Philippines
by Congress under Art. VI, Sec. 28(2) of the
Constitution, and as reiterated (now) in the CMTA,
viz:
“Flexible tariff clause” refers to the power
of the President upon recommendation of the
NEDA: (1) to increase, reduce or remove existing
protective tariff rates of import duty, but in no
case shall be higher than 100% ad valorem; (2) to
establish import quota or to ban importation of
any commodity as may be necessary; and (3) to
impose additional duty on all import not
exceeding 10% ad valorem, whenever necessary. 29
19. Can an importer question the legality of an
Executive Order increasing import duties on the
ground that only Congress has the authority to fix
the rates of import duties and, that such an
Executive Order can take effect only 30 days after
promulgation and that the President has no
authority to shorten said period?
No. The importer cannot question the
legality of that Executive Order. Under the
“Flexible Tariff Clause,” the President of the
Philippines, in the interest of the general welfare
and national security, and, subject to the
limitations prescribed under the law, upon the
recommendation of the NEDA, is empowered to
fix the rates of import duties including any
necessary change in classification. The existing
rates may be increased or decreased to any level,
in one or several stages, but in no case shall the
increased rate of import duty be higher than a
28
Tolentino v. Sec. of Finance, GR 115455,
Oct. 30, 1995 [Per J. Mendoza, En Banc]
29
Sec. 102(u), CMTA
8
 9|Page Chapter 2
maximum of 100% ad valorem; and impose an
additional duty on all imports not exceeding 10%
ad valorem whenever necessary: Provided, That
upon periodic investigations by the Tariff
Commission and recommendation of the NEDA,
the President may cause a gradual reduction of
rates of import duty granted in Section 1611 of the
CMTA, including those subsequently granted
pursuant to that section.
Any order issued by the President
pursuant to the above provision shall take effect
30 days after promulgation, except in the
imposition of additional duty not exceeding 10%
ad valorem, which shall take effect at the
discretion of the President.30
The purpose of the law in providing for
the flexible tariff clause is to provide for an
instrument for quick adjustment of the tariff to
changing conditions, with the end in view of giving
sufficient protection to local industries already
established or that may hereafter be established.
(9) Majority Vote of Congress
for Grant of Tax Exemption
“ART. VI, Sec. 28(4), No law
granting any tax exemption
shall be passed without the
concurrence of a majority of
the Members of the Congress.”
20. How many votes are required in Congress in
order that a law may grant tax exemption?
The concurrence of a MAJORITY OF ALL
THE MEMBERS OF CONGRESS is required for the
grant of tax exemption.
The phrase “majority of all the members
of Congress” means at least ½ plus 1 of all the
members of Congress voting separately, which
means “absolute majority”.
This “absolute majority” is also required
in the case of tax amnesty law, condonation or
refund, because they are all in the nature of tax
exemptions.
The basis of the grant of tax exemption is
that “the inherent power of the State to impose
taxes carries with it the power to grant tax
exemption.”
The reason for the requirement that the
concurrence of a majority of all the Members of
the Congress to vote for the grant of tax
exemption is to prevent indiscriminate grant of tax
exemptions.
21. But how many votes are required in Congress
in order to WITHDRAW the tax exemption?
30
Sec. 1608(d), CMTA
The RELATIVE majority vote of Congress
(i.e., majority of quorum) is sufficient to
WITHDRAW the tax exemption.
22. What is the scope and extent of the power of
Congress to grant tax exemption? BQ1997
The Legislature’s taxing power includes
the authority to grant tax exemptions or
condonations.31 Such exemption is embodied
either in a law, an international agreement (other
than an executive agreement) or a treaty, all of
which require legislative action for their validity as
prescribed under Sec. 28(4), Art. VI of the 1987
Phil. Constitution.
It is a fundamental rule that the power to
prescribe what property shall be taxed implies the
power to prescribe what property shall be exempt.
It is inherent in the exercise of the power to tax
that the sovereign State be free to select the
subject of taxation and to grant exemptions
therefrom, and unless restrained by some
provision of the Constitution, the Congress has full
power to exempt any person or corporation or
class of property from taxation, according to its
views of public policy and expediency. The power
to exempt from taxation is included or involved in
the right to apportion taxes, and exists in the
supreme legislative power, unless forbidden by
some constitutional limitation. Except as limited
by the Constitution, the power of Congress to
exempt is as broad as its power to tax.32
23. Can the President of the Philippines grant tax
exemptions thru an Executive Agreement?
No. The power to tax is inherently a
legislative prerogative, and the same cannot be
exercised through a mere executive agreement.
Executive agreements may only be given effect if
the same are done in furtherance of the
executive’s duty to ensure faithful execution of
laws and only if the same draws strength from a
law duly passed by Congress.
BQ2018
In an Exchange of Note between
the BSP (as borrower) and
private international bank (as
lender), it is stipulated that all
payments of interest by the BSP
to the lender shall be made free
and clear from all Philippine
taxes which may be imposed
thereon.
31
NPC v. Albay, GR 87479, June 4, 1980
[Per J. Sarmiento, En Banc]
32
Purisima v. Lazatin, GR 210588, Nov. 29,
2016 [Per J. Brion, En Banc]
9
 10 | P a g e C h a p t e r 2
A. Is the stipulation in the
exchange of Note valid?33
B. In case the private
international bank
erroneously paid the tax,
would a mere tax
assumption clause in the
Exchange of Notes be
tantamount to a tax
exemption which would
entitle the bank for the
refund of taxes it paid?34
C. What is now the recourse
of the BIR in order to collect
the said tax?35
BQ1992
A. The President of the
Philippines and the Prime
Minister of Japan entered
into an Executive
Agreement in respect of a
loan facility to the
Philippines from Japan
whereby it was stipulated
that interest on loans
granted by private Japanese
financial institutions to
private financial institutions
in the Philippines shall not
be subject to Philippine
income taxes but it will be
assumed by the executing
33
Yes. The stipulation in the Exchange of
Note is valid because this is not a case of tax
exemption per se, but merely a tax assumption,
which is not contrary to law, morals, good customs,
public order or public policy which is binding on the
State, the same being considered as an executive
agreement or an international instrument binding at
international law. Air Canada v. CIR, GR 169507,
Jan. 11, 2016 [Per J. Leonen, Second Div.].
34
Since this is not tax exemption per se, but
only tax assumption clause in an executive
agreement which is binding at international law, the
tax assumption clause merely shifts the burden of
paying the tax to another entity without necessarily
exempting it from the payment of the said tax.
