TAXATION Notes

Ch. 1 Introduction to Taxation to partner with PH

Definitions manufacturers and be taxed
Taxation 20%; high importation tax to
● The inherent power of the state (any make ph products cheaper
governing body) to enforce ● Used as a bargaining chip against
contributions and raise revenues to other countries with goods being
defray the necessary costs of imported into the Philippines.
government. ○ Imposing additional taxes on
● The government asking its citizens imports (for power)
for money in order to address public ● Curb spending power to halt inflation
needs or if it is suspended ward off
● *Inherent Powers of State depression.
○ The power to tax is the power to ○ Increase taxes to make
generate revenue products more expensive and
○ Power to enforce rules and laws bring down demand and
or to defend itself inflation
○ Power to acquire properties ○ Decrease taxes to make
Taxes goods cheaper, increase
● Enforced proportional and pecuniary economic activity and curb
contributions from persons and depression
properties levied by the state having ● Reduce inequalities in wealth and
jurisdiction over the subject of the income
burden to support the government ○ Proportional tax based on
and all public needs income
Purpose of Tax ● Promote science and invention
Primary Purpose ○ Tax exemption from
● To raise funds to defray the cost of inventions
government ● Improve the efficiency of local police
Secondary Purposes force.
● Strengthen anemic enterprises or ○ More money and equipment
provide incentives for greater from tax
production. ● Implement policies as an exercise of
○ Any foreign debts can come police power.
from the government, ○ I.e. sin taxes
allowing the peso to remain ● Provide incentives or
stable discouragement for certain acts or
● Protect local industries activities.
○ Minsan Patrol, Mitsubishi ○ I.e. sin taxes
Parejo etc. Filipinos were ● Improving the way of life of people by
producing it manually. If other providing exemptions or
manufacturers want to non-taxabilities on certain income
operate in the PH, they have brackets.
 TAXATION Notes

○ Uplifting quality of life by not ○ If there is no low, there must

taxing certain income be no tax
brackets (trabaho law) ● It is subject to constitutional and
● Other secondary purposes are valid so inherent limitations
long as the tax is for public purposes. ○ Absolute power corrupts
Taxes for personal use is called graft and absolutely
corruption-extortion Theory and Basis of Taxation
Essential Characteristics of Tax ● Existence of government
● It is an enforced contribution ○ You have a government, you
○ Not voluntary get taxed
● It is proportionate in character ● Reciprocal duties of state and
● It is generally payable in money inhabitants
○ Refusal to pay can result in ○ Duty of the government to
govt acquiring property and protect and provide for its
selling it to get tax or you citizens (basic needs)
cannot do services ● Public Purpose requirement for
● It is levied on persons or property lawful taxation
○ Real property tax is not a tax ○ Whatever the government
on the owner (although the collects, they give it back to us
owner will pay). Not paying Aspects of Taxation
this will not make the owner Levying of Tax
liable for tax evasion but the ● Legislative in character
govt will sell the property to ● This determines:
public auction ○ The subject and/or objects to
● It is levied by the state which has be taxed
jurisdiction over the person or ○ The purpose of the tax so long
property as it is for public purpose
○ You cannot tax ○ The amount and rate of the
someone/thing outside your tax
jurisdiction ○ The manner, means and
● It is levied by the law-making body of agencies of the collection of
the state taxes
○ It emanates from the Collection of Tax
legislative body. BIR only ● Administrative in Character
collects not impose (BIR-Executive)
● It is levied for public purposes ○ it’s procedural
Nature of the Power of Taxation ● Implements the tax laws
● It is inherent in sovereignty ○ Through assessments of taxes
○ If there is state, there must be ○ Collection of the same.
power of taxation Together they are called the tax system
● It is legislative in character Extent of the Legislative Power to Tax
The legislature, subject to constitutional
 TAXATION Notes

