I.
TAXATION
A. Meaning, Nature and Importance of Taxation: Overview
1) Overview:
a) A TAX LAW:
a. This is a body of rules passed by the legislature by virtue of which the government acquires a claim or property
as a matter of legal duty or obligation by operation of law.
b) There are various ways for the government to generate funds.
a. The government can borrow funds from local and international banks, sells public lands and other government
properties, and invests in corporations.
b. But collecting taxes generate most of the country’s revenues.
c) One of the government’s primary duties is to provide for the basic needs of its citizens through social services.
a. But the government needs to have enough funds to cover the expenses for these services.
b. The constitution mandates the government to collect fees from individuals who earn income or who own
properties or businesses (taxation).
d) Taxation undergoes two stages:
a. First: act of levying or imposing of the tax by the legislature
b. Second: collection of the tax that includes the enforcement of sanction for tax evasion.
2) Nature of tax
a) Tax is an “onus”, a Latin term for burden or obligation
b) Not to be confused with taxation
c) A tax is a fee, which is a percentage of income, property value, or transactions, to support the government in its expenses
and services.
3) Meaning of Taxation
a) A system of raising and collecting money to finance government expenses and services.
b) This is the power of the sovereign to impose burden or charges upon persons, property or property rights for the use and
support of government in order to enable it to discharge its function.
a. Since governments have been established to promote and protect the general welfare, it is necessary that
government should be provided with the means.
c) It is the power vested upon the legislature for the purpose of raising revenues to finance government expenditures and for
the general welfare and protection of its citizens.
a. It is only the legislature can make tax laws.
d) Taxation is the method of apportioning the cost of government among those who in some measure are privileged to enjoy
its benefits and must therefore, bear its burden.
e) It also regulates the flow of income in our economic system.
a. When there is too much money in the system, the government withdraws some of this money to check inflation.
4) The Basis of Taxation
a) The power of taxation originated from the theory that the existence of a government is a necessity.
a. No government, whether democratic or despotic, can exist without resources to finance its operations.
b. A true tax is an exaction for revenue that is for the support of the government.
b) It is found in the reciprocal duties of protection and support between the state and those that are subject to its authority.
a. In return of their contribution, taxpayer enjoys services and protection from the government.
5) Purpose of Taxation
a) The primary purpose of taxation is to raise revenues for public needs so that people may be enabled to live in a civilized
society.
b) It may be increased in order to stabilize prices and stimulate greater production
a. Taxes on imports may be increased to favor domestic production; or decreased to encourage foreign trade
b. It can also mobilize capital to be poured into capital deficient fields of business.
c) Taxation is an instrument of fiscal policy, and fiscal policy influences the direction and structure of money supply, prices
and of the national economy.
6) Objects of taxation
a) Individuals who earn a considerable amount of income as a worker, a businessman in partnerships or corporations,
including those who inherited a property or were given a gift or donation of a considerable value
b) Tangible or intangible properties
a. Movable personal properties: vehicles, furnitures, patents, ownership titles, real properties
b. Immovable personal properties: real estates that include the land, buildings, and houses
c) Transactions, consumptions interests, imports and exports; privileges
7) Places of Taxation
a) Income tax
a. Paid either in the place where income is earned or the place of residence of the taxpayer.
b. E.g. Ms. L resides in Quezon City and works in Makati. She may choose to pay her income tax in either of these
two places
b) Real Property tax
a. This is paid where the property is situated
c) Personal Property tax
a. Taxes on tangible properties are paid in the place where the property is located
b. Taxes of intangible properties (immovable) is the owner’s domicile
i. This refers to the place of permanent residence of the owner
c. To illustrate:
i. Mr. X has shares of stock evidenced by certificates of stock in ABS Corporation located in Makati City
for instance.
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ii.
iii.
d)
He resides in Manila but his provincial address is in Dagupan City, Pangasinan.
His domicile is in Dagupan City and this is where Mr. X must file his tax return for his certificates of
stocks.
Business and Occupation taxes
a. This is paid in the place where the business or occupation is located.
b. To illustrate:
i. Ms. S resides in Caloocan City and has a beauty parlor in Manila.
ii. She must pay her business tax in Manila.