Therefore, when the private international bank paid
the tax to the BIR, the payment is considered as
erroneously paid taxes since under the Exchange of
Notes, it should be BSP who should pay the tax
thereby entitling the private international bank to a
refund of the tax it paid to the BIR not because it is
exempt from tax, but because the PAYMENT of the
said taxes were assumed by the Philippine executing
agency under the Exchange of Notes. Mitsubishi Corp.
v. CIR, GR 175772, June 5, 2017 [Per J. Perlas
Bernabe, First Div.].
35
The BIR nevertheless is not without
recourse, because it can properly collect the subject
taxes from the BSP, the Philippine executing agency,
as the proper party that assumed the private
international bank’s tax liability pursuant to the
Exchange of Notes between the BSP and the private
international bank.. Mitsubishi Corp. v. CIR, GR
175772, June 5, 2017 [Per J. Perlas Bernabe, First
Div.].
agency of the Government.
Is this tax exemption valid?
Explain.36
B. In a loan agreement
between the Central Bank
of the Philippines (as
borrower) and private
international bank (as
lender), it is stipulated that
all payments of interest by
the Central bank to the
lenders shall be made free
and clear from all Philippine
taxes which may be
imposed thereon. Is the
stipulation valid? Explain. 37
(10) When Tax Treaty Shall be
Valid and Effective
“ART. VII, Sec. 21. No treaty or
international agreement shall be
valid and effective unless
concurred in by at least 2/3 of all
the Members of the Senate."
24. When may a tax treaty be considered as valid
and effective?
A Tax Treaty or international agreement
shall be considered valid and effective when
concurred in by at least 2/3 of all the Members of
the Senate.38 Consonant with the principle of
international comity, the provision of a tax treaty
must take precedence over and above the
36
Actually, there is no tax exemption per se
involved in this case but only tax assumption. The
Executive Agreement provides that interest on loans
granted by private Japanese financial institutions to
private financial institutions in the Philippines shall
not be subject to Philippine income taxes but it will
only be ASSUMED by the executing agency of the
Government. Therefore, this is merely a case of TAX
ASSUMPTION, not tax exemption and this act is not
contrary to law, morals, good customs, public order or
public policy, hence valid.
As a general rule, the President of the
Philippines cannot grant tax exemption through a
mere Executive Agreement since the act of granting
tax exemption is an act of taxation which is inherently
legislative. It is not one of those powers which the
President could exercise, except only when it was
delegated by the Constitution under the Flexible Tariff
Clause. Therefore, a mere executive agreement
cannot provide for a tax exemption. Air Canada v.
CIR, GR 169507, Jan. 11, 2016 [Per J. Leonen,
Second Div.]
37
Yes. The stipulation is valid because this
is a case of tax assumption, not tax exemption, which
is not contrary to law, morals, good customs, public
order or public policy, The stipulation in the
agreement that the lender “shall be made free and
clear” from all Philippines taxes, simply meant that
the BSP will assume the tax liability which is not
contrary to law, morals, good customs, public policy
or public order. Air Canada v. CIR, GR 169507, Jan.
11, 2016 [Per J. Leonen, Second Div.]
38
Art. VII, Sec. 21, 1987 Constitution.
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 11 | P a g e C h a p t e r 2

provisions of the local taxing statute. Tax treaties (1) Exercise original jurisdiction
are accepted limitations upon the power of over cases affecting
taxation.39 They form part of the law of the land, ambassadors, other public
and jurisprudence has applied the statutory ministers and consuls, and
construction principle that specific laws prevail over petitions for certiorari,
over general ones. Ordinarily, the later provisions prohibition, mandamus, quo
governs over the earlier one. warranto, and habeas
corpus.
In the case of Air Canada v. CIR, 40 the (2) Review, revise, reverse,
provisions of the RP-Canada Tax Treaty are more modify, or affirm on appeal
specific than the provisions found in the NIRC. or certiorari, as the law or
Therefore, the rules of interpretation apply even the Rules of Court may
though one of the sources is a treaty and not provide, final judgments and
simply a statute. orders of lower courts in:
(a) All cases in which the
(11) No Appropriation or constitutionality or
Use of Public Money validity of any treaty,
for Religious Purposes international or
executive agreement,
“ART. VI, Sec. 29(2). No public law, presidential
money or property shall be decree, proclamation,
appropriated, applied, paid, or order, instruction,
employed, directly or indirectly, ordinance, or regulation
for the use, benefit, or support is in question.
of any sect, church, (b) All cases involving the
denomination, sectarian legality of any tax,
institution, or system of religion, impost, assessment, or
or of any priest, preacher, toll, or any penalty
minister, other religious teacher, imposed in relation
or dignitary as such, except thereto.
when such priest, preacher, (c) All cases in which the
minister, or dignitary is assigned jurisdiction of any lower
to the armed forces, or to any court is in issue.
penal institution, or government (d) All criminal cases in
orphanage or leprosarium.” which the penalty
imposed is reclusion
25. May the public money or property be perpetua or higher.
appropriated directly or indirectly for the use of (e) All cases in which only
any religious organization> an error or question of
law is involved.”
No. No public money or property may be X x x
appropriated directly or indirectly for the use of x x x
any religious organization, except only when the xxx
religious dignitary is assigned to the armed forces
or penal institution or government orphanage or 26. What are the cases falling under the
leprosarium. jurisdiction of the Supreme Court insofar as tax
cases are concerned?
(12) Powers of the Supreme
Court to Review on Appeal Art. VIII, Sec. 5 of the 1987 Constitution
or Certiorari All Cases Involving enumerates, among others, the cases where the
the Supreme Court can exercise its appellate
Legality of Any Tax jurisdiction, namely:

“ART VIII, Sec. 5. The Supreme (1) X x x x xxx

Court shall have the following
powers: (2) Review, revise, reverse, modify, or
affirm on appeal or certiorari, as the law or the
Rules of Court may provide, final judgments and
39
orders of lower courts in:
CIR v. Pilipinas Shell Petroleum Corp., GR
188497, April 25, 2012 [Per J. Villarama,, Jr., First
(a) All cases in which the
Div.]
40 constitutionality or validity of any treaty,
Air Canada v. CIR, GR 169507, Jan. 11,
2016 [Per J. Leonen, Second Div.]; Cargill Phils. v. international or executive agreement,
CIR, GR 203346, Sept. 9, 2020 [Per J. Leonen, Third law, presidential decree, proclamation,
Div.]

11
 12 | P a g e C h a p t e r 2
order, instruction, ordinance, or
regulation is in question.
(b) All cases involving the legality
of any tax, impost, assessment, or toll, or
any penalty imposed in relation thereto.
(c) All cases in which the
jurisdiction of any lower court is in issue.
(d) All criminal cases in which the
penalty imposed is reclusion perpetua or
higher.
(e) All cases in which only an
error or question of law is involved.”
