TAXATION

TAXATION
Taxes are the enforced proportional contributions levied by the law-making body of
the state by virtue of its sovereignty upon the persons of property within its jurisdiction for
the support of the government and all public need.

As State Power refers to the inherent power if the state exercised through its
legislature to impose or levy a proportionate burdens upon persons, property, rights or
transactions to raise revenue to support and maintain government expenditure, and for general
and economic welfare.

As a Process refers to the act of imposing a tax by a sovereign state to raise revenue
for the use and support of the government.

Taxation is a system of payment that individuals and businesses are required to pay
the government.

As stated by De Leon (2005, p 375), taxes ought to possess the following characteristics:

Enforced Contribution. Due to the critical role taxes play in a state, a tax cannot be
imposed as a voluntary contribution or donation. All citizens, with respect to their ability,
have to pay taxes. The National Internal Revenue Code of the Philippines (Republic Act
8284).
Payable in Money. A tax must be discharged alone in money which must be in legal tender.
Proportionate in Character. Taxes are based on the ability to pay.
Imposed on person or property. A tax may be imposed on acts, transactions, or contracts.
For example, a person will pay taxes for his income and owned estates.
Imposed by the state which has jurisdiction over the person or property. The state cannot
apply its power of taxation to individuals or entities outside its legal jurisdiction.

Imposed by the law-making body of the state. Although taxation is considered to be an

inherent power of the state, its imposition must be anchored on the enactment of statutes and
ordinances made by the Legislative branch of the government.
It is levied for public purposes. Taxation involves and a tax constitutes, a charge of burden
imposes to provide income for public purposes – the support of the government, the
administration of the law, or the payment by public expense.

Kinds of Taxes under Existing Laws

As to who bears the burden?

a. Direct Taxes – These are paid and shouldered directly by the taxpayer to a tax collecting
agency of the government.

Example: Income Taxes (Corporations or Individuals)

Residence tax, Community tax, Real estate tax, Immigration tax, Gifts and Inheritance taxes.
b. Indirect Taxes – These are paid by the taxpayer but which he can shift or pass on to
others, particularly those who avail of his goods and services. A good example of this would
be the value-addedtax (VAT), which are passed on by the manufacturers to consumers
increasing the cost of their goods.
Another example would be the customs duties or tariffs imposed on imported merchandise.

Example: Sales taxes, Amusement tax, EVAT

2. As to Subject Matter or Object:

 Personal, Poll or Capitation Tax. Refers to a tax of fixed amount imposed on an
individual residing within a specified territory, whether a citizen or not, and
regardless of property or occupation they engaged in (e.g., community tax)
 Property Tax. Refers to the amount imposed on property, whether real or personal,
in proportion either to its value of in accordance with some other reasonable method
or apportionment (e.g., real estate tax).
 Excise Tax. Refers to any which does not fall within the classification of a poll tax
or a property tax. It is charged or imposed upon the performance of an act, the
enjoyment of a privilege and in engaging an occupation. (e.g., estate, donors, and
income taxes: value-added tax or VAT, and practically all business taxes).
3. As to Determination of Amount:
Specific – tax of a fixed amount imposed by the head or number, or by standard weight or
measurement; it requires no assessment other than a listing or classification of the objects to
be taxed.

Examples: distilled spirits, cigars, cigarettes

 Ad Valorem - tax of a fixed proportion of the amount or value of the property with
respect to which the tax is assessed.

Examples: real estate tax most custom duties, income tax, excise tax on automobiles and non-
essential goods.

As to Purpose:

 General, Fiscal or Revenue – tax imposed for the general purposes of government i.e.,
to raise revenues for governmental needs.
Examples: income tax, taxes on businesses

Special or Regulatory – tax imposed for a special purpose, i.e., to achieve some social or
economic ends irrespective of whether revenue is actually raised or not.
Examples: protective tariffs on imported goods.

As to Authority Imposing the Tax:

 National – tax imposed by the national government.
Examples: national internal revenue taxes – income tax, custom duties, national taxes
imposed by special law.

Municipal of Local – tax imposed by municipal corporations of local governments.

