PHILIPPINE TAXATION

BENJAMIN FRANKLIN WROTE, IN THIS WORLD,

NOTHING CAN BE SAID TO BE CERTAIN EXCEPT DEATH AND TAXES.

Nobody Enjoys Paying Taxes

Mans love to his country is always opposed by his displeasure to part away with his treasure or savings to pay taxes.

The Question About Paying Taxes

WHY SHOULD WE PAY TAXES?

Taxes are the lifeblood of the nation. (Lifeblood theory) Without taxes, government can neither exist nor endure.

Taxation is in Accord with the Bible

[] In Luke, 20:22-25, Jesus was asked by the Pharisees, Tell us, is it against our law for us to pay taxes to the Roman Emperor or not?

Jesus

said to them, show me a silver coin. Whose face and name are these on it? The Emperors, they answered. So Jesus said, well then, pay to the Emperor what belongs to the Emperor and pay to God what belongs to God.

Taxation

DEFINITION
[] An inherent power of sovereign [] Imposes burden upon persons and property [] Raises revenues for public purposes

Power to Tax Includes the Power to Destroy

As

opined by CJ Marshall of the US SC, taxation is a destructive power which interferes with the personal and property rights of the people as it takes from them a portion of their property for the support of the government.

Contrary View: Power to Tax Not Power to Destroy

Justice Holmes of US SC brushed aside Marshalls view by declaring that the power to tax is not the power to destroy while this Court sits.

Reconciliation of Marshalls View with Holmes View

[] A valid tax should not be judicially restrained merely because it would prejudice taxpayers property. [] An illegal tax could be judicially declared invalid.

THEORY AND BASIS OF TAXATION

[] Necessity theory [] Benefits-Protection theory

OBJECTIVES OF TAXATION
[] Revenue [] Regulatory [] Compensatory

STAGES OF TAXATION
[] Levy or imposition of tax [] Collection (including assessment)

Philippine Tax Laws

[] National Tax Laws NIRC and Tariff and Customs Code [] Local Tax Laws Local Government Code on Local Tax Ordinances [] Miscellaneous Tax Laws

Power of Judicial Review in Taxation

As long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or restrictions, the courts cannot inquire into the wisdom of a taxing act. The Courts power in taxation is limited only to the application and interpretation of the law.

TAXES
DEFINITION OF TAXES
A burden or charge imposed by legislative power upon persons or property to raise money for public purposes.

CHARACTERISTICS OF TAXES
[]

An enforced contribution [] Generally payable in money [] Proportionate in character [] Levied on persons, property or exercise of a right or privilege [] Levied by state having jurisdiction [] Levied by legislature [] Levied for public purpose [] Paid at regular a periods or intervals

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

[] Fiscal adequacy [] Administrative feasibility [] Theoretical justice

CLASSIFICATION OF TAXES

As to subject or object

1. Personal (poll or capitalization) Imposed on all residents, whether citizens or not (e.g.,community tax) 2. Property Imposed on property (e.g.,property tax)
3. Excise Imposed upon performance of an act, the enjoyment of a privilege or the engaging in occupation (e.g.,income tax, estate tax, donors tax)

WHO BEARS THE BURDEN

1. Direct Personal taxes due from natural persons; non-transferable (e.g.,income tax, donors tax, estate tax) 2. Indirect Business taxes due from either natural or juridical persons; transferable (e.g.,VAT, documentary stamp tax)

DETERMINATION OF AMOUNT
1. Specific Based on some standard of weight or measurement (e.g., excise taxes on distilled spirits and wines, cinematographic films)

2. Ad valorem Based on the value fixed by law or as appraised (e.g., real estate tax, custom duties)
3. Mixed or compound Both specific and ad valorem

 PURPOSE
1. General For purpose of raising public funds for the government (e.g., income tax, VAT, transfer taxes) 2. Special Primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for raising public funds (e.g.,customs duties, excise taxes)

GRADATION OR RATE
1. Proportional or flat rate Rate of tax increases or decreases in relation to bracket. 2. Progressive Increases as the tax base or bracket goes higher 3. Regressive Decreases as the tax base or bracket goes higher

IMPOSING AUTHORITY
National
Taxes imposed by national government (e.g.,NIRC taxes)

Local
Taxes imposed by local government units (e.g., community taxes, business licenses and permits, professional tax, real estate tax)

Tax Laws, In General

Sources
[] Philippine Constitution [] Existing tax laws of the Philippines (National, Local and Miscellaneous tax laws)

NATURE
[] Not political in character [] Civil in nature and not subject to ex post facto law prohibition [] Not penal in character

Escape from Taxation

[] Tax evasion [] Tax avoidance

A tax evader breaks the law (tax evasion), the tax avoider sidesteps it (tax avoidance).

LIMITATIONS ON THE POWER OF TAXATION

As

a general rule, there are no limitations upon the power to tax.

RATIONALE FOR
LIMITATIONS

To prevent abuse on the exercise of the otherwise unlimited power of taxation.

serve as a standard for determining whether a tax law or an act of the taxing authorities in the implementation of tax laws is valid or not.

To

LIMITATIONS ON THE POWER OF

TAXATION
Inherent limitations These are part and parcel of the power of taxation and originate from the very nature of taxation.

Constitutional limitations These are the restrictions imposed by the constitution.