(13) Salaries of the Judiciary
shall be Fixed by Law
“ART VIII, SEC. 10. The salary of
the Chief Justice and of the
Associate Justices of the
Supreme Court, and of judges of
lower courts, shall be fixed by
law. During their continuance in
office, their salary shall not be
decreased.”
27. What is the meaning of the clause “their
salary shall not be decreased” under Art. VIII, Sec.
10 of the 1987 Constitution?
The clause “their salary shall not be
decreased” under Art. VIII, Sec. 10 of the 1987
Constitution simply means that the salaries of the
Judiciary shall not be diminished during their
continuance in office. It does not mean that the
same should not be subject to tax (such as the
withholding tax on compensation income) because
the imposition of the withholding taxes on salaries
is just a manner of collecting the income tax on
the said salary which anyway are not tax exempt
under the law.
BQ2004
Citing Section 10, Art. VIII of the
1987 Constitution which
provides that salaries of judges
shall be fixed by law and that
during their continuance in
office their salary shall not be
decreased, a judge of MM
Regional Trial Court questioned
the deduction of withholding
taxes from his salary since it
results into a net deduction of
his pay. Is the contention of the
judge correct? Reason briefly.41
41
No. The contention of the judge that the
deduction of withholding taxes from his salary will
result in the diminution of his salary during his
continuance in office is not correct. The salaries of
judges are not tax exempt and their taxability is not
contrary to the provisions of Art. VIII, Sec. 10 of the
Constitution on the non-diminution of the salaries of
the members of the Judiciary during their
continuance in office. The clear intent of the
(14) Grant of Power to the
Local Government Units
to Create its Own Sources of
Revenue
“ART. X, Sec. 5. Each local
government unit shall have the
power to create its own sources
of revenues and 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.”
28. What is the nature of the taxing power of the
provinces, municipalities and cities? How will the
LGUs be able to exercise their taxing powers?
The power of the LGUs to tax is directly
conferred by the Constitution, subject to the
guidelines and limitations as the Congress may
provide consistent with the basic policy of local
autonomy. Said power is exercised by the LGUs
thru their respective Sanggunians by passing local
ordinances.42
29. May Congress, under the 1987 Constitution,
abolish the power to tax of local governments?
No. Congress cannot abolish the power
to tax of LGUs because the said taxing power is
expressly granted by the fundamental law. The
only authority conferred to Congress is to provide
the guidelines and limitations on the local
government’s exercise of the power to tax. Thus, a
law abolishing the power to tax of LGUs would
contravene the Constitution, hence, not valid.
Under Art. X, Sec. 5 of the 1987
Constitution, the power to tax is no longer vested
exclusively in Congress, but LGUs are now given
direct authority to levy taxes, fees and other
charges. The power of the LGUs to impose and
collect taxes is derived from the Constitution itself
which grants them “the power to create its own
sources of revenues and 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,
Constitutional Commission that framed the
Constitution is to subject their salaries to tax as in the
case of all employees both of the government and
private employers. The imposition of the withholding
taxes on salaries is just a manner of collecting the
income tax on their salary and not in any way a
diminution of the salary of judges. Nitafan v. CIR, GR
78780, July 23, 1987 [Per J. Melencio-Herrera, En
Banc] cited in COURAGE V. CIR and SoF, GR 213446,
July 3, 2018 [Per J. Caguioa, En Banc]
42
Art. X, Sec. 5, 1987 Constitution; Sec.
129, in relation to Sec. 132, LGC.
12
 13 | P a g e C h a p t e r 2
and charges shall accrue exclusively to the local
government units.”
The important legal effect of the above-
stated provision is that henceforth, in interpreting
statutory provisions on municipal fiscal powers,
doubts will be resolved in favor of the municipal
corporations. The power of taxation can be
delegated to municipal corporations, consistent
with the principle that legislative powers may be
delegated to local governments in respect of
matters of local concern. 43
30. Should the court construe a law granting a
municipal corporation the power to tax most
strictly?
No. Courts cannot construe a law
granting a municipal corporation the power to tax
most strictly. It cannot abolish what is expressly
granted by the Constitution. Each LGU shall have
the power to create its own sources of revenues
and 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. The
power to create local governments or political
subdivisions carries with it the power to clothe
them with the power to tax. No LGU may
successfully operate without any taxing power.
The basic rationale for the grant of taxing power
to LGUs is to safeguard their viability and self-
sufficiency by directly granting them general and
broad tax powers as conferred by the Constitution.
In interpreting therefore the statutory provisions
on municipal fiscal powers, doubts will have to be
resolved in favor of municipal corporations. 44 This
means that the court must adopt a liberal
construction of a law granting a municipal
corporation the power to tax.45
BQ2001
Congress, after much public
hearing and consultations with
various sectors of society, came
to the conclusion that it will be
good for the country to have
only one system of taxation by
centralizing the imposition and
collection of all taxes in the
national government.
Accordingly, it is thinking of
passing a law that would
abolish the taxing power of all
43
MERALCO v. City Assessor/Treasurer of
Lucena City, G.R. 166102, Aug. 5, 2015 [Per J.
Leonardo-De Castro, First Div.]
44
City Govt. of San Pablo, Laguna v. Reyes,
GR 127708, March 25, 1999 [Per J. Gonzaga-Reyes,
Third Div.]
45
MERALCO v. Prov. of Laguna, GR 131359,
May 5, 1999 [Per J. Vitug, Third Div.]
local government units. In your
opinion, would such a law be
valid under the present
Constitution? Explain your
answer.46
(15) National Taxes as the
Base Amount from which to
Compute the Just Share of the LGUs
“ART. X, Sec. 6. Local
government units shall have a
just share, as determined by law,
in the national taxes which shall
be automatically released to
them.”
31. What constitutes the just `share of the LGUs
on the taxes being collected by the government?
The Constitution itself set national taxes
as the base amount from which to reckon the just
share of the LGUs. Sec. 6, Art. X the 1987
Constitution textually commands the allocation to
the LGUs of a just share in the national taxes, viz.:
Section 6, when parsed, embodies three
mandates, namely:
(1) the LGUs shall have a just share in the
national taxes;
(2) the just share shall be determined by
law; and
(3) the just share shall be automatically
released to the LGUs.47
32. Has Congress infringed the constitutional
provision on the just share of the LGUs when it
ordained that the share should be taken from the
national internal revenue taxes?
Yes. Congress has exceeded its
constitutional boundary by limiting to the national
internal revenue taxes the base from which to
compute the just share of the LGUs. Although the
power of Congress to make laws is plenary in
nature, congressional lawmaking remains subject
to the limitations stated in the 1987 Constitution.
