TAXATION

TAXATION

 The power of taxation as an inherent power of the governments rest upon

necessity. The need for it stems from the recognition that without it, the
state cannot exist and carry out its functions for the benefits of the people.
Such functions include the provisions of public goods to society.
Moreover, without taxation the government cannot redistribute income,
stabilize the economy and promote economic growth.
Approaches to Equitable Taxation

1. Benefits received. A principle which holds that individuals should be

taxed according to the benefits which they received from various
government or public services.
2. Ability-to-pay. A principle which means that individuals should be taxed
according to the capacity to pay, that is, every individual should
contribute to the support of the government in proportion to his wealth
and ability to pay.
What Taxation Is?

 Taxation is the act of collecting taxes. It is the inherent power of the state,
acting through the legislature, to impose and collect revenues for the
support of the government and its recognized objects.
 Taxation can also be defined as the process which the sovereign, through
its law-making body, raises revenues to defray the necessary expenses of
the government.
 Taxes on the other hand are 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 and all public needs.
What Taxation Is?

 Revenue from taxes constitutes the bulk of the governments income

where taxes pay for more than eighty percent of the total expenditure of
the Philippine government.
Objectives of Taxation

 Taxation has the following four major objectives:

1. For production of goods and services. There are goods and services
needed by the people and are provided by the government. Aside from
this, taxes collected are also used in order to support the government’s
social and economic policies.
2. For Objectives. Imported goods are subjected to tax in order to reduce
competition with locally produced products. This is one way of protecting
local industries through the imposition of taxes.
Objectives of Taxation

3. For redistribution. Taxes are used to redistribute income or wealth to

prevent social inequalities. This is the rationale for the imposition of progressive
taxes on income and property.
4. For sumptuary. Taxes are used to regulate the spending of money by
reducing consumption of goods that are considered harmful to the people
health. This explain the imposition of sin taxes on cigarettes, liquor and other
alcoholic beverages.
Requisites of a Valid Taxation

While the government has the power to levy taxes on its citizens, there are
certain requisites which are necessary to continue valid taxation. These
requisites include the following:
1. The tax should be for a public purpose. By public purpose, we mean that
the proceeds of the tax are used for the support of the government or for
some other recognized objects of government or to promote the welfare of
the community.
Requisites of a Valid Taxation

2. The rule of taxation shall be uniform. Taxes are said to be unform when all
taxable articles or properties of the same class are taxed at the same rate.
Different articles may be taxed at different amount provided that the rate is
uniform on the same class everywhere. Uniformity implies equality in burden
not equality in amount.
Requisites of a Valid Taxation

3. The person or property taxed shall be within in jurisdiction of the

government levying tax. The state can only collect taxes on persons,
properties or transactions where it has its jurisdiction. A property owned by a
person living in another place may be levied a tax by the government of the
place where the property is located.
4. The assessment and collection of certain kinds of taxes must provide
guarantees against injustices to individuals. Taxation is valid sufficient notice
and opportunity for hearing is provided to individual subjects of taxation.
 Essential characteristics of Tax
A tax has certain essential characteristics namely:
1. It is enforced contribution
2. It is generally payable in money
3. It is proportionate in character
4. It is levied on persons or property
5. It is levied by the state, which has jurisdiction over the person or property
6. It is levied by the law-making body od the state
7. It is levied for public purpose ( the support of the govt., the administration of law, the
payment of public expenses.)
Theory and Basis of Taxation

1. The power of taxation proceeds upon the theory that the existence of
government is a necessity; that it cannot continue without means to pay
its expenses; and that for these means, it has a right to compel all its
citizens and property within its limit to contribute.
2. The basis of taxation is fount in the reciprocal duties of protection and
support between the state and its inhabitants. IN return for his
contribution, the taxpayer receives benefits and protection from the
government. This is the so-called benefits received principle
Classification of Taxes

Taxes may be classified according to subject purpose, authority imposing the

tax, determination of amount, who bears the burden and graduation or rate.
1. As to subject matter or object:
a. Personal, poll or capitation. A tax imposed on individual residing within
a specified territory, regardless of property of occupation (example-
community tax).
b. Property. A tax imposed on property whether real or personal. The
amount paid is in proportion to its value or some reasonable method of
apportionment. (real –estate tax)
 C. Excise. Any tax which does not fall within the classification of a poll tax
or property tax. It is charge imposed upon on the performance of an act, the
enjoyment of a privilege, or the engaging in an occupation. (Examples-
estate, donor’s, and income taxes; VAT and practically all business taxes.)
Classification of Taxes

