Scope of the Power of Taxation Limitations on the Power of Taxation Certain Doctrines in Taxation Meaning & Characteristics of a Tax Classification of Taxes Distinction of Taxes from Other Related Items Computation of Personal Tax and Personal Exemption
Concept of TaxationTaxation -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 throughthe enactment of tax which will be implemented bythe executive branch of the government to raiseincome from the inhabitants in order to pay thenecessary expenses of the government
Nature of Taxation•Inherent Power of Sovereignty•Essentially a Legislative Function•For Public Purposes•The Strongest of All the inherent Powersof the Government•Territorial in Operation•Subject to Constitutional and inherentLimitations
Basis of TaxationTaxation 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 & inevitableprice for civilized society-the government wouldbe paralyzed without it.” - “Without taxation, the State cannot raiseincome to pay for the government expenses"
Purposes of Taxation1. 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 Purpose3. 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 taxed c) Determining of the purpose for which taxes shall be imposed d) Fixing the amount of the tax to be imposed e) Fixing the amount of tax rate
2. Assessment and Collection Example of Tax Administrative Functions: a) Valuation of property for taxation b) Equalization of Assessment c) Collection of Taxes3. Payment of the Tax (Incidence of Taxation)
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 oroccupation, every object of industry, and everyspecies of possession. It imposes a burdenwhich, in case of failure to discharge, may befollowed by seizure or confiscation of property.
Limitations on the Power of Taxation The exercise of taxation is subject torestrictions 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 publicpurpose & taxes should only be spent for thesame purpose. Below are governmentalexpenditures 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 ashelp for destitute and handicapped persons,and;d) Financial Assistance for calamity victimsduring earthquake, typhoon, drought andthe like.
*Being inherently legislative, taxation may Not be Delegated There are three inherent power of theState which are police power (for publicwelfare) and eminent domain (for public use)and taxation (for revenue). Examples of taxation power that cannotbe delegated are the following: a) Power to select the coverage, object or property to be taxed
b) Determining the nature and purposesfrom which taxes shall be collected;c) Determining the place or situs of taximpositionsd) Fixing the amount to be imposed andtax ratese) Granting tax exemptions orcondonations, and ;f) Setting down the rules of taxation ingeneral.
*Exceptions To The General Rule That Taxation is Inherently Legislative in Character1. Delegation to the President to fix within specificlimits, tariff rates, tonnage, and wharf age dues andother duties and imposed as provided by theConstitution.
2. Delegations to the municipal corporations orLGU’s to be exercised by the local legislativebodies in line with the well accepted principlethat the power to create municipal corporationsfor purposes of local self-government necessarilyimplies the power to confer on them the powerto tax.
3. Delegation for administrativeimplementations such as valuation ofproperty, 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 imposeprivilege tax on business transactionundertaken abroad unless there is privity ofrelationship between the taxing state and theobject of the tax.
The state can still exercise its takingpowers over its citizens outside its territory. Itis because the fundamental basis of the right totax is the capacity of the government toprovide benefits and protection to the objectof the tax.
*Taxation is Subject to International Comity International Comity is the courteousrecognition, friendly agreement, interactionand respect accorded by one nation to the lawsand institutions of another. An example of International Comitylimitation on the power of taxation is the taxexemption of properties used by diplomats orhead of states in the exercise of sovereignpowers and diplomatic functions.
*Government Entities are Generally Tax Exempt Exemption from taxation is a grant ofimmunity to particular persons or corporationsof a particular class from a tax which othersgenerally within the same taxing district areobliged to pay.
Tax exemption applies only togovernment entities through which thegovernment immediately and directly exercisesits governmental functions, like the ArmedForces of The Philippines (AFP). However, ifthe government entities are performingproprietary functions such as PhilippineNational Railway (PNR), they are generallysubject to tax in the absence of tax exemptionprovisions in their charters or the law creatingthem.
Certain Doctrines in Taxation In the exercise of taxation power, someunderlying doctrines for its implementationsare as follows: Prospectivity of Tax Laws Imprescriptibility of taxes Double Taxation Escape from Taxation Exemption from Taxation
Equitable RecoupmentSet-off TaxesTaxpayer SuitCompromises Power to Destroy
Prospectivity of Tax Laws This principle states that “a tax bill mustonly be applicable and operative afterbecoming a law”. Thus the effectivity of the taxlaw commences upon its approval and its scopewould only cover the present and futuretransactions.