Examples: real estate tax, tax on occupations.
6. As to Graduation or Rate:
 Proportional – tax based on a fixed percentage of the amount of the property, income or
other basis to be taxed.
 Examples: real estate tax, value-added tax, other percentage taxes.
 Progressive of Graduated – the rate of which increases as the tax base increases.
 Examples: income tax, estate tax, donor’s tax.
 Regressive - the rate of which decreases as the tax base increases. We have no regressive
taxes.

Tariff explained by these three ideas:

A. Book with alphabetical listing of several lands and merchandise together with their
corresponding payments.
B. Duties payable on goods imported or exported.
C. System or principle of imposition of custom duties.

Tax Exemption – The government exempt the following in order to encourage and promote
their growth:
Cooperatives
Cottage Industries
Organizations or institutions engaged in non-profit undertakings:
religious, charitable, scientific, athletic or cultural purposes;
donations to social welfare, cultural and charitable institutions;
social security benefits, retirement gratuities, pensions and other similar benefits received by
retired employees; and benefits received by members of GSIS.

System of Taxation

Progressive Tax System – the tax rate tend to increase with the increase in the tax base.
Usually associated with direct taxes and is normally accepted to be the ideal system since it
taxes the people according to their ability to pay. The Philippines is under this system. By
imposing more progressive taxes, it takes more money away from the rich and less from the
poor; it in effect increases the disposable income of the consumer.

Regressive Tax System – where tax rates are high for low bases, and decrease for high bases.
This system is described as onerous since those with greater ability to pay are taxed less and
the poor people with less ability to pay are taxed more. This system is normally associated
with indirect taxes. The ease of collecting indirect taxes made the government highly
dependent to them that have prevented them to abolish such system even if it is unjust.

Proportional Tax System – imposes a uniform tax rate on all income levels. If the
government sets a tax rate of 10%, the taxpayer who earns Php50,000 pays a tax of Php5,000
and the one who earns Php100,000 pays a tax of Php10,000.
Characteristics of Taxation
As indicated above, they are enumerated below.

(1) It is an enforced contribution. – A tax is not a voluntary payment or donation and its
imposition is in no way dependent upon the will or assent, open or implied, of the person
taxed To be sure, taxation without representation, or without the consent in some form of
those who are to be taxed, is contrary to the fundamental principles of good government. The
principle of representation, however, applies only to political communities, as such, and not to
individuals.
(2) It is generally payable in money. – Unless qualified by law (e.g., backpay certificates
under Sec. 2, R.A No. 304, as amended.), the term “taxes” or “tax” is usually understood to
be a pecuniary burden – an exaction to be discharged alone in the form of money which must
be in legal tender.

(3) It is proportionate in character. – A tax is laid by some rule of apportionment according

which persons share the public burden. It is ordinarily based on ability to pay. Thus, in
practice, some people pay very high taxes; others, very small amounts or none at all.

(4) It is levied on persons or property. – A tax may also be imposed on acts, transactions,
rights or privileges. In each case, however, it is only a person who pays the tax. The property
is resorted to for the purpose of ascertaining the amount of tax that must be paid and of
enforcing payment in case default of the taxpayer. But not all who pay a tax shoulder the
burden of the tax.

(5) It is levied by the state which has jurisdiction over the person or property. – The
object to be taxed must be subject to the jurisdiction of the taxing state. This is necessary in
order that the tax can be enforced. Although a state can tax all persons subject to its
jurisdiction for all their property left by them within its jurisdiction to seize upon person or
property for purposes of taxation.

(6) It is levied by the law-making body of the state. – The power to tax is a legislative
power which under the Constitution only Congress can exercise through the enactment of tax
statutes. Accordingly, the obligation of a tax is statutory liability.

(7) It is levied for public purpose or purposes. – Taxation involves, and a tax constitutes, s
charge or burden imposed to government, the administration of the law, or the payment of
public expenses. Revenues derived from taxes cannot be used for purely private purposes or
for the exclusive benefit of private persons.

