NOTES IN
TAXATION
Definition of TAXATION
• The inherent power of the sovereign exercised
through the legislature to impose burden
upon subject and objects within its jurisdiction
for the purpose of raising revenues to carry
out the legitimate objects of the government.
• The act of laying TAX.
Definition of TAX
• A financial charge imposed upon persons or
property by the government for its support.
• From the Latin taxo; "rate“.
• Duty; burden; toll; levy.
Essential Elements/Characteristics of
TAX
• Enforced contribution
• Generally payable in money
• Proportionate in character
• Levied on persons, property or exercise of a right
or privilege
• Levied by the State having jurisdiction
• Levied by the legislature
• Levied for public purpose
• Paid at regular periods or interval.
LIFEBLOOD THEORY OF TAXATION
Taxes are the lifeblood of the nation. Without
revenues raised from taxation, the government
will not survive, resulting to detriment to
society. Without taxes, the government would
be paralyzed for lack of motive power to activate
and operate it.
Basis of Taxation
• Reciprocal duties of protection and support
between the government and the people.
• Also called “symbiotic relation” between the
government and its people.
Basis of Taxation
• Despite the natural reluctance to surrender part
of one’s hard earned income to the taxing
authorities, every person who is able must
contribute his share in running the government.
• The government, for its part, is expected to
respond in the form of tangible and intangible
benefits intended to improve the lives of the
people and enhance their moral and material
values.
Functions of Taxation (Kaplow, 2007)
• Raising of revenues
• Redistribution of income
• Correction of externalities
Taxation is used:
• To finance purely governmental expenditures;
• As a tool to carry out the national objectives of
social and economic development;
• To reduce inequalities in wealth and income by
imposing progressively higher tax rates as in the
case of estate and income taxes;
• To prevent or reduce inflation by increasing taxes,
or to expand business during periods of slump by
decreasing them.
• To regulate undesirable practices or vices.
Aspects of Taxation
• LEVYING of the tax which is legislative act, and
• COLLECTING of the tax levied which is
essentially administrative in character.
Scope of the Power of Taxation
• COMPREHENSIVE – Taxation can cover any article to
be subject of tax.
• UNLIMITED – Generally, the power to tax is not
subject to limitations.
• PLENARY – The State’s power to tax cannot be
diminished.
• SUPREME – By virtue of the State’s sovereignty, the
State’s power to tax is inherent and supreme.
Limitations of Taxation
• Inherent
• Implied
• Constitutional
Inherent Limitations
• Territoriality – The State’s power to tax is
limited to the bounds of its territory.
• International Comity – The State’s power to
tax respects treatises and international
agreements.
• Exemptions of Government Entity – The State,
through its Government, cannot tax itself.
Implied Limitations
• The tax collected must be only
for public purpose.
• The legislative power to tax
cannot be delegated.
Constitutional Limitations
• Equal protection of the laws – No one should be
above the law.
• Due process of law – Taxation cannot be
arbitrary.
• Rule of uniformity and equity in taxation –
Those who are similarly situated must be
similarly treated.
• Non-imprisonment for non-payment of poll tax –
Non-payment of community tax is not punishable
by imprisonment.
Constitutional Limitations
• Non-impairment of the obligations of contracts –
Lawful agreements between parties shall be respected.
• Non-infringement of religious freedom – Religious
exercise cannot be taxed.
• No appropriation for religious purpose – Tax revenues
cannot be used for any religious purpose.
• Exemption of religious, charitable and education
entities – these entities are no longer taxed because
they already assist the State in the performance of its
duties. Exemption is for property tax.
Constitutional Limitations
• Exemptions of non-stock, non-profit
organizations – Exemption is for income tax.
• Majority votes for tax exemptions – The
Congress cannot grant a tax exemption without a
majority vote from all its members.
• Veto of appropriations, revenue or tariff bills –
The President has the power to veto
appropriations bills.
• Non-impairment of the jurisdiction of Supreme
Court – Decisions of the Supreme Court on tax
issues can no longer be appealed.
Canons of Sound Tax System
• FISCAL ADEQUACY
• EQUALITY OR
THEORETICAL JUSTICE
• ADMINISTRATIVE
FEASIBILITY
Classification of Taxes
• As to subject matter
• As to who bears the burden
• As to determination of the amount
• As to purpose
• As to authority imposing the tax
• As to gradation or rate
As to subject matter…
• PERSONAL – imposed on all residents,
whether citizens or not.
• PROPERTY – imposed on property.
• EXCISE – imposed upon the performance of an
act, the enjoyment of a privilege or the
engaging in occupation.