limitations, can determine the following As to who bears the burden (who pays)
matters in tax laws: ● Direct
● The subjects or objects to be taxed ○ Person liable pays (income
● The purpose or objective of the tax so tax)
long as it is a public purpose ● Indirect
○ To determine whether it is for ○ Person liable does not pay for
public or private purpose it (VAT-they charge the VAT to
● The amount or rate of tax you)
○ Fixed figure or percentage As to determination
● The manner, means, and agencies of ● Specific
collection of the tax ○ Tax based on any other unit of
○ When, Who is going to collect, measure other than
etc.. money/value
Basic Principles of a Sound Tax System ○ lumber is taxed on board fee
● Fiscal Adequacy – Sufficiency of the (how large the wood is)
tax ○ beer is taxed per proof liter
○ Able to collect sufficient (how fast you will get drunk
amount of tax in order to by drinking the alcohol
meet the needs of product)
government ○ consumption of electricity is
● Administrative Feasibility – Viability based on number of KW used
of the tax ● Ad Valorem
○ Citizens are able to pay (What ○ “With value”
to do, Where to go, When to ○ Tax based on value or a
go) percentage of (income tax,
● Equality or Theoretical Justice – capital gain, VAT etc)
Fairness of tax As to purpose
○ The law applies to all or none ● General, fiscal or revenue raising
at all ○ to generate money
Classifications and Distinctions ● Special or regulatory
As to subject matter ○ to regulate some activity
● Personal, Poll or capitation As to scope
○ Tax because you’re a person ● National
(Tax per head) ○ Imposed by congress and
● Property applies to the entire country
○ Imposed on property ● Municipal or local
● Excise ○ Made by local legislature
○ Tax on a right or a privilege (mayor’s permit)
○ Income tax (right to earn As to graduation or rate
income) ● Proportional
○ Value-added tax (right to
purchase) etc
 TAXATION Notes

○ Same rate regardless of how ○ Veto Power of the President

much the tax base is (VAT- ■ Power to say no but
remains 12%) can be overruled by ⅔
● Progressive or graduated of the congress
○ the higher the tax base, the ○ Non-impairment of the
higher your rate (income tax) Supreme Court Jurisdiction
○ the more expensive your ■ final arbitror is the
luxury, the higher the tax supreme court
● Regressive Inherent Limits
○ rate goes down as tax base ● Limits imposed due to the very
increases (encourages people essence of Taxation
to earn more) ○ Tax must be for Public
Limits on the Power of Taxation Purpose
Constitutional Limits ○ Non-delegation of legislative
● Primary law of the land power to tax
○ Any law contrary to the ■ congress cannot
constitution is void delegate it to
● Those expressly found in the someone else
Constitution of implied from its ○ Exemption of Government
provisions from Tax
○ Due Process Clause ■ the goal is to raise
■ Prevents money for the
congressmen from goverment
taxing randomly; it ○ International Comity
must undergo a ■ International courtesy
process - not taxing
○ Equal Protection Clause internationals
■ Everybody in the ambassadors when
same situation must they are here
pay the same tax ○ Territorial Jurisdiction
○ No appropriation for religious ■ You can only tax
purposes people within your
■ Separation of church jurisdiction
and state Situs of Taxation – “Place of Taxation”
■ If the government will ● Of concern is Internet Commerce
build a cathedral for ● You place an order with a chinese
the catholic church, seller and the server is in singapore,
that’s appropriation where is it taxed?
○ Exemptions from Tax ● For international conflict, you can
■ Exemption of check tax treaties mostly taxes is
education from where it is consumed
income tax
 TAXATION Notes

● Works in makati lives in laguna where ● Transformation

do you file taxes? (any)
Double Taxation
● Being Taxed twice
● By the same Taxing authority
● Within the same jurisdiction
● For the same purpose
● In the same taxable year/period
● Prohibited by law ○ they turn the tax into
Escape from Taxation freebies; they made me think
Without Government Revenue Loss that I’m not paying the tax
● Shifting Resulting in Loss of Revenue for Government
● Avoidance
○ Avoidance means anticipating
the tax exposure and making
plans to avoid the tax
exposure from occuring
● Evasion
○ Evasion does nothing to avoid
○ the taxpayer shifts it to either the tax exposure
buyer or seller from occurring but instead
○ Someone offers to buys a misrepresent the transaction
parcel of land from me, he to avoid paying the tax
makes the buyer pay the tax ● Exemption
or seller shoulders it ○ Exemption is the grant of
● Capitalization immunity to a particular
persons or corporations or to
persons or corporations of a
particular class from a tax
which persons or
corporations within the same
state to taxing district are
○ Taxpayer wants to invest in a obliged to pay
corporation so he sells the Construction of Laws
building and uses the ● Legislative Intent is considered
proceeds to invest ○ To know what the law is
○ You add on to the price so the talking about Nd understand
buyer pays for the tax how to interpret it
● In case of doubt, resolve strictly
against the government and liberally
in favor of the taxpayer.
 TAXATION Notes