The phrase national internal revenue taxes
engrafted in Sec. 284 of the LGC is undoubtedly
more restrictive than the term national taxes
written in Section 6. As such, Congress has actually
departed from the letter of the 1987 Constitution
stating that national taxes should be the base
from which the just share of the LGU comes. Such
departure is impermissible. Verba legis non est
46
No. The proposed law centralizing the
imposition and collection of all taxes in the national
government would contravene Art. X, Sec. 5 of the
Constitution. It is clear that Congress can only give
the guidelines and limitations on the exercise by the
LGUs of the power to tax but what was granted by the
fundamental law cannot be withdrawn by Congress.
47
Mandanas v. Ochoa, GR 199802, April
10, 2019 [Per CJ Bersamin, En Banc]
13
 14 | P a g e C h a p t e r 2
recedendum (from the words of a statute there
should be no departure). Equally impermissible is
that Congress has also thereby curtailed the
guarantee of fiscal autonomy in favor of the LGUs
under the 1987 Constitution.48
33. Can Congress manipulate the base of the
allocation of the just share in the national taxes
of the LGUs?
No. Although Congress has the primary
discretion to determine and fix the just share of
the LGUs in the national taxes (e.g., Section 284 of
the LGC), it cannot disobey the express mandate
of Sec.6, Art. X of the 1987 Constitution for the
just share of the LGUs to be derived from the
national taxes. The phrase as determined by law in
Sec. 6 follows and qualifies the phrase just share,
and cannot be construed as qualifying the
succeeding phrase in the national taxes. The intent
of the people in respect of Sec. 6 is really that the
base for reckoning the just share of the LGUs
should include all national taxes. To read Sec. 6
differently as requiring that the just share of LGUs
in the national taxes shall be determined by law is
tantamount to the unauthorized revision of the
1987 Constitution. Thus, Congress, in limiting the
base amount to national internal revenue taxes,
gravely abused its discretion. What the
Constitution extended to Congress was the power
to determine, by law, the just share. The
Constitution did not empower Congress to
determine the just share and the base amount
other than national taxes.49
34. The Supreme Court declared that the IRA of
the LGUs is not in accordance with the
constitutional determination of the just share of
the LGUs in the national taxes. Therefore, should
the LGUs just share (IRA) be reckoned from the
effectivity of the LGC? What is meant by the
doctrine of operative fact? Explain.
No. A legislative or executive act declared
void for being unconstitutional cannot give rise to
any right or obligation as yet.
The need is answered by the doctrine of
operative fact. It is now accepted as a doctrine
that prior to its being nullified, its existence as a
fact must be reckoned with. This is merely to
reflect awareness that precisely because the
judiciary is the governmental organ which has the
final say on whether or not a legislative or
executive measure is valid, a period of time may
have elapsed before it can exercise the power of
judicial review that may lead to a declaration of
nullity. It would be to deprive the law of its quality
of fairness and justice then, if there be no
recognition of what had transpired prior to such
adjudication.
48
Ibid.
49
Ibid.
The doctrine of operative fact recognizes
the existence of the law or executive act prior to
the determination of its unconstitutionality as an
operative fact that produced consequences that
cannot always be erased, ignored or disregarded.
In short, it nullifies the void law or executive act
but sustains its effects. It provides an exception to
the general rule that a void or unconstitutional law
produces no effect. But its use must be subjected
to great scrutiny and circumspection, and it cannot
be invoked to validate an unconstitutional law or
executive act, but is resorted to only as a matter of
equity and fair play. It applies only to cases where
extraordinary circumstances exist, and only when
the extraordinary circumstances have met the
stringent conditions that will permit its
application.
As such, the effect of our declaration
through this decision of the unconstitutionality of
Section 284 of the LGC and its related laws as far
as they limited the source of the just share of the
LGUs to the NIRTs is PROSPECTIVE. It cannot be
otherwise.
It becomes unavoidable to ask when the
adjusted amounts will be granted in favor of LGUs.
The OSG suggests that the adjusted amounts be
given to the LGUs starting with the 2022 budget
cycle.
The adjusted amounts can be deemed
effective only after this ruling has lapsed into
finality, which is procedurally to be reckoned only
from the denial of the OSG's motion for
reconsideration through this resolution. From then
onwards, and as ruled herein, the just share
should be based on all national taxes collected on
"the third fiscal year preceding." In the absence of
any amendment by Congress, the rates fixed in
Section 284 of the LGC, as herein modified, shall
control.50
CONSTITUTIONAL TAX EXEMPTIONS FOR
NONSTOCK NONPROFIT EDUCATIONAL
INSTITUTIONS
(16) Exemption from REAL
PROPERTY TAX
of All Lands, Buildings and Improvements
Actually, Directly and Exclusively USED
for Religious, Charitable, or Educational Purposes
“Article VI, Sec. 28(3). -
Charitable institutions, churches
and parsonages or covenants
appurtenant thereto, mosques,
non-profit cemeteries and all
lands, buildings and
improvements actually, directly
and exclusively used for
religious, charitable or
50
Ibid.
14
 15 | P a g e C h a p t e r 2
educational purposes shall be
exempt from taxation.”
35. To what kind of tax does this tax
exemption apply?BQ2000, 2006, 2017, 2018
This exemption applies only to exemption
from Real Property Tax. This is the connotation of
the phrase “of all lands, buildings and
improvements” thereby limiting the exemption of
the institutions from Real Property Tax only. What
is exempted from the Real Property Tax is not the
institution but the LANDS, BUILDINGS and
improvements which are ACTUALLY, DIRECTLY
AND EXCLUSIVELY USED for religious, charitable or
educational purposes.51
36. What is the test for the exemption from the
real property tax under this provision of the
Constitution? Explain. BQ2000, 2006. 2017,2018
The test for exemption from the real
property tax under this provision of the
Constitution is the “USE OF THE REAL PROPERTY,”
as to whether it is being used actually, directly
and exclusively by the nonstock nonprofit
organizations for religious, charitable or
educational purposes.
Thus, the PROOF of ACTUAL USE of the
property is necessary for the real property tax
exemption to apply because tax exemptions are
strictly construed against the taxpayer. There
must be an evidence to show that the taxpayer
has complied with the requirements for
exemption. Here, the MAIN TEST for the
exemption from the real property tax being
collected by the LGUs is NOT ownership, but the
BENEFICIAL USE of the property, that is why it
must be proven that the property is actually,
directly and exclusively USED for religious,
charitable and educational purposes. And that the
religious, charitable or educational institution
actually, directly and exclusively using the land
must be a nonstock nonprofit organization.52
37. What is the meaning of the term “actual,
direct and exclusive USE of property” for
purposes of the exemption from Real Property
Tax?
51
CIR v. CA, CTA & YMCA, GR 124043, Oct.
14, 1998 [Per J. Panganiban, First Div.]
52
CIR v. St. Luke’s Medical Center, GR Nos.
195909 and 195960, Sept. 26, 2012 [Per J. Carpio,
Second Div.]
