TAX TV
TAXATION
TAXATION:
 Concept
of Taxation
 Nature
of Taxation
 Basis of Taxation
 Importance of Taxation
 Purposes
of Taxation
 Process of Taxation
 Principles of a Sound Tax System
 Scope
of the Power of Taxation
 Limitations on the Power of Taxation
 Certain Doctrines in Taxation
 Meaning & Characteristics of a Tax
 Classification of Taxes
 Distinction of Taxes from Other Related Items
 Computation of Personal Tax and Personal
Exemption
 Concept
of Taxation
Taxation
-is a process/act of imposing a charge by
governmental authority on property, individuals
or transactions to raise money for “public
purpose”
- it refers to the inherent power of a state
coextensive with sovereignty to demand
contributions for public purposes to support the
government
- it passes a legislative undertaking through
the enactment of tax which will be implemented by
the executive branch of the government to raise
income from the inhabitants in order to pay the
necessary expenses of the government
 Nature
of Taxation
•Inherent Power of Sovereignty
•Essentially a Legislative Function
•For Public Purposes
•The Strongest of All the inherent Powers
of the Government
•Territorial in Operation
•Subject to Constitutional and inherent
Limitations
 Basis
of Taxation
Taxation is based on the Principles of:
1) Necessity
“Taxation is the life blood or the bread &
butter of the government & every citizen
must pay his taxes”.
2) Reciprocal Duties
 Importance
of Taxation
- “Taxation is the indispensable & inevitable
price for civilized society-the government would
be paralyzed without it.”
- “Without taxation, the State cannot raise
income to pay for the government expenses"
 Purposes
of Taxation
1. Revenue Purposes
“The fiscal policy of the government is
based on the rule that receipts or revenue
should be equal to annual government
expenditures. The significant portion of the
required receipts is raised from taxation”.
2. Regulatory Purpose
3. Compensatory Purpose
 Process
of Taxation
1. Levy or imposition
Example of Tax Legislative Functions:
a) Prescribing general rules of taxation
b) Selecting of the object/subject to be
taxed
c) Determining of the purpose for which
taxes shall be imposed
d) Fixing the amount of the tax to be
imposed
e) Fixing the amount of tax rate
2. Assessment and Collection
Example of Tax Administrative Functions:
a) Valuation of property for taxation
b) Equalization of Assessment
c) Collection of Taxes
3. Payment of the Tax (Incidence of Taxation)
 Principles
of a Sound Tax System
1. Fiscal Adequacy
2. Theoretical Justice
3. Administrative Feasibility
 Scope
of the Power of Taxation
The power to tax is unlimited, complete
(plenary), with wide extent of application
(comprehensive) and of the highest degree
(supreme).
Taxation reaches every trade or
occupation, every object of industry, and every
species of possession. It imposes a burden
which, in case of failure to discharge, may be
followed by seizure or confiscation of property.
 Limitations
on the Power of Taxation
The exercise of taxation is subject to
restrictions which are generally classified as :
1. inherent limitations, and
2. constitutional limitations
*Taxes may Be Levied Only for Public Purposes
Taxes shall be imposed solely for a
legitimate objective of:
a) Supporting the State
b) Promoting the General Welfare of its
inhabitants as a whole (not merely for
private individuals) and;
c) Financing the recognized projects of the
government
The government is established for public
purpose & taxes should only be spent for the
same purpose. Below are governmental
expenditures for public purpose:
a) Protection, security and defense and
other similar peace and order functions;
b) Infrastructure and other public works;
c) Social welfare and charity works such as
help for destitute and handicapped persons,
and;
d) Financial Assistance for calamity victims
during earthquake, typhoon, drought and
the like.
*Being inherently legislative, taxation may Not be
Delegated
There are three inherent power of the
State which are police power (for public
welfare) and eminent domain (for public use)
and taxation (for revenue).
Examples of taxation power that cannot
be delegated are the following:
a) Power to select the coverage, object or
property to be taxed
b) Determining the nature and purposes
from which taxes shall be collected;
c) Determining the place or situs of tax
impositions
d) Fixing the amount to be imposed and
tax rates
e)
Granting
tax
exemptions
or
condonations, and ;
f) Setting down the rules of taxation in
general.
