BA 127 Tax Accounting

INHERENT AND CONSTITUTIONAL LIMITATIONS

I.

Inherent Limitations
A. Situs of Taxation
Situs of taxation literally means place of taxation. The general rule is that the taxing
power cannot go beyond the territorial limits of the taxing authority. Basically, the state
where the subject to be taxed has a situs may rightfully levy and collect the tax; and the
situs is necessarily in the state which has jurisdiction or which exercises dominion over the
subject in question.
Income tax may properly be exacted from persons who are residents or citizens in the
taxing jurisdiction and even from those who are neither residents nor citizens provided the
income is derived from sources within the taxing state. Thus, resident citizens and
domestic corporation are taxable on all income derived from sources within or without the
Philippines. A non-resident citizen is taxable on all income derived from sources within the
Philippines. An alien whether a resident or not of the Philippines and a foreign corporation,
whether engaged or not in trade or business in the Philippines are also taxable only from
sources within the Philippines.
The taxable situs will depend upon the nature of income as follows;
1)
Interests- Interest income is treated as income from within the Philippines if the
debtor or lender whether an individual or corporation is a resident of the Philippines.
2) Dividends- Dividends received from a domestic corporation are treated as income
from sources within the Philippines. Dividends received from a foreign corporation are
treated as income from sources within the Philippines, unless 50% of the gross income of
the foreign corporation for the three-year period preceding the declaration of such
dividends was derived from sources within the Philippines; but only in an amount which
bears the same ratio to such dividends as the gross income of the corporation for such
period derived from sources within the Philippines bears to its gross income from all
sources.
3)
Services- Services performed in the Philippines shall be treated as income from
sources within the Philippines.
4) Rentals and Royalties- Gain or income from property or interest located or used
in the Philippines is treated as income from sources within the Philippines.
5)
Sale of Real Property- Gain from sale of real property located within the
Philippines is considered as income within the Philippines.
6)
Sale of Personal Property- Gain, profit or income from sale of shares of stocks
of a domestic corporation is treated as derived entirely from sources within the Philippines,
regardless of where the said shares are sold Gains from sale of other personal property
can be considered income from within or without or partly within or partly without
depending on the rules provided in Section 42 E of the Tax Code.
The following situs of taxation applies:
a. Persons residence of the taxpayer
b. Real property or tangible personal property location of the property
* Lex loci rei sitae (Latin for "law of the place where the property is situated")
c. Intangible personal property As a rule, situs is the domicile of the owner unless has
acquired a situs elsewhere
*Mobilia sequuntur personam: Movables follow the person
d. Income taxpayers residence or citizenship or place where the income was earned
e. Business, occupation and transaction place where the business is being operated,
occupation being practiced and transactions completed

f.

I.

Gratuitous transfer of property taxpayers residence or citizenship or location of the

property

The taxing power of a state does not extend beyond its territorial limits, but within such
limits it may tax persons, property, income, or business. In such case, knowledge of the
situs of a particular income is crucial to ensure that only income taxable in a particular
jurisdiction is declared and assessed properly. Without proper knowledge on situs of
taxation, a taxpayer is at risk of failing to declare income which is properly taxable in one
jurisdiction or else declaring an income that is not taxable.
B. International comity
1. In par parem, non habet imperium An equal has no power over an equal.
2. The property of a foreign may not be taxed by another.
3. It has something to do with the friendly interaction and participation of different
estates. This adheres to some amount of submission and compliance of certain
international rules and covenants for mutual benefits and enjoyment of the states and
its inhabitants. Bilateral agreements, conventions and international treaties fall under
this category.
Constitutional Limitations
1. Due process clause
Section 1, Article III, 1987 Constitution: 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.
2. Equal protection clause
Section 1, Article III, 1987 Constitution: No person shall be deprived of life, liberty of
property without due process of law, nor shall any person be denied the equal protection of
the laws.
3. Rule of taxation shall be uniform and equitable
Section 28(1), Article VI, 1987 Constitution: The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of taxation.
4. Non-impairment of contracts
Section 10, Article III, 1987 Constitution: No law impairing the obligation of contracts shall
be passed.
Section 11, Article XII, 1987 Constitution: 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.
5. Non-imprisonment for non-payment of poll tax
Section 20, Article III, 1987 Constitution: No person shall be imprisoned for debt or nonpayment of poll tax.
6. Prohibition against taxation of real property of charitable institutions, churches,
personages or convents, mosques and non-profit cemeteries
Section 28(3), Article VI, 1987 Constitution: Charitable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit cemeteries and all
lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation.

7. Prohibition against taxation of non-stock non-profit educational institutions

Section 4(3), Article XIV, 1987 Constitution: All revenues and assets of non-stock, nonprofit, 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 limitations provided by law including restrictions on
dividends and provisions for reinvestment.
Section 30(H), NIRC: Exemptions from tax on corporations The following organizations
shall not be taxed under this Title in respect to income received by them as such:
. . . (H) A non-stock and non-profit educational institution
8. Passage of tax bills
Section 24, Article VI, 1987 Constitution: All appropriations, 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.
9. Granting of tax exemption
Section 28(4) Article VI, 1987 Constitution: No law granting any tax exemption shall be
passed without the concurrence of a majority of all the Members of the Congress.
10.Veto power of the president
Section 27(2) Article VI, 1987 Constitution: The President shall have the power to veto any
particular item or items in an appropriation, revenue or tariff bill but the veto shall not
affect the item or items to which he does not object.
11.Judicial power to review legality of tax
Section 5(2) (b) Article VIII, 1987 Constitution: The Supreme 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 judgements and orders of lower courts in:
. . . (b) All cases involving the legality of any tax, impost, assessment, or toll or any penalty
imposed in relation thereto.