The term “actual, direct and exclusive53
use of the property” means the direct and
immediate and actual application of the property
itself to such purpose or purposes. Here, it is NOT
the use of the INCOME from real property that is
determinative of whether or not the property is
used for tax exempt purposes“ but rather the
actual, direct and exclusive USE of the PROPERTY
for such purposes.54
For real property tax exemption
purposes, the incidental generation of income is
permissible because the TEST of exemption is the
USE of the property. The exemption extends to
facilities which are incidental to and reasonably
necessary for the accomplishment of said
purposes. The effect of failing to meet the “use”
requirement is simply to remove from the tax
exemption that PORTION of the property not
devoted to charitable, religious or educational
purposes.55
BQ2005
The Roman Catholic Church
owns a 2-hectare lot in a town
in Tarlac province. The
southern side and middle part
are occupied by the Church and
a convent, the eastern side, by a
school run by the Church itself,
the southern side, by some
commercial establishments,
while the rest of the property,
in particular, the northwestern
side, is idle or unoccupied.
May the Church claim tax
exemption on the entire land?
Decide with reasons.56
53
The word “exclusive” means PRIMARILY
rather than “solely.” Thus, the admission of paying
patients does not detract from the charitable
character of a hospital if all its funds are devoted
exclusively to the maintenance of the institution as a
public charity. Where rendering charity is its primary
object, and the funds derived from payments made
by patients able to pay are devoted to the benevolent
purposes of the institution, the mere fact that profit
has been made will not deprive the hospital of the
benevolent character. Hospital San Juan de Dios v.
Pasay City, GR L-19371, Feb. 28, 1966 [Per J. Dizon,
En Banc]
54
Abra Valley College, Inc. v. Aquino, GR
39086, June 15, 1988 [Per J. Paras, Second Div.]
55
CIR v. St. Luke’s Medical Center, Inc., GR
203514, Feb. 13, 2017 [Per J. Del Castillo, First Div.]
56
No. The church may not claim exemption
from the real property tax on the entire land because
the test for exemption from the payment of real
property tax is the USAGE OF THE PROPERTY AND
NOT THE OWNERSHIP. The Constitution and the
Local Government Code provides that lands and
improvements used actually, directly and exclusively
for religious purposes shall be exempt from the real
property tax. Thus, the portions of the land occupied
by the church, convent and school run by the church
are exempt from the RPT while the portion of the
15
 16 | P a g e C h a p t e r 2
(17) EXEMPTION FROM INCOME TAX and OTHER
TAXES
of ALL REVENUES AND ASSETS
of Non-Stock, Non-Profit Educational Institutions
Used Actually, Directly, and Exclusively
for Educational Purposes
“ART. 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.”
38. What are the requisites in order that the
REVENUES and ASSETS of a non-stock non-profit
educational institution may be exempt from
taxes and duties?
The requisites for the exemption from
taxes and duties of all revenues and assets of a
nonstock nonprofit educational institution are the
following:
(1) That ALL revenues57 and assets58 of
the nonstock nonprofit educational institution are
USED59 actually, directly and exclusively for
educational purposes;
land occupied by commercial establishments and the
portion which is idle shall be subject to the real
property tax.
57
“Revenues” consist of the amounts
earned by a person or entity from the conduct of
business operations. It may refer to the sale of goods,
rendition of services, or the return of an investment.
Revenue is a component of the tax base in income
tax, VAT, and local business tax. CIR v. DLSU, GR
196596, Nov. 9, 2016 [Per J. Brion, Second Div]
58
“Assets,” on the other hand, are the
tangible and intangible properties owned by a person
or entity. It may refer to real estate, cash deposit in a
bank, investment in the stocks of a corporation,
inventory of goods, or any property from which the
person or entity may derive income or use to
generate the same. In Philippine taxation, the FMV of
real property is a component of the tax base in real
property tax (RPT). Also, the landed cost of imported
goods is a component of the tax base in VAT on
importation and tariff duties CIR v. DLSU, GR
196596, Nov. 9, 2016 [Per J. Brion, Second Div]
(2) That the educational institution must
be a nonstock nonprofit educational institution
accredited by the DepEd, CHED or TESDA;
(3) That there shall be no capital divided
into shares; and no dividends distributed to its
members, trustees and officers, and that no profits
derived from any of its activities and undertakings
should inure to any of the members, trustees or
officers;
(4) That the income tax exemption
constitutionally granted to NSNP educational
institutions is NOT SUBJECT TO LIMITATIONS
imposed under the last paragraph of Sec. 30 of the
NIRC, and that said last par. of Sec. 30 of the NIRC
is WITHOUT FORCE AND EFFECT with respect to
the INCOME tax exemption of NSNP educational
institutions, provided, that the said NSNP
educational institution can PROVE that its
revenues, income and assets are being used
actually, directly and exclusively for educational
purposes.60
39. So, what are the tax exemptions given by the
Constitution to a non-stock non-profit
educational institution?
A nonstock-nonprofit educational
institution is entitled to the following tax
exemptions under the Constitution::
(a) Exemption from INCOME TAX on all
REVENUES and OTHER INCOME derived by it
which were actually, directly and exclusively
USED61 or EARMARKED62 FOR PROMOTING its
educational purposes;
(b) Exemption from VAT on the gross
receipts for services rendered as a nonstock
nonprofit educational institution;63
(c) Exemption from the Real Property Tax
on the lands and buildings being used actually,
directly and exclusively for educational purposes;
64
(d) Exemption from all Local Business
Taxes as such nonstock nonprofit educational
institution imposed by the LGUs.65
59
Or EARMARKED - DLSU College of St.
Benilde v. CIR, GR 202792, Feb. 27, 2019 [Per J.
Reyes, Jr., Third Div.]
60
Art. XIV, Sec. 4(3), Constitution, in relation
to last par. of Sec. 30, NIRC of 1997.
61
Art. XIV, Sec. 4(3), Constitution
62
DLSU College of St. Benilde v. CIR, GR
202792, Feb. 27, 2019 [Per J. Reyes, Jr., Third Div.]
63
Art XIV, Sec. 4(3), Constitution, in relation
to Sec. 109(1)(H), NIRC.
64
Art XIV, Sec. 4(3), Constitution, in relation
to Sec. 234(b), LGC.
65
Thus, when a non-stock, non-profit
educational institution proves that it used its
16
 17 | P a g e C h a p t e r 2
(e) Exemption from Donor’s Tax on all
grants, donations or contributions in favor of
another nonstock nonprofit educational institution
used actually, directly, and exclusively for
educational purposes,66 and/or charitable,
religious, cultural or social welfare or research
organization, provided that not more than 30% of
the said donation shall be used by such qualified
donee-institution for administration purposes.67
40. What is the tax implication of Art. XIV, Sec.
4(3) of the Constitution vis-à-vis the provision of
the last paragraph of Sec. 30 of the Tax Code is
concerned?