2. As to purpose:
a. General,Fiscal, or Revenue. These are taxes imposed for the general
purposes of the government. i.e to raise revenue.
b. Special or Regulatory. These are taxes imposed for special purpose, i.e to
achieve some social or economic ends like protection of local industries
from foreign competition.
3. As to scope (or authorithy imposing the tax)
a. National. These are taxes imposed by the national government(Examples-
National internal revenue taxes, customs duties, national taxes imposed by
special laws)
b. Municipal or local. These are taxes imposed by municipal or local
governments (Example –Real state Taxes)
4. As to determination of Amount:
a. Specific. This is a tax of a fix amount imposed by the head or number or
by some standard of weight measurement, it requires no
assessment(valuation) other than a listing of classification of the subject
to be taxed.
b. Ad valorem. This is a tax of fixed proportion of the value of the property
with respect to which the tax is assessed; It requires the intervention of
assessors.(example: real state tax, percentage taxes, excise taxes on
automobiles.
5. As to who bears the burden:
a. Direct. This tax which is demanded from the person who also absorbs or
shoulders the burden of the tax; it cannot be shifted to
another.(example: community tax, corporate and individual taxes)
b. Indirect. This is a tax which the taxpayer can shift to another. Hence, the
amount paid is paid by the person other than the one on whom it is
legally imposed(Examples- all business taxes, such as VAT, percentage
taxes on custom duties)
6. As to graduation or rate:
a. Proportional. This is a tax based on fixed percentage of the amount of
property, income or other basis to be taxed. (examples- real property
tax, sales tax all percentage taxes.
b. Progressive or graduated. This is a tax the rate of which increases as the
tax base or bracket increases. (examples- income taxes, estate tax,
donor’s tax).
c. Regressive. This is a tax the rate of which decreases as the tax base or
bracket increases.
LIMITATAIONS ON THE POWER OF
TAXATION

1. Constitutional – those expressly found in the Constitution or implied from its

provisions as follows:
a. Due process of law. Any deprivation of life, liberty or property is said to be
with due process if done under the authority of a law that is valid (i.e in
conformity to the provisions of the constitution and not contrary to it), A
taxpayer may not be deprived of his property for non-payment of taxes
without giving notice to him for his tax liabili0ty; a case of the observance
of due process; as the giving of notice is part of the procedure that is
prescribed by law.
 b.Equal protection of the laws. The signifies that “all persons subject to
legislation should be treated alike, under like circumstances and conditions
both privileges conferred and liabilities imposed. “The guarantee does not
require that persons or things different fact be treated in law as though they
were they same. Thus, inequality will results if the law will treat them alike
when different net incomes ( e.g P10,000 and P100,000) are taxed at the
same amount. What it prohibits is class legislation, which discriminates some
and favors others when both are similarly situated.
c.Rule of Unifomity and Equity. Uniformity in taxation means that “all taxable
articles or properties of the same class shall be taxed at the same rate”.
Different articles may, therefore, be taxed at different rates for as long as the
rate (not necessarily the amount) is the same on the same class everywhere.
Uniformity implies equality in burden, not in equality in amount. The concept
of equity in taxation requires that such appointment be more or less just inlight
of the taxpayer’s ability to shoulder the tax burden.
d. No imprisonment for non-payment of a poll tax. This principle is based on
the constitutional provisions that “No person shall be imprisoned for debt or
non-payment of poll tax” A person, however is subject to imprisonment for
violation other than for non-payment of community tax as in falsification of
community certificate, and for non-payment of other taxes if so expressly
provided by the pertinent law.
e. Non-impairment of the obligation of contracts. The obligation of contract is
impaired when its terms or conditions are changed by law or by party without
consent of the other, thereby weakening the position or the rights of the later.
f. Non-infringement of religious freedom. This principle is provided for in the
constitution which states that “No law shall be made respecting an
establishment of religion or prohibiting the free exercise thereof. The free
exercise and enjoyment of religious profession and worship without
discrimination or preference, shall forever be allowed”.
g. No appropriation for religious purpose. This limitation is based on the
requirement that taxes can only be levied for a public purpose. The legislative
body is without power to appropriate funds for private purpose.
h. Exemption of religious, charitable and educational entities, non-profit
cemeteries and churches from taxation. The exemption covers only property
taxes and not other taxes. Further, the test of the exemption is the use of
property, not its ownership. Thus, a property leased by the owner to another
who use it “actually, directly, and exclusively” for religious, charitable, or
educational purpose is exempt for property tax but not the owner who is
subject to income tax even if the income is used or devoted by him or
another religious, charitable, or educational purposes.
i. Exemption of non-stock, non-profit educational institutions from taxation.
As stipulated under Sec 4 (3), Art. XIV of the Constitution- All revenues and
assets used actually, directly and exclusively for educational purposes are
exempt from income and property taxes and custom duties. Thus, to be
exempt from taxation, the profits or assets must be used to improves
school facilities and academic standards. Moreover, all grants,
endowments, donations or contributions used actually, directly and
exclusively for educational purpose are also exempt from tax.
j. Concurrence by a majority of all members of congress for the passage of a
law granting tax exemptions. This requirement is intended as a safeguard
against the indiscriminate grant of tax exemptions.
k. Authority of the president to veto the particular item/items in a revenue or
tariff bill. The veto power of the president is the power vested in the president
to disapprove acts passed by Congress. While the president has the power to
veto any particular item or items in an appropriation, revenue or tariff bill,
such veto shall not affect the item or items to which he does not object.
l. Non-impairment of the jurisdiction of the supreme court in tax cases. This
limitation conforms to the provisions of the Constitution viz:
“ The Congress shall have the power to define, prescribe, and apportion the
jurisdiction of the various courts but may not deprive the supreme court of its
jurisdiction enumerated in section hereof (sec 2, Art VIII)”

