RELEVANCE OF TAXATION

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Taxes are the government's most important source of revenue. The act of tax
collection is called taxation. A tax is a compulsory payment or fee levied on persons or
businesses by the government. The taxpayers must pay the taxes irrespective of any
corresponding return by the government on the products or services. The taxes may be
imposed on the income and wealth of persons or corporations and the rate of taxes may
vary.

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As a way of increasing money, governments levy charges on their people and

corporations, which are then used to meet their budgetary demands. This involves
funding public and government programs, as well as making the country's market
climate conducive to economic development.

Importance of Taxes in Society

Governments would be unable of meeting the demands of their populations without
taxation. Taxes are important since this revenue is collected by governments and used
to fund social programs.
Some of these projects include:
• Health
Without taxes, government contributions to the health sector would be impossible.
Taxes go to funding health services such as social healthcare, medical research, social
security, etc.
• Education
Education could be one of the most deserving recipients of tax money. Governments
put a lot of importance in development of human capital and education is central in this
development. Money from taxes is channeled to funding, furnishing, and maintaining the
public education system.
• Governance
Governance is a crucial component in the smooth running of country affairs. Poor
governance would have far reaching ramifications on the entire country with a heavy toll
on its economic growth. Good governance ensures that the money collected is utilized
in a manner that benefits citizens of the country. This money also goes to pay public
servants, police officers, members of parliaments, the postal system, and others.
Indeed, with a proper and functioning form of government, there will be no effective
protection of public interest.
Other important sectors are infrastructure development, transport, housing, etc.
In addition to social projects, governments also use tax-collected money to fund sectors
that are crucial to their citizens' well-being, such as security, scientific research,
protection of the environment, etc.
Some of the cash is also channeled to fund initiatives such as pensions, unemployment
benefits, childcare, etc. Furthermore, taxes can affect the state of economic growth of a
country. Taxes generally contribute to the gross domestic product (GDP) of a country.
Because of this contribution, taxes help spur economic growth which in turn has a ripple
effect on the country’s economy; raising the standard of living, increasing job creation,
etc.
Governments also use taxes as a deterrent for undesirable activities such as the
consumption of liquor, tobacco smoking, etc. To achieve this, governments impose high
excise levies on these products and as a result, raise the cost of these products to
discourage people from buying or selling them.
Importance of Tax to Businesses
For business to flourish in the country, there has to be good infrastructures such as
roads, telephones, electricity, etc. This infrastructure is developed by governments or
through close involvement of the government. When governments collect money from
taxes, it ploughs this money into development of this infrastructure and in turn promotes
economic activity throughout the country.
The concept of taxation is also important to businesses because governments can fund
this money back into the economy in the form of loans or other funding forms.
Taxes help raise the standard of living in a country. The higher the standard of living,
the stronger and higher the level of consumption most likely is. Businesses flourish
when there is a market for their product and services. With a higher standard of living,
businesses would be assured of a higher domestic consumption as well. Taxes are
essential and every citizen is meant to reap benefits of these taxes. This is why it is
important that citizens endeavor to pay taxes and understand that it is meant to be more
than just a “money grab” from the government.

GENERAL PRINCIPLES OF TAXATION FUNDAMENTAL PRINCIPLES IN

TAXATION
Taxation
 Taxation is the inherent power of the sovereign, 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 objects of government.
 It is also defined as the act of levying a tax, i.e. the process or means by which the
sovereign, through its law-making body, raises income to defray the necessary
expenses of government. It is a method of apportioning the cost of government among
those who, in some measure, are privileged to enjoy its benefits and must therefore
bear its burdens.
 It is a mode of raising revenue for public purposes,
CHARACTERISTICS OF TAXATION

 Compulsory payment
 Raised for government purposes
 The exactions do not constitute payment for services rendered
 The payments are not penalties
 The exactions are not arbitrary
 Enforced under any written law The exactions should not be incontestable No
specific right is transferred 
Others:
 Tax is non penal
 It is not fine. It is imposed without any certain purpose
 It is paid without any expectation of direct benefit
 It is compulsory payable by the persons. People are bound to pay tax if it is
imposed
 It is a most important fiscal mechanism of transferring private property to state
property
 It is a source of revenue. It is the prime source of revenue for the government.

TAX PRACTICES IN OTHER COUNTRIES

Taxation is, by and large, the most important source of government revenue in
nearly all countries. According to the most recent estimates from
the International Centre for Tax and Development, total tax revenues account
for more than 80% of total government revenue in about half of the countries
in the world – and more than 50% in almost every country.

We begin this entry by providing an overview of historical changes in taxation

patterns, and then move on to an analysis of available data from the last
couple of decades, discussing recent trends and patterns in taxation around
the world.