*Exceptions To The General Rule That Taxation is
Inherently Legislative in Character
1. Delegation to the President to fix within specific
limits, tariff rates, tonnage, and wharf age dues and
other duties and imposed as provided by the
Constitution.
2. Delegations to the municipal corporations or
LGU’s to be exercised by the local legislative
bodies in line with the well accepted principle
that the power to create municipal corporations
for purposes of local self-government necessarily
implies the power to confer on them the power
to tax.
3.
Delegation
for
administrative
implementations such as valuation of
property, assessment and collection of taxes.
4. When allowed by the Constitution
*Tax power is limited to Territorial jurisdiction of the
State
The state cannot tax property wholly
and exclusively within the jurisdiction of
another state since it does not afford
protection on property beyond its territorial
boundaries for which a tax is supposed to
compensate.
The state has no power to impose
privilege tax on business transaction
undertaken abroad unless there is privity of
relationship between the taxing state and the
object of the tax.
The state can still exercise its taking
powers over its citizens outside its territory. It
is because the fundamental basis of the right to
tax is the capacity of the government to
provide benefits and protection to the object
of the tax.
*Taxation is Subject to International Comity
International Comity is the courteous
recognition, friendly agreement, interaction
and respect accorded by one nation to the laws
and institutions of another.
An example of International Comity
limitation on the power of taxation is the tax
exemption of properties used by diplomats or
head of states in the exercise of sovereign
powers and diplomatic functions.
*Government Entities are Generally Tax Exempt
Exemption from taxation is a grant of
immunity to particular persons or corporations
of a particular class from a tax which others
generally within the same taxing district are
obliged to pay.
Tax exemption applies only to
government entities through which the
government immediately and directly exercises
its governmental functions, like the Armed
Forces of The Philippines (AFP). However, if
the government entities are performing
proprietary functions such as Philippine
National Railway (PNR), they are generally
subject to tax in the absence of tax exemption
provisions in their charters or the law creating
them.
Certain Doctrines in Taxation
In the exercise of taxation power, some
underlying doctrines for its implementations
are as follows:
Prospectivity of Tax Laws
Imprescriptibility of taxes
Double Taxation
Escape from Taxation
Exemption from Taxation
Equitable Recoupment
Set-off Taxes
Taxpayer Suit
Compromises
Power to Destroy
Prospectivity of Tax Laws
This principle states that “a tax bill must
only be applicable and operative after
becoming a law”. Thus the effectivity of the tax
law commences upon its approval and its scope
would only cover the present and future
transactions.
Imprescriptibility of Taxes
This rule states that “otherwise provided
by the law itself, taxes in general are not
cancellable”
Double Taxation
This means “a sovereign act of taxing
twice for the same purpose in the same year
upon the same property or activity for the
same person, when should it be taxed once for
the same purpose and with same kind character
of tax”.
This may be classified as (a) Indirect
Duplicate Taxation, and (b) Direct Duplicate
Taxation.
Indirect Duplicate Taxation
Double Taxation in its broad sense. It
extends to all cases in which there is a burden
of two or more pecuniary impositions. It is
usually allowed as long as there is no violation
on the Constitution.
Direct Duplicate Taxation
-Double Taxation in its strict sense. It is
prohibited because it comprises an imposition
of the same tax on the same property for the
same purpose by the same state during the
same taxing period.
- This kind of double taxation violates
the constitutional provision of uniformity and
equal protection, as well as the principle that
tax must not be excessive, unreasonable and
inequitable. Such taxation should, whenever
and wherever possible, be avoided to prevent
injustice or unfairness.
Counteracting Indirect Double Taxation
The measures that are normally adopted
by sovereign taxing authorities to avoid
resulting inequalities of double taxation are the
following:
1. Tax Treaty
2. Application of Tax Credit
3. Application of Tax Exemptions
4. Application of Allowance for Deductions
such as vanishing deduction in Estate tax
Escape from Taxation
The ways by which a taxpayer could
escape tax burdens may be through Tax Evasion
and tax Avoidance.
“ A tax evader breaks the law (tax
evasion), the tax avoider sidesteps it (tax
avoidance).” The “doctrine of escape from
taxation” permits the taxpayer to minimize
payment of tax by lawful means.