Basic Characteristics of a Sound Tax System (Key FAT)

A sound tax system must be:

1. Fiscal Adequacy is the source of revenue must be adequate or enough to defray the
expenses of the government.

2. Administrative Feasibility must meet the following criteria:

 Tax laws must clear and concise
  It is capable of proper enforcement
  It is not burdensome

3. Theoretical Justice is a tax that must be used on the ability to pay.

Classification of Taxes
1. As to subject matter or object:
A. personal, poll or capitation- tax of a fixed amount on individuals residing within a
specified territory, without regard to their property, occupation or business. Ex.
Community tax (basic)
B. property- imposed on property, real or personal, in proportion to its value, or in
accordance with some reasonable method or apportionment. Ex. Real estate Tax
C. Excise- imposed upon the performance of an act, the enjoyment of a privilege, or the
engaging in an occupation, profession or business. Ex. Income tax, VAT, Estate Tax,
Donor’s Tax
2. As to who bears the burden of the tax:
a. Direct- the tax is imposed on the person who also bears the burden thereof
Ex. Income tax, community tax, estate tax
b. Indirect – imposed on the taxpayer who shifts the burden of the tax to another, Ex. VAT,
customs duties.
3. As to determination of amount:
a. specific – imposed and based on a physical unit of measurement as by head number,
weight, length or volume. Ex. Tax on distilled spirits, fermented liquors, cigars

b. Ad Valorem of a fixed proportion of the value of the property with respect to which the tax
is assessed.
Ex. Real estate tax, excise tax on cars, non-essential goods.

3. As to purpose:
A. general, fiscal, or revenue- imposed for the general purpose of supporting the
government. Ex. Income tax, percentage tax

B. special or regulatory- imposed for a special purpose, to achieve some social or economic
objective.
Ex. Protective tariffs or custom duties on imported goods intended to protect local industries.

5. As to scope or authority imposing the tax:

a. national- imposed by the national government ex. NIRC, custom duties.
b. municipal or local- imposed by municipal corporations or local governments ex. Real
estate tax.

6. As to graduation of rates:
a. Proportional- based on a fixed percentage of the amount of the property, receipts or on
other basis to be taxed ex. Real estate tax, VAT
b. Progressive and graduated- the rate of the tax increases as the tax base or bracket increases
ex. Income tax, estate tax, donor’s tax
c. Regressive- the rate of tax decreases as the tax base or bracket increases.

FORMS OF ESCAPE FROM TAXATION•

Shifting• B. Capitalization• C. Transformation• D. Avoidance• E. Exemption• F. Evasion

A. SHIFTING• process by which tax burden is transferred from statutory taxpayer to another
without violating the law.• One way of passing the burden of the tax from one person to other.
For Example, taxes paid by the manufacturer may be shifted to the consumer by adding the
amount of the tax paid to the price of the product.
Kinds of Shifting•
1. Forward shifting- when burden of tax is transferred from a factor of production through
the factors of
distribution until it finally settles on the ultimate purchaser or consumer.
2. Backward shifting – when the burden is transferred from consumer through factors of
distribution to
the factors of production;
3. Onward shifting- when the tax is shifted 2 or more times either forward or backward.

C. CAPITALIZATION• the reduction in the price of the taxed object equal to the capitalized
value of the future taxes which the purchaser expects to be called upon to pay. This refers to
the reduction in the price of the taxed object to the capitalize value of future taxes which the
purchaser expects to be called upon to pay. An example as the reduction made by the seller on
the price of the Real Estate, in anticipation of the future tax to be shouldered by the future
buyer.

D. TRANSFORMATION• the manufacturer or producer upon whom the tax has been
imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and
endeavors to recoup himself by improving his process of production thereby turning out his
units at a lower cost. Occurs when the manufacturer or the producer upon whom the tax has
been imposed pays the tax and endeavor to “recoup” himself/herself by improving his/her
process of production.

E. TAX AVOIDANCE• exploitation by the taxpayer of legally permissible alternative tax

rates or methods of assessing taxable property or income, in order to avoid or reduce tax
liability. The exploitation by the taxpayer of legally permissible methods in order to avoid or
reduce tax liability. This is also known as “tax minimization”. An example is exhausting
and/or utilizing all allowable deductions in law to lessen or reduce the tax burden.

E. TAX EXEMPTION• grant of immunity to particular persons or corporations of a

particular class from a tax which persons and corporations generally within the same state or
taxing district are obliged to pay. The grant of immunity or freedom from financial charge,
obligation, or burden to which others are subjected.

