REVIEWER in TAXATION

UNIT 1
 Philippines - is an archipelago rich in natural resources.
 Natural Resources - are essential in the production of consumer goods.

FACTORS OF THE PHILIPPINE ECONOMY:

1) Land - one of the factors of production.
4 CLASSES:
 Agricultural Land
 Commercial Land
 Residential Land
 Military Camp
 300,000sq.km. - estimated total land area of the country.
 Adam Smith - Scottish Philosopher
- “Wealth of Nation”
2) Labor - refers to the physical and mental components of a human being.
 Labor Force - number of people who may qualify for employment whose age level is from 15
years old and above.
 Unemployed - those members of the labor force who are qualified to be employed but are not
currently hired.
 Underemployed - people who are qualified for a higher employment position, but over qualified
for their current employment and receiving lower compensation.
- mostly hired be outsourcing companies or commonly known as Call Centers.
3) Capital - referred to as a finished good used to produce other goods.
4) Entrepreneurs - the ones who allocate the factors of production to maximize their outputs.
 Lack of Capital - common problem in starting a business.

Basic Types of Economic System:

1) Capitalism - private ownership and control of most resources.
- relies on the decisions made in the market between the buyer and the seller. The
decision is known as “laissez faire”
 laissez faire - a French term
- “leave alone” policy
2) Socialism - allows the government to manage and control the major and key industries.
 Government Planners - decide what goods will be produced and set the prices at which they are
to be sold.
 Socialist Economy - based on the principle, “production for use” which means that the produced
are for the satisfaction of economic demand and human needs.
3) Communism - is a Latin term meaning “common”.
- characterized by collective ownership of all resources and also a centrally planned
economic decision making.
- common ownership
- a classless society
4) Mixed Economy - characterized by the presence of private ownership of the different means of
production and the presence of a government which is in control of the implementation of the fiscal
and monetary policies.
5) Traditional Economy - decisions are based on customs, beliefs, and practices.

2 Approaches to understand Economics:

1) Macroeconomics - this approach involves the discussion of the principles and theories of
economics in totality.
2) Microeconomics - this approach pertains to the study on economic principles and theories in
smaller section or individual.
5 Divisions of Economic Activities:
1) Production - the process of creating goods and services and the conversion of raw materials into
finished goods.
2) Distribution - the process of allocating the different fruits of production to the different factory.
3) Exchange - the delivery of the finished goods or services from the producer’s to the customers.
- the process of giving out cash for the commodity purchased.
 Money - used to facilitate exchange.
4) Consumption - the utilization of the finished goods or services by the consumer in order to safety
his demand.
5) Public Finance - has to do with the management of the government’s monetary or financial
resources.

 Economic Problem - a situation when the basic needs of man cannot be satisfied.
- scarcity
 Market - a situation or mechanism that brings together the buyers and sellers of a particular
good or service and the exchange of goods or services between the buyer and the seller is
completed.
Elements of Market:
1) Price - the quantity of money or of other goods or services paid and received in exchange for a unit
of a good and service.
2) Demand - the amount of a good or service which buyers are willing to buy at various prices at a
given time and place.
Determinants of Demand:
1) Price Determinant - dictates how many the buyers will have to buy.
 Law of Demand - states that “as the price of the commodity increases, total quantity demanded
decreases, ceteris paribus (or all other things held constant) and as the price of the commodity
decreases, the total quantity demanded increases.”
2) Non-price Determinants of Demand - factors affecting demand other than the price of the
commodity.
 Income - the purchasing power of an individual.
 Population - the number of people residing in a specific area or location.
 Price of Substitute Products - products used as replacement for another product.
 Price of Complementary Products - products used simultaneously.
 Cost of advertising and promotions - pertains to expenses.
 Quality of the products - products that would provide consumers full satisfaction in terms of
reliability.
 Future Price Expectations - prices in the market may change without prior notice, and this affect
one’s demand.
 Taste and Preferences - fashion or trend can easily alter one’s preferences.

Demand Curve - the graphical illustration of the demand schedule.