8) Avoiding Taxation (non-payment and escape from taxation)
a) Shifting
a. This is the passing on of the tax burden from one person to another
b. E.g.
i. The 12% EVAT imposed on businessman, for certain items, and professionals, for their services, are
usually passed on to their customers and clients.
b) Capitalization
a. Done by reducing the price of a taxable product or service to lower the tax that will be imposed on its
consumption
b. E.g.
i. A salesman would offer a lower price for a real property in order to lower the real property/ real
estate tax.
c) Tax Avoidance (tax minimization)
a. Refers to the availing by the taxpayer of legally allowable means in reducing or minimizing the tax due on certain
properties, and services.
b. E.g.
i. An owner of commercial lands convert his properties into a corporation with his children as
incorporators
ii. This is done in anticipation of a much higher estate tax to be imposed upon his heirs.
d) Tax Evasion (tax dodging)
a. Refers to the use by the taxpayer of illegal means in escaping, defeating or lessening the tax due.
b. This implies malice, fraud, or bad faith on the part of the taxpayer.
c. E.g.
i. Taxpayer deliberately does not declare his taxable items or who does not pay taxes at all.
e) Tax Exemption
a. The bestowal of immunity by the taxing authority on a taxpayer from the obligation of tax payment
b. E.g.
i. Winning in the lottery is tax exempt.
f) Transformation
a. This is effected through the process of production.
b. When the producer pays the taxes himself and recovers the additional expenses by improving his production
thereby turning out units of his production at lower cost.
B.
Basic Principles and Classification of Taxes:
1) Basic Principles of a Sound Tax System
a) Fiscal Adequacy
a. Taxes collected by the BIR must be sufficient enough to fund the necessary government expenditures and basic
services in a given fiscal year.
i. Emphasizes that the source of revenue, as a whole, must be sufficient to meet the expanding
governmental expenses regardless of business conditions, export taxes, trade balances, and problems
of economic adjustments.
b. Revenues must be capable of adjusting to variations in public expenditures.
b)
Equality or Theoretical Justice
a. Refers to the “ability-to-pay” principle.
i. This refers to the use of revenues which must be believed based on the taxpayer’s ability to pay.
b. Tax burden must be in proportion to the tax-payer’s level of income.
i. People who earn more should be taxed at a much higher rate than those who earn less
c)
Administrative Feasibility
a. Payment of taxes must be effective, convenient, accessible, and tax-payer friendly.
i. This means that the tax system must be clear to the taxpayers, can be enforced and is convenient and
not burdensome or discouraging to a business activity.
b. Tax laws must be capable of simple, just, and effective administration.
2) Inherent Powers of the Government
a) Police Power
a. Authority of the government to regulate the activities of an individual even in the absence of lawfor the benefit
and protection of public welfare.
b) Taxation
a. Authority of the government to impose taxes, charges and fees from its taxpayers under its sovereignty and
territorial jurisdiction, to support its necessary expenses.
b. A tax may be defined then, as a forced and involuntary burden assessed in accordance with some reasonable
rule of appointment by the authority of a sovereign government upon the persons or properties within its
jurisdiction, to provide public revenues for the support of the government.
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i.
c)
It proceeds upon the theory that the existence of the government is a necessity, that it cannot
continue to operate without the means to pay for its expenses, and for those means has the right to
compel all citizens and properties within its limit to contribute.
Eminent Domain
a. Authority of the government to expropriate private property for public use upon payment of a just
compensation.
3) Essential Characteristics of Taxes:
a) It is an enforced contribution
b) It is exacted pursuant to legislative
authority
c) It is contribution in money
d)
e)
f)
g)
It is levied upon person, property and
property rights
It is for the purpose of raising revenue
It must be for public purpose
It must be proportionate in character
4) Classification of Taxes according to Authority imposing the tax
a) National Taxes
a. These are taxes imposed by the national government under the National Internal Revenue Code and other laws
particularly the Tariff and Custom Code.
b) Local Taxes
a. These are taxes imposed by the local government to meet particular needs under the Local Government Code,
such as real property tax and the Community Tax.
5) Forms of Taxes according to Subject
a) Direct Taxes
a. Form of tax paid directly by the individual or corporations directly to the government.
b. E.g. Income Tax
b)
Indirect Taxes
a. These are taxes imposed on a particular article or transaction which are paid by others than those from whom
the tax collector receives payment.
b. Paid indirectly by an individual to the government through intermediaries such as goods and services.
c. E.g. Value-Added Tax (VAT)
6) Taxes according to Object
a) Personal or Poll Tax
a. A fixed amount imposed on individuals residing within a specified territory, regardless of their property,
occupation, and business
b. Imposed on individuals within the jurisdiction of the taxing power, without regard to the amount of their
property or occupation in which they are engaged
c. E.g. Community or Residence Tax (Cedula)
b)
c)
Property Tax
a. Tax levied on the assess value of land and permanently attached improvements owned by individuals or
corporations.
b. Computed upon the valuation of property and assessed at the owner’s domicile, although privileges may be
included in the valuations.
c. This is imposed by municipalities or cities to individuals whose properties are within its jurisdiction
i. E.g.: Real Estate Tax
Excise Tax
a. Imposed directly by the legislature and the sum is measured by the amount of business done or the extent to
which the privilege has been enjoyed or exercised.
b. This tax is on the manufacture, sale or use of goods or services levied by local, state, or national governments.
c. But the tax party usually adds the amount of the tax to the price of the goods and services, making the buyer the
real taxpayer.
d. Excise taxes include fees paid for business licenses.
e. Most excise tax revenue comes from the sale of tobacco, alcohol and gasoline.