The income tax exemption
constitutionally granted to NSNP educational
institutions is NOT SUBJECT TO LIMITATIONS
imposed under the last paragraph of Sec. 30 of the
NIRC, and that said last paragraph of Sec. 30 of the
NIRC is WITHOUT FORCE AND EFFECT with respect
to the income tax exemption of NSNP educational
institutions, provided, that the said NSNP
educational institution can PROVE that its
revenues, income and assets are used actually,
directly and exclusively for educational purposes.
For purposes of the tax exemptions of a
nonstock nonprofit educational institution, a
simple reading of the Constitution would show
that Article XIV, Section 4(3) does not require that
the revenues and income must have also been
earned from educational activities or activities
related to the purposes of an educational
institution. The phrase "all revenues" is
UNQUALIFIED by any reference to the source of
revenues.
Thus, so long as the REVENUES of the
non-stock non-profit educational institution are
USED ACTUALLY, DIRECTLY AND EXCLUSIVELY for
the maintenance or improvement of the
revenues actually, directly, and exclusively for
educational purposes, it shall be exempted from
income tax, VAT, and Local business tax. On the other
hand, when it has also shown that it used its real
properties actually, directly and exclusively for
educational purposes, then, it shall also be exempted
from the Real Property Tax. CIR v. DLSU, GR 196596,
Nov. 9, 2016 [Per J. Brion, Second Div]
66
Art. XIV, Sec. 4(4), Constitution.
67
For purposes of the exemption from
donor’s tax, Sec. 101 of the Tax Code provides that
the qualified-donee institution should be a school,
college or university and/or charitable corporation,
accredited non-government organization, trust or
philanthropic organization and/or research institution
or organization, incorporated as a non-stock entity,
paying no dividends, governed by trustees who
receive no compensation, and devoting all its income,
whether students' fees or gifts, donations, subsidies
or other forms of philanthropy, to the
accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation. Art. XIV,
Sec. 4(4), Constitution, in relation to Sec. 101(A)(2),
NIRC.
educational institution (indispensable or
essential), INCLUDING ALL OTHER INCOME from all
its ASSETS, provided that said income are USED
ACTUALLY, DIRECTLY AND EXCLUSIVELY for
educational purposes, and recently, even those
EARMARKED68 FOR PROMOTING its educational
purposes, regardless of the source, shall be
exempt from income tax.69
41. What is the rationale for the tax exemptions
of nonstock nonprofit educational institutions?
From the records of the 1986
Constitutional Commission as demonstrated from
the policy of the 1987 Constitution, it is stated that
the reason for the grant of tax exemption to non-
stock non-profit educational institutions is to
provide broader tax privilege to these institutions
as recognition of their role in assisting the State
provide a public good. The tax exemption was
seen as beneficial to students who may otherwise
be charged unreasonable tuition fees if not for the
tax exemption extended to all revenues and assets
of non-stock, non-profit educational institutions.70
42. Will failure to secure a new BIR Tax
exemption ruling be a ground for the revocation
of the tax exemption of a nonstock nonprofit
educational institution?
No. In DLSU St. Benilde v. CIR,71 the
Supreme Court finds such fact insignificant. The
application for a new BIR Ruling is unnecessary
considering that the BIR Ruling on tax exemption
issued to DLSU St. Benilde was never revoked, and
the primary purpose of petitioner Foundation
remained the same.
43. May a nonstock nonprofit educational
institution be considered as profit driven simply
because it is generating profits and therefore can
no longer be considered as exempt from income
tax?
No. The accusation that the school is not
a non-profit educational institution anymore due
to its alleged enormous profits and that it is
operating contrary to the nature of a nonprofit
educational institution by generating massive
profits were completely unsupported by facts and
evidence and there is nothing in the petitioner
Foundation's books that will indicate that it is
driven by profit or that its income is used for
anything but in pursuit of its primary purpose.
To hold that an educational Institution is
subject to income tax whenever it is so
68
DLSU College of St. Benilde v. CIR, GR
202792, Feb. 27, 2019 [Per J. Reyes, Jr., Third Div.]
69
Art. XIV, Sec. 4(3), Constitution
70
DLSU College of St. Benilde v. CIR, GR
202792, Feb. 27, 2019 [Per J. Reyes, Jr., Third Div.]
71
Ibid.
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 18 | P a g e C h a p t e r 2
administered as to reasonably assure that it will
not incur in deficit, is to nullify and defeat the
aforementioned exemption of NSNP educational
institutions under the Philippine Constitution.
Indeed, the effect, in general, of the interpretation
would be to deny the exemption whenever there
is net income, contrary to the tenor of Sec. 30(H)
which positively exempts from taxation those
corporations or associations which, otherwise,
would be subject thereto, because of the
existence of said net income.
Needless to say, every responsible
organization must be so run as to, at least insure
its existence, by operating within the limits of its
own resources, especially its regular income. In
other words, it should always strive, whenever
possible, to have a surplus.
Considering the clear explanation of the
nature of the money involved, it is evident that all
of petitioner Foundation's income is actually,
directly and exclusively used or EARMARKED for
promoting its educational purpose.
Furthermore, a simple reading of the
Constitution would show that Art. XIV, Sec. 4(3)
does not require that the revenues and income
must have also been earned from educational
activities or activities related to the purposes of an
educational institution. The phrase "all revenues"
is unqualified by any reference to the source of
revenues. Thus, so long as the revenues and
income are USED actually, directly and exclusively
for educational purposes, then said revenues and
income shall be exempt from taxes and duties.72
44. Can the tax exemption granted by the
Constitution to nonstock nonprofit educational
institution be set aside by any statute?
No. The tax exemption expressly granted
by the 1987 Constitution, the supreme law of the
land, cannot be set aside by any statute, especially
by a mere technicality in procedure.
The Supreme Court has ruled in the past
that if a rigid application of the rules of procedure
will tend to obstruct rather than serve the broader
interests of justice and depending on the
prevailing circumstances of the case, such as
where strong considerations of substantive justice
are manifest in the petition, the Court may relax
the strict application of the rules of procedure in
the exercise of its equity jurisdiction. 73
BQ2017
San Juan University is a non-
stock non-profit educational
institution. It owns a piece of
72
DLSU College of St. Benilde v. CIR, GR
202792, Feb. 27, 2019 [Per J. Reyes, Jr., Third Div.]
73
Ibid.
land in Caloocan City on which
its three 2-storey school
building stood. Two of the
buildings are devoted to
classrooms, laboratories, a
canteen, a bookstore,
dormitories and administrative
offices. The third building is
reserved as dormitory for
student athletes who are
granted scholarships for a given
academic year.