Movements of the Demand Curve:
 The Demand Curve may move either to the right (upward) or left (downward).
 Change in Quantity Demanded - a movement when points move along the same demand curve
 Saving - the disposable income not spent

Supply - produced good

- the products purchased by the consumer are the output of the producers.
- defined as the quantity number of units that the sellers are willing to sell.
 Law of Supply - states that “the higher the price is, other things being the same, supply becomes
higher, as the price is reduced, less to be produced or sold.”
Supply Curve - when it slopes upward to the right, it indicate that sellers are willing to sell more at a
higher price, and sell less at a lower price.

 Profit - the difference between the cost of production and the total revenue obtained.
Movements of the Supply Curve:
1) Change in Supply - the shift or movement of the entire supply curve either to the right or to the
left.
2) Change in Quantity supplied - the movement of the points along the same supply curve.

 Market Price - the price determined by the interaction between the buyer and the seller.
- equilibrium point
- the intersection or the meeting point between the demand and supply curves.

4 Common Identified Market Structures:

1) Perfect Competition - many fully informed buyers and sellers of a standardized product and no
obstacles to enter or exit of firms in the long run.
2) Monopolistic Competition - many firms selling products that are substitutes but different enough
that each firm demand curve slopes downward and firm entry is relative easy.
3) Oligopoly - characterized by firms so few that each behaves interdependently.
4) Monopoly - there is only one producer supplier with no close substitutes.

Types of Business Organizations:

1) Single Proprietorship - there is only one who owns and controls the operation and management of
the business.
2) Partnership - two or more persons pool their resources and agreed on the manner of operating the
management.
3) Corporations - are voluntary organization of persons, either actual individuals or local entities,
legally bound together to form a business enterprise.
4) Cooperatives - a voluntary organization engaged in an economic activity which is established,
owned, and operated by those persons who together will share the total benefit.

UNIT 2
 Macroeconomics - the study of the major economic aggregates.
- its basic task is to study the causes of the good or bad performance of the big
three concepts of macroeconomics:
 Unemployment
 Inflation
 Economic growth
Basic Terminologies in Macroeconomics:
1) Consumption Expenditure - to purchase made by households of good services for their own
consumption.
2) Depreciation - (consumption allowance)
- a portion of the capital stock used up due to wear and tear or due to obsolescence.
3) Final Products - all produced goods and services available and are sold through the markets for
final consumption and are not resold.
4) Gross National Product - gross domestic produced (GDP)
5) National Income Account - the economic accounting system of a country that keeps track of GDP
and its other social accounts.
6) Nominal GDP - the value of domestic product in current prices.
7) Personal Disposable Income - the difference between personal income and the personal income
tax payments.
8) Transfer Payments - payments made for which no services or produced goods are expected in
return.

 Gross National Product - the market value of all final products produced by the resources of the
economy during a specified period of time.
 GNP figures - show the structure of production according to end use and factor contribution.
 GNP Camera - a formal tool which cannot picture the informal transactions in the economy.
2 Approaches Determining Gross National Product:
1) GNP Accounting Expenditure Approach - this approach identifies the final products according to
the principles and classifies them according to exports.
 Net Foreign Factor Income - the difference between the aggregate flow of factor payments from
(+) and to (-) the rest of the world.
 Inflow (+) - to exports
 Outflow (-) - to imports
 Statistical Discrepancy - a theoretical account used to even out the practical differences
between the figures arrived at by the two alternative approaches to GNP Accounting.
 Formula: GNP= C+G+I (X-M)
 C - Private Consumption Expenditure - the final expenditure of total household
 G - Government Expenditures - all expenses incurred by the government
 I - Gross Domestic Investment (sum of Private Gross Domestic Investment and Public
Gross Investment)
 Investment - capital formation
- resulted in additional capital
- it may be sub-classified as:
 Construction - like roads, buildings, etc.
 Durable Capital Equipment - like plant equipment and machinery.
 Depreciation - the consumption of capital goods.
 Inventory change - the stock of finished commodities or raw materials that
are kept by the producer.
 Net Foreign Investments - X-M (X stands for exports; M stands for imports)
2) GNP Accounting Income Approach - GNP is equal to the additive values of factor contributions in
the process of transforming products into their final forms.
 Taxes - factor contributions
 Capital Consumption Allowance - “depreciation”
- represent payments to the resource owners for the
consumption of capital goods in the production process.