7) Taxes according to purpose
a) Fiscal Taxes:
a. Designed to raise revenue for governmental needs.
b. Percentage tax on locally manufactured commodities
b) Regulatory taxes:
a. Designed to achieve some social and economic goals irrespective of whether revenue is actually raised or not.
b. E.g., protective tariff or custom duties
8) Taxes according to determination of amount
a) Specific tax
a. Fixed amount by the member, or by some standards of weight and measurement, and requires no assessment
other than a listing or classification of the subjects to be taxed.
b. E.g., excise taxes on wines and liquors
b) Ad Valorem Tax
a. Fixed proportion of the value of the property with respect to which the taxes are assessed, and require the
intervention of assessors to appraise the value of such property before the amount due from each taxpayer can
be determined.
b. E.g., real estate tax, excise tax on cigars and cigarettes
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9) Taxes according to rate:
a) Proportional tax
a. Based on a fix percentage regardless of the amount of income, property or other bases to be taxed, a single rate
being applied to different objects with different values
b) Progressive tax
a. The tax rate increases as the tax base increases
b. E.g., income tax
c) Regressive tax
a. Effective rate decreases as the base increases
b. E.g., value-added tax
10) Other taxes:
a) Income Tax
a. This kind of tax is derived from the individuals, corporate, estates, and trusts income
b. Tax on the net income or the entire income received in one taxable year.
b) Inheritance Tax
a. Paid on property passed on from a deceased person to those who are to inherit it.
b. The term may be applied on two different taxes:
i. Estate Taxes: a tax on the property before it is divided
ii. Inheritance Tax: a tax given to the heirs
c) Estate Tax
a. Tax on the right of the deceased person to transmit his estate to lawful heirs and beneficiaries at the time of
death and on certain transfer, which are made by law as equivalent to testamentary disposition.
d) Donor’s Tax
a. A tax levied on donation or gift and is imposed on the gratuitous transfer of property between two or more
persons who are living at the time of the transfer.
e) Capital Gains Tax
a. Tax imposed on income from sale of capital assets, which includes stocks, bonds, real estate, and partnership.
f) Documentary Stamp Tax
a. Tax imposed on documents, instruments, loan agreements and papers evidencing the acceptance, assignment,
sale or transfer of an obligation.
b. Such documents are:
i. Debentures and certificate of indebtedness
ii. Original issue of shares of stocks
iii. Sales contracts or agreements
iv. Bonds, loans agreements, promissory notes and bills of exchange
v. Insurance policies
vi. Powers of attorney
vii. Leases, mortgages, and pledges
11)
a)
b)
c)
12)
a)
b)
c)
d)
e)
f)
Examples of Indirect Taxes
Value-added Tax (Consumption Tax)
a. Tax imposed by the government at each stage in the production of a good or service.
i. The tax is paid by every company that handles a product during its transformation from raw materials
to finished goods.
ii. The amount of the tax is determined by the amount that a company adds to the materials and services
it buys from other firms.
iii. Most firms that pay value-added tax try to pay this expense on to the next buyer.
b. As a result, most of the burden of this tax in time falls on the consumer. In this sense, the final effect is equal to
that of a retail sales tax.
Sales Tax
a. Tax levied on the sale of goods and services. The tax is a certain percentage of the sale.
Percentage Tax
a. It is a business tax imposed on persons or entities that sell or lease goods, properties or services in the course of
trade or business whose gross annual sales or receipts do not exceed P550, 000 and are not VAT registered.
Some Fees, Charges, and Burdens Collected by the Bureau of Customs
Harbor Fee
a. The amount which the owner, agent, operator or master of a vessel has to pay for each entrance into or
departure from a port of entry in the Philippines.
Wharfage Due
a. The amount assessed against the cargo of a vessel engaged in the foreign trade, based on the quantity, weight or
measure received and/ or discharged by such vessel.
Berthing Charge
a. The amount assessed against a vessel for anchoring at a pier or any port in the Philippines
Storage Charge
a. The amount assessed on articles for storage in customs premises, cargo shed and warehouses of the
government.
Arrastre Charge
a. The amount which the owner of the article or baggage has to pay for the handling, receiving and custody of the
imported or exported article
Tonnage Due
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a.
13)
a)
b)
c)
C.
