Taxation – is the inherent power by which the sovereign state imposes financial burden upon persons and property as a means of raising revenue in order to defray the necessary expenses of the government. Tax – is a burden or charge imposed by the legislative power upon persons or property to raise money for public purpose Essential Characteristics It is an enforced contribution It is exacted pursuant to legislative authority It involves the exercise of taxing power It is a contribution in money It is for the purpose of raising revenue It is used for governmental purposes Purpose of Taxation: To raise revenue in order to satisfy government needs. Basis of Taxation Necessity Reciprocal Duties Two Aspects of Taxation Levy Collection – administrative act of collecting the tax and is exercised by the executive branch of government, more particularly BIR – National Taxes Bureau of Customs – customs duties Local Government Units – Local Taxes Inherent Power Power of Taxation Power of Eminent Domain – inherent power of sovereign state to take private property for public use upon payment of just compensation Police Power – inherent power of the sovereign state to enact laws to promote public health, public morals, public safety and general welfare of the people. Note: The power to tax involves the power to destroy because being an enforced contribution the subject is not at liberty to free himself from this burden. Limitations on the Power of Taxation Inherent Limitations Taxes may be levied only for public purpose The power to tax is limited to the territorial jurisdiction of the sovereign state Power to tax cannot be delegated International comity Exemption from taxation of governmental entities Constitutional Limitations Due process of law (Art. III, Sec. 1) No person shall be imprisoned for debt (Art. III, Sec. 20) No law impairing the obligation of contracts shall be passed (Art. III, Sec. 20) The rule of taxation shall be uniform and equitable Charitable, churches and etc. shall be exempt from taxation. (Art. VI, Sec. 28) All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. (Art. XIV, Sec. 4) Each local government unit shall have the power to create its own sources of revenues (Art. X, Sec. 5) LGU shall have a just share, as determined by law, in the national taxes which shall be automatically released to them (Art. X, Sec. 5) No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress Congress (Art. VI, Sec. 28) 10. The supreme court shall have the power to review tax laws (Art. VIII, Sec. 5) Three basic principles of a sound tax system Fiscal Adequacy – means that the source of revenue should be sufficient to meet the expanding expenditures of the government Theoretical Justice – means that the tax burden should be proportionate to the taxpayer’s
ability to pay Administrative Facility – means that the tax must be plain and clear to the taxpayer and should be capable of efficient enforcement by government officials Tax Evasion is the use of the taxpayer of illegal means to avoid or minimize payment of the tax Tax Avoidance – is the use of the taxpayer of legally permissible methods to reduce his tax liability Tax Exemption – is the privilege of not being imposed a financial burden to which others may be subject. It is strictly construed against the taxpayer and liberally construed in favor of he government Requisites of a valid and reasonable classification that would not violate the equal protection clause of Constitution It must rest on substantial distinctions It must be germane to the purpose of the law It is not limited to existing conditions only It must apply equally to all members of the same class Situs of Taxation – means place of taxation, that is, the country or government unit which has jurisdiction to impose a particular tax upon persons, property or business transactions. Situs on persons: Personal tax – resident of the person Income TaxCitizenship of recipient Residence of recipient Place where the income is derived Situs on property: Real property – place of location Tangible personal property – location of property Intangible personal property – domicile or residence of the owner Situs on business transactions – place where the act is performed Taxpayer Sources of Taxable Income Tax Base Tax Rates RC w/in and w/o Net Income 5-32% NRC w/in Net Income 5-32% RA w/in Net Income 5-32% NRA – ETB w/in Net Income 5-32% NRA not ETB
w/in Gross Income 25% (final tax withheld) Individual Taxpayers Resident Citizen – Filipino citizen who resides in the PhilippinesThose who are citizens of the Philippines at the time of the adoption of this constitution Those whose parents are citizen of the Philippines Those born before Jan. 17, 1973 of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority Naturalized Citizen Reacquire by applying the citizenship Non-resident citizen – includes the followingA citizen of the Philippines who establishes to the satisfaction of the commissioner of BIR the fact of his physical presence abroad with a definite intention to reside therein A citizen of the Philippines who leave the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. A citizen of the Philippines who works and derives income abroad and whose employment requires him to be physically present abroad most of the time during the taxable year (not less than 183 days during the taxable year) Resident Alien – is an alien who resides on a more or less permanent basis (must be actually present in the Philippines for more than 180 days during any calendar year) Non-resident alien engaged in trade or business in the Philippines – is an alien who comes to the Philippines and stays therein for an aggregate period of more than 180 days during any calendar year. Non-resident