GROUNDS FOR TAX EXEMPTION

a) Contract, wherein the government is the contracting party b) Public policy c) Reciprocity

F. TAX EVASION• The practice by the taxpayer through illegal or fraudulent means to
defeat or lessens the amount for tax. This is also known as “tax dodging”. Tax evasion
presupposes malice, fraud, bad faith, or wilful intent on the part of taxpayer as in the case of
substantial under declaration of income for four (4) consecutive years. An example is the
deliberate and/or malicious failure to report income to defeat tax liability.
INDICIA OF FRAUD IN TAX EVASION Indicia of Fraud in tax evasion• 1. Failure to
declare for taxation purposes true and actual income derived from business for 2 consecutive
years;• 2. Substantial under declaration of income tax returns of the tax payer for 4
consecutive years coupled with intentional overstatement of deductions.

Definition of Taxpayers Classification

1. Single Person – Including a married person judicially decreed as legally separated from his
or her spouse with no qualified dependents.
2. Head of the Family – an individual who actually supports and maintains one household
one or more individuals, who are closely connected with him by blood relationship,
relationship by marriage or by adoption and whose right to exercise family
control and provide for these dependent individuals is based
upon some moral or legal obligations.

Under the Tax Code, the term means an unmarried or legally separated man or woman with:
One or both parents, or
One or more brothers or sisters, or
One or more legitimate, recognized natural, or legally adopted children, living with
and dependent upon him or her for their chief support.

A Recognized Natural Child – is one borne outside wedlock between a man and woman who
at the time of the conception of the child were free to marry each other and is recognized by
one or both parents.

3. Married Persons – Man or woman not legally separated from his or her spouse, if both of
them are earning they are allowed an exemption of P32,000 each or a total of P64,000. Only
one of the spouses shall claim the additional exemption for children.

Additional Exemption for Dependents – P8,000 for each dependent child not to exceed four
(4) with the following pre-requisites:
1. The child is legitimate, illegitimate, legally adopted child.
2. The child is living with the taxpayer, chiefly dependent for support.
3. The child is not more than 21 years of age.
4. The child is not gainfully employed or incapable of self-support because of mental
or physical defect even if over 21 years of age.

Gross Income – means all income derived from whatever source.

Types of Gross Incomes:

Gross income includes, but not limited to the following:
 Compensation for services, in whatever form paid, including but not limited to fees,
salaries, wages, commissions and similar item.
 Gross income derived from the conduct of trade or business or the exercise of
professions.
 Gains derived from dealings in property
 Interest
 Rents
 Royalties
 Dividends
 Annuities
 Prizes and winnings
 Pensions
 Partner’s distributive

Exclusions from Gross Income:

a. Life Insurance
b. Amount received by insured as return of premium
c. Gifts, bequests or devises
d. Compensation for injuries or sickness
e. Income exempt under treaty
f. Retirement benefits, pensions, gratuities, etc.
g. Miscellaneous items like:

 Income derived by foreign government
 Income derived by the government or its political subdivision 
 Prizes and awards in sport competition 
 Prizes and awards which met the conditions set in the Tax Code 
 13th month pay and other benefits
 GSIS, SSS, Medicare and other contributions
 Gain from the sale of bonds, debentures or other certificate of indebtedness
 Gain from redemption of shares in mutual fund

Allowable Deductions from Gross Income

Except for taxpayers earning compensation income arising from personal services rendered
under an employer-employee relationships where the only deduction provided that the gross
family income does not exceed P250,000 per family is the premium payment on health and/or
hospitalization insurance, a taxpayer may opt to avail any of the following gross income:

Optional Standard Deduction – an amount not exceeding 40% of the net sales for individuals
and gross income for corporations; or

Itemized Deductions – which include the following:

 Expenses
 Interest
 Taxes
 Losses
 Bad Debts
 Depreciation
 Depletion of Oil and Gas Wells and Mines
 Charitable Contributions and other Contributions
 Research and Development
 Pension Trusts

In addition, individuals who are either earning compensation income, engaged in business or
deriving income from the practice of profession are entitled to personal and additional
exemptions as follows: