TAXATION

A. Taxation, In General

B. History of Taxation

C. Taxation in the Philippines

D. Kinds of Taxes

Taxation Defined• The inherent power of the state

- exercised through the legislature

• To impose burdens- upon subjects and objects- within its jurisdiction

• For the purpose of raising revenues

• To carry out the legitimate objectives of the government

Theory of Taxation• Lifeblood Theory

- Without revenue raised from taxation, the government will not survive, resulting in detriment to society

- Performance of governmental functions redounds to the benefit of the populace in general

- Revenues could be raised to defray expenditures for public purposes

Basis of Taxation• Symbiotic Relationship

- The reciprocal relation of protection and support between the state and the taxpayers

- The state gives protection and for it to continue giving protection, it must be supported by the taxpayers in the form of taxes

Purposes of Taxation• The basic purpose

- Revenue purpose: to raise funds to meet the objectives of government

• To secondary purposes

- Sumptuary or regulatory purpose: to promote the general welfare; ex. Sin Tax

- Compensatory purpose: to maintain high level of employment thru the acceleration of infrastructure projects

TWO PRINCIPLES of TAXATION• Who pays What” is based

on two principles:• Benefit Principle - The

more you benefit from something, the more you should pay. Taxes on gasoline for example.

• Ability to Pay - The more you make the more you should pay e.g. income tax.

Canons of Taxation• Principles of a Sound Tax System

- Fiscal adequacy: must be able to provide sufficient revenues to meet the objectives of government

- Administrative feasibility: should easily be implemented to assure the smooth flow into the treasury of the fiscally adequate amounts

- Theoretical justice: should be collected premised on the ability to pay

History• Reign of Egyptian Pharaohs

- Pharaoh would conduct a biennial tour of the kingdom

• Earliest taxes in Rome- Taxes known as Portoria were customs

duties on imports and exports

- Augustus Caesar introduced the inheritance tax to provide retirement funds for the military.

History• In England

- Taxes were first used as an emergency measure

• In the Philippines- The pre-colonial society, being communitarian, did not have taxes

History• In Modern Industrial Nations

- The government designates a tax base (such as income, property holdings, or a given commodity)

- A Tax Law is a body of rules passed by the legislature by which the government acquires a claim on taxpayers to convey, transfer and pay to the public authority

Taxation in the PhilippinesTax law in the Philippines covers national and local taxes:

• National taxes: refer to national internal revenue taxes imposed and collected by the national government through the Bureau of Internal Revenue (BIR)

• Local taxes: refer to those imposed and collected by the local government.

Taxation in the Philippines• The 1987 Philippine Constitution sets limitations

on the exercise of the power to tax:

“The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. 

(Article VI, Section 28, paragraph 1)

Taxation in the Philippines• The Constitution expressly grants tax exemptions:

“Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit cemeteries and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.”

(Article VI, Section 28, paragraph 3)

Taxation in the Philippines• National Internal Revenue Law: codifies all tax

provisions, the latest of which is embodied in Republic Act No. 8424 (The Tax Reform Act of 1997)

- Taxpayer: any person subject to tax whose sources of income is derived from within the Philippines

- Taxpayer Identification Number (TIN) is required for any individual taxpayer

Kinds of Taxes• Income Tax

- Tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business

• Donor’s Tax- Tax imposed on donations inter-vivos or those made between living persons to take effect during the lifetime of the donor

• Estate Tax- Tax on the right of the deceased person to transmit property at death

Kinds of Taxes• Value-added Tax (VAT)

- Tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines

• Capital Gains Tax- Tax imposed on the gains presumed to have been realized by the seller for the sale, exchange or other disposition of real property located in the Philippines

Kinds of Taxes• Excise Tax

- Tax applicable to specified goods manufactured in the Philippines for domestic sale or consumption

• Documentary Stamp Tax- Tax on documents, instruments, loan agreements and papers, agreements evidencing the acceptance, assignments, sale or transfer of an obligation, rights or property incident thereto

Who Pays Taxes• Resident citizens

- Taxed on all their net income derived from sources within and without the Philippines

• Alien individuals - Whether a resident or not, is taxable only on income derived from sources within the Philippines

Types of Taxes• Taxes are classified according to the

ability in which the tax burden changes as income changes.