Amount paid by the owner of a vessel engaged in foreign trade coming to the Philippines from a foreign port or
going to a foreign port from the Philippines based on the net tonnage of the vessel or weight of the articles
discharged.
Double Taxation
Refers to an instance when an income, a property, or a transaction was imposed with 2 or more taxes by a taxing authority
in the same year.
a. This happens when 2 or more countries are claiming to have a taxing authority over an object of taxation.
b. This is possible when the countries imposing taxes are using different tax bases.
c. E.g.
i. When a foreigner conducts his business in the Philippines, our country will charge taxes on him using
its territorial jurisdictions.
ii. The foreigner’s home country will also collect taxes from him based on its residential jurisdictions.
Direct duplicate
a. Occurs when an object of taxation was levied with 2 or more taxes from a single tax basis.
b. E.g.
i. XYZ Corporation is composed of 5 stockholders: John, Eman, Thalia, Gema, and Imelda.
ii. The income earned by the Corporation is divided among the stockholders in accordance with their
respective shares of stock.
iii. XYZ Corporation has to pay income tax on its income & the 5 stockholders have also to pay dividend
tax for their respective shares or dividends from the corporation’s profit.
iv. Hence, the same income is taxed twice.
Indirect duplicate
a. Refers to taxes that are paid by the same individual or corporation based on two or more different taxing bases.
b. E.g.
i. An imported good like a canned corned beef was charged with import tax.
ii. When it was already in the market for consumptions, the canned good will also be charged with ValueAdded Tax (VAT).
Limitations on the Power of Taxation
1) Limitations on the Power of Taxation
a) Constitutional Limitation
a. Those expressly found in the constitution or implied from its provisions
b. These limitations are more subject to change when a new constitution is introduced in the country.
c. To date, the constitutional limitations of taxation in the country are based on the 1987 constitution.
b) Inherent Limitation
a. Those which restrict the power although they are not embodied in the constitution
b. These are specific limitations that are not affected by changes in the provisions of the constitutions.
2) Constitutional Limitations
a) Requirement of Due Process of Law
a. Article III, Section 14.1 of the Constitution says, “no person shall be deprived of life, liberty or property without
due process of law”
b. This may be applied to a taxpayer accused of tax evasion.
i. Before the person is penalized for the act, he must first be accorded his right to due process of law.
ii. A taxpayer may not be deprived of his property because of non-payment of taxes without giving notice
to him as required by law of his tax liability.
b) Requirement of Equal Protection of the Laws
a. Not to treat the persons differently because of who he is or what he possesses
b. Prohibits class regulation that discriminates against some and favors other.
c) Requirement of Uniformity and Equity in Taxation
a. A tax is uniform when it operates with the same force and effect and in every place where the subject of it is
found.
b. Not all persons, properties, or transactions are identical or similarly situated.
i. This means that all taxable articles or properties of the same class shall be taxed at the same rate.
ii. The classification of the subjects of taxation must be based on reasonable and substantial grounds.
d) Prohibition Against Impairment of Obligation of Contracts
a. There is impairment of obligation of contracts “when a right is taken or when a person is deprived of the means
for enforcing such right.”
b. Another e.g.: when a tax exemption based on a contract entered into by the government is revoked by the latter
through a later taxing statute.
e) Prohibition Against Imprisonment for Non-Payment of Poll Tax
a. A poll tax can be understood as the cedula tax or residence certificate tax.
i. A poll tax maybe understood as a tax, the payment of which is made a requirement for the exercise of
the right of suffrage.
b. The imposition of poll tax in this sense is prohibited by Article V Sec. 1, which disallows “literacy, property or
other substantive requirement” for the exercise of suffrage.
c. Individuals are not required to pay community tax, unless needed for job applications or other purposes.
f) Prohibition Against Infringement of Religious Freedom
a. The prohibition proceeds from the provision of the constitution that “no law shall be made respecting an
establishment of religion, or prohibiting the free exercise thereof.
b. The free exercise and enjoyment of religious profession and worship, without discrimination shall forever be
allowed.
g) Prohibition Against Appropriation for Religious Purpose
5
a.
h)
i)
No public money shall be applied except when such priest is assigned to the armed forces, any penal institution,
government orphanage or leprosarium.
Prohibition Against Taxation Religious Institution, Charitable Institution, Non-profit and Non-stock Educational
Institutions and Non-profit Cemeteries
a. There must be a proof of the actual and direct use of lands, buildings, and improvements for religious, charitable
(or educational) purposes to be exempt from taxation (Real Property Tax)
Requirement of Concurrence by a Majority of All Members of Congress for the Passage of Law Granting Tax Exemption
a. No law granting any tax exemption shall be passed wihout the concurrence of a majority of all the members of
the Congress.
3) Inherent Limitations of the Power of Taxation
a) Requirement that Levy (tax revenues) must be for Public Purposes
a. It includes any use that is of utility, advantage, or productivity for the benefit of the public generally.
b. Revenues collected from the people must be returned to them in the form of security, peace and order
maintenance, social economic welfare, such as the construction of state-owned hospitals, learning institutions,
roads and bridges.
b)
Limitation of Double Taxation
a. Double taxation may be understood as direct duplicate taxation which means taxing twice by the same public
authority for the same purpose during the taxing period.
c)
Prohibition Against Delegation of Taxing Power
a. 1987 Constitution delegates to local government units (LGUs) the power to tax subject to such limitations as may
be provided by the Congress
b. The power to impose tax is purely legislative; Congress cannot delegate the power to others
c. This is because of the doctrine of separation of powers.
i. It means that each branch must exercise its powers without intruding into the exercise of the powers
of the other branches, for they are also independent.
d. The constitution provides that sovereignty resides in the people and all government authority resides in the
people and all government authority emanates from them.
i. Under a republican form of government, the people created a legislative department for the exercise
of their legislative power manner in which those rules shall be given effect.
ii. The power cannot be delegated to the President and to the local government.
iii. However, it may be delegated to the municipal corporations which are the instrumentalities of the
state for the better administration of the government in matters of local concerns.
d)
Prohibition Against Taxation of Government Entities
a. The general rule is that agencies and instrumentalities of the government are exempted from taxation.
i. So, properties owned by the Philippine government, any province, city, municipality, or municipal
districts are exempted from taxation.
b. The government obtains its revenue from taxing the people
i. Taxing the government itself will not generate income that is why it is exempted from taxation
c. The government may be taxed if it derives profit in the exercise of its proprietary capacity and not when the
revenues were gained from the exercise of governmental responsibility
i. E.g. LTO cannot be taxed for the funds it receives from registrations and renewal fees
ii. The government acts in its proprietary capacity when it functions for profit.
1. The National Power Corporation (NAPOCOR) is a government-owned and controlled
corporation engaged in the business of power generation from natural resources and selling
such electric power to the different power providers
2. SSS which invests the funds it receives from employees and emloyers
3. The government agencies performing proprietary functions like the Land Bank of the
Philippines (LBP) or Philippine National Railways (PNR), are generally subject to tax, except
when exempted in their charters or the law creating them.
d. Likewise, all tax exemptions enjoyed by government-owned or controlled corporations (GOCCs) had been
abolished.
e)
Limitation of International Comity
a. The property of a foreign state may not be taxed by another.
b. Foreign diplomats are also exempted from taxation
i. This principle is based on the sovereign equality among states under international law that foreign
government may not be sued without its consent so that it is useless to assess the tax, since it cannot
be collected anyway.
f)
Limitation of Territorial Jurisdiction
a. Tax laws do not operate beyond a country’s jurisdictional limits
i. Sovereignty of a state extends only as far as its territorial jurisdiction
b. Property which is wholly and exclusively within the jurisdiction of another state, receives none of the protection
in return for which a tax is supposed to be imposed.
c. A person, outside the state, may be taxed where there is relation between him and the taxing state.
d. In movable property taxation, the rule is: “Mobilia Sequntur Personan” which means movables follow the law
person.”
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D.
LOCAL TAXATION
1) Local government units (LGU) such as provinces, municipalities, cities and barangays can exercise the power of taxation.
2) Local tax may be valid only for public purposes.
a) Local funds shall be devoted exclusively to local purposes.
3) LEGAL BASIS FOR LOCAL POWER OF TAXATION:
a) RA 7160 (Local Government Code of 1991)
b) LGUs have authority:
a. To impose taxes, fees and charges on persons engaged in any occupation or business or exercising privileges in
their respective jurisdiction.
4) PROHIBITED IMPOSITION
a) Income tax, except on banks and other financial institutions
b) Documentary stamp tax
c) Taxes on estates, inheritances, gifts, legacies and other acquisitions by mortis causa
d) Custom duties, registration fees of vessels and warfage, except when it is operated and maintained by LGUs concerned
e) Taxes, fees and charges and other imposition on goods carried into or out of, or passing through, the territorial jurisdiction
of LGUs
f) Taxes, fees or charges on agricultural and aquatic products then sold by marginal farmers or fisherman
g) Taxes on business enterprises certified to by the Bureau of Investment as pioneer or non-pioneer for a period of 6 to 4
years respectively, from the date of legislation
h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes on petroleum
products.