As to who bears the burden…
• DIRECT – demanded from the very person to
whom it is intended or desired; he should pay
them and he cannot shift the burden to
another.
• INDIRECT – demanded in the first instance
from one person in the expectation and
intention that he can shift the burden to
someone else, not as a tax but as part of the
purchase price.
As to determination of the amount…
• SPECIFIC – Imposed based on some standard
of weight or measurement and which requires
no assessment beyond a listing and
classification of the object to be taxed.
• AD VALOREM – Imposed based on a specific
proportion of the value fixed by law or as
appraised.
As to purpose…
• GENERAL, FISCAL or REVENUE – Imposed for
the purpose of raising public funds for the
service of the government.
• SPECIAL or REGULATORY – Imposed primarily
for the regulation of useful or non-useful
occupation or enterprises and secondarily
only for the raising of public funds.
As to the authority imposing the tax…
• NATIONAL – imposed by the national
government
• MUNICIPAL or LOCAL – imposed by the local
(municipal or city) government.
As to gradation or rate…
• PROPORTIONAL – that which increases or
decreases in relation bracket.
• PROGRESSIVE or GRADUATED – that which
increases as the income of the taxpayer goes
higher.
• REGRESSIVE – that which decreases as the
income of taxpayer goes higher.
Middle Income Salary
INCOME TAX
VAT
OTHER TAXES
REMAINDER
Tax Laws
• R.A. 8424 – NATIONAL INTERNAL REVENUE
CODE As Amended By TAX REFORM ACT OF
1997 (R.A. 8424)
• R.A. 9504 – Makes the personal exemption of
individual income taxpayers uniform at
P50,000 per taxpayer, regardless of status.
• R.A. 10963 – Tax Reform for Acceleration and
Inclusion (TRAIN)
General Features of Income Tax
• A citizen of the Philippines residing therein is taxable
on all income derived from sources within and
without the Philippines.
• A non-resident citizen is taxable only on income
derived from sources within the Philippines.
• An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable on income from
sources within the Philippines. Provided, that a
seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad
as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as an overseas contract worker.
General Features of Income Tax
• An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines.
• A domestic corporation is taxable on all
income derived from sources within and
without the Philippines.
• A foreign corporation, whether engaged or
not in trade or business in the Philippines,
is taxable only on income derived from
sources within the Philippines.
Exclusions from Gross Income
• Proceeds of life insurance;
• Amounts received by the insured as return of
premiums paid;
• Gifts, bequests and devises (subject to estate
or donor’s tax);
• Compensation for personal injuries or
sickness;
Exclusions from Gross Income
• Income exempt under treaty;
• Certain retirement benefits, pensions, gratuities;
• Miscellaneous items.
N.B.: 13th month pay and other benefits received by
officials and employees of public and private entities
are exempt from tax, provided that the total exclusion
does not exceed P82,000, which shall cover, among
others, other benefits such as productivity incentives
and Christmas bonus.
Taxable Income
The pertinent item of gross income, less the
deduction and/or personal and additional
exemptions, if any, authorized for such type of
income.
Gross Income (Sec. 32[A], NIRC)
• Compensation for services in whatever form
paid, including, but not limited to fees,
salaries, wages, commissions, and other
similar items;
• Gross income derived from the conduct of
trade or business or the exercise of a
profession;
• Gains derived from dealings in property;
• Interests;
Gross Income (Sec. 32[A], NIRC)
• Rents;
• Royalties;
• Dividends;
• Annuities;
• Prizes and winnings;
• Pensions; and
• Partner’s distributive share from the net income
of the general professional partnership.
3 Kinds of Taxable Income
• PASSIVE INVESTMENT INCOME – subject to
final tax;
• COMPENSATION INCOME – tax base is gross
income;
• NON-COMPENSATION INCOME – tax base is
net income.
Income Subject to Final Tax
• ROYALTIES (except on books, literary works,
musical composition) – 10% of the amount of
royalties received.
• PRIZES AND OTHER WINNINGS (except those
amounting to P10,000 or less, which shall form
part of ordinary taxable income) – 10% of the
amount of prizes or other winnings received.
• INTEREST FROM PHILIPPINE CURRENCY BANK
DEPOSITS (and yield from deposit substitute and
from trust funds or similar arrangements) –
20% of the interest received.
Income Subject to Final Tax
• DIVIDENDS FROM DOMESTIC CORPORATIONS
(and shares of individual partners in the net
profits of taxable partnerships) – 10% of the
amount received.
• CAPITAL GAINS ON CERTAIN SALES (or exchanges
of real property by individuals) – 6% of gross
selling price or fair market value whichever is
higher.