In 2017, San Juan University
earned income from tuition fees
and from leasing a portion of its
premises to various
concessionaires of food, books
and school supplies.
A. Can the City Treasurer of
Caloocan City collect real
property taxes on the land
and building of San Juan
University? Explain your
answer.74
B. Is the income earned by San
Juan University for the year
2017 subject to income tax?
Explain your answer.75
BQ2004
But supposing a school is a
proprietary educational
institution owned by the
Archbishop’s family and not a
nonstock nonprofit educational
institution, is it also exempt
from income tax?76
74
Yes. But only that portion of the land and
building being leased to the concessionaires of food,
books and school supplies because the test for
exemption from the real property tax is the USE OF
THE PROPERTY as to whether the real property is
USED actually, directly and exclusively for
educational purposes. Thus, only the portion used
actually, directly and exclusively for educational
purposes shall be exempt from the real property tax.
Art. VI, Sec. 28(3), Constitution, in relation to Sec.
234(b), LGC; CIR v. DLSU, GR 196596, Nov. 9, 2016
[Per J. Brion, Second Div.]
75
No. All the income derived by San Juan
University as such nonstock nonprofit educational
institution, including all income from leasing a
portion of its premises to various concessionaires of
food, books and school supplies, are all exempt from
income tax. The Constitution provides that ALL
revenues derived by nonstock nonprofit educational
institutions used actually, directly and exclusively for
educational purposes is exempt from income tax.
The test for exemption from income tax is the USE OF
THE INCOME. There was no mention in the problem
on whether the income was used for purposes other
than for educational purposes. Art. XIV, Sec. 4(3),
Constitution; CIR v. DLSU, GR 196596, Nov. 9, 2016
[Per J. Brion, Second Div.].
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 19 | P a g e C h a p t e r 2
BQ2000
Under Art. XIV, Sec. 4(3) of the
1987 Phil. Constitution, all
revenues and assets of non-
stock, non-profit educational
institutions, used actually,
directly and exclusively for
educational purposes, are
exempt from taxes and duties.
Are income derived from
dormitories, canteens and
bookstores as well as interest
income on bank deposits and
yields from deposit substitutes
automatically exempt from
taxation? Explain.77
(18) Exemption from
DONOR’s TAX on DONATIONS
to NSNP Educational Institutions
“ART. XIV. SEC. 4(4). Subject to
conditions prescribed by law, all
grants, endowments, donations,
or contributions used actually,
directly, and exclusively for
educational purposes shall be
exempt from tax.”
45. What conditions must occur in order that all
grants, donations and contributions to nonstock
nonprofit private educational institutions may be
exempt from the donor’s tax under Sec. 101(A) of
the Tax Code?BQ2000
The following are the conditions for the
exemption from donor’s tax of the donations to
non-stock nonprofit educational institutions:
1. That the donee must be a nonstock
nonprofit educational institution, qualified and
accredited by the DepEd, CHED or TESDA paying
76
No. If the school is a proprietary
educational institution, it will be subject to income
tax at the rate of 10% based on its taxable income,
provided, however that if its gross income from
unrelated trade, business or other activity exceeds
50% of the TOTAL GROSS INCOME derived by such
educational institution from all sources, the tax
prescribed under Sec. 27(A) shall be imposed on the
ENTIRE TAXABLE INCOME. For this purpose, the term
'unrelated trade, business or other activity' means
any trade, business or other activity, the conduct of
which is not substantially related to the exercise or
performance by such educational institution of its
primary purpose or function.
77
No. There is a need for proof on whether
the INCOME derived by the nonstock nonprofit
educational institution is USED actually, directly and
exclusively for educational purposes, OR earmarked
for educational purposes. The Constitution provides
that all revenues derived by nonstock nonprofit
educational institutions used actually, directly and
exclusively for educational purposes is exempt from
income tax. Art. XIV, Sec. 4(3), Constitution. DLSU
College of St. Benilde v. CIR, GR 202792, Feb. 27,
2019 [Per J. Reyes, Jr., Third Div.]
no dividends, governed by trustees with no
compensation, and devoting all its income to the
accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation;
2. That the donations must be used
actually, directly, and exclusively for educational
purposes;
3. That not more than 30% of the
donation shall be used by such qualified-donee
institution for administration purposes;
4. That the donor shall give a Notice of
Donation on every donation worth at least
P50,000 to the RDO which has jurisdiction over his
place of business within 30 days after receipt of
the qualified-donee institution’s duly issued
Certificate of Donation;
5. That the Certificate of Donation shall
be attached to the said Notice of Donation, stating
that the donation shall be used actually, directly,
and exclusively for educational purposes and that
not more than 30% of the said donation for the
taxable year shall be used by such qualified-donee
institution for administration purposes.78
BQ2018
Years ago, Krisanto bought as
parcel of land in Muntinlupa for
only P65,000. He donated the
land to his son, Kornelio, in
1980 when the property had a
fair market value of P75,000,
and paid the corresponding
donor’s tax.
Kornelio, in turn, sold the
property in 2000 to Katrina for
PhP 6.5 million and paid the
CGT, DST, local transfer tax, and
other fees and charges.
Katrina, in turn, donated the
land to Klaret School last August
30, 2017 to be used as the site
for additional classrooms. No
donor’s tax was paid because
Katrina claimed that the
donation was exempt from
taxation.
At the time of the donation to
Klaret School, the land had a
FMV of P65 million.
A. Is Katrina liable for donor’s
tax?79
78
Art. XIV, Sec. 4(4), 1987 Constitution, in
relation to Sec. 101(A)(2), NIRC, as amended by RA
10963 (TRAIN Law).
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 20 | P a g e C h a p t e r 2
B. How much in deduction
from gross income may
Katrina claim on account of
the said donation?80
BQ2017
CMI School Inc., a non-stock
non-profit corporation, donated
its 3 parcels of idle land situated
in the Municipality of Cuyapo,
Nueva Ecija to SLC University,
another nonstock nonprofit
corporation, in recognition of
the latter’s contribution to and
participation in the spiritual and
educational development of the
former.
A. Is CMI School liable for the
payment of donor’s tax.
