TAX MATES

M o n d a y, O c t o b e r 1 2 , 2 0 0 9

5. NON-IMPAIRMENT OF THE OBLIGATION OF CONTRACTS

No law impairing the obligation of contracts shall be passed (Sec. 10, Art. III, 1987 Constitution).

The power of taxation cannot be exercised in a manner that would impair the obligation of
contracts. What is prohibited is that a taxing statute be passed that would alter the relative rights
of the parties with each other.

The mere fact that a tax makes the conduct of a business more expensive or makes an activity
more difficult does not result in the impairment of the obligation of contracts. Contract is impaired
only if the relative position of the parties to a contract (i.e. equality that is assumed when the
contract was entered into) is disturbed by the operation of a taxing statute.

Application

An example of impairment by law is when a tax exemption based on a contract is revoked by a

later taxing statute. But exemption from taxation provided for in a franchise, although in a sense is
an exemption based on a contract, may be revoked because under the Constitution, a franchise is
“subject to amendment, alteration, or repeal” by Congress. (Sec.11, Art. XII.)

The obligation of a contract is impaired when its terms or conditions are changed by law or by a
party without the consent of the other, thereby weakening the position or rights of the latter.

An example of impairment by law is when a later taxing statute revokes a tax exemption based on
a contract. But this only applies when the tax exemption has been granted for a valid
consideration.
A later statute may revoke exemption from taxation provided for in a franchise because the
Constitution provides that a franchise is subject to amendment, alteration or repeal.

The parties to the contract cannot exercise the power of taxation.

· > They cannot agree or stipulate that this particular transaction may be exempt from tax- not
allowed (except if government)

OPOSA vs. FACTORAN

· > Police power prevails over the non-impairment clause
LA INSULAR vs. MANCHUCA

· > A lawful tax on a new subject or an increased tax on an old one, does not interfere with a
contract or impairs its obligation.

· > The constitutional guarantee of the non-impairment clause can only invoked in the grant of tax
exemption.

RULES:
1) If the exemption was granted for valuable consideration and it is granted on the basis of a
contract.
> cannot be revoked
2) If the exemption is granted by virtue of a contract, wherein the government enters into a
contract with a private corporation
> cannot be revoked unilaterally by the government
3) If the basis of the tax exemption is a franchise granted by Congress and under the franchise or
the tax exemption is given to a particular holder or person
> can be unilaterally revoked by the government (Congress)
· > The non-impairment clause applies only to contracts and not to a franchise.
· > The non-impairment clause applies to taxation but not to police power and eminent domain.

Furthermore, it applies only where one party is the government and the other, a private individual.
· > As a rule, the obligation to pay tax is based on law. But when, for instance, a taxpayer enters
into a compromise with the BIR, the obligation of the taxpayer becomes one based on contract

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