Tax Evasion
The taxpayer uses unlawful means to
evade or lessen the payment of tax. This form
of tax dodging is prohibited and therefore
subject to civil or criminal penalties. Examples:
1. non-inclusion of sales
2. deliberate fabrication of expenses, and;
3. forming an artificial person to evade taxation
or to deliberately reduce taxable income
Tax Avoidance
The act of totally reducing or escaping
payment of taxes through legally permissible
means. Example:
1. Selling shares of stock through a stock
exchange to avail of the lower tax rates.
2. Estate planning within the means sanctioned
by the Tax Code has been held to be one of
permissible tax minimization
Forms of Tax Avoidance
•Shifting
•Capitalization
•Transformation; and
•Exemption
Shifting
This is the transfer of tax burden to
another .
Tax Avoidance
1. Forward Shifting
- the transfer of tax burden from the
producer to distributor until it finally reaches
the ultimate purchasers or consumers. Example:
(Tax is included in the final price of the product to be
paid by the customer, leading to price increase)
2. Backward Shifting
- the reverse of forward shifting. For
example, the manufacturer has agreed to buy
the supplier’s product only if the price is reduced
by the amount of the tax, thus allowing the
price increase.
3. Onward Shifting
-tax burden is shifted twice or more either
forward or backward.
Capitalization
-This is backward shifting of tax burden
whereby the tax on the selling price of the
property, which is supposed to be paid by the
buyer, is capitalized on the seller at the time of
purchase by deducting the same by the total
selling price. The taxes are shifted to the seller,
thus reducing the actual sales price by the
amount of the related tax.
Transformation
-The producer absorbs the payment of tax
to reduce prices and to maintain market share.
He recovers his additional tax expense by
improving the process of production. The tax,
therefore, is transformed into a gain through a
medium of production.
Exemption from Taxation
This denotes a grant of express or
implied immunity, to a particular person,
corporations or to persons, corporations, of a
particular class, from a tax upon property or an
exercise which persons and corporations
generally within the same taxing district are
obliged to pay.
Tax exemptions are generally granted on
the basis of (a) reciprocity, (b) public policy
and, (c) contracts
Tax exemptions are governed by the
following principles:
1. They are not presumed
2. When granted, they are strictly construed
against taxpayer.
3. They are highly disfavored and may almost be
said “to be directly contrary to the intention of
tax laws.”
Classification of Tax Exemption
Tax exemption may be classified as
follows:
1. Expressed Exemption
- This tax exemptions are statutory laws in
nature as provided by the constitution, statute,
treaties, ordinances, franchises or similar
legislative acts.
Example of tax statutory tax exemptions
are:
a) Inter-corporate dividends by a domestic
corporation from another domestic
corporation;
b) Section 105 of the Tariff and Customs Code
c) Section 234 of the Local Government Code,
and;
d) Other special Laws such as Omnibus
Investment Code of 1987, Philippine Overseas
Shipping Act
2. Implied Exemption by Omissions
- This occur when tax is imposed on a
certain class of persons, properties or
transactions without mentioning other classes;
those not mentioned are considered exempted
by omission.
3. Contractual Exemption
-Contractual Exemption are those
lawfully entered into by the government
contracts under existing laws.
Tax exemption by the Government
The state in its exercise of sovereignty,
does not tax itself or any of its political
subdivisions. However, the state may tax any of
its
government-owned
or
controlled
corporations exercising proprietary functions.
Therefore,
agencies
performing
governmental functions are exempt from tax
unless expressly taxed, while those performing
proprietary functions are subject to tax unless
expressly exempted.
Equitable Recoupment
This doctrine of law states that “a tax
claimed for refund, which is prevented by
prescription may be allowed to be used as
payment for unsettled tax liabilities if both
taxes arise from the same transaction in which
overpayment and underpayment is due.
The Supreme Court, however, rejected
the doctrine because such doctrine may lead to
the non-observance of the prescriptive periods
set by the law.
Set-Off Taxes
This doctrine states that taxes are not
subject to set-off or legal compensation
because the government and the taxpayer are
not mutual creditor and debtor to each other.
A person cannot refuse to pay tax on the
basis that the government owes him an
amount equal to or greater than the tax being
collected. The collection of a tax cannot await
the results of a lawsuit against the government.