Explain your answer.81
B. If SLC University later sells
the 3 parcels of land to
Puregold Supermarket, a
stock corporation, will SLC
University be liable for
capital gains tax? Explain
your answer.82
79
Yes. Katrina is liable to pay the donor’s tax
because the donation was not made to a qualified
nonstock nonprofit educational institution, regardless
of the fact that the said property will be used as the
site for additional classrooms. Not all donations
made to an educational institution is exempt from
donor’s tax. The Constitution provides that the
donation must be made to a qualified donee
nonstock nonprofit educational institution which
donation shall be used actually, directly and
exclusively for educational purposes and that not
more than 30% of the value of the donation shall be
used by the said qualified donee institution for
administration purposes. Art.XIV, Sec. 4(4),
Constitution, in relation to Sec. 101A(2), NIRC,
80
None. Katrina is not entitled to any
deduction from gross income because the donation
was NOT made to a qualified donee-institution. Sec.,
34(H), NIRC
81
Yes. Insofar as donations by CMI School,
Inc. to another nonstock nonprofit educational
institution is concerned, the test for exemption from
donor’s tax is the USAGE by the donee of the
thing/property donated, which means that the
donation should be used actually, directly and
exclusively for educational purposes. The
Constitution provides that the donation must be used
actually, directly and exclusively for educational
purposes and further, the law provides that not more
than 30% of the said donation must be used for
administration purposes. Here, the only reason for
the donation is due to the recognition of the latter’s
contribution to and participation in the spiritual and
educational development of CMI School and not on
the condition that said donation shall be used
actually, directly and exclusively for educational
purposes. Therefore, CMI School is liable for the
payment of donor’s tax. Art. XIV, Sec. 4(4),
Constitution, in relation to Sec. 101A(2), NIRC, . clearly a political subdivision, therefore donations
82
No. If later on, SLC University sells the
said 3 parcels of land to a stock corporation and it
C. If SLC University donated
the three parcels of idle
land in favor of the
Municipality of Cuyapo,
Nueva Ecija, will SLC
University liable for donor’s
tax? Explain your answer. 83
BQ2011
A non-stock, non-profit school
always had cash flow problems,
resulting in failure to recruit
well-trained administrative
personnel to effectively manage
the school. In 2010, Don Leon
donated P100 million pesos to
the school, provided the money
shall be used solely for paying
the salaries, wages, and
benefits of administrative
personnel. The donation
represents less than 10% of Don
Leon's taxable income for the
year. Is he subject to donor's
taxes?
A. No, since the donation is
actually, directly, and
exclusively used for educational
purposes.
will actually, directly and exclusively be using the
proceeds of the sale for educational purposes, then
said income shall be exempt from income tax, even if
it was sold to a stock corporation. The test for
exemption from income tax is the USAGE of the
income, and not whether it was sold to a stock
corporation. The Constitution provides that ALL
REVENUES of a nonstock nonprofit educational
institution USED ACTUALLY DIRECTLY AND
EXCLUSIVELY FOR EDUCATIONAL PURPOSES shall be
exempt from income tax. And since SLC University is
a nonstock nonprofit educational institution, and its
purpose for selling the 3 parcels of land is to utilize
the proceeds from sale for educational purposes,
then SLC University should NOT BE MADE LIABLE to
the capital gains tax on the income derived from the
sale of the said properties. A simple reading of the
Constitution would show that Art. XIV, Sec. 4(3)
does not require that the revenues and income
must have also been earned from educational
activities or activities related to the purposes of
an educational institution. The phrase "all
revenues" is unqualified by any reference to the
source of revenues. Thus, so long as the
revenues and income are USED actually, directly
and exclusively for educational purposes, then
said revenues and income shall be exempt from
income tax. Art. XIV, Sec. 4(3), Constitution.
83
No. SLC University will not be liable for
donor’s tax on its donation of its idle land to the
Municipality of Cuyapo, Nueva Ecija because the tax
law simply provides that gifts made TO OR for the
use of the National Government or to any of its
political subdivision shall be exempt from donor’s tax.
The local government of Cuyapo, Nueva Ecija is
made to it is exempt from donor’s tax. Sec. 101(A)
(1), NIRC, as amended by the TRAIN Law.
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B. Yes, because the donation is

to be wholly used for BQ2002
administration purposes.84
C. Yes, since he did not obtain On December 6, 2001, LVN
the requisite NGO certification Corporation donated a piece of
before he made the donation. vacant lot situated in
D. No, because the donation Mandaluyong City to an
does not exceed 10% of his accredited and duly registered
taxable income for 2010. non-stock, non-profit
educational institution to be
BQ2004 used by the latter in building a
sports complex for students.
XYZ Colleges is a non-stock,
non-profit educational A. May the donor claim in full
institution run by the as deduction from its gross
Archdiocese of BP City. It income for the taxable year
collected and received the 2001 the amount of the
following: donated lot equivalent to
its fair market value/zonal
1. Tuition fees value at the time of the
2. Dormitory fees donation? Explain your
3. Rentals from canteen answer.87
concessionaires B. In order that donations to
4. Interest from money- non-stock, non-profit
market placements of the educational institution may
tuition fees. be exempt from the donor's
5. Donation of a lot and gift tax, what conditions
building by school alumni. must be met by the
donee?88
A. Will the donation of the lot
and building by the school
alumni association be
exempt from donor’s tax?
Explain briefly.85
B. Suppose that XYZ Colleges
is a proprietary educational
institution owned by the
Archbishop's family, rather
than the Archdiocese, will
the donation still be
exempt from donor’s tax?
Explain briefly.86
84
In order that donations to a nonstock
nonprofit donee-educational institutions can be
exempt from donor’s tax, the donee can only use NOT
MORE THAN 30% OF THE DONATION for
administration purposes. Otherwise, the donor shall
be subject to the donor’s tax. Sec. 101(A)(2), NIRC, as
amended by the TRAIN Law.
85
Yes. The donation to XYZ Colleges of the
lot and building by the school alumni association will
be exempt from donor’s tax because XYZ Colleges is
a qualified nonstock nonprofit educational institution
provided that the said lot and building will be used
actually, directly and exclusively for educational compensation, and devoting all its income to the
purposes and not more than 30% of the said accomplishment and promotion of the purposes
donation shall be used for administration purposes enumerated under its Articles of Incorporation.
and subject to the other conditions provided for under Section 101(A)(2), NIRC, as amended by the TRAIN
Sec. 101(A)(2), NIRC, amended by the TRAIN Law. Law
87
Art. XIV, Sec. 4(4), 1987 Constitution, in relation to No. Although the donation of the vacant
Sec. 101(A)(2), NIRC, as amended by RA 10963. . lot was made to a qualified donee institutions, the
86
No. If XYZ Colleges is a proprietary value of the said donation cannot be based on its
educational institution, the said donation of lot and FMV/zonal value, but rather on the acquisition cost of
building will be subject to the donor's tax because a the property. The donor is not entitled to claim as full
donation to an educational institution is exempt only deduction the fair market value/zonal value of the lot
from donor’s tax if the school is incorporated as a donated pursuant to Sec. 34(H)(2)(c )(5), NIRC.
88
non-stock non-profit educational institution paying no Pls. refer to the answer in Q & A-45
dividends, governed by trustees who received no above.

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