● In case of exemptions, the rule is ● Motor Vehicle Users Tax (R.A. No.
reversed 8794)
● Where language is plain then literal ● Energy Taxes (P.D. No. 844 and 845,
meaning is used. B.P. Blg 36)
● In case of conflicts with other laws, if ● Special Education Fun Tax (R.A. No.
conflict is a matter of tax, the tax law 7160)
prevails. Tax Reforms in the Philippines
Application of Tax Laws TRAIN LAW (Republic Act 10963)
● Generally, tax laws prospective ● Tax Reform for Acceleration and
unless provided for specifically by the Inclusion Law
law and is not harsh and oppressive. ● TaxReform measure introduced by
● Tax treaties are applied as a tax law the current administration in order to
provided it is confirmed in fund the government’s efforts to
accordance with law. accelerate the economic
*Note that any error made by the government in development of the country in a more
applying tax laws are not prejudicial to the sustainable and inclusive manner.
government. ● First of the series of tax reform laws
Source of Tax Laws that was envisioned to be enacted in
● Legal Rules on Taxation order to finance the “Build, Build,
○ Legislation or statutes Build” policy of the current
○ Administrative Rules and administration
Regulations ● It sought to make the following
○ Judicial Decisions changes in the individual tax regime:
● Treaties with other countries ○ Make the tax system simpler,
○ Tax Treaties fairer and more efficient that
○ Other Treaties will lessen the overall tax
Kinds of National Taxes under the NIRC burden of the poor and
(National Internal Revenue Code) middle class
● Income Taxes ○ Estate and Donor’s tax rates
● Transfer Taxes (Estate and Donor’s) had been reduced
● Value-Added Taxes ○ Increased taxes on
● Other Percentage Taxes miscellaneous, non-essential
● Excise Taxes items and fuel.
● Documentary Stamp Taxes ○ VAT system and exemptions
● Such other taxes may be promulgated were rationalized.
Kinds of National Taxes under Special Laws TRABAHO Law
● Customs Duties (P.D. No. 1464) ● The next stage of tax reforms being
● Sugar Adjustment Taxes (C.A. No. proposed to be enacted pertains to
567) the taxes of corporate taxpayers that
● Taxes on Narcotic Drugs (R.A. No. seeks to rationalize the system in
953) order to:
● Travel Taxes (P.D. No. 1183)
 TAXATION Notes

○ Make the corporate tax Income is any inflow of wealth other than a
system more uniform and less return on capital
burdensome to encourage Elements of the Definition of Income
investors ● Inflow – Means that the flow of the
○ Codify and harmonize the resource should be towards the
various exemptions taxpayer.
○ Generate more employment ● Wealth – The resource does not have
opportunities to be in terms of money but of any
resource that has financial value.
Ch. 2a Income Taxes ● Not a return on Capital – The flow of
Definitions the resources is not a result of
● Income tax is referred to as tax on all recovering the investment previously
yearly profits arising from property, made by the taxpayer.
profession, trades, offices. ○ In accounting terms, cost of
● A Tax on a person’s income, sales
emoluments, profits and the like. Requisites for a Taxable Income
● Income Tax is an excise tax or a tax on ● There must be a gain - if there is no
the right to earn income and not a poll income, then there cannot be any
or property tax. income tax
Functions of Income Tax ● The gain must be realized or received
● To provide large amounts of revenues - the gain of the taxpayer must be
for the government sure to come about and not just
● To offset regressive sales and expected or speculation
consumption taxes together with ○ If something is as good as sold
estate taxes. even though it’s not yet paid
○ These are VAT etc as long as you are entitled to
(consumption of goods) which payment (mine-sold)
predominantly comes from ● The gain must not be excluded from
the middle class. Majority of taxation by law - not all income are
the collection will come from subject to tax
the poor because they are Distinction of Income from Other Terms
more. Thus, sales and ● Capital – Is the accumulation of
consumption tax is regressive wealth.
to the poor kaya the more ○ You do not use income to buy
income you earn, the higher something, you use capital.
the tax Your allowance is your
● To mitigate the evils arising from income, you save to buy
inequalities in the distribution of something which is capital
income and wealth which are ● Receipts – All inflows of wealth that
considered deterrents to social is not return on capital
progress. ● Revenue – Refers to all inflow of
Income wealth into the government
 TAXATION Notes