Exemptions to this rule are the ff.:
1. Where both the claims of the government
and the taxpayer against each other have already
become due, demandable and fully liquidated.
2. When there is an actual compromise between
the taxpayer and the tax officer
Tax Payer Suit
A taxpayer suit is effected through court
proceedings and could only be allowed if the
act involves a direct illegal disbursement of
public funds derived from taxation.
Compromises
This doctrine provides that compromises
are generally allowed and enforceable when the
subject matter thereof is not prohibited from
being compromised and the person entering
such compromise is duly authorized to do so.
The Law allows the following persons to
compromise in behalf of the government:
1. Only the BIR Commissioner is expressly
authorized by the tax code to enter into
compromise for both civil and criminal
liabilities, subject to certain conditions.
2. The Collector of Customs is given the power
to compromise with respect to customs duties
limited to cases where legitimate authority is
specifically granted, such as in the remission of
duties;
3. The Customs Commissioner, subject to
approval by the Secretary for Finance, has the
power to compromise cases involving the
imposition of fines, surcharges and forfeitures;
4. The Local government Code has no provision
regarding compromise; however, tax liability
(no criminal liability) is not prohibited from
being compromised. Even so, there is no
specific authority given to any public official to
execute the compromise so as to render it
effective.
Power to Destroy
A Power To Destroy
-The Power of Taxation is sometimes
viewed as the power to destroy in the sense that
a lawful tax cannot be defeated just because its
exercise would be destructive or would bring
about insolvency to a taxpayer.
-The Principle implies that “an imposition
of a lawful regulatory taxes and would be
destructive to the taxpayers and business
establishments because the government can
compel payment of tax and forfeiture of
property through the exercise police power.”
A Power To Build
- On the final analysis of the tax power, it
is said that it creates, builds and sustains the
upliftment of the social condition of the people
in general as it continuously supports the other
inherent powers (police power and eminent
domain) of the state which preserve the
fundamental rights of the people.
-Therefore, so long as the tax is exercised
with caution to minimize injury to the
proprietary rights of a taxpayer and does not
violate any constitutional and inherent
limitations, it is valid and cannot be judicially
restrained merely because of its prejudicial
effects to a particular taxpayer.
Situs of Taxation
-Situs of Taxation refers to the place of
taxation, or the state or political unit which has
jurisdiction to impose tax over its inhabitants. It
is the application of the principle of territorial
jurisdiction which limits the exercise of tax
power in defining the objects of taxation. It
defines boundaries of the taxing power over the
objects of taxation in terms of location whether
or not they shall be subject to tax.
The following factors are determinants
to the situs of taxation:
•Nature, kind or classification of the tax
being imposed;
•Subject matter of the tax (person, property
rights or activity);
•Source of the income being taxed;
•Place of the exercise, privilege, business or
occupation being taxed;
•Citizenship of the Taxpayer; and
•Residence of the Taxpayer
APPLICATION OF THE SITUS OF
TAXATION
OBJECT OR SUBJECT
OF TAXATION
Persons
SITUS OF TAXATION
Residence
Taxpayer
of
the
Income
Place where the income
is earned or residence or
citizenship
of
the
taxpayer
As a general rule,
Sovereign States retain
jurisdiction
over
wherever they may be
Place where occupation
is pursued
Note: This general rule
is applicable if the law is
Occupation or Privilege silent as to the criterion
(nationality
or
residence) of tax situs
for
occupation
or
privilege taxes.
Community
Residence or Domicile
of the person being
taxed
Place where the act is
Transaction or Activity
done or activity takes
(Sales)
place
Business
Place where the business
is conducted regardless
of the residence of the
owner or the location of
the property used in
business
Place of residence or
Gratuitous Transfer of citizenship of the
taxpayer
or
the
Property
location of property
Franchise
State which granted
the rights
Real Property
Personal Tangible
property
Place
where
the
property is located
whether the owner is a
resident
or
nonresident alien
Place
where
the
property is located
regardless
of
the
residence of the owner
Personal Intangible
Property
Residence of the owner,
unless the property has
acquired a business situs
in another jurisdiction
Note: shares of stock in
a domestic corporation
owned by non-resident
foreigners are taxable in
the Philippines because
of the protection and
benefit afforded by the
Philippine Government
Corporation and
Other Juridical
Entities
It shall depend on the
law of incorporation,
except state tax.