Other Social Accounts:

 Net National Product is equal to Gross National Product less depreciation.
 National Income (NI) - income earned by factor owners and equal to Net National Product (NNP)
less indirect taxes.
 Personal Income (PI) - income earned by persons or households.
 Disposable Income (DI) - personal income available for consumption.
 Consumption is equal to Disposable Income (DI) less Savings (S)

 Current GNP - a value using current prices

 Price index - “GNP deflator”
- most commonly used is the Consumer’s Prices Index.

UNIT 3
 Taxes - are the enforced proportional contributions from persons and property.
 Resident Citizens - aerial birth
 Non-resident Citizen - Filipino sa ibang bansa.
 Resident Aliens - tourists
 Non-resident Aliens - NETB (Not Engage in T Business);ETB (Engage in T Business)
 Debt
TAXES DEBT
Based on Law Based on Contract
Cannot be assigned Generally Assignable
Paid in Money May be Paid in Kind or Service
Non-payment of Taxes is a Crime Non-payment of Debt is not a Crime
 License Fee
TAXES
For raising Revenue
An exercise of the Power of Taxation
May not have Limitation in amount to be paid
Imposed on person or property
 Toll
TAXES
An Exercise of Sovereignty
For the Support of the Government
May Not be Limited in Amount
Imposed only by the Government
 Special Assessment
TAXES
Imposed on Persons, Property and Privilege
LICENSE FEE
For Regulation
An exercise of Police Power
The amount is Limited to the necessary expenses
Imposed on some privilege such as doing
business or exercise of profession
TOLL
A Propriety
For the Use of Property
Limited on the Value
Imposed by Private Individuals
SPECIAL ASSESSMENT
Imposed on Land or Real Property

Kinds of Taxes:
1) As to Object
a) Personal - tax on persons within the territory without regard to his/ her property.
b) Property - tax imposed on the value of personal or real property
c) Privilege or Excise - a charge imposed upon the performance of an act of the enjoyment of
privilege.
2) As to burden or incidence
a) Direct - cannot be shifted; demanded to the person primarily or directly liable to pay tax.
b) Indirect - may be shifted
3) As to rates
a) Specific - tax rates are provided for already by law.
b) Ad Valorem - VAT or Sales Tax
- tax upon the value of the article or thing subject to taxation.
4) As to purpose
a) General or Fiscal - imposed for the purpose of raising public funds for the service of the
government.
b) Special or Regulatory - imposed on certain useful or non-useful industry or privilege for the
purpose of regulation for the benefit of the public.
5) As to Scope
a) National - imposed by the National Government
b) Local - imposed by the Local Government
6) As to Graduation
a) Progressive or Regressive - tax to be paid increases or decreases as the income increases or
decreases.
b) Proportionate - tax is based on a fixed percentage of the amount of the property receipts
or other basis to be taxed.

Theories on the Exercise of the Inherent Power to Tax:

1) Lifeblood Theory - it implies taxes are the lifeblood of the government.
- it also implies that without taxes, the government would be paralyzed for lack
of motive power to activate and operate it.
2) Necessity Theory - states that taxes proceed upon the theory that the existence of the government
is a necessity.
3) Symbiotic Relationship or Benefits-Protection Theory - states that there exist a symbiotic
relationship , whereby in exchange for the protection that the citizens get from the government.
Principles of Sound Tax System
1) Fiscal Adequancy - there should be no excess or deficiency in that imposition and collection of
taxes.
2) Administrative Feasibility - should be capable of convenient, just and effective administration
especially of the executive department.
3) Theoretical Justice or Ability to pay principle - should be in proportion to the taxpayer’s ability to
pay.

 Interpretation - tax laws are liberally interpreted in favor of the taxpayer and strictly interpreted
against the government exept for tax exemption.
 Double taxation - direct duplicate taxation through being taxed twice by the same taxing
authority.

Ways to eliminate Double Taxation:

1) Exemption Method - the income or capital which is taxable at the State of source is exempted at
the State of residence of the taxpayer.
2) Credit Method - the common method is to reduce the tax to be paid by the taxpayer to his
residence State by the tax paid in another State.

 Compromise - a contract whereby the parties by reciprocal concessions, avoid litigation or put
an end to one already commenced.