INHERENT LIMITATIONS
oPublic

purpose of taxes oNon-delegability of the taxing power oTerritoriality or the situs of taxation oExemption of the government from taxes o International comity

CONSTITUTIONAL LIMITATIONS
Due

process of the law Equal protection of the law Freedom of speech and of the press Non-infringement of religious freedom

Non-impairment of contracts Non-imprisonment for debt or non-payment of poll tax Origin of appropriation, revenue and tariff bills Uniformity, equitability and progressivity of taxation Delegation of legislative authority to fix tariff rates, import and export quotas

Tax exemption of properties actually, directly and exclusively used for religious, charitable and educational purposes. Voting requirements in connection. with the legislative grant of tax exemption. Non-impairment of the Supreme . Courts jurisdiction in tax cases. Tax exemption of revenues and assets, including grants endowments, donations or contributions to educational institutions. .

DOUBLE TAXATION
Double taxation, in its general sense, means taxing the same subject or object twice during the same taxing period.

No prohibition against double Taxation

There is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is nevertheless permissible. Double taxation is not prohibited by our constitution.

Kinds of Double Taxation

1. Direct double taxation Taxing the same object or property twice, by the same taxing authority, for the same taxing purpose, within the same tax period.

2. Indirect double taxation Not repugnant to the constitution.

TAX EXEMPTIONS
An exemption from taxation may be defined as a grant of immunity, express or implied, to particular persons or corporations from the obligation to pay taxes.

Kinds of Tax Exemptions

Immunities from taxation which originate from the Constitution are known as constitutional exemptions; those which emanate from legislation are statutory exemptions.

Selected Principles Governing Tax Exemptions

Exemptions

from taxation are highly disfavored in law.

He who claims exemption should prove by convincing proof that he is exempted.

exemptions must be strictly construed. Tax exemptions are not presumed. Constitutional grants of tax exemption are self-executing. Tax exemptions are personal.

Tax

Interpretation of Tax Laws

No statutory construction needed if law is clear. Statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority.

Income TaxationIndividuals

GENERAL PRINCIPLES OF INCOME TAXATION IN THE

PHILIPPINES OR THE SOURCE RULE OF INCOME TAXATION FOR AS PROVIDED IN THE NIRC OF 1997. a.

b.

A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. A nonresident citizen is taxable only on income derived from sources within the Philippines.

 c.

An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker is taxable on income from sources within the Philippines. Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker.

d. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines.

INCOME TAXATION
2

Basic formula for the computation of income tax of a resident citizen from income derived solely from compensation.

Gross compensation income derived from all sources from within and without the Philippines
LESS: Personal and additional exemptions (1) Insurance premium for health and hospitalization (2)

------------------------------------------------------Taxable Income MULTIPLIED BY: The schedular tax rate ------------------------------------------------------Income Tax due LESS: Taxes withheld on the compensation income Tax credits ------------------------------------------------------Net Income Tax payable ================================

 Income

Taxation exemption (regardless of status)

Personal

P50,000 Additional exemption (whether single or married) P25,000 for each qualified dependent child not to exceed four (4) dependents Insurance premium for health and hospitalization (family has gross income of not more than P250,000 for taxable year P2,400

Income Taxation
4

Basic formula for the computation of income tax of a resident citizen from mixed income derived both from compensation and from exercise of a profession or from engaging in trade or business.

Gross compensation income derived from all sources from within and without the Philippines LESS: Personal and additional exemptions (1) Insurance premium for health and hospitalization (2)

-------------------------------------------------------------Taxable Compensation Income PLUS: Net income derived from exercise of a profession or engaging in trade or business (see page 6 for formula) *** -------------------------------------------------------------Total mixed taxable income MULTIPLIED BY: The schedular tax rate -------------------------------------------------------------Income Tax due (Forward)

Income Taxation

Income Tax due LESS: Taxes withheld on the compensation income Quarterly income taxes paid Tax credits ------------------------------------------------Net Income Tax payable on mixed income ==============================

Income Taxation 6 *** Computation of net income derived from exercise of a profession or engaging in trade or business under the optional standard deduction. Total receipts from all sources from within and without the Philippines LESS: Exclusions from gross income Income subject to final taxes

-------------------------------------------------------------Gross receipts derived from all sources from within and without the Philippines* LESS: Excess personal and additional exemptions (1) Insurance premium for health and hospitalization (2) Optional standard deduction (40% of gross receipts derived from all sources within and without the Philippines*) -------------------------------------------------------------Net income derived from exercise of a profession or engaging in trade or business

Income Taxation
7

*** Computation of net income derived from exercise of a profession or engaging in trade or business using itemized deduction.
Total sales from all sources from within and without the Philippines LESS: Exclusions from gross income Income subject to final taxes

--------------------------------------------------------Gross sales derived from all sources from within and without the Philippines LESS: Excess personal and additional exemptions (1) Insurance premium for health and hospitalization (2) Itemized deductions --------------------------------------------------------Net income derived from exercise of a profession or engaging in trade or business

Income Taxation

NOTES AND COMMENTS ON MIXED INCOME. An individual receiving a combination of compensation, business and professional income shall first deduct the allowable personal and additional exemptions from compensation income, only the excess there from can be deducted from business or professional income.

In the case of husband and wife, the husband shall be the proper claimant for the exemptions unless he waives it in favor of his wife. ================================

CONTENTS OF THIS MATERIAL WAS SOURCED FROM THE FOLLOWING REFERENCE TEXTBOOKS:
TAXATION, VOLUME 1, GENERAL PRINCIPLES BY ABELARDO T. DOMONDON, 2009 9TH ED PHILIPPINE TAXATION HANDBOOK, A SIMPLIFIED COURSE BY DANILO A. DUNCANO, CPA, 2009 ED LAW OF BASIC TAXATION IN THE PHILIPPINES BY BENJAMIN B. ABAN, REVISED EDITION

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