Meaning and Characteristics of a Tax
Taxes are defined as “the enforced
proportional contributions from persons and
property levied by the law-making body of the
state by virtue of its sovereignty for the
support of the government”.
They are characterized as follows:
•It is an enforced contribution
•It is generally payable in the form of
money
•It is proportionate in character
•It is levied on person or property
•It is levied by the state which has the
jurisdiction over the person or property.
•It is levied by the law-making body of the
state.
•It is levied for public purposes
Classification of taxes
* According to Subject
1. Personal, Poll or Capitalization
2. Property Tax
3. Excise Tax
* According to Purpose
1. General Fiscal or Revenue
2. Specific or Regulatory
* According to Scope
1. National
2. Municipal or Local
* According to Determination of Amount
1. Specific
2. Ad Valorem
* According to its Effect to taxpayer
1. Direct
2. Indirect
* According to Graduation Rate
1. Proportional
2. Progressive or Graduated
3. Regressive
Distinction of Taxes from Other Related Items
1. Revenue
- refers to all funds or income derived
from the government, whether it comes from
tax or any other source. It also refers to the
amount collected, while tax refers to the
amount imposed.
2. Internal Revenue
-refers to taxes imposed by the legislature
to duties on imports and exports.
3. Custom Duties (Duties)
- taxes imposed on goods exported from
a country or imported into a country.
4. Tariff
•The book of rates which is usually drawn in
alphabetical order. It contains names of several
lands of merchandise together with their
corresponding payments.
•The duties payable on good imported or exported.
•A system or principle of imposing duties on the
importation or exportation of goods
5. Debt
-A tax is not a debt. Below are the
distinguished feature of a tax and a debt
•A debt is generally based on contract, while a tax
is based on laws.
•A debt is assignable, while a tax cannot be assigned.
•A debt may be paid in kind, while a tax is generally
payable in money.
•A debt may be the subject or set off, or
compensation, while a tax is generally not.
•A person cannot be imprisoned for non-payment
of debt, while imprisonment is a sanction for nonpayment of tax (except poll tax)
6. Toll
- it is a sum of money for the use of
something, generally applied to consideration
that is paid for the use of roads, bridges or of
public purposes.
•A toll is demanded based on ownership, while a
taxis demanded based on the sovereignty; and
•A toll may be imposed by a private individual or
entity or government, while a tax may be imposed
only by the state.
7. License or permit fee
- it is a charge imposed under the police
power for the purpose of regulation.
•License Fee is imposed for regulation, while a tax
is levied for revenue.
•It involves an exercise of police power, while a tax
involves the exercise of the taxing power
•Its amount is usually limited to the necessary
expense or regulation, while there is generally no
limit on the amount of tax that may be imposed.
8. Penalty
-is any sanction imposed as a punishment
for violation of law or acts injurious. Thus the
violation of tax may give rise to imposition of
penalty.
•A penalty is designed to regulate conduct, while
tax is primarily aimed at raising revenue, and;
•A penalty may be imposed by either the
government or private entities, while a tax may be
imposed only by the government.
How to Compute Income Tax in the
Philippines (Single Proprietorship)
-Taxable corporations may be taxed using
a fixed income tax rate. On the other hand, if
you are a self-employed professional or an
owner of a single proprietorship business, your
income tax expense is computed using a
graduated tax rate.
It is a progressive tax which the tax rate
increases as the taxable base amount increases.
This means that the higher taxable income you
have, the higher your income tax expense is. The
following are the requirements, instructions and
procedures to compute and file your income tax
return.
Computation of Income Tax Due and Payable
The following are simple steps to calculate your
income tax payable:
1. Compute your taxable Compensation Income
(positive) or excess of Deductions over Taxable
Compensation Income (negative).
Here is how you will compute it:
a.) Determine your Gross Taxable Compensation
Income. This is the income you earn from your
employer during the taxable year. If you are earning
purely from your business or you are not employed,
then you can leave it blank.
b.) Determine your premium paid on Health and or
Hospitalization, which should not exceed Php
2,400 per year. If none, then leave it blank.
c.) Determine your Personal and Additional
Exemptions as follows:
*Personal exemption (Definition)
An amount excluded from taxable income,
given to any taxpayer who cannot be claimed
as a dependent by another taxpayer.