Imprescriptibility of Taxes This rule states that “otherwise providedby the law itself, taxes in general are notcancellable”
Double Taxation This means “a sovereign act of taxingtwice for the same purpose in the same yearupon the same property or activity for thesame person, when should it be taxed once forthe same purpose and with same kind characterof tax”.
This may be classified as (a) IndirectDuplicate Taxation, and (b) Direct DuplicateTaxation.Indirect Duplicate Taxation Double Taxation in its broad sense. It extends to all cases in which there is a burden of two or more pecuniary impositions. It is usually allowed as long as there is no violation on the Constitution.
Direct Duplicate Taxation -Double Taxation in its strict sense. It is prohibited because it comprises an imposition of the same tax on the same property for the same purpose by the same state during the same taxing period.
- This kind of double taxation violatesthe constitutional provision of uniformity andequal protection, as well as the principle thattax must not be excessive, unreasonable andinequitable. Such taxation should, wheneverand wherever possible, be avoided to preventinjustice or unfairness.
Counteracting Indirect Double Taxation The measures that are normally adoptedby sovereign taxing authorities to avoidresulting inequalities of double taxation are thefollowing: 1. Tax Treaty 2. Application of Tax Credit 3. Application of Tax Exemptions 4. Application of Allowance for Deductions such as vanishing deduction in Estate tax
Escape from Taxation The ways by which a taxpayer couldescape tax burdens may be through Tax Evasionand tax Avoidance. “ A tax evader breaks the law (taxevasion), the tax avoider sidesteps it (taxavoidance).” The “doctrine of escape fromtaxation” permits the taxpayer to minimizepayment of tax by lawful means.
Tax Evasion The taxpayer uses unlawful means toevade or lessen the payment of tax. This formof tax dodging is prohibited and thereforesubject 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 escapingpayment of taxes through legally permissiblemeans. Example:1. Selling shares of stock through a stockexchange to avail of the lower tax rates.2. Estate planning within the means sanctionedby the Tax Code has been held to be one ofpermissible tax minimization
Forms of Tax Avoidance•Shifting•Capitalization•Transformation; and•Exemption
Shifting This is the transfer of tax burden to another . Tax Avoidance1. 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 burdenwhereby the tax on the selling price of theproperty, which is supposed to be paid by thebuyer, is capitalized on the seller at the time ofpurchase by deducting the same by the totalselling price. The taxes are shifted to the seller,thus reducing the actual sales price by theamount of the related tax.
Transformation -The producer absorbs the payment of taxto reduce prices and to maintain market share.He recovers his additional tax expense byimproving the process of production. The tax,therefore, is transformed into a gain through amedium of production.
Exemption from Taxation This denotes a grant of express orimplied immunity, to a particular person,corporations or to persons, corporations, of aparticular class, from a tax upon property or anexercise which persons and corporationsgenerally within the same taxing district areobliged to pay. Tax exemptions are generally granted onthe basis of (a) reciprocity, (b) public policyand, (c) contracts
Tax exemptions are governed by thefollowing principles:1. They are not presumed2. When granted, they are strictly construedagainst taxpayer.3. They are highly disfavored and may almost besaid “to be directly contrary to the intention oftax 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 exemptionsare: a) Inter-corporate dividends by a domestic corporation from another domestic corporation; b) Section 105 of the Tariff and Customs Code c) Section 234 of the Local Government Code, and; d) Other special Laws such as Omnibus Investment Code of 1987, Philippine Overseas Shipping Act
2. Implied Exemption by Omissions - This occur when tax is imposed on a certain class of persons, properties or transactions without mentioning other classes; those not mentioned are considered exempted by omission.
3. Contractual Exemption -Contractual Exemption are those lawfully entered into by the government contracts under existing laws.
Tax exemption by the Government The state in its exercise of sovereignty,does not tax itself or any of its politicalsubdivisions. However, the state may tax any ofits government-owned or controlledcorporations exercising proprietary functions.
Therefore, agencies performinggovernmental functions are exempt from taxunless expressly taxed, while those performingproprietary functions are subject to tax unlessexpressly exempted.
Equitable Recoupment This doctrine of law states that “a taxclaimed for refund, which is prevented byprescription may be allowed to be used aspayment for unsettled tax liabilities if bothtaxes arise from the same transaction in whichoverpayment and underpayment is due.
The Supreme Court, however, rejectedthe doctrine because such doctrine may lead tothe non-observance of the prescriptive periodsset by the law.
Set-Off Taxes This doctrine states that taxes are notsubject to set-off or legal compensationbecause the government and the taxpayer arenot mutual creditor and debtor to each other.