alien not engaged in trade or business in the Philippines – is an alien who comes to the Philippines and stays therein for an aggregate period of 180 days or less during any calendar year Fixed Income Group – includes the salary and wage earners arising from an employeremployee relationship. Variable Income group – includes individuals who are engaged in trade or business and in the exercise of their profession. Their taxable income is computed as follows: Graduated Income Tax Rate TAXABLE INCOME INCOME TAX Not over P10, 000 5% Over P10, 000 but not over P30, 000 P500 + 10% of the excess over P10, 000 Over P30, 000 but not over P70, 000 P2, 500 + 15% of the excess over P30, 000 Over P70, 000 but not over P140, 000 P8, 500 + 20% of the excess over P10, 000 Over P140, 000 but not over P250, 000 P22, 500 + 25% of the excess over P10, 000 Over P250, 000 but not over P500, 000 P50, 000 + 30% of the excess over P10, 000 Over P500, 000 P125, 000 + 32% of the excess over P10, 000
Various Sources of taxable income Income within the Philippines Income without the Philippines Income partly within and partly without the Philippines Why is it important to know the source of income? - So that we may know whether it is taxable under Philippine jurisdiction or not. Taxable Income – means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. (Sec. 31) Gross income – means all income derived from whatever source, including (but not limited to) the following incomes: 1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and similar items 2. Gross income derived from the conduct of trade or business or the exercise of a profession 3. Gains derived from dealings in property 4. Interests 5. Rents 6. Royalties 7. Dividends 8. Annuities 9. Prizes and winnings 10. Pensions 11. Partners distributive share from the net income of the general professional partnership The following items shall not be included in gross income and shall be exempt from income taxation: LAGCIR / IPP13GG 1. Life insurance - Proceeds of life insurance paid to the heirs or beneficiaries upon the death of the insured 2. Amount received by the insured as a return of premium or premiums paid by him under life insurance 3. Gift, Bequests and Devises – the value of property acquired by gift, bequest, devise or descent. 4. Compensation for insurance or sickness 5. Income exempt under treaty 6. Retirement benefits, pensions, gratuities, etc. a. Retirement benefits received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer b. Separation pay received an official or employee or by his heirs from the employer because of death, sickness, or other physical disability or for any cause beyond his control c. Social security benefits, retirement, pensions and other benefits received from foreign government agencies and other institutions, private or public d. Payments of benefits by United States Veterans Administration e. Benefits received from SSS and GSIS
7. Income derived by foreign government, by the Philippine government or its political subdivisions 8. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic and literary, or civic achievement; provided that recipient was selected without any action on his part to enter the contest 9. Prizes and awards to athletes in local and international competition in sports sanctioned by their national sports associations 10. 13th month pay, productivity incentives and Christmas bonus up to a maximum amount of P30, 000 11. GSIS, SSS, Medicare and Pagibig contributions and union dues of individuals 12. Gains from redemption of shares of stock in a mutual fund company BIR form 1701 - Annual Income Tax Return for Self-Employed, Professionals, Estates, and Trusts BIR form 1700 – For individuals earning compensation income and marginal income earners Estates – is the mass of property, rights, and obligations left behind by the decedent upon his death. For purposes of income tax, an estate may be one that is not under judicial administration. Trusts – in a trust, the trustor grants the control of certain property in the person of the trustee for the benefit of the beneficiary. Chapter 1 and 2 reviewer Litonjua book
Inherent Power of State (TEP) Power of Taxation – refers to inherent power of the state to exact and enforced contribution upon persons, property or rights for the purpose of generating revenues for the use and support of the government. Power of Eminent Domain - refers to inherent power of the state to expropriate private property for public purpose in return for a just or reasonable compensation. Police Power - refers to inherent power of the state to promote the general welfare of the people by limiting or regulating the rights or properties of any person. Similarities among the inherent powers of the Government They all underlie and exist independently with the constitution They are ways or means by which the government interferes with private rights and purposes. They all rest upon necessity because there can be no effective government without them They all presupposes an equivalent compensation received, directly or indirectly, by the persons affected by the exercise of any of these governmental powers They are legislative in nature and character Power of taxation distinguished from Power of Eminent domain Taxation Power of Eminent Domain Directed against persons, properties or rights