• Proportional Tax• Progressive Tax• Regressive Tax

Proportional Taxes• Regardless of Income, the same tax rate is

imposed upon everyone. Another term for a proportional tax is a flat tax.

• If there is a 20% flat tax, how much do you pay in taxes if you earn Php10,000? What if you earn Php100,000?

• Note as a person’s income increases, the percentage of total income paid in taxes remains the same.

• Property Tax is a proportional tax

Progressive Tax•People with higher incomes

pay a higher percentage in taxes.

•Example: Income Tax•It is said “the more you make

the more they take”.

Regressive Taxes• The lower the income the higher

percentage paid in taxes. • Sales tax or Value-Added Tax is an

example of a regressive tax.

Classification of Taxes1. Direct taxes – directly levied on source of

income and wealth.E.g. Income tax and Wealth tax

2. Indirect taxes – indirectly levied on activity/transaction which generates income or wealth E.g. sales tax, service tax, etc.

Value-Added Tax• It is a form of sales tax. It is a tax on

consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. It is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services.

IMPORT TARIFF• All articles, when imported from any

foreign country into the Philippines, shall be subject to duty upon each importation, even though previously exported from the Philippines

Philippine Tax Rates

• Income Tax Rate - 32%

• Corporate Tax Rate - 30%

• Value Added Tax Rate – 12%

Tax Rates • On sale of goods and properties - twelve percent

(12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged

• On sale of services and use or lease of properties - twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties

• On importation of goods - twelve percent (12%) based on the total value used by the Bureau of Customs

Tax Avoidance• The exploitation by the taxpayer of

legally permissible alternative rates or methods of assessing taxable property or income to reduce or entirely avoid tax liability

- Availing of all deductions allowed by law of refraining from engaging in activities subject to tax

Tax Evasion• A scheme used outside those lawful means and when

availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities:

- Under-declaration of income- Non-declaration of income and other

items subject to tax- Under-appraisal of goods subject to

tariff - Over-declaration of deductions

Tax Avoidance v. Tax EvasionVALIDITY:

Legal; not subject to illegal; subject to criminal penalty criminal penalty

EFFECT:Minimization of taxes Almost always results in absence of tax payments

MEANS & METHODLegal; valid means Illegal methods

General Principles of Taxation• Taxation is the inherent power of the state, acting

through the legislature, to impose and collect revenues to support the government and its recognized objects. Simply stated, taxation is the power of the State to collect revenues for public purpose.

• Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the state by virtue of its sovereignty for the support of the government and all public needs.

Essential Characterictics of Tax1. It is an enforced contribution. It’s payment is not

voluntary in nature and the imposition is not dependent upon the will of the person being taxed.

2. It is generally payable in money. 3. It is proportionate in character. It is based on the “ability

to pay principle”.4. It is levied on persons and property.5. It is levied by the State that has jurisdiction over the

person or property. As a general rule, only persons, properties, acts, rights, transactions within the jurisdiction of the taxing State are subject to tax.

6. It is levied by the law-making body of the State.

Classification of Taxes1. 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 TaxC. 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

Classification of Taxes2. As to who bears the burden of the tax

a. Direct- the tax is imposed on the person who also bears the burden thereofEx. Income tax, community tax, estate taxb. Indirect – imposed on the taxpayer who shifts the burden of the tax to anotherEx. VAT, customs duties

Classification of Taxes• 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

Classification of Taxes4. 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.

Classification of Taxes5. 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,

Classification of Taxes6. 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, vatb. progressive and graduated- the rate of the tax increases as the tax base or bracket increases ex. Income tax, estate tax, donor’s taxc. regressive- the rate of tax decreases as the tax base or bracket increases

Difference between Tax and Penalty1.  Penalty is any sanction imposed as a punishment for

violation of law or for acts deemed injurious; taxes are enforced proportional contributions from persons and property levied by the State by virtue of its sovereignty for the support of the government and all public needs.