A person cannot refuse to pay tax on thebasis that the government owes him anamount equal to or greater than the tax beingcollected. The collection of a tax cannot awaitthe results of a lawsuit against the government.
Exemptions to this rule are the ff.:1. Where both the claims of the governmentand the taxpayer against each other have alreadybecome due, demandable and fully liquidated.2. When there is an actual compromise betweenthe taxpayer and the tax officer
Compromises This doctrine provides that compromisesare generally allowed and enforceable when thesubject matter thereof is not prohibited frombeing compromised and the person enteringsuch compromise is duly authorized to do so.
The Law allows the following persons tocompromise in behalf of the government:1. Only the BIR Commissioner is expresslyauthorized by the tax code to enter intocompromise for both civil and criminalliabilities, subject to certain conditions.
2. The Collector of Customs is given the powerto compromise with respect to customs dutieslimited to cases where legitimate authority isspecifically granted, such as in the remission ofduties;3. The Customs Commissioner, subject toapproval by the Secretary for Finance, has thepower to compromise cases involving theimposition of fines, surcharges and forfeitures;
4. The Local government Code has no provisionregarding compromise; however, tax liability(no criminal liability) is not prohibited frombeing compromised. Even so, there is nospecific authority given to any public official toexecute the compromise so as to render iteffective.
Power to DestroyA 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 impositionof a lawful regulatory taxes and would bedestructive to the taxpayers and businessestablishments because the government cancompel payment of tax and forfeiture ofproperty 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 exercisedwith caution to minimize injury to theproprietary rights of a taxpayer and does notviolate any constitutional and inherentlimitations, it is valid and cannot be judiciallyrestrained merely because of its prejudicialeffects 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 determinantsto 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 TAXATIONOBJECT OR SUBJECT SITUS OF TAXATION OF TAXATION Residence of the Persons Taxpayer
Place where the income is earned or residence or citizenship of the taxpayerIncome As a general rule, Sovereign States retain jurisdiction over wherever they may be
Place where occupation is pursued Note: This general rule is applicable if the law isOccupation or Privilege silent as to the criterion (nationality or residence) of tax situs for occupation or privilege taxes.
Residence or Domicile Community of the person being taxed Place where the act isTransaction or Activity done or activity takes (Sales) place
Place where the business is conducted regardless of the residence of theBusiness owner or the location of the property used in business
Place of residence orGratuitous Transfer of citizenship of the Property taxpayer or the location of property State which granted Franchise the rights
Place where the property is located Real Property whether the owner is a resident or non- resident alien Place where thePersonal Tangible property is located property regardless of the residence of the owner
Residence of the owner, unless the property has acquired a business situs in another jurisdiction Note: shares of stock inPersonal Intangible a domestic corporation Property owned by non-resident foreigners are taxable in the Philippines because of the protection and benefit afforded by the Philippine Government
Corporation and It shall depend on the Other Juridical law of incorporation, Entities except state tax.
Meaning and Characteristics of a Tax Taxes are defined as “the enforcedproportional contributions from persons andproperty levied by the law-making body of thestate by virtue of its sovereignty for thesupport 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
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 inalphabetical order. It contains names of severallands of merchandise together with theircorresponding payments.•The duties payable on good imported or exported.•A system or principle of imposing duties on theimportation or exportation of goods
5. Debt -A tax is not a debt. Below are the distinguished feature of a tax and a debt •A debt is generally based on contract, while a tax is based on laws.•A debt is assignable, while a tax cannot be assigned.
•A debt may be paid in kind, while a tax is generallypayable in money.•A debt may be the subject or set off, orcompensation, while a tax is generally not.•A person cannot be imprisoned for non-paymentof debt, while imprisonment is a sanction for non-payment of tax (except poll tax)
6. Toll - it is a sum of money for the use of something, generally applied to consideration that is paid for the use of roads, bridges or of public purposes. •A toll is demanded based on ownership, while a taxis demanded based on the sovereignty; and •A toll may be imposed by a private individual or entity or government, while a tax may be imposed only by the state.
7. License or permit fee - it is a charge imposed under the police power for the purpose of regulation. •License Fee is imposed for regulation, while a tax is levied for revenue.
•It involves an exercise of police power, while a taxinvolves the exercise of the taxing power•Its amount is usually limited to the necessaryexpense or regulation, while there is generally nolimit 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, whiletax is primarily aimed at raising revenue, and;•A penalty may be imposed by either thegovernment or private entities, while a tax may beimposed only by the government.