i)
Percentage of value-added tax on sales, barters, or exchange of goods and services
j)
Taxes on gross receipts of transportation contractor and persons engaged in transportation of passengers and freight
k) Taxes on premiums paid by way of reinsurance or retrocession
l)
Taxes, fees or charges for the registration of motor vehicles, except tricycles, and issuance of all licenses or permits
m) Taxes, fees or charges on Philippine products actually exported
n) Taxes, fees or charges on countryside and barangay business enterprise and cooperatives duly registered
o) Taxes, fees or charges of any kind of the national government, its agencies and instrumentalities and LGUs
5) KINDS OF LOCAL TAXES
a) REAL PROPERTY TAX
a. Collection of taxes on land and buildings and other structures and improvements on it, including machineries.
b. For purposes of assessment, real property may be classified as residential, agricultural, commercial, industrial,
mineral, timberland, or special.
c. LGUs may also classify land in accordance with its zoning ordinance.
b) ESTATE TAX
a. Refers to the tax on the right or privilege of person to transmit his property by reason of his death to his lawful
heirs.
c) INHERITANCE TAX
a. Tax on the privilege of the succeeding to or inheriting property by will or by ascendency, to become operative
only at or after death.
d) DONOR’S TAX
a. Imposed on the transfer by any person, resident or non-resident, of property by gift.
b. The donor’s tax or gift tax is levied on the act of giving, assessable on the aggregate sum of the gifts.
c. Gifts include real and personal property, whether tangible or intangible or mixed, wherever situated.
e) AMUSEMENT TAX
a. Imposed on the gross receipt of the proprietor, lessee, or operator of:
i. Cockpits, cabarets, night or day clubs: 18%
ii. Boxing exhibitions: 15%
iii. Professional Basketball Games: 15%
iv. Jai-alai and race tracks: 30%
f) DOCUMENTARY STAMP TAX
a. Tax on documents, instruments, and papers evidencing the acceptance, assignment, sale or transfer of an
obligation, right or property.
b.
g)
EFFECTS OF FAILURE TO STAMP TAXABLE DOCUMENTS
i. The document shall not be recorded
ii. Such document shall not be admitted or used as evidence in any court until the requisite stamp shall
be affixed and cancelled
iii. No notary public or other officer authorized to administer oath shall add his acknowledgement until
the document is properly stamped
iv. The person who fails to affix the proper documentary stamp shall be liable to an addition to an
amount of tax required to be paid, an amount equivalent to 25% of such unpaid amount.
CUSTOM DUTIES
a. Taxes levied by a government on the importation or exportation of goods in and out of the country.
i. ORDINARY OR REGULAR CUSTOM DUTY
1. Imposed and collected mainly as a source of revenue
ii. SPECIFIC TAX
1. The duty is based on weights or volume of imported articles
iii. AD VALOREM
1. The duty is based on the market value of imported articles
iv. SPECIAL CUSTOM DUTY
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1.
h)
E.
Imposed and collected in addition to the ordinary custom duty, usually to protect local
industries from unfair competition.
RESIDENCE TAX – tax imposed on person residing within a specified territory by reason of his being such a resident.
a. INDIVIDUAL
i. BASIC
1. Refers to Residence Certificate Class A issued to every person paying the basic residence tax
of P1.00
ii. ADDITIONAL
1. Refers to Residence Certificate Class B issued to every person paying the additional
residence tax in accordance with the schedule laid down by law.
b. CORPORATION
i. BASIC
1. Refers to Residence Certificate Class C issued to every corporation paying the basic
residence tax of P50.00
ii. ADDITIONAL
1. Refers to Residence Certificate Class C-1 issued to every corporation paying the additional
residence tax in accordance with the schedule laid down by law
c. OPTIONAL
i. Refers to the Residence Certificate Class D issued to any person or corporation, not liable to the
payment of the residence tax but desiring to have one upon payment of P1.00.
INCOME TAX
1) In the absence of constitutional prohibition, a state legislature has the power to impose tax upon income.
2) Income tax has been referred to as a tax on the yearly profits arising from property, professions, trades or offices, or a tax on a
person’s income, emoluments, profits, and the like.
3) Income, for tax purposes, means all wealth which flows into the taxpayer other than as mere return of capital.
a) It may also be defined as the gain derived from labor or from both combined, provided it be understood to include profit
gained through a sale or conversion of capital assets.
b) Gross income
a. Include gains, profits, and income derived from salaries, wages, or compensation for personal service of
whatever kind and in whatever form paid from profession, vocation, trade, business, commerce, sales or dealing
in property growing out of ownership or use of or interest in such property.
c) Net income
a. It means gross income less allowable deductions.
b. The tax base upon which the tax rate is computed is the taxable income.