2.  Penalty is designed to regulate conduct; taxes are generally intended to generate revenue.

3.  Penalty may be imposed by the government or by private individuals or entities; taxes only by the government.

 

Difference between Tax and Debt1. A debt is generally based on contract, express or implied, while a

tax is based on laws.2.  A debt is assignable, while a tax cannot generally be assigned.3.  A debt may be paid in kind, while a tax is generally paid in money.4.  A debt may be the subject of set off or compensation, a tax cannot.5.  A person cannot be imprisoned for non-payment of tax, except poll

tax.6.  A debt is governed by the ordinary periods of prescription, while a

tax is governed by the special prescriptive periods provided for in the NIRC.

7.  A debt draws interest when it is so stipulated or where there is default, while a tax does not draw interest except only when delinquent.

Income Tax Computation

INCOME TAX

INCOME - means all wealth which flows into the taxpayer

GROSS INCOMEAll income of whatever kind and derived by

a taxpayer from whatever source but not including exclusions.

EXCLUSIONSThose which are not included in gross income and shall be exempt from taxation.

PERSONAL AND ADDITIONAL EXEMPTIONS UNDER RA 9504

I. PERSONAL EXEMPTIONS: Php 50, 000.00 each1. SINGLE/ widow/widower/Legally separated w/ no qualified dependents2. HEAD OF FAMILY3. MARRIEDII. ADDITIONAL EXEMPTIONS: Php 25, 000.00 eachfor Qualified DependentChildren (QDC)

Steps in computing amount of tax to be withheld

• Step1. Determine the total monetary and non-monetary compensation paid to an employee for the payroll period, segregating gross benefits which include 13th month pay, productivity incentives, Christmas bonus, other benefits, received by the employee per payroll period, and employees’ contribution (employees’ contribution only and not the employers’ contribution) to SSS, GSIS, HDMF, PHIC, and union dues. Gross benefits which are received by officials and employees of both public and private entities in the amount of P30,000 or less shall be exempted from income and withholding taxes.

• Step2. Segregate the taxable from the non-taxable compensation income paid to the employee for the payroll period. The taxable income refers to all remuneration paid to an employee not otherwise exempted by law from income tax and consequently from withholding tax. The non-taxable income are those which are specifically exempted from income tax by the Code or by other special laws as listed in Sec.2.78.1(B) hereof (e.g. benefits not exceeding P30,000, non-taxable retirement benefits and separation pay).

• Step3. Segregate the taxable compensation income as determined in Step 2 into regular taxable compensation income and supplementary compensation income. Regular compensation includes basic salary, fixed allowances for representation, transportation and other allowances paid to an employee per payroll period. Supplementary compensation includes payments to an employee in addition to the regular compensation such as commission, overtime pay, taxable retirement pay, taxable bonus and other taxable benefit, with or without regard to a payroll period.

Step 4. Use the appropriate tables mentioned under Section 2.79 (B)(1) for the payroll period: monthly, semi-monthly, weekly or daily, as the case may be.Step 5. Fix the compensation level as follows:(a)    Determine the line (horizontal) corresponding to the status and number of qualified dependent children using the appropriate symbol for the taxpayer’s status.(b)   Determine the column to be used by taking into account only the total amount of taxable regular compensation income. The compensation level is the amount indicated in the line and column to which the regular compensation income is equal to or in excess, but not to exceed the amount in the next column of the same line.

Step 6. Compute the withholding tax due by adding the tax predetermined in the compensation level indicated at the top of the column, to the tax on the excess of the total regular and supplementary compensation over the compensation level, which is computed by multiplying the excess by the rate also indicated at the top of the same column/compensation level.

Monthly Tax Computation• By using the monthly withholding tax table,

the withholding tax for January 2011 is computed by referring to Table A line 2 S (single) of column 6 (fix compensation level taking into account only the regular compensation income of P18,000 which shows a tax of P1,875 on P15,833 plus 25% of the excess of P 2,167 (P18,000-15,833) plus P7,000 supplementary compensation.

Example 1: Single with no dependent receiving monthly compensation

• Juan Santos, single with no dependent, receives P18,000 (net of SSS/GSIS,PHIC,HDMF employee share only) as monthly regular compensation and P 7,000 as supplementary compensation for January 2011 or a total of P25,000. How much is the withholding tax for January 2011 for Juan?

