TAX TV

TAXATION

TAXATION:Concept of TaxationNature of TaxationBasis of Taxation Importance of TaxationPurposes of Taxation

Principles of a Sound Tax System

Process of Taxation

Scope of the Power of TaxationLimitations on the Power of

Taxation Certain Doctrines in TaxationMeaning & Characteristics of a TaxClassification of TaxesDistinction of Taxes from Other

Related ItemsComputation 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 Taxation1. Levy or imposition

Example of Tax Legislative Functions:a) Prescribing general rules of

taxation b) Selecting of the object/subject to be taxedc) Determining of the purpose for which taxes shall be imposedd) Fixing the amount of the tax to be imposede) Fixing the amount of tax rate

2. Assessment and Collection

a) Valuation of property for taxation

b) Equalization of Assessment

c) Collection of Taxes

Example of Tax Administrative Functions:

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 TaxationThe 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).

a) Power to select the coverage, object or property to be taxed

Examples of taxation power that cannot be delegated are the following:

c) Determining the place or situs of tax impositionsd) Fixing the amount to be imposed and tax rates e) Granting tax exemptions or condonations, and ;

b) Determining the nature and purposes from which taxes shall be collected;

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 RecoupmentSet-off Taxes  Taxpayer Suit CompromisesPower 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”

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”.

Double Taxation

This may be classified as (a) Indirect Duplicate Taxation, and (b) Direct 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.

Indirect 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.

Direct Duplicate Taxation

- 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

The ways by which a taxpayer could escape tax burdens may be through Tax Evasion and tax Avoidance.

Escape from Taxation

“ 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

1. They are not presumed

Tax exemptions are governed by the following principles:

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 Codec) 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 RecoupmentThis 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 TaxesThis 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.

CompromisesThis 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

SITUS OF TAXATION

PersonsResidence of the Taxpayer

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

Occupation or Privilege

Place where occupation is pursuedNote: This general rule is applicable if the law is 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

Transaction or Activity (Sales)

Place where the act is done or activity takes place

Business

Place where the business is conducted regardless of the residence of the owner or the location of the property used in business

Gratuitous Transfer of Property

Place of residence or citizenship of the taxpayer or the location of property

FranchiseState which granted the rights

Real Property

Place where the property is located whether the owner is a resident or non-resident alien

Personal Tangible property

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 jurisdictionNote: 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 Capitalization2. Property Tax3. Excise Tax

* According to Purpose

1. General Fiscal or Revenue2. Specific or Regulatory

* According to Scope

1. National2. Municipal or Local

* According to Determination of Amount

1. Specific2. Ad Valorem

* According to its Effect to taxpayer

1. Direct2. Indirect

* According to Graduation Rate

1. Proportional2. Progressive or Graduated3. 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 debt is generally based on contract, while a tax is based on laws.

•A debt is assignable, while a tax cannot be assigned.

-A tax is not a debt. Below are the distinguished feature of a tax and a debt

•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 non-payment of tax (except poll tax)

6. Toll

•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.

- 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.

7. License or permit fee

•License Fee is imposed for regulation, while a tax is levied for revenue.

- it is a charge imposed under the police power for the purpose of regulation.

•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 50,000.00For head of family…………….……P 50,000.00For each married individual *………P 50,000.00Note: 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 wifeThe 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 Deductions which include the following:

•Expenses •Interest

•Taxes•Losses

•Depreciation•Bad Debts

•Depletion of Oil and Gas Wells and Mines

•Charitable Contributions and Other Contributions

•Pension Trust

•Research and Development

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!!!!!!