4) Income subject to tax:
a) Compensation income
a. Payable in cash or in forms other than cash, includes income arising from employer-employee relationship
b) Business or commercial transaction income, including income from profession
c) Capital Gains
5) Persons subject to individual income tax
a) Citizens of the Philippines
a. Resident citizens
b. Non-resident citizens
b) Aliens
a. Resident aliens – upon their taxable compensation, business and other income received from all sources in the
Philippines
b. Non-resident aliens
i. engaged in trade or business in the Philippines
ii. not engaged in trade or business in the Philippines, based on their entire income received from all
sources within Philippines
iii. aliens employed by Regional or Area headquarters of Multinational Corporations, offshore banking
units, service contractors engaged in petroleum operations in the Philippines
6) Personal Exemption
a) Personal exemption is the amount allowed by law to an individual as a deduction in computing taxable income, depending
upon his status.
b) While additional exemption is given to taxpayer on account of his qualified dependents.
c) Qualifications of qualified dependent:
a. Must be parents, children, brothers or sisters
b. Must be minor, unmarried and unemployed
c. Must depend upon the taxpayer for chief support
d. For dependents over 21 years old, must be incapable of self-support due to mental or physical defect.
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F.
TAX RATES
1) Percentages by which an individual or corporation is being taxed.
a) These rates depend on the amount of income people or businesses earn in a year.
b) In the Philippines, the maximum tax rate is around 34%
c)
Tax Rate Table (REFERENCE FOR NET TAXABLE ANNUAL INCOME):
OVER
BUT NOT OVER
RATE
P 10,000
5%
P 10,000
P 30,000
P 500 + 10% of the excess over P 10,000
P 30,000
P 70,000
P 2,500 + 15% of the excess over P 30,000
P 70,000
P 140,000
P 8,500 + 20% of the excess over P70,000
P 140,000
P 250,000
P 22,500 + 25% of the excess over P140,000
P 250,000
P 500, 000
P 50,000 + 30% of the excess over P250,000
P 500, 000
P 125,000 + 32% of the excess over P500, 000
2) How to compute the taxable income and annual income tax
a) The following data should be known first:
a. Monthly income
b. Personal exemptions
i. P 50,000 for each individual, regardless of status and P25, 000 per qualified dependent, not
exceeding 4.
ii. Only four qualified dependents per family can be declared for purposes of additional exemption.
1. These dependents are below 21 years old, unemployed and unmarried; or with disabilities
b)
To calculate the gross taxable income (GI)
a. Gross income (Monthly Income) x 12 (MONTHS) = GROSS TAXABLE INCOME
c)
To calculate the next taxable income (TI)
a. GROSS TAXABLE INCOME – Personal Exemptions [P 50,000 (status) + (P25, 000 x number of qualified
dependents, not to exceed 4)] = NET TAXABLE INCOME
d)
TO CALCULATE THE ANNUAL INCOME TAX (TAX DUE), REFER TO THE TAX TABLE
a. Find the category of the net taxable income in the tax table and compute for the tax rate
b. Example: Mr. X, single, works as a head nurse at St. Matthews Hospital. For the taxable year 2010, he received a
basic salary of P 25, 000/ month.
i. TO CALCULATE FOR HIS GROSS TAXABLE INCOME:
1. P25,000 X 12 =
P300,000
2. GROSS TAXABLE INCOME =
P 300, 000
ii.
iii.
TO CALCULATE HIS NET TAXABLE INCOME:
1. GROSS TAXABLE INCOME =
2. PERSONAL EXEMPTION (SINGLE) =
3. NET TAXABLE INCOME =
TAX DUE OR ANNUAL INCOME TAX: (REFER TO THE TAX RATE TABLE)
1. Mr. X’s Net Taxable Income falls under the 5th bracket.
TAX RATE TABLE:
BUT NOT OVER
P 10,000
P 30,000
P 70,000
P 140,000
P 250,000
P 500, 000
OVER
1
2
3
4
5
6
7
P300, 000
-P50, 000
P250, 000
P 10,000
P 30,000
P 70,000
P 140,000
P 250,000
P 500, 000
2.
RATE
5%
P 500 + 10% of the excess over P 10,000
P 2,500 + 15% of the excess over P 30,000
P 8,500 + 20% of the excess over P70,000
P 22,500 + 25% of the excess over P140,000
P 50,000 + 30% of the excess over P250,000
P 125,000 + 32% of the excess over P500,000
P22,500 + [25% (P250,000 – P140,000)]
= P22, 500 + [25% (P110, 600)]
=P22, 500 + P27, 500
ANNUAL TAX DUE = P 50, 000
3.
c.
P 50, 000 is the total amount that Mr. X needs to pay to the government for his income tax
each year!