From a historical perspective, the growth of governments and the extent to

which they are able to collect revenues from their citizens, is a striking
economic feature of the last two centuries. The available long-run data shows
that in the process of development, states have increased the levels of
taxation, while at the same time changing the patterns of taxation, mainly by
providing an increasing emphasis on broader tax bases.

Taxation patterns around the world today reveal large cross-country

differences, especially between developed and developing countries. In
particular, developed countries today collect a much larger share of their
national output in taxes than do developing countries; and they tend to rely
more on income taxation to do so. Developing countries, in contrast, rely more
heavily on trade taxes, as well as taxes on consumption.

Moreover, the data shows that developed countries actually collect much
higher tax revenue than developing countries despite comparable statutory
taxation rates, even after controlling for underlying differences in economic
activity. This suggests that cross-country heterogeneity in fiscal capacity is
largely determined by differences in compliance and efficiency of tax
collection mechanisms. Both of these factors seem to be affected by the
strength of political institutions.

In the last part of this entry, we provide an overview of empirical evidence

regarding the equity and efficiency implications of taxation. In particular, we
show that taxation does have a powerful redistributive effect, but it is
important to consider how taxation also affects behavior of individuals, by
changing economic incentives. For example, recent studies have found that
taxation may lead to efficiency losses by inducing migration of ‘super stars.
These potential efficiency losses highlight the importance of designing
taxation systems that achieve redistributive objectives at the smallest possible
cost.

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AT A GLANCE: TAXES IN THE PHILIPPINES

Tax reforms are underway in the Philippines.

The Tax Reform for Acceleration and Inclusion (TRAIN) law has, since
January this year, jacked up or introduced excise taxes on fuels, cigarettes,
sugary drinks, automotive vehicles, and other goods. Tax revenues collected
on these were to offset a fall in personal income tax revenue - the
restructured tax regime for individuals sees a higher tax-exempt annual
salary cap of 250,000 Philippine pesos (S$6,500). 

The government expects TRAIN to add around 90 billion

Philippine pesos to its tax takings, and said that tax takings have already
started to rise, climbing 19 per cent in the first five months of 2018.
Hikes in fuel prices have prompted calls for the TRAIN law to be suspended,
but the Duterte administration has said that such a suspension would have a
minimal and short-term impact on inflation, and could stifle growth. The
government says tax revenues are much needed to support its ambitious
“Build, Build, Build Program”, aimed at bridging the infrastructure gap
between the Philippines and its Asean neighbors.

Corporate Tax: 30% standard rate

Local and foreign businesses are both subject to a standard corporate

tax rate of 30 per cent. Domestic ones - those incorporated in the Philippines
- are taxed on their worldwide net taxable income, while foreign corporations
are subject to tax only on income from Philippine sources. So foreign
corporations doing business in the Philippines through a branch office are
considered non-resident and therefore only taxed on revenue sourced from
the Philippines.

Minimum corporate income tax: 2% on gross income

From the fourth taxable year after the start of business operations, a
company would have to pay at least 2 per cent of the company’s income as
tax. This means that all domestic companies in the Philippines would have to
pay either 30 per cent corporate income tax, or 2 per cent minimum corporate
income tax.

Concessionary rates and exemptions

Proprietary educational institutions and non-profit hospitals face a lower

corporate income tax rate of 10 per cent. This applies if not more than 50 per
cent of their total gross income is derived from unrelated trade, business and
other activities.

Non-profit organizations and non-stock, non-profit educational

institutions (where all assets and revenues are used directly and only for
educational purposes), are exempt from tax.

Indirect Tax: 12% VAT

The Philippines imposes a value added tax (VAT) of 12 per cent on

most sales of goods and services. 

Export sales are zero-rated, while the sales of certain services are
exempt from VAT. For those not VAT-registered, because their annual sales
are less than 3 million Philippine pesos, a 3 per cent tax applies.

The TRAIN reforms included changes to the detailed conditions under

which VAT applies, while providing for additional VAT exemptions, such as
on the sale of goods and services to senior citizens and those with
disabilities, as well as on drugs and medicines for diabetes, high cholesterol
and hypertension.

Withholding Tax

Dividends: Dividends distributed to a non-resident are taxed at 15 per cent if

the country of the foreign corporate recipient allows a tax credit of 15 per
cent. If not, dividends are subject to a withholding tax of 30 per cent
Interest: Interest paid to a non-resident is subject to a 20 per cent
withholding tax

Royalties: Royalty payments made to a non-resident are subject to a 20 per

cent withholding tax.