How to Compute Income Tax in the Philippines (Single Proprietorship) -Taxable corporations may be taxed usinga fixed income tax rate. On the other hand, ifyou are a self-employed professional or anowner of a single proprietorship business, yourincome tax expense is computed using agraduated tax rate.
It is a progressive tax which the tax rateincreases as the taxable base amount increases.This means that the higher taxable income youhave, the higher your income tax expense is. Thefollowing are the requirements, instructions andprocedures to compute and file your income taxreturn.
Computation of Income Tax Due and PayableThe following are simple steps to calculate yourincome tax payable:1. Compute your taxable Compensation Income(positive) or excess of Deductions over TaxableCompensation Income (negative).
Here is how you will compute it:a.) Determine your Gross Taxable CompensationIncome. This is the income you earn from youremployer during the taxable year. If you are earningpurely from your business or you are not employed,then you can leave it blank.b.) Determine your premium paid on Health and orHospitalization, which should not exceed Php2,400 per year. If none, then leave it blank.
c.) Determine your Personal and AdditionalExemptions as follows:*Personal exemption (Definition) An amount excluded from taxable income, given to any taxpayer who cannot be claimed as a dependent by another taxpayer.
Personal Exemptions: For single individual or married individual judicially decreed as legally separated with no qualified dependents…………………P 50,000.00 For head of family…………….……P 50,000.00 For each married individual *………P 50,000.00 Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.
Additional Exemptions: For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4 qualified dependents
How Can You Claim this additional Exemption?The husband who is deemed the head of the familyunless he explicitly waives his right in favor of his wifeThe spouse who has custody of the child or childrenin case of legally separated spouses. Provided, that thetotal amount of additional exemptions that may beclaimed by both shall not exceed the maximumadditional exemptions allowed by the Tax Code.The individuals considered as Head of the Familysupporting a qualified dependent
d.) Add the amounts in (b) and (c), thendeduct the total from the amount in (a) toarrive at your taxable Compensation Income(positive) or excess of Deductions over TaxableCompensation Income (negative).
2. Compute your gross taxable business orprofessional income.Here is how you will compute it:a.) Determine your sales, receipts or revenues for thetaxable year.b.) Determine your cost of sales or cost of services.c.) (a) minus (b) will simply give you your grosstaxable or professional income.
3. Compute your total taxable business orprofessional income by simply adding result in (2)and your other taxable income.4. Compute your Net Income. Your Net Income isequal to result in (3) minus your allowabledeductions.
Your allowable deductions can be either:a.) Optional Standard Deduction – an amount notexceeding 40% of the net sales for individuals andgross income for corporations; orb.) Itemized Deductions which include thefollowing: •Expenses •Interest
•Taxes •Charitable Contributions•Losses and Other Contributions•Bad Debts •Research and Development•Depreciation •Pension Trust•Depletion of Oil and Gas Wellsand Mines
5. Compute you total taxable income by addingthe result in #4 (Net Income) to the result in #1(taxable Compensation Income or excess ofDeductions over Taxable CompensationIncome). If the result is negative or it becomes aloss, then you will not have a tax due for thetaxable year, otherwise, continue to the nextstep.
6. Compute your Income Tax Due. This is alsoyour income tax expense incurred during thetaxable year.Calculate your tax due for the taxable year usingthe following tax rate table:
7. Compute your Income Tax Payable. This is thetax you are still liable at the end of the year. Tocalculate your income tax payable, deduct yourincome tax due with the following taxcredit/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 youhave already file and this is your AmendedReturn-Other Payments made
8. Compute your Total Payable. Ifunfortunately, you fail to pay your income taxon or before the due date, the followingpenalties will be imposed and will be added toyour total amount payable.
1. A surcharge of twenty five percent (25%) foreach of the following violations:a) Failure to file any return and pay the amount oftax or installment due on or before the due dates;b) Filing a return with a person or office otherthan those with whom it is required to be filed;
c) Failure to pay the full or part of the amount oftax shown on the return, or the full amount of taxdue for which no return is required to be filed, onor before the due date;d) Failure to pay the deficiency tax within thetime prescribed for its payment in the noticeof Assessment (Delinquency Surcharge).
2. A surcharge of fifty percent (50%) of the tax or ofthe deficiency tax, in case any payment has beenmade on the basis of such return before thediscovery of the falsity or fraud, for each of thefollowing 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 willfullymade.3. Interest at the rate of twenty percent (20%) perannum, or such higher rate as may be prescribed byrules and regulations, on any unpaid amount of tax,from the date prescribed for the payment.