Personal Exemptions:
For single individual or married individual
judicially decreed as legally separated with no
qualified dependents…………………P 50,000.00
For head of family…………….……P 50,000.00
For each married individual *………P 50,000.00
Note: In case of married individuals where only
one of the spouses is deriving gross income,
only such spouse will be allowed to claim the
personal exemption.
Additional Exemptions:
For each qualified dependent, a P25,000
additional exemption can be claimed but only
up to 4 qualified dependents
How Can You Claim this additional Exemption?
The husband who is deemed the head of the family
unless he explicitly waives his right in favor of his wife
The spouse who has custody of the child or children
in case of legally separated spouses. Provided, that the
total amount of additional exemptions that may be
claimed by both shall not exceed the maximum
additional exemptions allowed by the Tax Code.
The individuals considered as Head of the Family
supporting a qualified dependent
d.) Add the amounts in (b) and (c), then
deduct the total from the amount in (a) to
arrive at your taxable Compensation Income
(positive) or excess of Deductions over Taxable
Compensation Income (negative).
2. Compute your gross taxable business or
professional income.
Here is how you will compute it:
a.) Determine your sales, receipts or revenues for the
taxable year.
b.) Determine your cost of sales or cost of services.
c.) (a) minus (b) will simply give you your gross
taxable or professional income.
3. Compute your total taxable business or
professional income by simply adding result in (2)
and your other taxable income.
4. Compute your Net Income. Your Net Income is
equal to result in (3) minus your allowable
deductions.
Your allowable deductions can be either:
a.) Optional Standard Deduction – an amount not
exceeding 40% of the net sales for individuals and
gross income for corporations; or
b.) Itemized
following:
•Expenses
Deductions
which
include
•Interest
the
•Charitable Contributions
•Taxes
and Other Contributions
•Losses
•Bad Debts
•Research and Development
•Depreciation
•Pension Trust
•Depletion of Oil and Gas Wells
and Mines
5. Compute you total taxable income by adding
the result in #4 (Net Income) to the result in #1
(taxable Compensation Income or excess of
Deductions
over
Taxable
Compensation
Income). If the result is negative or it becomes a
loss, then you will not have a tax due for the
taxable year, otherwise, continue to the next
step.
6. Compute your Income Tax Due. This is also
your income tax expense incurred during the
taxable year.
Calculate your tax due for the taxable year using
the following tax rate table:
7. Compute your Income Tax Payable. This is the
tax you are still liable at the end of the year. To
calculate your income tax payable, deduct your
income tax due with the following tax
credit/payments, if available
-Prior Years’ Excess Credits
-Tax Payments for the First Three Quarter
-Creditable Tax Withheld for the First Three
Quarters
-Creditable Tax Withheld Per BIR Form No.
2307 for the 4th Qtr.
-Tax Withheld Per BIR Form No. 2316
-Foreign Tax Credits
-Tax Paid in Return Previously Filed, if you
have already file and this is your Amended
Return
-Other Payments made
8.
Compute
your
Total
Payable.
If
unfortunately, you fail to pay your income tax
on or before the due date, the following
penalties will be imposed and will be added to
your total amount payable.
1. A surcharge of twenty five percent (25%) for
each of the following violations:
a) Failure to file any return and pay the amount of
tax or installment due on or before the due dates;
b) Filing a return with a person or office other
than those with whom it is required to be filed;
c) Failure to pay the full or part of the amount of
tax shown on the return, or the full amount of tax
due for which no return is required to be filed, on
or before the due date;
d) Failure to pay the deficiency tax within the
time prescribed for its payment in the notice
of Assessment (Delinquency Surcharge).
2. A surcharge of fifty percent (50%) of the tax or of
the deficiency tax, in case any payment has been
made on the basis of such return before the
discovery of the falsity or fraud, for each of the
following violations:
a) Willful neglect to file the return within the
period prescribed by the Code or by rules and
regulations; or
b) In case a false or fraudulent return is willfully
made.
3. Interest at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed by
rules and regulations, on any unpaid amount of tax,
from the date prescribed for the payment.
To God Be
The
Glory!!!!!!