• FRINGE BENEFITS – 32% of the amount received
as fringe benefits.
Fringe Benefits
• Any good, service or other benefit furnished
or granted in cash or in kind by an employer to
an individual employee (except rank and file
employees) such as, but not limited to the
following:
Fringe Benefits
• Housing
• Expense account
• Vehicle of any kind
• Household personnel such as maid, driver and
others
• Interest on loan at less than market rate to the
extent of the difference between the market
rate and actual rate granted
Fringe Benefits
• Membership fees, dues and other expenses
borne by the employer for the employee in social
and athletic clubs or other similar organizations
• Expenses for foreign travel
• Holiday and vacation expenses
• Educational assistance to the employee or his
dependents
• Life or health insurance and other non-life
insurance premiums or similar amounts in excess
of what the law allows.
NON-TAXABLE Fringe
Benefits!
• Fringe benefits which are authorized and
exempted from tax under special laws;
• Contributions of the employer for the benefit
of the employee to retirement insurance and
hospitalization benefit plans;
• Benefits given to the rank and file employees,
whether granted under a collective bargaining
agreement or not; and
• De minimis benefits.
TAX EVASION vs. TAX AVOIDANCE
• Tax avoidance is legal and not subject to
criminal penalty while tax evasion is illegal and
subject to criminal liability.
• Tax avoidance is minimization of taxes while
tax evasion almost always results in the
absence of tax payments.
TRAIN
• Tax Reform for Acceleration and Inclusion
• Republic Act 10963
• Effective January 1, 2018
• A cornerstone of Duterte Administration’s
poverty alleviation initiative
• Simpler, fairer and more efficient tax system
• Eradicate extreme poverty, provide equal
opportunities through inclusive economic and
political institutions and achieve high income
status.
Income Tax under TRAIN
• Starting 1 January 2018, compensation earners, self-
employed and professional taxpayers (SEP) whose
annual taxable incomes are P250,000 and below or less
than P21,000 a month is exempted from the personal
income tax (PIT).
• SEPs whose gross receipts or sales are below P3 million
have the option to choose from the 8% flat tax rate or
the TRAIN’s new personal income tax table.
• SEPs whose annual salaries are P500,000 and below
are exempt from 3% percentage tax.
• The 13th month pay and other bonuses amounting to
P90,000 are likewise tax-exempt.
Income Tax Rate before TRAIN
If taxable income is… Tax due is:
Not over P10,000 5%
Over P10,000 but not over P30,000 P500 + 15% of the excess over P10,000
Over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000
Over P70,000 but not over P140,000 P8,500 + 20% of the excess over P70,000
Over P140,000 but not over P250,000 P22,500 + 25% of the excess over
P140,000
Over P250,000 but not over P500,000 P50,000 + 30% of the excess over
P250,000
Over P500,000 P125,000 + 32% of the excess over
P500,000
Current Rates TRAIN 2018-2020 TRAIN 2021 Onwards
If taxable income is: Tax due is: If taxable income is: Tax due is: If taxable income is: Tax due is:
Not over P10,000 5% 0 to P250,000 0% 0 to P250,000 0%
P10,000 to P30,000 P500 + 10% of the excess
over P10,000
P30,000 to P70,000 P2,500 + 15% of the
excess over P30,000
P70,000 to P140,000 P8,500 + 20% of the
excess over P70,000
P140,000 to P250,000 P22,500 + 25% of the
excess over P140,000
P250,000 to P500,000 P50,000 + 30% of the Over P250,00 to P400,000 20% of the excess over Over P250,00 to P400,000 15% of the excess over
excess over P250,000 P250,000 P250,000
Over P500,000 P125,000 + 32% of the Over P400,000 to P30,000 + 25% of the Over P400,000 to P22,500 + 20% of the
excess over P500,000 P800,000 excess over P400,000 P800,000 excess over P400,000
Over P800,000 to P130,000 + 30% of the Over P800,000 to P102,500 + 25% of the
P2,000,000 excess over P800,000 P2,000,000 excess over P800,000
Over P2,000,000 to P490,000 + 32% of the Over P2,000,000 to P402,500 + 30% of the
P5,000,000 excess over P2,000,000 P5,000,000 excess over P2,000,000
Over P5,000,000 P1,450,000 + 35% of the Over P5,000,000 P1,302,500 + 35% of the
excess over 5,000,000 excess over 5,000,000
Value Added Tax
Sugar Sweetened Beverages (SSBs)
Petroleum Excise Tax
Automobile Excise Tax
Tobacco Excise Tax
Cosmetics, Donor’s and Estate Taxes
Coal (Mineral Products); Nonmetallic
Minerals and Quarry Resources