As a general rule, employers automatically withhold taxes from their employees’ income every month as
reflected in their payslips.
i. At the end of the year, employers are the ones tasked to file and pay such income tax of their
respective employees.
ii. These funds are reflected in the Annual Income Tax Return (ITR)/ (BIR Form 1700)
iii. FILING OF RETURN AND PAYMENT OF TAX:
1. TIME
a. The individual income tax return for the previous taxable year must be filed in
duplicate on or before April 15 of each year.
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2.
d.
PLACE
a.
The income tax must be filed with the revenue district officer, revenue collection
officer, or in any authorized agent bank, or the duly authorized treasurer of the
city or municipality where such person has his legal residence or principal place of
business in the Philippines.
COMPUTATION FOR MONTHLY WITHHOLDING TAX (WT):
WITHHOLDING TAX TABLE:
MONTHLY
Exemption
Status
A.Table for
1)Z
2)S/ME
B.Table for
1)ME1/S1
2)ME2/S2
3)ME3/S3
4)ME4/S4
Employees
0.0
50.0
Single/
75.0
100.0
125.0
150.0
1
2
3
0.00
+0% over
Without
1
1
married
1
1
1
1
0.00
+5% over
qualified
0
4,167
employee
6,250
8,333
10, 417
12,500
41.67
+10% over
Dependents.
833
5,000
with
7,083
9,167
11,250
13,333
i.
ii.
iii.
iv.
v.
vi.
vii.
4
208.33
+15% over
5
708.33
+20% over
6
1,875
+25% over
7
4,166.67
+30% over
8
10, 416.67
+32% over
2,500
6,667
qualified
8,750
10,833
12,917
15,000
5,833
10,000
Dependents
12,083
14,167
16,250
18,333
11,667
15,833
20, 833
25,000
41,667
45,833
17,917
20,000
22,083
24,167
27,083
29,167
31,250
33,333
47,917
50,000
52,083
54,167
Refer to the withholding tax table
STEP 1: check the status

ME1 OR S1
o
Z: Zero Exemption
o
ME: married employee
o
S: single
o
1: number of qualified dependent
STEP 2: select whether the monthly income falls under the categories of employees with or without
qualified dependents. Align the monthly income to the nearest possible amount not exceeding the
subsequent constant numerical value on the right column.
STEP 3: after aligning the amount, subtract the monthly income to the matched nearest amount on
the table. The difference should not be negative.
STEP 4: Multiply the result that you got from step 3 to the indicated % on the status row
STEP 5 (this is your answer for the withholding tax): add the result to the corresponding “Exemption
Amount” indicated above the status row
STEP 6: To check if you got the correct answer, multiply it by 12, your withholding tax should closely
match your TAX DUE!
LET’S USE AGAIN THE CASE OF MR. X AS STATED ABOVE: Mr. X is single and has a monthly basic salary of P 25,000. What is his monthly withholding tax?
 STEP 1 & 2: Mr. X’s category falls under the table for employees without qualified dependents.
 STEP 3: P25,000 – P25,000 = 0
 STEP 4: 0 x .30 = 0
 STEP 5: 0 + 4, 166. 67 = P 4, 166.67 (WITHHOLDING TAX = this is the tax deducted from the basic salary of Mr. X each month)
 STEP 6: 4, 166. 67 x 12 = P 50, 000. 04 (THIS MATCHES CLOSELY MR. X’S ANNUAL TAX DUE WHICH IS P 50, 000)
e)
TAX PAYABLE VS. TAX REFUND

Annual tax due – withholding tax that was multiplied by 12
o
50, 000 – 50, 000. 04 = -0.04

Tax refund
o
If the answer is negative: the government returns the excess tax that is accountable to you

Tax payable
o
If the answer is more than 0 = you owe an additional credit to the government
3) SURCHARGES AND INTEREST
a) A Surcharge is an amount imposed by law as additional to the principal tax in the event of delinquency.
b) The following surcharges are:
a. In case of false or fraudulent tax return is willfully made, 50% of the tax or deficiency tax
b. In case of willful neglect to file a tax return within the time prescribed by law, 50% of the tax
c. In case of failure,
i. to file any income tax return and pay the tax due thereon required on the date prescribed;
ii. or to pay the deficiency of tax within the time prescribed for its payment in the notice of assessment
of the BIR;
iii. or to pay the full payment of tax shown on any tax return required or the full or part of the amount of
tax due for which no tax return is required, on or before the date prescribed by law for its payment,
not due to willful neglect, 25% of the amount due
d. In case of failure to file a tax return with the proper revenue officer, i.e., in the city of municipality where the
taxpayer has his legal residence or principal place of business, 25% of the amount due
e. The taxpayer is liable to pay interest at the rate of 20% per annum for any unpaid tax from the date prescribed
by law for its payment or from the due date appearing in the notice and demand by the Commissioner of Internal
Revenue (or his duly authorized representative) until it is fully paid.
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