Regular compensation:                           P     18,000Less: compensation level(line A-2 column 6)                                            15,833Excess                                                              P    2,167Add: Supplementary compensation            7,000Total                                                                  P   9,167Tax on P15,833                                                       P  1,875.00Tax on excess (P9,167 x 25%)                                2,291.75Withholding tax for January 2011             P  4,166.75

Example 2: Married with qualified dependent children receiving semi-monthly compensation

• Jose Cruz, married with three (4) qualified dependent children receives P14,000 (net of SSS/GSIS,PHIC,HDMF employee share only) as regular semi-monthly compensation. His wife is also employed but he did not waive his right in favor of the wife to claim for the additional exemptions.

• Computation: Using the semi-monthly withholding tax tables, the withholding tax due is computed by referring to Table B line 4 ME4 of column 6 which shows a tax of P937.5 on P12,083 plus 25% of the excess (P 14,000 – 12,083 = P1,917).

Total taxable compensation                    P 14,000Less: compensation level(line B-4 Column 6)                                          12,083Excess                                                                P 1,917Tax on P12,083                                               P 937.50Tax on excess (P1,917 x 25%)                      479.25Semi-monthly withholding tax          P1,416.75

Example 3:• Given:

Assuming Withholding Tax Computed Monthly Taxable Income: P8558.00 Status: Single(S)

• Corresponding Bracket or Exemption:P6,667.00 Corresponding %over: 15% or.15 Corresponding Bracket Tax or Base Tax: P208.33

•  • Computing Your Withholding Tax:

Withholding Tax = ( ([Taxable Income] - [Bracket or Exemption] ) x [%over] ) + [Bracket Tax or Base Tax]

Withholding Tax =[(P8558.00-P6,667.00) X .15] + P208.33 Withholding Tax =P491.98

Example 4:• Given:

Assuming Withholding Tax Computed Monthly Taxable Income: P12,540.00 Status: Single or Married with 1 Qualified Dependent (S1 or M1)

• Corresponding Bracket or Exemption:P12,083.00 Corresponding %over: 20% or.20 Corresponding Bracket Tax or Base Tax: P708.33

Withholding Tax = ( ([Taxable Income] - [Bracket or Exemption] ) x [%over] ) + [Bracket Tax or Base Tax]

Withholding Tax =[(P12,540.00-P12,083.00) X .20] + P708.33 Withholding Tax = P799.73

Annual Tax Rates

Types of taxable compensation• Gross compensation income is defined as taxable income

arising from an employer/employee relationship and includes the following:

• salaries, wages, compensation, commissions, emoluments, and honoraria

• bonuses exceeding PHP30,000• allowances for transportation, representation, entertainment,

and other similar items• fees (including director’s fees paid to a director who is at the

same time an employee of the payer)• taxable pensions• taxable retirement pay• other income of a similar nature, including compensation paid

in-kind.

Tax-exempt income• Gross income subject to tax does not include the following:• statutory minimum wage• damages received by an employee or his/her heirs

following a judgment or agreement arising out of or related to an employer-employee relationship

• proceeds of life insurance policies• gifts, bequests, and devises• compensation for injuries or sickness• retirement benefits, pensions, and gratuities• interest on tax-exempt government securities• thirteenth-month pay and other benefits such as

productivity incentives and Christmas bonus subject to the PHP30,000 limit

Tax-exempt income

• certain other items specifically provided as not taxable including the following:• amount received by the insured as return of premium• income exempt from treaty• certain prizes and awards exempted by law• certain prizes and awards in sports competition• GSIS, SSS, Medicare, and other contribution• gain from sale of bonds, debentures, or other

certificate of indebtedness with a maturity of more than five years

Tax-exempt income

• gains from redemption of shares in mutual fund• interest income from long-term deposits or

investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments

• income of non-residents from transactions with offshore banking units and depository banks under the expanded foreign currency depository system.