Escape from Taxation

1) Shifting of Taxes - the burden of paying the taxes may be shifted to other taxpayer, such as the
payment of value added tax (VAT).
2) Tax Avoidance - legal
- “tax minimization”
- wherein the taxpayer resorts to other legal means in order to avoid or reduce the
payment of taxes.
3) Tax Evasion - illegal; premiditated
- “tax dodging”
- punishable by law; the use of taxpayer of illegal or fraudulent means to defeat or
lessen the payment of tax
4) Tax Amnesty - general pardon

Stages of Taxation:
1) Levy - it pertains to determination of the purpose, subject, object, nature and amount.
2) Assessment - the manner of enforcement of the obligation or burden imposed by law on the part
of those who are taxed.
3) Collection and Payment - the act of compliance by the taxpayer.
4) Refund - the recovery of any tax.

Scope and Limitation of Philippine Taxation:

A) Inherent Limitation
1) Public Purpose - tax must be used for the support of the government’s projects and
operations for the benefit and welfare of the community.
2) Legislative in Character - taxation is inherently legislative in character and cannot be
delegated by Congress.
3) Territorial - tax is limited to the territorial jurisdiction of the taxing authority and cannot be
enforced to other sovereign.
- “place of taxation” means that only the persons and properties within or inside the
territory of the Philippines may be taxed.
4) International Comity - the properties of other State may not be the subject of taxation of
another State.
5) Exemption of Government Entities - the exemption applies only to government entities
through which the government immediately and directly exercises its sovereign powers.
B) Constitutional Limitations
Philippine National Internal Revenue Code (NIRC) of 1997
A) Income Taxation
1) Income - it means cash or its equivalent coming to a person within a specified period
whether as payment, services, interest or profit from investment.
2) Income Taxation - a tax on all yearly profits arising from property, profession, trade or
business, or a tax on person income, emoluments, profits and the like.
3) Philippine Income Tax Systems
 Global Tax System - all income received by the taxpayers are grouped together.
 Schedular Tax System - the various types or items of income are classified accordingly
and are accorded different tax treatments, in accordance with schedules characterized
by graduated tax rates.
 Semi-Schedular or Semi Global
4) Features of Philippine Income Tax Law
 Direct - one assessed upon the property, person, business income, etc. of those who
pay them.
 Progressive - the tax rates increase as the tax base increases.
 Comprehensive - the Philippine Income Tax Law is comprehensive in the sense that it
practically applies all possible rules of tax.
 Semi-Schedular or Semi Global
5) Principles in imposing Philippine Income Tax
 Citizenship - citizens are table on all their incomes within and outside of the
Philippines
 Residence - a resident (including foreigner) is liable to pay income tax on his income
from sources within the Philippines.
 Source - the source of which is within the Philippines is subject to income taxation.
6) Fiscal Period
 Calendar - 12 month period from January to December.
 Fiscal - Period of 12 months not starting January.
 Short Period - monthly, quarterly or semi-annually.
7) Forms of Income
 Cash - monetary or pecuniary value
- actual or constructive
 Property - renting
- barter
- exchange
 Cash and Property combined - buy and sell
- condominiums
B) Kinds of Taxpayers:
1) Individual Taxpayers
 Resident Citizen - taxed on their worldwide income
 Non-Resident Citizen - immigrants; employees of a foreign entity on a permanent basis.
 OCWs - taxed on income derived in the Philippines but exempt from income derived
abroad.
 Resident Aliens - taxed on income realized in the Philippines, exemptions are allowed.
 Minimum Wage Earners - exempted from Income taxation.
 Non-Resident Aliens Engaged in trade or business - stayed in the Philippines for more than
180 days.
 Non-Resident Aliens Not Engaged in trade or business - does not stay in the Philippines for
more than 180 days.
 Special Aliens - employees of multinational companies.
2) Partnership
3) General Professional Partnership
4) Estates and Trusts
5) Co-ownership
Types of Income:
1) Gross Income - all income, gain or profit subject to tax.
2) Net Income - gross income less allowable deductions and exemptions.
3) Imputed Income - meal allowances, rice subsidies, living quarters, fringe benefits or de minimis
benefits.
4) Compensation Income - compensation due to the service rendered which arises in an employee-
employer relationship.
5) Taxable Income vs. Income Tax - Gross income less allowable deductions and/or personal and
additional exemptions and health/hospitalization premium allowances, while Income tax is tax on all
yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income,
emoluments, profits and the like.

Gross Income
1) Inclusions - all income derived during a taxable year by a taxpayer from whatever source, whether
legal or illegal.
2) Exclusions - specifically excluded by law.