Personal Tax: 35% top marginal rate

The Philippines taxes personal income at a series of progressive rates

ranging from 5 per cent to 35 per cent.

Resident citizens are taxed on worldwide income, while resident foreigners

and non-residents are taxed only on Philippine-source income. Foreign
individuals may also benefit from preferential tax treatment. 

What’s taxable: all income less deductions. This includes compensation,

business income, capital gains from the sale of real property or shares,
dividends, interest, rents, royalties, annuities, pensions and share of income
from general professional partnerships.

Exemptions and other taxes

Minimum wage earners need not pay income tax on their compensation
income. Their holiday, overtime, night shift and hazard pay is also tax-
exempt.

On the sale of real property, individuals are subject to a 6 per cent capital
gains tax on the gross sales price or the current fair market value, whichever
is higher. For capital gains derived from the sale of shares not traded on the
stock exchange, individuals will also be taxed at a rate of 15 per cent. Gains
from the sale of shares listed on the stock exchange are taxed at 0.6 per cent
of the gross sales price.

Tax incentives

To incentivize particular economic activities and investments, the government

provides businesses with incentives under the Omnibus Investment Code of
1987 and the Special Economic Zone Act of 1995. There are both fiscal
incentives, such as income tax holidays, and non-fiscal ones such as the
simpler customs procedures for imports and exports. There are also other
incentives unique to enterprises engaged in specific business activities.

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Source of Tax Law in the Philippines

The basic sources of tax law in the Philippine's are the nation's
constitution, the National Internal Revenue Code, administrative
issuance, and local laws.

History

Up until the 1970s, Philippine taxes accounted for only roughly 10 percent of the
nation's GNP. Capital expenditures required more tax revenue under the regime of
Ferdinand Marcos. However, the Philippines still lacked a comprehensive tax system
and few limitations were placed on the government's power to levy taxes, which
changed with the ratification of the modern Philippine Constitution in 1987 which
specifically details the authority of the government to establish taxes.

Sources of Tax Law

After the constitution, the primary source of specific tax law in the Philippines is the
National Internal Revenue Code (NIRC), the most recent version of which was
enacted via the The Tax Reform Act of 1997. The NIRC establishes basic taxes the
government may levy such as personal income taxes, corporate taxes, sales taxes,
excise taxes and estate taxes. It also codifies the tax collection process and
procedures for appeals. Additionally, Philippine tax law empowers local governments
to establish and assess some types of taxes, but which may not include taxes
specifically limited to the national government such as personal income taxes, estate
taxes, and some sales taxes.

Implementation

The Commissioner of Internal Revenue, has the authority to interpret the provisions of
the Tax Code subject to review by the Secretary of Finance. Both the Secretary of
Finance and the Commissioner may issue administrative orders based on these
interpretations. The Bureau of Internal Revenue is responsible for collecting these
taxes.
SOURCES OF TAX INFORMATION

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by
the seller from the sale, exchange, or other disposition of capital assets located in the
Philippines, including pacto de retro sales and other forms of conditional sale. 

Documentary Stamp Tax is a tax on documents, instruments, loan agreements and

papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights,
or property incident thereto. 

Donor's Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of
property between two or more persons who are living at the time of the transfer. 

Estate Tax is a tax on the right of the deceased person to transmit his/her estate to
his/her lawful heirs and beneficiaries at the time of death and on certain transfers which
are made by law as equivalent to testamentary disposition. 

Income Tax is a tax on all yearly profits arising from property, profession, trades or
offices or as a tax on a person’s income, emoluments, profits and the like.

Percentage Tax is a business tax imposed on persons or entities who sell or lease
goods, properties or services in the course of trade or business whose gross annual
sales or receipts do not exceed P550,000 and are not VAT-registered. 

Value-Added Tax is a business tax imposed and collected from the seller in the course
of trade or business on every sale of properties (real or personal) lease of goods or
properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be
passed on to the buyer. 

Withholding Tax on Compensation is the tax withheld from individuals receiving purely
compensation income. 

Expanded Withholding Tax is a kind of withholding tax which is prescribed only for
certain payors and is creditable against the income tax due of the payee for the taxable
quarter year. 

Final Withholding Tax is a kind of withholding tax which is prescribed only for certain
payors and is not creditable against the income tax due of the payee for the taxable
year. Income Tax withheld constitutes the full and final payment of the Income Tax due
from the payee on the said income. 

Withholding Tax on Government Money Payments is the withholding tax withheld by

government offices and instrumentalities, including government-owned or -controlled
corporations and local government units, before making any payments to private
individuals, corporations, partnerships and/or associations.

Excise Tax is a tax on the production, sale or consumption of a commodity in a country.

It applies to goods manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition; and to imported goods.