Inclusion in Taxable Income ● Other exempted items

Gross income is all income of a taxpayer derived ○ income of foreign
from whatever source, including governments and any of its
(but not limited to) the following: subsidiaries
● Compensation for services in ○ income of the Philippine
whatever form paid, including, but government or any of its
not limited to fees, salaries, wages, political subdivisions
commissions, and similar items ○ Prizes and Awards
● Gross income derived from the ○ 13th month pay and other
conduct of trade or business or the benefits to the extent of the
exercise of a profession first 90,000, GSIS/SSS
● Gains derived from dealings in contributions
property ○ Gains from sale of bonds,
● Interests debentures and other
● Rents certificates of indebtedness
○ Loaning from property as prescribed by the NIRC and
● Royalties Gains from redeption of
○ Income from the use of shares in mutual funds)
intellectual properties Compensation Income
● Dividends De Minimis Benefits (Exempted)
● Annuities There are some allowances, privileges and
○ Investments that will yield facilities that are exempted by law if such
future returns on a regular facilities or privileges are of relatively small
interval value and are offered to promote health,
● Prizes and winnings goodwill, contentment or efficiency of the
● Pensions employees.
○ From retirement ● Note that 13th month pay and
● Partner's distributive share from the bonuses up to P90,000 are exempt
net income of the general from taxes.
professional partnership. ● Monetized unused vacation leaves of
Provided the income is not excluded/exempted private employees not exceeding 10
by law. days during the year.
Exclusions from Taxable Income ● Monetized unused vacation and sick
● Proceeds of life Insurance leaves of public officials and
● Amounts received as returns on employees.
Premiums ● Medical Cash Allowance to
● Gifts, bequests and devises dependents of employees not
● Compensation for sickness or injuries exceeding P1,500 per semester or
● Income exempt from treaties P250 per month.
(exemption) what is the ● Rice subsidy of P2,000 or one sack of
● Retirement benefits, pesions, 50kg rice per month.
gratuities, etc. (exemption)
 TAXATION Notes

● Uniform and clothing allowance not value of the fringe benefit

exceeding P6,000 a year
● Actual medical assistance not
exceeding P10,000 a year
● Laundry allowance not exceeding
P300 per month.
● Gifts given during Christmas and For purposes of the Tax Code, Fringe Benefits
major anniversary celebration not means any goods, services or other benefit
exceeding P5,000 per employee per furnished or granted in cash or kind by an
year. employer to an individual employee (except rank
● Employee achievement awards (i.e. and file employees) such as, but not limited to
length of service, safety achievement the following:
awards) which must be in the form of ● Housing;
a tangible personal property other ● Expense Account
than cash or gift certificates, with an ● Vehicle of any kind
annual monetary value not exceeding ● Household personnel
P10,000, received by the employee ● Interest on leans less than market
under an established written plan value
which does not discriminate in favor ● Membership fees, dues and other
of highly paid employees. expenses in social and athletic clubs
● Daily meal allowances for overtime and other similar organizations
work and night/graveyard shift, not ● Expenses for foreign travel
exceeding 25% of the basic minimum ● Holiday and vacation expenses
wage per region. ● Educational assistance to the
● Benefits received by an employee by employee or his dependent
virtue of a CBA and productivity ● Life or health insurance and other
incentive schemes provided these do non-life insurance premiums or
not exceed P10,000 per employee similar in amount of what the law
per taxable year. allows (i.e. de minimis)
These De Minimis Benefits do not form part of Note: the fringe benefit tax is not subject to tax
the P90,000.00 bonuses that are exempted if:
under income tax. These benefits are separately ● The “fringe benefit” is required by the
exempted from tax by the De Minimis provision nature of or necessary to the trade,
business or profession of the
Fringe Benefits employer. Or
Fringe benefits are subjected to a final tax of ● The “fringe benefit” is more for the
35% based on the grossed up convenience or advantage of the
employer.
Business Income
Gross income derived from the conduct of
trade or business or the exercise of a
profession
 TAXATION Notes

● The initial Tax base is Gross Business ○ Indebtedness must be

Income connected with the trade,
○ Less: Cost of Sales equals business or
Gross Taxable Income ○ profession of the taxpayer
○ Less: Allowable Deductions ○ The interest must have been
equals Net Taxable Income paid or incurred during the
taxable year
○ The interest must be legally
● due
GBI (1Mx12) - 60% of 12M = Gross ○ The interest must have been
Taxable income stipulated in writing
● GTI - annual salaries (40k x 13 mos) - ● Taxes
utilities (30kx12) - rentals (15kx12) = ● Losses
GBI ● Bad Debts
Allowable Deductions ● Depreciation
● Business Expenses ● Depletion
○ Must be ordinary and ● Charitable and other Contributions
necessary ● Research and Development
■ Any other taxpayer in ● Pension Trusts
the same situation
would do the same.
However, it should be
reasonable.
○ Paid or incurred during the ●
taxable year ●
○ Paid or incurred in the
carrying on of business or
trade or profession
○ Must be reasonable in
amount
○ Must be substantiated by
adequate proof
■ Official receipts
○ Must not be against law,
morals, public policy or public
order.
● Interest Expenses (Cost for the
forbearance of Money)
○ The taxpayer must have an
indebtedness