“The supreme Court shall have the following powers: reviews, revise, reverse
or modify or affirm final judgments and orders of lower courts in all cases
involving the legality of any tax, impost, assessment, or toll or any penalty
imposed in relation there to” Sec 1-5 (2b), Art VII).
*** Under the two mentioned provisions, the congress cannot take away from
the supreme court the power given to it by the constitution as the final arbiter
of tax cases.
2. Inherent- those which restrict the power although they are not embodied in
the constitution which includes the following:
a. Requirement to that levy must by for a public purpose. Since the
government es established for a public purpose, public money can be used
inly for that purpose. The proceeds of the tax therefore must be used for the
support of the government, for some of the recognized objects of the
government for the promotion of the welfare of the community.
b. Non-delegation of legislative power to tax. This limitations in consonance
with the doctrine of separation of powers. Hence, Congress cannot delegate
the power of taxation to others, it being purely legislative.
c. Exemption from taxation of government entities. Agencies and
instrumentalities of the government are generally exempt from taxation for
obvious reason- to tax a public property would render necessary new taxes in
order to pay this tax and thus, the government would be taxing itself to raise
money to pay over to itself.
D. International comity. This limitation stipulates that the property of a foreign
state or government may not be taxed by another. This is based on the
sovereign equality among states under international law by virtue of which
one state cannot exercise its sovereign powers over another.
E. Territorial Jurisdiction. This limitation posits that the country’s tax laws do not
operate beyond its jurisdictional limits. Furthermore, property which is wholly
and exclusively within then jurisdiction of another state receives none of the
protection.
Taxes in the Philippines

The two basic type of taxes in the Philippines are local taxes and national
taxes.
*Local Taxes: Local taxes include taxes, fees, and other charges that may be
levied by the local government units (i.e provinces, municipalities, cities, and
barangays) to individuals or judicial persons(e.g corportaions and
partnerships) in the Philippines. The local government taxation in the
Philippines is based on the Republic Act 7160 or otherwise known as Local
Government Code of 1991, as amended
 National taxes: Are those that are imposed by the national government
through the Bureau of Interna Revenue (BIR). The national taxation in our
country is governed by Republic Act No. 8424 or the National Internal
Revenue Code of 1997, as amended by new and subsequent tax laws
and tax regulations enacted by the government.
Distinction between tax evasion and
tax avoidance