Annualized Withholding TaxStep 1- Determine the taxable regular andsupplementary compensation paid tothe employee for the entire calendaryear;Step 2 - If the employee has previousemployments within the year, add theamount of taxable regular andsupplementary compensation paid tothe employee by the previousemployer;

Annualized Withholding Tax

Step 3 - Deduct from the aggregate amount of Deduct from the aggregate amount of compensation computed in step 2 the amount of the total personal and additional exemptions of the employee;

Personal Exemptions:Single - P 50,000Head of the Family Head of the Family - P 50,000Married Married - P 50,000Additional Exemption:P25,000 for each qualified dependent child not exceeding four (4)

Annualized Withholding Tax

Step 4 - Deduct the amount of premium payment on Health and/or Hospitalization Insurance of

employees who have presented evidence that They have paid the same during the taxableStep 5- Compute the amount of tax on the difference arrived at in Step 4.

Format - Annualized Withholding TaxGross Compensation IncomeLess: Non-Taxable/Exempt Compensation Income

a.) 13th Month pay and other benefitsb.) Other non-taxable benefitsc.) SSS, GSIS, PHIC, Pag-ibig and Union Dues

Less: a.) Personal and Additional Exemption b.) Health/Hospitalization premium payment

Taxable Compensation Income=Tax DueTax Withheld (Jan-Nov.)

Sample Problem

Mr. Jacobson, married with 2 qualified dependent children receives P 15,000.00 monthly compensation (net of SSS, philhealth, HDMF employees contribution). 13th Mo Pay/Other Benefits for the year amounted to P25,000. Tax withheld Jan-Nov. 2009 was P9,800.00

Sample ComputationTotal Compensation Jan-Nov. 15,000 x 11 mos. P165,000.00Add: Compensation to be received in December 15,000.00Gross Compensation P180,000.00Less: Personal Exemption - married P50,000

Additional Exemption- 2 x P25,000 50,000 P100,000.00Total Taxable Compensation income P80,000.00 ==========Tax Due (using annual IT table) P10,500.00Less Tax Withheld from Jan to Nov. 9,800.00Collectible Withholding Tax for December Salary P 700.00 ==========

Problem 1Mrs. Jolie Sy is employed as a sales manager. Her husband is unemployed for three years now. They have four children;the eldest is 25 years old, the second is 20 years old, the third is 18 years old and the youngest is 15 years old. Compute for the annual income tax return for the taxable year 2011 given the following additional information:Monthly salary  18,000Monthly allowance  3,000Annual Commission  120,000Withholding Tax  60,000

Solution:

Gross Compensation Income: P372,000.00Less: Personal Exemptions 50,000.00

Additional Exemptions 75,000.00Total Exemptions P125,000.00Taxable Income P247,000.00Tax Due 49,250.00Less: Tax Witheld 60,000.00Tax Payable/Refundable P 10,750.00

Tax Due CalculationTaxable Income P247,000

Over 140,000 but not over 250,00022,500 + 25% of excess over 140,000(refer Tax Rates)

Tax Due = 22,500 + (247,000 - 140,000) x 0.25= 22,500 + 26,750=49,250

Problem #2

Mr. Herrera is unmarried with two legal dependents. The following information is used to determine his income tax. Compute for his annual income tax return for the year 2011:Monthly salary  20,000Monthly overtime pay  1,500Monthly gas and food allowance 3,500Withholding Tax  35,000

Solution:Gross Compensation Income: P300,000.00Less: Personal Exemptions 50,000.00

Additional Exemptions 50,000.00Total Exemptions P100,000.00Taxable Income P200,000.00Tax Due 37,500.00Less: Tax Witheld 35,000.00Tax Payable/Refundable P 2,500.00

Tax Due CalculationTaxable Income P200,000.00

Over 140,000 but not over 250,00022,500 + 25% of excess over 140,000(refer Tax Rates)

Tax Due = 22,500 + (200,000 - 140,000) x 0.25= 22,500 + 15,000=37,500

Problem #3Mr. Dan Medina is a bank employee. He is married with four children, all in elementary and high school. His salary isP30,000 per month and the following:Medicine allowance every 3 months  5,000Monthly transportation and food allowance  2,500Tax withheld per month  3,25013th month pay equal to his monthly salary, given once a year

Thank you!