Directed against real property The purpose of taxation is to raise revenues to support the government To have the real property for public purposes The taxpayer gives money representing his taxes in consideration for services and protections presumed furnished by the government The taxpayer gives away his real property in consideration for a just or reasonable monetarial consideration/compensation Power of taxation distinguished from Police Power Taxation Police power The power of taxation is to raise revenues to support the government To regulate or limit the rights of persons for public welfare Directed against persons, properties or rights Directed against taxpayer’s right The amount of tax imposition maybe unlimited The amount of the regulation fee to be imposed must be limited to what is necessary to carry out the regulation Limitations on the power of Taxation Constitutional Limitations: Due process of law – no person shall be deprived of life, liberty or property without due process. A law which hears before it condemns, which precedes inquiry and renders judgment only after trial. Equal Protection of the law – a law that prevents any taxpayer, a person or class, from being singled out as a special subject of hostile or discriminating tax legislation. Non-Imprisonment for Non-payment of a debt or a Poll Tax – No person shall be imprisoned for failure to pay a debt unless guilty of estafa. Non-Impairment of the provisions of obligations of contracts – No tax law impairing the obligations of contracts shall be passed. Rule of taxation shall be uniform and equitable No public money/policy shall be appropriated for a Religious or Private purpose Exemption from Taxation of Educational, Religious and Charitable organization No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of congress Non-Impairment of the jurisdictions of the Supreme court on Tax Cases 10. The Philippine president has the power to approved/veto a Tax Bill approved by the congress
Sources of Revenue. - The following taxes, fees and charges are deemed to be national internal revenue taxes: (a) Income tax; (b) Estate and donor's taxes; (c) Documentary stamp taxes
(d) Other percentage taxes; (e) Value-added tax; (f) Excise taxes; (g) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue. Itemized deduction – means the aggregate amount of all the specified deductible business expense items, actually incurred or paid, provided for under the NIRC. Allowed deductions: Losses Interest Expense Taxes Expense Expense (in general) Bad debts expense Depreciation Expense Depletion/Amortization Expense Charitable Contributions Expense Research and Development Expense 10. Pensions trusts contribution Expense Requirements/conditions for business expense to be deductible Connected in trade, business, profession For the account of the taxpayer Reasonable, Ordinary, Necessary Incurred/Paid during the taxable year Not illegal, immoral, not against public order or public policy Documented or substantiated Kinds of deductions Itemized deductions ( Sec. 34 A-J and M) – is a way of claiming deductible expenses wherein the specific type of expenses are listed down and substantiated by receipts and other pieces of evidence Note: NRANEBP and Non-resident corporations cannot avail of the itemized deduction 2. Optional standard deductions (Sec 34L) – is a way of claiming deductible expenses where in 40% of the gross income may be deducted. 3. Special deductions (Sec. 37 & 38) Conditions of deducting/ Requisites B. Interest 1. There must be an indebtedness 2. The indebtedness must be that of the taxpayer 3. The indebtedness must be connected with the trade, business or profession of the taxpayer 4. The interest must have been paid or incurred during the taxable year 5. The interest must be legally due 6. The interest must have been stipulated in writing 7. There must be legal liability to pay the interest 8. The deduction for interest expense shall be reduced by an amount equal to the following percentages of interest income subjected to final tax: Effective January 1, 2009 33% C. Taxes 1. Payment must be for taxes 2. Taxes are imposed by law upon the taxpayer 3. Taxes must be paid or accrued during the taxable year in connection with the taxpayer’s trade, business or profession 4. Taxes are specifically excluded by law from being deducted from the taxpayer’s gross
income D. Losses 1. The loss must be that of a taxpayer 2. It must be actually sustained and charged off within the taxable year 3. It must have been incurred in trade, business or profession 4. It must be evidenced by a closed and completed transaction 5. It must be compensated for by insurance or other form of indemnity 6. The loss must be reported to the BIR within 45 days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss 7. The loss must not be claimed as a deduction for estate tax purposes in the estate tax return 8. The taxpayer must prove the elements of the loss claimed, such as the actual nature and occurrence of the event and amount of the loss Net operating loss carry over - means that the net operating loss (the excess of allowable deduction over gross income) for the taxable year immediately preceding the current taxable year shall be carried over as a deduction from gross income for the next three consecutive taxable years; provided that there has been no substantial change in the ownership of the business; and provided further that in the case of mining businesses other than oil and gas wells, a net operating loss incurred in any of the first ten years of operations may be carried over for the next five years. Wash sale- is a sale of stocks or securities at a loss whereby the seller acquired by purchase or exchange substantially identical stocks or securities within 30 days before or 30 days after such sale. The seller must not be a dealer in stocks or securities or even if he is, the transaction was not made in the ordinary course of business of such dealer. (The loss is not deductible from gross income). Capital loss: the term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. a. Losses from sales or exchanges of capital assets b. Losses resulting from securities becoming worthless, and which are capital assets c. Losses from short sales of property d. Losses due to failure to exercise privileges or options to buy or sell property Bad debts 1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable. 2. The same must be connected with the taxpayer’s trade, business or practice of profession 3. The same must not be sustained in a transaction entered into between related parties:
a. Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or b. Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or c. Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; d. Between the grantor and a fiduciary of any trust; e. Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or f. Between a fiduciary of a trust and beneficiary of such trust. 4. The same must be actually charged-off the books of accounts of the taxpayer as of the end of the taxable year 5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year Depreciation 1. The allowance for depreciation must be reasonable 2. It must be for property arising out of its use or employment in the business or trade, or out of its not being used temporarily during the year 3. It must be charged-off during the taxable year 4. A statement on the allowance must be attached to the return Depletion 1. Depletable asset 2. Charged off within the taxable year 3. Allowance for depletion is computed in accordance with the cost depletion method 4. Depletion deductible Charitable and other contributions 1. The contribution must actually be paid or made to the Philippine Government or any political subdivision thereof or to any of the domestic corporations or associations specified by the Tax code. 2. It must be made within the taxable year 3. It must not exceed 10% of the individual’s taxable income and 5% of the corporation’s taxable income before deducting the contribution. 4. It must be evidenced by adequate records or receipts Research and development 1. Paid or incurred by the taxpayer in connection with his trade, business or profession 2. Not treated as ordinary or necessary expenses as provided above 3. Chargeable to capital account but not chargeable to property of a character which is subject to depreciation and depletion.
Pension trusts 1. The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to its employees. 2. The pension plan is reasonable and actuarially sound 3. It must be funded by the employer 4. The amount contributed must no longer be subject to its control or disposition 5. The payment has not theretofore been allowed before as a deduction 6. The amount is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made. DEFINITIONS Deductions- are items or amounts which the law allows to be deducted from the gross income of a taxpayer in order to arrive at taxable income. Taxpayer- any person subject to income tax, and a person may be an individual, estate, trust or corporation. Business expenses- deductible from gross income are the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the taxpayer’s trade, business or exercise of profession. Interest expense- is the compensation allowed by law or fixed by the parties for the loan or forbearance of money, goods or credits. Taxes- refers to taxes proper and deductions are not allowed in amounts representing: (1) surcharges, (2)penalties, (3) fines incident to delinquency Tax credit- refers to the taxpayer’s right to deduct from the income tax due, the amount of tax he has paid to a foreign country subject to limitations. Losses- implies an unintentional parting with something of value Bad debts- are debts due to the taxpayer when actually ascertained to be worthless and charged-off within the taxable year. Depreciation- is the gradual diminution in the useful value of tangible property used in trade or business resulting from exhaustion, wear and tear, and normal obsolescence. Depletion- is the exhaustion of natural resources like mines and oil or gas wells as a result of production or severance from such mines or wells.
De minimis benefits – are privileges granted by the employer to the employees which are of relatively small value for the purpose of promoting the health, goodwill, contentment and efficiency of the employees. Examples: Monetized unused vacation leave credits of not more than 10 days during the year Medical cash allowance to dependents of employees of not more than 750 per employee Rice subsidy of 1, 000 Uniforms and clothing allowance 3, 000 per annum Yearly medical benefits of not more than 10, 000 per annum Laundry allowance of not more than 300 per month Employees achievement awards Gifts during Christmas and major anniversary celebrations of not more than 5, 000 per annum Flowers, fruits, books or similar items given on account of illness, marriage and other circumstances 10. Daily meal allowance for overtime work of not more than 25% of basic minimum wage
Fringe benefit tax – means any good, service or other benefit furnish and granted in cash or in kind by an employer to the individual employee except rank and file employee. Examples: HEV HIM THEL Housing Account Expense Account Vehicle of any kind Household personnel Interest on loan at less than market rate Membership dues Travel Expense Holiday and vacation expense Educational Assistance 10. Life and health insurance Computation: Grossed-up monetary value = Monetary Value/68% Fringe Benefit Tax = Grossed-up monetary value x 32% Fringe benefit that are not subject to the fringe benefit tax Contributions of employer for the benefit of employee to retirement, insurance and hospitalization benefit plan Benefits given to rank and file employees De minimis benefits Fringe benefit that are exempted from tax under special laws