Both tax evasion and tax avoidance have the purpose of lessening tax liability
or payment. The difference between the two however, lies in the manner of
how tax reduction is done.
A deliberate intent to defraud the revenues becomes a basis of criminal
action against the offender under our tax laws. Such is a case of tax evasion
where the taxpayer employs illegal or fraudulent means to defeat or reduce
the payment of a tax which is punishable by law. Some specific cases of tax
evasion are under-declaration of income, non-declaration of income and
other items subject to tax, over-declaration of deductions and under-
appraisal of goods subject to tariff.
Tax avoidance on the other hand is the use by the taxpayer of legally
permissible means or methods in order to avoid or reduce tax liability, a case
which is not punishable by law. This may include situations where a person
refrains from engaging in some of activity or enjoying some privilege in order
to avoid incidental taxation. Changing the form of property by putting one’s
money into non-taxable securities also falls under a case of tax evasion.
Progressive system of Taxation and the
Income Tax

Many direct taxes are designed on the basis of a progressive structure. This
means that the tax rate increases as the income increases. Taxes on income,
on inheritance and on transfers of wealth have a progressive structure often
for the reason that it helps to equalize the distribution of income and wealth in
the country.
 Tax Table:
TAX TABLE
If Taxable Income is: Tax Due is: If Taxable Income is: Tax Due is:

Not Over P10,000 5%

Over P10,000 but not P500 + 10% of the Over P140,000 but not P22,500 + 25% of the
over P30,000 excess over P10,000 over P250,000 excess over P140,000

Over P30,000 but not P2,500+15% of the Over P250,000 but not P50,000+30% of the
over P70,000 excess of 30,000 over P500,000 excess over P250,000

Over P70,000 but not P8,500+20% of the Over P500,000 P125,000 +32% of the
over P140,000 excess over P70,000 excess over P500,000
• In broad sense, income mean all wealth that flows into the taxpayer other
than as a mere return of capital. Income tax on the other hand, is a tax on
all yearly profits arising from property, professions, trades, or offices or as a
tax on person’s income, emoluments, profits and the like. It is based on
income either gross or net, and is levied upon the right of a person to
receive income of profit.
• A Philippine citizen and resident is taxed on all income derived from
sources within and without the Philippines.
 The income tax is imposed on his/her taxable income. (that is gross income
less allowable deductions and or personal exemptions) computed in
accordance with the following schedule.
Formula: Gross Income; Net Income; Taxable Compensation Income, Tax
Due, Income Tax Payable
Gross Income = All income less exclusions
Net or Taxable Income = Gross Income less allowable deductions
Taxable Compensation Income = Gross compensation less personal and
additional exemptions
Income Tax Due = Taxable or net income multiplied by income tax rate
Income Tax Payable = Income tax due less creditable with holding tax or tax
credit
Individuals who are either earning compensation income, engaged in
business or deriving income from the practice of profession are entitled to
personal and additional exemptions as follows:

Personal Exemptions:
For single individual or married individual judicially decreed as legally:
Separated with no qualified dependents………………….P50,000.00
For head of family ………………………………………………P50,000.00
For each married individual*………………………………….P50,000.00
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, P25,000 additional exemption can be claim
but only up to 4 qualified dependents.
The dependent must be:
a. A taxpayer’s child, whether legitimate, illegitimate or legally adopted
b. Chiefly depending for support on the taxpayer
c. Living with the taxpayer
d. Not married, not gainfully employed and not more than 21 years old.

The law continues additional exemption to dependent child more than 21

years old if incapable of self-support to mental or physical defects.
The additional exemption can be claimed by the following:
- The husband who is deemed the head of the family unless be explicitly
waived his right in favor of his wife.
- The 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 individual considered as Head of the Family supporting a qualified
dependent
OFW’s Granted Tax Exemption
Section 23 © of the National Internal Revenue Code of 1997 states that a
Filipino who works abroad as an OFW is taxed only on income earned in the
Philippines, regardless of the period that he/she is outside the Philippines
Minimum Wage Earners Granted Tax Exemption
The granting of income tax exemption to minimum wage earners in both
private and public sectors has been formalized under RA 9504. Said
exemptions extends to their wage and work-related benefits such as holiday
pay, overtime pay, night shift differential pay, and hazard pay.